1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10
GENERAL REPORT FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
L&C SPINCO, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-2632672
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1420 PEACHTREE STREET, NE
ATLANTA, GEORGIA 30309-3002
(Address of Principal Executive Offices -- Zip code)
(404) 853-1000
(Registrant's Telephone Number, Including Area Code)
---------------------
Securities to be registered pursuant to section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
Common Stock, $.01 par value per share New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT HAS BEEN PREPARED ON A PROSPECTIVE BASIS ON THE
ASSUMPTION THAT, AMONG OTHER THINGS, THE DISTRIBUTION (AS DEFINED IN THE
INFORMATION STATEMENT WHICH IS A PART OF THIS REGISTRATION STATEMENT) AND THE
RELATED TRANSACTIONS CONTEMPLATED TO OCCUR PRIOR TO OR CONTEMPORANEOUSLY WITH
THE DISTRIBUTION WILL BE CONSUMMATED AS CONTEMPLATED BY THE INFORMATION
STATEMENT. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY OR ALL OF SUCH
TRANSACTIONS WILL OCCUR OR WILL OCCUR AS SO CONTEMPLATED. ANY SIGNIFICANT
MODIFICATIONS OR VARIATIONS IN THE TRANSACTIONS CONTEMPLATED WILL BE REFLECTED
IN AN AMENDMENT OR SUPPLEMENT TO THIS REGISTRATION STATEMENT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
CROSS REFERENCE
L&C SPINCO, INC.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY
REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------------------------------------- --------------------------------------------
1 Business............................. "SUMMARY;" "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS;" and "SPINCO'S BUSINESSES."
2 Financial Information................ "HISTORICAL AND PRO FORMA COMBINED
CAPITALIZATION;" "PRO FORMA FINANCIAL
INFORMATION;" "SELECTED FINANCIAL DATA;"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS;" and "COMBINED FINANCIAL
STATEMENTS OF NATIONAL SERVICE INDUSTRIES,
INC. LIGHTING EQUIPMENT AND CHEMICALS
BUSINESSES."
3 Properties........................... "SPINCO'S BUSINESSES -- Properties."
4 Security Ownership of Certain
Beneficial Owners and Management..... "BENEFICIAL OWNERSHIP OF SPINCO SHARES."
5 Directors and Executive Officers..... "SPINCO'S MANAGEMENT."
6 Executive Compensation............... "SPINCO'S MANAGEMENT."
7 Certain Relationships and Related
Transactions......................... "SUMMARY;" "RELATIONSHIP BETWEEN NSI AND
SPINCO FOLLOWING THE DISTRIBUTION;" and
"SPINCO'S MANAGEMENT."
8 Legal Proceedings.................... "SPINCO'S BUSINESSES -- Legal Proceedings."
9 Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters.......... "SUMMARY;" "THE DISTRIBUTION -- Listing and
Trading of the Spinco Shares;" and "DIVIDEND
POLICIES."
i
3
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- ---- ------------------------------------- --------------------------------------------
10 Description of Registrant's
Securities to be Registered.......... "DESCRIPTION OF SPINCO'S CAPITAL STOCK."
11 Indemnification of Officers and
Directors............................ "LIABILITY AND INDEMNIFICATION OF DIRECTORS
AND OFFICERS."
12 Financial Statements and
Supplementary Data................... "PRO FORMA FINANCIAL INFORMATION;" "SELECTED
FINANCIAL DATA;" and "COMBINED FINANCIAL
STATEMENTS OF NATIONAL SERVICE INDUSTRIES,
INC. LIGHTING EQUIPMENT AND CHEMICALS
BUSINESSES."
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
Item 10. Recent Sales of Unregistered Securities.
On June 27, 2001, as part of its incorporation, the registrant
issued 100 shares of its common stock, par value $.01 per share,
to NSI Enterprises, Inc., a California corporation and wholly
owned subsidiary of National Service Industries, Inc., a
Delaware corporation ("NSI"), for total consideration of
$100.00. The issuance was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended, because it did not
involve any public offering. NSI (or a subsidiary thereof) will
be the registrant's sole stockholder until the consummation of
the distribution described in the information statement. After
such distribution, NSI and its subsidiaries will hold no capital
stock of the registrant.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
(a) List of Financial Statements. The following financial statements are
included in the information statement:
Report of Independent Public Accountants.
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Balance Sheets as of May 31, 2001 (Unaudited), and
August 31, 2000 and 1999.
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Statements of Income for the Nine Month Periods
Ended May 31, 2001 and 2000 (Unaudited) and for the Years Ended August
31, 2000, 1999 and 1998.
ii
4
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Statements of Parent's Equity and Comprehensive
Income for the Years Ended August 31, 2000, 1999 and 1998.
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Statements of Cash Flows for the Nine Month Periods
Ended May 31, 2001 and 2000 (Unaudited) and for the Years Ended August
31, 2000, 1999 and 1998.
Report of Independent Public Accountants on Schedule
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Schedule II -- Valuation and Qualifying Accounts for the
Years Ended August 31, 2000, 1999 and 1998.
(b) Exhibits. The following documents are filed as exhibits hereto:
EXHIBIT
NO.
- -------
2.1* -- Form of Agreement and Plan of Distribution.
3.1 -- Form of Restated Certificate of Incorporation of L&C Spinco,
Inc.
3.2 -- By-Laws of L&C Spinco, Inc.
4.1* -- Form of certificate representing L&C Spinco, Inc. common
stock.
4.2* -- Form of Stockholder Protection Rights Agreement
10.1* -- Form of Tax Disaffiliation Agreement.
10.2 -- Form of Transition Services Agreement.
10.3* -- Form of Agreement and Plan of Distribution (see Exhibit
2.1).
10.4* -- Form of Employee Benefits Agreement.
10.5* -- L&C Spinco Long-Term Incentive Plan.
10.6* -- L&C Spinco 2001 Non-Employee Director Stock Option Plan.
10.7 -- Form of Indemnification Agreement.
10.8* -- Form of Severance Protection Agreement.
10.9* -- Form of Lease Agreement
10.10* -- Form of First Supplemental Indenture to Indenture dated as
of January 26, 1999.
10.11* -- Indenture dated as of January 26, 1999.
10.12* -- Form of 6% Note due 2009.
10.13* -- Form of 8.375% Note due August 1, 2010.
21.1* -- List of Subsidiaries.
- -------------------------
* To be filed by amendment.
iii
5
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
L&C SPINCO, INC.
By: /s/ KENYON W. MURPHY
-----------------------------------
Kenyon W. Murphy
Senior Vice President and
General Counsel
Date: July 3, 2001
iv
6
[NSI LOGO]
, 2001
Dear Fellow Stockholder:
I am pleased to inform you that the board of directors of National Service
Industries, Inc. ("NSI") has approved a pro rata distribution to NSI
stockholders of 100% of the outstanding shares of common stock of L&C Spinco,
Inc. ("Spinco"), which is currently a wholly owned subsidiary of NSI. Spinco
will own and operate the lighting equipment and chemicals businesses of NSI.
The distribution will take place on , 2001. Each NSI stockholder
as of , 2001, the record date for the distribution, will receive one
Spinco share for every NSI share held on that date. Spinco has submitted an
application to list the Spinco shares on the New York Stock Exchange under the
symbol " " following completion of the distribution.
We believe that the distribution will meaningfully enhance value for NSI
stockholders and will give Spinco the financial and operational flexibility to
take advantage of significant growth opportunities in the lighting equipment and
chemicals businesses. We believe that separating the two companies will enhance
the ability of each of Spinco and NSI to focus on strategic initiatives and new
business opportunities, as well as to improve cost structures and operating
efficiencies and to design equity-based compensation programs targeted to its
own performance. In addition, we expect that the transition to an independent
company will heighten Spinco management's focus, provide Spinco with greater
access to capital, and allow the investment community to better measure Spinco's
performance relative to its peers.
The enclosed information statement describes the distribution and provides
important financial and other information about Spinco. Please read it
carefully.
You do not have to vote, or take any other action, to receive your Spinco
shares. You will not be required to pay anything or to surrender your NSI
shares. Account statements reflecting your ownership of Spinco shares will be
mailed to record holders of NSI stock shortly after , 2001. If you are
not a record holder of NSI stock, your Spinco shares should be credited to your
account with your stockbroker or nominee on or about , 2001. Following
the distribution, you may also request physical stock certificates if you wish.
Information for making that request will be furnished with your account
statement.
Sincerely,
James S. Balloun
Chairman and Chief Executive Officer
7
SUBJECT TO COMPLETION, DATED JULY 3, 2001
INFORMATION STATEMENT RELATING TO THE SPINOFF OF
L&C SPINCO, INC.
FROM NATIONAL SERVICE INDUSTRIES, INC.
Common Stock
(Par Value $.01 Per Share)
National Service Industries, Inc. ("NSI") is sending you this information
statement to describe the pro rata distribution to NSI stockholders of 100% of
the outstanding common stock of L&C Spinco, Inc. ("Spinco"). In this
distribution, you will receive one share of Spinco common stock, together with
an associated preferred stock purchase right, for every share of NSI common
stock that you hold at the close of business on , 2001. Immediately
following the distribution, NSI and its subsidiaries will not own any shares of
Spinco and Spinco will be an independent public company. See "The Distribution"
beginning on page 18.
Spinco is currently a wholly owned subsidiary of NSI and will own and
operate the lighting equipment and chemicals businesses of NSI following the
distribution. These businesses represented approximately 80% of NSI's
consolidated assets and revenues as of and for the fiscal year ended August 31,
2000. Following the distribution, NSI's operations will consist of the textile
rental and envelope businesses. See "Spinco's Businesses" beginning on page 44.
The distribution of Spinco shares will be effected at 11:59 p.m., New York
City time, on , 2001. You do not have to vote or take any other action
to receive your Spinco shares. You will not be required to pay anything or to
surrender your NSI shares. The Spinco shares will be distributed by book entry.
The number of NSI shares that you own will not change as a result of the
distribution.
There is no current public trading market for the Spinco shares, although a
"when-issued" trading market will likely develop prior to completion of the
distribution. Spinco has submitted an application to list the Spinco shares on
the New York Stock Exchange under the symbol " " following completion of
the distribution. See "The Distribution -- Listing and Trading of the Spinco
Shares" beginning on page 20.
-------------------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION.
NSI IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND A PROXY OR
YOUR SHARE CERTIFICATES.
AS YOU REVIEW THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
RISK FACTORS BEGINNING ON PAGE 8 IN EVALUATING THE BENEFITS AND RISKS OF HOLDING
OR DISPOSING OF THE SPINCO SHARES YOU WILL RECEIVE IN THE DISTRIBUTION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
INFORMATION STATEMENT OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES.
THE DATE OF THIS INFORMATION STATEMENT IS , 2001.
8
TABLE OF CONTENTS
PAGE
----
Questions and Answers About the Distribution................ i
Summary..................................................... 1
Cautionary Statement Regarding Forward-Looking Statements... 7
Risk Factors................................................ 8
The Distribution............................................ 18
Relationship Between NSI and Spinco Following the
Distribution.............................................. 26
Financing Arrangements for Spinco........................... 31
Historical and Pro Forma Combined Capitalization............ 32
Dividend Policies........................................... 33
Pro Forma Financial Information............................. 34
Selected Financial Data..................................... 35
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 36
Spinco's Businesses......................................... 44
Spinco's Management......................................... 54
Beneficial Ownership of Spinco Shares....................... 68
Description of Spinco's Capital Stock....................... 70
Certain Anti-Takeover Provisions of Spinco's Certificate of
Incorporation, Bylaws and Rights Agreement and Delaware
Law....................................................... 73
Liability and Indemnification of Directors and Officers..... 81
Independent Public Accountants.............................. 82
Additional Information...................................... 83
Index to Combined Financial Statements...................... F-1
9
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
The following section answers various questions that you may have with
respect to the pro rata distribution to NSI stockholders of 100% of the
outstanding shares of Spinco common stock. We refer to this distribution in this
information statement as the "Distribution."
Q: WHEN WILL THE DISTRIBUTION OCCUR?
A: NSI currently anticipates completing the Distribution on , 2001.
Q: WHAT WILL I RECEIVE AS A RESULT OF THE DISTRIBUTION?
A:For every share of NSI common stock that you own of record on ,
2001, you will receive one share of Spinco common stock. For example, if you
own 100 shares of NSI common stock on , you will receive 100 shares
of Spinco common stock.
NSI will distribute the Spinco shares by book entry. If you are a record
holder of NSI stock, instead of physical stock certificates, you will receive
from Spinco's transfer agent shortly after , 2001 a statement of
your book entry account for the Spinco shares distributed to you. Following
the Distribution, you may request physical stock certificates if you wish,
and instructions for making that request will be furnished with your account
statement. If you own a fractional share of NSI common stock, you will
receive a corresponding fractional share of Spinco common stock. If you are
not a record holder of NSI stock because your shares are held on your behalf
by your stockbroker or other nominee, your Spinco shares should be credited
to your account with your stockbroker or nominee on or about ,
2001.
You will also receive one preferred stock purchase right for each share of
Spinco common stock that you receive. These rights are similar to the rights
associated with your existing shares of NSI common stock and may have certain
anti-takeover effects similar to NSI's current preferred stock purchase
rights. See "The Distribution -- Manner of Effecting the Distribution"
beginning on page 19, "Risk Factors -- Certain Provisions of Spinco's
Certificate of Incorporation, Bylaws and Rights Plan and the Tax
Disaffiliation Agreement May Discourage Takeovers" beginning on page 16 and
"Certain Anti-Takeover Provisions of Spinco's Certificate of Incorporation,
Bylaws and Rights Agreement and Delaware Law" beginning on page 73.
Q: WHAT DO I HAVE TO DO TO RECEIVE MY SPINCO SHARES?
A:Nothing. Your Spinco shares will be either reflected in an account statement
that Spinco's transfer agent will send to you shortly after , 2001
or credited to your account with your broker or nominee on or about
, 2001.
Q: WHEN WILL I RECEIVE MY SPINCO SHARES?
A:If you hold your NSI shares in your own name, your account statement will be
mailed to you on or about , 2001. You should allow several days
for the mail to reach you.
If you hold your NSI shares through your stockbroker, bank or other nominee,
you are probably not a stockholder of record and your receipt of Spinco
shares depends on your arrangements with the nominee that holds your NSI
shares for you. NSI anticipates that stockbrokers and banks generally will
credit their customers' accounts with Spinco shares on or about ,
2001, but you should check with your stockbroker, bank or other
i
10
nominee. See "The Distribution -- Manner of Effecting the Distribution"
beginning on page 19.
Q: HOW WILL THE DISTRIBUTION AFFECT THE MARKET PRICE OF MY NSI SHARES?
A:Following the Distribution, NSI expects that its common stock will continue to
be listed and traded on the New York Stock Exchange under the symbol "NSI." As
a result of the Distribution, the trading price of NSI shares immediately
following the Distribution will be substantially lower than immediately prior
to the Distribution. The lighting equipment and chemicals businesses
represented approximately 80% of NSI's consolidated assets and revenues as of
and for the fiscal year ended August 31, 2000. Until the market has fully
analyzed the operations of NSI without these businesses, the price of NSI
shares may fluctuate significantly. See "The Distribution -- Listing and
Trading of the Spinco Shares" beginning on page 20.
Q: WHERE WILL MY SPINCO SHARES BE TRADED?
A:Spinco has submitted an application to list the Spinco shares on the New York
Stock Exchange under the symbol " " following completion of the
Distribution. Trading of the Spinco shares will likely commence on a
when-issued basis after the record date. See "The Distribution -- Listing and
Trading of the Spinco Shares" beginning on page 20.
Q: WHAT IF I WANT TO SELL MY NSI SHARES OR MY SPINCO SHARES?
A:You should consult with your own financial advisors, such as your stockbroker,
bank or tax advisor. NSI does not make recommendations on the purchase,
retention or sale of shares of NSI common stock or Spinco common stock.
If you do decide to sell any shares, you should make sure your stockbroker,
bank or other nominee understands whether you want to sell your NSI common
stock or your Spinco common stock, or both. The following information may be
helpful in discussions with your stockbroker, bank or other nominee.
There is not currently a public market for the Spinco common stock, although
a when-issued market will likely develop prior to completion of the
Distribution. When-issued trading refers to a transaction made conditionally
because the security has been authorized but is not yet issued or available.
Even though when-issued trading will likely develop, none of these trades
would settle prior to the effective date of the Distribution, and if the
Distribution does not occur, all when-issued trading will be null and void.
On the first trading day following the date of the Distribution, when-issued
trading in respect of Spinco's common stock will end and regular-way trading
will begin. Regular-way trading refers to trading after a security has been
issued and typically involves a transaction that settles on the third full
business day following the date of a transaction. Spinco has submitted an
application to list the shares of Spinco common stock you will receive in the
Distribution on the New York Stock Exchange under the symbol " ."
NSI's common stock may also trade on a when-issued basis on the New York
Stock Exchange, reflecting an assumed post-Distribution value for NSI common
stock. When-issued trading in NSI common stock, if available, could last from
on or about the record date through the effective date of the Distribution.
If when-issued trading in NSI common stock is available, NSI stockholders may
trade their existing NSI common stock prior to the effective date of the
Distribution in either the when-issued market or in the regular market for
NSI common stock. If a stockholder trades in the when-issued market, he will
have no obligation to transfer to a purchaser of NSI common stock the Spinco
common stock such stockholder receives in the Distribution. If a stockholder
trades in the regular
ii
11
market, the shares of NSI common stock traded will be accompanied by due
bills representing the Spinco common stock to be distributed in the
Distribution. If when-issued trading in NSI common stock is not available,
neither the NSI common stock nor the due bills may be purchased or sold
separately during the period from the record date through the effective date
of the Distribution.
If a when-issued market for NSI common stock develops, an additional listing
for NSI common stock will appear on the New York Stock Exchange. Differences
will likely exist between the combined value of when-issued Spinco common
stock plus when-issued NSI common stock and the price of NSI common stock
during this period.
Sales of NSI common stock with the right to receive shares of Spinco common
stock should generally settle in the customary three business day settlement
period. Sales of NSI common stock without the right to receive shares of the
Spinco common stock and sales of Spinco common stock without the right to
receive NSI common stock are expected to settle four business days following
the date account statements for the Spinco shares are mailed. You should
check with your stockbroker, bank or other nominee for details. See "The
Distribution -- Listing and Trading of the Spinco Shares" beginning on page
20.
Q: HOW WILL THE DISTRIBUTION AFFECT THE AMOUNT OF DIVIDENDS I CURRENTLY RECEIVE
ON MY NSI SHARES?
A:It is anticipated that following the Distribution, Spinco initially will pay
quarterly cash dividends which, on an annual basis, will equal $.60 per share,
and NSI initially will pay quarterly cash dividends which, on an annual basis,
will equal $.04 per share. Therefore, it is anticipated that the aggregate
cash dividends payable by Spinco and NSI after the Distribution, taken
together, in respect of (1) shares of NSI common stock held on the
Distribution date and (2) shares of Spinco common stock received in the
Distribution will be substantially less than the annual rate of the cash
dividend currently paid on NSI common stock of $1.32 per share. However, no
formal action has been taken with respect to these dividends and the
declaration and payment of dividends by Spinco and NSI will be at the sole
discretion of their respective boards of directors. See "Dividend Policies" on
page 33.
Q: WILL I HAVE TO PAY TAXES ON THE SPINCO SHARES THAT I RECEIVE?
A:NSI and Spinco intend for the Distribution to be tax-free for U.S. federal
income tax purposes. The Distribution is conditioned upon the receipt by each
of NSI and Spinco of opinions from each of King & Spalding, counsel to NSI,
and Ernst & Young LLP, special tax advisor to NSI, that, for U.S. federal
income tax purposes, the receipt of Spinco shares by NSI stockholders will be
tax-free. Neither NSI nor Spinco has requested an advance ruling from the
Internal Revenue Service as to the tax consequences of the Distribution. The
opinions of King & Spalding and Ernst & Young LLP are subject to certain
assumptions and the accuracy and completeness of certain factual
representations and statements made by NSI and Spinco and certain other data,
documentation and other materials that each of King & Spalding and Ernst &
Young LLP deemed necessary for purposes of their respective opinions. These
opinions represent the views of King & Spalding and Ernst & Young LLP as to
the interpretation of existing tax law and, accordingly, such opinions are not
binding on the Internal Revenue Service or the courts and no assurance can be
given that the Internal Revenue Service or the courts will agree with their
opinions. You may have to pay taxes if you sell your Spinco shares. You are
advised to consult your own tax advisor as to the specific tax consequences of
the Distribution. See "Risk Factors -- Failure to Qualify as a Tax-Free
Transaction Could
iii
12
Result in Substantial Liability" beginning on page 10 and "The
Distribution -- Federal Income Tax Consequences of the Distribution" beginning
on page 22.
Q: WILL THERE BE ANY CHANGE IN THE UNITED STATES FEDERAL TAX BASIS OF MY NSI
SHARES AS A RESULT OF THE DISTRIBUTION?
A:Yes, your tax basis in your NSI shares will be reduced. If you are the record
holder of your NSI shares, you will receive information with your account
statement that will help you calculate the adjusted tax basis for your NSI
shares, as well as the tax basis for your Spinco shares. If you are not the
record holder of your NSI shares because your shares are held on your behalf
by your stockbroker or other nominee, you should contact your stockbroker or
nominee for help in determining the tax basis for your NSI shares, as well as
the tax basis for your Spinco shares. See "The Distribution -- Federal Income
Tax Consequences of the Distribution" beginning on page 22.
Q: WHERE CAN I GET MORE INFORMATION?
A:If you have any questions relating to the mechanics of the Distribution and
the delivery of account statements or the trading of NSI or Spinco shares
prior to the Distribution, you can contact the Distribution Agent:
For other questions related to the Distribution, NSI or Spinco, please
contact:
After the Distribution, Spinco stockholders with inquiries relating to the
Distribution or their investment in Spinco should contact:
L&C Spinco, Inc.
1420 Peachtree Street, NE
Atlanta, Georgia 30309
Attention: Corporate Secretary
(404) 853-1000
iv
13
After the Distribution, NSI stockholders with inquiries relating to the
Distribution or their investment in NSI should contact:
National Service Industries, Inc.
1420 Peachtree Street, NE
Atlanta, Georgia 30309
Attention: Investor Relations
(404)853-1000
v
14
SUMMARY
This summary highlights selected information contained elsewhere in this
information statement. It is not complete and may not contain all of the
information that is important to you. To better understand the Distribution and
Spinco, you should read this entire information statement carefully, including
the risks described beginning on page 8 and the financial statements and the
notes thereto beginning on page F-1.
WHY NSI SENT THIS DOCUMENT TO YOU
National Service Industries, Inc. ("NSI") sent you this document because
you were an owner of NSI common stock on , 2001. This entitles you
to receive a pro rata distribution of one share of common stock of L&C Spinco,
Inc. ("Spinco"), which is currently a wholly owned subsidiary of NSI, for every
NSI share you owned on that date. This distribution is referred to in this
information statement as the "Distribution." No action is required on your part
to participate in the Distribution and you do not have to pay cash or other
consideration to receive your Spinco shares.
This document describes Spinco's business, the relationship between NSI and
Spinco, and how this transaction benefits NSI and its stockholders, and provides
other information to assist you in evaluating the benefits and risks of holding
or disposing of the Spinco shares that you will receive in the Distribution. You
should be aware of certain risks relating to the Distribution and Spinco's
business, which are described in this document beginning on page 8.
SPINCO'S BUSINESSES
Spinco will own and operate the lighting equipment and chemicals businesses
of NSI. These businesses represented approximately 80% of NSI's consolidated
assets and revenues as of and for the fiscal year ended August 31, 2000.
Following the Distribution, NSI's operations will consist of the textile rental
and envelope businesses.
LIGHTING EQUIPMENT
Spinco's lighting equipment business includes Lithonia Lighting and
Holophane. Management of Spinco believes that the lighting equipment business is
the world's largest manufacturer of lighting fixtures for both new construction
and renovation. Products include a full range of indoor and outdoor lighting for
commercial and institutional, industrial and residential applications. Lighting
products are manufactured in the United States, Canada, Mexico, and Europe and
are marketed under numerous brand names, including Lithonia, Holophane(R),
Home-Vue(R), Light Concepts(R), Gotham(R), Hydrel(R), Peerless(R), Antique
Street Lamps, and Reloc(R).
Principal customers include wholesale electrical distributors, retail home
centers, and lighting showrooms located in North America and select
international markets. In North America, the lighting equipment business's
products are sold through independent sales agents and factory sales
representatives who cover specific geographic areas and market segments.
Products are delivered through a network of distribution centers, regional
warehouses, and commercial warehouses using both common carriers and a company-
owned truck fleet. For international customers, the lighting equipment business
employs a
1
15
sales force that adopts distribution methods to meet individual customer or
country requirements. In fiscal 2000, North American sales accounted for more
than 97% of the lighting equipment business's gross sales.
CHEMICALS
Spinco's chemicals business, The Zep Group, includes Zep Manufacturing
Company, Enforcer Products, and Selig Industries. The Zep Group is a leading
provider of specialty chemical products in the institutional and industrial
(I&I) and retail markets. Products include cleaners, sanitizers, disinfectants,
polishes, floor finishes, degreasers, deodorizers, pesticides, insecticides, and
herbicides. Zep Manufacturing manufactures products in four North American
plants and two European plants. Enforcer operates a manufacturing facility in
Georgia.
The Zep Group provides products to customers primarily in North America and
Western Europe. In fiscal 2000, North American sales accounted for approximately
90% of the business's gross sales. Zep Manufacturing and Selig Industries serve
a range of institutional and industrial customers, from small sole
proprietorships to Fortune 1000 corporations. Individual markets in the
non-retail channel include automotive, vehicle wash, food, aviation, industrial
manufacturing, and contract cleaners and are serviced through a direct
commissioned sales force. Enforcer provides Enforcer-branded products and
Zep-branded products to retail channels such as home centers, hardware stores,
mass merchandisers, and drug stores.
THE DISTRIBUTION
Distributing Company............ National Service Industries, Inc., a
Delaware corporation.
Distributed Company............. L&C Spinco, Inc., a Delaware corporation.
Primary Purposes of
Distribution.................... NSI's board of directors and management
believe that separating the lighting
equipment and chemicals businesses from the
rest of NSI's operations will allow both
Spinco and NSI to focus on their respective
businesses and provide them with the
flexibility to pursue different strategies
and react quickly to changing market
environments. NSI's board of directors and
management believe that the Distribution
will enhance the ability of each of Spinco
and NSI to focus on strategic initiatives
and new business opportunities, improve cost
structures and operating efficiencies and
design equity-based compensation programs
targeted to its own performance. In
addition, NSI's board of directors believes
that Spinco will have greater access to
capital as an independent company and that
the investment community will be better able
to measure Spinco's performance relative to
its peers. The lighting equipment and
chemicals businesses also have some
important traits in common that
2
16
make these businesses distinct from NSI's
other operations with respect to markets,
products, capital needs and plans for
growth. For a more detailed discussion of
the reasons for the Distribution, see "The
Distribution -- Reasons for the
Distribution" beginning on page 18.
Spinco Shares to be
Distributed..................... NSI will distribute to NSI stockholders
approximately shares of common stock,
par value $.01 per share, of Spinco
(together with the associated preferred
stock purchase rights, the "Spinco Shares"),
based on approximately NSI shares
outstanding on , 2001. The Spinco
Shares to be distributed will constitute
100% of the Spinco Shares outstanding after
the Distribution. Immediately following the
Distribution, NSI and its subsidiaries will
not own any Spinco Shares and Spinco will be
an independent public company.
Trading Market and Symbol....... There is no current trading market for the
Spinco Shares, although a when-issued market
will likely develop prior to completion of
the Distribution. Spinco has submitted an
application to list the Spinco Shares on the
New York Stock Exchange under the symbol
" " following completion of the
Distribution. See "The
Distribution -- Listing and Trading of the
Spinco Shares" beginning on page 20.
Record Date..................... If you owned NSI shares at the close of
business on , 2001 (the "Record
Date"), then you will receive Spinco Shares
in the Distribution.
Distribution Date............... The Distribution will occur at 11:59 p.m.,
New York City time, on , 2001 (the
"Distribution Date"). If you are a record
holder of NSI stock, instead of physical
stock certificates you will receive from
Spinco's transfer agent shortly after
, 2001 a statement of your book
entry account for the Spinco Shares
distributed to you. Following the
Distribution, you may request physical stock
certificates if you wish, and instructions
for making that request will be furnished
with your account statement. If you are not
a record holder of NSI stock because such
shares are held on your behalf by your
stockbroker or other nominee, your Spinco
Shares should be credited to your account
with your stockbroker or other nominee on or
about , 2001.
3
17
Distribution Ratio.............. You will receive one Spinco Share for every
NSI share you held on the Record Date.
Distribution Agent..............
Transfer Agent and Registrar for
the Spinco Shares...............
Fractional Share Interests...... Fractional Spinco Shares will be issued in
the Distribution. You will be entitled to
receive a fractional Spinco Share only if
you own a fractional share of NSI common
stock as of the Record Date. See "The
Distribution -- Manner of Effecting the
Distribution" beginning on page 19.
Tax Consequences................ NSI and Spinco intend for the Distribution
to be tax-free for U.S. federal income tax
purposes. The Distribution is conditioned
upon the receipt by each of NSI and Spinco
of opinions from each of King & Spalding,
counsel to NSI, and Ernst & Young LLP,
special tax advisor to NSI, that, for U.S.
federal income tax purposes, the receipt of
Spinco shares by NSI stockholders will be
tax-free. See "Risk Factors -- Failure to
Qualify as a Tax-Free Transaction Could
Result in Substantial Liability" beginning
on page 10 and "The Distribution -- Federal
Income Tax Consequences of the Distribution"
beginning on page 22.
Relationship with NSI After the
Distribution.................. Prior to the Distribution, NSI and Spinco
will enter into agreements to transfer to
Spinco selected assets and liabilities of
NSI related to Spinco's business, to arrange
for the continued provision of certain
services by each company to the other, to
make arrangements for the Distribution and
to define the ongoing relationships between
NSI and Spinco. In addition, NSI and Spinco
will enter into an agreement providing for
the sharing of taxes incurred by them prior
to the Distribution and providing certain
indemnification rights with respect to tax
matters. After the Distribution, NSI and
Spinco will not have any other material
contracts or other arrangements between them
other than arrangements made on an arm's
length basis. See "Relationship Between NSI
and Spinco Following the Distribution"
beginning on page 26.
Board of Directors of Spinco.... After the Distribution, Spinco is expected
to have an initial board of between 9 and 11
directors, classified into three classes.
After their initial term, directors of each
class will serve three-year terms.
4
18
Each person expected to serve on Spinco's
initial board of directors is currently a
director of NSI and is expected to resign
from NSI's board as of the Distribution
Date. See "Spinco's Management" beginning on
page 54.
Management of Spinco............ Certain of NSI's current executive officers,
including the current senior management of
the lighting equipment and chemicals
businesses, will serve as executive officers
of Spinco after the Distribution. Each
Spinco executive officer is expected to
resign his position with NSI as of the
Distribution Date. See "Spinco's Management"
beginning on page 54.
Debt............................ Prior to the Distribution, Spinco is
expected to assume or refinance all but
approximately $5 million of NSI's total
outstanding debt including all of the
indebtedness under (1) NSI's indenture
relating to the $200 million principal
amount 8.375% Notes due August 1, 2010, and
the $160 million principal amount 6% Notes
due February 1, 2009, and (2) NSI's $150
million receivables facility. Spinco will
also enter into an unsecured credit facility
and may establish a commercial paper program
that will be supported by the credit
facility. The credit facility is expected to
contain, among other terms, conditions
precedent, covenants, representations and
warranties, mandatory and voluntary
prepayment provisions and events of default
customary for similar facilities. See
"Financing Arrangements for Spinco" on page
31.
Post-Distribution
Dividend Policies............. It is anticipated that following the
Distribution, Spinco initially will pay
quarterly cash dividends which, on an annual
basis, will equal $.60 per share, and NSI
initially will pay quarterly cash dividends
which, on an annual basis, will equal $.04
per share. Therefore, the aggregate cash
dividends payable by Spinco and NSI after
the Distribution, taken together, in respect
of (1) shares of NSI common stock held on
the Distribution Date and (2) Spinco Shares
received in the Distribution will likely be
substantially less than the annual rate of
the cash dividend currently paid on NSI
common stock of $1.32 per share. However, no
formal action has been taken with respect to
these dividends and the declaration and
payment of dividends by Spinco and NSI will
be
5
19
at the sole discretion of their respective
boards of directors. See "Dividend Policies"
on page 33.
Certain Anti-takeover
Effects....................... Certain provisions of Spinco's certificate
of incorporation and bylaws may have the
effect of making the acquisition of control
of Spinco in a transaction not approved by
Spinco's board of directors more difficult.
The stockholder protection rights agreement
that Spinco will enter into in connection
with the Distribution also would make such a
transaction more difficult. Moreover,
certain provisions of the agreement
providing for certain tax disaffiliation and
other tax-related matters that Spinco will
enter into in connection with the
Distribution could discourage potential
acquisition proposals. See "Risk Factors --
Certain Provisions of Spinco's Certificate
of Incorporation, Bylaws and Rights Plan and
the Tax Disaffiliation Agreement May
Discourage Takeovers" beginning on page 16
and "Certain Anti-Takeover Provisions of
Spinco's Certificate of Incorporation,
Bylaws and Rights Agreement and Delaware
Law" beginning on page 73.
Risk Factors.................... You should review the risks relating to the
Distribution and Spinco's businesses described in "Risk Factors" beginning on
page 8.
6
20
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This information statement contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Spinco and NSI
base these forward-looking statements on their respective expectations and
projections about future events, which Spinco and NSI have derived from the
information currently available to them. In addition, from time to time, Spinco
or NSI or their representatives may make forward-looking statements orally or in
writing. Furthermore, forward-looking statements may be included in Spinco's and
NSI's filings with the Securities and Exchange Commission or press releases or
oral statements made by or with the approval of one of their executive officers.
For each of these forward-looking statements, Spinco and NSI claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to future events or Spinco's or NSI's future performance,
including but not limited to:
- benefits resulting from the spin-off;
- possible or assumed future results of operations;
- growth in revenue and earnings; and
- business and growth strategies.
You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology such as "may,"
"could," "will," "should," "likely," "expects," "anticipates," "contemplates,"
"estimates," "believes," "plans," "projected," "predicts," "potential" or
"continue" or the negative of these or similar terms. In evaluating these
forward-looking statements, you should consider various factors, including those
described under "Risk Factors" beginning on page 8.
Forward-looking statements are only predictions. The forward-looking events
discussed in this information statement and other statements made from time to
time by Spinco or NSI or their representatives may not occur, and actual events
and results may differ materially and are subject to risks, uncertainties and
assumptions about Spinco and NSI. Except for their ongoing obligations to
disclose material information as required by the federal securities laws, Spinco
and NSI are not obligated to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this information statement and in other statements made from
time to time by Spinco or NSI or their representatives might not occur.
7
21
RISK FACTORS
You should carefully consider each of the following risk factors and all of
the other information in this information statement. The following risks relate
principally to the Distribution and Spinco's businesses. The risks and
uncertainties described below are not the only ones Spinco will face. Additional
risks and uncertainties not presently known to Spinco or that it currently
believes to be immaterial may also adversely affect Spinco's businesses.
If any of the following risks and uncertainties develops into actual
events, the business, financial condition or results of operations of Spinco
could be materially adversely affected. If that happens, the trading prices of
Spinco Shares could decline significantly.
The risk factors below contain forward-looking statements regarding the
Distribution and Spinco. Actual results could differ materially from those set
forth in the forward-looking statements. See "Cautionary Statements Regarding
Forward-Looking Statements" on page 7.
RISKS RELATING TO THE DISTRIBUTION
THE DISTRIBUTION WILL CAUSE THE TRADING PRICE OF NSI COMMON STOCK TO DECLINE
SIGNIFICANTLY
Following the Distribution, NSI expects that its common stock will continue
to be listed and traded on the New York Stock Exchange under the symbol "NSI."
As a result of the Distribution, the trading price of NSI common stock
immediately following the Distribution will be substantially lower than the
trading price of NSI common stock immediately prior to the Distribution.
Following the Distribution, NSI's operations will consist of the textile rental
and envelope businesses. These businesses represented approximately 20% of NSI's
consolidated assets and revenues as of and for the fiscal year ended August 31,
2000. Further, the combined trading prices of NSI common stock and the Spinco
Shares after the Distribution may be less than the trading prices of NSI common
stock immediately prior to the Distribution.
SUBSTANTIAL SALES OF NSI COMMON STOCK MAY HAVE AN ADVERSE IMPACT ON THE TRADING
PRICE OF THE NSI COMMON STOCK
After the Distribution, some NSI stockholders may decide that they do not
want shares in a company consisting of textile rental and envelope businesses,
and may sell their NSI common stock following the Distribution. Additionally, it
is expected that NSI will no longer comprise part of the S&P 500 Index. It is
expected that some stockholders, including certain mutual funds, will sell their
NSI common stock on this basis alone. If NSI stockholders sell large numbers of
shares of NSI common stock over a short period of time, or if investors
anticipate large sales of NSI common stock over a short period of time, this
could adversely affect the trading price of the NSI common stock.
SUBSTANTIAL SALES OF SPINCO SHARES MAY HAVE AN ADVERSE IMPACT ON THE TRADING
PRICE OF THE SPINCO SHARES
Based on the number of shares of NSI common stock outstanding on , 2001,
NSI will distribute to NSI's stockholders a total of approximately
Spinco Shares.
8
22
Under the United States federal securities laws, all of these shares may be
resold immediately in the public market, except for Spinco Shares held by
affiliates of Spinco. Some of the NSI stockholders who receive Spinco Shares may
decide that they do not want shares in a company consisting of lighting
equipment and chemicals businesses, and may sell their Spinco Shares following
the Distribution. Spinco cannot predict whether stockholders will resell large
numbers of Spinco Shares in the public market following the Distribution or how
quickly they may resell these Spinco Shares. If Spinco stockholders sell large
numbers of Spinco Shares over a short period of time, or if investors anticipate
large sales of Spinco Shares over a short period of time, this could adversely
affect the trading price of the Spinco Shares.
THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET FOR NSI COMMON STOCK
WILL RETURN
Even though NSI is currently a publicly held company, there can be no
assurance as to whether an active trading market for NSI common stock will be
maintained after the Distribution or as to the prices at which the NSI common
stock will trade. Some NSI stockholders may decide that they do not want shares
in a company consisting of textile rental and envelope businesses, and may sell
their NSI common stock following the Distribution. Additionally, it is expected
that NSI will no longer comprise part of the S&P 500 Index. It is expected that
some stockholders, including certain mutual funds, will sell their NSI common
stock on this basis alone. These and other factors may delay or hinder the
return to an orderly trading market in the NSI common stock following the
Distribution. Whether an active trading market for NSI common stock will be
maintained after the Distribution and the prices for NSI common stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the shares, NSI's results of
operations, what investors think of NSI and the textile rental and envelope
industries, the amount of dividends that NSI pays, changes in economic
conditions in the textile rental and envelope industries and general economic
and market conditions. Market fluctuations could have a material adverse impact
on the trading price of the NSI common stock.
THERE HAS NOT BEEN ANY PRIOR TRADING MARKET FOR THE SPINCO SHARES
There is no current trading market for the Spinco Shares, although a
when-issued trading market will likely develop prior to completion of the
Distribution. Spinco has submitted an application to list the Spinco Shares on
the New York Stock Exchange under the symbol " " following completion of
the Distribution.
There can be no assurance as to whether the Spinco Shares will be actively
traded or as to the prices at which the Spinco Shares will trade. Although NSI
has been a part of the S&P 500 Index, there can be no assurance that Spinco will
become a part of the S&P 500 Index. Some of the NSI stockholders who receive
Spinco Shares may decide that they do not want shares in a company consisting of
lighting equipment and chemicals businesses, and may sell their Spinco Shares
following the Distribution. This may delay the development of an orderly trading
market in the Spinco Shares for a period of time following the Distribution.
Until the Spinco Shares are fully distributed and an orderly market develops,
the prices at which the Spinco Shares trade may fluctuate significantly and may
be lower than the price that would be expected for a fully distributed issue.
Prices for Spinco Shares will be determined in the marketplace and may be
influenced by many factors, including the depth and liquidity of the market for
the shares, Spinco's
9
23
results of operations, what investors think of Spinco and the lighting equipment
and chemicals industries, the amount of dividends that Spinco pays, changes in
economic conditions in the lighting equipment and chemicals industries and
general economic and market conditions. Market fluctuations could have a
material adverse impact on the trading price of the Spinco Shares.
FAILURE TO QUALIFY AS A TAX-FREE TRANSACTION COULD RESULT IN SUBSTANTIAL
LIABILITY
NSI and Spinco intend for the Distribution to be tax-free for U.S. federal
income tax purposes. The Distribution is conditioned upon the receipt by each of
NSI and Spinco of opinions from each of King & Spalding, counsel to NSI, and
Ernst & Young LLP, special tax advisor to NSI, that for U.S. federal income tax
purposes the receipt of Spinco Shares by NSI stockholders will be tax-free.
Neither NSI nor Spinco has requested an advance ruling from the Internal Revenue
Service as to the tax consequences of the Distribution. The opinions of King &
Spalding and Ernst & Young LLP are subject to certain assumptions and the
accuracy and completeness of certain factual representations and statements made
by NSI and Spinco and certain other data, documentation and other materials that
each of King & Spalding and Ernst & Young LLP deemed necessary for purposes of
their respective opinions. If these assumptions and factual representations were
incorrect or incomplete in a material respect, the conclusions set forth in the
opinions may not be correct. These opinions represent the views of King &
Spalding and Ernst & Young LLP as to the interpretation of existing tax law and
accordingly, such opinions are not binding on the Internal Revenue Service or
the courts and no assurance can be given that the Internal Revenue Service or
the courts will agree with their opinions.
If the Distribution does not qualify for tax-free treatment, a substantial
corporate tax would be payable by the consolidated group of which NSI is the
common parent measured by the difference between (1) the aggregate fair market
value of the Spinco Shares on the Distribution Date and (2) NSI's adjusted tax
basis in the Spinco Shares on the Distribution Date. The corporate level tax
would be payable by NSI. However, Spinco has agreed under certain circumstances
to indemnify NSI for all or a portion of this tax liability. This
indemnification obligation, if triggered, could have a material adverse effect
on the results of operations and financial position of Spinco. In addition,
under the applicable treasury regulations, each member of NSI's consolidated
group (including Spinco) is severally liable for such tax liability.
Furthermore, if the Distribution does not qualify as tax-free, each NSI
stockholder who receives Spinco Shares in the Distribution would be taxed as if
he had received a cash dividend equal to the fair market value of his Spinco
Shares on the Distribution Date.
Even if the Distribution qualifies as tax-free, NSI could nevertheless
incur a substantial corporate tax liability under Section 355(e) of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code" or the "Code"), if
NSI or Spinco were to undergo a change in control (whether by acquisition,
additional share issuance or otherwise) within the four-year period beginning
two years prior to the Distribution and NSI fails to establish that the change
in control of NSI or Spinco and the Distribution were not made pursuant to a
plan or a series of related transactions. Under certain circumstances, Spinco
would be obligated to indemnify NSI for all or a portion of this substantial
corporate tax liability under the tax disaffiliation agreement. This
indemnification obligation would have a material adverse effect on the results
of operations and financial position of Spinco. NSI stockholders would not
recognize gain or loss under
10
24
Section 355(e) of the Code solely because either NSI or Spinco undergoes a
change in control after the Distribution.
CREDITORS OF NSI MAY CHALLENGE THE DISTRIBUTION AS A FRAUDULENT CONVEYANCE
On , 2001, the NSI board of directors made a determination that the
Distribution is permissible under applicable dividend and solvency laws. There
is no certainty, however, that a court would find the decision of the NSI board
to be binding on creditors of NSI and Spinco or that a court would reach the
same conclusions as the NSI board in determining whether NSI or Spinco was
insolvent at the time of, or after giving effect to, the Distribution. If a
court in a lawsuit by an unpaid creditor or representative of creditors, such as
a trustee in bankruptcy, were to find that at the time NSI effected the
Distribution, NSI or Spinco (1) was insolvent; (2) was rendered insolvent by
reason of the Distribution; (3) was engaged in a business or transaction for
which their respective remaining assets constituted unreasonably small capital;
or (4) intended to incur, or believed it would incur, debts beyond its ability
to pay as such debts matured, such court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and require that the
stockholders return the Spinco Shares (in whole or in part) to NSI or require
Spinco to fund certain liabilities for the benefit of creditors. The measure of
insolvency for purposes of the foregoing will vary depending upon the
jurisdiction whose law is being applied. Generally, however, NSI or Spinco would
be considered insolvent if the fair value of their respective assets were less
than the amount of their respective liabilities or if they incurred debt beyond
their ability to repay such debt as it matures.
RISKS RELATING TO SPINCO
SPINCO'S BUSINESSES ARE DEPENDENT ON CYCLICAL INDUSTRIES
A significant portion of the lighting equipment business's sales are made
to customers in the new construction and renovation industries. These industries
are cyclical in nature and subject to changes in general economic conditions. In
addition, sales of the chemicals business are dependent on the needs of the
retail, wholesale and industrial markets for its product line. Economic
downturns and the potential declines in construction and demand for specialty
chemicals may have a material adverse effect on Spinco's results of operations.
AN INCREASE IN THE PRICE OF RAW MATERIALS OR FINISHED GOODS COULD ADVERSELY
AFFECT SPINCO'S OPERATIONS
Spinco's businesses require certain raw materials for their products,
including aluminum, plastics, electrical components, solvents, surfactants,
certain grades of steel and glass. Spinco will purchase most of these raw
materials on the open market and rely on third parties for the sourcing of
finished goods. As such, the cost of products sold may be affected by changes in
the market price of the above-mentioned raw materials or sourcing services and
finished goods. Spinco does not expect to engage in commodity hedging
transactions for raw materials. Significant increases in the prices of Spinco's
products due to increases in the cost of raw materials or sourcing could have a
negative effect on demand for products and on profitability, as well as a
material adverse effect on Spinco's results of operations.
11
25
SPINCO'S BUSINESSES COULD SUFFER IN THE EVENT OF A WORK STOPPAGE OR INCREASED
ORGANIZED LABOR ACTIVITY
While Spinco management considers relations with employees to be generally
good, there can be no assurance that Spinco will not experience work stoppages,
strikes or slowdowns in the future. A prolonged work stoppage, strike or
slowdown could have a material adverse effect on Spinco's results of operations.
In addition, there can be no assurance that, upon expiration of any of existing
collective bargaining agreements, new agreements will be reached without union
action or that any new agreement will be on terms satisfactory to Spinco.
Moreover, there can be no assurance that Spinco's non-union facilities will not
become subject to labor union organizing efforts. If any current non-union
facilities were to unionize, Spinco would incur increased risk of work
stoppages, and possibly higher labor costs.
THE INDUSTRIES IN WHICH SPINCO WILL OPERATE ARE HIGHLY COMPETITIVE
The industries in which Spinco will operate are highly competitive. Spinco
will compete primarily on the basis of price, brand name recognition, product
quality, and customer responsiveness. Main competitors in the lighting equipment
industry include Cooper Industries, U.S. Industries and Genlyte Group.
Competitors in the chemicals industry include Ecolab, Unilever/Diversey, NCH and
SC Johnson.
Many of these competitors offer products which are substantially identical
to those to be offered by Spinco. As a result of competitive pressures, there
can be no assurance that Spinco will be able to compete effectively or increase
prices in the future. Price increases by Spinco, price reductions by
competitors, decisions by Spinco with regard to maintaining profit margins
rather than market share, or other competitive or market factors or strategies
could adversely affect market share or results of operations. Competition could
prevent the institution of price increases or could require price reductions or
increased spending on research and development and marketing and sales which
could adversely affect results of operations.
ADVERSE ECONOMIC CONDITIONS COULD AFFECT SPINCO'S ABILITY TO SERVICE DEBT
Spinco's ability to service its indebtedness will depend on its future
operating performance, which will be affected by prevailing economic conditions
and financial and other factors, certain of which Spinco cannot control. While
Spinco believes that future operating cash flow, together with financing
arrangements, will be sufficient to finance current operating requirements,
Spinco's leverage and debt service requirements may make Spinco more vulnerable
to economic downturns. If Spinco could not service its indebtedness, it would be
forced to pursue one or more alternative strategies such as reducing its capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital (which may substantially dilute the ownership
interest of holders of Spinco Shares). There can be no assurance that Spinco can
effect any of these strategies on satisfactory terms, if at all.
12
26
SPINCO STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION IF FUTURE EQUITY
OFFERINGS ARE USED TO FUND OPERATIONS OR ACQUIRE COMPLEMENTARY BUSINESSES OR AS
A RESULT OF OPTION EXERCISES
If future acquisitions are financed through the issuance of equity
securities, Spinco stockholders could experience significant dilution. In
addition, securities issued in connection with future financing activities or
potential acquisitions may have rights and preferences senior to the rights and
preferences of the Spinco Shares.
In connection with the Distribution, Spinco will replace options held by
NSI employees who become Spinco employees with options to purchase Spinco
Shares. The actual number of shares subject to these options will be determined
based on the relative trading prices of the NSI common stock and the Spinco
Shares on the Distribution Date. Currently, Spinco anticipates that options to
purchase approximately Spinco Shares will be outstanding immediately
following the Distribution. The issuance of Spinco Shares upon the exercise of
these options will result in dilution to the Spinco stockholders.
SPINCO IS DEPENDENT ON CERTAIN KEY PERSONNEL
Spinco's success depends to a significant extent on the continued service
of certain key management personnel. The loss or interruption of the services of
Spinco's senior management personnel or the inability to attract and retain
other qualified management, sales, marketing and technical employees could also
have an adverse effect on Spinco.
SPINCO HAS NO OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY AND MAY BE
UNABLE TO OPERATE PROFITABLY AS A STAND-ALONE COMPANY
Spinco does not have an operating history as an independent public company.
Historically, since the businesses that comprise each of Spinco and NSI have
been under one ultimate parent, they have been able to rely, to some degree, on
the earnings, assets, and cash flow of each other and former businesses owned by
NSI for capital requirements. After the Distribution, Spinco will be able to
rely only on the lighting equipment and chemicals businesses for such
requirements. While the lighting equipment and chemicals businesses have been
profitable segments of NSI, there can be no assurance that, as an independent
company, profits will continue at the same level, if at all. Additionally,
Spinco's businesses have relied on NSI for various financial, administrative and
managerial expertise in conducting their operations. Following the Distribution,
Spinco will maintain its own credit and banking relationships and perform its
own financial and investor relations functions. While a significant number of
key employees of NSI will be employed by Spinco following the Distribution,
there can be no assurance that Spinco will be able to put in place successfully
the financial, administrative and managerial structure necessary to operate as
an independent public company, or that the development of such structure will
not require a significant amount of management's time and other resources.
HISTORICAL FINANCIAL INFORMATION MAY BE OF LIMITED RELEVANCE
The historical financial information included in this information statement
does not reflect the results of operations, financial position and cash flows of
Spinco in the future and only estimates the results of operations, financial
position and cash flows of Spinco had it operated as a separate stand-alone
entity during the periods presented. The financial
13
27
information included herein does not reflect any changes that may occur in the
funding and operations of Spinco as a result of the Distribution.
MEMBERS OF SPINCO'S BOARD OF DIRECTORS AND MANAGEMENT MAY HAVE CONFLICTS OF
INTEREST AFTER THE DISTRIBUTION BECAUSE OF THEIR OWNERSHIP OF BOTH SPINCO AND
NSI COMMON STOCK
Members of the board of directors and management of Spinco will likely own
shares of both Spinco and NSI common stock after the Distribution because of
their prior relationship with NSI. This ownership could create, or appear to
create, potential conflicts of interest when Spinco's directors and management
are faced with decisions that could have different implications for Spinco and
NSI. Examples of these types of decisions might include the resolution of
disputes arising out of the agreements governing the relationship between NSI
and Spinco following the Distribution. Also, the appearance of conflicts, even
if such conflicts do not materialize, might adversely affect the public's
perception of Spinco following the Distribution.
SPINCO WILL CONDUCT OPERATIONS INTERNATIONALLY, WHICH ENTAILS CERTAIN RISKS AND
UNCERTAINTIES
Spinco will manufacture and assemble products at numerous facilities, some
of which are located outside the United States. Spinco will also obtain
components and finished goods from suppliers located outside the United States.
Changes in local economic or political conditions could affect Spinco's
manufacturing, assembly and distribution capabilities and have a material
adverse effect on Spinco's business, financial condition and results of
operations. Additional risks inherent in Spinco's international business
activities generally include unexpected changes in regulatory requirements,
tariffs and other trade barriers, changes in local economic or political
conditions, longer customer payment cycles, potentially adverse tax
consequences, restrictions on repatriation of earnings and the burdens of
complying with a wide variety of foreign laws.
As a specific example of the foregoing, approximately 28% of Spinco's
lighting equipment products are produced in facilities operated in Mexico.
Mexico has enacted legislation to promote the use of such manufacturing
operations, known as "Maquiladoras," by foreign companies. These operations are
authorized to operate as Maquiladoras by the Ministry of Commerce and Industrial
Development of Mexico. Maquiladora status allows Spinco to import certain items
from the United States into Mexico duty-free, provided that such items, after
processing, are re-exported from Mexico within six months. Maquiladora status,
which must be renewed every two years, is subject to various restrictions and
requirements, including compliance with the terms of the Maquiladora program and
other local regulations. Although manufacturing operations in Mexico continue to
be less expensive than comparable operations in the United States, in recent
years many companies have established Maquiladora operations to take advantage
of lower labor costs. Increasing demand for labor, particularly skilled labor
and professionals, from new and existing Maquiladora operations has in the past
and could in the future result in increased labor costs. Spinco may be required
to make additional investments in automating equipment to partially offset
increased labor costs. The loss of Maquiladora status, the inability to recruit,
hire and retain qualified employees, a significant increase in labor costs, or
interruptions in the trade relations between the United States and Mexico could
have a material adverse effect on Spinco's results of operations.
14
28
SPINCO WILL BE SUBJECT TO FOREIGN CURRENCY RISKS
Changes in the value of foreign currencies, specifically the Mexican peso
and Canadian dollar, relative to the U.S. dollar could result in losses from
foreign currency conversion. Spinco does not expect to use derivative products
to hedge against foreign currency exchange risk.
THE PAYMENT OF DIVIDENDS BY SPINCO'S BOARD OF DIRECTORS MAY LIMIT GROWTH
While the payment of dividends is at the discretion of Spinco's board of
directors and will be subject to Spinco's financial results, the availability of
surplus funds to pay dividends and other restrictions, it is expected that
Spinco will initially pay quarterly cash dividends which, on an annual basis,
will equal $.60 per share. While no assurance can be given that Spinco will pay
dividends at this rate or at all, payment of dividends at this rate may limit
Spinco's ability to grow its businesses internally or by acquisitions that may
be in its best interest.
COMPLIANCE WITH ENVIRONMENTAL RULES AND REGULATIONS MAY MAKE IT COSTLY TO
OPERATE SPINCO'S BUSINESSES, WHICH MAY HARM ITS OPERATING RESULTS
Spinco's operations will be subject to federal, state, local and foreign
laws and regulations relating to the generation, storage, handling,
transportation, and disposal of hazardous substances and solid and hazardous
wastes and to the remediation of contaminated sites. Permits and environmental
controls are required for certain of Spinco's operations to limit air and water
pollution, and these permits are subject to modification, renewal, and
revocation by issuing authorities. Spinco will incur capital and operating costs
relating to environmental compliance on an ongoing basis. Environmental laws and
regulations have generally become stricter in recent years, and the cost of
responding to future changes may be substantial. There can be no assurance that
Spinco will not incur significant costs to remediate violations of such laws and
regulations, particularly in connection with acquisitions of existing operating
facilities, or to comply with changes in, or stricter or different
interpretations of, existing laws and regulations. Such costs could have a
material adverse effect on Spinco's results of operations.
Spinco will assume certain environmental liabilities in the Distribution
relating to ongoing legal proceedings in connection with state and federal
Superfund sites. While Spinco does not believe these claims will result in
material liability, there can be no assurance that Spinco will not be required
pay a substantial amount of money relating to these claims. Such payment could
have a material adverse effect on Spinco's results of operations.
SPINCO MAY INCUR INCREASED EXPENSES IF THE TRANSITION SERVICES AGREEMENT WITH
NSI IS TERMINATED
In connection with the Distribution, Spinco will enter into a transition
services agreement with NSI. This agreement will provide that NSI and Spinco
will provide each other services in such areas as information management and
technology, employee benefits administration, payroll, financial accounting and
reporting, claims administration and reporting, legal, and other areas where NSI
and Spinco may need transitional assistance and support following the
Distribution. The agreement will extend for one year after the Distribution, but
may be terminated earlier under certain circumstances, including a
15
29
default, bankruptcy event, or change in control. If the agreement is terminated,
Spinco may be required to obtain such services from a third party. This could be
more expensive than the fees which Spinco will be required to pay under the
transition services agreement.
CERTAIN PROVISIONS OF SPINCO'S CERTIFICATE OF INCORPORATION, BYLAWS AND RIGHTS
PLAN AND THE TAX DISAFFILIATION AGREEMENT MAY DISCOURAGE TAKEOVERS
Spinco's certificate of incorporation and bylaws contain certain
anti-takeover provisions that may make more difficult or expensive or that may
discourage a tender offer, change in control or takeover attempt that is opposed
by Spinco's board of directors. In particular, Spinco's certificate of
incorporation and bylaws:
(1) classify Spinco's board of directors into three groups, so that
stockholders elect only one-third of the board each year;
(2) permit stockholders to remove directors only for cause and only by
the affirmative vote of at least 80% of Spinco's voting shares;
(3) permit a special stockholders' meeting to be called only by a
majority of the board of directors;
(4) do not permit stockholders to take action except at an annual or
special meeting of stockholders;
(5) require stockholders to give Spinco advance notice to nominate
candidates for election to Spinco's board of directors or to make
stockholder proposals at a stockholders' meeting;
(6) permit Spinco's board of directors to issue, without stockholder
approval, preferred stock with such terms as the board may determine;
(7) require the vote of the holders of at least 80% of Spinco's voting
shares for stockholder amendments to Spinco's bylaws; and
(8) require, for the approval of a business combination with
stockholders owning 5% or more of Spinco's voting shares, the vote of at
least 50% of Spinco's voting shares not owned by such stockholder, unless
certain "fair price" requirements are met or the business combination is
approved by the continuing directors of Spinco.
The preferred stock purchase rights attached to the Spinco Shares would, in
effect, prevent a person or group from acquiring more than 15% of the total
number of Spinco Shares outstanding at any time after the Distribution without
approval from Spinco's board of directors. In addition, Delaware law generally
restricts mergers and other business combinations between Spinco and any holder
of 15% or more of the Spinco Shares, unless the transaction or the 15%
acquisition is approved in advance by Spinco's board of directors.
These provisions of Spinco's certificate of incorporation and bylaws,
Delaware law and the preferred stock purchase rights could discourage potential
acquisition proposals and could delay or prevent a change in control of Spinco,
even though a majority of Spinco's stockholders may consider such proposals, if
effected, desirable. Such provisions could also make it more difficult for third
parties to remove and replace the members of Spinco's board of directors.
Moreover, these provisions could diminish the opportunities for stockholders to
participate in certain tender offers, including tender offers at prices above
16
30
the then-current market value of the Spinco Shares, and may also inhibit
increases in the trading price of the Spinco Shares that could result from
takeover attempts or speculation.
In connection with the Distribution, Spinco has agreed to indemnify NSI for
all taxes and liabilities incurred as a result of (1) a breach of a
representation or covenant given to King & Spalding or Ernst & Young LLP in
connection with rendering their tax opinions, which contributes to an Internal
Revenue Service determination that the Distribution was not tax-free or (2)
Spinco or an affiliate's post-Distribution action or omission contributes to an
Internal Revenue Service determination that the Distribution was not tax-free.
Unless NSI effectively rebuts the presumption that a change in control
transaction involving Spinco or disposition of Spinco occurring within the
four-year period beginning two years prior to the Distribution Date is pursuant
to the same plan or series of related transactions as the Distribution, the
Internal Revenue Service might determine that the Distribution was not tax-free,
giving rise to Spinco's indemnification obligation. These provisions of the tax
disaffiliation agreement may have the effect of discouraging or preventing an
acquisition of Spinco or a disposition of Spinco's businesses, which may in turn
depress the market price for the Spinco Shares.
17
31
THE DISTRIBUTION
INTRODUCTION
On , 2001, NSI's board of directors declared a pro rata
distribution payable to the holders of record of outstanding NSI common stock at
the close of business on , 2001 (the "Record Date") of one share of
common stock (the "Spinco Common Stock") of Spinco, together with an associated
preferred stock purchase right (the shares of Spinco Common Stock and the
associated preferred stock purchase rights, collectively, the "Spinco Shares"),
for every share of NSI common stock outstanding on the Record Date. The
Distribution will be effected at 11:59 p.m., New York City time, on ,
2001 (the "Distribution Date"). As a result of the Distribution, 100% of the
outstanding Spinco Shares will be distributed to NSI stockholders. Immediately
following the Distribution, NSI and its subsidiaries will not own any Spinco
Shares and Spinco will be an independent public company. The Spinco Shares will
be distributed by book entry. Instead of stock certificates, each NSI
stockholder that is a record holder of NSI shares will receive a statement of
such stockholder's book entry account for the Spinco Shares distributed to such
stockholder. Account statements reflecting ownership of the Spinco Shares will
be mailed shortly after the Distribution Date. Spinco Shares should be credited
to accounts with stockbrokers, banks or nominees of NSI stockholders that are
not record holders on or about , 2001.
Spinco was incorporated on June 27, 2001. Spinco's principal executive
offices are located at 1420 Peachtree Street, NE, Atlanta, Georgia 30309, and
its telephone number is (404) 853-1000.
Spinco will own and operate the lighting equipment and chemicals businesses
of NSI. These businesses represented approximately 80% of NSI's consolidated
assets and revenues as of and for the fiscal year ended August 31, 2000.
Following the Distribution, NSI's operations will consist of the textile rental
and envelope businesses.
REASONS FOR THE DISTRIBUTION
The board of directors and management of NSI believe that the Distribution
is in the best interests of NSI, Spinco and NSI stockholders. NSI believes that
the Distribution will enhance value for NSI stockholders and give Spinco the
financial and operational flexibility to take advantage of significant growth
opportunities in the lighting equipment and chemicals businesses. NSI's board of
directors and management believe that the Distribution will enhance the ability
of each of Spinco and NSI to focus on strategic initiatives and new business
opportunities, improve cost structures and operating efficiencies and design
equity-based compensation programs targeted to its own performance. In addition,
NSI's board of directors expects that the transition to an independent company
will heighten Spinco management's focus, provide Spinco with greater access to
capital, and allow the investment community to measure Spinco's performance
relative to its peers. The lighting equipment and chemicals businesses also have
some important traits in common that make these businesses distinct from NSI's
other operations with respect to markets, products, capital needs and plans for
growth. For instance, both businesses sell primarily to commercial and
industrial customers through commissioned agents and both have a small but
growing portion of retail sales.
18
32
The Distribution will give Spinco direct access to capital markets. As part
of NSI, the lighting equipment and chemicals businesses competed with NSI's
other core business groups for capital to finance expansion and growth
opportunities. As a separate entity, Spinco will be free of NSI's capital
structure restrictions and should be in a better position to fund the
implementation of its business strategy. The Distribution will also enable
Spinco to provide its management and employees incentive compensation in the
form of equity ownership in Spinco, enhancing Spinco's ability to attract,
retain and motivate key employees.
The separation will also enable new NSI management to concentrate attention
on the remaining NSI businesses. NSI's board strongly believes that these
businesses may be managed more effectively and positioned for future growth if
new management is able to focus on the textile rental and envelope businesses.
In addition to focusing on existing businesses, new NSI management may also
consider further diversification into other businesses.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution will be set
forth in an Agreement and Plan of Distribution (the "distribution agreement")
between NSI and Spinco. See "Relationship between NSI and Spinco Following the
Distribution -- Distribution Agreement" on page 26.
The Distribution will be made on the basis of one Spinco Share for every
share of NSI common stock outstanding on the Record Date. The actual total
number of Spinco Shares to be distributed will depend on the number of NSI
shares outstanding on the Record Date. Based upon the number of NSI shares
outstanding on , 2001, approximately Spinco Shares will be
distributed to NSI stockholders. The Spinco Shares to be distributed will
constitute 100% of the outstanding Spinco Shares. Immediately following the
Distribution, NSI and its subsidiaries will not own any Spinco Shares and Spinco
will be an independent public company. The employee benefits agreement provides
that at the time of the Distribution NSI stock options held by Spinco employees
will generally be converted to, and replaced by, Spinco stock options in
accordance with a conversion ratio. Each employee holding NSI restricted stock
(all of which is unvested) will receive a dividend of one Spinco Share (subject
to the same restrictions as the NSI restricted stock) for each NSI share held.
See "Relationship Between NSI and Spinco Following the Distribution -- Employee
Benefits Agreement" beginning on page 27. The Spinco Shares will be fully paid
and non-assessable and the holders thereof will not be entitled to preemptive
rights. See "Description of Spinco's Capital Stock" beginning on page 70.
NSI will use a book entry system to distribute the Spinco Shares in the
Distribution. Following the Distribution, each record holder of NSI stock on the
Record Date will receive from the Distribution Agent a statement of the Spinco
Shares credited to the stockholder's account. If you are not a record holder of
NSI stock because your shares are held on your behalf by your stockbroker or
other nominee, your Spinco shares should be credited to your account with your
stockbroker or nominee on or about , 2001. After the Distribution,
stockholders may request stock certificates from Spinco's transfer agent instead
of participating in the book entry system.
19
33
Fractional Spinco Shares will be issued. If you own a fractional share of
NSI common stock as of the Record Date, you will receive a corresponding
fractional Spinco Share in the Distribution.
No NSI stockholder will be required to pay any cash or other consideration
for the Spinco Shares received in the Distribution, or to surrender or exchange
NSI shares in order to receive Spinco Shares. The Distribution will not affect
the number of, or the rights attaching to, outstanding NSI shares. No vote of
NSI stockholders is required or sought in connection with the Distribution, and
NSI stockholders will have no appraisal rights in connection with the
Distribution.
In order to receive Spinco Shares in the Distribution, NSI stockholders
must be stockholders at the close of business on the Record Date.
RESULTS OF THE DISTRIBUTION
After the Distribution, Spinco will be a separate public company operating
the lighting equipment and chemicals businesses. Immediately after the
Distribution, Spinco expects to have approximately holders of record of
Spinco Shares and approximately Spinco Shares outstanding, based on the
number of stockholders of record and outstanding NSI shares on , 2001
and the distribution ratio of one Spinco Share for every NSI share. The employee
benefits agreement provides that at the time of the Distribution NSI stock
options held by Spinco employees will generally be converted to, and replaced
by, Spinco stock options in accordance with a conversion ratio. Each employee
holding NSI restricted stock (all of which is unvested) will receive a dividend
of one Spinco Share (subject to the same restrictions as the NSI restricted
stock) for each NSI share held. See "Relationship Between NSI and Spinco
Following the Distribution -- Employee Benefits Agreement" beginning on page 27.
The actual number of Spinco Shares to be distributed will be determined as of
the Record Date. The Distribution will not affect the number of outstanding NSI
shares or any rights of NSI stockholders.
LISTING AND TRADING OF THE SPINCO SHARES
You should consult with your own financial advisors, such as your
stockbroker, bank or tax advisor. NSI does not make recommendations on the
purchase, retention or sale of shares of NSI common stock or Spinco Shares.
If you do decide to sell any shares, you should make sure your stockbroker,
bank or other nominee understands whether you want to sell your NSI common stock
or your Spinco Shares, or both. The following information may be helpful in
discussions with your stockbroker, bank or other nominee.
There is not currently a public market for the Spinco Shares, although a
when-issued market will likely develop prior to completion of the Distribution.
When-issued trading refers to a transaction made conditionally because the
security has been authorized but is not yet issued or available. Even though
when-issued trading will likely develop, none of these trades would settle prior
to the effective date of the Distribution, and if the Distribution does not
occur, all when-issued trading will be null and void. On the first trading day
following the date of the Distribution, when-issued trading in respect of Spinco
Shares will end and regular-way trading will begin. Regular-way trading refers
to trading after a security has been issued and typically involves a transaction
that settles on the third
20
34
full business day following the date of a transaction. Spinco has applied to
list the Spinco Shares you will receive in the Distribution on the New York
Stock Exchange under the symbol " ."
NSI's common stock may also trade on a when-issued basis on the New York
Stock Exchange, reflecting an assumed post-Distribution value for NSI common
stock. When-issued trading in NSI common stock, if available, could last from on
or about the record date through the effective date of the Distribution. If
when-issued trading in NSI common stock is available, NSI stockholders may trade
their existing NSI common stock prior to the effective date of the Distribution
in either the when-issued market or in the regular market for NSI common stock.
If a stockholder trades in the when-issued market, he will have no obligation to
transfer to a purchaser of NSI common stock the Spinco Shares such stockholder
receives in the Distribution. If a stockholder trades in the regular market, the
shares of NSI common stock traded will be accompanied by due bills representing
the Spinco Shares to be distributed in the Distribution. If when-issued trading
in NSI common stock is not available, neither the NSI common stock nor the due
bills may be purchased or sold separately during the period from the record date
through the effective date of the distribution.
If a when-issued market for NSI common stock develops, an additional
listing for NSI common stock will appear on the New York Stock Exchange.
Differences will likely exist between the combined value of when-issued Spinco
Shares plus when-issued NSI common stock and the price of NSI common stock
during this period.
Sales of NSI common stock with the right to receive Spinco Shares should
generally settle in the customary three business day settlement period. Sales of
NSI common stock without the right to receive the Spinco Shares and sales of
Spinco Shares without the right to receive NSI common stock are expected to
settle four business days following the date account statements for the Spinco
Shares are mailed. You should check with your stockbroker, bank or other nominee
for details.
The Spinco Shares distributed to NSI stockholders will be freely
transferable, except for Spinco Shares received by persons who may be deemed to
be "affiliates" of Spinco under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of Spinco after
the Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, Spinco and may include certain
directors, officers and significant stockholders of Spinco. Persons who are
affiliates of Spinco will be permitted to sell their Spinco Shares only pursuant
to an effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as the exemptions
afforded by Section 4(1) of the Securities Act and the provisions of Rule 144
thereunder. It is believed that persons who may be deemed to be affiliates of
Spinco after the Distribution will beneficially own approximately Spinco
Shares, or approximately % of the outstanding Spinco Shares.
There can be no assurance as to whether the Spinco Shares will be actively
traded or as to the prices at which the Spinco Shares will trade. Although NSI
has been a part of the S&P 500 Index, there can be no assurance that Spinco will
become a part of the S&P 500 Index. Some of the NSI stockholders who receive
Spinco Shares may decide that they do not want shares in a company consisting of
lighting equipment and chemicals businesses, and may sell their Spinco Shares
following the Distribution. This may delay the development of an orderly trading
market in the Spinco Shares for a period of time
21
35
following the Distribution. Until the Spinco Shares are fully distributed and an
orderly market develops, the prices at which the Spinco Shares trade may
fluctuate significantly and may be lower than the price that would be expected
for a fully distributed issue. Prices for Spinco Shares will be determined in
the marketplace and may be influenced by many factors, including the depth and
liquidity of the market for the shares, Spinco's results of operations, what
investors think of Spinco and the lighting equipment and chemicals industries,
the amount of dividends that Spinco pays, changes in economic conditions in the
lighting equipment and chemicals industries and general economic and market
conditions.
Following the Distribution, NSI expects that its common stock will continue
to be listed and traded on the New York Stock Exchange under the symbol "NSI."
As a result of the Distribution, the trading price of NSI common stock
immediately following the Distribution will be substantially lower than the
trading price of NSI common stock immediately prior to the Distribution.
Following the Distribution, NSI's operations will consist of the textile rental
and envelope businesses. These businesses represented approximately 20% of NSI's
consolidated assets and revenues as of and for the fiscal year ended August 31,
2000. Further, the combined trading prices of NSI common stock and the Spinco
Shares after the Distribution may be less than the trading prices of NSI common
stock immediately prior to the Distribution.
Even though NSI is currently a publicly held company, there can be no
assurance as to whether an active trading market for NSI common stock will be
maintained after the Distribution or as to the prices at which the NSI common
stock will trade. Some NSI stockholders may decide that they do not want shares
in a company consisting of textile rental and envelope businesses, and may sell
their NSI common stock following the Distribution. Additionally, it is expected
that NSI will no longer comprise part of the S&P 500 Index. It is expected that
some stockholders, including certain mutual funds, will sell their NSI common
stock on this basis alone. These and other factors may delay or hinder the
return to an orderly trading market in the NSI common stock following the
Distribution. Whether an active trading market for NSI common stock will be
maintained after the Distribution and the prices for NSI common stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the shares, NSI's results of
operations, what investors think of NSI and the textile rental and envelope
industries, the amount of dividends that NSI pays, changes in economic
conditions in the textile rental and envelope industries and general economic
and market conditions.
In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations could have a material
adverse impact on the trading price of the Spinco Shares and/or NSI common
stock.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion summarizes the material U.S. federal income tax
consequences resulting from the Distribution. This discussion is based upon the
U.S. federal income tax laws and regulations now in effect and as currently
interpreted and does not take into account possible changes in such tax laws or
such interpretations, any of which may be applied retroactively.
22
36
The following summary is for general information only and may not be
applicable to stockholders who received their shares of NSI stock pursuant to an
employee benefit plan or who are not citizens or residents of the United States
or who are otherwise subject to special treatment under the Code. Each
stockholder's individual circumstances may affect the tax consequences of the
Distribution to such stockholder. In addition, no information is provided with
respect to tax consequences under any applicable foreign, state or local laws.
Consequently, each NSI stockholder is advised to consult his own tax advisor as
to the specific tax consequences of the Distribution and the effect of possible
changes in tax laws.
Neither NSI nor Spinco has requested an advance ruling from the Internal
Revenue Service as to the tax consequences of the Distribution.
GENERAL
NSI and Spinco intend for the Distribution to be tax-free for U.S. federal
income tax purposes. The Distribution is conditioned upon the receipt by each of
NSI and Spinco of opinions from each of King & Spalding, counsel to NSI, and
Ernst & Young LLP, special tax advisor to NSI, that for U.S. federal income tax
purposes (assuming that NSI common stock is a capital asset in the hands of an
NSI stockholder):
- Neither NSI nor Spinco will recognize any gain or loss on the
distribution of Spinco Shares to NSI stockholders.
- An NSI stockholder will not recognize any income, gain or loss as a
result of the receipt of Spinco Shares in the Distribution.
- An NSI stockholder's holding period for the Spinco Shares received in the
Distribution will include the holding period for which that stockholder's
NSI shares were held.
- An NSI stockholder's aggregate tax basis for his NSI shares and Spinco
Shares immediately after the Distribution will equal the aggregate tax
basis of that stockholder's NSI shares immediately before the
Distribution, with such aggregate basis being allocated between the NSI
shares and Spinco Shares in proportion to their respective fair market
values at the time of the Distribution.
- An NSI stockholder will not recognize any income, gain or loss as a
result of the receipt of the preferred stock purchase rights which are
attached to Spinco Common Stock in the Distribution, and the receipt of
such rights will have no effect on a stockholder's basis or holding
period in the Spinco Shares or the NSI shares.
The opinions of King & Spalding and Ernst & Young LLP are subject to
certain assumptions and the accuracy and completeness of certain factual
representations and statements made by NSI and Spinco and certain other data,
documentation and other materials that each of King & Spalding and Ernst & Young
LLP deemed necessary for purposes of their respective opinions. These opinions
represent the views of King & Spalding and Ernst & Young LLP as to the
interpretation of existing tax law and, accordingly, such opinions are not
binding on the Internal Revenue Service or the courts and no assurance can be
given that the Internal Revenue Service or the courts will agree with their
opinions.
23
37
If the Distribution does not qualify as a tax-free distribution under
Section 355 of the Code, (i) the corporate-level tax would be based upon the
excess of the fair market value of the Spinco Shares on the Distribution Date,
over NSI's adjusted tax basis for such shares on such date, and (ii) each NSI
stockholder who receives Spinco Shares in the Distribution would generally be
treated as receiving a taxable distribution in an amount equal to the fair
market value of such shares on the Distribution Date, taxed first as a dividend
to the extent of such holder's pro rata share of NSI's current and accumulated
earnings and profits (as increased to reflect any NSI gain on a taxable
distribution as discussed above), and then as a nontaxable return of capital to
the extent of such holder's tax basis in the shares of NSI stock, with any
remaining amount being taxed as capital gain (provided that the NSI shares were
held by the stockholder as a capital asset on the Distribution Date).
Stockholders which are corporations may be subject to additional special
provisions dealing with taxable distributions, such as the dividends received
deduction and the extraordinary dividend rules.
In addition, under Section 355(e) of the Code, even if the Distribution
qualifies as tax-free, the Distribution could nevertheless become taxable to NSI
(but not NSI stockholders) if NSI or Spinco were to undergo a change in control
within the four-year period beginning two years prior to the Distribution and
NSI failed to establish that the change in control of NSI or Spinco and the
Distribution were not made pursuant to a plan or a series of related
transactions. In this context, a change in control generally means a shift in
50% or more of the ownership of either NSI or Spinco. Examples of such a change
in control could include an acquisition (including acquisitions which are
neither planned nor accepted by the board of the company being acquired), the
issuance of a significant amount of additional shares, and certain redemptions.
INDEMNIFICATION
Spinco would be obligated to indemnify NSI under the tax disaffiliation
agreement for the full amount of any liability of NSI incurred as a result of
(1) a breach of a representation made to King & Spalding or Ernst & Young LLP in
connection with rendering their respective tax opinions, which breach
contributes to an Internal Revenue Service determination that the Distribution
was not tax-free, or (2) Spinco or an affiliate's post-Distribution action or
omission contributes to an Internal Revenue Service determination that the
Distribution was not tax-free. NSI will indemnify Spinco for all taxes and
liabilities incurred solely because NSI or an affiliate's post-Distribution
action or omission contributes to an Internal Revenue Service determination that
the Distribution was not tax-free. If the Internal Revenue Service determines
that the Distribution was not tax-free for any other reason, NSI and Spinco will
indemnify each other against all taxes and liabilities pro rata based on
relative post-closing market capitalization values. If triggered, Spinco's
indemnification obligation would have a material adverse effect on the results
of operations and financial position of Spinco.
Spinco will indemnify NSI against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution Date.
For a description of the agreement pursuant to which NSI and Spinco have
provided for certain tax disaffiliation and other tax-related matters, see
"Relationship Between NSI and Spinco Following the Distribution -- Tax
Disaffiliation Agreement" on page 27.
24
38
INFORMATION REPORTING
Current Treasury regulations require each NSI stockholder who receives
Spinco Shares pursuant to the Distribution to attach to his federal income tax
return for the year in which the Distribution occurs a detailed statement
setting forth such data as may be appropriate in order to show the applicability
of Section 355 of the Code to the Distribution. NSI will provide appropriate
information to each holder of record of NSI common stock as of the Record Date.
REASONS FOR FURNISHING THIS DOCUMENT
This document is being furnished solely to provide information to NSI
stockholders who will receive Spinco Shares in the Distribution. It is not, and
is not to be construed as, an inducement or encouragement to buy or sell any
securities of NSI or Spinco. Neither NSI nor Spinco will update the information
contained in this document except in the normal course of their respective
public disclosure practices. However, this document will be amended if there is
any material change in the terms of the Distribution.
25
39
RELATIONSHIP BETWEEN NSI AND SPINCO
FOLLOWING THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between NSI
and Spinco after the Distribution and to provide for an orderly transition to
the status of two independent companies, NSI and Spinco have entered or will
enter into the agreements described in this section. The forms of agreements
summarized in this section are, or will be, included as exhibits to the
Registration Statement on Form 10 (including any amendments thereto, the
"Registration Statement") that Spinco has filed with the Securities and Exchange
Commission (the "Commission") which relates to this information statement, and
the following summaries are qualified in their entirety by reference to the
agreements as filed. See "Additional Information" on page 83.
DISTRIBUTION AGREEMENT
On the Distribution Date, NSI and Spinco will enter into the distribution
agreement, which will provide for, among other things, the principal corporate
transactions required to effect the Distribution and certain other agreements
relating to the continuing relationship between Spinco and NSI after the
Distribution.
The distribution agreement will provide that on or prior to the
Distribution Date, Spinco will have issued to NSI a number of Spinco Shares
equal to the total number of shares of NSI common stock outstanding on the
Distribution Date. NSI will effect the Distribution by delivering a certificate
representing 100% of the Spinco Shares to the Distribution Agent.
NSI currently indirectly owns through its subsidiaries the assets which
will comprise Spinco's businesses. Under the distribution agreement, NSI's
subsidiaries will transfer ownership of these subsidiaries and assets to Spinco,
and Spinco will assume certain obligations related to these subsidiaries and
assets so that the assets, liabilities and operations associated with the
lighting equipment and chemicals businesses will be owned by Spinco and its
subsidiaries.
Under the distribution agreement and effective as of the Distribution Date,
Spinco will assume, and will agree to indemnify NSI against, all liabilities,
litigation and claims, including related insurance costs, arising out of
Spinco's businesses (including discontinued or sold lighting equipment and
chemicals businesses), and NSI will retain, and will agree to indemnify Spinco
against, all other liabilities, litigation and claims, including related
insurance costs. The foregoing obligations will not entitle an indemnified party
to recovery to the extent any such liability is covered by proceeds received by
such party from any third party insurance policy.
Under the distribution agreement for a two-year period beginning on the
Distribution Date, except in limited circumstances, Spinco will not solicit or
recruit any NSI employee without NSI's prior written consent, and, likewise, NSI
will not solicit or recruit any Spinco employee without Spinco's prior written
consent.
The distribution agreement will also provide that each of NSI and Spinco
shall be granted access to certain records and information in the possession of
the other, and will require the retention by each of NSI and Spinco for a period
of six years following the Distribution Date of all such information in its
possession.
26
40
TRANSITION SERVICES AGREEMENT
On the Distribution Date, Spinco will enter into a transition services
agreement with NSI. This agreement will provide that NSI and Spinco will provide
each other services in such areas as information management and technology,
employee benefits administration, payroll, financial accounting and reporting,
claims administration and reporting, legal, and other areas where NSI and Spinco
may need transitional assistance and support following the Distribution. The
transition services agreement will provide generally that each of Spinco and NSI
will undertake to provide substantially the same level of service and use
substantially the same degree of care as their respective personnel provided and
used in providing such services prior to the Distribution. The agreement will
extend for one year after the Distribution, but may be terminated earlier under
certain circumstances, including a default, bankruptcy event, or change in
control. Spinco believes that the terms and conditions of the transition
services agreement are as favorable to Spinco as those available from unrelated
parties for a comparable arrangement.
LEASE AGREEMENT
Spinco and NSI will enter into a lease agreement pursuant to which NSI will
lease to Spinco a portion of NSI's corporate headquarters, which will be owned
by NSI. The term of the lease is months, and the monthly rent is
$ .
TAX DISAFFILIATION AGREEMENT
NSI and Spinco will enter into a tax disaffiliation agreement on the
Distribution Date which sets out each party's rights and obligations with
respect to deficiencies and refunds, if any, of federal, state, local or foreign
taxes for periods before and after the Distribution and related matters such as
the filing of tax returns and the conduct of Internal Revenue Service and other
audits. Under the tax disaffiliation agreement, Spinco will indemnify NSI for
all taxes and liabilities incurred as a result of (1) a breach of a
representation made to King & Spalding or Ernst & Young LLP in connection with
rendering their respective tax opinions, which breach contributes to an Internal
Revenue Service determination that the Distribution was not tax-free or (2)
Spinco or an affiliate's post-Distribution action or omission contributes to an
Internal Revenue Service determination that the Distribution was not tax-free.
NSI will indemnify Spinco for all taxes and liabilities incurred solely because
NSI or an affiliate's post-Distribution action or omission contributes to an
Internal Revenue Service determination that the Distribution was not tax-free.
If the Internal Revenue Service determines that the Distribution was not
tax-free for any other reason, NSI and Spinco will indemnify each other against
all taxes and liabilities pro rata based on relative post-closing market
capitalization values.
Spinco will indemnify NSI against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution Date.
EMPLOYEE BENEFITS AGREEMENT
GENERAL. Spinco will enter into an employee benefits agreement with NSI on
the Distribution Date that will provide for the transition of employee plans and
programs sponsored by NSI for employees of the lighting equipment and chemicals
businesses and the employees of the corporate office hired by Spinco. This
agreement will allocate responsibility for certain employee benefits matters and
liabilities after the Distribution
27
41
Date. Spinco will also generally assume the liabilities for benefits for
retirees and other former employees of the lighting equipment and chemicals
businesses and the corporate office. Under the employee benefits agreement,
Spinco will become liable for providing specified welfare and retirement
benefits to its employees after the Distribution Date, which will generally be
similar to the benefits currently provided to such employees by NSI and its
subsidiaries. In some cases, Spinco will adopt and assume the separate plans
currently maintained by NSI for employees of the lighting equipment and
chemicals businesses and corporate office and in others, Spinco will adopt new
plans that will be similar to the plans maintained by NSI. Except as
specifically provided in the employee benefits agreement, nothing in that
agreement will restrict Spinco's or NSI's ability to amend or terminate any of
their respective employee benefit plans.
STOCK OPTIONS AND RESTRICTED STOCK. The employee benefits agreement
provides that, at the time of the Distribution, NSI stock options held by Spinco
employees will generally be converted to, and replaced by, Spinco stock options
in accordance with a conversion ratio. This conversion ratio will be determined
at the time of the Distribution and will generally equal (a) the closing price
of NSI's common stock on the New York Stock Exchange on the Distribution Date
(without giving effect to the Distribution), divided by (b) the closing price of
a Spinco Share on the Distribution Date (trading on a when-issued basis). As
part of the conversion, Spinco will multiply the number of shares purchasable
under each converted stock option by this conversion ratio and divide the
exercise price per share of each option by the ratio. Fractional shares will be
rounded down to the nearest whole number of shares. All other terms of the
converted stock options will generally remain the same as those in effect
immediately prior to the Distribution. With respect to options held by Spinco
employees in some foreign countries, if the above conversion method is not
permitted or desirable under the foreign tax, securities or other laws, a
different approach may be used. Each employee holding outstanding shares of NSI
restricted stock (all of which is unvested) will receive a dividend of one
Spinco Share for each NSI share held. Any Spinco Shares received as a dividend
on NSI restricted stock will be subject to the same restrictions and terms,
including the vesting schedule, as the NSI restricted stock and will be
registered in the name of such employee on the books of Spinco's transfer agent.
Each Spinco employee who has a performance-based restricted stock award of NSI
that has not reached a vesting start date will not receive the dividend, and
will receive a replacement performance-based restricted stock award of Spinco,
adjusted to reflect the Distribution.
LONG-TERM INCENTIVE AWARDS. Under NSI's long-term incentive plan, with
respect to awards for the long-term incentive performance period that began
September 1, 1999, and will end August 31, 2002, the performance period is
expected to be terminated for corporate office employees on August 31, 2001 and
NSI will be responsible for determining the extent to which the established
performance criteria have been met at such date. NSI will be obligated to make
any payments under the plan to all qualifying participants, including Spinco
employees.
28
42
DEFERRED COMPENSATION PLANS. The employee benefits agreement provides that
at the time of the Distribution, Spinco will establish deferred compensation
plans for its employees which will be substantially similar to NSI's deferred
compensation plans as in effect at such time. The accounts and benefits of
current and former employees of the lighting equipment and chemicals businesses
and the corporate office (other than corporate office employees employed by NSI
after the Distribution Date) will be transferred to the new plans. In some
cases, assets that were held by NSI to help fund its obligations under the
deferred compensation plans will be transferred to Spinco to help fund the
obligations it is assuming.
PENSION PLANS. Effective as of the Distribution Date, Spinco will adopt
and assume all liabilities with respect to NSI's current separate defined
benefit pension plans that cover employees and former employees of the lighting
equipment and chemicals businesses and NSI's plan that covers employees and
former employees of the corporate office (other than corporate office employees
employed by NSI after the Distribution Date) ("Transferred Pension Plans"). As
soon as practical after the Distribution Date, all of the assets associated with
the Transferred Pension Plans will be transferred from the NSI's Defined Benefit
Plans Master Trust to the Spinco Defined Benefit Plans Master Trust in
accordance with the employee benefits agreement.
401(K) PLANS. Effective as of the Distribution Date, Spinco will adopt and
assume all liabilities with respect to NSI's separate 401(k) plans that cover
employees and former employees of the lighting equipment and chemicals
businesses and NSI's plan that covers employees and former employees of the
corporate office (other than corporate office employees employed by NSI after
the Distribution Date) ("Transferred 401(k) Plans"). During a transition period,
an NSI stock account and a Spinco stock account will be maintained under the
401(k) plans remaining with NSI and under the Transferred 401(k) Plans to hold
shares of NSI common stock and Spinco Shares distributed with respect to such
NSI common stock. Employees of one company will not be allowed to add to their
stock accounts of the other company through new contributions or balance
transfers. At the time of the Distribution, all of the assets associated with
the Transferred 401(k) Plans will be transferred from the NSI's Defined
Contribution Plans Master Trust to the Spinco Defined Contribution Plans Master
Trust.
HEALTH AND WELFARE PLANS. Spinco will assume all liabilities and
responsibilities for providing health and welfare benefits to its active
employees. As of the Distribution Date, Spinco intends to establish health and
welfare plans that are substantially similar to NSI's plans as in effect at such
time. During a transition period after the Distribution, Spinco will administer
some of its plans in conjunction with the respective NSI plans and provide
reimbursement to NSI for any costs or expenses it incurs in connection with such
administration. For those benefits that are provided through insurance, NSI will
take steps to have each insurance carrier agree to allow Spinco's employees to
continue to be covered by NSI policies or through separate contracts on
substantially the same basis during the transition period.
EMPLOYEE STOCK PURCHASE PLAN. On or shortly after the Distribution Date,
Spinco expects to adopt an employee stock purchase plan that is substantially
similar to NSI's current employee stock purchase plan. The plan will generally
permit eligible employees of Spinco to periodically purchase Spinco Shares at a
discount and will be structured to satisfy the requirements of Section 423 of
the Internal Revenue Code.
29
43
LITIGATION AGAINST NSI
Various legal claims, including product liability claims, are pending or
may be instituted against NSI or its various operating subsidiaries. Because
Spinco and its subsidiaries are separate corporations, Spinco's management
believes the risk that Spinco's assets could be subject to these claims and
liabilities (except for those claims and liabilities expressly assumed in the
distribution agreement) is remote.
30
44
FINANCING ARRANGEMENTS FOR SPINCO
Based upon the relative financial conditions, results of operations,
historical transactions and prospects of Spinco and NSI, NSI determined that all
but approximately $5 million of NSI's total outstanding debt would be assumed by
Spinco or refinanced by new borrowings of Spinco as part of the Distribution.
NSI and Spinco expect that Spinco and its principal operating subsidiaries
will assume all of NSI's rights and obligations under the Indenture, dated as of
January 26, 1999, relating to the $200 million principal amount 8.375% Notes due
August 1, 2010, and the $160 million principal amount 6% Notes due February 1,
2009, through the execution of a supplemental indenture upon the effective date
of the Distribution. Upon the execution of the supplemental indenture, Spinco
and its principal operating subsidiaries will become the obligors of the Notes,
and NSI will be relieved of all obligations and covenants with respect to the
Notes and the Indenture.
In May 2001, NSI entered into a $150 million credit facility under which
borrowings are secured by certain accounts receivable of the lighting equipment
and chemicals businesses (the "Receivables Facility"). The Receivables Facility
permits NSI to borrow amounts from time to time against its then outstanding
accounts receivable. As of May 31, 2001, NSI had $118.9 million in outstanding
borrowings under the Receivables Facility. Effective on the Distribution Date,
Spinco will assume all of NSI's borrowings and other obligations under the
Receivables Facility. Spinco expects to maintain the Receivables Facility and to
continue to finance its receivables with borrowings under the facility.
Prior to the Distribution, Spinco expects to enter into an unsecured credit
facility with a syndicate of banks. The credit facility is expected to contain,
among other terms, conditions precedent, covenants, representations and
warranties, mandatory and voluntary prepayment provisions and events of default
customary for facilities of this type. Spinco may also establish prior to the
Distribution a commercial paper program that will be supported by the credit
facility. Spinco will obtain funds for working capital and other general
corporate purposes through borrowings under the credit facility, the issuance of
commercial paper or a combination thereof.
31
45
HISTORICAL AND PRO FORMA COMBINED CAPITALIZATION
The following table sets forth Spinco's combined capitalization as of May
31, 2001, on a historical and pro forma basis, to give effect to the
Distribution as if it had occurred on May 31, 2001. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the "Combined Financial Statements" and the notes
thereto, and the "Pro Forma Financial Information" and discussion thereof,
included elsewhere in this information statement. The pro forma information may
not necessarily reflect the debt and capitalization of Spinco in the future or
as it would have been had Spinco been a separate, independent company at May 31,
2001, or had the Distribution actually been effected on that date.
Based upon the relative financial conditions, results of operations,
historical transactions and prospects of Spinco and NSI, NSI determined that all
but approximately $5 million of NSI's total outstanding debt would be assumed by
Spinco or refinanced by new borrowings of Spinco as part of the Distribution.
Spinco intends to take the necessary actions to effect the transfer of these
obligations to Spinco under the same terms existing with NSI; however, Spinco
does not have the ability to unilaterally effect the transfer in all cases. In
the event that any of NSI's creditors do not accept this transfer, Spinco would
be required to refinance the related borrowings. In addition, Spinco may enter
into a new unsecured credit facility to potentially support a commercial paper
program, as NSI's existing credit facilities supporting its commercial paper
program will expire upon the completion of the Distribution. Spinco believes
that the terms of the debt which will ultimately be outstanding at Spinco will
not differ materially from the terms of NSI's debt currently outstanding.
(UNAUDITED)
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(IN THOUSANDS)
DEBT:
Commercial paper............................. $ 115,665 $ -- $ 115,665
6% notes due February 2009................... 159,680 -- 159,680
8.375% notes due August 2010................. 199,775 -- 199,775
Short-term secured borrowings................ 118,900 -- 118,900
Other notes.................................. 43,537 -- 43,537
---------- --------- ----------
Total debt................................. 637,557 -- 637,557
---------- --------- ----------
EQUITY:
NSI equity investment........................ 432,496 (432,496) --
Common stock and paid-in capital(1).......... -- 432,496 432,496
Accumulated other comprehensive income....... (13,628) -- (13,628)
---------- --------- ----------
Total equity............................... 418,868 -- 418,868
---------- --------- ----------
Total capitalization....................... $1,056,425 $ -- $1,056,425
========== ========= ==========
- -------------------------
(1) The NSI equity investment will be classified as common stock and paid-in
capital at the time of the Distribution.
32
46
DIVIDEND POLICIES
After the Distribution, Spinco intends to pay quarterly dividends on its
common stock at an initial annual rate of $.60 per share. The declaration and
payment of dividends will be at the discretion of Spinco's board of directors
and will be subject to Spinco's financial results and the availability of
surplus funds to pay dividends. Delaware law prohibits Spinco from paying
dividends or otherwise distributing funds to its stockholders, except out of
legally available surplus. The amount of Spinco's future dividends will depend
on Spinco's ongoing financial condition, capital requirements, results of
operations, future business prospects and other factors the Spinco board of
directors may deem relevant. Spinco also may be restricted in the payment of
dividends by the terms of its credit facilities. There can be no assurance that
Spinco will continue to pay dividends on its common stock at the expected
initial annual rate of $.60 per share. See "Risk Factors -- The Payment of
Dividends by Spinco's Board of Directors May Limit Growth" on page 15.
After the Distribution, NSI intends to pay quarterly dividends on its
common stock at an initial annual rate of $.04 per share. The declaration and
payment of dividends are at the discretion of NSI's board of directors and are
subject to NSI's financial results and the availability of surplus funds to pay
dividends. Delaware law prohibits NSI from paying dividends or otherwise
distributing funds to its stockholders, except out of legally available surplus.
The amount of NSI's future dividends will depend on NSI's ongoing financial
condition, capital requirements, results of operations, future business
prospects and other factors the NSI board of directors may deem relevant. NSI
also may be restricted in the payment of dividends by the terms of its credit
facilities. There can be no assurance that NSI will continue to pay dividends on
its common stock at the expected initial annual rate of $.04 per share.
Although no formal action has been taken with respect to dividend policy of
NSI or Spinco after the Distribution, it is anticipated that the aggregate cash
dividends payable by Spinco and NSI after the Distribution, taken together, in
respect of (1) shares of NSI common stock held on the distribution date and (2)
shares of Spinco common stock received in the Distribution will be substantially
less than the annual rate of the cash dividend currently paid on NSI common
stock of $1.32 per share.
33
47
PRO FORMA FINANCIAL INFORMATION
On June 28, 2001, the board of directors of NSI authorized management to
evaluate and pursue the spin-off of its lighting equipment and chemicals
businesses, subject to certain conditions, into a separate publicly traded
company with its own management and board of directors. The Distribution is
expected to occur during the fourth fiscal quarter of 2001 or the first fiscal
quarter of 2002 and will be accomplished by transferring the assets and
liabilities of NSI's lighting equipment and chemicals businesses to Spinco and
then distributing all of the shares of common stock of Spinco to NSI's
stockholders. NSI's stockholders will receive one share of Spinco common stock
for each share of NSI common stock held as of the Record Date. After the
Distribution, Spinco and NSI will be two separate public companies. Spinco was
incorporated on June 27, 2001, as an indirect wholly owned subsidiary of NSI and
will not have any operations, assets, or liabilities until immediately prior to
the Distribution.
Operating expenses in the historical income statements of Spinco reflect
direct expenses of the Spinco businesses together with allocations of certain
NSI corporate expenses that have been charged to Spinco based on usage or other
methodologies appropriate for such expenses. In the opinion of Spinco
management, these allocations have been made on a reasonable basis. As there are
no known material incremental costs to be incurred by Spinco as a direct result
of the Distribution, pro forma income statement information has not been
presented herein. In addition, the only pro forma adjustment that would be
applicable to the historical balance sheet of Spinco as of May 31, 2001 would be
the recording of common stock and additional paid-in-capital to reflect the
capitalization of NSI's equity investment in Spinco. Accordingly, no pro forma
financial statements for Spinco have been included in this information
statement.
34
48
SELECTED FINANCIAL DATA
The following table sets forth certain selected combined financial data of
Spinco, which have been derived from the combined financial statements of Spinco
for the nine months ended May 31, 2001 and 2000, and for each of the five years
in the period ended August 31, 2000. The historical information may not be
indicative of Spinco's future performance as an independent company. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
"Combined Financial Statements" and the notes thereto, and the "Pro Forma
Financial Information" and the discussion thereof, included elsewhere in this
information statement. Operating expenses in the historical income statements
reflect direct expenses of the Spinco businesses together with allocations of
certain NSI corporate expenses that have been charged to Spinco based on usage
or other methodologies appropriate for such expenses. In the opinion of Spinco
management, these allocations have been made on a reasonable basis. Actual per
share data has not been presented since the businesses that comprise Spinco were
wholly owned subsidiaries of NSI during the periods presented.
(UNAUDITED)
NINE MONTHS ENDED
MAY 31, YEARS ENDED AUGUST 31,
----------------------- --------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Net sales................ $1,482,957 $1,466,622 $2,022,711 $1,708,385 $1,559,787 $1,354,595 $1,235,453
Net income............... 34,104 52,785 83,691 89,116 81,811 64,019 67,832
Total assets at period
end.................... 1,370,605 1,371,145 1,422,880 1,337,038 700,112 638,636 568,593
Long-term debt (including
current portion) at
period end............. 384,302 434,040 384,443 435,567 73,190 21,313 19,966
Pro forma basic earnings
per share.............. 0.83 n/a 2.06 n/a n/a n/a n/a
35
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Selected
Financial Data," the "Combined Financial Statements" including the notes
thereto, the "Pro Forma Financial Information" and discussion thereof and the
other financial information included elsewhere in this information statement.
This discussion contains forward-looking statements. Please see "Cautionary
Statement Regarding Forward-Looking Statements" on page 7 for a discussion of
the uncertainties, risks and assumptions associated with these statements.
SEPARATION FROM NATIONAL SERVICE INDUSTRIES, INC. (NSI)
Spinco was incorporated under the laws of the State of Delaware on June 27,
2001, as an indirect wholly owned subsidiary of NSI. Spinco will have no
material assets or activities until the contribution of the lighting equipment
and chemicals businesses described in this information statement. After the
Distribution, Spinco will be an independent public company, with NSI having no
continuing ownership interest in Spinco.
Spinco's combined financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and reflect
the historical financial position, results of operations, and cash flows of the
businesses to be transferred to Spinco from NSI as part of the Distribution. The
financial information included in this information statement, however, is not
necessarily indicative of what Spinco's results of operations or financial
position would have been had it operated as an independent company during the
periods presented, nor is it necessarily indicative of its future performance as
an independent company.
All material intercompany transactions between entities included in
Spinco's combined financial statements have been eliminated. Spinco has been
allocated certain NSI corporate assets, liabilities and expenses based on an
estimate of the proportion of such amounts allocable to Spinco, utilizing such
factors as total revenues, employee headcount and other relevant factors. Spinco
believes that these allocations have been made on a reasonable basis. Spinco
believes that all costs allocated to Spinco are a reasonable representation of
the costs that Spinco would have incurred if Spinco had performed these
functions as a stand-alone company.
In conjunction with the separation of the lighting equipment and chemicals
businesses from NSI, Spinco will enter into various agreements with NSI that
address the allocation of assets and liabilities, and that define Spinco's
relationship with NSI after the Distribution, including a distribution
agreement, a tax disaffiliation agreement, an employee benefits agreement, and a
transition services agreement.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999 AND FISCAL YEAR 1999 COMPARED
WITH FISCAL YEAR 1998
Spinco's businesses had revenues of $2.0 billion for the fiscal year ended
August 31, 2000. The revenue increase in comparison to the prior year resulted
from 1999 acquisitions, primarily Holophane, as well as core growth in both
business segments. Revenues in 1999
36
50
were $1.7 billion, representing a 9.5% increase in comparison to 1998 primarily
due to growth in the core business and acquisitions.
Net income in fiscal 2000 decreased $5.4 million to $83.7 million,
primarily as increased profit in the lighting equipment and chemicals businesses
was offset by increased interest expense related to higher debt levels for
financing capital expenditures, prior-year acquisitions, and increased inventory
and receivables. Net income for 1999 increased $7.3 million over 1998, or 8.9%,
to $89.1 million.
Lighting equipment segment sales grew $291.0 million, or 23.8%, to $1.5
billion in 2000. The growth in sales primarily related to the acquisitions of
Holophane Corporation ("Holophane") and Peerless Corporation ("Peerless").
Operating profit increased primarily as a result of the acquisitions of
Holophane and Peerless, growth in the segment's core business, and containment
of fixed costs, offset somewhat by a $1.0 million pretax charge during the first
quarter of fiscal 2000 for closing a manufacturing facility in California.
Although the non-residential construction market remained strong throughout
fiscal 2000, Spinco forecasts a 5% decline in the next calendar year's
non-residential construction market. Spinco expects to partially offset the
impact of the anticipated slowing market with cost-saving initiatives and the
achievement of synergies related to the Holophane acquisition. Sales grew $115.3
million, or 10.4%, to $1.2 billion in fiscal 1999. Continued strength in the
non-residential construction market and the acquisitions of GTY Industries
(d/b/a "Hydrel"), Peerless, and Holophane contributed to the growth in sales. As
a result of the increased sales and manufacturing cost savings, operating profit
increased 11.4% in 1999.
Chemicals segment revenues for fiscal 2000 increased $23.3 million, or
4.8%, to $511.1 million. Increased revenues related primarily to growth in the
retail channel and higher revenue in the institutional and industrial channels.
Operating profit increased $3.5 million, or 7.7%, to $48.7 million. The increase
in operating profit resulted from the increased revenue, offset somewhat by a
$2.0 million pretax charge for the disposal of obsolete retail chemical
inventories in the fourth quarter of fiscal 2000 and lower operating profit from
the segment's international operations. The chemicals segment's international
operations were negatively impacted by severance costs and weakening currencies.
During fiscal 2000, NSI reorganized its three chemical companies. Under the new
structure, Spinco expects to benefit from shared resources but will continue to
maintain separate sales forces and product brand identities. Revenues in 1999
increased $33.3 million, or 7.3%, to $487.8 million. The increase in fiscal 1999
revenue was a result of continued growth in the retail channel, higher revenue
in the industrial and institutional distribution channels, inclusion of a full
year of Calman Australia Pty Ltd. ("Calman"), and other international revenue.
Operating profit increased $8.7 million, or 24.0%, to $45.2 million as a result
of the increased revenues, lower operating costs, and severance costs included
in 1998 that were not repeated in 1999.
Allocated corporate expenses in fiscal 2000 increased $2.6 million,
primarily due to higher costs related to strategic initiatives, partially offset
by lower compensation expense. Corporate expenses in fiscal 1999 approximated
those in fiscal 1998. Net interest expense increased $30.6 million in fiscal
2000 as a result of higher debt levels required for financing acquisitions as
well as higher capital expenditures and working capital. Net interest expense
increased $8.3 million in 1999 as a result of higher average debt levels.
Combined income before taxes in 2000 decreased $7.3 million, or 5.1%, to
$135.3 million primarily due to increased interest expense partially offset by
increased operating
37
51
profits in both the lighting equipment and chemicals segments. Income before
taxes increased $12.7 million, or 9.8%, to $142.6 million in fiscal 1999
primarily due to increased income from both the lighting equipment and chemicals
segments. The provision for income taxes was 38.1%, 37.5%, and 37.0% in fiscal
years 2000, 1999, and 1998, respectively. The increase in the provision for
income taxes primarily relates to goodwill recorded in the Holophane
acquisition, which is not deductible for tax purposes.
ACQUISITIONS
Management periodically implements strategic transactions that, it
believes, afford it the opportunity to redeploy resources to create value and
position the business for future growth. During the three-year period ending
August 31, 2000, the following transactions occurred:
Acquisition spending in 2000 totaled $16.2 million and related to the
cash-out of remaining Holophane shares. NSI purchased Holophane, a manufacturer
of premium quality, highly engineered lighting fixtures and systems, in July
1999 for approximately $470.8 million, including approximately $20.0 million for
the payoff of Holophane's existing debt. Of the total purchase price, $454.6
million was paid during fiscal 1999 and $16.2 million was paid during fiscal
2000.
In 1999, acquisition spending totaled approximately $514.4 million and was
primarily related to the Holophane acquisition. Other acquisitions in the
lighting equipment segment included the September 1998 purchase of certain
assets of Hydrel, a manufacturer of architectural-grade light fixtures for
landscape, in-grade, and underwater applications; the April 1999 purchase of
certain assets of Peerless, a manufacturer of high performance indirect/direct
suspended lighting products; and the July 1999 purchase of C&G Carandini SA, a
manufacturer of exterior lighting fixtures.
In 1998, acquisition spending totaled $11.4 million and was primarily
related to the chemicals segment. In November 1997, NSI purchased Pure
Corporation, a specialty chemical company with its core businesses in Indiana,
Pennsylvania, and New York. In July 1998, NSI purchased Calman. Calman, located
in Victoria, Australia, is a manufacturer of cleaning, maintenance, sanitation
and industrial products, chemicals, supplies, and accessories. Additionally, NSI
paid certain performance payments associated with a prior-year chemicals
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999 AND FISCAL YEAR 1999 COMPARED
WITH FISCAL YEAR 1998
Operating Activities
Operations provided cash of $64.0 million in 2000, compared with cash
provided of $148.1 million in 1999 and $36.4 million in 1998. The decrease in
2000 related to the increase in receivables and inventory, a decrease in current
liabilities, and an increase in income tax payments. The increase in 1999
primarily resulted from increased payables and accrued liabilities, lower
inventories, an increase in net income, and lower tax payments.
38
52
Investing Activities
Investing activities used cash of $87.0 million in 2000, $554.4 million in
1999 and $60.1 million in 1998. The change in fiscal 2000 primarily related to a
decrease in acquisition spending, offset somewhat by an increase in capital
expenditures. The change during 1999 was a result of the significant increase in
acquisition spending.
Acquisition spending during fiscal 2000 was $16.2 million and related
primarily to the cash-out of remaining Holophane shares. Prior-year acquisition
spending of $514.4 million related to the lighting equipment segment's purchase
of Holophane, certain assets of Hydrel, certain assets of Peerless, and C&G
Carandini SA. In 1998, acquisition spending totaled $11.4 million and was
primarily related to the chemicals segment.
Capital expenditures were $62.9 million in 2000, compared with $38.6
million in 1999 and $46.7 million in 1998 and primarily related to the lighting
equipment segment. In 2000, the lighting equipment segment invested in land,
buildings, and equipment for a new plant and in an office facility. The lighting
equipment segment's capital expenditures in 1999 related to the purchase of land
and buildings for a new plant, manufacturing improvements and upgrades for
capacity expansion, and implementation of new technology. During 1998, the
lighting equipment segment invested in facility expansions and manufacturing
process improvements. In 2001, capital expenditures are expected to approximate
$50.7 million as the company continues to invest capital in technology and
facilities. Contractual commitments for capital and acquisition spending for
fiscal year 2001 approximate $14.1 million.
Financing Activities
Financing activities provided cash of $22.6 million and $390.2 million
during 2000 and 1999, respectively, and used cash of $13.6 million in 1998. The
decrease in cash provided by financing activities in 2000 primarily related to
the decrease in net borrowings from $463.1 million to $91.9 million. Fiscal 2000
borrowings were used for general operating purposes, including working capital
requirements and capital expenditures. Fiscal 1999 borrowings were used
primarily to finance acquisitions.
Management believes current cash balances, anticipated cash flows from
operations, and available funds from its commercial paper program or committed
credit facilities, and the complimentary uncommitted lines of credit are
sufficient to meet Spinco's planned level of capital spending and general
operating cash requirements for at least the next twelve months.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 2001 COMPARED WITH NINE MONTHS ENDED MAY 31, 2000
Spinco's businesses generated revenue of $1.5 billion in the nine months
ended May 31, 2001 representing a $16.3 million increase over the same period in
the prior year. The increase in revenue was primarily due to the chemicals
segment, although modest growth was noted in the lighting equipment segment.
Net income in the nine months ended May 31, 2001 decreased $18.7 million to
$34.1 million as the increase in revenue was offset by losses on the sale of the
French and Australian chemical businesses, weakened economic conditions, higher
interest expense and
39
53
energy costs, and expenses associated with repositioning Spinco's businesses for
an economic slowdown. Spinco anticipates that its operations will continue to be
impacted by a softer economy. Although Spinco expects to offset the effects of
the economic slowdown with operational initiatives such as the consolidation of
the chemicals businesses, a major sourcing initiative, other cost reduction
projects, and aggressive sales efforts, further deterioration in economic
conditions could negatively impact future earnings.
Compared with the same period in the prior year, revenue in the lighting
equipment segment for the nine months ended May 31, 2001 increased $3.0 million
to $1.1 billion, or less than 1%. Spinco expects the non-residential
construction market to remain flat or slightly down from current levels over the
remainder of calendar 2001. Excluding a $1.0 million pretax charge during the
first quarter of fiscal 2000 for closing a manufacturing facility in California,
year-to-date operating profit remained relatively flat as profit improvements
during the third quarter were offset by increased spending for sales, marketing
and technology initiatives and costs to establish a Texas distribution center.
Revenue in the chemicals segment of $386.5 million for the nine months
ended May 31, 2001, increased $13.3 million compared to the same prior-year
period. The increase was due to sales volume growth in North America in the
retail, industrial, and institutional channels, offset somewhat by a decrease in
revenue in Europe and Australia. The decrease in international revenue was
attributable, in part, to unfavorable foreign currency fluctuations. The profit
contribution from the increase in revenue was more than offset by a loss on the
sale of the segment's French and Australian operations. In addition to these
factors, operating profit for the nine months ended May 31, 2001 decreased
compared to a year ago as a result of costs incurred to integrate the chemical
operations, increased energy costs, and up-front costs associated with
developing new sales representatives.
As part of an initiative to refocus the overseas operations of the
chemicals segment, NSI sold its Australian subsidiary, NSI International Pty,
Ltd., resulting in a pretax loss of $5.6 million. In addition, NSI entered into
a contract to sell its French operations, as well as certain trademarks and
formulas. Spinco recorded an estimated pretax loss on this transaction of $9.0
million and finalized the sale on June 29, 2001. The combined pretax loss of
$14.6 million is included in "Loss on sale of businesses" in the "Combined
Statements of Income."
For the nine months ended May 31, 2001, allocated corporate expenses
increased $3.2 million to $13.7 million. Higher year-to-date corporate expenses
were primarily caused by lower-than-normal long-term incentive compensation
expense in the prior-year first quarter and higher costs related to strategic
and operational initiatives. Year-to-date net interest expense increased as a
result of higher outstanding debt balances and higher interest rates. On a
year-to-date basis, the provision for income taxes increased to 41.7% of pretax
income primarily as a result of nondeductible losses associated with the
chemicals segment's divestiture of its French operations.
40
54
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED MAY 31, 2001 COMPARED WITH NINE MONTHS ENDED MAY 31, 2000
Operating Activities
Operations provided cash of $100.8 million during the nine months ended May
31, 2001 compared with $25.3 million during the respective period of the prior
year. The improvement in operating cash flows was largely due to an increase in
net cash provided by receivables and inventory, primarily as a result of the
implementation of working capital initiatives. Improvements in cash flow from
these items were partially offset by the decrease in net income.
Investing Activities
Investing activities used cash of $31.1 million during the nine months
ended May 31, 2001 versus $59.5 million in the prior year. The change in
investing cash flows related primarily to lower capital expenditures and
acquisition spending and an increase in cash provided from the sale of
businesses. Higher acquisition spending in fiscal 2000 was primarily due to
remaining payments associated with the 1999 acquisition of Holophane.
Capital expenditures totaled $38.3 million for the nine months ended May
31, 2001 compared to $48.3 million in the prior period. In the lighting
equipment segment, investments were made primarily in manufacturing cost
improvements, new product tooling, and the completion of a new corporate
headquarters. In the chemicals segment, capital expenditures were associated
with manufacturing equipment and facilities improvements. In the same period
last year, capital spending was primarily attributable to the lighting equipment
segment. The lighting equipment segment invested in land, buildings, and
equipment for a new plant in Mexico, manufacturing cost improvements, and new
product tooling.
Management believes current cash balances, anticipated cash flows from
operations, available funds from the commercial paper program, short-term
secured borrowings and a committed credit facility, as well as the complimentary
lines of credit, are sufficient to meet Spinco's planned level of capital
spending and general operating cash requirements for at least the next twelve
months.
Financing Activities
Cash used for financing activities totaled $56.7 million during the nine
months ended May 31, 2001 compared to cash provided of $34.3 million one year
ago, primarily as a result of a reduction in cash provided by net borrowings.
The decrease in cash provided by net borrowings was primarily due to improved
operating cash flows and a decrease in capital expenditures and acquisition
spending.
In May 2001, NSI entered into a three-year agreement (the "Receivables
Facility") to borrow, on an ongoing basis, up to $150.0 million secured by
undivided interests in a defined pool of trade accounts receivable of the
lighting equipment and chemicals segments. At May 31, 2001, net trade accounts
receivable pledged as security for borrowings under the Receivables Facility
totaled $220.4 million. Borrowings outstanding at May 31, 2001 of $118.9 million
were used to reduce borrowings under NSI's
41
55
commercial paper program. Interest rates under the Receivables Facility are
based on the LIBOR rate.
In June 2001, NSI renewed the $250.0 million, 364-day committed credit
facility (the "Revolving Credit Facility") with six domestic banks. The
Revolving Credit Facility supports NSI's $250.0 million commercial paper
program. Interest rates under the Revolving Credit Facility are based on the
LIBOR rate or other rates, at NSI's option. NSI pays an annual fee on the
commitment based on NSI's debt rating.
As part of the distribution agreement between NSI and Spinco, all but
approximately $5 million of NSI's total outstanding debt will be assumed by
Spinco or refinanced with new borrowings by Spinco. Accordingly, for purposes of
the historical presentation of Spinco's financial position as of May 31, 2001,
August 31, 2000 and August 31, 1999 included in this information statement, all
but $5 million of NSI's total outstanding debt has been presented as obligations
of Spinco. For purposes of the historical presentation of Spinco's results of
operations, Spinco has reflected all of NSI's interest expense related to the
debt allocated to it. Management intends to take the necessary actions to effect
the transfer of these obligations to Spinco under the same terms existing with
NSI; however, management does not have the ability to unilaterally effect the
transfer in all cases. In the event that any of NSI's creditors do not accept
this transfer, Spinco will be required to refinance the related borrowings. In
addition, Spinco expects to enter into a new credit facility to borrow under, or
if desired, support its commercial paper program, as the Credit Facility and the
Revolving Credit Facility described above will expire upon the completion of the
Distribution. Management believes that the terms of the debt which will
ultimately be outstanding at Spinco will not differ materially from the terms of
NSI's debt currently outstanding.
ACCOUNTING STANDARDS YET TO BE ADOPTED
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." Specifically, Issue 00-10 addresses how the seller of goods should
classify amounts billed to a customer for shipping and handling. The EITF
concluded that all amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as revenue. Spinco is required to and will adopt EITF 00-10
in the fourth quarter of fiscal year 2001. NSI has historically netted certain
shipping and handling revenues charged to customers in costs and expenses. The
adoption of EITF 00-10 will result in an increase in sales and costs and
expenses, with no impact on net income. Spinco has not yet calculated the effect
of this reclassification on its reported revenues and costs.
ENVIRONMENTAL MATTERS AND LITIGATION
See "Note 6: Commitments and Contingencies" in the "Notes to the Combined
Financial Statements" beginning on page F-18 for a discussion of environmental
and litigation matters.
OUTLOOK
Management continues to execute its strategic plan to grow internally. With
both segments anticipating higher material, labor, and fuel costs, an economic
slowdown may
42
56
intensify pricing pressures and limit Spinco's ability to pass along these
additional costs in the form of price increases. Additionally, Spinco will incur
costs to improve the flexibility of its cost structure to better position it for
the slowdown. However, Spinco expects to deliver improved earnings results as it
benefits from initiatives taken to improve the cost structure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL. Spinco is exposed to market risks that may impact the "Combined
Balance Sheets," "Combined Statements of Income," and "Combined Statements of
Cash Flows" due to changing interest rates and foreign exchange rates. Spinco
does not currently participate in any significant hedging activities, nor does
it currently utilize any significant derivative financial instruments. The
following discussion provides additional information regarding Spinco's market
risks.
INTEREST RATES. Interest rate fluctuations expose Spinco's variable-rate
debt to changes in interest expense and cash flows. Spinco's variable-rate debt,
primarily commercial paper and short-term secured borrowings, amounted to $264.4
million at May 31, 2001. Based on outstanding borrowings at quarter-end, a 10%
adverse change in market interest rates at May 31, 2001 would result in
additional annual after-tax interest expense of approximately $0.8 million.
Although a fluctuation in interest rates would not affect interest expense or
cash flows related to the $360 million publicly traded notes, Spinco's primary
fixed-rate debt, a 10% increase in market interest rates at May 31, 2001 would
decrease the fair value of these notes to approximately $345.7 million.
FOREIGN EXCHANGE RATES. The majority of Spinco's revenue, expense, and
capital purchases are transacted in U.S. dollars. Spinco does not believe a 10%
fluctuation in average foreign currency rates would have a material effect on
its combined financial position or results of operations. Spinco does not engage
in speculative transactions, nor does Spinco hold or issue financial instruments
for trading purposes. To the extent possible, Spinco mitigates its exposure to
unfavorable foreign currency translation adjustments through the use of
foreign-currency denominated debt agreements.
43
57
SPINCO'S BUSINESSES
GENERAL
Spinco will own and operate the lighting equipment and chemicals businesses
of NSI. These businesses represented approximately 80% of NSI's consolidated
assets and revenues as of and for the fiscal year ended August 31, 2000.
Following the Distribution, NSI's operations will consist of the textile rental
and envelope businesses.
LIGHTING EQUIPMENT
Spinco's lighting equipment business includes Lithonia Lighting and
Holophane. Management of Spinco believes that the lighting equipment business is
the world's largest manufacturer of lighting fixtures for both new construction
and renovation. Products include a full range of indoor and outdoor lighting for
commercial and institutional, industrial and residential applications. Lighting
products are manufactured in the United States, Canada, Mexico, and Europe and
are marketed under numerous brand names, including Lithonia, Holophane(R),
Home-Vue(R), Light Concepts(R), Gotham(R), Hydrel(R), Peerless(R), Antique
Street Lamps, and Reloc(R).
Principal customers include wholesale electrical distributors, retail home
centers, and lighting showrooms located in North America and select
international markets. In North America, the lighting equipment business's
products are sold through independent sales agents and factory sales
representatives who cover specific geographic areas and market segments.
Products are delivered through a network of distribution centers, regional
warehouses, and commercial warehouses using both common carriers and a company-
owned truck fleet. For international customers, the lighting equipment business
employs a sales force that adopts distribution methods to meet individual
customer or country requirements. In fiscal 2000, North American sales accounted
for more than 97% of the lighting equipment business's gross sales.
CHEMICALS
Spinco's chemicals business, The Zep Group, includes Zep Manufacturing
Company, Enforcer Products, and Selig Industries. The Zep Group is a leading
provider of specialty chemical products in the institutional and industrial
(I&I) and retail markets. Products include cleaners, sanitizers, disinfectants,
polishes, floor finishes, degreasers, deodorizers, pesticides, insecticides, and
herbicides. Zep Manufacturing manufactures products in four North American
plants and two European plants. Enforcer operates a single manufacturing
facility in Georgia.
The Zep Group provides products to customers primarily in North America and
Western Europe. In fiscal 2000, North American sales accounted for approximately
90% of the business's gross sales. Zep Manufacturing and Selig Industries serve
a range of institutional and industrial customers, from small sole
proprietorships to Fortune 1000 corporations. Individual markets in the
non-retail channel include automotive, vehicle wash, food, aviation, industrial
manufacturing, and contract cleaners and are serviced through a direct
commissioned sales force. Enforcer provides Enforcer-branded products and
Zep-branded products to retail channels such as home centers, hardware stores,
mass merchandisers, and drug stores.
44
58
INDUSTRY OVERVIEW
LIGHTING EQUIPMENT
The size of the world lighting fixture market in 2000 was estimated at
$19.0 billion. North America represents the largest market with a size of $8.5
billion, followed by Europe at $6.5 billion, and Asia/Pacific at $3.3 billion.
The U.S. market is relatively fragmented with the top four manufacturers
(including Spinco's lighting equipment business) representing approximately 50%
of the total lighting market.
Primary demand influences are non-residential and residential construction,
both new and renovation. Major trends include the on-going development of new
and more efficient lamp sources and optical designs, increased adoption of new
lighting ordinances, and continued emphasis on energy efficiency.
There has been a significant increase in the size and relative presence of
the retail home center segment. In addition, imports of foreign-sourced lighting
products continue to grow, including both the foreign production of U.S.
manufacturers, as well as low-cost fixtures from Asian manufacturers.
European-based electrical distributors have increased their presence in the U.S.
with the acquisition of U.S.-based local and regional distributor chains, and
smaller U.S. distributors continue to seek leverage through alignment with
buying groups.
CHEMICALS
The $7.6 billion U.S. industrial & institutional (I&I) janitorial cleaning
and sanitation market is highly fragmented with five major players (including
The Zep Group) possessing 50% of the total market and the remainder divided
between hundreds of regional players. In general, the market grows at a rate
approximating GDP. To some extent, consumption of janitorial cleaning and
sanitation products is discretionary, but in a health-driven, sophisticated
market such as the U.S., health and safety regulations and customer expectations
buffer demand downturns. Increasing legislation in the areas of food and
occupational health that require increased application ranges and frequency of
use is fueling demand increases. Demand decreases are being pushed by more
efficient product use and an increased awareness of the potential negative
impacts of occupational chemical exposure and residuals. In addition to the I&I
market, there is a U.S. retail chemical market of $5.4 billion, including a $3.4
billion market for cleaners and a $2.0 billion market for pest control.
Two major trends are reshaping the industry. First, health and safety
regulations are shrinking the pool of available chemicals, while at the same
time increasing the total use rates. This has pushed development of improved
physical product forms and application methods. Second, consolidation and
communication are forcing increased corporate buying and disintermediation of
the supply chain, threatening the reselling distributors and requiring increased
base manufacture logistics skills.
45
59
PRODUCTS
LIGHTING EQUIPMENT
The lighting equipment business produces a wide variety of lighting
fixtures, used in the following applications:
- COMMERCIAL & INSTITUTIONAL -- Applications are represented by stores,
hotels, offices, schools, hospitals, as well as other government and
public buildings. Products that serve these applications include
recessed, surface and suspended fluorescent lighting products, recessed
downlighting and track-lighting, as well as "high-abuse" lighting
products. The outdoor areas associated with these application segments
are addressed by the lighting equipment business's outdoor lighting
products, such as area and floodlighting, decorative site lighting, as
well as landscape lighting.
- INDUSTRIAL -- Applications include primarily warehouses and manufacturing
facilities. The lighting equipment business serves these applications
with a variety of glass and acrylic high intensity discharge (HID) and
fluorescent lighting products.
- INFRASTRUCTURE -- Applications include highways, tunnels, airports,
railway yards and ports. Products that serve these applications include
high-mast lighting, off-set roadway and sign lighting.
- RESIDENTIAL -- Applications are addressed with a combination of
decorative fluorescent and downlighting products, as well as utilitarian
fluorescent products.
- OTHER APPLICATIONS & PRODUCTS -- Other applications and products include
emergency lighting products which are used in all non-residential
buildings, and lighting control and flexible wiring systems.
CHEMICALS
The Zep Group produces and supplies various specialty chemicals products,
such as:
- CLEANERS -- One of the largest ranges, with liquid, emulsion, aerosol,
acids, solvent and powdered products. New products (45 in the past 24
months) have been based on "micro emulsion technology" and are targeted
to maintain a competitive advantage in this fast changing area.
- SANITIZERS/DISINFECTANTS -- This area has seen increased regulatory
pressure on the choice of available chemistry. Application technology and
the use of non-residual products such as chlorine dioxide have
supplemented the broad existing range of oxidizing and non-oxidizing
range.
- POLISHES -- Historically a strong area for The Zep Group, decreasing
customer interest has limited additional products in this range.
- FLOOR FINISHES -- This continues to be a strong product segment. Products
covering stripping, burnishing, cleaning, polishing, and broadloom and
spot carpet care provides customers with extensive choice. Little new
technology has been seen in this area recently.
- DEGREASERS -- Health and safety regulations have had a major impact in
this area. The Zep Group has introduced over 25 new products in this area
recently. These
46
60
new introductions have coped with the requirement for solvent elimination
and/or reductions in the percentage of volatile solvents.
- DEODORIZERS -- This market segment has seen significant growth, primarily
due to consumer demand. Driven more by application method, packaging and
physical form, this trend-based segment has required numerous new
introductions to strengthen the range, including metered dispensing
system and refillable delivery packages.
- PESTICIDES/INSECTICIDES/HERBICIDES -- There are few new molecules
available for The Zep Group to bring to market. As with solvents, this
segment has seen a decreasing pool of available chemistries and new
developments have targeted delivery systems and application methods.
STRATEGY
LIGHTING EQUIPMENT
Spinco's lighting equipment business intends to focus on the North American
market. Spinco believes that it must execute on a combination of rapid product
development and customer/channel focus in order to respond quickly and
effectively to specific opportunities. The lighting equipment business will
continue improving logistics, especially through Internet-based solutions, in
order to deliver timely and accurate information to customers. Management
believes the key challenge for the lighting equipment business is being able to
respond quickly to changing economic and market trends.
CHEMICALS
Spinco management believes the key objective for the chemicals business
will be the integration of all chemicals R&D, manufacturing, logistics and
support functions under The Zep Group. Management views the central challenge
ahead of the chemicals business as leveraging the strength and efficiencies
gained through the consolidation of support functions to grow revenues faster
than the overall market, and return the chemicals business to historical profit
margins.
CUSTOMERS
No single customer accounted for 10% or more of the lighting equipment and
chemicals businesses total revenues in fiscal year 2000. However, 11% of the
2000 fiscal year revenues of the chemicals business was related to a single
customer, the loss of which would adversely affect the chemicals business.
LIGHTING EQUIPMENT
The lighting equipment business's primary customer groups include
electrical distributors, retail home centers, national accounts, lighting
showrooms, and electric utilities. In addition, there are a variety of other
buying influences which, for any given project, could represent a significant
influence in the product specification process. These generally include
engineers, architects and lighting designers. For the nine months ended May 31,
2001, the main customer base for NSI's lighting equipment segment was electrical
distributors, representing approximately 75% of revenue. For the nine months
47
61
ended May 31, 2001, retail home centers and national accounts represented a
combined 12% of revenue.
CHEMICALS
The Zep Group features both institutional and industrial (I&I) and retail
customers. I&I customers include automotive, vehicle wash, aviation,
restaurateurs, industrial manufacturing and contract cleaners. Customers range
from small sole proprietorships to Fortune 1000 corporations. The retail market
includes customers such as Lowe's, Ace Hardware, TruServ Hardware and HWI,
together marketing a wide variety of the Enforcer line of products.
Additionally, The Home Depot is the exclusive marketing arm for Enforcer's
industrial strength line of cleaner products sold under the Zep Commercial brand
name. For the nine months ended May 31, 2001, the main customer base for NSI's
chemicals segment was the I&I market, representing approximately 82% of revenue.
MANUFACTURING
Spinco will operate 31 manufacturing facilities and sites in seven
countries, including 19 facilities in the United States, four facilities in
Canada, four facilities in Mexico, and four facilities in Europe.
LIGHTING EQUIPMENT
In the lighting equipment business, key processes are evaluated on an
ongoing basis to promote an appropriate balance of vertical integration versus
outsourced capabilities to produce the most profitable outcomes for the
business. Investment is focused at offsetting rising labor costs through
increased labor efficiency. Local supplier factories and warehouses also provide
an opportunity to minimize these locations' inventory carrying costs through
frequent just-in-time deliveries.
Contract manufacturing for residential, commercial and industrial product
occurs via established supplier/partner relationships. Also, OEM purchases of
finished goods are outsourced from both pole manufacturers for the outdoor
product line, as well as from Asian and European sources for a variety of
residential and commercial lighting equipment.
U.S. operations represent approximately 56% of production; Mexico accounts
for approximately 28% of production; Canada accounts for approximately 6% of
production; and Europe accounts for approximately 2% of production. The
remaining 8% of production is outsourced using contract manufacturing and OEM
finished good suppliers.
CHEMICALS
The Zep Group manufactures products that comprise approximately 75% of the
chemicals segment's sales volume, with facilities located in the United States,
Canada, Holland and Italy. The remaining 25% of the chemicals segment's sales
volume is derived from finished goods that supplement the manufactured product
line. Approximately 4% of the inhouse manufactured goods are produced outside of
the U.S.
Core manufacturing and distribution processes are being integrated to
provide the lowest possible costs. The Zep Group is focused on efforts to
maximize return on employed capital through Six Sigma to lead productivity
improvement programs. In
48
62
addition, efforts are underway to optimize inventories through a Stock Keeping
Unit (SKU) reduction program.
The Zep Group controls a proprietary distribution network designed to
ensure continuation of customer service levels at the top end of the industrial
and retail markets. Given the freight systems and technology available in
today's marketplace, The Zep Group will continue to explore options for
reductions in distribution network assets while improving historically higher
service levels.
DISTRIBUTION
LIGHTING EQUIPMENT
Products are delivered through a network of strategically located
distribution centers, regional warehouses, and commercial warehouses using both
common carriers and a company-owned truck fleet. For international customers,
the lighting equipment business employs an inside sales force that adapts
distribution methods to meet individual customer or country requirements.
CHEMICALS
The Zep Group employs a direct sales force. The Zep and Selig brands
utilize numerous strategically located distribution centers, while the Enforcer
products are shipped via common carrier from the Cartersville, Georgia, plant
and warehouse.
RESEARCH AND DEVELOPMENT
In recent years, research and development for the lighting equipment and
chemicals segments of NSI has been focused on the development of new products
and improved delivery systems. NSI spent approximately $14.2 million on research
and development for the lighting equipment and chemicals segments in the nine
months ended May 31, 2001. NSI spent $18.6 million, $8.1 million and $12.9
million on research and development activities for the lighting equipment and
chemicals segments for the fiscal years ended August 31, 2000, 1999 and 1998,
respectively.
SALES AND MARKETING
LIGHTING EQUIPMENT
SALES. The lighting equipment business will sell its lighting products
through independent sales agents and factory sales representatives. Following
the Distribution, Spinco will employ approximately 500 people in sales and
marketing of lighting products, with 331 in the United States, 33 in Canada, 60
in Mexico, and 76 in other countries, including Europe and Asia.
MARKETING. The lighting equipment business will market its products
through a broad spectrum of marketing and promotion vehicles, including direct
customer contact, on-site training at a training facility, print advertising in
industry publications, product brochures and other literature, as well as
electronic media. Direct customer contact will be performed by market
development managers, whose primary role is the promotion of select products to
the many buying influences involved in the specification/bid process common in
the industry. On-site training is conducted at a dedicated product training
facility at the lighting equipment business's headquarters in Conyers, Georgia.
49
63
CHEMICALS
SALES. Spinco will sell its chemicals products primarily through a direct
sales force. Following the Distribution, Spinco will employ approximately 2,100
people in sales and marketing of chemicals products, with 1,650 in the United
States, 190 in Canada, and 260 in Europe. In the United States, sales
representatives will be distributed in proportion to the relative size of the
economic centers.
MARKETING. Marketing efforts are focused on solving customer needs through
attention to solution-based programs that combine industry knowledge with
chemical products and delivery systems.
COMPETITION
LIGHTING EQUIPMENT
The lighting equipment industry in which Spinco will operate is highly
competitive, with the largest suppliers serving many of the same markets.
Competition is based on brand name recognition, price, product quality and
customer responsiveness. Main competitors in the lighting industry include
Cooper Industries, Genlyte Group and U.S. Industries. Spinco management believes
that, together with Spinco's lighting equipment business, the four largest
lighting manufacturers (including Spinco's lighting equipment business) possess
approximately a 50% share of the total lighting market.
CHEMICALS
The chemicals industry in which Spinco will operate is highly competitive.
Overall, competition is very fragmented, with numerous local and regional
operators and a few companies with national presences. Most competitors offer
products in some but not all of the markets served by Spinco. Competition is
based primarily on brand name recognition, price, product quality, and customer
responsiveness. Competitors in the chemicals industry include Ecolab,
Unilever/Diversey, NCH and SC Johnson. Management believes that the five major
players (including The Zep Group) have 50% of the total market and the remainder
is divided between hundreds of regional players.
ENVIRONMENTAL REGULATION
Spinco's operations will be subject to federal, state, local and foreign
laws and regulations relating to the generation, storage, handling,
transportation, and disposal of hazardous substances and solid and hazardous
wastes and to the remediation of contaminated sites. Permits and environmental
controls are required for certain of Spinco's operations to limit air and water
pollution, and these permits are subject to modification, renewal, and
revocation by issuing authorities. Spinco will incur capital and operating costs
relating to environmental compliance on an ongoing basis. Environmental laws and
regulations have generally become stricter in recent years, and the cost of
responding to future changes may be substantial. While Spinco believes that it
is currently in substantial compliance with all material environmental laws and
regulations, there can be no assurance that Spinco will not incur significant
costs to remediate violations of such laws and regulations, particularly in
connection with acquisitions of existing operating facilities, or to comply with
changes in, or stricter or different interpretations of, existing laws and
regulations. Such costs could have a material adverse effect on Spinco's results
of operations.
50
64
Spinco will assume certain environmental liabilities in the Distribution
relating to ongoing legal proceedings in connection with state and federal
Superfund sites. While Spinco does not believe these claims will result in
material liability, there can be no assurance that Spinco will not be required
pay a substantial amount of money relating to these claims. Such payment could
have a material adverse effect on Spinco's results of operations. See "Note 6:
Commitments and Contingencies" in the "Notes to the Combined Financial
Statements" beginning on page F-18 for a discussion of environmental matters.
RAW MATERIALS
Spinco's businesses require certain raw materials for their products,
including aluminum, plastics, electrical components, solvents, surfactants,
certain grades of steel and glass. Spinco will purchase most of these raw
materials on the open market and rely on third parties for the sourcing of
finished goods. As such, the cost of products sold may be affected by changes in
the market price of the above-mentioned raw materials or sourcing services and
finished goods. Spinco does not expect to engage in commodity hedging
transactions for raw materials. Significant increases in the prices of Spinco's
products due to increases in the cost of raw materials or sourcing could have a
negative effect on demand for products and on profitability as well as a
material adverse effect on Spinco's results of operations.
Each business utilizes multiple suppliers, with no single supplier
comprising more than 10% of purchased raw materials of either business. Each
business constantly monitors and investigates alternative suppliers and
alternative materials. Additionally, each business has participated in internet
auctions as a new method of competitive bidding.
BACKLOG ORDERS
Sales order backlogs of the lighting equipment business believed to be firm
as of May 31, 2001 and May 31, 2000 were $134 million and $145 million,
respectively. The May 31, 2000 backlog for lighting equipment reflects increased
orders after a price increase was announced in April 2000. Sales order backlogs
for the chemicals business are not material.
PATENTS, LICENSES AND TRADEMARKS
Spinco will own and have obtained licenses to various domestic and foreign
patents, patent applications and trademarks related to its products, processes
and businesses. These intellectual property rights, particularly the trademarks
relating to the brands of Spinco products, are important factors for Spinco's
business. To protect these proprietary rights, Spinco relies on copyright, trade
secret and trademark laws. Despite these protections, unauthorized parties may
attempt to infringe on Spinco's intellectual property. Management of Spinco is
not aware of any such material unauthorized use or of any claims that Spinco
does not have the right to use any intellectual property material to Spinco's
businesses. While patents and patent applications in the aggregate are important
to Spinco's competitive position, no single patent or patent application is
material to Spinco.
51
65
SEASONALITY AND CYCLICALITY
Spinco's businesses are seasonal in nature, with revenues being affected by
the impact of weather and seasonal demand on construction and installation
programs, in addition to the annual budget cycles of major customers. Because of
these seasonal factors, Spinco expects to experience its highest sales in the
last two quarters of its fiscal year ended August 31.
A significant portion of the lighting equipment business's revenues are
made to customers in the new construction and renovation industries. These
industries are cyclical in nature and subject to changes in general economic
conditions. In addition, sales of the chemicals business are dependent on the
retail, wholesale and industrial markets for its product line. Economic
downturns and the potential declines in construction and demand for specialty
chemicals may have a material adverse effect on Spinco's net sales and operating
income.
INTERNATIONAL OPERATIONS
Spinco will manufacture and assemble products at numerous facilities, some
of which are located outside the United States. Approximately 39% and 4% of the
lighting equipment and chemicals segments' products, respectively, are
manufactured outside the United States. Spinco will also obtain components and
finished goods from suppliers located outside the United States. Approximately
28% of Spinco's lighting equipment products are produced in facilities operated
in Mexico. Mexico has enacted legislation to promote the use of such
manufacturing operations, known as "Maquiladoras," by foreign companies. These
operations are authorized to operate as Maquiladoras by the Ministry of Commerce
and Industrial Development of Mexico. Maquiladora status allows Spinco to import
certain items from the United States into Mexico duty-free, provided that such
items, after processing, are re-exported from Mexico within six months.
Maquiladora status, which must be renewed every two years, is subject to various
restrictions and requirements, including compliance with the terms of the
Maquiladora program and other local regulations. Although manufacturing
operations in Mexico continue to be less expensive than comparable operations in
the United States, in recent years many companies have established Maquiladora
operations to take advantage of lower labor costs. Increasing demand for labor,
particularly skilled labor and professionals, from new and existing Maquiladora
operations has in the past and could in the future result in increased labor
costs. Spinco may be required to make additional investments in automating
equipment to partially offset increased labor costs.
For the fiscal year ended August 31, 2000, international sales represented
approximately 10% and 17% of the total sales of the lighting equipment and
chemicals businesses, respectively.
EMPLOYEES
Following the Distribution, Spinco will employ approximately 11,800
employees, of whom approximately 8,050 will be employed in the United States,
2,400 in Mexico, 720 in Canada, and 630 in other international locations,
including Europe and Asia/Pacific. Union recognition and collective bargaining
arrangements will be in place in six countries (including the United States),
covering a total of approximately 5,500 persons (including approximately 2,950
in the United States). Management believes that it generally has a good
relationship with both its unionized and non-unionized employees.
52
66
PROPERTIES
The general corporate offices of Spinco are located in Atlanta, Georgia.
Because of the diverse nature of operations and the large number of individual
locations, it is neither practical nor meaningful to describe each of the
operating facilities owned or leased by Spinco. The following listing summarizes
the significant facility categories by business:
DIVISION OWNED LEASED NATURE OF FACILITIES
- -------- ----- ------ --------------------
Lighting Equipment................ 18 6 Manufacturing Facilities
1 9 Warehouses
1 1 Distribution Centers
9 11 Offices
Chemicals......................... 4 3 Manufacturing Plants
16 40 Warehouses
-- 10 Offices
-- 1 Training Center
LEGAL PROCEEDINGS
From time to time, as a normal incident of the nature and kind of
businesses in which Spinco is engaged, various claims or charges may be asserted
and litigation commenced against Spinco. In the opinion of Spinco's management,
no current claim or litigation would result in a material adverse effect on
Spinco's results of operations or financial condition. See "Note 6: Commitments
and Contingencies" in the "Notes to the Combined Financial Statements" beginning
on page F-18 for a discussion of litigation matters.
53
67
SPINCO'S MANAGEMENT
BOARD OF DIRECTORS
As provided in Spinco's certificate of incorporation, Spinco's board of
directors will be divided into three classes. Directors in each class initially
will serve until the annual meeting of stockholders held in the year in which
the term for such class expires and will serve thereafter for three-year terms.
Spinco initially intends to have a board of directors that will consist of
between 9 and 11 directors. Each director of Spinco who is a director of NSI is
expected to resign from NSI's board as of the Distribution Date. Following the
Distribution, there will be no overlap between the respective boards of
directors of NSI and Spinco. Spinco expects to determine the composition of its
board of directors before the NSI board of directors declares the Distribution.
COMMITTEES OF THE BOARD OF DIRECTORS
Spinco's board of directors will establish several standing committees to
assist in the discharge of its responsibilities. These committees will include
an audit committee, a nominating and compensation committee and an executive
committee. Spinco's board of directors will also establish such other committees
as it deems appropriate, in accordance with applicable Delaware law and Spinco's
bylaws.
DIRECTORS' COMPENSATION
Directors who are salaried employees of Spinco will receive no additional
compensation for services as a director or as a member of a committee of
Spinco's board. Following the Distribution Date, all non-employee directors are
expected to receive an annual retainer of $40,000. The chair of each standing
committee of the board is expected to receive an additional annual fee of
$5,000. Spinco will also reimburse each non-employee director for out-of-pocket
expenses incurred in connection with attendance at board and committee meetings.
Spinco intends to adopt a deferred stock unit plan for the benefit of the
non-employee directors. Under this plan, each director will be paid one-half of
his annual fee and may elect to receive additional portions of his annual fee
and chairman fee in deferred stock units. Non-employee directors will receive a
one-time grant of deferred stock units upon their election and an annual grant
of deferred stock units. The value and return on the deferred stock units will
be equivalent to the value and return on Spinco Shares. The director's account
will generally be payable on or after retirement from the board.
The deferred stock units currently held by non-employee directors of NSI
who will become directors of Spinco will be transferred and assumed by Spinco.
As of the Distribution Date, the value of such units will be converted into
deferred stock units representing Spinco Shares based upon the relative values
of NSI's common stock and the Spinco Shares.
Spinco expects its board will adopt, with the approval of NSI (or a
subsidiary thereof) in its capacity as sole stockholder, the Spinco 2001
Non-Employee Director Stock Option Plan (the "Director Plan"). The full text of
the Director Plan will be filed as an exhibit to the Registration Statement that
Spinco has filed with the Commission which relates to this information
statement. Spinco will establish the plan to encourage ownership
54
68
of Spinco Shares by directors, which gives directors an increased incentive to
devote their efforts to Spinco's success on behalf of stockholders.
Grants of awards under the Director Plan will be automatic. On the day
following the Distribution Date, each non-employee director will be granted an
option to purchase Spinco Shares. Each person who later becomes a
non-employee director will also be granted an option to purchase
Spinco Shares on the date that the person becomes a non-employee director. In
addition, as of the day following the first annual meeting of Spinco's
stockholders after the Distribution, and on the day following each subsequent
annual meeting of Spinco's stockholders, each non-employee director serving on
that date will be granted an option to purchase Spinco Shares.
The exercise price of each option granted under the Director Plan will be the
fair market value of the shares of common stock on the date of grant. Each
option granted under the Director Plan will become fully exercisable one year
after the date of grant and will remain exercisable for ten years from the grant
date.
Spinco Shares subject to the Director Plan may be authorized but unissued
shares or shares that were once issued and subsequently reacquired by Spinco.
The total number of Spinco Shares for which options may be granted under the
director plan will be , subject to adjustment. The Director Plan
will terminate automatically on the second day following Spinco's 2010 annual
meeting of stockholders, but the board of directors may terminate the Director
Plan at any time before that date.
With respect to outstanding options held by non-employee directors of NSI
who will become directors of Spinco, at the time of the Distribution the NSI
options will be converted to, and replaced by, Spinco stock options in
accordance with the option conversion ratio provided for in the employee
benefits agreement. See "Relationship Between NSI and Spinco Following the
Distribution -- Employee Benefits Agreement" beginning on page 27.
55
69
EXECUTIVE OFFICERS
Listed below is certain information concerning individuals who are expected
to serve as executive officers of Spinco following the Distribution. Each person
named below is currently an executive officer of NSI and is expected to resign
his position with NSI as of the Distribution Date.
POSITION WITH NSI AND PRINCIPAL
BUSINESS AFFILIATIONS DURING PAST
NAME AGE POSITION WITH SPINCO FIVE YEARS
- ---- --- -------------------- ---------------------------------
James S. Balloun..... 63 Chairman, President and Mr. Balloun has served as
Chief Executive Officer Chairman of the Board of
Directors and Chief Executive
Officer of NSI since February
1996 and President of NSI since
October 1996. He was previously
affiliated with the management
consulting firm McKinsey &
Company, Inc., where he served as
a Director from June 1976 until
January 1996. Mr. Balloun is a
director of Georgia-Pacific
Corporation, Radiant Systems,
Inc., and Wachovia Corporation.
Brock A. Hattox...... 53 Executive Vice President Mr. Hattox has served as
and Chief Financial Executive Vice President and
Officer Chief Financial Officer of NSI
since September 1996. Previously
with McDermott International,
Inc., he had been Chief Financial
Officer since 1991 and President
of the engineering and
construction group since 1995.
Kenneth W. 50 President of Lithonia Mr. Honeycutt has served as
Honeycutt.......... Lighting President of Lithonia Lighting
under NSI since June 2000. He has
been with Lithonia since 1972 in
a variety of positions covering a
broad range of processes and
products.
56
70
POSITION WITH NSI AND PRINCIPAL
BUSINESS AFFILIATIONS DURING PAST
NAME AGE POSITION WITH SPINCO FIVE YEARS
- ---- --- -------------------- ---------------------------------
John K. Morgan....... 47 President of Holophane Mr. Morgan has served as
President of Holophane since June
2000 and Executive Vice President
of Lithonia Lighting Group since
1999. He joined Lithonia Lighting
in 1977 and held a variety of
senior management positions prior
to 1999.
James H. Heagle...... 56 President of The Zep Mr. Heagle has served as
Group President of The Zep Group
(formerly known as NSI Chemicals
Group) since May 2000. He
previously served as President
and Chief Operating Officer of
Calgon Corporation from 1996
until 2000. Prior to Calgon, Mr.
Heagle spent 24 years in various
management positions with Mobil
Chemical.
Kenyon W. Murphy..... 44 Senior Vice President Mr. Murphy has served as Senior
and General Counsel Vice President and General
Counsel of NSI since April 2000.
Prior to that role, he served NSI
as Vice President and Associate
Counsel from 1996 until April
2000 and as Secretary from 1992
until 1998. Mr. Murphy joined NSI
in 1985.
Joseph G. Parham, 51 Senior Vice President, Mr. Parham has served as Senior
Jr................. Human Resources Vice President of Human Resources
of NSI since May 2000. He had
been President and Chief
Operating Officer of Polaroid
Eyeware since 1999 and Senior
Vice President of Worldwide Human
Resources of Polaroid Corporation
since 1994.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no family relationship between any of Spinco's executive officers
or directors, and there are no arrangements or understandings between any of
Spinco's executive officers or directors and any other person pursuant to which
any of them was elected an
57
71
officer or director, other than arrangements or understandings with directors or
officers of Spinco acting solely in their capacities as such. Generally,
following the Distribution, Spinco's executive officers will be elected annually
and will serve at the pleasure of Spinco's board of directors.
HISTORICAL COMPENSATION OF SPINCO EXECUTIVE OFFICERS
Spinco has never paid any compensation or granted any form of stock
options, stock units or stock appreciation rights to its executive officers.
During the fiscal years ended August 31, 2000, August 31, 1999, and August 31,
1998, Spinco's executive officers were compensated in accordance with NSI's
plans and policies. The following table sets forth certain information with
respect to the annual and long-term compensation for services to NSI for
Spinco's chief executive officer and the other individuals expected to be the
four most highly compensated executives of Spinco following the Distribution.
All references in the following tables to stock and stock options relate to
awards of stock and stock options granted by NSI. Such amounts do not reflect
the compensation such persons will receive following the Distribution. The
employee benefits agreement provides that at the time of the Distribution NSI
stock options held by Spinco employees will generally be converted to, and
replaced by, Spinco stock options in accordance with a conversion ratio. Each
employee holding NSI restricted stock (all of which is unvested) will receive a
dividend of one Spinco Share (subject to the same restrictions as the NSI
restricted stock) for each NSI share held. See "Relationship Between NSI and
Spinco Following the Distribution -- Employee Benefits Agreement" beginning on
page 27.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
----------------------
AWARDS PAYOUT
---------- ---------
ANNUAL COMPENSATION UNDERLYING
-------------------------------------------- OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL OTHER ANNUAL SARS PAYOUT COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) (#)(2) ($)(3) ($)(4)
- ------------------ ------ ---------- --------- ------------------- ---------- --------- ------------
James S. Balloun...... 2000 850,000 0 4,800 312,489 0 0
Chairman, President 1999 850,000 985,000 4,800 100,000 1,045,657 0
and Chief 1998 750,000 513,750 4,800 65,000 0 2,500
Executive Officer
Brock A. Hattox....... 2000 395,000 0 4,800 105,001 0 5,250
Executive Vice 1999 385,000 311,850 4,800 40,000 574,483 9,177
President and Chief 1998 370,000 114,071 4,800 40,000 0 5,447
Financial Officer
Kenneth W. Honeycutt.. 2000 283,750 123,425 0 6,000 560,000 21,008
President of 1999 229,167 108,113 0 4,500 490,000 20,160
Lithonia Lighting 1998 208,333 100,000 0 4,000 0 25,441
John K. Morgan........ 2000 283,750 123,425 0 6,000 518,000 22,931
President of 1999 222,500 98,503 0 4,000 415,000 22,882
Holophane 1998 191,667 92,500 0 3,500 0 26,241
James H. Heagle(5).... 2000 100,000 59,940 1,600 10,000 0 0
President of 1999 -- -- -- -- -- --
The Zep Group 1998 -- -- -- -- -- --
58
72
- -------------------------
(1) Each amount shown includes an automobile allowance of $400 per month.
(2) The amounts shown for fiscal year 2000 include long-term options granted in
exchange for a portion of the 1999 LTIP award payout, as discussed in note 3
below, as follows: 162,489 shares for Mr. Balloun and 65,001 shares for Mr.
Hattox. The options were valued for purposes of the exchange at $7.99, the
approximate Black-Scholes value at the time of the exchange election as
determined by an independent compensation consultant. No stock appreciation
rights were granted during this period.
(3) Each amount shown excludes that portion of the payout exchanged for
long-term options in fiscal years 2000 and 1999, respectively, as follows:
$978,297 and $1,298,287 for Mr. Balloun; $469,583 and $519,358 for Mr.
Hattox.
(4) The amounts shown for 2000 include a matching contribution on 401(k)
deferrals in the amount of $5,250 for Mr. Hattox, $8,090 for Mr. Honeycutt,
and $7,098 for Mr. Morgan.
(5) Mr. Heagle commenced employment with NSI effective as of May 1, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning NSI stock options that
were granted to the executive officers of Spinco during the fiscal year ended
August 31, 2000, as disclosed in the Summary Compensation Table above. NSI did
not award any stock appreciation rights or reprice any stock options during its
most recent fiscal year.
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS/SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE(2) ($)(3)
- ---- ------------ ------------ ----------- ---------- -----------
James S. Balloun..... 312,489 27.7% 27.6875 1/4/10 3,159,264
Brock A. Hattox...... 105,001 9.3% 27.6875 1/4/10 1,061,560
Kenneth W.
Honeycutt.......... 6,000 0.5% 27.6875 1/4/10 60,660
John K. Morgan....... 6,000 0.5% 27.6875 1/4/10 60,660
James H. Heagle...... 10,000 0.9% 22.1875 4/30/10 101,100
- -------------------------
(1) Includes options granted in fiscal year 2000 in exchange for a portion of
the 1999 LTIP payout, as described in note 2 to the Summary Compensation
Table above.
(2) Options have a ten-year term, subject to earlier termination upon certain
events related to termination of employment, and generally vest in four
equal annual installments beginning on the first anniversary of the grant
date. Options granted in exchange for LTIP payments, as described in note 2
to the Summary Compensation Table above, are immediately exercisable. The
Executive Resource and Compensation Committee of NSI's board of directors
has discretion, subject to limitations contained in NSI's Long-Term
Incentive Program and the Long-Term Achievement Incentive Plan, to modify
the terms of outstanding options, but not to reprice these options or others
granted on or after January 5, 2000.
59
73
(3) The amounts shown were calculated using a Black-Scholes option pricing
model. The estimated values assume a risk-free rate of return of 6.85%, a
dividend yield of 2.54%, an option term of ten years, and stock price
volatility having a standard deviation of .3080. The option values were not
discounted to reflect the vesting period of the options or to reflect any
exercise or lapse of the options prior to the end of the ten-year option
period. The actual value, if any, that an executive may realize will depend
upon the excess of the stock price over the exercise price on the date the
option is exercised, so that there is no assurance the value realized by an
executive will be at or near the value estimated by the Black-Scholes model.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table contains information concerning the exercise of NSI
stock options by those executive officers of Spinco named in the Summary
Compensation Table during the 2000 fiscal year and the aggregate value of
unexercised stock options held by the Spinco executive officers as of August 31,
2000. No stock appreciation rights are held by any Spinco executive officer.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
James S. Balloun....... 0 0 503,739 268,750 0 0
Brock A. Hattox........ 0 0 125,001 100,000 0 0
Kenneth W. Honeycutt... 584 2,300 22,060 12,000 185 0
John K. Morgan......... 772 3,040 12,085 11,375 173 0
James H. Heagle........ 0 0 0 10,000 0 0
- -------------------------
(1) The amounts shown represent the aggregate excess of market value of NSI
common stock under option as of August 31, 2000 (using the $19.9375 closing
price on August 31, 2000) over the exercise price of the options.
60
74
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
The following table contains information concerning the grant of aspiration
awards to those executive officers of Spinco named in the Summary Compensation
Table during the 2000 fiscal year.
PERFORMANCE OR ESTIMATED FUTURE PAYOUT UNDER
NUMBER OF OTHER PERIOD NON-STOCK PRICE-BASED PLANS
SHARES, UNITS UNTIL -------------------------------
OR OTHER MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) OR PAYOUT(1) ($) ($) (S)
- ---- ------------- -------------- --------- ------- ---------
James S. Balloun......... 400,000 3 years 100,000 400,000 2,000,000
Brock A. Hattox.......... 187,200 3 years 46,800 187,200 936,000
Kenneth W. Honeycutt..... 200,000 3 years 50,000 200,000 1,000,000
John K. Morgan........... 200,000 3 years 50,000 200,000 1,000,000
James H. Heagle(2)....... 410,666 3 years 102,666 410,666 2,053,330
- -------------------------
(1) Aspiration awards are payable based on the performance of NSI, as measured
by cumulative economic profit (adjusted after-tax profit less a capital
charge) over a three-year performance cycle ending August 31, 2002. Award
payments up to and including twice commitment level performance will be paid
one-half in shares of NSI stock and one-half in cash. For award payments in
excess of twice commitment level performance, that portion of the award will
be paid one-half in restricted stock of NSI, which will vest in equal annual
installments over a two-year period, and one-half in cash, to be paid out in
equal annual installments on the vesting dates of the restricted stock. The
final determination of the form of payment of the award is at the discretion
of NSI's Executive Resource and Compensation Committee.
(2) The numbers shown reflect the combined pro rata awards granted to Mr. Heagle
for certain performance cycles in progress as of May 1, 2000 (the date of
his employment), based on the cumulative economic profit of the business
units for which he is responsible. The respective threshold, target, and
maximum payout amounts are as follows: for the performance cycle ending
August 31, 2001, $37,333, $149,333, and $746,665; and for the performance
cycle ending August 31, 2002, $65,333, $261,333, and $1,306,665.
SPINCO LONG-TERM INCENTIVE PLAN
GENERAL
Spinco expects its board will adopt, with the approval of NSI (or a
subsidiary thereof) in its capacity as Spinco's sole stockholder, the Spinco
Long-Term Incentive Plan (referred to in this section as the "Plan"). The full
text of the Plan will be filed as an exhibit to the Registration Statement that
Spinco has filed with the Commission which relates to this information
statement. Spinco will establish the Plan to provide long-term incentive
compensation to officers and other key management personnel who make substantial
contributions to Spinco's success, and to assist in attracting and retaining the
highest quality individuals in key executive positions.
Spinco's compensation committee (referred to in this section as the
"Committee") will administer the Plan and has the authority to amend, suspend,
or terminate the Plan as long as such action does not adversely affect any award
that is already outstanding under
61
75
the Plan. No awards may be granted under the Plan after the tenth anniversary of
the date the board approves the Plan.
In connection with the Distribution, stock options granted to Spinco
employees under the NSI long-term incentive plans will be replaced by Spinco
options. The employee benefits agreement provides that at the time of the
Distribution NSI stock options held by Spinco employees will generally be
converted to, and replaced by, Spinco stock options in accordance with a
conversion ratio. Each employee holding NSI restricted stock (all of which is
unvested) will receive a dividend of one Spinco Share (subject to the same
restrictions as the NSI restricted stock) for each NSI share held. See
"Relationship Between NSI and Spinco Following the Distribution -- Employee
Benefits Agreement" beginning on page 27.
DESCRIPTION OF THE PLAN
The Plan is a flexible plan that will provide the Committee broad
discretion to fashion the terms of several types of awards (described below),
including: stock options (both incentive stock options and nonqualified stock
options), restricted stock, performance units, and performance shares
(individually and collectively, "Awards"). Not more than 30% of the maximum
number of shares that may be issued or transferred pursuant to Awards under the
Plan may be in the form of Awards of restricted stock, aspiration achievement
incentive awards, performance shares, and performance units.
The Committee will (a) select those participants to whom Awards will be
granted and (b) determine the type, size and terms and conditions of Awards,
including the exercise price per share for each stock option and the
restrictions or performance criteria relating to aspiration achievement
incentive awards, restricted stock, performance units and performance shares.
The Committee will administer, construe, and interpret the Plan. Members of the
Committee will be ineligible to participate in the Plan.
An aggregate of Spinco Shares may be issued or transferred
pursuant to the Plan. In the event of any "Change in Capitalization" (as defined
in the Plan), the Committee may adjust the maximum number and class of shares
with respect to which Awards may be granted, the number and class of shares
which are subject to outstanding Awards (subject to limitations imposed under
Section 422 of the Code in the case of incentive stock options), and the
purchase price therefor, if applicable.
AWARDS ISSUABLE UNDER THE PLAN
STOCK OPTIONS. Both incentive stock options and nonqualified stock options
may be granted pursuant to the Plan. The maximum number of Spinco Shares subject
to stock options which can be granted under the Plan to any participant during a
fiscal year of Spinco is 500,000. All stock options granted under the Plan will
have an exercise price per share equal to at least the fair market value of a
Spinco Share on the date the stock option is granted. The maximum term for all
stock options granted under the Plan is ten years. Unless the Committee provides
otherwise in the agreement evidencing the stock options granted, stock options
are nontransferable other than by will or the laws of descent and distribution
and during an optionee's lifetime may be exercised only by the optionee or his
guardian or legal representative. Stock options are exercisable at such time and
in such installments as the Committee may provide at the time the stock option
is granted. The Committee may accelerate the exercisability of any stock option
at any time, subject to any limitations required by Section 162(m) of the Code.
The purchase price for Spinco
62
76
Shares acquired pursuant to the exercise of an option must be paid, as
determined by the Committee, in cash, by check, or by transferring shares to
Spinco or attesting to ownership of shares upon such terms and conditions as may
be determined by the Committee. The terms and conditions of the stock options
relating to their treatment upon termination of the optionee's employment will
be determined by the Committee at the time the stock options are granted.
Upon a Change in Control (as defined in the Plan) all outstanding stock
options on the date of a Change in Control may become immediately and fully
exercisable.
RESTRICTED STOCK. The aggregate maximum number of Spinco Shares that may
be awarded under a restricted stock Award and an Award of performance shares and
units to a participant during any fiscal year of Spinco is 100,000. The terms of
a restricted stock award, including the restrictions placed on such shares and
the time or terms at which such restrictions will lapse, shall be determined by
the Committee at the time the Award is made. The Committee may determine at the
time an Award of restricted stock is granted that dividends paid on shares may
be paid to the grantee or deferred. Deferred dividends (together with any
interest accrued thereon) will be paid upon the lapsing of restrictions on
shares of restricted stock or forfeited upon the forfeiture of shares of
restricted stock. The agreements evidencing Awards of restricted stock shall set
forth the terms and conditions of such Awards upon a grantee's termination of
employment. Unless the Committee provides otherwise in the agreements, all
restrictions on outstanding shares of restricted stock will lapse upon a Change
in Control.
PERFORMANCE UNITS AND PERFORMANCE SHARES. Each performance unit will
represent one share and payments in respect of vested performance units will be
made in cash, shares, or shares of restricted stock or any combination of the
foregoing, as determined by the Committee. Performance shares are awarded in the
form of shares of restricted stock. The vesting of performance units and
performance shares is based upon the level of achievement of the performance
measure or performance measures specified by the Committee, over the performance
period specified by the Committee. The performance measure may relate to the
performance of Spinco or its subsidiaries or divisions, or any combination of
the foregoing. Performance measures and the length of the performance cycle for
performance units and performance shares (which shall not be less than two
years) will be determined by the Committee at the time the Award is made. The
Committee may make adjustments to achieved performance levels and changes to
performance measures to the same extent described under aspiration achievement
incentive awards above. The agreements evidencing Awards of performance units
and performance shares will set forth the terms and conditions of such Awards,
including those applicable in the event of the grantee's termination of
employment. The aggregate maximum number of performance units, performance
shares, and restricted stock a participant may be awarded for any fiscal year is
100,000.
Upon a Change in Control, the Committee may provide that a percentage of
performance units will become vested and the grantee will be entitled to receive
a cash payment equal to the per share adjusted fair market value multiplied by
the number of performance units which become vested, and with respect to
performance shares, all restrictions shall lapse on a percentage of the
performance shares.
63
77
FEDERAL INCOME TAX CONSEQUENCES OF CERTAIN AWARDS
An optionee will not recognize taxable income upon grant or exercise of an
incentive stock option. However, upon the exercise of an incentive stock option,
the excess of the fair market value of the shares received over the exercise
price of the shares subject to such stock option will be treated as an
adjustment to alternative minimum taxable income. Any dividends paid on shares
will be taxable as ordinary income in the taxable year in which the dividend is
received. Spinco and its subsidiaries will not be entitled to any business
expense deduction with respect to the grant or exercise of an incentive stock
option, except as discussed below.
In order for the exercise of an incentive stock option to qualify for
favorable tax treatment, the optionee generally must be an employee of the
corporation, parent, or a subsidiary (within the meaning of Section 422 of the
Code) from the date the incentive stock option is granted through a date within
three months before the date of exercise. In the case of an optionee who is
disabled, the three-month period for exercise following termination of
employment may be extended to one year. In the case of an optionee's death, the
time for exercising incentive stock options after termination of employment and
the holding period for stock received pursuant to the exercise of the incentive
stock options are waived.
If all of the requirements for incentive stock option treatment are met and
the optionee has held the shares for at least two years after the date of grant
and for at least one year after the date of exercise, upon disposition of the
shares by the optionee, the difference, if any, between the sales price of the
shares and the exercise price of the stock option will be treated as long-term
capital gain or loss. If the optionee does not hold the shares in accordance
with the holding period rules set forth above, the optionee will recognize
ordinary income at the time of the disposition of the shares, generally in an
amount equal to the excess of the fair market value of the shares at the time
the stock option was exercised over the exercise price of the stock option. The
ordinary income recognized by an optionee upon the disposition of the shares has
been determined by the IRS not to constitute wages for purposes of applicable
withholding tax requirements. The balance of the gain realized, if any, will be
long-term or short-term capital gain, depending upon whether or not the shares
were sold more than one year after the stock option was exercised. If the
optionee sells the shares prior to the satisfaction of the holding period rules
but at a price below the fair market value of the share at the time the stock
option was exercised, the amount of ordinary income will be limited to the
amount realized on the sale over the exercise price of the stock option. Spinco
and its subsidiaries will be allowed a business expense deduction to the extent
the optionee recognizes ordinary income.
An optionee to whom a nonqualified stock option is granted will recognize
no income at the time of the grant of the stock option. Upon exercise of a
nonqualified stock option, an optionee will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the stock option. If it complies with
applicable withholding requirements, Spinco and its subsidiaries will be
entitled to a business expense deduction in the same amount and at the same time
as the optionee recognizes ordinary income. Upon a subsequent sale or exchange
of shares acquired pursuant to the exercise of a nonqualified stock option, the
optionee will have taxable gain or loss, measured by the difference between the
amount realized on the disposition and the tax basis of the shares (generally,
the amount paid for the shares plus the amount treated as ordinary income at the
time the stock option was exercised).
64
78
PENSION PLANS
The employee benefits agreement provides for Spinco to adopt and assume the
obligations under NSI's qualified defined benefit retirement plan covering
corporate office employees who will become employees of Spinco and the
nonqualified supplemental executive retirement plan that covers certain
executives of Spinco. The combined benefit under the qualified retirement plan
and nonqualified retirement plan is 45% of average base salary and bonus (using
the highest three consecutive years of remuneration out of the ten years
preceding the individual's retirement), less 50% of the individual's primary
social security benefit, and less the actuarial equivalent of the participant's
account in the 401(k) plan, assuming an annual contribution of 4% of the
individual's annual compensation over $15,000 (subject to applicable limitations
on eligible compensation), any applicable matching contribution, and earnings on
those amounts at 8% per annum.
The following table shows the estimated aggregate annual benefits payable
to a covered participant at normal retirement age under the pension plan and
supplemental plan, without the reduction under the supplemental plan for the
actuarial equivalent of the 401(k) plan benefits (approximately $9,576 for Mr.
Balloun, $34,790 for Mr. Hattox, and $16,749 for Mr. Heagle).
YEARS OF SERVICE
----------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
$ 400,000..................... $128,100 $170,800 $170,800 $170,800 $170,800
500,000..................... 161,800 215,800 215,800 215,800 215,800
600,000..................... 195,600 260,800 260,800 260,800 260,800
700,000..................... 229,300 305,800 305,800 305,800 305,800
800,000..................... 263,100 350,800 350,800 350,800 350,800
900,000..................... 296,800 395,800 395,800 395,800 395,800
1,000,000..................... 330,600 440,800 440,800 440,800 440,800
1,200,000..................... 398,100 530,800 530,800 530,800 530,800
The remuneration specified in the table above consists of salary and annual
incentive bonus. Benefits shown above are based on payment of a single life
annuity with 10 years certain. Equivalent payment options are offered.
The salary and bonus expected to be covered by the pension plan and the
supplemental plan for the named executive officers who are participants
substantially correspond to the amounts disclosed in the Summary Compensation
Table. The years of credited service for each of the following executive
officers as of August 31, 2000 were: Mr. Balloun, four years (eight years under
the supplemental plan); Mr. Hattox, three years; and Mr. Heagle, zero years.
Messrs. Honeycutt and Morgan are not currently participants in any defined
benefit or actuarial plans of NSI.
401(K) PLAN
The employee benefits agreement provides for Spinco to adopt and assume the
defined contribution 401(k) plan covering corporate office employees of NSI who
will become employees of Spinco. The 401(k) plan will provide for employee
pre-tax contributions and employer matching contributions, which may be in the
form of Spinco Shares. The account balances of Spinco employees in the 401(k)
plan as of the Distribution Date will
65
79
continue to be held under the Spinco plan. During a transition period, an NSI
stock account and a Spinco stock account will be maintained under the plan.
Spinco employees will be able to transfer amounts out of their NSI stock
account, but they will not be able to add to their NSI stock account.
SEVERANCE PROTECTION AGREEMENTS
Effective as of the Distribution, Spinco intends to enter into severance
protection agreements with all executive officers which will be substantially
similar to the agreements such executives now have with NSI. Spinco intends for
the agreements to provide the executives some measure of security against the
possibility of employment loss that may result following a Change in Control (as
defined below) so that they may devote their energies to meeting the business
objectives and needs of Spinco and its stockholders.
The agreement for Mr. Balloun is effective until his 65th birthday. The
agreements for the other executive officers are effective for a term of two
years, which is automatically extended for one year at the end of each year
unless terminated by either party. However, the term of the agreements will not
expire during a "Threatened Change in Control Period" (as defined in the
agreements) or prior to the expiration of 24 months following a Change in
Control. If the employment of the officer is terminated within 24 months
following a Change in Control or in certain other instances in connection with a
Change in Control (1) by Spinco other than for "Cause" or "Disability" or (2) by
the officer for "Good Reason" (as each term is defined in the agreements) or
during the 60-day period commencing on the first anniversary of the occurrence
of a Change in Control, the officer will be entitled to receive (a) a pro rata
bonus for the year of termination, (b) a lump sum cash payment equal to two
times the sum of his base salary and bonus (in each case at least equal to his
base salary and bonus prior to a Change in Control), subject to certain
adjustments, (c) continuation of life insurance, disability, medical, dental and
hospitalization benefits for a period of up to 24 months, and (d) a lump sum
cash payment reflecting certain retirement benefits he would have been entitled
to receive had he remained employed by Spinco for an additional two years and a
reduced requirement for early retirement benefits. Additionally, all
restrictions of any outstanding incentive awards will lapse and become fully
vested, all outstanding stock options will become fully vested and immediately
exercisable, and Spinco will be required to purchase for cash, on demand, at the
then per-share fair market value, any shares of unrestricted stock and shares
purchased upon exercise of options.
The agreements provide that Spinco shall make an additional "gross-up
payment" to each officer to offset fully the effect of any excise tax imposed
under Section 4999 of the Internal Revenue Code, on any payment made to him
arising out of or in connection with his employment. In addition, Spinco will
pay all legal fees and related expenses incurred by the officer arising out of
his employment or termination of employment if, in general, the circumstances
for which he has retained legal counsel occurred on or after a Change in
Control.
A "Change in Control" includes (1) the acquisition (other than from Spinco)
by any "person" (as that term is used for purposes of Sections 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than
a trustee of an employee benefit plan maintained by Spinco or certain related
entities of beneficial ownership of 20% or more of the combined voting power of
Spinco's then outstanding voting securities, (2) a change in more than one-third
of the members of the Spinco board
66
80
who were either members as of the Distribution Date, or were nominated or
elected by a vote of two-thirds of those members or members so approved, (3) a
merger, consolidation or reorganization involving Spinco unless (i) the
stockholders of Spinco immediately before such merger, consolidation or
reorganization, as a result of such merger or consolidation, own, directly or
indirectly, at least 70% of the combined voting power of the outstanding voting
securities of the corporation resulting from or surviving such merger,
consolidation or reorganization, (ii) the individuals who were members of the
Spinco board immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization, constitute at least two-thirds of
the members of the board of directors of the corporation resulting from or
surviving such merger, consolidation or reorganization, and (iii) no person
(other than Spinco, a trustee of an employee benefit plan maintained by Spinco
or certain related entities) has beneficial ownership of 20% or more of the
combined voting power of the corporation resulting from or surviving such
merger, consolidation or reorganization unless such person had beneficial
ownership of 20% or more of the combined voting power of Spinco immediately
prior to such merger, consolidation or reorganization, and (4) a complete
liquidation or dissolution of Spinco or the sale or other disposition of all or
substantially all of the assets of Spinco (except for certain transfers to
related entities and distributions to stockholders).
DEFERRED COMPENSATION PLANS
The employee benefits agreement provides for Spinco to establish deferred
compensation plans covering its executives that are substantially similar to the
plans currently maintained by NSI covering such executives. The accounts and
benefits of Spinco employees (including former employees who were employed by
the lighting equipment and chemicals businesses and the corporate office) will
be transferred to the new plans (along with any assets intended to support such
obligations).
67
81
BENEFICIAL OWNERSHIP OF SPINCO SHARES
All of the outstanding Spinco Shares are, and prior to the Distribution
will be, held beneficially and of record by NSI and no director or executive of
Spinco owns any Spinco Shares. The following table sets forth information
concerning the Spinco Shares that are projected to be beneficially owned after
the Distribution by each of the executive officers named in the Summary
Compensation Table and by all directors and executive officers as a group.
Unless otherwise indicated, the projections are based on the number of NSI
shares held by such persons as of May 31, 2001 and reflect the Distribution
ratio of one Spinco Share for every share of common stock of NSI held on the
Record Date. No person or entity is expected to own beneficially more than 5% of
the Spinco Shares outstanding immediately following the Distribution, based on
the ownership of NSI common stock as known to Spinco. Spinco expects to
determine the composition of its board of directors before the NSI board of
directors declares the Distribution and the following table will be updated at
the time of such determination.
NUMBER
OF SHARES
BENEFICIALLY
OWNED PERCENT
NAME OF BENEFICIAL OWNER (1)(2)(3) OF CLASS(4)
- ------------------------ ------------ -----------
James S. Balloun................................. 840,851 2.0
Brock A. Hattox.................................. 240,783 *
Kenneth W. Honeycutt............................. 51,317 *
John K. Morgan(5)................................ 37,260 *
James H. Heagle.................................. 4,280 *
All executive officers and directors as a group
( persons).................................... %
- -------------------------
* Less than 1%.
(1) Subject to applicable community property laws, each beneficial owner has
sole voting and investment power with respect to all shares shown, except as
otherwise indicated and except that 18,174 shares shown for Mr. Morgan are
jointly held with his spouse.
(2) Includes shares that may be acquired within 60 days after the ownership date
reflected, upon exercise of employee stock options. Such shares are deemed
to be outstanding and to be beneficially owned by the person or group
holding the options for the purpose of computing the percentage ownership of
such person or group, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person or group. Options are
included for the following individuals: Mr. Balloun, 713,140 shares; Mr.
Hattox, 222,313 shares; Mr. Honeycutt, 27,194 shares; Mr. Morgan, 16,857
shares; Mr. Heagle, 2,500 shares; and all current executive officers as a
group, 1,027,664 shares. The employee benefits agreement provides that, at
the time of the Distribution, NSI stock options held by Spinco employees
will generally be converted to, and replaced by, Spinco stock options in
accordance with a conversion ratio. See "Relationship Between NSI and Spinco
Following the Distribution -- Employee Benefits Agreement" beginning on page
27.
68
82
(3) Includes performance-based restricted shares granted under NSI's Long-Term
Incentive Achievement Plan, which vests in equal installments through
January 2005 and to which the executives have sole voting power. Restricted
shares are included for the following individuals: Mr. Balloun, 9,000
shares; Mr. Hattox, 2,380 shares; Mr. Honeycutt, 1,840 shares; Mr. Morgan,
1,840 shares; Mr. Heagle, 1,780 shares; and all current executive officers
as a group, 20,300 shares. The employee benefits agreement provides that
each employee holding NSI restricted stock (all of which is unvested) will
receive a dividend of one Spinco Share (subject to the same restrictions as
the NSI restricted stock) for each NSI share held. See "Relationship Between
NSI and Spinco Following the Distribution -- Employee Benefits Agreement"
beginning on page 27.
(4) Based on an aggregate of 41,188,504 shares of NSI common stock issued and
outstanding as of May 31, 2001 and the Distribution ratio of one Spinco
Share for every share of common stock of NSI.
(5) Includes 72 shares held by Mr. Morgan's son and 106 shares held by his
spouse.
69
83
DESCRIPTION OF SPINCO'S CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under Spinco's certificate of incorporation, the total number of shares of
all classes of stock that Spinco has authority to issue is 550,000,000, of which
500,000,000 are shares of common stock, par value $.01 per share, and 50,000,000
are shares of preferred stock, par value $.01 per share. Based on the number of
NSI shares outstanding on , 2001, approximately Spinco Shares will
be issued to stockholders of NSI on the Distribution Date, though the actual
number of Spinco Shares to be issued will be determined as of the Record Date.
All of the Spinco Shares to be distributed to NSI stockholders in the
Distribution will be fully paid and non-assessable. million Spinco Shares
have been reserved for issuance under Spinco's Long-Term Incentive Plan and
million Spinco Shares have been reserved for issuance under the Spinco 2001
Non-Employee Director Stock Option Plan. No shares of preferred stock have been
issued, although shares of preferred stock have been reserved for issuance under
the Rights Agreement (as defined below).
The following summary of certain terms of Spinco's capital stock describes
material provisions of, but does not purport to be complete and is subject to,
and qualified in its entirety by, Spinco's certificate of incorporation and
Spinco's bylaws, the forms of which are included as exhibits to the Registration
Statement, and by applicable provisions of law.
COMMON STOCK
The holders of the Spinco Shares will be entitled to one vote for each
share on all matters voted on by stockholders, and the holders of such shares
will possess all voting power, except as otherwise required by law or provided
in any resolution adopted by Spinco's board of directors with respect to any
series of preferred stock of Spinco. There are no cumulative voting rights.
Accordingly, the holders of a plurality of the Spinco Shares voting for the
election of directors can elect all of the directors, if they choose to do so,
subject to any rights of the holders of preferred stock to elect directors.
Subject to any preferential or other rights of any outstanding series of
preferred stock of Spinco that may be designated by Spinco's board of directors,
the holders of the Spinco Shares will be entitled to such dividends as may be
declared from time to time by Spinco's board of directors from funds available
therefor, and upon liquidation will be entitled to receive pro rata all assets
of Spinco available for distribution to such holders. See "Dividend Policies" on
page 33.
PREFERRED STOCK
Spinco's board of directors is authorized without further stockholder
approval (except as may be required by applicable law or New York Stock Exchange
regulations) to provide for the issuance of shares of preferred stock, in one or
more series, and to fix for each such series such voting powers, designations,
preferences and relative, participating, optional and other special rights, and
such qualifications, limitations or restrictions, as are stated in the
resolution adopted by Spinco's board of directors providing for the issuance of
70
84
such series and as are permitted by the Delaware General Corporation Law. The
terms and rights of any such series may include:
- the designation of the series,
- the number of shares of the series, which number the board of directors
may thereafter, except where otherwise provided in the applicable
certificate of designation, increase or decrease, but not below the
number of shares thereof then outstanding,
- whether dividends, if any, will be cumulative or noncumulative, and, in
the case of shares of any series having cumulative dividend rights, the
date or dates or method of determining the date or dates from which
dividends on the shares of such series shall be cumulative,
- the rate of any dividends or method of determining such dividends payable
to the holders of the shares of such series, any conditions upon which
such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable,
- the redemption rights and prices, if any, for shares of the series,
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series,
- the amounts payable on and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of Spinco,
- whether the shares of the series will be convertible or exchangeable into
shares of any other class or series, or any other security, of Spinco or
any other corporation, and, if so, the specification of such other class
or series or such other security, the conversion or exchange price or
prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms
and conditions upon which such conversion or exchange may be made,
- restrictions on the issuance of shares of the same series or of any other
class or series,
- the voting rights, if any, of the holders of the shares of the series,
and
- any other relative rights, preferences and limitations of such series.
Should Spinco's board of directors elect to exercise this authority, the
rights and privileges of holders of the Spinco Shares could be made subject to
the rights and privileges of any such series of preferred stock. Presently,
Spinco has no plans to issue any preferred stock, except that Spinco's
Stockholder Protection Rights Agreement (the "Rights Agreement") provides for
the issuance of shares of participating preferred stock under the circumstances
specified in the Rights Agreement, upon exercise or exchange of rights (the
"Rights") issued thereunder. See "Certain Anti-Takeover Provisions of Spinco's
Certificate of Incorporation, Bylaws and Rights Agreement and Delaware Law --
Stockholder Protection Rights Agreement" beginning on page 77.
71
85
NO PREEMPTIVE RIGHTS
No holder of any stock of Spinco of any class authorized at the
Distribution Date will have any preemptive right to subscribe to any securities
of Spinco of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Distribution Agent will be the Transfer Agent and Registrar for Spinco
immediately following the Distribution.
72
86
CERTAIN ANTI-TAKEOVER PROVISIONS
OF SPINCO'S CERTIFICATE OF INCORPORATION, BYLAWS AND
RIGHTS AGREEMENT AND DELAWARE LAW
GENERAL
Spinco's certificate of incorporation, Spinco's bylaws, the Rights
Agreement and the Delaware General Corporation Law contain certain provisions
that could delay or make more difficult an acquisition of control of Spinco not
approved by Spinco's board of directors, whether by means of a tender offer,
open market purchases, a proxy contest or otherwise. These provisions have been
implemented to enable Spinco, particularly (but not exclusively) in the initial
years of its existence as an independent, publicly owned company, to develop its
business in a manner which will foster its long-term growth without disruption
caused by the threat of a takeover not deemed by Spinco's board of directors to
be in the best interests of Spinco and its stockholders. These provisions could
have the effect of discouraging third parties from making proposals involving an
acquisition or change of control of Spinco, although such a proposal, if made,
might be considered desirable by a majority of Spinco's stockholders. These
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current management of Spinco without the
concurrence of Spinco's board of directors. In addition, certain provisions of
the tax disaffiliation agreement to be entered into by NSI and Spinco may also
have the effect of discouraging third parties from making proposals involving an
acquisition or change of control of Spinco prior to the second anniversary of
the Distribution Date. See "Relationship Between NSI and Spinco Following the
Distribution -- Tax Disaffiliation Agreement" on page 27. Set forth below is a
description of the provisions contained in Spinco's certificate of incorporation
and bylaws, the Rights Agreement and the Delaware General Corporation Law that
could impede or delay an acquisition of control of Spinco that Spinco's board of
directors has not approved. This description is intended as a summary only and
is qualified in its entirety by reference to Spinco's certificate of
incorporation, Spinco's bylaws and the Rights Agreement, the forms of which are,
or will be, included as exhibits to the Registration Statement, as well as the
Delaware General Corporation Law.
CLASSIFIED BOARD OF DIRECTORS
Spinco's certificate of incorporation provides for Spinco's board of
directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of Spinco's board of
directors will be elected each year. The first class of directors will initially
serve a one-year term, and the second class of directors will initially serve a
two-year term. Thereafter, each class of directors will be elected for a
three-year term. See "Spinco's Management -- Board of Directors" on page 54.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of Spinco's board of
directors until the second annual stockholders meeting following the date on
which the acquiror obtains the controlling stock interest and could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of Spinco and could thus increase the
likelihood that incumbent directors will retain their positions.
73
87
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
Spinco's certificate of incorporation and bylaws provide that the number of
directors shall be fixed only by resolution of Spinco's board of directors from
time to time. Spinco's certificate of incorporation provides that the directors
may be removed by stockholders only both for cause and by the affirmative vote
of at least 80% of the shares entitled to vote.
Spinco's certificate of incorporation and bylaws provide that vacancies on
the board of directors may be filled only by a majority vote of the remaining
directors or by the sole remaining director.
STOCKHOLDER ACTION
Spinco's certificate of incorporation provides that stockholder action may
be taken only at an annual or special meeting of stockholders and that
stockholders may not act by written consent. Spinco's certificate of
incorporation and bylaws provide that special meetings of stockholders may be
called only by Spinco's board of directors. Stockholders are not permitted to
call a special meeting or to require Spinco's board of directors to call a
special meeting of stockholders.
ADVANCE NOTICE FOR STOCKHOLDER PROPOSALS OR NOMINATIONS AT MEETINGS
Spinco's bylaws establish an advance notice procedure for stockholder
proposals to be brought before any annual or special meeting of stockholders and
for nominations by stockholders of candidates for election as directors at an
annual meeting or a special meeting at which directors are to be elected.
Subject to any other applicable requirements, including, without limitation,
Rule 14a-8 under the Exchange Act, nominations of persons for election to the
board of directors and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
Spinco's notice with respect to such meeting, (ii) by or at the direction of the
board of directors or (iii) by any stockholder of record of Spinco who was a
stockholder of record at the time of the giving of notice for the annual
meeting, who is entitled to vote at the meeting and who has complied with
Spinco's notice procedures. Additionally, only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to Spinco's notice of meeting. Nominations of persons for
election to the board of directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to Spinco's notice of
meeting (a) by or at the direction of the board of directors or (b) by any
stockholder of record of Spinco who is a stockholder of record at the time of
the giving of notice for the special meeting, who is entitled to vote at the
meeting and who has complied with Spinco's notice procedures.
For nominations or other business to be properly brought before an annual
or special meeting by a stockholder, (i) the stockholder must have given timely
notice in writing to the Spinco's secretary, (ii) such business must be a proper
matter for stockholder action under the Delaware General Corporation Law, (iii)
if the stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided Spinco with a Solicitation Notice (as defined
below), such stockholder or beneficial owner must, in the case of a proposal,
have delivered a proxy statement and form of proxy to holders of at least the
percentage of Spinco's voting shares required under applicable law to carry any
such proposal, or, in the case of a nomination or nominations, have delivered a
proxy statement and form of proxy to holders of a percentage of Spinco's voting
shares
74
88
reasonably believed by such stockholder or beneficial holder to be sufficient to
elect the nominee or nominees proposed to be nominated by such stockholder, and
must, in either case, have included in such materials the Solicitation Notice
and (iv) if no Solicitation Notice relating to the proposal has been timely
provided, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice.
For an annual meeting, to be timely, a stockholder's notice must be
delivered to Spinco's secretary at the principal executive offices of Spinco not
less than 45 or more than 75 days prior to the first anniversary (the
"Anniversary") of the date on which Spinco first mailed its proxy materials for
the preceding year's annual meeting of stockholders. However, if the date of the
annual meeting is advanced more than 30 days prior to or delayed by more than 30
days after the anniversary of the preceding year's annual meeting, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the later of (i) the 90th day prior to such annual meeting or (ii)
the 10th day following the day on which public announcement of the date of such
meeting is first made.
For a special meeting, to be timely, a stockholder's notice must be
delivered to Spinco's secretary at the principal executive offices of Spinco not
later than the close of business on the later of (i) the 90th day prior to such
special meeting or (ii) the 10th day following the day on which public
announcement of the date of such meeting is first made of the date of the
special meeting and of the nominees proposed by the board of directors to be
elected at such meeting.
A stockholder's notice must set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person as would be required to be disclosed in
solicitations of proxies for the election of such nominees as directors pursuant
to Regulation 14A under the Exchange Act and such person's written consent to
serve as a director if elected; (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of such
business, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; (iii) as to the stockholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (A) the name and address of such stockholder, as they appear on
Spinco's books, and of such beneficial owner, (B) the class and number of shares
of Spinco that are owned beneficially and of record by such stockholder and such
beneficial owner, and (C) whether either such stockholder or beneficial owner
intends to deliver a proxy statement and form of proxy to holders of, in the
case of a proposal, at least the percentage of Spinco's voting shares required
under applicable law to carry the proposal or, in the case of a nomination or
nominations, a sufficient number of holders of Spinco's voting shares to elect
such nominee or nominees (an affirmative statement of such intent, a
"Solicitation Notice").
In the event that the number of directors to be elected to the board of
directors is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased board of directors
made by Spinco at least 55 days prior to the Anniversary, a stockholder's notice
required by Spinco's bylaws also will be considered timely, but only with
respect to nominees for any new positions created by such increase, if it is
delivered to the secretary at the principal executive offices of Spinco not
later than the close of business on the 10th day following the day on which such
public announcement is first made by Spinco.
75
89
Only persons nominated in accordance with the procedures set forth in
Spinco's bylaws are eligible to serve as directors and only such business may be
conducted at an annual or special meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in
Spinco's bylaws. The chairman of an annual or special meeting shall have the
power and the duty to determine whether a nomination or any business proposed to
be brought before the meeting has been made in accordance with the procedures
set forth in Spinco's bylaws and, if any proposed nomination or business is not
in compliance with the bylaws, to declare that such defectively proposed
business or nomination may not be presented for stockholder action at the
meeting and shall be disregarded.
AMENDMENTS TO BYLAWS
Spinco's certificate of incorporation provides that only Spinco's board of
directors or the holders of 80% of the shares of Spinco's capital stock entitled
to vote at an annual or special meeting of stockholders have the power to amend
or repeal Spinco's bylaws.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any proposal to amend, alter, change or repeal any provision of Spinco's
certificate of incorporation requires approval by the affirmative vote of a
majority of the voting power of all of the shares of Spinco's capital stock
entitled to vote on such matters, with the exception of certain provisions of
Spinco's certificate of incorporation which require a vote of 80% or more of
such voting power.
FAIR PRICE PROVISION
Spinco's certificate of incorporation contains certain requirements for
business combinations between Spinco and Spinco stockholders owning 5% or more
of Spinco's voting shares (an "Interested Person"). A majority of the shares of
Spinco's voting stock, other than those shares owned by the Interested Person,
are required to approve such a transaction unless (i) Spinco's board of
directors approved the business combination prior to the time the Interested
Person became an owner of 5% or more of Spinco's voting shares, or approved it
later if a majority of the directors voting to approve such transaction were
members of the board of directors prior to the time the Interested Person became
an owner of 5% or more of Spinco's voting shares; or (ii) (A) the consideration
paid by the Interested Person in exchange for the shares held by Spinco's
stockholders has a fair market value per share of Spinco's stock of not less
than either (1) the highest price per share paid by the Interested Person in
acquiring any of Spinco's stock, or (2) a price per share equal to (x) the
aggregate earnings per share of Spinco for the four full consecutive fiscal
quarters immediately preceding the record date for solicitation of votes or
consents on the business combination, multiplied by (y) the figure obtained by
dividing the highest price per share paid by the Interested Person in acquiring
any of Spinco's stock by the earnings per share of Spinco for the four full
consecutive fiscal quarters immediately preceding the time when the Interested
Person became an owner of 5% or more of Spinco's voting shares, and (B) there
has been no significant reduction in Spinco's dividend rate subsequent to the
time the Interested Person acquired 5% or more of Spinco's voting shares, unless
such reduction was approved by the board of directors and a majority of the
directors approving such reduction were members of the board prior to the time
the Interested Person acquired a 5% position. Spinco's fair price provision may
be
76
90
amended only by the affirmative vote or consent of the holders of a majority of
the shares of Spinco's voting stock, excluding those shares owned by an
Interested Person.
PREFERRED STOCK
Spinco's certificate of incorporation authorizes Spinco's board of
directors by resolution to issue one or more series of Preferred Stock and to
determine, with respect to any series of preferred stock, the terms and rights
of such series.
Spinco believes that the availability of the preferred stock will provide
Spinco with increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs which might arise. Having such
authorized shares available for issuance will allow Spinco to issue shares of
preferred stock without the expense and delay of a special stockholders'
meeting. The authorized shares of preferred stock, as well as Spinco Shares,
will be available for issuance without further action by Spinco's stockholders,
unless such action is required by applicable law or the rules of the New York
Stock Exchange or any other stock exchange on which Spinco's securities may be
listed. Although Spinco's board of directors has no intention at the present
time of doing so, it would have the power (subject to applicable law) to issue a
series of preferred stock that could, depending on the terms of such series,
impede the completion of a merger, tender offer or other takeover attempt. For
instance, subject to applicable law, such series of preferred stock might impede
a business combination by including class voting rights which would enable the
holder to block such a transaction. See "-- Stockholder Protection Rights
Agreement" below.
STOCKHOLDER PROTECTION RIGHTS AGREEMENT
Each share of Spinco Common Stock has attached to it one right (a "Right").
Each Right entitles its registered holder to purchase from Spinco, on or after
the Separation Time (as hereinafter defined), one one-hundredth of a share of
Participating Preferred Stock, par value $.01 per share (the "Participating
Preferred"), for an exercise price which will be established by Spinco's board
of directors prior to the Distribution (the "Exercise Price"), which price will
be subject to future adjustment. The Rights will not trade separately from the
Spinco Common Stock until the Separation Time.
The Rights will be evidenced by common stock certificates until the
Separation Time. The Separation Time shall mean the earlier of (i) the close of
business on the tenth business day (or such later date as Spinco's board of
directors may from time to time fix by resolution adopted prior to the
Separation Time that would otherwise have occurred) after the date on which any
Person (as defined in the Rights Agreement) commences a tender or exchange offer
which, if consummated, would result in such Person's becoming an Acquiring
Person (as defined below) and (ii) the first date (the "Stock Acquisition Date")
of public announcement by Spinco (by any means) that a Person has become an
Acquiring Person; provided that if a tender or exchange offer referred to in
clause (i) is canceled, terminated or otherwise withdrawn prior to the
Separation Time without the purchase of any shares of stock pursuant thereto,
such offer shall be deemed never to have been made. An Acquiring Person is any
Person who is or becomes the Beneficial Owner (as defined in the Rights
Agreement) of 15% or more of the outstanding Spinco Shares after the
Distribution Date, excluding (i) Spinco, any majority-owned subsidiary of Spinco
or any employee stock ownership or other employee benefit plan of Spinco or a
subsidiary of Spinco (or any entity or trustee holding shares of Spinco Common
Stock pursuant to
77
91
the terms of any such plan or for the purpose of funding any such plan or
funding other employee benefits for employees of Spinco or any subsidiary of
Spinco), (ii) any Person who is the beneficial owner of 15% or more of the
outstanding shares of Spinco Common Stock on the date of the Rights Agreement or
any Person who became the Beneficial Owner of 15% or more of the outstanding
Spinco Shares solely as a result of an acquisition of Spinco Shares by Spinco,
until such time as such Person acquires additional Spinco Shares other than
through a dividend or stock split, (iii) any Person who becomes an Acquiring
Person without any plan or intent to seek or affect control of Spinco if such
Person, upon notice by Spinco, promptly divests sufficient securities to reduce
its Beneficial Ownership below 15% or (iv) any Person who Beneficially Owns
Spinco Shares that were solely (A) acquired upon exercise of an option granted
by Spinco in connection with an agreement to merge with, or acquire, Spinco
entered into prior to a Stock Acquisition Date, (B) owned by such Person and its
Affiliates and Associates (as defined in the Rights Agreement) at the time of
such grant or (C) amounting to less than 1% of the outstanding Spinco Shares,
acquired by Affiliates and Associates of such Person after the time of such
grant.
The Rights Agreement provides that, until the Separation Time, the Rights
will be transferred with and only with the Spinco common stock. Spinco Share
certificates issued after the Record Time but prior to the Separation Time shall
evidence one Right for each share of Spinco common stock represented thereby and
shall contain a legend incorporating by reference the terms of the Rights
Agreement (as it may be amended from time to time). Promptly following the
Separation Time, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of Spinco Shares at the
Separation Time.
The Rights will not be exercisable until the Separation Time. The Rights
will expire on the earliest of (i) the Exchange Time (as defined below), (ii)
the close of business on the tenth anniversary of the Record Time, unless
extended by action of Spinco's board of directors, (iii) the date on which the
Rights are redeemed as described below and (iv) immediately prior to the
effective time of a consolidation, merger or share exchange of Spinco (A) into
another corporation or (B) with another corporation where Spinco is the
surviving corporation but Spinco Shares are converted into cash or securities of
another corporation, in either case pursuant to an agreement that Spinco entered
into prior to a Stock Acquisition Date (in any such case, the "Expiration
Time").
The Exercise Price and the number of Rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the Rights, may be
adjusted from time to time to prevent dilution in the event of a common stock
dividend on, or a subdivision or a combination into a smaller number of shares
of, Spinco Common Stock, or the issuance or distribution of any securities or
assets in respect of, in lieu of or in exchange for Spinco Common Stock.
In the event that prior to the Expiration Time a Flip-in Date (as defined
below) occurs, each Right (other than Rights Beneficially Owned by the Acquiring
Person or any affiliate or associate thereof, which Rights shall become void)
shall constitute the right to purchase from Spinco, upon the exercise thereof in
accordance with the terms of the Rights Agreement, that number of shares of
Spinco Common Stock having an aggregate market price (as defined in the Rights
Agreement), on the Stock Acquisition Date equal to twice the Exercise Price for
an amount in cash equal to the then current Exercise Price. In addition,
Spinco's board of directors may, at its option, at any time after a Flip-in Date
and prior to the time that an Acquiring Person becomes the Beneficial Owner of
more
78
92
than 50% of the outstanding shares of Spinco Common Stock, elect to exchange all
(but not less than all) the then outstanding Rights (other than Rights
Beneficially Owned by the Acquiring Person or its Affiliates or Associates,
which Rights become void) for shares of Spinco Common Stock at an exchange ratio
of one share of Spinco Common Stock per Right, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
of the Separation Time (the "Exchange Ratio"). Immediately upon such action by
Spinco's board of directors (the "Exchange Time"), the right to exercise the
Rights will terminate and each Right will thereafter represent only the right to
receive a number of shares of Spinco Common Stock equal to the Exchange Ratio. A
"Flip-In Date" is defined in the Rights Agreement as any Stock Acquisition Date
or such later date as Spinco's board of directors may from time to time fix by
resolution adopted prior to the Flip-In Date that would otherwise have occurred.
Whenever Spinco becomes obligated under the preceding paragraph to issue
shares of Spinco Common Stock upon exercise of or in exchange for Rights,
Spinco, at its option, may substitute shares of participating preferred stock
for shares of Spinco Common Stock, at a ratio of one one-hundredth of a share of
the Participating Preferred for each share of Spinco Common Stock.
In the event that prior to the Expiration Time Spinco enters into,
consummates or permits to occur a transaction or series of transactions after
the time an Acquiring Person has become such in which, directly or indirectly,
(i) Spinco shall consolidate, merge or participate in a statutory share exchange
with any other Person if, at the time of the consolidation, merger or statutory
share exchange or at the time Spinco enters into any agreement with respect to a
consolidation, merger or share exchange, the Acquiring Person is the Beneficial
Owner of 90% or more of the outstanding shares of Spinco Common Stock or
controls Spinco's board of directors and either (A) any term of or arrangement
concerning the treatment of shares of Spinco Common Stock in such consolidation,
merger or statutory share exchange relating to the Acquiring Person is not
identical to the terms and arrangements relating to other holders of Spinco
Common Stock or (B) the person with whom the transaction or transactions occur
is the Acquiring Person or an affiliate or associate of the Acquiring Person or
(ii) Spinco or one or more of its subsidiaries sells or otherwise transfers
assets (A) aggregating more than 50% of the assets (measured by either book
value or fair market value) or (B) generating more than 50% of the operating
income or cash flow of Spinco and its subsidiaries taken as a whole to any other
Person (other than Spinco or one or more of its wholly owned subsidiaries) or to
two or more such Persons which are affiliated or otherwise acting in concert,
if, at the time of such sale or transfer of assets or at the time Spinco (or any
such subsidiary) enters into an agreement with respect to such sale or transfer,
the Acquiring Person controls Spinco's board of directors (a "Flip-over
Transaction or Event"), Spinco shall take such action as shall be necessary to
ensure, and shall not enter into, consummate or permit to occur such Flip-over
Transaction or Event until it shall have entered into a supplemental agreement
with the Person engaging in such Flip-over Transaction or Event or the parent
corporation thereof (the "Flip-over Entity"), for the benefit of the holders of
the Rights, provided that upon consummation or occurrence of the Flip-over
Transaction or Event (i) each Right shall thereafter constitute the right to
purchase from the Flip-over Entity, upon exercise thereof in accordance with the
terms of the Rights Agreement, that number of shares of common stock of the
Flip-over Entity having an aggregate market price on the date of consummation or
occurrence of such Flip-over Transaction or Event equal to twice the Exercise
Price for an amount in cash equal to the then current Exercise Price and (ii)
the Flip-over Entity shall thereafter be liable for, and shall assume, by virtue
of such Flip-over
79
93
Transaction or Event and such supplemental agreement, all the obligations and
duties of Spinco pursuant to the Rights Agreement.
Spinco's board of directors may, at its option, at any time prior to the
Flip-in Date, redeem all (but not less than all) the then outstanding Rights at
a redemption price of $.01 per Right. Immediately upon the action of Spinco's
board of directors to redeem the Rights, without any further action and without
any notice, the right to exercise the Rights will terminate and each Right will
thereafter represent only the right to receive the redemption price in cash or
securities.
The holders of Rights will, solely by reason of their ownership of Rights,
have no rights as stockholders of Spinco, including the right to vote or to
receive dividends.
Spinco and the Rights Agent may from time to time supplement or amend the
Rights Agreement without the approval of any holders of Rights (i) prior to the
Flip-In Date, in any respect and (ii) on or after the Flip-In Date, to make any
changes that Spinco may deem necessary or desirable and which shall not
materially adversely affect the interests of the holders of Rights generally or
in order to cure any ambiguity or correct or supplement any inconsistent or
defective provision contained therein.
The Rights will not prevent a takeover of Spinco. However, the Rights may
cause substantial dilution to a person or group that acquires 15% or more of the
Spinco Shares unless the Rights are first redeemed by Spinco's board of
directors. Nevertheless, the rights should not interfere with a transaction that
is in the best interests of Spinco and its stockholders because the Rights can
be terminated on or prior to the Flip-in Date and before the transaction is
consummated.
As long as the rights are attached to Spinco Common Stock, Spinco will
issue one Right with each new share of Spinco Common Stock so that all shares
will have Rights attached. Prior to the Distribution, Spinco's board of
directors will reserve an appropriate number of shares of participating
preferred stock for issuance upon exercise of the Rights.
The Rights Agreement (which includes as Exhibit A the forms of Rights
Certificate and Election to Exercise) will be filed as an exhibit to the
Registration Statement which relates to this information statement. The
foregoing description of the Rights is qualified in its entirety by reference to
the Rights Agreement and such exhibit.
DELAWARE LAW
Under Section 203 of the Delaware General Corporation Law ("Section 203"),
which will be applicable to Spinco after the Distribution, certain "business
combinations" (defined generally to include mergers or consolidations between
the Delaware corporation and an interested stockholder and transactions with an
interested stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase the interested
stockholder's percentage ownership of stock) between a publicly held Delaware
corporation and an "interested stockholder" (defined generally as those
stockholders who become beneficial owners of 15% or more of a Delaware
corporation's voting stock or their affiliates) are prohibited for a three-year
period following the date that such stockholder became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation not to be so governed, (ii) either the business combination or the
proposed acquisition of stock resulting in the person becoming an interested
stockholder was approved by the board of directors of the corporation before the
other party to the business combination became an interested stockholder, (iii)
upon
80
94
consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by officers who are also directors or held in employee benefit plans in which
the employees do not have a confidential right to tender or vote stock held by
the plan) or (iv) the business combination was approved by the board of
directors of the corporation and also ratified by two-thirds of the voting stock
which the interested stockholder did not own.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. Spinco's certificate of incorporation does not exclude Spinco from
restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in acquiring Spinco to negotiate in advance with
Spinco's board of directors, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approved either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in the management of Spinco. It is possible that such
provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION ON LIABILITY OF DIRECTORS
Pursuant to authority conferred by Section 102 of the Delaware General
Corporation Law, Article X of Spinco's certificate of incorporation ("Article
X") eliminates the personal liability of Spinco's directors to Spinco or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that such exemption from liability or limitation thereof is
not permitted under the Delaware General Corporation Law as currently in effect
or as it may hereafter be amended. Under the Delaware General Corporation Law as
in effect on the date hereof, Spinco's directors remain liable for (i) any
breach of the duty of loyalty to Spinco or its stockholders, (ii) any act or
omission not in good faith or which involves intentional misconduct or a knowing
violation of law, (iii) any violation of Section 174 of the Delaware General
Corporation Law, which proscribes the payment of dividends and stock purchases
or redemptions under certain circumstances and (iv) any transaction from which
directors derive an improper personal benefit.
Article X provides that any future repeal or amendment of its terms
(including any amendment or repeal of Article X made by virtue of any change in
the Delaware General Corporation Law) will not adversely affect any rights of
directors existing thereunder with respect to acts or omissions occurring prior
to such repeal or amendment.
INDEMNIFICATION
Spinco's bylaws and Section 145 of the Delaware General Corporation Law,
which allows, and in some cases requires, the indemnification of directors and
officers under certain circumstances, grant Spinco's directors and officers a
right to indemnification to the
81
95
fullest extent permitted by law for all expenses relating to civil, criminal,
administrative or investigative procedures to which they are a party (i) by
reason of the fact that they are or were directors or officers of Spinco or (ii)
by reason of the fact that, while they are or were directors or officers of
Spinco, they are or were serving at the request of Spinco as a director, officer
or employee of another enterprise. Spinco's bylaws further provide that an
advancement for any such expenses shall only be made upon delivery to Spinco by
the indemnitee of an undertaking to repay all amounts so advanced if it is
ultimately determined that such indemnitee is not entitled to be indemnified by
Spinco.
INDEMNIFICATION AGREEMENTS
In connection with the Distribution, Spinco will enter into indemnification
agreements with certain of its directors and officers. These agreements will
require Spinco to indemnify these directors and officers with respect to their
activities as directors or officers of Spinco or when serving at Spinco's
request as a director, officer or trustee of another corporation, trust or other
enterprise against expenses (including attorneys' fees, judgments, fines and
amounts paid in settlement) actually and reasonably incurred by them in any
threatened, pending or completed suit or proceeding (civil, criminal
administrative or investigative) to which they are, or are threatened to be
made, parties as a result of their service to Spinco. Spinco will agree to
indemnify each indemnitee for any one or a combination of the following,
whichever is most advantageous to the indemnitee, as determined by the
indemnitee (i) the benefits provided by Spinco's certificate of incorporation
and bylaws in effect on the date of the indemnification agreement; (ii) the
benefits provided by Spinco's certificate of incorporation and bylaws at the
time expenses are incurred by the indemnitee; (iii) the benefits allowable under
Delaware law in effect on the date of the indemnification agreement; (iv) the
benefits allowable under the law of the jurisdiction under which Spinco exists
at the time expenses are incurred by the indemnitee; (v) the benefits available
under liability insurance obtained by Spinco; and (vi) such other benefits as
may be otherwise available to indemnitee under Spinco's existing practices.
Under the indemnification agreements, each indemnitee will continue to be
indemnified even after ceasing to occupy a position as an officer, director,
employee or agent of Spinco with respect to suits or proceedings arising out of
acts or omissions during his service to Spinco.
Each indemnitee will agree to notify Spinco promptly of any proceeding
brought or threatened and not to make any admission or settlement without
Spinco's consent, unless the indemnitee determines to undertake his own defense
and waives the benefits of the indemnification agreement.
INDEPENDENT PUBLIC ACCOUNTANTS
The combined financial statements and schedule of the National Service
Industries, Inc. lighting equipment and chemicals businesses (to be reorganized
as L&C Spinco, Inc.) as of August 31, 2000 and August 31, 1999, and for each of
the three years in the period ended August 31, 2000, appearing in this
information statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
82
96
ADDITIONAL INFORMATION
Spinco has filed with the Commission the Registration Statement under the
Exchange Act, with respect to the Spinco Common Stock and the preferred stock
purchase rights associated with each share of Spinco Common Stock. This document
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, to which reference is hereby made.
Statements made in this document as to the contents of any contract, agreement
or other document referred to herein are not necessarily complete. With respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by Spinco with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Regional Offices of the Securities and Exchange
Commission at Seven World Trade Center, Thirteenth Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such information can be obtained by mail from the
Public Reference Branch of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's website is http://www.sec.gov.
After the Distribution, Spinco will be required to comply with the
reporting requirements of the Exchange Act and to file with the Commission
reports, proxy statements and other information as required by the Exchange Act.
Additionally, Spinco will be required to provide annual reports containing
audited financial statements to its stockholders in connection with its annual
meetings of stockholders. After the Distribution, these reports, proxy
statements and other information will be available to be inspected and copied at
the public reference facilities of the Commission or obtained by mail or over
the Internet from the Commission, as described above. Spinco has submitted an
application to list the Spinco Shares on the New York Stock Exchange under the
symbol " " following completion of the Distribution. When the Spinco Shares
commence trading on the New York Stock Exchange, such reports, proxy statements
and other information will be available for inspection at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
83
97
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Combined balance sheets as of May 31, 2001 (unaudited),
August 31, 2000 and 1999.................................. F-3
Combined statements of income for the nine month periods
ended May 31, 2001 and 2000 (unaudited) and for the years
ended August 31, 2000, 1999, and 1998..................... F-4
Combined statements of Parent's equity and comprehensive
income for the years ended August 31, 2000, 1999, and
1998...................................................... F-5
Combined statements of cash flows for the nine month periods
ended May 31, 2001 and 2000 (unaudited) and for the years
ended August 31, 2000, 1999, and 1998..................... F-6
Notes to combined financial statements...................... F-8
Report of Independent Public Accountants on Schedule........ F-26
Schedule II -- Valuation and Qualifying Accounts............ F-27
F-1
98
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Service Industries, Inc.:
We have audited the accompanying combined balance sheets of the National
Service Industries, Inc. lighting equipment and chemicals businesses (to be
reorganized as L&C Spinco, Inc. -- Note 1) as of August 31, 2000 and 1999 and
the related combined statements of income, parent's equity and comprehensive
income, and cash flows for each of the three years in the period ended August
31, 2000. These combined financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
National Service Industries, Inc. lighting equipment and chemicals businesses as
of August 31, 2000 and 1999 and the results of their operations and their cash
flows for each of the three years in the period ended August 31, 2000 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 22, 2001
F-2
99
COMBINED BALANCE SHEETS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS)
AUGUST 31,
MAY 31, -----------------------
2001 2000 1999
----------- ---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 13,779 $ 1,510 $ 2,254
Receivables, less reserves for doubtful accounts of
$7,607 in 2001, $6,570 in 2000, and $5,470 in 1999..... 312,140 344,451 310,729
Inventories, at the lower of cost (on a first-in,
first-out basis) or market............................. 232,274 236,856 197,453
Deferred income taxes.................................... 6,222 15,631 15,739
Prepayments and other current assets..................... 26,342 22,531 18,026
---------- ---------- ----------
Total Current Assets................................... 590,757 620,979 544,201
---------- ---------- ----------
PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land..................................................... 14,954 15,090 13,719
Buildings and leasehold improvements..................... 156,748 148,100 129,273
Machinery and equipment.................................. 323,916 300,946 328,830
---------- ---------- ----------
Total Property, Plant, and Equipment................... 495,618 464,136 471,822
Less -- Accumulated depreciation and amortization........ 249,353 219,108 247,338
---------- ---------- ----------
Property, Plant, and Equipment -- net.................. 246,265 245,028 224,484
---------- ---------- ----------
OTHER ASSETS:
Goodwill and other intangibles........................... 478,257 497,324 517,970
Other.................................................... 55,326 59,549 50,383
---------- ---------- ----------
Total Other Assets..................................... 533,583 556,873 568,353
---------- ---------- ----------
Total Assets........................................... $1,370,605 $1,422,880 $1,337,038
========== ========== ==========
LIABILITIES AND PARENT'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt..................... $ 1,089 $ 201 $ 368
Commercial paper, short-term............................. 115,665 231,706 97,539
Short-term secured borrowings............................ 118,900 -- --
Notes payable............................................ 18,690 20,285 11,471
Accounts payable......................................... 102,953 103,672 104,981
Accrued salaries, commissions, and bonuses............... 37,420 54,928 62,148
Current portion of self-insurance reserves............... 2,598 2,679 3,321
Accrued taxes payable.................................... -- 1,700 8,954
Other accrued liabilities................................ 53,675 46,699 55,491
---------- ---------- ----------
Total Current Liabilities.............................. 450,990 461,870 344,273
---------- ---------- ----------
Long-Term Debt, less current maturities.................. 383,213 384,242 435,199
---------- ---------- ----------
Deferred Income Taxes.................................... 25,108 36,902 34,963
---------- ---------- ----------
Self-Insurance Reserves, less current portion............ 8,852 10,942 11,837
---------- ---------- ----------
Other Long-Term Liabilities.............................. 83,574 86,122 78,911
---------- ---------- ----------
Commitments and Contingencies (Note 6)
PARENT'S EQUITY:
NSI equity investment.................................... 432,496 455,568 441,173
Accumulated other comprehensive income................... (13,628) (12,766) (9,318)
---------- ---------- ----------
Total Parent's Equity.................................. 418,868 442,802 431,855
---------- ---------- ----------
Total Liabilities and Parent's Equity.................. $1,370,605 $1,422,880 $1,337,038
========== ========== ==========
The accompanying notes are an integral part of these combined balance sheets.
F-3
100
COMBINED STATEMENTS OF INCOME
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NINE MONTHS
ENDED MAY 31, YEARS ENDED AUGUST 31,
----------------------- -------------------------------------
2001 2000 2000 1999 1998
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
SALES......................... $1,482,957 $1,466,622 $2,022,711 $1,708,385 $1,559,787
COSTS AND EXPENSES:
Cost of products sold......... 845,063 847,480 1,168,221 978,274 902,851
Selling and administrative
expenses.................... 512,793 489,366 656,112 570,792 517,851
Interest expense, net......... 37,710 31,016 43,299 12,697 4,412
Amortization expense.......... 13,521 13,899 18,441 5,802 3,102
Loss on sale of businesses.... 14,557 -- -- -- --
Other (income) expense, net... 825 (469) 1,347 (1,765) 1,712
---------- ---------- ---------- ---------- ----------
Total costs and expenses.... 1,424,469 1,381,292 1,887,420 1,565,800 1,429,928
---------- ---------- ---------- ---------- ----------
Income before provision for
income taxes................ 58,488 85,330 135,291 142,585 129,859
Provision for income taxes.... 24,384 32,545 51,600 53,469 48,048
---------- ---------- ---------- ---------- ----------
Net income.................... $ 34,104 $ 52,785 $ 83,691 $ 89,116 $ 81,811
========== ========== ========== ========== ==========
Pro forma basic earnings per
share (Note 2).............. $ 0.83 n/a $ 2.06 n/a n/a
========== ========== ========== ========== ==========
Pro forma basic weighted
average number of shares
outstanding (Note 2)........ 41,039 n/a 40,708 n/a n/a
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these combined statements.
F-4
101
COMBINED STATEMENTS OF PARENT'S EQUITY AND COMPREHENSIVE INCOME
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS)
ACCUMULATED
OTHER
NSI'S COMPREHENSIVE TOTAL COMPREHENSIVE
EQUITY INCOME EQUITY INCOME
-------- ------------- -------- -------------
BALANCE AUGUST 31, 1997.......... $409,219 $ (6,812) $402,407
Net income....................... 81,811 -- 81,811 $81,811
Foreign currency translation
adjustment..................... -- (4,528) (4,528) (4,528)
-------
Comprehensive income............. -- $77,283
=======
Net transactions with NSI........ (66,003) -- (66,003)
-------- -------- --------
BALANCE AUGUST 31, 1998.......... 425,027 (11,340) 413,687
Net income....................... 89,116 -- 89,116 $89,116
Foreign currency translation
adjustment..................... -- 2,022 2,022 2,022
-------
Comprehensive income............. -- -- -- $91,138
=======
Net transactions with NSI........ (72,970) -- (72,970)
-------- -------- --------
BALANCE AUGUST 31, 1999.......... 441,173 (9,318) 431,855
Net income....................... 83,691 -- 83,691 $83,691
Foreign currency translation
adjustment..................... -- (3,448) (3,448) (3,448)
-------
Comprehensive income............. -- -- -- $80,243
=======
Net transactions with NSI........ (69,296) -- (69,296)
-------- -------- --------
BALANCE AUGUST 31, 2000.......... $455,568 $(12,766) $442,802
======== ======== ========
The accompanying notes are an integral part of these combined statements.
F-5
102
COMBINED STATEMENTS OF CASH FLOWS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS)
NINE MONTHS YEARS ENDED
ENDED MAY 31, AUGUST 31,
---------------------- ---------------------------------
2001 2000 2000 1999 1998
--------- ---------- --------- --------- ---------
(UNAUDITED)
CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES
Net income.......................... $ 34,104 $ 52,785 $ 83,691 $ 89,116 $ 81,811
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization....... 48,584 45,322 58,485 33,297 28,669
(Gain)/loss on sale of property,
plant & equipment................. (237) (44) (156) 69 767
Loss on sale of businesses.......... 14,557 -- -- -- --
Provision for losses on accounts
receivable........................ 2,471 1,999 2,667 2,744 2,580
Change in assets and liabilities net
of effect of acquisitions -
Receivables....................... 27,899 2,442 (37,464) (16,047) (44,037)
Inventories....................... 3,007 (45,469) (40,054) 10,920 (20,906)
Deferred income taxes............. (2,385) 8,333 321 (14,697) (4,281)
Prepayments and other current
assets.......................... (4,812) (4,698) (3,335) (3,940) (455)
Accounts payable and accrued
liabilities..................... (17,971) (33,819) (12,202) 43,383 (12,392)
Self-insurance reserves and other
long-term liabilities........... (4,400) (1,512) 12,038 3,225 4,605
--------- ---------- --------- --------- ---------
Net Cash Provided by Operating
Activities................... 100,817 25,339 63,991 148,070 36,361
--------- ---------- --------- --------- ---------
CASH PROVIDED BY (USED FOR) INVESTING
ACTIVITIES
Purchases of property, plant, and
equipment......................... (38,326) (48,270) (62,913) (38,555) (46,708)
Proceeds from the sale of property,
plant and equipment............... 1,361 1,378 1,866 378 450
Proceeds from the sale of
businesses........................ 1,799 -- -- -- --
Acquisitions........................ -- (14,477) (16,214) (514,370) (11,398)
Change in other assets.............. 4,052 1,827 (9,764) (1,898) (2,394)
--------- ---------- --------- --------- ---------
Net Cash Used for Investing
Activities................... (31,114) (59,542) (87,025) (554,445) (60,050)
--------- ---------- --------- --------- ---------
CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES
Net (repayments) borrowings of notes
payable........................... (1,595) (229) 8,814 3,588 805
Issuances (repayments) of commercial
paper, net (less than 90 days).... (107,188) 93,699 (87,762) 352,265 --
Issuances of commercial paper
(greater than 90 days)............ 1,347 186,024 194,953 -- --
Repayments of commercial paper
(greater than 90 days)............ (10,200) (182,750) (222,750) -- --
Proceeds from short-term secured
borrowings........................ 118,900 -- -- -- --
Proceeds from issuances of long-term
debt.............................. -- -- 199,798 267,585 52,000
F-6
103
COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
NINE MONTHS YEARS ENDED
ENDED MAY 31, AUGUST 31,
---------------------- ---------------------------------
2001 2000 2000 1999 1998
--------- ---------- --------- --------- ---------
(UNAUDITED)
Repayments of long-term debt........ (826) (861) (1,196) (160,304) (369)
Net activity with NSI............... (57,176) (61,607) (69,296) (72,970) (66,003)
--------- ---------- --------- --------- ---------
Net Cash Provided by (Used for)
Financing Activities......... (56,738) 34,276 22,561 390,164 (13,567)
--------- ---------- --------- --------- ---------
Effect of Exchange Rate Changes on
Cash................................ (696) (838) (271) 9 (410)
--------- ---------- --------- --------- ---------
Net Change in Cash and Cash
Equivalents......................... 12,269 (765) (744) (16,202) (37,666)
Cash and Cash Equivalents at Beginning
of Period........................... 1,510 2,254 2,254 18,456 56,122
--------- ---------- --------- --------- ---------
Cash and Cash Equivalents at End of
Period.............................. $ 13,779 $ 1,489 $ 1,510 $ 2,254 $ 18,456
========= ========== ========= ========= =========
Supplemental Cash Flow Information:
Income taxes paid during the
period............................ $ 27,661 $ 42,932 $ 55,302 $ 29,333 $ 52,709
Interest paid during the period..... 33,922 27,134 42,399 14,289 5,939
Noncash Investing and Financing
Activities:
Noncash aspects of acquisitions -
Assets acquired................. $ -- $ -- $ -- $ 633,023 $ 14,401
Liabilities assumed or
incurred..................... -- -- -- 118,653 3,055
The accompanying notes are an integral part of these combined statements.
F-7
104
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
NOTE 1: SPIN-OFF AND BASIS OF PRESENTATION
In fiscal year 2001, management of National Service Industries, Inc. ("NSI"
or "Parent") began to evaluate and pursue the spin-off of its lighting equipment
and chemicals businesses, subject to certain conditions, into a separate
publicly traded company with its own management and Board of Directors (the
"Distribution" or the "Spinoff"). This distribution is expected to occur during
the last quarter of fiscal 2001 or the first quarter of fiscal 2002 and will be
accomplished by transferring the assets and liabilities of the businesses that
comprise the lighting equipment and chemicals businesses to L&C Spinco, Inc., a
soon-to-be formed holding company, and then distributing all of the shares of
common stock of L&C Spinco, Inc. to NSI's stockholders. NSI's stockholders will
receive one share of L&C Spinco, Inc. common stock for every one share of NSI
common stock held as of the date of distribution (the "Distribution Date").
After the Distribution, L&C Spinco, Inc. and NSI will be two separate public
companies. L&C Spinco, Inc. will be incorporated as an indirect wholly owned
subsidiary of NSI and will not have any operations, assets, or liabilities until
immediately prior to the Distribution.
These combined financial statements include the accounts of the NSI
businesses that comprise its lighting equipment and chemicals businesses
(collectively referred to herein as "Spinco"). The lighting equipment segment
produces a variety of fluorescent and non-fluorescent fixtures for markets
throughout the United States, Canada, Mexico, and overseas. The chemicals
segment produces maintenance, sanitation, and water treatment products for
customers throughout the United States, Canada, and Western Europe.
The combined financial statements have been prepared on the historical cost
basis in accordance with accounting principles generally accepted in the United
States and present Spinco's financial position, results of operations, and cash
flows as derived from NSI's historical financial statements. Certain NSI
corporate assets, liabilities and expenses have been allocated to Spinco based
on an estimate of the proportion of corporate amounts allocable to Spinco,
utilizing such factors as revenues, number of employees, and other relevant
factors. In the opinion of management, the allocations have been made on a
reasonable basis. Management believes that all amounts allocated to Spinco are a
reasonable representation of the costs that would have been incurred if Spinco
had performed these functions as a stand-alone company. The combined financial
statements reflect an allocation of debt and related interest expense, as
further described in Note 4.
In conjunction with the separation of their businesses, Spinco and NSI will
enter into various agreements that address the allocation of assets and
liabilities between them and that define their relationship after the
separation, including the distribution agreement, the tax disaffiliation
agreement, the employee benefits agreement, and the transition services
agreement.
F-8
105
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
NOTE 2: SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Spinco after
elimination of significant intercompany transactions and accounts.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Spinco records revenues as products are shipped. A provision for estimated
returns, allowances, and warranty costs is recorded when products are shipped.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions, which include estimates of NSI costs allocated to
Spinco, that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash in excess of daily requirements is invested in time deposits and
marketable securities and is included in the accompanying balance sheets at
market value. Spinco considers time deposits and marketable securities purchased
with an original maturity of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to receivables are limited due
to the wide variety of customers and markets using Spinco's products, as well as
their dispersion across many different geographic areas. As a result, as of
August 31, 2000, Spinco does not consider itself to have any significant
concentrations of credit risk.
F-9
106
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost (on a first-in, first-out
basis) or market and consisted of the following at August 31, 2000 and 1999:
2000 1999
-------- --------
(IN THOUSANDS)
Raw materials and supplies................................. $ 99,089 $ 92,240
Work in progress........................................... 19,677 16,215
Finished goods............................................. 118,090 88,998
-------- --------
$236,856 $197,453
======== ========
GOODWILL AND OTHER INTANGIBLES
Goodwill of $3.5 million was recognized in connection with a 1969
acquisition and is not being amortized. Remaining amounts of goodwill ($341.4
million in 2000 and $359.4 million in 1999) and other intangible assets are
being amortized on a straight-line basis over various periods ranging from 2 to
40 years.
Spinco periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful lives of goodwill and
other long-lived assets or whether the remaining balance of goodwill should be
evaluated for possible impairment. Spinco uses an estimate of related
undiscounted cash flows over the remaining life of the goodwill in measuring
whether the goodwill is recoverable.
EARNINGS PER SHARE
Earnings per share data has not been presented since the businesses that
comprise Spinco were wholly owned subsidiaries of NSI, or businesses thereof,
during the periods presented and will be recapitalized as part of the
Distribution.
PRO FORMA EARNINGS PER SHARE (UNAUDITED)
Pro forma basic earnings per share is calculated as net income divided by
the pro forma weighted average number of common shares outstanding. Pro forma
weighted average shares outstanding has been computed by applying the
distribution ratio of one share of Spinco common stock to the historical NSI
weighted average shares outstanding for the same periods presented. Pro forma
earnings per share information is unaudited and has been presented for the nine
month period ended May 31, 2001 and the year ended August 31, 2000 only.
DEPRECIATION
For financial reporting purposes, depreciation is determined principally on
a straight-line basis using estimated useful lives of plant and equipment (25 to
40 years for buildings
F-10
107
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
and 3 to 15 years for machinery and equipment) while accelerated depreciation
methods are used for income tax purposes. Leasehold improvements are amortized
over the life of the lease or the useful life of the improvement, whichever is
shorter.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development expenses amounted to $18.6 million, $8.1 million, and $12.9 million
during 2000, 1999, and 1998, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for Spinco's foreign operations is the local
currency in most cases. The translation of foreign currencies into U.S. dollars
is performed for balance sheet accounts using exchange rates in effect at the
balance sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. The gains or losses, net of applicable income
taxes, resulting from the translation are included in "Accumulated Other
Comprehensive Income" in the Combined Statements of Parent's Equity and
Comprehensive Income and are excluded from net income.
Gains or losses resulting from foreign currency transactions are included
in "Other (income) expense, net" in the Combined Statements of Income and were
insignificant in 2000, 1999, and 1998.
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS
Spinco's retiree medical plans are financed entirely by retiree
contributions; therefore, Spinco has no liability in connection with them.
Several programs provide limited retiree life insurance benefits. The liability
for these plans is not material.
POSTEMPLOYMENT BENEFITS
Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers'
Accounting for Postemployment Benefits," requires the accrual of the estimated
cost of benefits provided by an employer to former or inactive employees after
employment but before retirement. Spinco's accrual, which is not material,
relates primarily to severance agreements and the liability for life insurance
coverage for certain eligible employees.
INTEREST EXPENSE, NET
Interest expense, net, is comprised primarily of interest expense on
long-term debt, credit facility borrowings, commercial paper, and line of credit
borrowings offset by interest income on cash and cash equivalents.
F-11
108
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
ACCOUNTING STANDARDS YET TO BE ADOPTED
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." Specifically, Issue 00-10 addresses how the seller of goods should
classify amounts billed to a customer for shipping and handling. The EITF
concluded that all amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as revenue. Spinco is required to and will adopt EITF 00-10
in the fourth quarter of fiscal year 2001. NSI has historically netted certain
shipping and handling revenues charged to customers in costs and expenses. The
adoption of EITF 00-10 will result in an increase in sales and costs and
expenses, with no impact on net income. Spinco has not yet calculated the effect
of this reclassification on its reported revenues and costs.
F-12
109
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
NOTE 3: PENSION AND PROFIT SHARING PLANS
Spinco has several pension plans covering hourly and salaried employees.
Benefits paid under these plans are based generally on employees' years of
service and/or compensation during the final years of employment. Spinco makes
annual contributions to the plans to the extent indicated by actuarial
valuations. Plan assets are invested primarily in equity and fixed income
securities.
The following tables reflect the status of Spinco's pension plans at August
31, 2000 and 1999:
2000 1999
------- -------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $70,137 $60,189
Service cost................................................ 2,256 1,364
Interest cost............................................... 5,307 4,232
Acquisition................................................. -- 11,869
Actuarial gain.............................................. (5,392) (5,263)
Benefits paid............................................... (3,064) (2,437)
Other....................................................... 126 183
------- -------
Benefit obligation at end of year........................... $69,370 $70,137
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $82,057 $65,813
Actual return on plan assets................................ 7,577 4,241
Employer contributions...................................... 1,532 564
Employee contributions...................................... 254 --
Benefits paid............................................... (3,064) (2,437)
Acquisition................................................. -- 13,663
Other....................................................... (1,439) 213
------- -------
Fair value of plan assets at end of year.................... $86,917 $82,057
======= =======
FUNDED STATUS:
Assets in excess of benefit obligation...................... $17,546 $11,919
Unrecognized actuarial (gain) loss.......................... (2,135) 3,347
Unrecognized transition asset............................... (858) (1,019)
Unrecognized prior service cost............................. 1,635 1,155
------- -------
Prepaid pension expense..................................... $16,188 $15,402
======= =======
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for defined benefit pension plans with accumulated benefit
obligations in excess of plan assets were $2.0 million, $1.4 million, and $1.1
million, respectively, as of August 31, 2000, and $1.8 million, $1.1 million,
and $1.0 million, respectively, as of August 31, 1999.
F-13
110
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
Components of net periodic benefit cost for the fiscal years ended August
31, 2000, 1999, and 1998 included the following:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Service cost..................................... $ 2,256 $ 1,364 $ 1,268
Interest cost.................................... 5,307 4,232 3,976
Expected return on plan assets................... (7,511) (6,063) (5,183)
Amortization of prior service cost............... 86 91 96
Amortization of transitional asset............... (161) (161) (161)
Recognized actuarial loss........................ 64 221 164
------- ------- -------
Net periodic pension benefit..................... $ 41 $ (316) $ 160
======= ======= =======
Weighted average assumptions in 2000 and 1999 included the following:
2000 1999
---- ----
Discount rate............................................... 8.2% 7.5%
Expected return on plan assets.............................. 9.4% 9.2%
Rate of compensation increase............................... 5.1% 5.1%
During 2000, the discount rate used to determine the projected benefit
obligation was increased to 8.2% to more closely approximate rates on
high-quality, long-term obligations.
Spinco also has profit sharing and 401(k) plans to which both employees and
the company contribute. Spinco's cost of these plans was $4.7 million in 2000,
$4.3 million in 1999, and $3.7 million in 1998.
In addition to the above employee benefit plans, certain employees of
Spinco have participated in the NSI employee benefit plans, the assets,
liabilities and expenses of which have been allocated in the Combined Financial
Statements based on an estimate of the proportion of amounts related to Spinco.
In the opinion of management, these amounts have been allocated on a reasonable
basis. Upon the Distribution, Spinco will provide benefits to its employees,
which will generally be similar to those benefits provided under NSI's plans.
NOTE 4: LONG-TERM DEBT AND LINES OF CREDIT
As part of the distribution agreement between NSI and Spinco, all but
approximately $5.0 million of NSI's total outstanding debt will be assumed by
Spinco or refinanced with new borrowings by Spinco. Accordingly, for purposes of
the historical presentation of Spinco's financial position as of August 31, 2000
and 1999, all but $5.0 million of NSI's total outstanding debt has been
presented as obligations of Spinco. For purposes of the historical presentation
of Spinco's results of operations, Spinco has reflected all of NSI's interest
expense related to the debt allocated to it. Management intends to take the
necessary actions to effect the transfer of these obligations to Spinco under
the same terms
F-14
111
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
existing with NSI; however, management does not have the ability to unilaterally
effect the transfer in all cases. In the event any of NSI's creditors do not
accept this transfer, Spinco would be required to refinance the related
borrowings. In addition, Spinco will be required to enter into a new credit
facility to borrow under, or if desired, to support its commercial paper
program, as the Credit Facility and the Revolving Credit Facility described
below will expire upon completion of the Distribution. Management believes that
the terms of the debt which will ultimately be outstanding at Spinco will not
differ materially from the terms of NSI's debt currently outstanding.
2000 1999
-------- --------
(IN THOUSANDS)
Commercial paper........................................... $ -- $249,726
6% notes due February 2009 with an effective rate of 6.04%,
net of unamortized discount of $351 in 2000 and $393 in
1999..................................................... 159,649 159,607
8.375% notes due August 2010 with an effective rate of
8.398%, net of unamortized discount of $244.............. 199,756 --
4.3% to 8.5% other notes, payable in installments to 2026
(secured in part by property, plant, and equipment having
a net book value of $148 at August 31, 2000)............. 25,038 26,234
-------- --------
384,443 435,567
Less -- Amounts payable within one year included in current
liabilities.............................................. 201 368
-------- --------
$384,242 $435,199
======== ========
Future annual principal payments of long-term debt are as follows:
FISCAL YEAR AMOUNT
- ----------- --------------
(IN THOUSANDS)
2001........................................................ $ 201
2002........................................................ 2,045
2003........................................................ 1,094
2004........................................................ 3,578
2005........................................................ 89
2006 and beyond............................................. 377,436
--------
$384,443
========
In 1996, NSI negotiated a $250.0 million multi-currency committed credit
facility (the "Credit Facility") with ten domestic and international banks. The
Credit Facility has a term of five years, expiring in July 2001, with no
provision for a reduction in commitments. The Credit Facility contains
restrictions on the incurrence of indebtedness by subsidiaries, as well as
financial and other covenants, including the restriction that NSI's ratio of
total debt to capitalization may not exceed 60%. In July 1999, NSI entered into
an additional $250.0 million, 364-day committed credit facility (the "Revolving
Credit
F-15
112
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
Facility"), which was renewed in July 2000 and expires in July 2001. Each credit
facility permits certain subsidiaries of NSI to borrow under such facility, and
NSI guarantees these borrowings. The combined $500.0 million under the Credit
Facility and the Revolving Credit Facility support NSI's commercial paper
program, which was initiated in July 1999. Interest rates under the credit
facilities are based on the LIBOR rate or other rates, at NSI's option. NSI pays
an annual fee on the commitments based on NSI's debt rating and leverage ratio.
No amounts were outstanding under either facility at August 31, 2000 and 1999.
Amounts outstanding under NSI's commercial paper program ($231.7 million in
2000 and $347.3 million in 1999) had weighted average interest rates of 6.8% and
5.6% at August 31, 2000 and 1999, respectively.
At August 31, 1999, $249.7 million of commercial paper was classified as
long-term as NSI intended to refinance this amount through long-term debt
instruments. As discussed below, NSI refinanced $200.0 million of long-term
commercial paper in the fourth quarter of 2000. Additionally, the remaining
portion of commercial paper which was classified as long-term at August 31, 1999
(approximately $50.0 million) was reclassified to short-term debt in the fourth
quarter of 2000.
At August 31, 2000, NSI had complimentary uncommitted lines of credit
totaling $128.9 million for general operating purposes, of which $28.9 million
is designated as multi-currency. At August 31, 2000, NSI had $20.3 million of
foreign currency short-term bank borrowings under the multi-currency lines of
credit at a weighted-average interest rate of 5.35%. At August 31, 2000, $74.4
million in letters of credit was outstanding, primarily under the domestic
uncommitted line of credit.
In January 1999, NSI issued $160.0 million in ten-year publicly traded
notes bearing a coupon rate of 6.0%. Proceeds were used for the repayment of
$80.0 million in borrowings under the Credit Facility, of which $52.0 million
was outstanding under the domestic uncommitted line of credit at August 31,
1998. The remainder was used for general operating purposes including working
capital requirements, capital expenditures, acquisitions, and share repurchases.
In August 2000, NSI issued $200.0 million in ten-year publicly traded notes
bearing a coupon rate of 8.375%. Proceeds were used for the repayment of
borrowings under the commercial paper program. The fair values of the $160.0
million and $200.0 million notes, based on quoted market prices, were
approximately $138.7 million and $201.9 million, respectively, at August 31,
2000.
Excluding the $160.0 million and $200.0 million notes, long-term debt
recorded in the accompanying balance sheets approximates fair value based on the
borrowing rates currently available to NSI for bank loans with similar terms and
maturities.
NOTE 5: PARENT'S EQUITY AND RELATED MATTERS
NSI'S EQUITY INVESTMENT. NSI's equity investment includes the original
investments in Spinco, accumulated income of Spinco, and the net intercompany
balances with NSI.
F-16
113
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
In connection with the Distribution, the net intercompany balances with NSI will
be capitalized.
Historically, Spinco participated in NSI's long-term incentive programs
which provided qualified and non-qualified stock options to officers and
employees of NSI at exercise prices not less than market value on the date of
grant. Generally, options vest proportionately over a four-year period and are
exercisable for ten years from the grant date. Certain of the long-term
incentive programs also provide for awards of restricted shares of NSI's common
stock.
Spinco has recorded $6.7 million, $8.1 million and $5.1 million of
compensation expense related to long-term incentive programs in 2000, 1999 and
1998, respectively. Spinco intends to establish similar long-term incentive
programs after the Distribution; however, the terms and benefits of these
programs are yet to be determined.
Pursuant to the employee benefits agreement, NSI stock options held by
Spinco's employees will be converted to Spinco stock options at the time of the
Distribution. In accordance with the provisions of EITF 90-9 and FASB
Interpretation No. 44, ("FIN 44"), Spinco will multiply the number of shares
purchasable under each converted stock option by a ratio determined at the time
of Distribution and divide the exercise price per share of each option by the
same ratio. Fractional shares will be rounded down to the nearest whole number
of shares. In accordance with the provisions of EITF 90-9, and FIN 44, all other
terms of the converted stock options will remain the same as those in effect
immediately prior to the Distribution. Accordingly, no compensation expense will
result from the replacement of the options. At August 31, 2000, the number of
shares of NSI common stock subject to options held by NSI employees was
3,353,299. The exercise prices of such options range from $17.83 to $59.44. The
ultimate number of stock options to be held by Spinco employees and the number
and exercise prices of Spinco stock options to be issued subject to the above
calculation cannot yet be determined.
RIGHTS AGREEMENT. Spinco anticipates its Board of Directors will adopt a
Rights Agreement (the "Rights Agreement") on or prior to the Distribution. If
adopted, the Rights Agreement will contain provisions designed to deter bids and
other business combinations that are not approved by the Spinco Board of
Directors.
COMMON AND PREFERRED STOCK. Spinco expects to have 500 million shares of
common stock, par value $.01 per share, and 50 million shares of preferred
stock, par value $.01 per share (the "Preferred Stock"), authorized as of the
Distribution Date. No shares of Preferred Stock are expected to be issued as of
the Distribution Date.
EMPLOYEE STOCK PURCHASE PLAN. In 1998, NSI's stockholders approved the
National Service Industries, Inc. Employee Stock Purchase Plan for the benefit
of eligible employees. Under the plan, employees could purchase, through payroll
deduction, NSI's common stock at a 15% discount. Shares are purchased quarterly
at 85% of the lower of the fair market value of Spinco's common stock on the
first business day of the quarterly plan period or on the last business day of
the quarterly plan period. Spinco intends to
F-17
114
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
establish a similar Employee Stock Purchase Plan upon the Distribution; however,
the exact terms of this plan are yet to be determined.
NOTE 6: COMMITMENTS AND CONTINGENCIES
SELF-INSURANCE
It is Spinco's policy to self insure for certain insurable risks consisting
primarily of physical loss to property; business interruptions resulting from
such loss; and workers' compensation, comprehensive general, and auto liability.
Insurance coverage is obtained for catastrophic property and casualty exposures
as well as those risks required to be insured by law or contract. Based on an
independent actuary's estimate of the aggregate liability for claims incurred, a
provision for claims under the self-insured program is recorded and revised
annually.
The activity in the self-insurance liability as allocated to Spinco for
each of the years ended August 31 was as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Reserve, beginning of period......................... $15,158 $19,213 $22,125
Expense.............................................. 5,055 2,618 736
Payments............................................. (6,592) (6,673) (3,648)
------- ------- -------
Reserve, end of period............................... $13,621 $15,158 $19,213
======= ======= =======
LEASES
Spinco leases certain of its buildings and equipment under noncancelable
lease agreements. Minimum lease payments under noncancelable leases for years
subsequent to August 31, 2000, are as follows: 2001 -- $11.2 million;
2002 -- $8.6 million; 2003 -- $6.4 million; 2004 -- $4.4 million; 2005 -- $2.3
million; after 2005 -- $16.0 million.
Total rent expense was $14.5 million in 2000, $12.3 million in 1999, and
$9.2 million in 1998.
COLLECTIVE BARGAINING AGREEMENTS
Approximately 40% of Spinco's total work force is covered by collective
bargaining agreements. Collective bargaining agreements representing 16% of
Spinco's total work force will expire within one year. Management believes that
the renewal of the collective bargaining agreements will not have a material
adverse effect on Spinco's financial condition or results of operations.
F-18
115
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
LITIGATION
Spinco is subject to various legal claims arising in the normal course of
business out of the conduct of its current and prior businesses, including
patent infringement and product liability claims. Based on information currently
available, it is the opinion of management that the ultimate resolution of
pending and threatened legal proceedings will not have a material adverse effect
on Spinco's financial condition or results of operations. However, in the event
of unexpected future developments, it is possible that the ultimate resolution
of such matters, if unfavorable, could have a material adverse effect on
Spinco's results of operations in future periods. Spinco reserves for known
legal claims when payments associated with the claims become probable and the
costs can be reasonably estimated. The actual costs of resolving legal claims
may be substantially lower or higher than that reserved. Spinco does not believe
that the amount of such costs below or in excess of that reserved is reasonably
estimable.
ENVIRONMENTAL MATTERS
Spinco's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to the remediation of contaminated sites. Permits
and environmental controls are required for certain of Spinco's operations to
limit air and water pollution, and these permits are subject to modification,
renewal, and revocation by issuing authorities. Spinco believes that it is in
substantial compliance with all material environmental laws, regulations, and
permits. On an ongoing basis, Spinco incurs capital and operating costs relating
to environmental compliance. Environmental laws and regulations have generally
become stricter in recent years, and the cost of responding to future changes
may be substantial.
Spinco reserves for known environmental claims when payments associated
with the claims become probable and the costs can be reasonably estimated.
Spinco's environmental reserves, for all periods presented, are immaterial. The
actual cost of environmental issues may be substantially lower or higher than
that reserved due to the difficulty in estimating such costs, potential changes
in the status of government regulations, and the inability to determine the
extent to which contributions will be available from other parties. Spinco does
not believe that any amount of such costs below or in excess of that accrued is
reasonably estimable.
Certain environmental laws, such as Superfund, can impose liability for the
entire cost of site remediation upon each of the current or former owners or
operators of a site or parties who sent waste to a site where a release of a
hazardous substance has occurred regardless of fault or the lawfulness of the
original disposal activity. Generally, where there are a number of potentially
responsible parties ("PRPs") that are financially viable, liability has been
apportioned based on the type and amount of waste disposed of by each party at
such disposal site and the number of financially viable PRPs, although no
assurance as to the method of apportioning the liability can be given as to any
particular site.
F-19
116
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
Spinco is currently a party to, or otherwise involved in, legal proceedings
in connection with state and federal Superfund sites. Spinco believes its
liability is de minimis at each of the currently active sites which it does not
own where it has been named as a PRP due to its limited involvement at the site
and/or the number of viable PRPs. Specifically, the preliminary allocation among
48 PRPs at the Crymes Landfill site in Georgia indicates that Spinco's liability
is not significant, and there are more than 1,000 PRPs at the M&J Solvents site
in Georgia. For property which Spinco owns on Seaboard Industrial Boulevard in
Atlanta, Georgia, Spinco has conducted an investigation on its and adjoining
properties and submitted a Compliance Status Report ("CSR") to the State of
Georgia Environmental Protection Division ("EPD") pursuant to the Georgia
Hazardous Site Response Act. The CSR is currently pending, subject to EPD's
final approval. Until the CSR is finalized, Spinco will not be able to determine
if remediation will be required, if Spinco will be solely responsible for the
cost of such remediation, or whether such cost is likely to result in a material
adverse effect on Spinco.
INDEMNIFICATIONS
As further discussed in Note 1, in connection with the Spinoff, Spinco and
NSI will enter into various agreements that address the allocation of assets and
liabilities between them and that define their relationship after the Spinoff.
Included in these agreements will be certain general indemnifications granted by
Spinco to NSI, and by NSI to Spinco as well as specific limited tax liability
indemnifications in the event that the Spinoff is deemed to be taxable, or if
any of the internal reorganization steps taken to effect the Spinoff are not
deemed to be on a tax free basis.
NOTE 7: ACQUISITIONS AND DISPOSITIONS
Acquisition spending in 2000 totaled $16.2 million and related to the
cash-out of remaining Holophane Corporation ("Holophane") shares. NSI purchased
Holophane in July 1999 for approximately $470.8 million. Of the total purchase
price, $454.6 million was paid during fiscal 1999 and $16.2 million was paid
during fiscal 2000. Results of operations after the acquisition date are
included in the Combined Statements of Income.
Acquisition spending in 1999 totaled $514.4 million and was primarily
related to the lighting equipment segment. The acquisitions were accounted for
as purchases and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on estimated fair values.
The lighting equipment segment acquired four companies during 1999. The
largest acquisition was Holophane, a manufacturer of premium quality, highly
engineered lighting fixtures and systems, which was purchased in July 1999 for
approximately $470.8 million. The preliminary allocation of the purchase price
resulted in additional goodwill of $251.8 million, which is being amortized over
40 years, and identifiable intangibles of $145.7 million, which are being
amortized over periods ranging from 2 to 40 years. Identifiable intangibles
include trade names, trademarks, patented technology, distribution network,
F-20
117
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
trained workforce, and restrictive covenants. In 2000, certain adjustments were
made to the purchase price allocation resulting in additional goodwill of
approximately $1.3 million. These adjustments primarily related to severance
charges and costs associated with the termination of a joint venture in
Australia.
Results of operations after the acquisition date of Holophane are included
in the Combined Statements of Income. The following pro forma information has
been prepared assuming the Holophane acquisition had taken place at the
beginning of the respective fiscal year of Spinco. The pro forma information
includes adjustments for interest expense incurred on debt to effect the
acquisition, the interest income forgone on the cash portion paid for the
acquisition, additional depreciation based on the fair market value of property,
plant, and equipment, and amortization of goodwill and intangibles resulting
from this transaction. The pro forma financial information does not purport to
reflect the financial position or results of operations that actually would have
resulted had the transaction occurred as of the date indicated or to project the
results of operations for any future period.
1999 1998
-------------- ----------
(IN THOUSANDS)
Pro Forma Information (Unaudited)
Sales............................................... $1,912,147 $1,768,799
Net income.......................................... $ 84,969 $ 77,575
Other acquisitions in the lighting equipment segment included the September
1998 purchase of certain assets of GTY Industries (d/b/a "Hydrel"), a
manufacturer of architectural-grade light fixtures for landscape, in-grade, and
underwater applications; the April 1999 purchase of certain assets of Peerless
Corporation, a manufacturer of high performance indirect/direct suspended
lighting products; and the July 1999 purchase of C&G Carandini SA, a
manufacturer of exterior lighting fixtures.
Acquisition spending in 1998 totaled $11.4 million and was related to the
chemicals segment. In November 1997, the chemicals segment purchased Pure
Corporation, a specialty chemical company with its core businesses in Indiana,
Pennsylvania, and New York. In July 1998, NSI purchased Calman Australia Pty
Ltd. ("Calman"). Calman, located in Victoria, Australia is a manufacturer of
cleaning, maintenance, sanitation and industrial products, chemicals, supplies,
and accessories. Additionally, NSI paid certain performance payments associated
with a prior year chemicals acquisition.
In May 2001, the chemicals segment sold the Calman operations for a pre-tax
loss of $5.6 million, and provided a $9.0 million accrual for the loss on the
sale of its French chemicals business which is expected to close in June 2001.
Both losses are reflected as loss on sale of businesses in fiscal 2001.
F-21
118
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
NOTE 8: INCOME TAXES
Historically, Spinco has been included in the consolidated federal income
tax return of NSI. Spinco's provision for income taxes in the accompanying
statements of income reflects federal, state, and foreign income taxes
calculated using the separate return basis. Spinco accounts for income taxes
using the asset and liability approach as prescribed by SFAS No. 109,
"Accounting for Income Taxes." This approach requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Using the
enacted tax rates in effect for the year in which the differences are expected
to reverse, deferred tax liabilities and assets are determined based on the
differences between the financial reporting and the tax basis of an asset or
liability.
The provision for income taxes consists of the following components:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Provision for current Federal taxes.................. $40,527 $34,958 $40,344
Provision for current state taxes.................... 2,134 2,132 2,426
Provision for current foreign taxes.................. 4,657 2,373 1,952
Provision for deferred taxes......................... 4,282 14,006 3,326
------- ------- -------
Total provision for income taxes................... $51,600 $53,469 $48,048
======= ======= =======
A reconciliation from the Federal statutory rate to the total provision for
income taxes is as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Federal income tax computed at statutory rate........ $47,352 $49,905 $45,451
State income tax, net of Federal income tax
benefit............................................ 3,518 3,638 3,456
Foreign and other, net............................... 730 (74) (859)
------- ------- -------
Total provision for income taxes................... $51,600 $53,469 $48,048
======= ======= =======
F-22
119
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
Components of the net deferred income tax liability at August 31, 2000 and
1999 include:
2000 1999
-------- --------
(IN THOUSANDS)
DEFERRED TAX LIABILITIES:
Depreciation............................................... $ 9,598 $ 7,981
Pension.................................................... 4,160 3,571
Intangibles................................................ 54,565 53,289
Other...................................................... 2,751 2,623
-------- --------
Total deferred tax liabilities........................... 71,074 67,464
-------- --------
DEFERRED TAX ASSETS:
Self-insurance............................................. (9,607) (10,119)
Deferred compensation...................................... (23,520) (22,437)
Bonuses.................................................... (5,765) (5,130)
Foreign tax losses......................................... (643) (807)
Restructuring and asset impairment......................... (4,425) (4,312)
Other assets............................................... (5,843) (5,435)
-------- --------
Total deferred tax assets................................ (49,803) (48,240)
-------- --------
Net deferred tax liability............................... $ 21,271 $ 19,224
======== ========
At August 31, 2000, Spinco had foreign net operating loss carryforwards of
$1.8 million expiring in fiscal years 2001 through 2004.
F-23
120
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
NOTE 9: BUSINESS SEGMENT INFORMATION
CAPITAL
OPERATING EXPENDITURES
PROFIT TOTAL DEPRECIATION AMORTIZATION AND
SALES (LOSS) ASSETS EXPENSE EXPENSE ACQUISITIONS
---------- ------------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
2000
Lighting Equipment..... $1,511,641 $144,149 $1,142,227 $31,792 $14,994 $ 68,721
Chemicals.............. 511,070 48,699 241,645 7,705 3,447 9,946
---------- -------- ---------- ------- ------- --------
2,022,711 192,848 1,383,872 39,497 18,441 78,667
Corporate.............. (14,258) 39,008 547 460
Interest Expense,
net.................. (43,299)
---------- -------- ---------- ------- ------- --------
$2,022,711 $135,291 $1,422,880 $40,044 $18,441 $ 79,127
========== ======== ========== ======= ======= ========
1999
Lighting Equipment..... $1,220,602 $121,755 $1,073,936 $20,351 $ 2,322 $541,649
Chemicals.............. 487,783 45,206 233,461 6,681 3,480 10,980
---------- -------- ---------- ------- ------- --------
1,708,385 166,961 1,307,397 27,032 5,802 552,629
Corporate.............. (11,679) 29,641 463 296
Interest Expense,
net.................. (12,697)
---------- -------- ---------- ------- ------- --------
$1,708,385 $142,585 $1,337,038 $27,495 $ 5,802 $552,925
========== ======== ========== ======= ======= ========
1998
Lighting Equipment..... $1,105,255 $109,286 $ 397,962 $18,819 $ 295 $ 37,541
Chemicals.............. 454,532 36,460 235,269 6,387 2,807 20,217
---------- -------- ---------- ------- ------- --------
1,559,787 145,746 633,231 25,206 3,102 57,758
Corporate.............. (11,475) 66,881 361 348
Interest Expense,
net.................. (4,412)
---------- -------- ---------- ------- ------- --------
$1,559,787 $129,859 $ 700,112 $25,567 $ 3,102 $ 58,106
========== ======== ========== ======= ======= ========
F-24
121
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
The geographic distribution of Spinco's sales and service revenues,
operating profit (loss), and long-lived assets is summarized in the following
table:
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
SALES(1)
United States................................ $1,783,990 $1,550,930 $1,427,424
Canada....................................... 104,335 85,829 79,435
European countries........................... 81,246 46,723 39,936
Other........................................ 53,140 24,903 12,992
---------- ---------- ----------
$2,022,711 $1,708,385 $1,559,787
========== ========== ==========
OPERATING PROFIT (LOSS)
United States................................ $ 127,783 $ 139,733 $ 131,185
Canada....................................... 6,342 1,170 152
European countries........................... (891) 934 (2,562)
Other........................................ 2,057 748 1,084
---------- ---------- ----------
$ 135,291 $ 142,585 $ 129,859
========== ========== ==========
LONG-LIVED ASSETS(2)
United States................................ $ 746,548 $ 731,420 $ 185,544
Canada....................................... 15,196 14,719 14,196
European countries........................... 26,041 32,491 12,641
Other........................................ 14,116 14,207 3,544
---------- ---------- ----------
$ 801,901 $ 792,837 $ 215,925
========== ========== ==========
- -------------------------
(1) Sales are attributed to each country based on the selling location.
(2) Long-lived assets include net property, plant, and equipment, goodwill and
intangibles, and other long-term assets.
F-25
122
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To National Service Industries, Inc.:
We have audited, in accordance with auditing standards generally accepted
in the United States, the combined financial statements of the NATIONAL SERVICE
INDUSTRIES, INC. lighting equipment and chemicals businesses (to be reorganized
as L&C Spinco, Inc.) as of August 31, 2000 and 1999 and for each of the three
years in the period ended August 31, 2000, included in this information
statement, and have issued our report thereon dated June 22, 2001. Our audit was
made for the purpose of forming an opinion on those statements taken as a whole.
The Schedule of Valuation and Qualifying Accounts for the years ended August 31,
2000, 1999 and 1998 included in this information statement is the responsibility
of Spinco's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic combined
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic combined financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic combined financial
statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 22, 2001
F-26
123
SCHEDULE II
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC.)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 2000, 1999, AND 1998
(IN THOUSANDS)
ADDITIONS CHARGED TO
BALANCE AT ----------------------- BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
---------- --------- ----------- ------------- ----------
YEAR ENDED AUGUST 31, 2000:
Deducted in the balance sheet from
the asset to which it
applies -- Reserve for doubtful
accounts........................ $5,470 2,667 1,927 3,494 $6,570
====== ===== ===== ===== ======
YEAR ENDED AUGUST 31, 1999:
Deducted in the balance sheet from
the asset to which it
applies -- Reserve for doubtful
accounts........................ $3,746 2,744 1,595 2,615 $5,470
====== ===== ===== ===== ======
YEAR ENDED AUGUST 31, 1998:
Deducted in the balance sheet from
the asset to which it
applies -- Reserve for doubtful
accounts........................ $3,566 2,580 87 2,487 $3,746
====== ===== ===== ===== ======
- -------------------------
(1) Recoveries credited to reserve, reserves recorded in acquisitions, and
reserves removed in sale of businesses.
(2) Uncollectible accounts written off and net currency translation adjustments.
F-27
1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
L & C SPINCO, INC.
L & C SPINCO, INC., a Delaware corporation (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation is L & C Spinco, Inc. The date of
filing of its original certificate of incorporation with the Secretary of State
was _____________, 2001.
2. This Restated Certificate of Incorporation amends, restates
and integrates the provisions of the Certificate of Incorporation as currently
in effect of said Corporation and has been duly adopted in accordance with the
provisions of Sections 242 and 245 of the Delaware General Corporation Law by
written consent of the holders of all of the outstanding stock entitled to vote
thereon in accordance with the provisions of Section 228 of the Delaware General
Corporation Law.
3. The text of the Certificate of Incorporation as currently in
effect is hereby amended and restated to read as set forth in full herein:
ARTICLE I
The name of the Corporation is L & C Spinco, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 2711 Centerville Road, Suite 400 in the City of Wilmington, County
of New Castle, Delaware 19808. The name of its registered agent at such address
is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
2
ARTICLE IV
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 550,000,000, of which 500,000,000
shares of the par value of $.01 per share shall be a separate class designated
as Common Stock and 50,000,000 shares of the par value of $.01 per share shall
be a separate class designated as Preferred Stock.
A. COMMON STOCK
(i) Voting. Except as may be provided in this Certificate of
Incorporation or required by law, the Common Stock shall have voting rights in
the election of directors and on all other matters presented to stockholders,
with each holder of Common Stock being entitled to one vote for each share of
Common Stock held of record by such holder on such matters.
(ii) Dividends. Subject to the rights of the holders of any series of
Preferred Stock, holders of Common Stock shall be entitled to receive such
dividends and distributions (whether payable in cash or otherwise) as may be
declared on the Common Stock by the board of directors of the Corporation from
time to time out of assets or funds of the Corporation legally available
therefor.
(iii) Subdivisions, Combinations and Mergers. In the event of any
merger, statutory share exchange, consolidation or similar form of corporate
transaction involving the Corporation (whether or not the Corporation is the
surviving entity), the holders of Common Stock shall be entitled to receive the
same per share consideration, if any.
(iv) Rights on Liquidation. Subject to the rights of the holders of any
series of Preferred Stock, in the event of any liquidation, dissolution or
winding-up of the Corporation (whether voluntary or involuntary), the assets of
the Corporation available for distribution to stockholders shall be distributed
in equal amounts per share to the holders of Common Stock.
For purposes of this paragraph, a merger, statutory share exchange,
consolidation or similar corporate transaction involving the Corporation
(whether or not the Corporation is the surviving entity), or the sale, transfer
or lease by the Corporation of all or substantially all its assets, shall not
constitute or be deemed a liquidation, dissolution or winding-up of the
Corporation.
B. PREFERRED STOCK
Shares of Preferred Stock may be issued in one or more series from time
to time as determined by the board of directors of the Corporation, and the
board of directors of the Corporation is authorized to fix by resolution or
resolutions the designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions thereof, of the shares of each
series of Preferred Stock, including the following:
-2-
3
(i) the distinctive serial designation of such series which shall
distinguish it from other series;
(ii) the number of shares included in such series;
(iii) whether dividends shall be payable to the holders of the shares
of such series and, if so, the basis on which such holders shall be entitled to
receive dividends (which may include, without limitation, a right to receive
such dividends or distributions as may be declared on the shares of such series
by the board of directors of the Corporation, a right to receive such dividends
or distributions, or any portion or multiple thereof, as may be declared on the
Common Stock or any other class of stock or, in addition to or in lieu of any
other right to receive dividends, a right to receive dividends at a particular
rate or at a rate determined by a particular method, in which case such rate or
method of determining such rate may be set forth), the form of such dividend,
any conditions on which such dividends shall be payable and the date or dates,
if any, on which such dividends shall be payable;
(iv) whether dividends on the shares of such series shall be cumulative
and, if so, the date or dates or method of determining the date or dates from
which dividends on the shares of such series shall be cumulative;
(v) the amount or amounts, if any, which shall be payable out of the
assets of the Corporation to the holders of the shares of such series upon the
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, and the relative rights of priority, if any, of payment of the
shares of such series;
(vi) the price or prices (in cash, securities or other property or a
combination thereof) at which, the period or periods within which and the terms
and conditions upon which the shares of such series may be redeemed, in whole or
in part, at the option of the Corporation or at the option of the holder or
holders thereof or upon the happening of a specified event or events;
(vii) the obligation, if any, of the Corporation to purchase or redeem
shares of such series pursuant to a sinking fund or otherwise and the price or
prices (in cash, securities or other property or a combination thereof) at
which, the period or periods within which and the terms and conditions upon
which the shares of such series shall be redeemed or purchased, in whole or in
part, pursuant to such obligation;
(viii) whether or not the shares of such series shall be convertible or
exchangeable, at any time or times at the option of the holder or holders
thereof or at the option of the Corporation or upon the happening of a specified
event or events, into shares of any other class or classes or any other series
of the same or any other class or classes of stock of the Corporation or any
other securities or property of the Corporation or any other entity, and the
price or prices (in cash, securities or other property or a combination thereof)
or rate or rates of conversion or exchange and any adjustments applicable
thereto; and
-3-
4
(ix) whether or not the holders of the shares of such series shall have
voting rights, in addition to the voting rights provided by law, and if so the
terms of such voting rights, which may provide, among other things and subject
to the other provisions of this Certificate of Incorporation, that each share of
such series shall carry one vote or more or less than one vote per share, that
the holders of such series shall be entitled to vote on certain matters as a
separate class (which for such purpose may be comprised solely of such series or
of such series and one or more other series or classes of stock of the
Corporation) and that all the shares of such series entitled to vote on a
particular matter shall be deemed to be voted on such matter in the manner that
a specified portion of the voting power of the shares of such series or separate
class are voted on such matter.
For all purposes, this Certificate of Incorporation shall include each
certificate of designations (if any) setting forth the terms of a series of
Preferred Stock.
Subject to the rights, if any, of the holders of Preferred Stock, an
amendment of this Certificate of Incorporation to increase or decrease the
number of authorized shares of Preferred Stock (but not below the number of
shares thereof then outstanding) may be adopted by resolution adopted by the
board of directors of the Corporation and approved by the affirmative vote of
the holders of a majority of the voting power of all outstanding shares of
Common Stock of the Corporation and all other outstanding shares of stock of the
Corporation entitled to vote thereon, with such outstanding shares of Common
Stock and other stock considered for this purpose as a single class, and no vote
of the holders of Preferred Stock, voting as a separate class, shall be required
therefor.
Except as otherwise required by law or provided in the certificate of
designations for the relevant series, holders of Common Stock, as such, shall
not be entitled to vote on any amendment of this Certificate of Incorporation
that alters or changes the powers, preferences, rights or other terms of one or
more outstanding series of Preferred Stock if the holders of such affected
series are entitled, either separately or together with the holders of one or
more other series of Preferred Stock, to vote thereon as a separate class
pursuant to this Certificate of Incorporation or pursuant to the Delaware
General Corporation Law as then in effect.
C. PARTICIPATING PREFERRED STOCK
There is hereby established a series of Preferred Stock, $.01 par
value, of the Corporation, and the designation and certain terms, powers,
preferences and other rights of the shares of such series, and certain
qualifications, limitations and restrictions thereon, are hereby fixed as
follows:
(i) The distinctive serial designation of this series shall be
"Participating Preferred Stock" (hereinafter called "this Series"). Each share
of this Series shall be identical in all respects with the other shares of this
Series except as to the dates from and after which dividends thereon shall be
cumulative.
-4-
5
(ii) The number of shares in this Series shall initially be _______,
which number may from time to time be increased or decreased (but not below the
number then outstanding) by the Board of Directors. Shares of this Series
purchased by the Corporation shall be canceled and shall revert to authorized
but unissued shares of Preferred Stock undesignated as to series. Shares of this
Series may be issued in fractional shares, which fractional shares shall entitle
the holder, in proportion to such holder's fractional share, to all rights of a
holder of a whole share of this Series.
(iii) The holders of full or fractional shares of this Series shall be
entitled to receive, when and as declared by the Board of Directors, but only
out of funds legally available therefor, dividends, (A) on each date that
dividends or other distributions (other than dividends or distributions payable
in Common Stock of the Corporation) are payable on or in respect of Common Stock
comprising part of the Reference Package (as defined below), in an amount per
whole share of this Series equal to the aggregate amount of dividends or other
distributions (other than dividends or distributions payable in Common Stock of
the Corporation) that would be payable on such date to a holder of the Reference
Package and (B) on the last day of March, June, September and December in each
year, in an amount per whole share of this Series equal to the excess (if any)
of $____ over the aggregate dividends paid per whole share of this Series during
the three month period ending on such last day. Each such dividend shall be paid
to the holders of record of shares of this Series on the date, not exceeding
sixty days preceding such dividend or distribution payment date, fixed for the
purpose by the Board of Directors in advance of payment of each particular
dividend or distribution. Dividends on each full and each fractional share of
this Series shall be cumulative from the date such full or fractional share is
originally issued; provided that any such full or fractional share originally
issued after a dividend record date and on or prior to the dividend payment date
to which such record date relates shall not be entitled to receive the dividend
payable on such dividend payment date or any amount in respect of the period
from such original issuance to such dividend payment date.
The term "Reference Package" shall initially mean 100 shares of Common
Stock, par value $.01 per share ("Common Stock"), of the Corporation. In the
event the Corporation shall at any time after the Close of Business on ________,
____ (A) declare or pay a dividend on any Common Stock payable in Common Stock,
(B) subdivide any Common Stock or (C) combine any Common Stock into a smaller
number of shares, then and in each such case the Reference Package after such
event shall be the Common Stock that a holder of the Reference Package
immediately prior to such event would hold thereafter as a result thereof.
Holders of shares of this Series shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided on this Series.
So long as any shares of this Series are outstanding, no dividend
(other than a dividend in Common Stock or in any other stock ranking junior to
this Series as to dividends and upon liquidation) shall be declared or paid or
set aside for payment or other distribution declared or made upon the Common
Stock or upon any other stock ranking junior to this Series as to dividends or
upon liquidation, unless the full cumulative dividends (including the dividend
to be paid upon payment of such dividend or other distribution) on all
outstanding shares of this Series
-5-
6
shall have been, or shall contemporaneously be, paid. When dividends are not
paid in full upon this Series and other stock ranking on a parity as to
dividends with this Series, all dividends declared upon shares of this Series
and any other stock ranking on a parity as to dividends shall be declared pro
rata so that in all cases the amount of dividends declared per share on this
Series and such other stock shall bear to each other the same ratio that
accumulated dividends per share on the shares of the Series and such other stock
bear to each other. Neither the Common Stock nor any other stock of the
Corporation ranking junior to or on a parity with this Series as to dividends or
upon liquidation shall be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation (except by
conversion into or exchange for stock of the Corporation ranking junior to this
Series as to dividends and upon liquidation), unless the full cumulative
dividends (including the dividend to be paid upon payment of such dividend,
distribution, redemption, purchase or other acquisition) on all outstanding
shares of this Series shall have been, or shall contemporaneously be, paid.
(iv) In the event of any merger, consolidation, reclassification or
other transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property, then in
any such case the shares of this Series shall at the same time be similarly
exchanged or changed in an amount per whole share equal to the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, that a holder of the Reference Package would be entitled to receive
as a result of such transaction.
(v) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
full and fractional shares of this Series shall be entitled, before any
distribution or payment is made on any date to the holders of the Common Stock
or any other stock of the Corporation ranking junior to this Series upon
liquidation, to be paid in full an amount per whole share of this Series equal
to the greater of (A) $__________ or (B) the aggregate amount distributed or to
be distributed prior to such date in connection with such liquidation,
dissolution or winding up to a holder of the Reference Package (such greater
amount being hereinafter referred to as the "Liquidation Preference"), together
with accrued dividends to such distribution or payment date, whether or not
earned or declared. If such payment shall have been made in full to all holders
of shares of this Series, the holders of shares of this Series as such shall
have no right or claim to any of the remaining assets of the Corporation.
In the event the assets of the Corporation available for distribution
to the holders of shares of this Series upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, shall be
insufficient to pay in full all amounts to which such holders are entitled
pursuant to the first paragraph of this Section (v), no such distribution shall
be made on account of any shares of any other class or series of Preferred Stock
ranking on a parity with the shares of this Series upon such liquidation,
dissolution or winding up unless proportionate distributive amounts shall be
paid on account of the shares of this Series, ratably in proportion to the full
distributable amounts for which holders of all such parity shares are
respectively entitled upon such liquidation, dissolution or winding up.
-6-
7
Upon the liquidation, dissolution or winding up of the Corporation, the
holders of shares of this Series then outstanding shall be entitled to be paid
out of assets of the Corporation available for distribution to its stockholders
all amounts to which such holders are entitled pursuant to the first paragraph
of this Section (v) before any payment shall be made to the holders of Common
Stock or any other stock of the Corporation ranking junior upon liquidation to
this Series.
For the purposes of this Section (v), the consolidation or merger of,
or binding share exchange by, the Corporation with any other corporation shall
not be deemed to constitute a liquidation, dissolution or winding up of the
Corporation.
(vi) The shares of this Series shall not be redeemable.
(vii) In addition to any other vote or consent of stockholders required
by law or by the Certificate of Incorporation, as amended, of the Corporation,
each whole share of this Series shall, on any matter, vote as a class with any
other capital stock comprising part of the Reference Package and voting on such
matter and shall have the number of votes thereon that a holder of the Reference
Package would have.
ARTICLE V
All corporate powers shall be exercised by the board of directors of
the Corporation, except as otherwise specifically required by law or as
otherwise provided in this Certificate of Incorporation. Any meeting of
stockholders may be postponed by action of the board of directors at any time in
advance of such meeting. The board of directors of the Corporation shall have
the power to adopt such rules and regulations for the conduct of the meetings
and management of the affairs of the Corporation as they may deem proper and the
power to adjourn any meeting of stockholders without a vote of the stockholders,
which powers may be delegated by the board of directors to the chairman of such
meeting either in such rules and regulations or pursuant to the by-laws of the
Corporation.
Special meetings of stockholders of the Corporation may be called at
any time by, but only by, the board of directors of the Corporation, to be held
at such date, time and place either within or without the State of Delaware as
may be stated in the notice of the meeting.
The board of directors of the Corporation is authorized to adopt, amend
or repeal by-laws of the Corporation. No adoption, amendment or repeal of a
by-law by action of stockholders shall be effective unless approved by the
affirmative vote of the holders of not less than 80% of the voting power of all
outstanding shares of Common Stock of the Corporation and all other outstanding
shares of stock of the Corporation entitled to vote on such matter, with such
outstanding shares of Common Stock and other stock considered for this purpose
as a single class. Any vote of stockholders required by this Article V shall be
in addition to any other vote
-7-
8
of stockholders that may be required by law, this Certificate of Incorporation,
the by-laws of the Corporation, any agreement with a national securities
exchange or otherwise.
ARTICLE VI
Elections of directors need not be by written ballot except and to the
extent provided in the by-laws of the Corporation.
ARTICLE VII
The directors of the Corporation shall be divided into three classes.
The number of directors of the Corporation and the number of directors in each
class of directors shall be fixed only by resolution of the board of directors
of the Corporation from time to time. The initial term of office of the first
such class of directors shall expire at the first annual meeting of
stockholders, the initial term of office of the second such class of directors
shall expire at the second annual meeting of stockholders and the initial term
of office of the third such class of directors shall expire at the third annual
meeting of stockholders, with each such class of directors to hold office until
their successors have been duly elected and qualified. At each annual meeting of
stockholders, directors elected to succeed the directors whose terms expire at
such annual meeting shall be elected to hold office for a term expiring at the
annual meeting of stockholders in the third year following the year of their
election and until their successors have been duly elected and qualified. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes in such manner as the board of directors of the Corporation
shall determine, but no decrease in the number of directors may shorten the term
of any incumbent director.
No director who is part of any such class of directors may be removed
except both for cause and with the affirmative vote of the holders of not less
than 80% of the voting power of all outstanding shares of stock of the
Corporation entitled to vote generally in the election of directors, considered
for this purpose as a single class.
Vacancies and newly created directorships resulting from any increase
in the authorized number of directors or from any other cause (other than
vacancies and newly created directorships which the holders of any class or
classes of stock or series thereof are expressly entitled by this Certificate of
Incorporation to fill) shall be filled by, and only by, a majority of the
directors then in office, although less than a quorum, or by the sole remaining
director (and not by stockholders). Any director appointed to fill a vacancy or
a newly created directorship shall hold office until the next election of the
class of directors of the director which such director replaced or the class of
directors to which such director was appointed, and until his or her successor
is elected and qualified or until his or her earlier resignation or removal.
Notwithstanding the foregoing, in the event that the holders of any
class or series of Preferred Stock of the Corporation shall be entitled, voting
separately as a class, to elect any
-8-
9
directors of the Corporation, then the number of directors that may be elected
by such holders voting separately as a class shall be in addition to the number
fixed pursuant to a resolution of the board of directors of the Corporation.
Except as otherwise provided in the terms of such class or series, (i) the terms
of the directors elected by such holders voting separately as a class shall
expire at the annual meeting of stockholders next succeeding their election
without regard to the classification of other directors and (ii) any director or
directors elected by such holders voting separately as a class may be removed,
without cause, by the holders of a majority of the voting power of all
outstanding shares of stock of the Corporation entitled to vote separately as a
class in an election of such directors.
ARTICLE VIII
No action of stockholders of the Corporation required or permitted to
be taken at any annual or special meeting of stockholders of the Corporation may
be taken without a meeting of stockholders, without prior notice and without a
vote, and the power of stockholders of the Corporation to consent in writing to
the taking of any action without a meeting is specifically denied.
Notwithstanding this Article VIII, the holders of any series of Preferred Stock
of the Corporation shall be entitled to take action by written consent to such
extent, if any, as may be provided in the terms of such series.
ARTICLE IX
A. In addition to any approval of the board of directors or any
stockholder vote or consent required by the laws of the State of Delaware or any
other provision of this Certificate of Incorporation or otherwise, there shall
be required for the approval, adoption, or authorization of a Business
Combination with an Interested Person the affirmative vote or consent of the
holders of a majority of the shares of stock of the Corporation entitled to vote
in elections of directors considered separately for the purposes of this Article
IX, which are not beneficially owned, directly or indirectly, by such Interested
Person; provided, however, that said voting requirement shall not be applicable
if all of the conditions specified in subparagraphs (1) and (2) below are met or
if all of the conditions specified in subparagraph (3) are met:
(1) The consideration to be received per share in such
Business Combination by holders of the stock of the Corporation is payable in
cash or Acceptable Securities, or a combination of both, and the Acceptable
Securities (plus the cash, if any) have a fair market value per share of the
Corporation's stock of not less than either:
(a) the highest price (including the highest per
share brokerage commissions, transfer tax, and soliciting dealers fees) paid by
said Interested Person in acquiring any of the Corporation's stock; or
(b) a price per share obtained by multiplying
the aggregate earnings per share of stock of the Corporation (appropriately
adjusted for any subdivision of shares, stock
-9-
10
dividend, or combination of shares during the period) for the four full
consecutive fiscal quarters immediately preceding the record date for
solicitation of votes or consents on such Business Combination by the figure
obtained by dividing the highest per share price (including the highest per
share brokerage commissions, transfer tax, and soliciting dealers fees) paid by
such Interested Person acquiring any of the Corporation's stock by the aggregate
earnings per share of the Corporation for the four full consecutive fiscal
quarters immediately preceding the time when the Interested Person shall have
become the beneficial owner of five percent (5%) or more of the stock of the
Corporation entitled to vote in elections of directors.
If any securities were issued by an Interested Person in
exchange for stock of the Corporation prior to the proposed Business
Combination, the fair market value of said securities at the time of issue shall
be used in determining the per share price paid for said stock.
(2) After the Interested Person has become the beneficial
owner of five percent (5%) or more of the stock of the Corporation entitled to
vote in the election of directors and prior to the consummation of such Business
Combination, there shall have been no reduction in the rate of dividends payable
on the Corporation's stock which would result in a quarterly dividend rate per
share which is less than the average quarterly dividend rate per share for the
four full consecutive fiscal quarters immediately preceding the time when the
Interested Person shall have become the beneficial owner of five percent (5%) or
more of the stock of the Corporation unless such reduction in the rate of
dividends has been approved by the board of directors of the Corporation and a
majority of the members of the board of directors approving such reduction were
duly elected and acting members of the board of directors prior to the time that
such Interested Person shall have become a beneficial owner of five percent (5%)
or more of the shares of the Corporation. For the purposes of this paragraph,
"quarterly dividend rate per share" for any quarterly dividend shall be equal to
the percentage said quarterly dividend per share bears to the earnings per share
for the four full fiscal quarters immediately preceding the declaration of said
quarterly dividend.
(3) The board of directors of the Corporation has
approved a memorandum of understanding with such other Interested Person with
respect to such Business Combination prior to the time that such Interested
Person shall have become a beneficial owner of five percent (5%) or more of the
shares of stock entitled to vote in elections of directors, or thereafter if
such Business Combination is otherwise approved by the board of directors of the
Corporation, provided that a majority of the members of the board of directors
voting for the approval of such transaction were duly elected and acting members
of the board of directors prior to the time that such Interested Person shall
have become a beneficial owner of five percent (5%) or more of the shares of
stock of the Corporation entitled to vote in elections of directors.
-10-
11
B. For the purposes of this Article IX:
(1) "Affiliate" and "associate" shall have the respective
meanings given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
(2) A person shall be the "beneficial owner" and
"beneficially owns" shares of stock of the Corporation (other than shares of the
Corporation's stock held in its treasury) (a) which such person and its
affiliates and associates beneficially own, directly or indirectly, whether of
record or not, (b) which such person or any of its affiliates or associates has
the right to acquire, pursuant to any agreement upon the exercise of conversion
rights, warrants, or options, or otherwise, (c) which such person or any of its
affiliates or associates has the right to sell or vote pursuant to any
agreement, or (d) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of its affiliates or
associates has any agreement, arrangement, or understanding for the purpose of
acquiring, holding, voting, or disposing of securities of the Corporation.
(3) "Business Combination" is
(a) any merger or consolidation of the
Corporation or any subsidiary of the Corporation with or into any Interested
Person (regardless of the identity of the surviving corporation);
(b) any sale, lease, or other disposition of all
or any substantial part of the assets of the Corporation or any subsidiary of
the Corporation to any Interested Person for cash or securities or both;
(c) any issuance or delivery of securities of
the Corporation or a subsidiary of the Corporation (which the beneficial owner
shall have the right to vote, or to vote upon exercise, conversion, or by
contract) to an Interested Person in consideration for or in exchange of any
securities or other property (including cash);
(4) "Acceptable Securities" shall mean (a) securities of
the same class or series, with the same rights, powers, and benefits and of the
same denomination, term, and interest, or dividend, if any, as the securities
issued and delivered by the Interested Person in exchange for the majority of
the stock of the Corporation acquired by the Interested Person or (b) the class
of common stock of the Interested Person which is beneficially owned by the most
persons.
(5) "Interested Person" is any person which, as of the
record date for the determination of stockholders entitled to notice of any
Business Combination and to vote thereon or consent thereto, or as of the date
of any such vote or consent, or immediately prior to the consummation of any
Business Combination, beneficially owns, directly or indirectly, five percent
(5%) or more of the shares of stock of the Corporation entitled to vote in
elections of directors.
-11-
12
(6) "Person" is an individual, partnership, corporation,
limited liability company, or other entity.
(7) "Subsidiary of the Corporation" is any corporation of
which fifty percent (50%) or more of any class of stock is beneficially owned,
directly or indirectly, by the Corporation.
C. No amendment to this Certificate of Incorporation shall amend,
alter, change, or repeal any of the provisions of this Article IX unless such
amendment, in addition to receiving any stockholder vote or consent required by
the laws of the State of Delaware in effect at the time, shall receive the
affirmative vote or consent of the holders of a majority of the shares of stock
of the Corporation entitled to vote in elections of directors which are not
beneficially owned, directly or indirectly, by any person which would be an
Interested Person if the vote or consent on such amendment were a vote or
consent on a Business Combination.
ARTICLE X
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE XI
No provision of Article V, Article VII, Article VIII or Article X or of
this Article XI shall be amended, modified or repealed, and no provision
inconsistent with any such provision shall become part of this Certificate of
Incorporation, unless such matter is approved by the affirmative vote of the
holders of not less than 80% of the voting power of all outstanding shares of
Common Stock of the Corporation and all other outstanding shares of stock of the
Corporation entitled to vote on such matter, with such outstanding shares of
Common Stock and other stock considered for this purpose as a single class. Any
vote of stockholders required by this Article XI shall be in addition to any
other vote of the stockholders that may be required by
-12-
13
law, this Certificate of Incorporation, the by-laws of the Corporation, any
agreement with a national securities exchange or otherwise.
-13-
14
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed and attested by its duly authorized officer on this ____ day of
_______________, 2001.
L & C SPINCO, INC.
By:
---------------------------------------
Name:
Title:
-14-
1
EXHIBIT 3.2
L & C SPINCO, INC.
BY-LAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
(1) An annual meeting of the stockholders, for the
election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix.
(2) Nominations of persons for election to the Board of
Directors and the proposal of business to be transacted by the stockholders may
be made at an annual meeting of stockholders (a) pursuant to the Corporation's
notice with respect to such meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of record of the Corporation who was a
stockholder of record at the time of the giving of the notice provided for in
the following paragraph, who is entitled to vote at the meeting and who has
complied with the notice procedures set forth in this section.
(3) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (c) of the
foregoing paragraph, (1) the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation, (2) such business must be a
proper matter for stockholder action under the Delaware General Corporation Law,
(3) if the stockholder, or the beneficial owner on whose behalf any such
proposal or nomination is made, has provided the Corporation with a Solicitation
Notice, as that term is defined in subclause (c)(iii) of this paragraph, such
stockholder or beneficial owner must, in the case of a proposal, have delivered
a proxy statement and form of proxy to holders of at least the percentage of the
Corporation's voting shares required under applicable law to carry any such
proposal, or, in the case of a nomination or nominations, have delivered a proxy
statement and form of proxy to holders of a percentage of the Corporation's
voting shares reasonably believed by such stockholder or beneficial holder to be
sufficient to elect the nominee or nominees proposed to be nominated by such
stockholder, and must, in either case, have included in such materials the
Solicitation Notice and (4) if no Solicitation Notice relating thereto has been
timely provided pursuant to this section, the stockholder or beneficial owner
proposing such business or nomination must not have solicited a number of
proxies sufficient to have required the delivery of such a Solicitation Notice
under this section. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not less
than 45 or more than 75 days prior to the first anniversary (the "Anniversary")
of the date on which the Corporation first mailed its proxy materials for the
preceding year's annual meeting of stockholders; provided, however, that if the
date of the annual meeting is advanced more than 30 days prior to or delayed by
more than 30 days
2
after the anniversary of the preceding year's annual meeting, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the later of (i) the 90th day prior to such annual meeting or (ii)
the 10th day following the day on which public announcement of the date of such
meeting is first made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person as would be required to be
disclosed in solicitations of proxies for the election of such nominees as
directors pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and such person's written consent to serve as a
director if elected; (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of such business, the reasons
for conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose behalf
the proposal is made; (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made (i)
the name and address of such stockholder, as they appear on the Corporation's
books, and of such beneficial owner, (ii) the class and number of shares of the
Corporation that are owned beneficially and of record by such stockholder and
such beneficial owner, and (iii) whether either such stockholder or beneficial
owner intends to deliver a proxy statement and form of proxy to holders of, in
the case of a proposal, at least the percentage of the Corporation's voting
shares required under applicable law to carry the proposal or, in the case of a
nomination or nominations, a sufficient number of holders of the Corporation's
voting shares to elect such nominee or nominees (an affirmative statement of
such intent, a "Solicitation Notice").
(4) Notwithstanding anything in the second sentence of
the third paragraph of this Section 1 to the contrary, in the event that the
number of directors to be elected to the Board of Directors is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the Corporation
at least 55 days prior to the Anniversary, a stockholder's notice required by
this Bylaw shall also be considered timely, but only with respect to nominees
for any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the 10th day following the day on which such public
announcement is first made by the Corporation.
(5) Only persons nominated in accordance with the
procedures set forth in this Section 1 shall be eligible to serve as directors
and only such business shall be conducted at an annual meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this section. The chairman of the meeting shall have the power and
the duty to determine whether a nomination or any business proposed to be
brought before the meeting has been made in accordance with the procedures set
forth in these By-Laws and, if any proposed nomination or business is not in
compliance with these By-Laws, to declare that such defectively proposed
business or nomination shall not be presented for stockholder action at the
meeting and shall be disregarded.
(6) For purposes of these By-Laws, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
-2-
3
(7) Notwithstanding the foregoing provisions of this
Section 1, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to
matters set forth in this Section 1. Nothing in this Section 1 shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2. Special Meetings.
(1) Special meetings of the stockholders may be called at
any time by the Board of Directors acting pursuant to a resolution adopted by a
majority of the Whole Board. For purposes of these By-Laws, the term "Whole
Board" shall mean the total number of authorized directors whether or not there
exist any vacancies in previously authorized directorships. The Board of
Directors may postpone or reschedule any previously scheduled special meeting.
(2) Only such business shall be conducted at a special
meeting of stockholders as shall have been brought before the meeting pursuant
to the Corporation's notice of meeting. Nominations of persons for election to
the Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (a)
by or at the direction of the Board of Directors or (b) by any stockholder of
record of the Corporation who is a stockholder of record at the time of giving
of notice provided for in this paragraph, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in Section 1 of
this Article I. Nominations by stockholders of persons for election to the Board
of Directors may be made at such a special meeting of stockholders if the
stockholder's notice required by the third paragraph of Section 1 of this
Article I shall be delivered to the Secretary at the principal executive offices
of the Corporation not later than the close of business on the later of the 90th
day prior to such special meeting or the 10th day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
(3) Notwithstanding the foregoing provisions of this
Section 2, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to
matters set forth in this Section 2. Nothing in this Section 2 shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 3. Notice of Meetings.
Notice of the place, if any, date, and time of all meetings of
the stockholders, and the means of remote communications, if any, by which
stockholders and proxyholders may be deemed to be present in person and vote at
such meeting, shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the certificate of incorporation of the
Corporation).
When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting if the time and place, if any,
thereof, and the means of remote
-3-
4
communications, if any, by which stockholders and proxyholders may be deemed to
be present in person and vote at such adjourned meeting are announced at the
meeting at which the adjournment is taken; provided, however, that if the date
of any adjourned meeting is more than thirty (30) days after the date for which
the meeting was originally noticed, or if a new record date is fixed for the
adjourned meeting, notice of the place, if any, date, and time of the adjourned
meeting and the means of remote communications, if any, by which stockholders
and proxyholders may be deemed to be present in person and vote at such
adjourned meeting, shall be given in conformity herewith. At any adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law. Where
a separate vote by a class or classes or series is required, a majority of the
shares of such class or classes or series present in person or represented by
proxy shall constitute a quorum entitled to take action with respect to that
vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of
the meeting may adjourn the meeting to another place, if any, date, or time.
Section 5. Organization.
Such person as the Board of Directors may have designated or,
in the absence of such a person, the Chairman of the Board or, in his or her
absence, the President of the Corporation or, in his or her absence, such person
as may be chosen by the holders of a majority of the shares entitled to vote who
are present, in person or by proxy, shall call to order any meeting of the
stockholders and act as chairman of the meeting. In the absence of the Secretary
of the Corporation, the secretary of the meeting shall be such person as the
chairman of the meeting appoints.
Section 6. Conduct of Business.
The chairman of any meeting of stockholders shall determine
the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to him
or her in order. The chairman shall have the power to adjourn the meeting to
another place, if any, date and time. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled
to vote may vote in person or by proxy authorized by an instrument in writing or
by a transmission permitted by law filed in accordance with the procedure
established for the meeting. Any copy, facsimile telecommunication or other
reliable reproduction of the writing or transmission created pursuant to this
paragraph may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy,
-4-
5
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
The Corporation may, and to the extent required by law, shall,
in advance of any meeting of stockholders, appoint one or more inspectors to act
at the meeting and make a written report thereof. The Corporation may designate
one or more alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting may, and to the extent required by law, shall,
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. Every vote taken by ballots shall
be counted by a duly appointed inspector or inspectors.
All elections shall be determined by a plurality of the votes
cast, and except as otherwise required by law, all other matters shall be
determined by a majority of the votes cast affirmatively or negatively.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any
meeting of stockholders, arranged in alphabetical order for each class of stock
and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder for a period of at least 10 days prior to the meeting in the manner
provided by law.
The stock list shall also be open to the examination of any
stockholder during the whole time of the meeting as provided by law. This list
shall presumptively determine the identity of the stockholders entitled to vote
at the meeting and the number of shares held by each of them.
ARTICLE II - BOARD OF DIRECTORS
Section 1. Number of Directors.
Subject to the rights of the holders of any series of
preferred stock to elect directors under specified circumstances, the number of
directors shall be fixed from time to time exclusively by the Board of Directors
pursuant to a resolution adopted by a majority of the Whole Board.
Section 2. Newly Created Directorships and Vacancies.
Subject to the rights of the holders of any series of
preferred stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause shall, unless otherwise required by law or by
resolution of the Board of Directors, be filled only by a majority vote of the
directors then in office, though less than a quorum (and not by stockholders),
and directors so chosen shall serve for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have been
-5-
6
elected expires or until such director's successor shall have been duly elected
and qualified. No decrease in the number of authorized directors shall shorten
the term of any incumbent director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at
such place or places, on such date or dates, and at such time or times as shall
have been established by the Board of Directors and publicized among all
directors. A notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by
the Chairman of the Board, the President or by a majority of the Whole Board and
shall be held at such place, on such date, and at such time as they or he or she
shall fix. Notice of the place, date, and time of each such special meeting
shall be given to each director by whom it is not waived by mailing written
notice not less than five (5) days before the meeting or by telephone or by
telegraphing or telexing or by facsimile or electronic transmission of the same
not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the
total number of the Whole Board shall constitute a quorum for all purposes. If a
quorum shall fail to attend any meeting, a majority of those present may adjourn
the meeting to another place, date, or time, without further notice or waiver
thereof.
Section 6. Participation in Meetings By Conference
Telephone.
Members of the Board of Directors, or of any committee
thereof, may participate in a meeting of such Board of Directors or committee by
means of conference telephone or other communications equipment by means of
which all persons participating in the meeting can hear each other and such
participation shall constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be
transacted in such order and manner as the Board of Directors may from time to
time determine, and all matters shall be determined by the vote of a majority of
the directors present, except as otherwise provided herein or required by law.
Action may be taken by the Board of Directors without a meeting if all members
thereof consent thereto in writing or by electronic transmission, and the
writing or writings or electronic transmission or transmissions are filed with
the minutes of proceedings of the Board of Directors. Such filing shall be in
paper form if the minutes are maintained in paper form and shall be in
electronic form if the minutes are maintained in electronic form.
-6-
7
Section 8. Compensation of Directors.
Unless otherwise restricted by the certificate of
incorporation, the Board of Directors shall have the authority to fix the
compensation of the directors. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or paid a stated
salary or paid other compensation as director. No such payment shall preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
compensation for attending committee meetings.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors may from time to time designate
committees of the Board of Directors, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board of Directors
and shall, for those committees and any others provided for herein, elect a
director or directors to serve as the member or members, designating, if it
desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting
and conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing or by electronic transmission, and the writing or writings or
electronic transmission or transmissions are filed with the minutes of the
proceedings of such committee. Such filing shall be in paper form if the minutes
are maintained in paper form and shall be in electronic form if the minutes are
maintained in electronic form.
ARTICLE IV - OFFICERS
Section 1. Generally.
The officers of the Corporation shall consist of a Chairman of
the Board, a President, one or more Vice Presidents, a Secretary, a Treasurer
and such other officers (including a Vice Chairman of the Board and a Chairman
Emeritus) as may from time to time be appointed by the Board of Directors.
Officers shall be elected by the Board of Directors, which shall consider that
-7-
8
subject at its first meeting after every annual meeting of stockholders. Each
officer shall hold office until his or her successor is elected and qualified or
until his or her earlier resignation or removal. Any number of offices may be
held by the same person. The salaries of officers elected by the Board of
Directors shall be fixed from time to time by the Board of Directors or by such
officers as may be designated by resolution of the Board of Directors.
Section 2. Chief Executive Officer.
The Board of Directors shall designate either the Chairman of
the Board or the President as the chief executive officer of the Corporation.
Subject to the provisions of these By-laws and to the direction of the Board of
Directors, the chief executive officer shall have the responsibility for the
general management and control of the business and affairs of the Corporation
and shall perform all duties and have all powers which are commonly incident to
the office of chief executive or which are delegated to him or her by the Board
of Directors. He or she shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized and
shall have general supervision and direction of all of the other officers,
employees and agents of the Corporation.
Section 3. Chief Operating Officer.
The Board of Directors may designate an officer or the
Corporation as the chief operating officer of the Corporation. The chief
operating officer shall have general responsibility for the management and
control of the operations of the Corporation and shall perform all duties and
have all powers which are commonly incident to the office of chief operating
officer or which are delegated to him or her by the Board of Directors. Subject
to the direction of the Board of Directors and the chief executive officer, the
chief operating officer shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized and
shall have general supervision of all of the other officers (other than the
Chairman of the Board or any Vice Chairman), employees and agents of the
Corporation.
Section 4. Vice President.
Each Vice President shall have such powers and duties as may
be delegated to him or her by the Board of Directors. One (1) Vice President
shall be designated by the Board of Directors to perform the duties and exercise
the powers of the President in the event of the President's absence or
disability.
Section 5. Treasurer.
The Treasurer shall have the responsibility for maintaining
the financial records of the Corporation. He or she shall make such
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all such transactions and of the financial
condition of the Corporation. The Treasurer shall also perform such other duties
as the Board of Directors may from time to time prescribe.
-8-
9
Section 6. Secretary.
The Secretary shall issue all authorized notices for, and
shall keep minutes of, all meetings of the stockholders and the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.
Section 7. Delegation of Authority.
The Board of Directors may from time to time delegate the
powers or duties of any officer to any other officers or agents, notwithstanding
any provision hereof.
Section 8. Removal.
Any officer of the Corporation may be removed at any time,
with or without cause, by the Board of Directors.
Section 9. Action with Respect to Securities of Other
Corporations.
Unless otherwise directed by the Board of Directors, the
President or any officer of the Corporation authorized by the President shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of stockholders of or with respect to any action of
stockholders of any other Corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
Corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by,
or in the name of the Corporation by, the President or a Vice President, and by
the Secretary or an Assistant Secretary, or the Treasurer or an Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all of
the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books
of the Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders, or to receive
payment of any dividend or other distribution
-9-
10
or allotment of any rights or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may, except as otherwise required by law, fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any
certificate of stock, another may be issued in its place pursuant to such
regulations as the Board of Directors may establish concerning proof of such
loss, theft or destruction and concerning the giving of a satisfactory bond or
bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of
certificates of stock shall be governed by such other regulations as the Board
of Directors may establish.
ARTICLE VI - NOTICES
Section 1. Notices.
If mailed, notice to stockholders shall be deemed given when
deposited in the mail, postage prepaid, directed to the stockholder at such
stockholder's address as it appears on the records of the Corporation. Without
limiting the manner by which notice otherwise may be given effectively to
stockholders, any notice to stockholders may be given by electronic transmission
in the manner provided in Section 232 of the Delaware General Corporation Law.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder or
director, or waiver by electronic transmission by such person, whether given
before or after the time of the event for which notice is to be given, shall be
deemed equivalent to the notice required to be given to such person. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
Attendance
-10-
11
at any meeting shall constitute waiver of notice except attendance for the sole
purpose of objecting to the timeliness of notice.
ARTICLE VII - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification.
Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or an
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer or trustee of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer or trustee or in any other capacity while serving as a
director, officer or trustee, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section 3 of this Article VII with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
Section 2. Right to Advancement of Expenses.
In addition to the right to indemnification conferred in
Section 1 of this Article VII, an indemnitee shall also have the right to be
paid by the Corporation the expenses (including attorney's fees) incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section 2 or otherwise.
Section 3. Right of Indemnitee to Bring Suit.
If a claim under Section 1 or 2 of this Article VII is not
paid in full by the Corporation within sixty (60) days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period
-11-
12
shall be twenty (20) days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) in any suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met any applicable standard for indemnification set forth in the
Delaware General Corporation Law. Neither the failure of the Corporation
(including its directors who are not parties to such action, a committee of such
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its directors who
are not parties to such action, a committee of such directors, independent legal
counsel, or its stockholders) that the indemnitee has not met such applicable
standard of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article VII or otherwise shall be on the Corporation.
Section 4. Non-Exclusivity of Rights.
The rights to indemnification and to the advancement of
expenses conferred in this Article VII shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's certificate of incorporation, By-laws, agreement, vote of
stockholders or directors or otherwise.
Section 5. Insurance.
The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
Section 6. Indemnification of Employees and Agents of
the Corporation.
The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
-12-
13
Section 7. Nature of Rights.
The rights conferred upon indemnitees in this Article VII
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a director, officer or trustee and shall inure to the benefit
of the indemnitee's heirs, executors and administrators. Any amendment,
alteration or repeal of this Article VII that adversely affects any right of an
indemnitee or its successors shall be prospective only and shall not limit or
eliminate any such right with respect to any proceeding involving any occurrence
or alleged occurrence of any action or omission to act that took place prior to
such amendment or repeal.
ARTICLE VIII - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures
elsewhere specifically authorized in these By-laws, facsimile signatures of any
officer or officers of the Corporation may be used whenever and as authorized by
the Board of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing
the name of the Corporation, which seal shall be in the charge of the Secretary.
If and when so directed by the Board of Directors or a committee thereof,
duplicates of the seal may be kept and used by the Treasurer or by an Assistant
Secretary or Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the
Board of Directors, and each officer of the Corporation shall, in the
performance of his or her duties, be fully protected in relying in good faith
upon the books of account or other records of the Corporation and upon such
information, opinions, reports or statements presented to the Corporation by any
of its officers or employees, or committees of the Board of Directors so
designated, or by any other person as to matters which such director or
committee member reasonably believes are within such other person's professional
or expert competence and who has been selected with reasonable care by or on
behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the
Board of Directors.
Section 5. Time Periods.
In applying any provision of these By-laws which requires that
an act be done or not be done a specified number of days prior to an event or
that an act be done during a period of a specified number of days prior to an
event, calendar days shall be used, the day of the doing of the act shall be
excluded, and the day of the event shall be included.
-13-
14
ARTICLE IX - AMENDMENTS
In furtherance and not in limitation of the powers conferred
by law, the Board of Directors is expressly authorized to adopt, amend and
repeal these By-Laws subject to the power of the holders of capital stock of the
Corporation to adopt, amend or repeal the By-Laws; provided, however, that, with
respect to the power of holders of capital stock to adopt, amend and repeal
By-Laws of the Corporation, notwithstanding any other provision of these By-Laws
or any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any affirmative vote of the holders of any particular class
or series of the capital stock of the Corporation required by law, these By-Laws
or any preferred stock, the affirmative vote of the holders of at least 80%
percent of the voting power of all of the then-outstanding shares entitled to
vote generally in the election of directors, voting together as a single class,
shall be required to adopt, amend or repeal any provision of these By-Laws.
-14-
1
EXHIBIT 10.2
TRANSITION SERVICES AGREEMENT
THIS TRANSITION SERVICES AGREEMENT, dated as of __________, 2001 (this
"Agreement"), is made by and between National Service Industries, Inc., a
Delaware corporation ("Parent"), and L & C Spinco, Inc., a Delaware corporation
("Spinco").
WITNESSETH:
WHEREAS, Parent and Spinco are parties to an Agreement and Plan of
Distribution, dated as of __________, 2001 (the "Distribution Agreement"),
pursuant to which Parent will transfer certain assets to Spinco and have Spinco
assume certain liabilities of Parent;
WHEREAS, in connection with the transactions contemplated by the
Distribution Agreement, Parent and Spinco wish to enter into this Agreement for
purposes of continuity and transition; and
WHEREAS, Spinco desires to cause Parent to provide the Services set
forth on Schedule A to Spinco, and Parent is willing to provide such Services,
and Parent desires to cause Spinco to provide the Services set forth on Schedule
B to Parent, and Spinco is willing to provide such Services, all on the terms
and conditions set forth below;
NOW, THEREFORE, the parties hereto, in consideration of the premises
and the mutual covenants contained herein, agree as follows:
SECTION 1. SPECIFIC DEFINITIONS.
In addition to the terms defined elsewhere in this Agreement, as used
in this Agreement, the following terms have the respective meanings set forth
below:
"Applicable Rate" shall mean the rate of interest per annum announced
from time to time by ____________________________ as its prime lending rate plus
4% per annum.
"Bankruptcy Event" with respect to a party shall mean the filing of an
involuntary petition in bankruptcy or similar proceeding against such party
seeking its reorganization, liquidation or the appointment of a receiver,
trustee or liquidator for it or for all or substantially all of its assets,
whereupon such petition shall not be dismissed within sixty (60) days after the
filing thereof, or if such party shall (i) apply for or consent in writing to
the appointment of a receiver, trustee or liquidator of all or substantially all
of its assets, (ii) file a voluntary petition or admit in writing its inability
to pay its debts as they become due, (iii) make a general assignment for the
benefit of creditors, (iv) file a petition or an answer seeking reorganization
or an arrangement with its creditors or take advantage of any insolvency law
with respect to itself as debtor, or (v) file an answer admitting the material
allegations of a petition filed against it in any bankruptcy, reorganization,
insolvency proceedings or any similar proceedings.
"Change in Control" shall have the meaning given to that term in that
certain Severance Protection Agreement for Key Management entered into between
Parent and certain of its key management.
"Loss" shall mean all losses, liabilities, damages, claims, demands,
judgments or settlements of any nature or kind, known or unknown, fixed,
accrued, absolute or contingent, liquidated or unliquidated, including all
reasonable costs and expenses (legal, accounting or otherwise as such costs are
incurred) relating thereto.
2
"Parent Services" shall mean those transitional services to be provided
by Parent to Spinco set forth on Schedule A hereto to assist Spinco in operating
Spinco's business.
"Person" shall mean any natural person, corporation, business trust,
limited liability company, joint venture, association, company, partnership or
government, or any agency or political subdivision thereof.
"Services" shall mean, collectively, the Parent Services and the Spinco
Services.
"Spinco Services" shall mean those transitional services to be provided
by Spinco to Parent set forth on Schedule B hereto to assist Parent in operating
Parent's business.
SECTION 2. SERVICES.
Section 2.1 Services. (a) Parent shall provide to Spinco each
Parent Service for the term set forth opposite the description of such Parent
Service in Schedule A. Additional services may be provided to Spinco by Parent
if such arrangement is agreed to in writing and executed by Parent and Spinco.
(b) Spinco shall provide to Parent each Spinco Service
for the term set forth opposite the description of such Spinco Service in
Schedule B. Additional services may be provided by Spinco to Parent if such
arrangement is agreed in writing and executed by Parent and Spinco.
Section 2.2 Standard of Service. In performing the Services, Parent
and Spinco shall provide substantially the same level of service and use
substantially the same degree of care as their respective personnel provided and
used in providing such Services prior to the date hereof, subject in each case
to any provisions set forth on Schedule A or Schedule B with respect to each
such Service.
SECTION 3. LICENSES AND PERMITS.
Each party warrants and covenants that all duties and obligations
(including with respect to Parent, all Parent Services and with respect to
Spinco, all Spinco Services) to be performed hereunder shall be performed in
compliance with all material applicable federal, state, provincial and local
laws, rules and regulations. Each party shall obtain and maintain all material
permits, approvals and licenses necessary or appropriate to perform its duties
and obligations (including with respect to Parent, the Parent Services and with
respect to Spinco, the Spinco Services) hereunder and shall at all times comply
with the terms and conditions of such permits, approvals and licenses.
SECTION 4. PAYMENT.
Section 4.1 Service Fees. (a) In consideration for the provision of
each of the Parent Services, Spinco shall pay to Parent the fee set forth for
such Parent Service on Schedule A.
(b) In consideration for the provision of each of the
Spinco Services, Parent shall pay to Spinco the fee set forth for such Spinco
Service on Schedule B.
Section 4.2 Costs and Expenses. (a) In addition to the fees payable
in accordance with Section 4.1(a), Spinco shall reimburse Parent for all
reasonable and necessary out-of-pocket costs and expenses (including postage and
other delivery costs, telephone, telecopy and similar expenses) incurred by
Parent with respect to third parties in connection with the provision of Parent
Services to Spinco pursuant to the terms of this Agreement or paid by Parent on
behalf of Spinco.
(b) In addition to the fees payable in accordance with
Section 4.1(b), Parent shall reimburse Spinco for all reasonable and necessary
out-of-pocket costs and expenses (including postage and other delivery
-2-
3
costs, telephone, telecopy and similar expenses) incurred by Spinco with respect
to third parties in connection with the provision of Spinco Services to Parent
pursuant to the terms of this Agreement or paid by Spinco on behalf of Parent.
Section 4.3 Invoices. (a) Parent will invoice Spinco in U.S.
dollars: (i) as of the last day of each calendar month for any fees payable by
Spinco in accordance with Section 4.1(a) for Parent Services listed on Schedule
A provided pursuant to the terms of this Agreement during such month; (ii) as of
the last day of each calendar month for any amounts payable by Spinco in
accordance with Section 4.2(a) for any out-of-pocket costs and expenses incurred
during the immediately preceding month to the extent Parent has received an
invoice from such third party; and (iii) as of the last day of each calendar
month for any taxes (excluding income taxes) payable with respect to the
provision of Parent Services to Spinco during such month. Parent shall deliver
or cause to be delivered to Spinco each such invoice within thirty (30) days
following the last day of the calendar month to which such invoice relates.
Spinco shall pay each such invoice received by electronic funds transfer within
thirty (30) days of the date on which such invoice was received.
(b) Spinco will invoice Parent in U.S. dollars: (i) as of
the last day of each calendar month for any fees payable by Parent in accordance
with Section 4.1(b) for Spinco Services listed on Schedule B provided pursuant
to the terms of this Agreement during such month; (ii) as of the last day of
each calendar month for any amounts payable by Parent in accordance with Section
4.2(b) for any out-of-pocket costs and expenses incurred during the immediately
preceding month to the extent Spinco has received an invoice from such third
party; and (iii) as of the last day of each calendar month for any taxes
(excluding income taxes) payable with respect to the provision of Spinco
Services to Parent during such month. Spinco shall deliver or cause to be
delivered to Parent each such invoice within thirty (30) days following the last
day of the calendar month to which such invoice relates. Parent shall pay each
such invoice received by electronic funds transfer within thirty (30) days of
the date on which such invoice was received.
Section 4.4 Late Payment. Any amount not paid when due shall be
subject to a late payment fee computed daily at a rate equal to the Applicable
Rate. Notwithstanding the foregoing, in the event a party disputes the accuracy
of any invoice, a party shall pay the undisputed portion of such invoice a
provided herein, and the parties hereto will promptly meet and seek to resolve
the disputed amount of the invoice. Each party agrees to pay the other party's
reasonable attorneys' fees and other costs incurred in collection of any amounts
owed to such other party hereunder and not paid when due. Notwithstanding
anything to the contrary contained herein, in the event either party fails to
make a payment when due hereunder, and such failure continues for a period of
thirty (30) days following delivery of written notice to such non-paying party
of such failure, the other party shall have the right to cease provision of
Services to such non-paying party until such overdue payment (and any applicable
late payment fee accrued with respect thereto) is paid in full. Such right of
the party providing Services shall not in any manner limit or prejudice any of
such party's other rights or remedies in the event of the non-paying party's
failure to make payments when due hereunder, including any rights or remedies
pursuant to Section 7.
Section 4.5 Fees, Etc. Upon Termination of Services. In the event
of a termination of Services pursuant to Section 7.1, with respect to the
calendar month in which such Services cease to be provided, the recipient of
such Services shall be obligated to pay a pro rata share of the fee for such
Service set forth on Schedule A or Schedule B, as applicable, equal to the
product of (x) the fee set forth on Schedule A or Schedule B, as applicable,
multiplied by (y) a fraction, the numerator of which is the number of days in
the calendar month in which such Services cease to be provided preceding and
including the last date on which such Services are provided, and the denominator
of which is 30.
SECTION 5. INDEMNIFICATION.
Section 5.1 Indemnification by Principal. (a) Spinco agrees to
indemnify, defend and hold Parent harmless from and against any Loss to which
Parent may become subject arising out of, by reason of or otherwise in
connection with the provision hereunder by Parent of Parent Services, other than
Losses resulting from Parent's gross negligence, willful misconduct or material
breach of its obligations pursuant to this Agreement. Notwithstanding any
provision in this Agreement to the contrary, Spinco shall not be liable under
this Section 5.1 for any consequential, special or punitive damages (including
lost profits), except to the extent that such
-3-
4
consequential, special or punitive damages relate to a Loss resulting from a
Third-Party Claim (as defined in the Distribution Agreement).
(b) Parent agrees to indemnify, defend and hold
Spinco harmless from and against any Loss to which Spinco may become subject
arising out of, by reason of or otherwise in connection with the provision
hereunder by Spinco of Spinco Services, other than Losses resulting from
Spinco's gross negligence, willful misconduct or material breach of its
obligations pursuant to this Agreement. Notwithstanding any provision in this
Agreement to the contrary, Parent shall not be liable under this Section 5.1 for
any consequential, special or punitive damages (including lost profits), except
to the extent that such consequential, special or punitive damages relate to a
Loss resulting from a Third-Party Claim (as defined in the Distribution
Agreement).
Section 5.2 Indemnification by Provider. (a) Parent agrees to
indemnify, defend and hold Spinco harmless from and against any Loss to which
Spinco may become subject arising out of, by reason of or otherwise in
connection with the provision hereunder by Parent of Parent Services to Spinco
where such Losses resulted from Parent's gross negligence, willful misconduct or
material breach of its obligations pursuant to this Agreement.
(b) Spinco agrees to indemnify, defend and hold
Parent harmless from and against any Loss to which Parent may become subject
arising out of, by reason of or otherwise in connection with the provision
hereunder by Spinco of Spinco Services to Parent where such Losses resulted from
Spinco's gross negligence, willful misconduct or material breach of its
obligations pursuant to this Agreement.
Section 5.3 Procedures for Indemnification. Any indemnification
claims made hereunder shall be made in accordance with Article III of the
Distribution Agreement.
SECTION 6. CONFIDENTIALITY.
Each party shall keep confidential the Schedules to this Agreement and
all information received from the other party regarding the Services, including
any information received with respect to Parent or Spinco, and to use such
information only for the purposes set forth in this Agreement unless otherwise
agreed to in writing by the party from which such information was received. In
the event a party is required by any court or legislative or administrative body
(by oral questions, interrogatories, requests for information or documents,
subpoena, civil investigation demand or similar process) to disclose any
confidential information provided pursuant to this Agreement, the party shall
provide the other party with prompt notice of such requirement in order to
afford the other party an opportunity to seek an appropriate protective order or
other remedy. However, if the other party is unable to obtain or does not seek
such protective order and the party required to disclose the confidential
information is, in the opinion of its counsel, legally compelled to disclose
such confidential information, disclosure of such information may be made
without liability under this Agreement. The covenants in this Section 6 shall
survive any termination of this Agreement indefinitely with respect to
information qualifying as a trade secret under applicable law and for a period
of three (3) years from the date such termination becomes effective with respect
to all other information.
SECTION 7. TERM.
Section 7.1 Duration. (a) Subject to Sections 6, 7.2, 7.3 and 7.4,
the term of this Agreement shall commence on the date hereof and shall continue
in full force and effect with respect to each Service until the earlier of (i)
the first anniversary of the Distribution Date (as defined in the Distribution
Agreement) or (ii) the termination of such Service in accordance with Section
7.1(b).
(b) Each party acknowledges that the purpose of
this Agreement is for Parent to provide the Parent Services to Spinco on an
interim basis until Spinco can perform the Parent Services for itself, and for
Spinco to provide the Spinco Services to Parent on an interim basis until Parent
can perform the Spinco Services for itself. Accordingly, each of Parent and
Spinco shall use its commercially reasonable efforts to make or obtain such
approvals, permits and licenses and implement such systems, as shall be
necessary for it to provide the appropriate
-4-
5
Services for itself as promptly as practicable. As Spinco becomes
self-sufficient or engages other sources to provide any Parent Service, Spinco
shall be entitled to release Parent from providing any or all of the Parent
Services hereunder by delivering a written notice thereof to Parent at least
thirty (30) days prior to the effective date of release of such Parent
Service(s). At the end of such thirty (30) day period (or such shorter period as
may be agreed by the parties), Parent shall discontinue the provision of the
Parent Services specified in such notice and any such Parent Services shall be
excluded from this Agreement, and Schedule A shall be deemed to be amended
accordingly. As Parent becomes self-sufficient or engages other sources to
provide any Spinco Service, Parent shall be entitled to release Spinco from
providing any or all of the Spinco Services hereunder by delivering a written
notice thereof to Spinco at least thirty (30) days. At the end of such thirty
(30) day period (or such shorter period as may be agreed by the parties), Spinco
shall discontinue the provision of the Spinco Services specified in such notice
and any such Spinco Services shall be excluded from this Agreement, and Schedule
B shall be deemed to be amended accordingly.
Section 7.2 Early Termination by Parent. Parent may terminate this
Agreement by giving written notice to Spinco under the following circumstances:
(a) if Spinco shall default in the performance of any of
its material obligations under, or breach any of its warranties set forth in,
this Agreement, and such default or breach shall continue and not be remedied
for a period of thirty (30) days after Parent has given written notice to Spinco
specifying such default or breach and requiring it to be remedied;
(b) if a Bankruptcy Event has occurred with respect to
Spinco; or
(c) upon the occurrence of a Change in Control of Spinco.
Section 7.3 Early Termination by Spinco. Spinco may terminate this
Agreement by giving written notice to Parent under the following circumstances:
(a) if Parent shall default in the performance of any of
its material obligations under, or breach any of its warranties set forth in,
this Agreement and such default or breach shall continue and not be remedied for
a period of thirty (30) days after Spinco has given written notice to Parent
specifying such default or breach and requiring it to be remedied;
(b) if a Bankruptcy Event has occurred with respect to
Parent; or
(c) upon the occurrence of a Change in Control of Parent.
Section 7.4 Force Majeure. In the event the performance by Spinco
or Parent of their respective duties or obligations hereunder is interrupted or
interfered with by reason of any cause beyond its reasonable control, including
fire, storm, flood, earthquake, explosion, war, strike or labor disruption,
rebellion, insurrection, quarantine, act of God, boycott, embargo, shortage or
unavailability of supplies, riot, or governmental law, regulation or edict
(collectively, the "Force Majeure Events"), the party affected by such Force
Majeure Event shall not be deemed to be in default of this Agreement by reason
of its nonperformance due to such Force Majeure Event, but shall give prompt
written notice to the other party of the Force Majeure Event. The party affected
by the Force Majeure Event shall cooperate with the other party in obtaining, at
the other party's sole expense, an alternative source for the affected Services,
and the other party shall be released from any payment obligation to the party
affected by the Force Majeure Event with respect to such Services during the
period of such Force Majeure Event. Additionally, upon and during the occurrence
of a Force Majeure Event, at the sole option of the party receiving the Services
affected by the Force Majeure Event, the term of this Agreement shall be tolled
with respect to any Services that are not being provided by a third party.
Section 7.5 Consequences on Termination. In the event this
Agreement expires or is terminated in accordance with this Section 7, then (a)
all Services to be provided will promptly cease, (b) each of Parent and Spinco
shall promptly return all confidential information received from the other party
in connection with this Agreement (including the return of all information
received with respect to the Services of Parent or Spinco, as the case may
-5-
6
be), without retaining a copy thereof, and (c) each of Parent and Spinco shall
honor all credits and make any accrued and unpaid payment to the other party as
required pursuant to the terms of this Agreement, and no rights already accrued
hereunder shall be affected.
SECTION 8. RECORDS.
Each of the parties shall create and, for a period of six (6) years
after the termination or expiration of this Agreement, maintain full and
accurate books in connection with the provision of the Services, and all other
records relevant to this Agreement, and upon reasonable notice from the other
party shall make available for inspection and copy by such other party's agents
such records during reasonable business hours.
SECTION 9. DISPUTE RESOLUTION.
SECTION 9.1 Dispute Resolution under Distribution Agreement. Any
dispute arising out of or relating to the performance, breach or interpretation
of this Agreement shall be handled in accordance with Article V of the
Distribution Agreement.
SECTION 9.2 Continuity of Service and Performance. Unless
otherwise agreed herein or in writing, the parties will continue to provide
Services and honor all other commitments under this Agreement and each Ancillary
Agreement (as defined in the Distribution Agreement) during the course of
dispute resolution pursuant to the provisions of this Section 9 with respect to
all matters not subject to such dispute, controversy or claim.
SECTION 10. NOTICES.
All notices and other communications hereunder shall be in writing,
shall reference this Agreement and shall be hand delivered or mailed by
registered or certified mail (return receipt requested) or sent by any means of
electronic message transmission with delivery confirmed (by voice or otherwise)
to the parties at the following addresses (or at such other addresses for a
party as shall be specified by like notice) and will be deemed given on the date
on which such notice is received:
To Parent:
National Service Industries, Inc.
-------------------------------------
-------------------------------------
Attention: _____________________________
Telephone: _____________________________
Facsimile: _____________________________
With a copy to:
National Service Industries, Inc.
-------------------------------------
-------------------------------------
Attention: _____________________________
Telephone: _____________________________
Facsimile: _____________________________
To Spinco:
-6-
7
L & C Spinco, Inc.
-------------------------------------
-------------------------------------
Attention: _____________________________
Telephone: _____________________________
Facsimile: _____________________________
With a copy to:
L & C Spinco, Inc.
-------------------------------------
-------------------------------------
Attention: _____________________________
Telephone: _____________________________
Facsimile: _____________________________
SECTION 11. MISCELLANEOUS.
SECTION 11.1 Waivers, Modifications, Amendments. Any provision of
this Agreement may be amended or waived if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by Spinco, on the
one hand, and Parent, on the other hand, or in the case of a waiver, by the
party against whom the waiver is to be effective. No failure or delay by any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and in
addition to other or further remedies provided by law or equity.
SECTION 11.2 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF DELAWARE.
SECTION 11.3 Severability. The provisions of this Agreement shall
be deemed severable and the invalidity or unenforceability of any provision
shall not affect the validity or enforceability of the other provisions hereof.
If any provision of this Agreement, or the application thereof to any person,
corporation, partnership or other entity or any circumstance, is invalid and
unenforceable, (a) a suitable and equitable provision shall be substituted
therefor in order to carry out, so far as may be valid and enforceable, the
intent and purpose of such invalid or unenforceable provision and (b) the
remainder of this Agreement and the application of such provision to other
persons, corporations, partnerships or other entities or circumstances shall not
be affected by such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any jurisdiction.
SECTION 11.4 Reference; Interpretation. References in this
Agreement to any gender include references to all genders, and references to the
singular include references to the plural and vice versa. The words "include",
"includes" and "including" when used in this Agreement shall be deemed to be
followed by the phrase "without limitation." Unless the context otherwise
requires, references in this Agreement to Sections and Schedules shall be deemed
references to Sections of, and Schedules to, this Agreement. Unless the context
otherwise requires, the words "hereof", "hereby" and "herein" and words of
similar meaning when used in this Agreement refer to this Agreement in its
entirety and not to any particular Section or provision of this Agreement. This
Agreement shall not be construed against either party as the principal drafter
hereof.
SECTION 11.5 Entire Agreement. This Agreement (including all
Schedules hereto) contains the entire agreement between the parties hereto with
respect to the subject matter hereof and supersedes all prior agreements and
understandings, oral or written, with respect to such matters.
-7-
8
SECTION 11.6 Assignment. Neither Parent nor Spinco may, directly or
indirectly, assign or subcontract, or attempt to assign or subcontract, any of
its rights or obligations hereunder, in whole or in part, by operation of law or
otherwise, except with the prior written consent of the other party; it being
understood that such consent shall not be unreasonably withheld if Parent or
Spinco assigns or subcontracts the Agreement to one of its Affiliates (as
defined in the Distribution Agreement) with the financial and other resources
and expertise to perform all of the obligations of such party hereunder. Any
attempted assignment or delegation not in compliance with the forgoing shall be
null and void and of no effect. Nothing contained herein shall prevent a party
from providing Services through or with the assistance of third parties whom
such party regularly used to provide such Services prior to the date hereof.
SECTION 11.7 Binding Effect. This Agreement shall be binding upon
the parties hereto and their respective successors and permitted assigns, if
any, and except as provided herein, shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns, if any.
SECTION 11.8 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
shall constitute one and the same Agreement.
SECTION 11.9 No Agency or Partnership. Nothing in this Agreement
will create, or will be deemed to create, a partnership or the relationship of
principal and agent or of employer and employee between the parties.
SECTION 11.10 Provisions Unaffected. Nothing contained in this
Agreement shall affect the rights and obligations of Parent and Spinco pursuant
to the Distribution Agreement.
-8-
9
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
on behalf of the parties as of the date first herein above written.
NATIONAL SERVICE INDUSTRIES, INC.
By:
----------------------------------------
Name:
Title:
L & C SPINCO, INC.
By:
----------------------------------------
Name:
Title:
-9-
1
EXHIBIT 10.7
INDEMNIFICATION AGREEMENT
This Agreement made as of ___________, 2001, between L & C Spinco,
Inc., a Delaware corporation (the "Company") and ____________________, a
director, officer, employee or agent of the Company (the "Indemnitee").
WHEREAS, the Company and the Indemnitee are also aware of the exposure
to litigation of officers, directors, employees and agents of corporations as
such persons exercise their duties to the Company;
WHEREAS, the Company desires to continue to benefit from the services
of highly qualified and experienced persons such as the Indemnitee; and
WHEREAS, the Indemnitee desires to serve or to continue to serve the
Company as a director, officer, employee or agent, including service at the
request of the Company as a director, officer or trustee of another corporation,
joint venture, trust or other enterprise, for so long as the Company continues
to provide on an acceptable basis indemnification against certain liabilities
and expenses which may be incurred by the Indemnitee.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties hereto agree as follows:
1. INDEMNIFICATION. The Company shall indemnify the Indemnitee with
respect to his activities as a director, officer or employee of the Company or
as a person who is serving or has served at the request of the Company ("Agent")
as a director, officer or trustee of another corporation, joint venture, trust
or other enterprise against expenses (including attorneys' fees, judgments,
fines, and amounts paid in settlement) actually and reasonably incurred by him
("Expenses") in connection with any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), to which he was, is, or is threatened to be made a party by
reason of facts which include his being or having been such a director, officer,
employee or agent to the extent of the highest and most advantageous to the
Indemnitee, as determined by the Indemnitee, of one or any combination of the
following:
(a) The benefits provided by the Company's Restated Certificate of
Incorporation (the "Certificate of Incorporation") or By-Laws of the Company
(the "By-Laws") in effect on the date hereof, a copy of the relevant portions of
which are attached hereto as Exhibit I;
(b) The benefits provided by the Certificate of Incorporation or
By-Laws or their equivalent in effect at the time Expenses are incurred by
Indemnitee;
(c) The benefits allowable under Delaware law in effect at the
date hereof;
2
(d) The benefits allowable under the law of the jurisdiction under
which the Company exists at the time Expenses are incurred by the Indemnitee;
(e) The benefits available under liability insurance obtained by
the Company; and
(f) Such other benefits as may be otherwise available to
Indemnitee under then existing practices of the Company.
A combination of two or more of the benefits provided by (a) through
(f) shall be available only to the extent that the Applicable Document, as
hereafter defined, does not require that the benefits provided therein must be
exclusive of other benefits. The document or law providing for the benefits
listed in items (a) through (f) above is called the "Applicable Document" in
this Agreement. The Company hereby undertakes to assist Indemnitee, in all
proper and legal ways, to obtain the benefits selected by Indemnitee under items
(a) through (f) above.
2. INSURANCE. The Company shall maintain directors' and officers'
liability insurance for so long as Indemnitee's services are covered hereunder,
provided and to the extent that such insurance is available on a commercially
reasonable basis. In the event the Company maintains directors' and officers'
liability insurance, Indemnitee shall be named as an insured in such manner as
to provide Indemnitee the same rights and benefits as are accorded to the most
favorably insured of the Company's officers or directors. However, the Company
agrees that the provisions hereof shall remain in effect regardless of whether
liability or other insurance coverage is at any time obtained or retained by the
Company; except that any payments made to, or on behalf of, Indemnitee under an
insurance policy shall reduce the obligations of the Company hereunder.
3. PAYMENT OF EXPENSES. At Indemnitee's request, the Company shall pay the
Expenses when incurred by Indemnitee upon receipt of an undertaking in the form
of Exhibit II attached hereto by or on behalf of Indemnitee to repay such
amounts so paid on his behalf if it shall ultimately be determined under the
Applicable Document that he is not entitled to be indemnified by the Company for
such Expenses. That portion of Expenses which represents attorneys' fees and
other costs incurred in defending any Proceeding shall be paid by the Company
within thirty (30) days of its receipt of such request, together with such
reasonable documentation evidencing the amount and nature of such Expenses as
the Company shall require, subject to its also receiving such undertaking.
4. ADDITIONAL RIGHTS. The indemnification provided in this Agreement shall
not be deemed exclusive of any other indemnification or rights to which
Indemnitee may be entitled and shall continue after Indemnitee has ceased to
occupy a position as an officer, director, employee or agent as described in
Paragraph 1 above with respect to Proceedings relating to or arising out of
Indemnitee's acts or omissions during his service in such position.
5. NOTICE TO COMPANY. Indemnitee shall provide to the Company prompt
written notice of any proceeding brought, threatened, asserted or commenced
against Indemnitee with respect to which Indemnitee may assert a right to
indemnification hereunder. Indemnitee shall not effect any settlement without
the Company's written consent,
-2-
3
unless Indemnitee shall have determined to undertake his own defense in such
matter and has waived the benefits of this Agreement as to amounts payable with
respect to such settlement. The Company shall not settle any Proceeding to which
Indemnitee is a party in any manner which would impose any penalty on Indemnitee
without his written consent. Neither Indemnitee nor the Company will
unreasonably withhold consent to any proposed settlement. Indemnitee shall
cooperate to the extent reasonably possible with the Company and/or its
insurers, in attempts to defend and/or settle such Proceeding.
6. ASSUMPTION OF DEFENSE. Except as otherwise provided below, to the
extent that it may wish, the Company jointly with any other indemnifying party
similarly notified will be entitled to assume Indemnitee's defense in any
Proceeding, with counsel mutually satisfactory to Indemnitee and the Company.
After notice from the Company to Indemnitee of the Company's election so to
assume such defense, the Company will not be liable to Indemnitee under this
Agreement for Expenses subsequently incurred by Indemnitee in connection with
the defense thereof other than reasonable costs of investigation or as otherwise
provided below. Indemnitee shall have the right to employ counsel in such
Proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of its assumption of the defense thereof shall be at Indemnitee's
expense unless:
(a) The employment of counsel by Indemnitee has been authorized by
the Company;
(b) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between Indemnitee and the Company in the conduct of the
defense of such Proceeding; or
(c) The Company shall not in fact have employed counsel to assume
the defense of such Proceeding, in each of which cases the fees and expenses of
counsel shall be at the expense of the Company. The Company shall not be
entitled to assume the defense of Indemnitee in any Proceeding brought by or on
behalf of the Company or as to which Indemnitee shall have made the conclusion
provided for in clause (b) above.
7. ARBITRATION AND ENFORCEMENT.
(a) In the event that any dispute or controversy shall arise
between Indemnitee and the Company with respect to whether the Indemnitee is
entitled to indemnification in connection with any Proceeding or with respect to
the amount of Expenses incurred, such dispute or controversy shall be submitted
by the parties to binding arbitration before a single arbitrator at Atlanta,
Georgia. If the parties cannot agree on a designated arbitrator fifteen (15)
days after arbitration is requested in writing by either of them, the
arbitration shall proceed before an arbitrator appointed by, and in accordance
with the rules then in effect of, one of the following bodies, which shall be
chosen by the initiator of such arbitration:
(i) the American Arbitration Association;
(ii) the CPR Institute for Dispute Resolution; or
(iii) Judicial Arbitration and Mediation Services, Inc.
-3-
4
The award shall be rendered in such form that judgment may be entered
thereon in any court having jurisdiction thereof.
(b) Reasonable expenses incurred by Indemnitee in connection with
his request for indemnification hereunder shall be borne by the Company, unless
Indemnitee is determined according to the preceding paragraph of this Section 7
not to be entitled to indemnification for any liability or expense hereunder. In
the event that Indemnitee is a party to or intervenes in any proceeding in which
the validity of this Agreement is at issue or seeks an award in arbitration
pursuant to the preceding paragraph of this Section 7 to enforce his rights
under, or to recover damages for breach of, this Agreement, Indemnitee, if he
prevails in whole or in part in such action, shall be entitled to recover from
the Company and shall be indemnified by the Company against any expenses
actually and reasonably incurred by him.
(c) In any proceeding in which the validity or enforceability of
this Agreement is at issue, or in which Indemnitee seeks an award in arbitration
to enforce his rights hereunder, the Company shall have the burden of proving
that Indemnitee is not entitled to indemnification hereunder.
8. EXCLUSIONS. No indemnification, reimbursement or payment shall be
required of the Company hereunder:
(a) With respect to any claim as to which Indemnitee shall have
been adjudged by a court of competent jurisdiction to have acted with bad faith,
willful misfeasance, or willful disregard of his duties, except to the extent
that such court shall determine upon application that, despite the adjudication
of liability, but in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnify for such expenses as the court shall
deem proper; or
(b) With respect to any obligation of Indemnitee under Section
16(b) of the Exchange Act.
9. EXTRAORDINARY TRANSACTIONS The Company covenants and agrees that, in
the event of any merger, consolidation or reorganization in which the Company is
not the surviving entity, any sale of all or substantially all of the assets of
the Company or any liquidation of the Company (each such event is hereinafter
referred to as an "extraordinary transaction"), the Company shall use its best
efforts to:
(a) Obtain insurance in Indemnitee's favor from a reputable
insurance carrier in reasonable amounts (if such insurance is available at
commercially reasonable rates) for a period of not less than one (1) year from
the date of such extraordinary transaction against any liability to which the
indemnification provided in this Agreement relates;
(b) Have the obligations of the Company under this Agreement
expressly assumed by the survivor, purchaser or successor, as the case may be,
in such extraordinary transaction; or
(c) Otherwise adequately provide for the satisfaction of the
Company's obligations under this Agreement, in a manner acceptable to
Indemnitee.
-4-
5
10. NO PERSONAL LIABILITY. Indemnitee agrees that neither the Directors,
nor any officer, employee, representative or agent of the Company shall be
personally liable for the satisfaction of the Company's obligations under this
Agreement, and Indemnitee shall look solely to the assets of the Company for
satisfaction of any claims hereunder.
11. SEVERABILITY. If any provision, phrase, or other portion of this
Agreement should be determined by any court of competent jurisdiction to be
invalid, illegal or unenforceable, in whole or in part, and such determination
should become final, such provision, phrase or other portion shall be deemed to
be severed or limited, but only to the extent required to render the remaining
provisions and portions of the Agreement enforceable, and the Agreement as thus
amended shall be enforced to give effect to the intention of the parties insofar
as that is possible.
12. GOVERNING LAW. The parties hereto agree that this Agreement shall be
construed and enforced in accordance with and governed by the laws of the State
of Delaware.
13. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be considered to have been duly given if
delivered by hand and receipted for by the party to whom the notice, request,
demand or other communication shall have been directed, or mailed by registered
mail with postage prepaid:
(a) If to the Company, to:
L & C Spinco, Inc.
1420 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attention: Secretary
(b) If to Indemnitee, to:
---------------------------
---------------------------
---------------------------
14. TERMINATION. This Agreement may be terminated by either party upon not
less than sixty (60) days prior written notice delivered to the other party, but
such termination shall not in any way diminish the obligations of Company
hereunder with respect to Indemnitee's activities prior to the effective date of
termination. Indemnitee's right to indemnification and advancement of expenses
pursuant to this Agreement shall continue regardless of whether Indemnitee has
ceased for any reason to be a director of the Company and shall inure to the
benefit of the heirs of Indemnitee and the executors and administrators of
Indemnitee's estate.
-5-
6
This Agreement is and shall be binding upon and shall inure to the
benefits of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
INDEMNITEE [SPINCO]
- ----------------------- -----------------------------
Name: Name:
Title:
-6-
7
EXHIBIT I
RESTATED CERTIFICATE OF INCORPORATION
ARTICLE X
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
BYLAWS
ARTICLE VII - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification.
Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or an
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer or trustee of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer or trustee or in any other capacity while serving as a
director, officer or trustee, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section 3 of this Article VII with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
8
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
Section 2. Right to Advancement of Expenses.
In addition to the right to indemnification conferred in
Section 1 of this Article VII, an indemnitee shall also have the right to be
paid by the Corporation the expenses (including attorney's fees) incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section 2 or otherwise.
Section 3. Right of Indemnitee to Bring Suit.
If a claim under Section 1 or 2 of this Article VII is not
paid in full by the Corporation within sixty (60) days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
(20) days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that, and
(ii) in any suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met any applicable standard for indemnification set forth in the
Delaware General Corporation Law. Neither the failure of the Corporation
(including its directors who are not parties to such action, a committee of such
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its directors who
are not parties to such action, a committee of such directors, independent legal
counsel, or its stockholders) that the indemnitee has not met such applicable
standard of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article VII or otherwise shall be on the Corporation.
9
Section 4. Non-Exclusivity of Rights.
The rights to indemnification and to the advancement of
expenses conferred in this Article VII shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's certificate of incorporation, By-laws, agreement, vote of
stockholders or directors or otherwise.
Section 5. Insurance.
The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
Section 6. Indemnification of Employees and Agents of
the Corporation.
The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
Section 7. Nature of Rights.
The rights conferred upon indemnitees in this Article VII
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a director, officer or trustee and shall inure to the benefit
of the indemnitee's heirs, executors and administrators. Any amendment,
alteration or repeal of this Article VII that adversely affects any right of an
indemnitee or its successors shall be prospective only and shall not limit or
eliminate any such right with respect to any proceeding involving any occurrence
or alleged occurrence of any action or omission to act that took place prior to
such amendment or repeal.
10
EXHIBIT II
FORM OF UNDERTAKING
THIS UNDERTAKING has been entered into by
______________________________ (hereinafter "Indemnitee") pursuant to an
Indemnification Agreement dated ________________, 2001 (the "Indemnification
Agreement") between L & C Spinco, Inc. (hereinafter "Company"), a Delaware
corporation and Indemnitee.
WITNESSETH:
WHEREAS, pursuant to the Indemnification Agreement, Company agreed to
pay Expenses (within the meaning of the Indemnification Agreement) as and when
incurred by Indemnitee in connection with any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative, to which indemnitee was, is, or is threatened to be made a party
by reason of facts which include Indemnitee's being or having been a director,
officer or employee of the Company or a person who is serving or has served at
the request of the Company as a director, officer, or trustee of another
corporation, joint venture, trust or other enterprise;
WHEREAS, a claim has been asserted against the Indemnitee and the
Indemnitee has notified the company thereof in accordance with the terms of
Section 6 of the Indemnification Agreement (hereinafter the "Proceeding");
WHEREAS, Indemnitee believes that Indemnitee should prevail in this
proceeding and it is in the interest of both the Indemnitee and the Company to
defend against the claim against Indemnitee thereunder.
NOW THEREFORE, Indemnitee hereby agrees that in consideration of the
Company's advance payment of Indemnitee's Expenses incurred prior to a final
disposition of the proceeding, Indemnitee hereby undertakes to reimburse the
Company for any and all legal fees, costs and expenses paid by Company on behalf
of the Indemnitee prior to a final disposition of the Proceeding in the event
that Indemnitee is determined under the Applicable Document (within the meaning
of the Indemnification Agreement) not to be entitled to indemnification. Such
payments or arrangements for payments shall be consummated within ninety (90)
days after a determination that Indemnitee is not entitled to indemnification
and reimbursement pursuant to the Indemnification Agreement and applicable law.
IN WITNESS WHEREOF, the undersigned has set his/her hand this ____ day
of , 20___.
--------------------------
Name:
