<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1999.
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
STRATEGIC INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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<S> <C>
DELAWARE 51-0305292
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
C/O U.S. INDUSTRIES, INC. 08830
101 WOOD AVENUE SOUTH (ZIP CODE)
ISELIN, N.J.
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (732) 767-0700
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS TO BE REGISTERED EACH CLASS IS TO BE REGISTERED
------------------------------------ ------------------------------
<S> <C>
Common stock, par value $0.01 per share [New York Stock Exchange]
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
________________________________________________________________________________
<PAGE>
STRATEGIC INDUSTRIES, INC.
INFORMATION REQUIRED IN INFORMATION STATEMENT
ITEM 1. BUSINESS
The registrant, Strategic Industries, Inc., a Delaware corporation, is
presently an indirect wholly-owned subsidiary of U.S. Industries, Inc.
The information required by this item is contained in the sections entitled
'Summary,' 'The Spin-off' and 'Business' of the Information Statement.*
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained in the sections entitled
'Summary,' 'Capitalization,' 'Selected Combined Financial Data,' 'Unaudited Pro
Forma Combined Financial Data' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' of the Information Statement.*
ITEM 3. PROPERTIES
The information required by this item is contained in the section entitled
'Business' of the Information Statement.*
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the sections entitled
'Executive Compensation' and 'Security Ownership of Certain Beneficial Owners of
Common Stock' of the Information Statement.*
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained in the sections entitled
'Management -- Directors' and 'Management -- Executive Officers' of the
Information Statement.*
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained in the section
'Executive Compensation' of the Information Statement.*
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section entitled
'The Spin-off -- Agreements between Strategic and USI and Relationship after the
Spin-off' of the Information Statement.*
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained in the section entitled
'Business -- Legal Proceedings' of the Information Statement.*
- ------------
* Incorporated by reference.
1
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in the sections entitled
'The Spin-off -- Manner of Effecting the Spin-off,' 'Projected Ownership of Our
Stock Immediately After the Spin-off' and 'Description of Capital Stock' of the
Information Statement.*
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained in the sections entitled
'Description of Capital Stock' and 'Purposes and Effects of Certain Provisions
of Certificate of Incorporation, By-Laws and Delaware Statutory Law' of the
Information Statement.*
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained in the sections entitled
'Purposes and Effects of Certain Provisions of the Certificate of Incorporation,
By-Laws and Delaware Statutory Law' and 'Limitation on Liability and
Indemnification of Officers and Directors' of the Information Statement.*
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is identified in 'Index to Combined
Financial Statements' of the Information Statement.*
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
1. See Index to Combined Financial Statements on page F-1 of the Information
Statement.*
2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts
All Schedules, other than that indicated above, are inapplicable, and are
therefore omitted.
(b) Exhibits
<TABLE>
<S> <C>
2.1 -- Information Statement (attached to this Registration
Statement as Annex A)
**3.1 -- Amended and Restated Certificate of Incorporation of
Strategic (attached to Exhibit 2.1 as Annex A)
**3.2 -- Amended and Restated By-Laws of Strategic
**3.3 -- Rights Agreement, dated , 1999, between Strategic
and , as Rights Agent
**4.1 -- Specimen form of certificate evidencing Strategic common
stock
**10.1 -- Spin-off Agreement, dated , 1999, between USI and
Strategic
**10.2 -- Indemnification Agreement, dated , 1999, between
USI and Strategic
**10.3 -- Tax Sharing and Indemnification Agreement dated ,
1999, between USI and Strategic
**10.4 -- Corporate Transition Agreement, dated , 1999, between
USI and Strategic
**10.4(a) -- Employment Agreement of John G. Raos, dated May 18, 1999
(b) -- Employment Agreement of Peter J. Statile, dated June 1, 1999
(c) -- Employment Agreement of Steven C. Barre, dated July 1, 1999
(d) -- Employment Agreement of Gary K. Meuchel, dated July 1, 1999
(e) -- Employment Agreement of Peter F. Reilly, dated July 1, 1999
**10.5 -- Strategic Industries, Inc. Annual Performance Incentive Plan
**10.6 -- Strategic Industries, Inc. Stock Incentive Plan (attached to
Exhibit 2.1 as Annex B)
**21.1 -- Subsidiaries of Strategic
**27.1 -- Financial Data Schedule
</TABLE>
- ------------
** To be filed by amendment.
2
<PAGE>
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.
STRATEGIC INDUSTRIES, INC.
By: /s/ STEVEN C. BARRE
.................................
Name: Steven C. Barre
Title: Vice President, General
Counsel and Secretary
July 15, 1999
3
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
WILL NOT BE ISSUED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY INFORMATION STATEMENT SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THESE SECURITIES.
ANNEX A
PRELIMINARY COPY, DATED JULY 15, 1999
SUBJECT TO COMPLETION OR AMENDMENT
INFORMATION STATEMENT
STRATEGIC INDUSTRIES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
[LOGO]
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You should consider
carefully the risk
factors beginning on
page 7 of this
information statement.
The spin-off does not
require approval by USI
stockholders. Therefore,
USI is not asking you
for a proxy and requests
that you do not send USI
a proxy.
This information
statement is not an
offer to sell, or a
solicitation of an offer
to buy, any of our
securities or those of
USI.
We have prepared this information statement to provide
you with information regarding the proposed spin-off to U.S.
Industries, Inc. stockholders of all of our shares of common
stock. At the time of the spin-off, we will own and operate
the diversified businesses of USI.
If you are a USI stockholder at the close of business
on , 1999, you will receive one share of our
common stock for every ten shares of USI common stock you
hold at that time (together with cash instead of any
fraction of a share to which you would be entitled). The
spin-off will take effect on , 1999 and certificates
for our shares will be mailed to you on or about ,
1999. You will not be required to make any payment for the
shares of our common stock that you will receive in the
spin-off.
If you have any questions regarding the spin-off, you
may call ChaseMellon Shareholder Services L.L.C., telephone
number .
</TABLE>
No public market currently exists for our common stock. However, we are
seeking to list our common stock on the [New York Stock Exchange]. If the shares
are accepted for listing on the [New York Stock Exchange], we expect that a
'when-issued' market will develop on or shortly before the record date for the
spin-off and regular way trading will begin on the first business day after the
effective date of the spin-off.
Proposed [New York Stock Exchange] Trading Symbol
' '
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OUR COMMON STOCK, OR DETERMINED IF THIS
INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
We first mailed this information statement to USI stockholders on
, 1999.
<PAGE>
TABLE OF CONTENTS
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PAGE
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Questions and Answers about the
Spin-off............................ ii
Expected Timetable for the Spin-off... iii
Forward-Looking Statements............ iv
Summary............................... 1
Risk Factors.......................... 7
The Spin-off.......................... 11
Capitalization........................ 16
Selected Combined Financial Data...... 17
Unaudited Pro Forma Combined Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 32
Management............................ 39
Executive Compensation................ 41
Projected Ownership of Our Stock
Immediately after the Spin-off...... 48
Description of Capital Stock.......... 49
Rights Plan........................... 50
Purposes and Effects of Certain
Provisions of Certificate of
Incorporation, By-Laws and Delaware
Statutory Law....................... 53
Limitation on Liability and
Indemnification of Officers
and Directors....................... 56
Additional Information................ 57
Index to Combined Financial
Statements.......................... F-1
ANNEXES
A Amended and Restated Certificate of
Incorporation...................... A-1
B Strategic Industries, Inc. Stock
Incentive Plan..................... B-1
C Material Federal Income Tax
Consequences of Awards and Material
Federal Income, Estate and Gift Tax
Consequences Relating to the
Transfer of Options Under Our Stock
Incentive Plan..................... C-1
</TABLE>
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
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<S> <C>
WHAT IS THE SPIN-OFF? USI intends to pay a dividend to its stockholders consisting of all of our shares
of common stock. The dividend is known as a spin-off. At the time of the spin-
off, we will own and operate the diversified businesses of USI.
WHAT WILL I RECEIVE IN For every ten shares of USI stock that you hold at the close of business on
THE SPIN-OFF? , 1999, you will receive one share of our common stock. You will
receive cash (net of applicable fees) instead of any fraction of a share to which
you would be entitled. Our common stock (and any cash) will be sent to you
automatically without any required payment or other action on your part.
WHEN WILL THE SPIN-OFF The spin-off will be completed as soon as possible after the conditions to the
OCCUR? spin-off are met. These conditions include:
USI's receipt of a tax ruling from the Internal Revenue Service to the effect
that the spin-off will be tax-free to USI's stockholders and to USI for
federal income tax purposes, and
completion of financing.
DO I HAVE TO PAY TAXES USI is seeking a tax ruling to the effect that the spin-off will be tax-free to
ON THE RECEIPT OF USI stockholders and to USI for federal income tax purposes, except with respect
STRATEGIC COMMON to cash received instead of fractional shares. To review the material federal
STOCK? income tax consequences in greater detail, see page .
WILL STRATEGIC COMMON We do not expect to pay cash dividends on our stock for the foreseeable future.
STOCK PAY DIVIDENDS?
WILL MY STRATEGIC [Yes, we anticipate that our common stock will be traded on the [NYSE] under the
COMMON STOCK BE LISTED symbol ' ,' subject to official notice of issuance.]
ON THE NEW YORK STOCK
EXCHANGE?
WHAT WILL HAPPEN TO USI will continue to own and operate its other businesses -- including bath and
USI AND MY EXISTING plumbing, lighting and hardware. USI stock will continue to trade on the NYSE
USI COMMON STOCK? under the symbol 'USI.' The spin-off will not affect the number of outstanding
shares of USI stock or any rights of USI stockholders.
WHAT WILL HAPPEN TO Beginning on or about , 1999, and continuing through , 1999,
THE TRADING OF USI AND you will only be able to sell your USI stock with due bills for our stock. This
STRATEGIC COMMON means that you will give up your right to receive our stock if you sell your USI
STOCK? stock during this time and you will have to deliver the certificate for our stock
to the buyer of your USI stock once you receive our stock certificate.
Beginning on , 1999, we expect that regular way trading in our stock will
begin on the [NYSE].
</TABLE>
ii
<PAGE>
EXPECTED TIMETABLE FOR THE SPIN-OFF
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[day], [date], 1999........... 'When-issued' trading in our common stock commences on the
[NYSE].
[day], [date], 1999........... USI common stock commences trading with due bills attached
on the NYSE.
[day], [date], 1999........... Spin-off record date for holders of USI common stock (5:00
p.m. New York time).
[day], [date], 1999........... Spin-off effective date for holders of USI common stock.
Regular way trading in our common stock commences on the
[NYSE].
[day], [date], 1999........... Ex-entitlement date for the stock dividend for USI common
stock trading on the NYSE.
[day], [date], 1999........... Settlement date for 'when-issued' trading in our common
stock on the [NYSE].
</TABLE>
iii
<PAGE>
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this information statement.
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Forward-looking statements are statements, other than statements of
historical facts, that address activities, events or developments that we expect
or anticipate will or may occur in the future, including such items as business
strategy and measures to implement strategy, competitive strengths, objectives,
goals, growth of our business and operations, plans and references to future
success.
Forward-looking statements also include any other statements that include
words such as 'anticipate,' 'believe,' 'plan,' 'estimate,' 'intend' and other
similar expressions.
Forward-looking statements are based on certain assumptions and analyses we
have made in light of our experience and our perception of historical trends,
current conditions, expected future developments and other factors that we
believe are appropriate. Whether actual results and developments will conform
with our expectations and predictions is subject to a number of risks and
uncertainties, including, among others noted in this information statement, the
following:
interest rates,
foreign currency exchange rates,
instability in domestic and foreign markets,
consumer spending patterns,
availability of consumer and commercial credit,
levels of automotive production,
the effect of changes in domestic and foreign laws and regulations
(including government subsidies, tariffs and international trade
regulations),
product initiatives and other actions taken by competitors,
changes in raw material costs and our suppliers' continuing ability
to fulfill our purchasing requirements, and
Year 2000 issues.
All of the forward-looking statements made in this information statement
are qualified by these cautionary statements, and we cannot assure you that the
actual results or developments we have anticipated will be realized. Even if the
results and developments in our forward-looking statements are substantially
realized, we cannot assure you that they will have the expected consequences to,
or effects on us, or our business or operations.
iv
<PAGE>
SUMMARY
This summary highlights selected information from this information
statement, but does not contain all details concerning the spin-off of our
common stock to USI stockholders, including information that may be important to
you. To better understand the spin-off and our business and financial position,
you should carefully review this entire document. References to 'Strategic,'
'we,' 'us' or 'our' mean Strategic Industries, Inc. and its subsidiaries and
assume the spin-off has already occurred. References to 'USI' mean U.S.
Industries, Inc. and its subsidiaries (excluding, if the reference is to a date
or period of time after the spin-off, Strategic and its subsidiaries).
References to 'fiscal' are to the applicable fiscal year ended September 30.
THE COMPANY
Strategic Industries, Inc. operates and manages a diversified group of
businesses on a decentralized basis, with a corporate management team providing
strategic direction and financial support. Our operating companies are divided
into three business groups: Consumer Products, Precision Engineered Products and
Automotive Interior Products. In fiscal 1998, we had net sales of $888 million
and operating income of $96 million (excluding goodwill impairment,
restructuring and other related charges totalling $71 million).
We believe our businesses generally have leading positions in niche
markets, high quality products, attractive operating margins compared to their
peers and experienced management. Our products are used in a variety of markets
by a broad range of end-users in the U.S. and internationally. We believe the
business trends that affect our operating companies and the markets we serve
vary. As a result, we believe our diversity reduces our exposure to any single
market.
The following table presents the operating companies in each of our
business groups.
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CONSUMER PRODUCTS
Rexair Manufactures Rainbow'r' premium vacuum cleaners for sale
through an extensive independent direct sales network
EJ Footwear Manufactures Georgia Boot'r' western, work and outdoor
sporting boots and Lehigh'r' industrial safety footwear
Native Textiles Manufactures warp knit fabrics used in lingerie and
activewear
BiltBest Windows Manufactures windows and patio doors
SCF Industries Manufactures folding and stacking chairs as a licensee of
the Samsonite'r' brand name
PRECISION ENGINEERED PRODUCTS
Huron Manufactures precision metal products used in automobiles
Bearing Inspection Inspects and overhauls aircraft engine bearings and other
aircraft components
FSM Manufactures flat shadow masks, a component of color
television picture tubes
Jade Technologies Manufactures customized leadframes for the semiconductor
industry (an approximately 75%-owned Singapore public
company)
AUTOMOTIVE INTERIOR PRODUCTS
Garden State Tanning Manufactures premium automotive leather
Leon Plastics Manufactures molded plastic parts and assemblies for
automotive interiors
</TABLE>
We also own approximately 20% of the equity of United Pacific Industries
Limited, a company listed on the Stock Exchange of Hong Kong. United Pacific
manufactures voltage converters and other electronic components. This equity
interest is included in the Precision Engineered Products Group.
1
<PAGE>
BUSINESS STRATEGY
Our objective is to build our equity value by consistently focusing on
reducing our debt and increasing profitability and cash flow. Key elements of
our business strategy are described below.
DEBT REDUCTION. Historically, our operating companies have generated
significant cash flow. We intend to use a substantial portion of any
available cash flow to reduce our debt. In addition, we will
regularly evaluate our businesses to determine whether our debt
reduction strategy should be accelerated through selected
dispositions.
GROWTH INITIATIVES. We will seek to build upon our niche positions
through internal and external growth in targeted markets. We will
selectively commit capital to extend our markets, develop new
products and expand manufacturing capabilities. We will also consider
complementary acquisitions to augment these initiatives. For example,
in fiscal 1998, to enhance its product offering and foster increased
sales, Rexair introduced a redesigned product line and increased
efforts to expand its independent direct sales network in the United
States and abroad. Recently, we also invested in a new facility for
Bearing Inspection to support future growth and acquired Atech
Turbine Components to complement Bearing Inspection's operations.
COST REDUCTION AND MARGIN EXPANSION. We will seek to reduce costs and
improve operating margins at each of our individual businesses
through process improvements and by focusing on higher margin
products and markets. For example, our continuous productivity
improvement techniques have reduced operating costs at Huron and Leon
Plastics, and we intend to apply these techniques where appropriate
to other operating companies. Ongoing programs also include the
continued rationalization of manufacturing operations and increased
use of foreign sources of supply at EJ Footwear. In addition Garden
State is implementing process changes to increase hide-cutting yields
and is focusing on higher margin products.
DECENTRALIZED MANAGEMENT WITH PERFORMANCE-BASED INCENTIVES. Our
operating companies will be managed on a decentralized basis by
experienced executives. The chief executive officers of our operating
companies average over 15 years in their industries. Incentive
compensation for senior executives at our operating companies will
depend on reaching short and long-term operating goals linked to the
executives' respective businesses. Our corporate management team will
supply strategic direction and financial support to the operating
companies. They have extensive experience in senior management
positions within multi-industry public companies including Hanson PLC
and USI. Their compensation under our annual bonus and long-term
deferred compensation plans will depend upon reaching operating goals
linked to our overall performance. Both our corporate management team
and our operating company management will have significant personal
equity interests in us, principally in the form of stock options.
ADDRESS AND TELEPHONE NUMBER
We are a Delaware corporation. Our principal executive offices will be
located at and our telephone number at that address will be
.
2
<PAGE>
THE SPIN-OFF
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Company Doing the
Spin-off.............. U.S. Industries, Inc., a Delaware corporation.
Company Resulting from
the Spin-off.......... Strategic Industries, Inc., a Delaware corporation.
Conditions to the
Spin-off.............. Completion of the spin-off is subject to the following
conditions:
USI's receipt of a tax ruling from the Internal Revenue
Service to the effect that the spin-off will be tax-free to
USI's stockholders and to USI for federal income tax
purposes;
Availability of proceeds under our new credit facility and
an offering of senior subordinated notes into the
institutional debt market.
We expect to use approximately $588 million of proceeds of
the new credit facility and the offering of senior
subordinated notes to repay existing indebtedness and
accrued interest owed by our businesses to subsidiaries of
USI, to repay other existing indebtedness, to pay expenses
incurred in the spin-off and to pay a dividend to USI. The
undrawn portion of the new credit facility will be available
for working capital and to pay any spin-off adjustments that
may be required to be paid by our subsidiaries to
subsidiaries of USI. See 'Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' and 'The
Spin-off -- Agreements between Strategic and USI and
Relationship after the Spin-off.'
Spin-off Ratio.......... One share of our common stock for every ten shares of USI
common stock held of record on the spin-off record date.
Spin-off Record Date.... , 1999 (5:00 p.m. New York time).
Spin-off Effective
Date.................. , 1999. The dividend agent will commence mailing our common
stock certificates on this date.
Trading in USI Common
Stock from the Spin-off
Record Date up to and
Including the Spin-off
Effective Date........ During this period, USI stock will trade on the NYSE with
due bills attached. The due bills will entitle a purchaser
of USI stock during this period to receive one share of our
stock for every ten shares purchased. If the spin-off
conditions are not satisfied and the spin-off is not
completed, the due bills will become null and void.
Our Outstanding Stock... Based on approximately 92 million shares of USI common stock
outstanding at the close of business on , 1999,
approximately 9.2 million shares of our stock will be
distributed in the spin-off. These shares will constitute
all of our capital stock that will be outstanding
immediately following the spin-off. After the spin-off, we
will recommend the issuance to our executive officers and
other key employees of a total of shares of our
common stock, which will be subject to certain restrictions.
In addition, we will issue a total of shares of our
common stock to our non-employee directors. After taking
into account these issuances, we will have shares of
common stock outstanding. After the spin-off, we will also
recommend the issuance to our executive officers and other
key employees of options to purchase the total number of
shares of
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3
<PAGE>
<TABLE>
<S> <C>
our common stock determined by dividing $ million by
the fair market value of our common stock on the date of
grant (up to a maximum of shares). See 'Executive
Compensation -- Stock Incentive Plan.'
Interests in Fractions
of Shares............. Fractions of shares of our common stock will not be issued
in the spin-off. Instead, fractions of shares will be
aggregated by the dividend agent and sold on the [NYSE.] The
net cash proceeds of these sales will be paid ratably to USI
stockholders otherwise entitled to fractions of shares. See
'The Spin-off -- Fractions of Shares.'
Dividend Agent.......... The dividend agent is ChaseMellon Shareholder Services
L.L.C. Its address and telephone number are:
Material Federal Income
Tax Consequences to
USI Stockholders...... It is a condition to the spin-off that USI receives a tax
ruling from the Internal Revenue Service to the effect that,
for federal income tax purposes, the spin-off will qualify
as a tax-free distribution to the stockholders of USI under
Section 355 of the Internal Revenue Code. Therefore, you
will not incur federal income tax upon the receipt of our
common stock in the spin-off, except with respect to cash
received instead of a fraction of a share. See 'The
Spin-off -- Material Federal Income Tax Consequences.'
Trading Market and
Symbol for Our Common
Stock................. We are seeking to list our common stock on the [NYSE] under
the proposed symbol ' .' Prior to the spin-off, we do
not expect there to be any public trading market for our
common stock except that our common stock is expected to
trade on a 'when-issued' basis on the [NYSE] beginning on
, 1999, for settlement on , 1999. If the
spin-off is not completed, all 'when-issued' trading in our
common stock will be null and void. If the spin-off is
completed, we expect that 'regular way' trading in our
common stock on the [NYSE] will commence at 9:30 a.m. New
York time, on , 1999, subject to official notice of
issuance. See 'Risk Factors -- There Is No Trading History
For Our Common Stock and We Do Not Expect to Pay Dividends'
and 'The Spin-off -- Listing and Trading of Our Common
Stock.'
Transfer Agent and
Registrar for the
Common Stock..........
Agreements between
Strategic
and USI and
Relationship after the
Spin-off.............. After the spin-off, we and USI will operate independently of
each other as separate public companies. Neither we nor USI
will own each other's stock (except, in the near-term, for a
limited number of shares held in employee benefit plan
trusts). All directors, executives and employees of USI who
join us will cease to be directors, executives or employees
of USI. See 'The Spin-off -- Agreements between Strategic
and USI and Relationship after the Spin-off.'
</TABLE>
4
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The historical summary combined financial data set forth below for each of
the fiscal years in the three-year period ended September 30, 1998 are derived
from our audited combined financial statements included elsewhere in this
information statement. The historical summary combined financial data for the
six months ended March 31, 1999 and 1998 are unaudited but, in our opinion, have
been prepared on a basis consistent with that of each of the fiscal years in the
three-year period ended September 30, 1998 (except for normal year-end
adjustments). The interim financial data include all adjustments that management
considers necessary for a fair presentation of interim results. Historical
financial information may not be indicative of our future performance as an
independent company. Furthermore, the historical financial data presented below
do not reflect certain pro forma adjustments giving effect to the spin-off which
are reflected in 'Unaudited Pro Forma Combined Financial Data.' The information
set forth below should also be read in conjunction with 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' and the Combined
Financial Statements and notes. See 'Index to Combined Financial Statements.' We
have not presented data about historical earnings per share or dividends because
the capital structure of our businesses prior to the spin-off is not indicative
of our capital structure following the spin-off.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------ ---------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................................. $738 $808 $888 $450 $448
Cost of products sold.................................. 522 576 669 331 337
Selling, general and administrative expenses........... 106 113 124 56 64
Goodwill impairment and restructuring charges(A)....... -- -- 63 -- --
Operating income(A)(B)................................. 101 109 25 60 42
Net income (loss)(C)................................... 40 49 (23) 29 17
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.............................. $ 3 $ 8 $ 12 $ 9 $ 11
Working capital........................................ 156 160 195 194 199
Total assets........................................... 563 584 645 653 640
Total debt(D).......................................... 411 365 344 319 554
Invested capital (deficit)............................. 23 83 126 195 (71)
OTHER DATA:
EBITDA(B)(E)........................................... $121 $129 $120 $ 71 $ 55
Capital expenditures................................... 10 17 27 14 15
Depreciation and amortization.......................... 20 20 24 11 13
</TABLE>
- ------------
(A) In fiscal 1998, in addition to the goodwill impairment and restructuring
charges, we incurred $8 million of other related charges which were
included in cost of products sold and selling, general and administrative
expenses See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and Note 4 to the Combined Financial Statements.
(B) Operating income (loss) in fiscal 1997 and 1998, and for the six months
ended March 31, 1998 and 1999 included $2 million, $(3) million,
$1 million and $(1) million, respectively, of equity earnings (loss) from
our investment in United Pacific. Fiscal 1998 equity (loss) includes a
charge of $4 million associated with an impairment of a United Pacific
subsidiary.
(C) After an income tax benefit of $6 million, the $71 million of charges
detailed above reduced net income for fiscal 1998 by $65 million.
(D) Amounts primarily represent intercompany notes and interest payable to
affiliates.
(E) EBITDA for any period is calculated as the sum of operating income plus
depreciation, amortization of goodwill, amortization of unearned restricted
stock of USI and goodwill impairment, restructuring and other related
charges. We consider EBITDA to be a widely accepted financial indicator of
a company's ability to service debt, fund capital expenditures and expand
its business; however, EBITDA is not calculated in the same way by all
companies and is neither a measurement required, nor represents cash flow
from operations as defined, by generally accepted accounting principles.
EBITDA should not be considered as an alternative to net income (loss), as
an indicator of operating performance or as an alternative to cash flow as
a measure of liquidity.
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following summary unaudited pro forma combined financial data reflect
the spin-off as if it occurred as of the beginning of each of the periods
presented for pro forma combined statement of operations data purposes and as of
March 31, 1999 for pro forma combined balance sheet data purposes. The unaudited
pro forma combined financial data reflect our expected capitalization as a
result of the spin-off, the incurrence of a total of approximately $588 million
of indebtedness under the new credit facility and the senior subordinated notes
and interest expense (including amortization of capitalized costs) relating to
such borrowings. The unaudited pro forma combined financial data do not include
$10 million of expected non-recurring legal, investment banking and other
advisory costs related to the spin-off which will be expensed by us at the time
of the spin-off. These data do not necessarily reflect our results of operations
or financial position had the spin-off actually been completed as of the dates
shown. Also, these data are not necessarily indicative of our future results of
operations or future financial position. See 'Capitalization' and 'Unaudited Pro
Forma Combined Financial Data.'
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
FISCAL YEAR ENDED -----------------
SEPTEMBER 30, 1998 1998 1999
------------------ ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 888 $450 $448
Operating income(A).................................. 20 58 40
Interest expense..................................... 63 31 31
Net (loss) income.................................... (51) 15 5
Basic and diluted (loss) earnings per share(B)....... (5.54) 1.63 .54
OHER DATA:
EBITDA(C)............................................ 115 69 53
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 11
Working capital........................................ 199
Total assets........................................... 613
Total debt............................................. 600
Total liabilities...................................... 755
Stockholders' equity (deficit)......................... (142)
Book value (deficit) per share(B)...................... (15.43)
</TABLE>
- ------------
(A) Pro forma operating income for fiscal 1998 includes goodwill impairment and
restructuring charges of $63 million and other related charges of
approximately $8 million. After an income tax benefit of $6 million, these
charges reduced pro forma net income for fiscal 1998 by $65 million ($7.07
per share).
(B) Pro forma basic and diluted (loss) earnings and book value (deficit) per
share have been determined assuming that 9.2 million shares of our common
stock will be issued in the spin-off.
(C) EBITDA for any period is calculated as the sum of operating income plus
depreciation, amortization of goodwill, amortization of unearned restricted
stock of USI and goodwill impairment, restructuring and other related
charges. We consider EBITDA to be a widely accepted financial indicator of
a company's ability to service debt, fund capital expenditures and expand
its business; however, EBITDA is not calculated in the same way by all
companies and is neither a measurement required, nor represents cash flow
from operations as defined, by generally accepted accounting principles.
EBITDA should not be considered as an alternative to net income (loss), as
an indicator of operating performance or as an alternative to cash flow as
a measure of liquidity.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors relating to the
ownership of common stock in our company.
WE WILL HAVE SUBSTANTIAL INDEBTEDNESS
As of March 31, 1999, after giving pro forma effect to the spin-off,
including our expected initial borrowings under the new credit facility and our
issuance of the senior subordinated notes, we would have had combined
indebtedness of approximately $600 million and stockholders' deficit of
approximately $142 million. See 'Capitalization' and 'Unaudited Pro Forma
Combined Financial Data.' The new credit facility will require us to repay
$ million principal amount of term loans on or before .
Accordingly, our excess cash flow from operations (after capital expenditures)
during this period will be dedicated in substantial part to meeting debt
service and amortization requirements, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures and other general
corporate purposes. Our ability to generate cash available for the repayment
of debt will depend upon numerous business factors, many of which are outside
our control. See 'Forward-Looking Statements.'
We believe that our cash flow from operations, available cash and available
borrowings under our new credit facility will be adequate to meet our liquidity
needs for at least the next twelve months. We cannot assure you, however, that
our business will generate sufficient cash flow from operations or that future
borrowings will be available to us under the new credit facility in an amount
sufficient to enable us to pay our debt or to fund other liquidity needs. To the
extent that cash flow from operations is insufficient to cover our working
capital, capital expenditure and debt service requirements, we, in order to pay
such expenses, may seek to obtain funds from additional borrowings, sell a
portion of our businesses, engage in sale/leaseback transactions and/or raise
equity capital. We cannot assure you of the availability or accessibility of
these or other similar transactions, or that these or other similar transactions
could be accomplished on terms favorable to us. We cannot assure you that we
will be able to refinance any of our indebtedness on commercially reasonable
terms or at all.
In addition, the new credit facility and the indenture governing the senior
subordinated notes will contain covenants restricting, among other things, our
ability to incur additional indebtedness and create liens. These restrictions
could have important consequences to us. For example, they could:
increase our vulnerability to general adverse economic and industry
conditions;
limit our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate;
place us at a competitive disadvantage compared to our competitors
that have less debt; and/or
limit, along with the financial and other restrictive covenants of
our indebtedness, among other things, our ability to borrow
additional funds.
See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- New Credit Facility
and Senior Subordinated Notes.'
THERE IS NO TRADING HISTORY FOR OUR COMMON STOCK AND WE DO NOT EXPECT TO PAY
DIVIDENDS
Although we are seeking to list our common stock on the [New York Stock
Exchange], there is no existing market for our common stock. We cannot assure
you as to the trading prices for our common stock either in the 'when issued'
market or after 'regular way' trading begins. Until our common stock is fully
distributed and an orderly market develops, the trading prices for our common
stock may be adversely affected by the sale of a substantial number of shares.
Prices for our common stock may also be influenced by the depth and liquidity of
the market for our common stock, investor perceptions about us and our
businesses, our future financial results, the absence of cash dividends on our
common stock and general economic and market conditions.
7
<PAGE>
We do not expect to pay cash dividends on our common stock for the
foreseeable future. We will be restricted from paying dividends under the terms
of our new credit facility and the senior subordinated notes.
OUR BUSINESSES OPERATE IN HIGHLY COMPETITIVE MARKETS AND COMPETE WITH MANY
LARGER AND BETTER CAPITALIZED COMPANIES
Generally, our operating companies are subject to competition from a
substantial number of regional, national and international competitors, many of
which have greater financial, manufacturing, engineering and other resources
than our operating companies. Many of these competitors can be expected to
continue to improve the design and performance of their products and to
introduce new products with competitive price and performance characteristics.
Many of our subsidiaries' products are not protected by any proprietary rights
such as patents. Although we believe that our operating companies have certain
advantages over their competitors, realizing and maintaining such advantages
will require continued and, in some cases, increased investment by our operating
companies in manufacturing, research and development, quality standards,
marketing and customer service and support. We cannot assure you that our
operating companies will have sufficient resources to continue to make such
investments or that they will be successful in maintaining such advantages.
Failure to make such investments or to maintain such advantages could have a
material adverse effect on our business, financial condition and results of
operations.
THERE ARE NUMEROUS RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN INTERNATIONAL
MARKETS
Our operating companies manufacture and assemble products at numerous
facilities, some of which are located outside the United States. We also obtain
components and finished goods from suppliers located outside the United States.
Although we have not experienced significant problems conducting operations in
or obtaining supplies from these areas, changes in local economic or political
conditions could affect our manufacturing, assembly and distribution
capabilities and have a material adverse effect on our business, financial
condition and results of operations. Additional risks inherent in our
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, changes in local
economic or political conditions, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially adverse tax
consequences, restrictions on repatriation of earnings and the burdens of
complying with a wide variety of foreign laws. In fiscal 1998, we derived
approximately 38% of our net sales from customers outside the United States. At
September 30, 1998, we held $117 million of assets outside of the United States.
We intend to continue to expand our operations outside the United States and to
enter additional international markets. With respect to our foreign sales that
are U.S. dollar-denominated, decreases in the value of foreign currencies
relative to the U.S. dollar have in the past, and could in the future, make our
products less price competitive.
Decreases in the value of foreign currencies relative to the U.S. dollar
could result in losses from foreign currency conversions. We make limited use of
derivative products in order to hedge our foreign exchange exposure. We also
borrow in foreign currencies to effectively hedge a portion of our net
investment in our foreign subsidiaries.
WE ARE DEPENDENT ON CERTAIN INDUSTRIES
A significant portion of our sales are made to customers in the automotive
and consumer electronics industries. These industries are cyclical in nature and
subject to changes in general economic conditions. Economic downturns and the
likely resulting declines in automotive and consumer electronics sales,
generally, may have a material adverse effect on our net sales and operating
income.
SALES BY REXAIR ARE DEPENDENT ON AN INDEPENDENT DISTRIBUTION NETWORK AND THE
AVAILABILITY OF CONSUMER CREDIT
Rexair's sales are directly dependent on the efforts of independent
distributors. Growth in future sales volume will require growth in the number of
distributors and sales representatives and/or
8
<PAGE>
increased productivity by them. As is typical of most direct selling businesses,
Rexair experiences a high level of turnover in its independent distribution
network from year to year which requires the replacement of outgoing members in
order to maintain its overall distribution network. Sales levels and distributor
and sales representative retention levels are affected by changes in the level
of distributor and sales representative motivation. This in turn can be affected
by a number of factors such as new legislation or regulations affecting direct
selling activities, general economic conditions including levels of unemployment
(which, when low, adversely affects recruitment), and the perception of Rexair's
products or of direct selling businesses generally. Historically, Rexair has
experienced periodic increases and decreases in the number of distributors and
sales representatives; however, we cannot predict the timing or degree of these
changes. We estimate that over 60% of the purchases of Rexair products in the
United States are financed either through independent consumer finance companies
or, to a lesser extent, through the distributors. Accordingly, the inability to
maintain or increase its distribution network or the unavailability of consumer
credit could have a material adverse effect on Rexair's business, financial
condition and results of operations.
WE FACE ENVIRONMENTAL REGULATION OF OUR OPERATIONS
Our businesses are subject to a variety of federal, state, local and
foreign governmental regulations relating to the use, transportation, storage,
discharge, emission or disposal of hazardous substances and wastes, remediation
of contamination associated with releases of hazardous substances at our
facilities and at off-site disposal locations, and worker health and safety.
These regulations are complex, change frequently and have tended to become more
stringent over time.
Based on our experience to date, we believe that the future cost of
compliance with existing environmental regulations and the future cost of
necessary investigation or remediation of contamination will not have a material
adverse effect on our business, financial condition or results of operations.
Nevertheless, future events, such as discovery of unknown contamination,
compliance with more stringent regulations, or more vigorous enforcement
policies by regulatory agencies or stricter or different interpretations of
existing regulations, could require us to make material expenditures. See
'Business -- Governmental Regulation.'
AN INCREASE IN THE PRICE OF RAW MATERIALS COULD ADVERSELY AFFECT OUR OPERATIONS
Our operating companies purchase most of the raw materials for their
products on the open market, and as such, our cost of products sold may be
affected by changes in the market price of such raw materials. We do not
generally engage in commodity hedging transactions for raw materials.
Significant increases in the prices of our operating companies' products due to
increases in the cost of raw materials could have a negative effect on demand
for their respective products and on profitability as well as a material adverse
effect on our business, financial condition and results of operations.
FAILURE BY US OR CERTAIN THIRD PARTIES TO BE YEAR 2000 COMPLIANT POSES CERTAIN
RISKS
The inability of our information systems to process dates on or after
January 1, 2000 could have serious adverse effects on us. Our business
operations are also dependent on the Year 2000 readiness of our customers and
suppliers.
We engaged outside technology consultants to review the Year 2000 readiness
of our operating companies. We developed our Year 2000 plans based on this
review. We cannot assure you that our Year 2000 plans will be effective, that
our estimates about the timing and cost of completing our plans will be accurate
or that our customers and third party suppliers will timely resolve any or all
Year 2000 problems with their systems. Any failure by us, our customers or our
suppliers to timely resolve Year 2000 issues could have a material adverse
effect on our business, financial condition and results of operations. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness Disclosure.'
9
<PAGE>
WE HAVE NO OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY AND ARE DEPENDENT
ON KEY PERSONNEL
We do not have an operating history as an independent public company. Our
businesses have historically relied on USI for certain administrative services
and financial support, and a majority of our businesses have been members of the
USI consolidated group for federal income tax purposes. After the spin-off, this
will no longer be the case.
Our success as an independent public company depends to a significant
extent on the continued services of our senior management and other members of
management. We could be adversely affected if any of these persons were
unwilling or unable to continue in our employ.
WE WILL BE SUBJECT TO CERTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE OF
CONTROL
Prior to the spin-off we will enter into a rights agreement under which
preferred stock purchase rights will attach to our presently outstanding shares
of common stock and to all shares of common stock to be issued afterwards
(including common stock that will trade on a 'when issued' basis) until the
rights expire. The rights may cause substantial dilution to a person or group
that acquires 15% or more of our common stock unless the rights are first
redeemed by our board of directors. Unless earlier redeemed, the rights will
expire at the close of business on the date of our annual meeting of
stockholders in 2001 and the rights agreement will not be extended or renewed
beyond this date without the approval of our independent directors. In addition,
our certificate of incorporation and by-laws and Delaware statutory law contain
several provisions that could have the effect of delaying or preventing our
change of control in a transaction not approved by our board of directors.
Accordingly, our stockholders could be prevented from realizing a premium on
their shares if such a transaction was not approved by our board of directors.
Our agreements with our executive officers and certain other key employees may
have the effect of making a change of control more expensive. See 'Executive
Compensation,' 'Rights Plan,' and 'Purposes and Effects of Certain Provisions of
Certificate of Incorporation, By-Laws and Delaware Statutory Law.'
10
<PAGE>
THE SPIN-OFF
MANNER OF EFFECTING THE SPIN-OFF
The spin-off will be effected by a stock dividend paid to holders of record
of USI common stock. The spin-off ratio will be one share of our common stock
for every ten shares of USI common stock outstanding on the spin-off record
date. USI stockholders will not be required to pay for shares of our common
stock received in the spin-off or to surrender or exchange USI common stock in
order to receive shares of our common stock. All shares of our common stock
received by USI stockholders in connection with the spin-off will be fully paid
and non-assessable. USI stockholders do not have any appraisal rights in
connection with the spin-off.
During the period beginning on or about , 1999 and continuing through
, 1999, USI common stock will trade on the NYSE with due bills
attached. The due bills will entitle a purchaser of USI common stock during this
period to receive one share of our common stock for each ten shares purchased.
If the spin-off is not completed, all due bills attaching to USI common stock
will become null and void.
In order to be entitled to receive shares of our common stock in the
spin-off, USI stockholders must be holders of record of USI common stock at 5:00
p.m. New York time on the spin-off effective date, which is expected to be
, 1999.
The dividend agent is ChaseMellon Shareholder Services L.L.C. ChaseMellon
will commence mailing our common stock certificates on the spin-off effective
date.
FRACTIONS OF SHARES
No certificates representing fractions of shares will be issued as part of
the spin-off. Instead of receiving a fraction of a share, each USI shareholder
of record on the spin-off effective date who would otherwise be entitled to
receive a fraction of a share will receive cash. As soon as practicable after
the spin-off effective date, ChaseMellon will aggregate and sell all fractions
of shares of our common stock on the [NYSE] at then prevailing market prices and
distribute the aggregate proceeds (net of fees) ratably to stockholders entitled
to them. See ' -- Material Federal Income Tax Consequences' below for a
discussion of the federal income tax treatment of the sale of interests in
fractions of shares.
RESULTS OF THE SPIN-OFF
Following the spin-off, we will be a separate, publicly-traded company that
holds the USI diversified businesses. Immediately after the spin-off, based on
the number of outstanding shares of USI common stock and the number of record
holders on , 1999, we expect to have approximately 9.2 million shares of
common stock outstanding, held by approximately record holders
(excluding shares of our common stock that we anticipate will be
issued, subject to certain restrictions, to executive officers and other key
employees, and shares of our common stock that will be issued to our
non-employee directors, after the spin-off effective date as described under
'Executive Compensation'). The actual number of shares of our common stock to be
issued will be determined as of the spin-off effective date.
Following the spin-off, USI will continue to own and operate its other
businesses -- including bath and plumbing, lighting and hardware. The spin-off
will not affect the number of outstanding shares of USI common stock or any
rights of USI stockholders.
LISTING AND TRADING OF OUR COMMON STOCK
Our common stock has been authorized for listing on the [NYSE] under the
symbol ' ', subject to official notice of issuance. Prior to the spin-off,
we do not expect any public trading market for our common stock to exist except
that, beginning on , 1999, our common stock is expected to trade on a
'when-issued' basis on the [NYSE] for settlement when our common stock is issued
on
11
<PAGE>
, 1999. The term 'when-issued' means trading in shares prior to the time
certificates are actually available or issued. If the spin-off conditions are
not satisfied and the stock dividend is not paid, all such 'when-issued' trading
will become null and void. If the spin-off conditions are satisfied and the
stock dividend is paid on the spin-off effective date, it is expected that
'regular way' trading in our common stock on the [NYSE] will commence at 9:30
a.m. New York time on , 1999, subject to official notice of issuance.
The shares of our common stock issued to USI stockholders will be freely
transferable, except for shares received by persons who may be deemed to be our
'affiliates' under the Securities Act. Persons who may be deemed to be our
affiliates after the spin-off generally include individuals or entities that
control, are controlled by, or are under common control with us and may include
certain of our officers and directors. Persons who are our affiliates will be
permitted to sell their shares of our common stock 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 Rule 144 under the Securities Act
(with the exemption under Rule 144 not available until 90 days after the date of
this information statement).
Certain USI subsidiaries, including certain of the subsidiaries to be
transferred to us, presently maintain tax-qualified profit-sharing and savings
plans that hold, among other assets, USI common stock. Certain of our
subsidiaries will continue to maintain these plans or establish new plans to
which liabilities and assets, including USI common stock, will be transferred in
connection with the spin-off. Based upon their ownership of USI common stock on
the spin-off record date after giving effect to these transfers, USI plans and
our plans are expected to hold approximately [53,200] and [62,648] shares of our
common stock, respectively, and our plans are expected to hold approximately
[626,480] shares of USI common stock. The trustees of the USI plans presently
intend to dispose of all of our common stock acquired in the spin-off. We expect
that participants in our plans will be permitted to redirect any investments in
USI common stock to other permitted investments under such plans for a period of
time. However, after such time, the trustees of our plans intend to dispose of
all USI common stock held in our plans and invest the net proceeds of such
dispositions in shares of our common stock, subject to the exercise of the
trustee's fiduciary duties under applicable law. The dispositions will be made
on behalf of participating employees and subject to the exercise of the
trustees' fiduciary duties under applicable law. The timing of dispositions and
acquisitions will be determined by plan administrators and trustees or by their
independent institutional investment managers, subject to their exercise of
fiduciary duties under applicable law. We and USI cannot predict the timing of
dispositions and acquisitions, but we expect that they will occur during the
first few months following the spin-off. Dispositions are expected to be made,
to the extent practicable by exchanges of our common stock and USI common stock
between plans at prices based upon publicly-reported trading prices and also by
open market sales. See 'Projected Ownership of Our Stock Immediately after the
Spin-off.'
For a discussion of certain uncertainties that should be considered when
trading in our common stock, see 'Risk Factors -- There is No Trading History
for Our Common Stock and We Do Not Expect to Pay Dividends.'
AGREEMENTS BETWEEN STRATEGIC AND USI AND RELATIONSHIP AFTER THE SPIN-OFF
After the spin-off, we and USI will operate independently of each other as
separate public companies. Neither we nor USI will have any beneficial stock
ownership interest in the other (although employee benefits plan trusts
sponsored by us and USI and/or certain of our or their subsidiaries will, in the
near term, hold certain of the other company's shares. All directors, executives
and employees of USI who join us will cease to be directors, executives or
employees of USI.
We will enter into agreements with USI providing for the transfer of the
USI diversified businesses to us prior to the spin-off. We will also enter into
agreements with USI that will define our responsibilities regarding the
following:
indemnification against certain liabilities, including liabilities
for taxes; and
corporate transitional matters, including the transfer of assets and
liabilities under employee benefit plans.
12
<PAGE>
These agreements will be negotiated before the spin-off and thus will be
negotiated between affiliated parties. Accordingly, we cannot assure you that
any of these agreements, or that any of the transactions provided for in these
agreements, will be effected on terms at least as favorable to us or to USI as
could have been obtained from unaffiliated third parties.
Following the spin-off, additional or modified agreements, arrangements and
transactions may be entered into by us and USI. Any such future agreements,
arrangements and transactions will be determined through arm's-length
negotiation between the parties.
The following is a summary of certain agreements, arrangements and
transactions to be entered into between us and USI and our and its respective
subsidiaries. Certain of these agreements will be filed as exhibits to this
information statement, and the following descriptions are qualified in their
entirety by reference to such exhibits.
Agreements to Effect the Transfer of the Diversified Businesses of USI. The
assets and liabilities of USI's diversified businesses will be transferred by
USI and its subsidiaries to us. The transfer will be subject to a post spin-off
adjustment, if any. We and USI will each agree to execute and deliver such
further assignments, documents of transfer, deeds and instruments as may be
necessary for the more effective implementation of such transfers.
Some assignments and transfers may require prior consent by third parties
and various filings or recordings with governmental entities. Some permits or
licenses may require reapplication by us, and reissuance in our name. If consent
to the assignment or reissuance of any contract, license or permit being
transferred is not obtained, we and USI will develop alternative approaches so
that, to the maximum extent possible, we will receive the benefits of the
contract, license or permit and will discharge the duties and bear the costs and
risks under the contract, license or permit. We will bear the risk that the
alternative arrangements will not provide us with the full benefits of the
contract, license or permit. We and USI, however, believe that all necessary
consents and reissuances that are material to us will be obtained.
Indemnification Agreement. In connection with the spin-off, we will enter
into an indemnification agreement with USI. Under the agreement, subject to
certain exceptions, we will agree to indemnify USI against all liabilities,
litigation and claims arising out of USI's diversified businesses (including
liabilities for claims relating to or arising out of the assets, businesses and
operations previously conducted by these businesses or their predecessors,
subject to certain exceptions). USI will agree to indemnify us against (1) all
liabilities, litigation and claims arising out of all USI operations other than
the diversified businesses, (2) liabilities (including liabilities under the
Securities Exchange Act of 1934) for statements included in this information
statement and (3) certain other liabilities. Neither we nor USI will be entitled
to a recovery to the extent any liability is covered by proceeds received by it
from any third-party insurance policy. In circumstances in which the potential
liability is joint, we and USI will share responsibility for the liability on a
mutually agreed basis consistent with the principles established in the
indemnification agreement.
The indemnification agreement will set forth procedures for notification
and payment of claims, use and preservation of records and resolution of
disputes. Liability for tax-related matters will be governed by the tax sharing
and indemnification agreement described below.
Tax Sharing and Indemnification Agreement. We will enter into a tax sharing
and indemnification agreement with USI that will govern the allocation between
us of federal, state, local and foreign tax liabilities and related tax matters,
such as the preparation and filing of tax returns and the conduct of audits and
other tax proceedings, for taxable periods before and after the spin-off.
In general, the tax sharing agreement will provide that (i) USI will be
responsible for, and will indemnify us and our subsidiaries against, tax
liabilities for taxable periods ending on or prior to, the date of the spin-off
and (ii) we will be responsible for, and will indemnify USI and its subsidiaries
against, tax liabilities for taxable periods beginning on or after the date of
the spin-off.
In addition, USI will be liable for, and will indemnify us and our
subsidiaries against, all tax liabilities incurred by us or our subsidiaries as
a result of any event, action, or failure to act, wholly or partially within the
control of USI or any of its subsidiaries, including any event, action or
failure to act that results in a breach of any representation made to the
Internal Revenue Service in connection with
13
<PAGE>
the ruling request, or any other event related to the acquisition of USI stock,
resulting in taxes imposed on us or any of our subsidiaries with respect to any
action taken pursuant to the spin-off or any related transaction. We will be
liable for, and will indemnify USI and its subsidiaries against, all tax
liabilities incurred by USI or any of its subsidiaries as a result of any event,
action, or failure to act wholly or partially within our control or the control
of any of our subsidiaries, including any event, action or failure to act that
results in a breach of any representation made to the Internal Revenue Service
in connection with the ruling request, or any other event related to the
acquisition of our stock, resulting in taxes imposed on USI or any of its
subsidiaries with respect to any action taken pursuant to the spin-off or any
related transaction.
Corporate Transition Agreement. We expect to enter into an agreement with
USI providing for the transfer of certain corporate assets (including
corporate-sponsored employee benefit plans) and related obligations by USI to us
and our subsidiaries, and for the reimbursement by us of USI for certain
expenses incurred in connection with our formation and related matters. Upon
completion of the spin-off and satisfaction of certain conditions, we would
assume sponsorship of and all responsibility for benefit liabilities under each
of the plans with respect to our employees, including the retirement plan
described under 'Executive Compensation.' Following the completion of the
spin-off, assets attributable to our employees under plans maintained or
sponsored by USI would be transferred from the master trusts maintained with
respect to such plans to mirror trusts established by us. With respect to each
of our plans which is a 'welfare plan,' including workers' compensation, we will
be responsible for all claims by our employees and their dependents after
completion of the spin-off. With respect to each of our plans which is a
nonqualified pension plan or bonus plan which is not funded, we will generally
assume liability and be responsible for all benefits.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The spin-off is conditioned upon receipt by USI of a private letter ruling
from the Internal Revenue Service to the effect that, among other things, the
spin-off will qualify as a tax-free spin-off to USI's stockholders and USI under
Section 355 of the Internal Revenue Code. The following is a summary of the
material federal income tax consequences to USI's stockholders and USI expected
to result from the spin-off:
(1) A USI stockholder will not recognize any income, gain or loss as a
result of the spin-off except, as described below, in connection with the
receipt of cash, if any, instead of a fraction of a share of our common stock.
(2) A USI stockholder will apportion the tax basis for his USI stock on
which our common stock is distributed between the USI stock and our common stock
received in the spin-off (including any fraction of a share of our common stock
deemed received) in proportion to the relative fair market values of USI stock
and our common stock on the date of the spin-off.
(3) The holding period for our common stock received by a USI stockholder
in the spin-off will include the period during which he held the USI stock on
which our common stock is distributed, provided that the USI stock is held as a
capital asset by such holder on the date of the spin-off.
(4) A USI stockholder who receives cash instead of a fraction of a share of
our common stock will be treated as if he received a fraction of a share of our
common stock as part of the spin-off and then sold the fraction of a share
through the dividend agent. Accordingly, the USI stockholder will recognize gain
or loss equal to the difference between the cash so received and the portion of
the tax basis in our common stock that is allocable to the fraction of a share,
which gain or loss will be capital gain or loss, provided that the fraction of a
share was held as a capital asset at the time of the spin-off.
(5) USI will not recognize any gain or loss as a result of the spin-off.
Current Treasury regulations require each USI stockholder who receives our
common stock in the spin-off to attach to his or her federal income tax return
for the year in which the spin-off occurs a detailed statement setting forth
such data as may be appropriate in order to show the applicability of Section
355 of the Internal Revenue Code to the spin-off. USI will provide the
appropriate information to each stockholder of record as of the spin-off record
date.
14
<PAGE>
Backup Withholding. Under the Internal Revenue Code, a USI stockholder may
be subject, under certain circumstances, to backup withholding at a rate of 31%
with respect to the amount of cash, if any, received instead of an interest in a
fraction of a share pursuant to the spin-off unless the holder provides proof of
an applicable exemption or correct taxpayer identification number, and otherwise
complies with applicable requirements of the backup withholding rules. Any
amounts withheld under the backup withholding rules are not additional tax and
may be refunded or credited against the holder's federal income tax liability,
provided the required information is furnished to the Internal Revenue Service.
The summary of federal income tax consequences set forth above is for
general information only and may not be applicable to stockholders who receive
their shares of our common stock through the exercise of employee stock options
or otherwise as compensation or who are otherwise subject to special treatment
under the Internal Revenue Code. All stockholders should consult their own tax
advisors as to the particular tax consequences to them, including the
applicability and effect of state, local and foreign tax laws.
REASONS FOR FURNISHING THIS INFORMATION STATEMENT
This information statement is being furnished by USI solely to provide
information to USI stockholders about, subject to the satisfaction of the
spin-off conditions, the receipt of our common stock pursuant to the spin-off.
It is not, and is not to be construed as, an inducement or encouragement to buy
or sell any of our securities or those of USI. The information contained in this
information statement is believed by us and USI to be accurate as of the date
set forth on its front cover. Changes may occur after that date, and neither we
nor USI will update the information except in the normal course of our
respective public disclosure practices.
15
<PAGE>
CAPITALIZATION
The following table, which is unaudited, sets forth, as of March 31, 1999,
our capitalization as adjusted to reflect the spin-off and the incurrence of
indebtedness under the new credit facility and the senior subordinated notes, as
if these transactions had occurred as of that date. This data should be read in
conjunction with 'Unaudited Pro Forma Combined Financial Data,' 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Combined Financial Statements and notes. See 'Index to Combined Financial
Statements.'
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
------ ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Long-Term Debt (including current portion):
New credit facility and senior subordinated notes...... $-- $ 588 $ 588
Notes and interest payable to affiliates............... 524 (524) --
Other.................................................. 30 (18) 12
---- ----- -----
Total long-term debt (including current
portion)........................................ $554 $ 46 $ 600
Stockholders' Equity (Deficit):
Common stock, 50,000,000 shares authorized, par value
$0.01 per share, 9,200,000 shares issued and
outstanding
(as adjusted)........................................ $-- $ -- $--
Preferred stock, 10,000,000 shares authorized, none
issued and outstanding............................... -- -- --
Retained (deficit)..................................... -- (142) (142)
Invested capital (deficit)............................. (71) 71 --
---- ----- -----
Total invested capital (deficit)/stockholders'
equity (deficit)................................ (71) (71) (142)
---- ----- -----
Total capitalization......................... $483 $ (25) $ 458
---- ----- -----
---- ----- -----
</TABLE>
16
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The historical selected combined financial data of Strategic set forth
below for each of the years in the three-year period ended September 30, 1998
are derived from the audited combined financial statements of Strategic included
elsewhere in this information statement. The historical selected combined
financial data for the six months ended March 31, 1999 and 1998 and the years
ended September 30, 1995 and 1994 are unaudited but, in our opinion, have been
prepared on a basis consistent with that for the three-year period ended
September 30, 1998 (except, in the case of interim financial data, for normal
year-end adjustments). The interim financial data include all adjustments that
management considers necessary for a fair presentation of interim results.
Historical financial information may not be indicative of our future performance
as an independent company. Furthermore, the historical financial data presented
below do not reflect certain pro forma adjustments giving effect to the spin-off
which are reflected in 'Unaudited Pro Forma Combined Financial Data.' The
information set forth below should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Combined Financial Statements and notes thereto. See 'Index to Combined
Financial Statements.' Historical basic and diluted earnings per share and
dividend data have not been presented, as the capital structure of the
businesses that comprise Strategic prior to the spin-off is not indicative of
its capital structure following the spin-off.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------- -----------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $717 $715 $738 $808 $888 $450 $448
Cost of products sold..................... 519 519 522 576 669 331 337
Selling, general and administrative
expenses................................ 107 104 106 113 124 56 64
Goodwill impairment and restructuring
charges(A).............................. -- -- -- -- 63 -- --
Operating income(A)(B).................... 84 84 101 109 25 60 42
Net income (loss)(C)...................... 48 50 40 49 (23) 29 17
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................. $ 5 $ 9 $ 3 $ 8 $ 12 $ 9 $ 11
Working capital........................... 153 141 156 160 195 194 199
Total assets.............................. 535 531 563 584 645 653 640
Total debt(D)............................. 380 405 411 365 344 319 554
Invested capital (deficit)................ 46 8 23 83 126 195 (71)
OTHER DATA:
EBITDA(B)(E).............................. $101 $ 99 $121 $129 $120 $ 71 $ 55
Capital expenditures...................... 17 22 10 17 27 14 15
Depreciation and amortization............. 17 15 20 20 24 11 13
</TABLE>
- ------------
(A) In fiscal 1998, in addition to the goodwill impairment and restructuring
charges, we incurred $8 million of other related charges which were
included in cost of products sold and selling, general and administrative
expenses See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and Note 4 to the Combined Financial Statements.
(B) Operating income (loss) in fiscal 1997 and 1998, and for the six months
ended March 31, 1998 and 1999 included $2 million, $(3) million,
$1 million and $(1) million, respectively, of equity earnings (loss) from
our investment in United Pacific. The fiscal 1998 equity loss of $3 million
includes a charge of $4 million associated with an impairment of a United
Pacific subsidiary.
(C) After an income tax benefit of $6 million, the $71 million of charges
detailed above reduced net income for fiscal 1998 by $65 million.
(D) Amounts primarily represent intercompany notes and interest payable to
affiliates.
(E) EBITDA for any period is calculated as the sum of operating income plus
depreciation, amortization of goodwill, amortization of unearned restricted
stock of USI and goodwill impairment, restructuring and other related
charges. We consider EBITDA to be a widely accepted financial indicator of
a company's ability to service debt, fund capital expenditures and expand
its business; however, EBITDA is not calculated in the same way by all
companies and is neither a measurement required, nor represents cash flow
from operations as defined by generally accepted accounting principles.
EBITDA should not be considered as an alternative to net income (loss), as
an indicator of operating performance or as an alternative to cash flow as
a measure of liquidity.
17
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data reflect the
spin-off as if it occurred as of March 31, 1999 for pro forma combined balance
sheet purposes and as of the beginning of each of the periods presented for pro
forma combined statements of operations purposes. The unaudited pro forma
combined financial data reflect our expected capitalization as a result of the
spin-off, the incurrence of indebtedness under the new credit facility and the
senior subordinated notes and interest expense (including amortization of
capitalized costs) relating to such borrowings. These data do not necessarily
reflect our results of operations or financial position had the spin-off
actually been consummated as of such dates. Also, these data are not necessarily
indicative of our future results of operations or future financial position.
PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 11 $ $ 11
Trade receivables, net................................. 140 140
Inventories............................................ 136 136
Deferred income taxes.................................. 3 3
Other current assets................................... 16 16
---- ----- -----
Total current assets.............................. 306 306
Property, plant and equipment, net.......................... 135 135
Deferred income taxes....................................... -- 17 (A) 17
Pension assets.............................................. 68 (59)(A) 9
Other assets................................................ 18 15 (B) 33
Goodwill, net............................................... 113 113
---- ----- -----
$640 $ (27) $ 613
---- ----- -----
---- ----- -----
LIABILITIES AND INVESTED CAPITAL (DEFICIT)/
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt................... $ 1 $ $ 1
Trade accounts payable................................. 47 47
Accrued expenses and other liabilities................. 53 53
Income taxes payable................................... 6 6
---- ----- -----
Total current liabilities......................... 107 107
Long-term debt.............................................. 29 570 (C) 599
Deferred income taxes....................................... 2 (2)(A) --
Other liabilities........................................... 49 49
Notes and interest payable to affiliates.................... 524 (524)(C) --
---- ----- -----
Total liabilities................................. 711 44 755
---- ----- -----
Invested capital (deficit)/stockholders' equity (deficit)... (71) (71)(D) (142)
---- ----- -----
$640 $ (27) $ 613
---- ----- -----
---- ----- -----
</TABLE>
18
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET:
(A) To reflect the anticipated changes in net pension assets and the related
deferred tax balances resulting from the transfer of our employees from
pension plans and trusts maintained by USI to plans and trusts to be
maintained or established by us. This change is expected due to the
actuarial method of allocating assets and liabilities which results in a
portion of the net overfunding of the relevant plans being retained by USI.
After giving effect to this pro forma adjustment, the net pension obligation
will be $6 million, of which $15 million is classified in other liabilities
(long-term).
(B) To capitalize the cost of obtaining financing under the new credit facility
and senior subordinated notes, which will be amortized over their respective
terms. This does not include $10 million of expected non-recurring legal,
investment banking and other advisory costs relating to the spin-off which
will be expensed by us at the time of the spin-off.
(C) To reflect initial borrowings under the new credit facility and the proceeds
from the issuance of senior subordinated notes, estimated to total
$588 million, and repayment of notes payable to affiliates, including
accrued interest thereon. In addition, we anticipate the repayment of
$18 million of our Hong Kong dollar-denominated long-term debt. For
additional information concerning the expected terms of the new credit
facility and the senior subordinated notes, see 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- New Credit Facility and Senior Subordinated Notes.'
(D) To reflect the net effect on invested capital (deficit)/stockholders' equity
(deficit) of the following (in millions):
<TABLE>
<S> <C>
Net pension adjustment (A).................................. $(40)
Non-recurring transaction costs (B)......................... (10)
Dividend to USI............................................. (21)
----
$(71)
----
----
</TABLE>
19
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30, 1998
------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $ 888 $ 888
Operating costs and expenses:
Cost of products sold.................................. 669 669
Selling, general and administrative expenses........... 124 7 (A) 136
5 (D)
Management fees allocated from USI..................... 7 (7)(A) --
Goodwill impairment and restructuring charges.......... 63 63
------ ---- -------
Operating income............................................ 25 (5) 20
Interest expense to affiliates.............................. 19 (19)(B) --
Interest expense............................................ 3 58 (B) 63
2 (C)
Interest income............................................. (1) (1)
Other expense, net.......................................... 1 1
------ ---- -------
Income before income taxes.................................. 3 (46) (43)
Provisions for income taxes................................. 26 (18)(E) 8
------ -------
Net loss.................................................... $ (23) $(28) $ (51)
------ ---- -------
------ ---- -------
Basic and diluted loss per share(F)......................... $(2.50) $ (5.54)
------ -------
------ -------
Other Data:
EBITDA (G).................................................. $ 120 $ (5)(D) $ 115
------ ---- -------
------ ---- -------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1998
------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $ 450 $ 450
Operating costs and expenses:
Cost of products sold.................................. 331 331
Selling, general and adminintrative expenses........... 56 $ 3 (A) 61
2 (D)
Management fees allocated from USI..................... 3 (3)(A) --
----- ---- -----
Operating income............................................ 60 (2) 58
Interest expense to affiliates.............................. 9 (9)(B) --
Interest expense............................................ 1 29 (B) 31
1 (C)
Other expense, net.......................................... 1 1
----- ---- -----
Income before income taxes.................................. 49 (23) 26
Provision for income taxes.................................. 20 (9)(E) 11
----- ---- -----
Net income.................................................. $ 29 $(14) $ 15
----- ---- -----
----- ---- -----
Basic and diluted earnings per share(F)..................... $3.15 $1.63
----- -----
----- -----
Other Data:
EBITDA(G)................................................... $ 71 $ (2)(D) $ 69
----- ---- -----
----- ---- -----
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $ 448 $ 448
Operating costs and expenses:
Cost of products sold.................................. 337 337
Selling, general and administrative expenses........... 64 $ 5 (A) 71
2 (D)
Management fees allocated from USI..................... 5 (5)(A) --
----- ---- -----
Operating income............................................ 42 (2) 40
Interest expense to affiliates.............................. 12 (12)(B) --
Interest expense............................................ 1 29 (B) 31
1 (C)
Other expense, net.......................................... 1 1
----- ---- -----
Income before income taxes.................................. 28 (20) 8
Provisions for income taxes................................. 11 (8)(E) 3
----- -----
Net income.................................................. $ 17 $(12) $ 5
----- ---- -----
----- ---- -----
Basic and diluted earnings per share(F)..................... $1.85 $0.54
----- -----
----- -----
Other Data:
EBITDA(G)................................................... $ 55 $ (2)(D) $ 53
----- ---- -----
----- ---- -----
</TABLE>
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS:
(A) To reclassify management fees allocated from USI to selling, general and
administrative expenses. Until the spin-off, USI will provide management,
treasury, accounting, legal, insurance, employee benefits and tax services
for which we will be charged a management fee based on the percentage that
our net sales represent of USI's total net sales. While we believe that the
amounts allocated from USI are reasonable, they may not be indicative of
our ongoing costs as a separate public entity.
(B) To reflect interest expense on initial borrowings under the new credit
facility and senior subordinated notes at an assumed weighted average
interest rate of 10% per year and eliminate interest cost on notes payable
to affiliates. For each 1/8% change in the assumed interest rates, pro
forma interest expense would change by approximately $1 million per year.
(C) To amortize the cost of obtaining new financing ($15 million) over the
terms of the new credit facility and senior subordinated notes.
(D) To reflect the anticipated change in net periodic pension cost resulting
from the transfer of our employees from pension plans and trusts maintained
by USI to new plans and trusts to be maintained or established by us. This
change is expected due to the actuarial method of allocating assets and
liabilities which results in a portion of the net overfunding of the
relevant plans will be retained by USI.
(E) To reflect tax effects of above adjustments (A through D) at a tax rate of
40% (inclusive of federal, state and local taxes).
(F) Basic and diluted earnings (loss) per share have been determined assuming
that 9.2 million shares of our common stock will be issued upon the
spin-off.
(G) EBITDA for any period is calculated as the sum of operating income plus
depreciation, amortization of goodwill, amortization of unearned restricted
stock of USI and goodwill impairment, restructuring and other related
charges. We consider EBITDA to be a widely accepted financial indicator of
a company's ability to service debt, fund capital expenditures and expand
its business; however, EBITDA is not calculated in the same way by all
companies and is neither a measurement required, nor represents cash flow
from operations as defined, by generally accepted accounting principles.
EBITDA should not be considered as an alternative to net income (loss), as
an indicator of operating performance or as an alternative to cash flow as
a measure of liquidity.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We operate and manage a diverse group of businesses on a decentralized
basis, with a corporate management team providing strategic direction and
financial support. Our operating companies are divided into three business
groups: Consumer Products, Precision Engineered Products and Automotive Interior
Products.
The following table presents, for each of the last five fiscal years and
the six months ended March 31, 1998 and 1999, net sales and operating income
(loss) of the three business groups under the ownership of USI and USI's
predecessor. The historical net sales and operating income (loss) data for the
three business groups for fiscal 1994 and 1995 and the six months ended
March 31, 1998 and 1999 are unaudited but, in our opinion, have been prepared on
a basis consistent with that of fiscal 1996, 1997 and 1998 (except, in the case
of interim financial data, for normal year-end adjustments). This historical
financial information may not be indicative of our future financial performance
as an independent company and does not reflect the pro forma adjustments giving
effect to the spin-off presented in 'Unaudited Pro Forma Combined Financial
Data.'
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
-------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES
Consumer Products........ $390 $403 $413 $409 $410 $215 $187
Precision Engineered
Products............... 63 69 74 89 138 57 96
Automotive Interior
Products............... 264 243 251 310 340 178 165
---- ---- ---- ---- ---- ---- ----
Total net sales..... $717 $715 $738 $808 $888 $450 $448
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
OPERATING INCOME
Consumer Products........ $ 62 $ 68 $ 80 $ 81 $ 48 (A) $ 41 $ 22
Precision Engineered
Products............... 7 10 13 19 (B) 28 (B) 15 17
Automotive Interior
Products............... 22 14 17 19 (44)(A) 7 8
---- ---- ---- ---- ---- ---- ----
Operating income before
management fees........ 91 92 110 119 32 63 47
Management fees.......... (7) (8) (9) (10) (7) (3) (5)
---- ---- ---- ---- ---- ---- ----
Total operating
income............ $ 84 $ 84 $101 $109 $ 25 $ 60 $ 42
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
</TABLE>
- ------------
(A) In fiscal 1998, operating income includes goodwill impairment and
restructuring charges of $63 million and other related charges of
approximately $8 million. See Note 4 to the Combined Financial Statements.
Consumer Products' operating income was $64 million excluding $16 million of
these charges and Automotive Interior Products' operating income was $11
million excluding $55 million of these charges.
(B) In fiscal 1997 and 1998, operating income of Precision Engineered Products
included $2 million and $(3) million, respectively, of equity earnings
(loss) from our investment in United Pacific. The fiscal 1998 equity loss of
$3 million includes a charge of $4 million associated with an impairment of
a United Pacific subsidiary.
General. Net sales increased from $717 million in fiscal 1994 to $888
million in fiscal 1998, while operating income increased from $84 million in
fiscal 1994 to $96 million in fiscal 1998 (excluding goodwill impairment,
restructuring and other related charges of $71 million). Over this five-year
period, a number of industry and company-specific developments have influenced
the financial performance of our operating companies, both positively and
negatively. During fiscal 1998 and the first six months of fiscal 1999, several
of our operating companies, including Rexair, EJ Footwear and Garden State, have
initiated strategic actions to address specific issues that have affected
profitability.
22
<PAGE>
Consumer Products. Net sales increased from $390 million in fiscal 1994 to
$410 million in fiscal 1998, while operating income increased from $62 million
in fiscal 1994 to $64 million in fiscal 1998 (excluding restructuring and other
related charges of $16 million). Changes in net sales and operating income in
the 1994 through 1998 fiscal periods were principally attributable to Rexair and
EJ Footwear.
During this period Rexair increased its emphasis on international
growth, with international net sales rising from 42% of total net
unit sales in fiscal 1994 to 58% in fiscal 1997. Rexair's
extraordinarily strong sales in several Central and Eastern European
countries in fiscal 1996 and 1997 were primarily responsible for the
increase in the group's operating income from $68 million in fiscal
1995 to $80 million in fiscal 1996 and $81 million in fiscal 1997.
Sales in these countries declined substantially during fiscal 1998
due in part to severe flooding in June 1997, which disrupted Rexair's
distribution network, and the strength of the U.S. dollar against
local currencies, which significantly increased local product prices.
Sales in these countries have not recovered to previous levels and in
fiscal 1998 international sales declined to 51% of Rexair's total
unit sales. In the second half of fiscal 1998, Rexair reorganized and
strengthened its international operations by adding management
resources. Rexair's results in fiscal 1998 and the first six months
of fiscal 1999 were also adversely affected by difficulties in
introducing its first new product line in eight years as well as
difficulties encountered by Rexair's distributors in recruiting and
retaining sales representatives during a period of low domestic
unemployment. Rexair has resolved the issues relating to the new
product introduction and has significantly increased its promotion of
recruitment initiatives by its domestic distributors.
Since fiscal 1994, EJ Footwear has experienced a gradual decline in
net sales and operating income (excluding the effect of non-recurring
items) due to competition in the footwear industry. In response,
EJ Footwear has increased its purchases of finished goods
manufactured abroad and has continued initiatives to reduce
production and administrative costs. In addition, it replaced its
infant's and children's footwear manufacturing operations with
products purchased from offshore suppliers. This will result in
restructuring and other related charges of approximately
$2.5 million in the third quarter of fiscal 1999.
Precision Engineered Products. Net sales and operating income grew from
$63 million and $7 million, respectively, in fiscal 1994 to $138 million and
$28 million, respectively, in fiscal 1998. Changes in net sales and operating
income in the 1994 through 1998 fiscal periods were principally attributable to
Huron and Bearing Inspection, as well as during the fiscal 1998 period, FSM,
which was acquired in May 1998.
Huron has increased its net sales and operating income by developing
strategic supplier relationships in the automotive industry.
Bearing Inspection's net sales and operating income have
significantly increased as a result of continued growth in the market
for overhauled bearings and an increase in Bearing Inspection's share
of the market due to strategic alliances with major domestic and
international airlines. The acquisition of Atech in January 1999 has
allowed Bearing Inspection to expand into the business of
refurbishing the 'hot sections' of turbo-prop engines.
The net sales and operating income of this group have also been aided
by the acquisition of the flat shadow mask business of Philips
Components in May 1998 and Jade's acquisition of the integrated
circuit leadframe business of Philips Semiconductors in January 1998.
Automotive Interior Products. Net sales increased from $264 million in
fiscal 1994 to $340 million in fiscal 1998, while operating income declined from
$22 million in fiscal 1994 to $11 million in fiscal 1998 (excluding goodwill
impairment charges of $55 million). Changes in net sales and operating income in
the 1994 through 1998 fiscal periods were attributable to both Garden State and
Leon Plastics.
Over the past several years, Garden State's net sales have continued
to benefit from the increased use of leather interiors in cars, light
trucks and sport utility vehicles. The group demonstrated profit
improvement during fiscal 1995 through 1997 as operating income rose
from $14 million to $19 million, reflecting increased sales volumes
at Garden State and
23
<PAGE>
improved operating margins at Leon Plastics. However, the group's
profitability between fiscal 1994 and 1995 was affected by the U.S.
Government's threatened trade sanctions against Japanese automobile
manufacturers, which represent a significant portion of Garden
State's sales base. Results declined in fiscal 1998 at Garden State
due to poor hide-cutting yields, price concessions in the automobile
industry and reduced scrap leather prices and at Leon Plastics due to
the phase-out of a major program. In fiscal 1999, Garden State has
sought to improve profitability by eliminating low margin business
and implementing process changes to improve hide-cutting yields and
to reduce the amount of excess scrap leather.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
Net Sales and Operating Income
We had total net sales of $448 million and total operating income of $42
million for the six months ended March 31, 1999, reflecting decreases of $2
million (0.4%) and $18 million (30%), respectively, from the six months ended
March 31, 1998.
Consumer Products had net sales of $187 million and operating income of $22
million for the six months ended March 31, 1999, reflecting decreases of $28
million (13%) and $19 million (46%), respectively, from the comparable period of
fiscal 1998. The primary contributors to the decline in net sales were Rexair
and Native Textiles. The primary contributors to the decline in operating income
were Rexair and EJ Footwear. As more fully discussed in ' -- Overview' above,
Rexair's results reflected difficulties associated with the introduction of its
new product line and the recruitment of dealers by its distributors. Native
Textiles' net sales were reduced by the exit from its unprofitable lace business
in the fourth quarter of fiscal 1998. EJ Footwear's operating income decreased
due to competitive conditions in the market for safety shoes and loss of a key
customer for certain lines of infant's and children's footwear. Comparability of
EJ Footwear's operating income was also affected by a favorable settlement of
environmental obligations in the 1998 period.
Precision Engineered Products had net sales of $96 million and operating
income of $17 million for the six months ended March 31, 1999, reflecting
increases of $39 million (68%) and $2 million (13%), respectively, from the
comparable period of fiscal 1998. The increases principally reflect the first
time inclusion of FSM, which was acquired in May 1998 and the inclusion of the
Philips leadframe business acquired in January 1998.
Automotive Interior Products had net sales of $165 million and operating
income of $8 million for the six months ended March 31, 1999. Net sales
decreased $13 million (7%) while operating income increased $1 million (14%)
from the comparable period of fiscal 1998. The decrease in net sales reflected
management's decision to forego some low margin business at Garden State. The
increase in operating income reflected reduced goodwill amortization and other
costs, partially offset by lower prices for scrap leather due, in part, to poor
economic conditions in Asia.
Interest and Taxes
Interest expense was $13 million for the six months ended March 31, 1999, a
$3 million (30%) increase from the comparable period of fiscal 1998. The
increase reflects higher levels of outstanding notes payable to affiliates.
Interest income was less than $1 million in both periods.
The provision for income taxes was $11 million on pre-tax income of $28
million (a 39% effective rate) for the six months ended March 31, 1999 compared
to $20 million on pre-tax income of $49 million (a 41% effective rate) for the
six months ended March 31, 1998. The decrease in the effective tax rate is
primarily attributable to non-deductible goodwill and foreign losses with no
associated tax benefits in the six months ended March 31, 1998.
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<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales and Operating Income
We had total net sales of $888 million in fiscal 1998, reflecting an
increase of $80 million (10%) from fiscal 1997. Our operating income in fiscal
1998 was $25 million compared to $109 million in fiscal 1997. Operating income
in fiscal 1998 included goodwill impairment, restructuring and other related
charges totalling $71 million, which are discussed below. Excluding these items,
operating income in fiscal 1998 would have been $96 million, a decrease of $13
million (12%) from fiscal 1997.
Consumer Products had sales of $410 million and operating income of $48
million in fiscal 1998, an increase of $1 million (0.2%) in net sales and a
decrease of $33 million (41%) in operating income from fiscal 1997. Operating
income in fiscal 1998 included restructuring and other related charges of $16
million discussed below. Excluding these charges, operating income would have
been $64 million, a decrease of $17 million (21%) from fiscal 1997. Rexair's
results reflected the disruption of its Central and Eastern European
distribution network, the strength of the U.S. dollar, and difficulties
associated with the new product introduction and the recruiting and retention of
sales representatives.
Precision Engineered Products had net sales of $138 million and operating
income of $28 million, reflecting increases of $49 million (55%) and $9 million
(47%), respectively, from fiscal 1997. The results reflected the first time
contributions of FSM, which was acquired in May 1998, and the integrated circuit
leadframe operation acquired in January 1998.
Automotive Interior Products had net sales of $340 million and an operating
loss of $44 million in fiscal 1998, an increase of $30 million (10%) in net
sales and a decrease of $63 million (332%) in operating income from 1997.
Operating income in fiscal 1998 included a goodwill impairment charge of $55
million discussed below. Excluding this charge, operating income would have been
$11 million, a decrease of $8 million (42%) from fiscal 1997. Net sales
increased at Garden State on strong sales of automobile models using its leather
products. However, Garden State's operating income declined due to price
concessions, poor hide-cutting yields and reduced scrap leather prices. Results
decreased at Leon Plastics due to the phase-out of a major program.
Goodwill Impairment, Restructuring and Other Related Charges
In June 1998, USI reviewed its long-term strategy and reviewed each
operating company's performance and future prospects. As a result, USI adopted a
plan to improve efficiency and enhance competitiveness at some of its
operations, including some now held by Strategic. In addition, due to
indications of impairment, USI evaluated the recoverability of certain
long-lived assets, primarily goodwill at Garden State. In arriving at the fair
value of Garden State, USI considered a number of factors including: (1) annual
price concessions in the automotive industry and Garden State's inability to
reduce costs due to antiquated facilities and equipment, (2) a dramatic decline
in scrap leather prices attributable to the Asian economic crisis, (3) capital
investment that would be required to make Garden State a lower cost
manufacturer, (4) Garden State's long-term financial plan and (5) analysis of
values for similar companies. In determining the amount of the impairment, USI
compared the net book values to the estimated fair values of Garden State. Based
on the above, USI determined that an impairment to goodwill of $55 million was
necessary which will reduce future goodwill amortization by $2 million a year.
The restructuring plan included the closing of an EJ Footwear manufacturing
facility and Native Textiles' exit from its lace manufacturing business. The
production and distribution activities of the footwear facility were either
outsourced or consolidated into existing facilities. The restructuring plan
included a reduction in the work force of approximately 500 employees throughout
the Consumer Products Group including salaried and administrative employees at
the restructured facilities as well as other administrative and executive
employees. As of September 30, 1998, approximately 300 employees had been
terminated. In certain cases, severance and related benefits will be paid
subsequent to the termination date.
The restructuring is not anticipated to have a significant impact on the
ongoing operations during the periods that manufacturing is transitioned from
the facilities to be closed. The expected benefits from the restructuring are
primarily reduced depreciation, reduced fixed costs associated with leased
25
<PAGE>
facilities and reduced compensation costs. The final anticipated benefit will be
approximately $1 million per year, which will be realized subsequent to the
completion of the restructuring plan. We expect that approximately 100% of the
annual benefit will be realized in fiscal 1999 and thereafter.
The principal components of the goodwill impairment and restructuring
charges are:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Impairment of goodwill...................................... $55
Lease obligations and impairment of equipment............... 2
Severance and related costs................................. 6
---
Total.................................................. $63
---
---
Cash charges................................................ $ 7
Non-cash charges............................................ 56
---
Total.................................................. $63
---
---
</TABLE>
Cash charges of $2 million were paid prior to September 30, 1998. The
remaining cash charges will be paid by September 30, 1999, or through the
respective lease termination dates.
In addition to the $63 million of goodwill impairment and restructuring
charges, we incurred $8 million of inventory obsolescence and other costs
related to the elimination of product lines and the reduction of manufacturing
and warehouse facilities at our restructured operations. These costs are
reflected in cost of products sold and selling, general and administrative
expenses.
After an income tax benefit of $6 million, the $71 million of charges
detailed above reduced net income for fiscal 1998 by $65 million.
Interest and Taxes
Interest expense was $22 million for fiscal 1998, a $3 million (12%)
decrease from fiscal 1997. The decrease reflects lower levels of outstanding
notes payable to affiliates. Interest income was $1 million for fiscal 1998, a
$1 million increase from fiscal 1997.
The provision for income taxes was $26 million on pre-tax income of $3
million for fiscal 1998 compared to $35 million on pre-tax income of $84 million
(a 42% effective rate) for fiscal 1997. The fiscal 1998 provision included the
impact of nondeductible goodwill impairment and other non-recurring charges.
Excluding these items, the effective rate would have been approximately 43%.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales and Operating Income
We had total net sales of $808 million and total operating income of $109
million in fiscal 1997, reflecting increases of $70 million (10%) and $8 million
(8%), respectively, from fiscal 1996.
Consumer Products had net sales of $409 million and operating income of $81
million, reflecting a decrease of $4 million (1%) and an increase of $1 million
(1%), respectively, from fiscal 1996. The decrease in net sales was primarily
due to decreases at EJ Footwear and Rexair. The increase in operating income
primarily reflected an increase at Native Textiles, offset by small decreases at
EJ Footwear and Rexair. Native Textiles benefitted from improved knit fabric
sales and better manufacturing performance.
Precision Engineered Products had net sales of $89 million and operating
income of $19 million, reflecting increases of $15 million (20%) and $6 million
(46%), respectively. Each of the operations showed improved performance.
Automotive Interior Products had sales of $310 million and operating income
of $19 million, increases of $59 million (24%) and $2 million (12%),
respectively, from fiscal 1996. Net sales increased primarily due to a
significant increase in volumes at Garden State while profit margins decreased
due to highly competitive market conditions, a decline in the quality of hides
available in the marketplace, reduced hide cutting yields and lower scrap
leather prices.
26
<PAGE>
Gain on Sale of Subsidiary Stock
In January 1997, an initial public offering of 25% of the shares of Jade
Technologies was completed. Jade sold 8 million shares at approximately $0.53
per share, generating cash proceeds of approximately $4 million. We recorded a
gain of approximately $1 million ($0.7 million after provision for deferred
income taxes) in connection with the sale. Immediately after the transaction, we
owned approximately 75% of the outstanding shares of Jade.
Interest and Taxes
Interest expense was $25 million for fiscal 1997, a $7 million (22%)
decrease from the prior fiscal year. The decrease reflects lower levels of
outstanding notes payable to affiliates. Interest income was less than $1
million for fiscal 1997 and 1996.
The provision for income taxes was $35 million on pre-tax income of $84
million (a 42% effective rate) for fiscal 1997 compared to a $28 million
provision on pre-tax income of $68 million (a 41% effective rate) for fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
Prior to and during the six months ended March 31, 1999, we financed our
operations and capital and other expenditures from a combination of cash
generated from operations and notes and invested capital provided by USI or its
affiliates. This arrangement will continue to be in effect until the
consummation of the spin-off, after which we expect to meet all cash
requirements through internally-generated funds and borrowings under the new
credit facility and other available sources.
Our ability to generate cash available for the repayment of debt will
depend upon numerous business factors, including conditions in the U.S. and
world economies, the level of demand for our products, changes in raw material
costs, the level of capital expenditures and working capital requirements.
Excess cash flow from operations (after capital expenditures) is expected to
satisfy our amortization requirements under the new credit facility after the
spin-off. If our excess cash flow from operations (after capital expenditures),
together with any net disposition proceeds realized by us, is insufficient to
satisfy debt amortization requirements under the new credit facility, we will be
required to renegotiate the terms of, or refinance, the new credit facility. See
' -- New Credit Facility and Senior Subordinated Notes' below and 'Risk
Factors -- We Will Have Substantial Indebtedness.'
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
Operating activities provided cash of $21 million for the six months ended
March 31, 1999, compared with $3 million for the six months ended March 31,
1998. The increase was due to lower working capital requirements at Garden State
combined with cash provided by operations of newly acquired companies.
Investing activities used cash of $19 million for the six months ended
March 31, 1999, compared with $39 million for the six months ended March 31,
1998. The fiscal 1999 period included net cash used for the acquisition of
Atech, as well as capital expenditures. The fiscal 1998 period included cash
used in the acquisition of the Philips leadframe business and an additional
equity interest in United Pacific, as well as capital expenditures.
Financing activities used net cash of $2 million for the six months ended
March 31, 1999, compared with cash provided of $37 million for the six months
ended March 31, 1998. Financing activities during both periods principally
resulted from intercompany transactions with USI. During the fiscal 1998 period,
third party financing was principally used to finance the acquisitions of the
Philips leadframe business and an additional equity interest in United Pacific.
FISCAL 1998 COMPARED TO FISCAL 1997
Operating activities provided cash of $35 million in fiscal 1998, compared
with $56 million in fiscal 1997. The decrease was due to reduced cash flow from
Rexair and Leon Plastics, partially offset by cash provided by operations of
newly acquired FSM.
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<PAGE>
Investing activities used net cash of $80 million in fiscal 1998, compared
with $14 million in fiscal 1997. Fiscal 1998 included net cash used in
acquisitions of the Philips leadframe operations and FSM, and an additional
equity interest in United Pacific. In addition, net cash used for capital
expenditures included capital used for the new product introduction at Rexair.
Fiscal 1997 included net cash used for capital expenditures, partially offset by
proceeds from the sale of a minority interest in Jade.
Financing activities provided $49 million in fiscal 1998, and used net cash
of $36 million in fiscal 1997. Financing activities during both periods
principally resulted from intercompany transactions with USI. During the fiscal
1998 period, third party financing was principally used to finance the
acquisitions of the Philips leadframe business and an additional equity
investment in United Pacific.
NEW CREDIT FACILITY AND SENIOR SUBORDINATED NOTES
New Credit Facility. USI has entered into commitment letters with
lenders in which such lenders have, subject to the satisfaction of certain
conditions, agreed to provide us financing at or about the time of the
spin-off. At such time, we will enter into a new credit facility with Bank of
America as administrative agent and a syndicate of lenders. The new credit
facility will consist of three term loans ranging from six to eight years and
a six year revolving credit line.
All of our obligations under the new credit facility will be
unconditionally guaranteed by each of our existing and each subsequently
acquired or organized domestic subsidiaries. The new credit facility and the
related guarantees will be secured by substantially all of our assets and the
assets of each guarantor.
Borrowings under the new credit facility will bear interest at a floating
rate based upon, at our option, (1) the applicable margin plus the base rate
(as such terms are defined in the new credit facility) in effect from time to
time, or (2) the applicable margin plus the eurodollar rate (as such term is
defined in the new credit facility), adjusted for maximum reserves. The
applicable margin in each case will be determined in accordance with a
performance pricing grid. In addition to paying interest on outstanding
principal under the new credit facility, we will be required to pay a commitment
fee to the lenders on the unused portion of the revolving credit line in an
amount to be determined in accordance with the performance pricing grid.
Each of the term loans will be subject to scheduled quarterly amortization
of principal. Advances made under the revolving credit facility will be due and
payable in full at maturity. The new credit facility will contain mandatory
prepayment provisions, subject to certain exceptions to be agreed upon.
It is expected that the new credit facility will contain representations
and warranties, covenants (including maximum leverage ratios, minimum interest
coverage ratios, minimum EBITDA and limitations on incurrence of liens,
incurrence of debt, voluntary prepayment of debt, modification of equity
interests and agreements, issuance of equity interests, payment of dividends,
transactions with affiliates, capital expenditures, loans, advances and
investments), events of default and other provisions customary for credit
facilities of this type. We will pay the lenders certain facility, syndication
and administration fees, reimburse certain expenses and provide certain
indemnities, in each case which are customary for credit facilities of this
type.
Senior Subordinated Notes. At or about the time of the spin-off, we intend
to offer senior subordinated notes to the institutional debt market. The net
proceeds of the offering will be primarily used to repay existing intercompany
indebtedness to USI. It is anticipated that the senior subordinated notes will
mature 10 years after the date of issuance, will be subordinated to all of our
obligations under the new credit facility, and will rank equal to or senior in
right of payment to all of our subordinated debt. The senior subordinated notes
are expected to be unsecured and will have no mandatory redemption or sinking
fund payments. We expect to have the option to redeem the senior subordinated
notes in whole or in part, after the fifth year, at redemption prices to be
determined. In addition, it is expected that upon a change of control, as
defined in the indenture that will govern the senior subordinated notes, each
holder of the notes will have the right to require us to repurchase all or any
part of such holder's notes at a repurchase price in cash equal to 101% of the
aggregate principal amount thereof plus accrued interest. Furthermore, we
anticipate that the indenture governing the senior subordinated notes will
contain covenants which, among other things, will limit our ability and
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<PAGE>
that of our subsidiaries to incur debt, merge or consolidate, sell, lease or
transfer assets, make dividend payments and engage in transactions with
affiliates.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of doing business, we are exposed to the risks
associated with changes in interest rates and currency exchange rates. To limit
the risks from such fluctuations, USI has in the past entered into and we
anticipate in the future entering into various hedging transactions that have
been authorized pursuant to our policies and procedures. See Note 2 to the
Combined Financial Statements. We do not engage in such transactions for trading
purposes.
We utilize foreign currency-denominated borrowings to effectively hedge a
portion of our net investments in subsidiaries in foreign countries. At
September 30, 1998 these borrowings were denominated in Dutch guilders and Hong
Kong dollars. We estimate that a 10% change in the relevant currency exchange
rates would have an impact of $3 million on the fair value of these borrowings.
This quantification of our exposure to the market risk of foreign exchange
sensitive financial instruments does not take into account the offsetting impact
of our underlying investment exposures.
We are also exposed to foreign currency exchange risk related to our
international operations and our U.S. businesses which import or export goods.
We have made limited use of financial instruments to manage this risk.
EFFECT OF INFLATION
Because of the relatively low levels of inflation experienced in our
principal markets, inflation did not have a material impact on our results of
operations in fiscal 1996, 1997 or 1998 or the six months ended March 31, 1998
or 1999.
YEAR 2000 READINESS DISCLOSURE
Many computer systems and other equipment with embedded technology use only
two digits to define the applicable year and may recognize a date using '00' as
the year 1900 rather than the year 2000. This could result in failures or
miscalculations causing disruptions of normal business activities and operations
(the 'Year 2000 issue').
We are actively addressing the Year 2000 issue. Our compliance program is
led by information technology staff at each operating company, with assistance
from manufacturing staff and outside technology consultants where necessary.
Progress is being monitored by each operating company president and reported to
management. We use outside technology consultants to provide independent reviews
of Year 2000 readiness.
Our Year 2000 efforts focus on three areas: information technology ('IT')
related systems and processes, such as operating systems, applications and
programs; embedded logic ('non-IT') systems and processes, such as manufacturing
machinery, telecommunications equipment and security devices; and compliance
efforts of third parties (such as customers, suppliers and service providers).
Within each of the IT and non-IT areas, the project spans four phases:
assessment of programs and devices to identify those that are affected by the
Year 2000 issue; development of remediation strategies; testing such strategies;
and implementing the solutions.
We are presently evaluating each of our critical and principal customers,
suppliers, service providers and other business associates to determine each of
such party's Year 2000 readiness status. The evaluation of each third party
includes a request for a Year 2000 readiness certification. Then, depending upon
each party's response, evaluation procedures may be expanded to include
obtaining Year 2000 disclosures contained in SEC filings of those third parties,
where available; testing interfaced systems; holding face-to-face discussions
with third parties; and developing and refining contingency plans to address the
possibility of a third party failure to complete their year 2000 initiatives on
a timely basis. We anticipate that this evaluation will be ongoing through the
remainder of 1999.
We have completed an assessment of our critical IT systems and, as a
result, the operating companies have decided to modify, upgrade or replace
portions of their systems. The remediation efforts achieved significant progress
in fiscal 1997 and 1998, and remain underway. We expect that the
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<PAGE>
remediation, testing and implementation of all critical IT systems will be
completed at various dates through October 1999. We are continuing the process
of assessing and remediating critical non-IT systems, as well, and expects that
the assessment, remediation, testing and implementation of such systems will be
completed by the fourth quarter of calendar year 1999.
Year 2000 costs for computer equipment, software and outside consultants
incurred through March 31, 1999 are approximately $0.8 million, of which $0.5
million was expensed and $0.3 million was capitalized. Estimated future costs to
complete the Year 2000 program are $2.3 million, of which $0.8 million are
expected to be expensed as incurred and the remaining $1.5 million are expected
to be capitalized. These costs have been, and will continue to be, funded by USI
through the date of the spin-off, after which they will be funded from operating
cash flow and amounts available under the new credit facility. Most of the costs
are for new systems and improved functionality. These costs exclude internal
costs, principally related to payroll costs for our employees who are involved
in the Year 2000 program, which we do not separately track.
We are developing contingency plans to address the possibility of our
failure or that of third parties to complete our or their Year 2000 initiatives
on a timely basis. Preliminary plans for substantially all of our businesses are
in place with further refinements anticipated through the end of 1999 based on
our ongoing evaluation of our readiness as well as the status of compliance of
third parties. Such contingency plans may include using alternative processes,
such as manual procedures to substitute for non-compliant systems; arranging for
alternate suppliers and service providers; increasing inventory levels; and
developing procedures internally and in conjunction with significant third
parties to address compliance issues as they arise.
No amount of preparation and testing can guarantee Year 2000 compliance.
However, we believe we are taking appropriate preventive measures and will be
successful in avoiding any material adverse effect on our operations or
financial condition. Nevertheless, we recognize that failing to resolve our Year
2000 issues on a timely basis would, in a worst case scenario, significantly
limit our ability to manufacture and distribute products and process daily
business transactions for a period of time, especially if such failure is
coupled with third party or infrastructure failures. Similarly, we could be
significantly affected by the failure of one or more significant suppliers,
customers or components of the infrastructure to conduct their respective
operations without interruption after 1999. Because of the difficulty of
assessing the Year 2000 compliance of such third parties, we consider the
potential disruptions caused by such parties to present the most reasonably
likely worst-case scenarios. Adverse effects on us could include business
disruption, increased costs, loss of sales and other similar ramifications.
The costs of our Year 2000 initiatives, the dates on which we believe that
we will complete such activities and our evaluation of third-party effects are
estimates and subject to change. Actual results could differ from those
currently anticipated. Factors that could cause such differences include, but
are not limited to, the availability of key Year 2000 personnel, our ability to
respond to unforeseen Year 2000 complications, the readiness of third parties,
the accuracy of third party assurances regarding Year 2000 compliance, our
ability to monitor progress and provide oversight to Year 2000 initiatives in
the periods leading up to and subsequent to the spin-off and similar
uncertainties.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their sovereign currencies and
a single European currency. During a transition period from January 1, 1999
through December 31, 2001, legacy sovereign currencies will continue to be in
use; however, the value of such currencies will be set at fixed and irrevocable
conversion rates to the Euro. Beginning in January 2002, new Euro-denominated
bills and coins will be issued and the legacy currencies will be withdrawn from
circulation. We are addressing issues raised by the conversion to the Euro, such
as assessing whether cross-border price transparency will limit our flexibility
to charge different prices for similar products and adapting its information
technology systems. Our efforts to adapt systems differ at our various European
operations. Our significant European operations have formulated plans to
accommodate all Euro-denominated transactions and conversion conventions by
January 1, 2002. We anticipate that its costs in connection with the Euro
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<PAGE>
conversion will not be material. We do not anticipate that the conversion from
the legacy currencies to the Euro would have a material adverse impact on our
financial condition or results of operations. To date there have not been, and
we do not anticipate there being, any material adverse impact on our financial
condition or result of operations as a result of the introduction of the Euro.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted beginning in fiscal
2001. This statement will require us to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. We do not anticipate that the
adoption of the new statement will have a significant effect our earnings or
financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for years beginning after
December 15, 1997. This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. We will adopt the new requirements
retroactively in fiscal 1999. We do not anticipate that the adoption of this
statement will have a significant effect on our reported segments.
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BUSINESS
GENERAL
We operate and manage a diversified group of businesses on a decentralized
basis, with a corporate management team providing strategic direction and
financial support. Our operating companies are divided into three business
groups: Consumer Products, Precision Engineered Products and Automotive Interior
Products. In fiscal 1998, we had net sales of $888 million and operating income
of $96 million (excluding goodwill impairment, restructuring and other related
charges totalling $71 million).
We believe our businesses generally have leading positions in niche
markets, high quality products, attractive operating margins compared to their
peers and experienced management. Our products are used in a variety of markets
by a broad range of end-users in the U.S. and internationally. We believe the
business trends that affect our operating companies and the markets we serve
vary. As a result, we believe our diversity reduces our exposure to any single
market.
The following table presents the operating companies in each of our
business groups.
<TABLE>
<S> <C>
CONSUMER PRODUCTS
Rexair Manufactures Rainbow'r' premium vacuum cleaners for sale
through an extensive independent direct sales network
EJ Footwear Manufactures Georgia Boot'r' western, work and outdoor
sporting boots and Lehigh'r' industrial safety footwear
Native Textiles Manufactures warp knit fabrics used in lingerie and
activewear
BiltBest Windows Manufactures windows and patio doors
SCF Industries Manufactures folding and stacking chairs as a licensee of
the Samsonite'r' brand name
PRECISION ENGINEERED PRODUCTS
Huron Manufactures precision metal products used in automobiles
Bearing Inspection Inspects and overhauls aircraft engine bearings and other
aircraft components
FSM Manufactures flat shadow masks, a component of color
television picture tubes
Jade Technologies Manufactures customized leadframes for the semiconductor
industry (an approximately 75%-owned Singapore public
company)
AUTOMOTIVE INTERIOR PRODUCTS
Garden State Tanning Manufactures premium automotive leather
Leon Plastics Manufactures molded plastic parts and assemblies for
automotive interiors
</TABLE>
We also own approximately 20% of the equity of United Pacific Industries
Limited, a company listed on the Stock Exchange of Hong Kong. United Pacific
manufactures voltage converters and other electronic components. This equity
interest is included in the Precision Engineered Products Group.
BUSINESS STRATEGY
Our objective is to build our equity value by consistently focusing on
reducing our debt and increasing profitability and cash flow. Key elements of
our business strategy are described below.
DEBT REDUCTION. Historically, our operating companies have generated
significant cash flow. We intend to use a substantial portion of any
available cash flow to reduce our debt. In addition, we will
regularly evaluate our businesses to determine whether our debt
reduction strategy should be accelerated through selected
dispositions.
GROWTH INITIATIVES. We will seek to build upon our niche positions
through internal and external growth in targeted markets. We will
selectively commit capital to extend our markets, develop new
products and expand manufacturing capabilities. We will also consider
complementary acquisitions to augment these initiatives. For example,
in fiscal 1998, to enhance its product offering and foster increased
sales, Rexair introduced a redesigned product line and increased
efforts to expand its independent direct sales network in the
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United States and abroad. Recently, we also invested in a new
facility for Bearing Inspection to support future growth and acquired
Atech Turbine Components to complement Bearing Inspection's
operations.
COST REDUCTION AND MARGIN EXPANSION. We will seek to reduce costs and
improve operating margins at each of our individual businesses
through process improvements and by focusing on higher margin
products and markets. For example, our continuous productivity
improvement techniques have reduced operating costs at Huron and Leon
Plastics, and we intend to apply these techniques where appropriate
to other operating companies. Ongoing programs also include the
continued rationalization of manufacturing operations and increased
use of foreign sources of supply at EJ Footwear. In addition, Garden
State is implementing process changes to increase hide-cutting yields
and is focusing on higher margin products.
DECENTRALIZED MANAGEMENT WITH PERFORMANCE BASED INCENTIVES. Our
operating companies will be managed on a decentralized basis by
experienced executives. The chief executive officers of our operating
companies average over 15 years in their industries. Incentive
compensation for senior executives at our operating companies will
depend on reaching short and long-term operating goals linked to the
executives' respective businesses. Our corporate management team will
supply strategic direction and financial support to the operating
companies. They have extensive experience in senior management
positions within multi-industry public companies including Hanson PLC
and USI. Their compensation under our annual bonus and long-term
deferred compensation plans will depend upon reaching operating goals
linked to our overall performance. Both our corporate management team
and our operating company management will have significant personal
equity interests in us, principally in the form of stock options.
CONSUMER PRODUCTS GROUP
Our Consumer Products Group designs, manufactures and markets a wide
variety of products serving numerous, diverse end markets. Several companies in
this group sell products which generate attractive margins as compared with
those of their peers and strong cash flows. The companies in this group are
engaged in the manufacture and distribution of premium vacuum cleaners,
footwear, textiles for apparel, folding chairs, windows and patio doors. In
fiscal 1998, the Consumer Products Group had net sales of $410 million and
operating income of $64 million, excluding restructuring and other related
charges of $16 million. These amounts represented 46% of our net sales and 62%
of our operating income before management fees charged by USI, excluding
goodwill impairment, restructuring and other related charges, in fiscal 1998.
REXAIR. Rexair, founded in 1933, is a leading manufacturer of premium
vacuum cleaner systems. Rexair markets its Rainbow'r' vacuum cleaner system
through an extensive network of independent distributors. Rexair products are
sold to consumers by direct sale throughout the United States and Canada and
over 70 other countries.
In 1998, Rexair introduced a redesigned vacuum cleaner system, the
Rainbow'r' e SERIES'TM', a full-service cleaning system that collects dirt
particles by means of a combination water filtration and separator system. This
new product line offers updated styling and improved filtration through the
addition of High Efficiency Particulate Arresting (HEPA) filters to the system.
Rexair believes this system provides a technologically superior alternative to
traditional vacuum cleaners. The full system has optional accessories including
a motorized power nozzle; the RainbowMate'r', a motorized, hand-held attachment
for cleaning upholstery, stairs and other hard-to-reach areas; and the
AquaMate'r' carpet shampooing attachment.
Rexair distributes the Rainbow'r' and its accessories through a network of
over 1,000 independent authorized distributors and subdistributors, which
together employ over 10,000 full and part-time sales representatives. Sales to
consumers are made through in-home demonstrations by sales representatives and
are typically arranged by referrals from other consumers. We estimate that over
60% of the purchases of Rexair products in the United States are financed either
by independent consumer finance companies or, to a lesser extent, by the
distributors. Rexair supports the distribution network with training about
product features and sales techniques and sponsors sales incentive and
recruitment programs.
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In fiscal 1998, sales in the United States and Canada accounted for
approximately 49% of Rexair's total unit sales. The remaining sales were spread
over a number of foreign markets, with significant sales made in Portugal,
Austria, Japan and Poland. In the domestic market, the vacuum cleaner industry
is mature and highly competitive. Rexair's most significant competitors in the
premium segment of the domestic vacuum cleaner industry are the Kirby division
of Scott-Fetzer (a subsidiary of Berkshire Hathaway Inc.), Electrolux, Inc.
(U.S.A.) and, to a lesser extent, Health-Mor (Filter Queen vacuum cleaners).
Competition in direct sales of vacuum cleaners is based primarily on the
quality of the product and on sales technique and personnel, as well as
marketing and distribution approaches. Management believes that Rexair does not
compete on the basis of price. Rexair also experiences competition in
recruiting its distributors. In addition, its distributors experience
competition in recruiting and retaining sales representatives.
Rexair manufactures the Rainbow'r' system at its facility in Cadillac,
Michigan. It purchases motors and other components from third-party vendors.
Rexair considers its suppliers to be reliable.
Rexair's strategy focuses on providing premier quality products, supported
by strong customer service, through effective marketing techniques. It seeks to
achieve growth by increasing its distribution network through ongoing recruiting
efforts.
EJ FOOTWEAR. EJ Footwear, founded in 1890, is a designer, manufacturer and
marketer of work, hiking, hunting and western boots and children's footwear. Its
products are sold in niche markets under well-known specialty brand names,
including Georgia Boot'r', Lehigh'r', Northlake'r', Durango'r' and Baby Deer'r'.
EJ Footwear operates five companies:
Georgia Boot produces boots in the mid-range price segment of the
industry and markets its products to sporting goods stores, and farm and
ranch stores. It competes with Wolverine, Carolina, Timberland and Rocky.
Lehigh Safety Shoe is a direct service provider of occupational safety
footwear. Lehigh utilizes a nationwide network of shoemobiles, shoe
centers, independent distributors and on-site commissary locations to sell
directly to industrial and commercial facilities. It competes with Iron-Age
and Hy-Test.
Durango Boot markets a diversified line of western and farm and ranch
boots primarily to farm, ranch and independent western stores. It competes
with Justin, Wolverine, Acme and Laredo.
Trimfoot sells infant's and children's footwear through various
distribution channels offering extensive product lines. It competes with
Step-N-Stride, Carter's, Capezio and Goldbug.
Empire Footwear supplies domestic department stores, catalog merchants
and mass merchants with imported footwear products, primarily on a private
label basis as well as under the Northlake'r' brand name.
EJ Footwear seeks to maintain its competitive position in the markets it
serves by offering comfortable, technologically advanced products at moderate
price points. EJ Footwear has a modern distribution center located in Endicott,
New York, as well as two domestic manufacturing facilities located in
Blairsville, Georgia and Franklin, Tennessee. To improve operating efficiencies
and margins, EJ Footwear recently introduced several initiatives to refocus its
strategic orientation. These initiatives include rationalizing its manufacturing
facilities and sourcing specific products from the Far East and the Dominican
Republic through long-standing supplier relationships.
NATIVE TEXTILES. Native Textiles, founded in 1929, is a leading supplier of
warp knit fabrics to domestic apparel manufacturers in both the activewear and
intimate apparel markets. It also commission-dyes lace and other specialty
fabrics for third parties. Native's customers include Nike, Champion, Adidas and
W.L. Gore (the maker of Gore-Tex) in the activewear market, and Playtex, Hanes,
Bali, Warner and Fruit of the Loom in the intimate apparel market.
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Native employs sales representatives in New York City and Los Angeles and
also distributes its products through non-company selling agents. Its
manufacturing facilities are located in Glens Falls, New York. Its competitors
include Guilford Mills, Inc. and Fab Industries.
BILTBEST WINDOWS. BiltBest, founded in 1947, manufactures and distributes
wood windows, aluminum-clad windows and patio doors. BiltBest, located in Ste.
Genevieve, Missouri, primarily sells its products to lumber yards, building
products dealers and manufactured housing companies in the mid-western United
States. It competes with regional and national window companies by offering
quality products at moderate price points.
SCF INDUSTRIES. SCF, formed in 1997, manufactures folding and stacking
chairs as a licensee of the Samsonite'r' name. The Samsonite'r' brand name has
been in use for over 80 years and has been associated with folding chairs since
the 1940's. SCF's current license agreement for the brand name extends to 2012.
SCF has a strong position in selling folding chairs to the party rental market.
It also sells its products to office product wholesalers. Key competitors
include Krueger, Bevis, ABCO and Office Star.
PRECISION ENGINEERED PRODUCTS GROUP
Our Precision Engineered Products Group serves specialized markets
requiring high-quality, value-added products and services designed to meet
exacting standards and customer specifications. To satisfy these precise
standards, our companies provide significant design, engineering and
manufacturing expertise as well as tailored technical support. Substantially all
of the products and services provided by this group are critical to our
customers. We expect to expand these businesses through both organic growth and
by making selected complementary acquisitions in this fragmented market. The
group has a significant international presence, with approximately 33% and 15%
of fiscal 1998 net sales generated in Europe and Asia, respectively. The group
had annual net sales of $138 million and operating income of $28 million in
fiscal 1998. This group represented 16% of our net sales and 27% of our
operating income before management fees charged by USI, in fiscal 1998,
excluding goodwill impairment, restructuring and other related charges in fiscal
1998.
HURON. Huron, founded in 1943, is a manufacturer of value-added precision
machined products for the automotive industry. Products include screw machined
parts, tubular assemblies, dowels, fittings, shafts and air-conditioning and
fuel manifolds. Huron's manufacturing facilities are strategically located in
Port Huron, Michigan and Lexington, Michigan near its principal customers. Huron
has developed strategic supplier relationships with domestic and foreign
automobile manufacturers and their suppliers. Huron's largest customers are
Visteon (a Tier I supplier to Ford), Ford and Chrysler. Huron is a long-term
supplier to several Ford divisions, and has supplied Ford with virtually all of
its brake bolt requirements for light trucks and sports utility vehicles since
1976.
Industry over-capacity has resulted in consolidation among original
equipment manufacturers and their supplier base. In order to address these
market conditions and the impact of price concessions sought by manufacturers,
Huron seeks to introduce new and efficient products and processes to maintain a
low-cost position in the market. Huron has a well-developed continuous process
improvement program that has been in place since 1995. Huron also provides a
high degree of engineering and logistical support to its key customers to
further Huron's goal of maintaining and improving its competitive position with
them. The market for the manufacture of machined automotive components is
fragmented. Many of our competitors are small and privately owned. Key
competitors include Master Automatic, Black River Manufacturing and Horizon.
BEARING INSPECTION. Bearing Inspection, founded in 1955, inspects and
overhauls jet aircraft engine bearings for customers located worldwide. In
January 1999, Bearing Inspection acquired Atech Turbine Components, allowing
Bearing Inspection to expand into the business of refurbishing the 'hot
sections' of turbo-prop engines. These companies offer fleet operators
cost-effective alternatives to the purchase of new parts from original equipment
manufacturers.
The demand for jet and turbo-prop engine overhaul products and services
reflects the number of engine hours flown by the commercial airline industry.
Our customers include international, domestic and regional carriers and
independent engine overhaul companies. Bearing Inspection has recently moved
into a larger, ISO9002 accredited facility in Los Almitos, California and
continues to operate its Atech facility located in Worcester, Massachusetts.
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Bearing Inspection's primary competitors are the MRC Bearings division of
AB SKF (Sweden), the PBC division of Timken, the SNR Bearing, USA division of
SNR (France) and FAG Bearings Corp, a division of FAG Group (Germany). These
companies manufacture new bearings and also have bearing overhaul operations.
Bearing Inspection believes that it is the only major independent overhauler of
aircraft engine bearings. Our growth strategy includes expansion of our
strategic relationships with engine manufacturers and further marketing
initiatives with international air carriers.
FSM EUROPE BV. FSM, founded in 1967, is located in Sittard, The
Netherlands. USI acquired FSM from Philips Components B.V. in May 1998. FSM
manufactures flat shadow masks, a component in color television picture tubes. A
flat shadow mask is the screen within a picture tube that directs the colors
emitted by each of the blue, red and green color guns. In connection with the
acquisition from Phillips, FSM entered into a long-term contract to supply
Philips, with a specified number of flat shadow masks annually. This contract,
denominated in U.S. dollars, expires in May 2004, presently accounts for
substantially all of FSM's sales, and is subject to annual price adjustments
based on world market prices.
JADE TECHNOLOGIES SINGAPORE LTD. Jade, founded in 1981, is a public company
based in Singapore. The shares of Jade are listed on the Stock Exchange of
Singapore Dealing and Automated Quotation system. We own approximately 75% of
Jade's shares, with the remainder being owned by the public. Jade manufactures
stamped and plated integrated circuit leadframes. A leadframe is a customized
product that holds a semiconductor chip and acts as the electrical connection
between the chip and a circuit board. In January 1998, Jade acquired the
leadframe business of Philips Semiconductors B.V., which is located in Sittard,
The Netherlands.
Jade sells primarily to electronics manufacturers with all sales
denominated in U.S. dollars. The leadframe industry is competitive, with
competition based on delivery lead-times, price and quality. Jade has a
long-term contract to supply Philips Semiconductors B.V., its largest customer,
with a specified number of leadframes annually. This contract expires in January
2001 and is subject to annual price adjustments based on world market prices.
AUTOMOTIVE INTERIOR PRODUCTS GROUP
Our Automotive Interior Products Group provides specialty products to the
automotive market. The companies within this group have developed many
'strategic supplier' relationships with leading automotive original equipment
manufacturers and Tier 1 suppliers and provide strong product and customer
support. The group had fiscal 1998 net sales of $340 million and operating
income of $11 million, excluding goodwill impairment. This group represented 38%
of our net sales and 11% of our operating income before management fees charged
by USI, excluding goodwill impairment, restructuring and other related charges,
in fiscal 1998.
Our strategy is to be a leading manufacturer and supplier of high quality
products, supported by superior customer service and a strong design team. We
seek to maximize our profitability by focusing on profit margins and
implementing continuous process improvement programs in these companies to
reduce costs while optimizing quality and delivery capabilities.
GARDEN STATE TANNING. Garden State, founded in 1933, is a leading
manufacturer and marketer of high quality leather upholstery products in various
colors, patterns and grains, primarily for installation as automotive seating
and trim. Garden State has earned a reputation within the automotive industry
for producing high quality products. Among Garden State's customers for finished
leather are Toyota (including Lexus), Ford, General Motors, BMW, Mazda and Honda
(including Acura) or their Tier I suppliers. Garden State believes it is
positioned to benefit from the current trend of increasing demand for leather
interiors in the automobile industry. This trend is particularly strong within
the light truck and sport utility vehicle segments of the automobile market.
Garden State has received many customer awards for product, service and
cost reduction achievements. Recently it was designated by Toyota Motor
Corporation as one of only five 'Superior Suppliers' worldwide. Garden State
produces cut leather 'sets' that are shipped to customers' facilities where they
are sewn and attached to automobile seats and other vehicle parts. In addition,
Garden State generates operating income through the sale of byproducts (i.e.,
split hides and scrap leather). Hides comprise approximately one-half of Garden
State's costs of production, and Garden State procures approximately one-half of
its hides from the largest U.S. supplier of hides, with whom it has a long
standing relationship. The balance is purchased from various other suppliers.
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Garden State has three primary manufacturing facilities located in
Williamsport, Maryland, Fleetwood, Pennsylvania and Reading, Pennsylvania along
with cutting facilities in Adrian, Michigan and Saltillo, Mexico. All of Garden
State's facilities are ISO9002/QS9000 accredited.
Major manufacturers in the worldwide automotive leather industry include
Garden State and two of its major competitors, Eagle Ottawa Leather Corporation
and Seton Corporation. Garden State is focused on increasing profitability by
providing high quality products, improving production yields and streamlining
operations.
LEON PLASTICS. Leon Plastics, founded in 1958, manufactures molded plastic
parts and assemblies for the automotive industry. Its products range from
plastic console and instrument panel components to functional components such as
the complete rear door panel for the Ford Ranger pickup truck. Among Leon
Plastics' customers are Ford, Chrysler, General Motors, Nissan and/or their
Tier I suppliers.
Leon Plastics operates manufacturing facilities in Grand Rapids, Michigan
and Grand Island, Nebraska. Leon Plastics has an industry-wide reputation for
its expertise in molding flexible vinyl over foam to fabricate cushioned trim
components with high quality characteristics. We believe that Leon Plastics'
extensive product knowledge and innovative engineering allow it to shorten the
overall product development cycle.
Key competitors at the Tier I level include Lear, Plastech, JCI/Becker
Group and Woodbridge.
EQUITY INTERESTS
We own approximately 20% of the equity of United Pacific Industries, a
limited liability company incorporated in Bermuda and listed on the Stock
Exchange of Hong Kong. United Pacific is an investment holding company whose
subsidiaries are engaged in the manufacture of voltage converters as component
parts for low voltage consumption electronic products, rechargeable batteries
and other electronic components and toy products. This investment is accounted
for using the equity method of accounting within our Precision Engineered
Products Group.
RAW MATERIALS COSTS
Most of our businesses are dependent, to varying degrees, on the
availability of raw materials, including plastics, hides, copper, nickel,
certain grades of steel, wood, glass and corrugated packaging materials. The
impact of raw material price increases on the operating income of our businesses
depends on their ability to pass along cost increases to our customers. Although
raw material shortages or price increases from time to time may have an adverse
effect on the results of operations of our individual businesses, we do not
believe that these factors are material to us on a consolidated basis.
EMPLOYEES
At September 30, 1998, we had approximately 5,000 employees (excluding
employees of United Pacific and Jade). Approximately 48% of our employees were
represented by unions. We believe that the relations of our operating
subsidiaries with employees and unions are generally good.
GOVERNMENTAL REGULATION
Our operating units are subject to numerous federal, state, local and
foreign laws and regulations concerning such matters as zoning, health and
safety and protection of the environment. We believe that our operating units
are currently operating in substantial compliance with, or under approved
variances from such various federal, state, local and foreign laws and
regulations.
Approximately five present and former operating sites, or portions thereof
are the subject of investigations, monitoring or remediation under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
('CERCLA'), the federal Resource Conservation and Recovery Act or comparable
state statutes or agreements with third parties. These proceedings are in
various stages ranging from initial investigations to active settlement
negotiations to implementation of the clean-up or remediation of sites. We do
not believe that any of these proceedings will have a material adverse effect on
our business or financial condition.
A number of our present and former operating units have been named as
potentially responsible parties at approximately seven off-site disposal sites
under CERCLA or comparable state statutes in a number of federal and state
proceedings. In each of these matters our operating units are working with the
governmental agencies involved and other potentially responsible parties to
address the
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environmental claims in a responsible and appropriate manner. Under CERCLA and
other similar statutes, any generator of hazardous waste sent to a hazardous
waste disposal site is potentially responsible for all clean-up, remediation and
response costs required for such site, irrespective of the amount of waste which
the generator sent to the site. We do not believe that any of the pending
proceedings will have a material adverse effect on our business or financial
condition.
In the past, our subsidiaries have made significant capital and maintenance
expenditures to comply with zoning, water, air and solid and hazardous waste
regulations. While the amount of expenditures in future years will depend on
legal and technological developments which cannot be predicted at this time,
these expenditures may progressively increase as regulations become more
stringent. Future costs for compliance cannot be predicted with precision and
there can be no certainty with respect to any costs we may be forced to incur in
connection with historical on-site or off-site waste disposal.
Laws and regulations protecting the environment have become more stringent
in recent years, and may in certain circumstances impose 'strict liability,'
rendering a person liable for environmental damage without regard to negligence
or fault on the part of such person. In addition, we cannot predict whether
modifications of existing laws or regulations or the adoption of new laws or
regulations, or presently unidentified environmental conditions or unanticipated
enforcement actions, particularly with respect to environmental standards, could
require material capital expenditures or otherwise have a material adverse
effect on our business or financial condition.
At September 30, 1998, we had accrued approximately $4 million for various
known environmental-related liabilities. We believe that the range of liability
for such matters is between $1 million and $5 million. We cannot predict whether
future developments in laws and regulations concerning environmental protection
will affect our earnings or cash flow in a materially adverse manner or whether
our operating units will be successful in meeting future demands of regulatory
agencies in a manner which will not have a material adverse effect on our
business or financial condition.
PATENTS AND TRADEMARKS
Our subsidiaries have numerous United States and foreign patents, patent
applications, registered trademarks and trade names, and licenses. Certain of
the trademarks and trade names, some of which are described above, are of
material importance to our businesses, including our Rainbow'r', Georgia
Boot'r', Durango'r', Lehigh'r' and BiltBest'r' trademarks. The Samsonite'r'
trademark is used under a license that extends to 2012. None of our other
material trademarks are of limited duration. Although protection of our patents
and related technologies are important components of our business strategy, none
of the individual patents is material to our business as a whole.
PROPERTIES
Our operating subsidiaries own or lease approximately 45 plants and other
properties. None of the individual properties is considered to have a value that
is significant in relation to our assets as a whole. We believe that our
properties are well maintained and are in good operating condition. The
properties are deemed to be suitable and adequate for our present needs. We
believe that we have additional capacity available at most of our production
facilities and that we could significantly increase production without
substantial capital expenditures.
LEGAL PROCEEDINGS
Various of our subsidiaries are defendants in pending legal proceedings
incidental to present and former operations. We do not expect that the outcome
of these proceedings, either individually or in the aggregate, will have a
material adverse effect upon our business or financial condition.
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MANAGEMENT
DIRECTORS
After the spin-off, our board of directors will consist of six persons, who
will be divided into three equal classes each having a three-year term. The two
executive officers who are expected to serve as directors after the spin-off are
presented below. We will name our additional directors in an amendment to this
filing.
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
John G. Raos......................... Chairman and Chief Executive Officer
Peter J. Statile..................... Executive Vice President -- Operations
</TABLE>
John G. Raos, 50, has served as President and Chief Operating Officer of
USI and as a director of USI since USI's demerger from Hanson PLC in 1995. For
the balance of the past five years, Mr. Raos served as President and Chief
Operating Officer of Hanson Industries, the U.S. arm of Hanson, and was a
director of Hanson.
Peter J. Statile, 42, has served as President and CEO of Hanson North
America, Inc. and as an associate director of Hanson PLC from 1998 to 1999. For
the balance of the past five years, he served Hanson's U.S. group as Vice
President -- Corporate Controller and subsequently as Executive Vice
President -- Chief Financial Officer.
COMMITTEES
After the spin-off, our board of directors is expected to establish and
designate a compensation committee and an audit committee. Directors who are
also our officers or employees will not be permitted to serve on either
committee. The functions of these standing committees will be as follows:
Compensation Committee. The compensation committee will set the
compensation of all executive officers subject to the terms of their
employment agreements and administer and make awards under our stock
incentive plan and other incentive plans. The committee will also review
the competitiveness of management compensation and benefit programs and
principal employee relations policies and procedures. All of the members of
the compensation committee are intended to be 'disinterested' within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, and
'outside directors' within the meaning of Section 162(m) of the Internal
Revenue Code ('Code Section 162(m)').
Audit Committee. The audit committee will be responsible for matters
relating to accounting policies and practices, financial reporting and
internal controls. It will recommend to our board of directors the
appointment of a firm of independent accountants to audit our financial
statements and will review with representatives of the independent
accountants the scope of the audit of our financial statements, results of
audits, audited financial statements, audit costs and recommendations with
respect to internal controls and financial matters. It will also review
non-audit services rendered by our independent accountants and will
periodically meet with or receive reports from our principal financial and
accounting officers.
FEES
Non-employee directors will receive an annual cash retainer of $ and
$ for each board or committee meeting, respectively, attended and
reimbursement of all reasonable expenses incurred in connection with such
meetings. In addition, five business days after our common stock opens for
'regular way' trading on the [NYSE], each non-employee director also will
receive shares of our common stock. We will pay the premiums on directors'
and officers' liability and travel accident insurance policies insuring
directors.
EXECUTIVE OFFICERS
The following individuals are expected to serve as our executive officers
at the time of the spin-off. Our board of directors may appoint additional
executive officers from time to time.
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<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
John G. Raos Chairman and Chief Executive Officer
Peter J. Statile Executive Vice President -- Operations
Steven C. Barre Vice President, General Counsel and Secretary
Gary K. Meuchel Vice President -- Human Resources
Peter F. Reilly Vice President, Chief Financial Officer and
Treasurer
Robert J. Vander Meulen Corporate Controller
</TABLE>
For biographical information concerning Messrs. Raos and Statile, see
' -- Directors' above.
Steven C. Barre, 39, has served as Associate General Counsel of USI since
1995. For the balance of the past five years, Mr. Barre served as Associate
General Counsel of Hanson Industries.
Gary K. Meuchel, 45, has served since 1997 as Vice President -- Human
Resources of Lighting Corporation of America, which is a USI subsidiary. For the
balance of the past five years, Mr. Meuchel served as Vice President -- Human
Resources of Progress Lighting Inc., another subsidiary of USI.
Peter F. Reilly, 35, has served as Treasurer of USI since 1997. Earlier in
his career at USI, he served as Assistant Treasurer and subsequently as a Group
Controller. For the balance of the past five years, he served as a financial
advisor to Hanson Industries and, previously, as Assistant Treasurer of Marine
Harvest International, Inc., a public company engaged in the farming and
distribution of seafood products.
Robert J. Vander Meulen, 36, has served as Director of Audit and Internal
Control of USI since 1999. Earlier in his career at USI, he served as Assistant
Corporate Controller and subsequently as Assistant Treasurer. For the balance of
the past five years, Mr. Vander Meulen served as Director of Financial Analysis
of Hanson Industries and, previously, as an Audit Senior Manager for Ernst &
Young LLP.
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EXECUTIVE COMPENSATION
The following is a description of the executive compensation arrangements
and benefit plans expected to be adopted by us, some of which are substantially
similar to those in effect at USI. After completion of the spin-off, none of our
officers will participate in any USI benefit plans, except to the extent they
are entitled to exercise any vested USI stock options pursuant to such plans for
a period of 90 days following the spin-off or in the case of Mr. Raos, the later
of January 15, 2000 or 90 days following the spin-off. For information regarding
our assumption of certain liabilities and assets of the USI plans, see 'The
Spin-off -- Agreements between Strategic and USI and Relationship after the
Spin-off -- Corporate Transition Agreement.'
EMPLOYMENT AGREEMENTS
The following is a summary of the employment agreements of each of the
individuals who is expected to become one of our five most highly compensated
executive officers after the spin-off.
The employment agreements provide for Messrs. Raos, Statile, Barre, Meuchel
and Reilly to serve, commencing on the date of the spin-off (the 'Commencement
Date'), respectively, as our Chairman, Chief Executive Officer and Director; as
Executive Vice President -- Operations and Director; as Vice President, General
Counsel and Secretary; as Vice President -- Human Resources; and as Vice
President, Chief Financial Officer and Treasurer. Unless terminated earlier as
discussed below, the term of employment under each agreement will expire on the
second (or, in the case of Mr. Raos, the third) anniversary of the Commencement
Date subject to automatic extension for additional two (or, in the case of Mr.
Raos, three) year terms on each applicable anniversary unless either party gives
at least 90 days' prior written notice of non-extension.
The employment agreements provide that we will pay Messrs. Raos, Statile,
Barre, Meuchel and Reilly annual base salaries at rates of not less than
$500,000, $250,000, $180,000, $165,000 and $200,000, respectively. Commencing
with fiscal 2000, each executive will be eligible to receive an annual cash
bonus, with a target bonus potential equal to at least 100%, 70%, 55%, 55% and
65% of his base salary, respectively, based on the achievement of a performance
target established by the Compensation Committee under an annual bonus plan
qualifying the bonuses as 'performance-based' for purposes of Code Section
162(m). Mr. Statile's employment agreement also provides that he will be
entitled to receive a special bonus in the amount of $50,000, which will be paid
on the later of 30 days following the Commencement Date or January 15, 2000 (the
'Special Bonus').
Mr. Raos and Mr. Statile acknowledge in their employment agreements their
intention to purchase our common stock after the Commencement Date. In the case
of Mr. Raos, he acknowledges his intention to purchase the lesser of (i)
$1,000,000 worth of our common stock or (ii) 0.5% of our issued and outstanding
common stock on the day after the Commencement Date, within the 120 day period
following the Commencement Date. In the case of Mr. Statile, he acknowledges his
intention to purchase the lesser of (i) $250,000 worth of our common stock or
(ii) 0.125% of our issued and outstanding common stock on the day after the
Commencement Date, within the 365 day period following the Commencement Date.
In addition, we have agreed to recommend to the compensation committee that
(i) within 90 days after the Commencement Date, Messrs. Raos and Reilly be
granted awards of and shares of our restricted common stock,
respectively, to replace the shares of restricted USI common stock which were
forfeited upon ceasing employment with USI (and in the case of Mr. Reilly, the
compensation committee is required to recommend that such shares of restricted
common stock vest over a period not to exceed 5 years), and (ii) Messrs. Raos,
Statile, Barre, Meuchel and Reilly receive grants of stock options to purchase a
number of shares of our common stock with a value in the aggregate of
$3,500,000, $1,500,000, $720,000, $660,000 and $1,100,000, respectively (the
total number of options will be granted in three successive grants made during
each of the three fifteen day periods following the Commencement Date with each
grant determined by dividing one third of the foregoing amounts by the fair
market value on the date of grant ). The recommended exercise price of the stock
options is to be equal to the fair market value of the common stock on the date
of grant. We also will recommend that the options vest in equal installments on
each of the first four anniversaries of October
41
<PAGE>
1, 1999, in each case subject to (i) full acceleration upon a Change in Control
of us (as defined in each employment agreement) and (ii) except with respect to
Mr. Raos, vesting of the portion of the options which would have vested on the
next vesting date, and with respect to Mr. Raos, vesting of all outstanding
options, following the date of termination upon any termination other than by us
for Cause (as defined in each employment agreement) or a voluntary termination
by the executive without Good Reason (as defined in each employment agreement).
The employment agreement for Mr. Raos provides that we do not intend to
recommend to the compensation committee that any additional stock options or
restricted stock be granted to Mr. Raos for two years after the Commencement
Date.
The executives will be entitled to participate in all pension, retirement,
savings, welfare and other employee benefit plans and arrangements and fringe
benefits and perquisites that we maintain from time to time for comparable level
executives. The employment agreement for Mr. Raos also provides that Mr. Raos
will have coverage and benefits at least equal in the aggregate and fringe
benefits and perquisites of at least equal value to those provided to him by USI
in accordance with the provisions of his employment agreement with USI in effect
immediately before the Commencement Date. To the extent the executives currently
participate in any long-term incentive plan sponsored by USI or its subsidiaries
(the 'USI LTIP') and any supplemental executive retirement plan sponsored by USI
or its subsidiaries (the 'USI SERP'), each executive's account balance in the
USI LTIP and benefit accruals under the USI SERP will be transferred to similar
arrangements with us.
The employment agreements provide that if the executive's employment with
us is terminated by reason of death or disability, the executive or his legal
representative will receive, in addition to accrued compensation, the prorated
target annual bonus of the executive for the fiscal year of the executive's
death or disability, payment on a monthly basis of, in the case of Mr. Raos, 12
months, in the case of Mr. Statile, 6 months, and, in the case of Messrs. Barre,
Meuchel and Reilly, 3 months of base salary (subject in the case of a
termination due to disability to offset by the amount the executive receives
under any long-term disability program maintained by us), payment of spouses'
and dependents' COBRA coverage premiums for no more than 3 years and any other
benefits owing to the executive under the then applicable employee benefit, long
term incentive and equity plans of Strategic.
The employment agreements with Messrs. Raos and Statile provide that if the
executive's employment with us is terminated (1) by us other than for Cause (as
defined in each employment agreement), (2) by the executive for Good Reason (as
defined in each employment agreement), (3) in the case of Mr. Raos for any or no
reason within two years after a Change in Control of us (as defined in his
employment agreement), or in the case of Mr. Statile, during the 30 day period
commencing 6 months after a Change in Control of us (as defined in his
employment agreement), or (4) as a result of our giving notice of non-extension
at the end of any employment term, then the executive will be entitled to
receive accrued compensation and certain payments and amounts. Payments to Mr.
Statile are subject to the execution of a release of claims by him and, in the
case of the amounts and benefits described in (a)(2), (3) and (4) below, only if
termination is after a Change in Control of us (as defined in his employment
agreement). The payments and benefits to be made in that situation are: (a) a
lump sum equal to three (or, in the case of Mr. Statile, two) times (1) base
salary, (2) the highest annual bonus paid or payable to the executive by us for
any of the previous three completed fiscal years, (3) the value of an additional
year of service and compensation credit for qualified and nonqualified pension
plan purposes, and (4) the value of our maximum contribution under any type of
qualified or nonqualified 401(k) plan, (b) our payment of the premiums for the
executive and his dependents' health coverage for three years (or in the case of
Mr. Statile, for two years), (c) any other amounts or benefits due under any
employee benefit, long-term incentive or equity plans in which the executive
participates at that time in accordance with such plans and (d) in the case of
Mr. Statile, if not vested in a tax-qualified defined benefit plan maintained by
us, a pro rata payment based upon his then accrued benefit under our qualified
pension plan (all such payments being collectively referred to as the 'Severance
Payment').
In addition, if the Severance Payment to either of the executives under his
employment agreement, together with other amounts paid to the executive, exceeds
certain threshold amounts and results from a change in ownership as defined in
Section 280G(b)(2) of the Internal Revenue Code, the employment
42
<PAGE>
agreement provides that the executive will receive an additional amount to cover
the federal excise tax and any interest or penalties with respect thereto on a
'grossed up' basis.
The employment agreements provide that if the executive is terminated for
Cause (as defined in the employment agreement) or voluntarily resigns without
Good Reason (as defined in the employment agreement) (which right the executive
has on 60 days notice), the executive will only receive accrued compensation
through the date of termination and unreimbursed business expenses.
The employment agreements with Messrs. Barre, Meuchel and Reilly provide
for substantially similar provisions on termination as those provided for in Mr.
Statile's employment agreement except that (i) payment of the two times base
salary will be made to the executive in installments if termination occurs prior
to a Change in Control of us and (ii) the executive may only resign and collect
severance based purely on the Change in Control of us during a 30-day window
after the first anniversary of the Change in Control.
The employment agreements also will provide for (i) indemnification of the
executives for actions in their corporate capacity and directors and officers
liability insurance, (ii) with regard to Messrs. Raos and Statile, coverage in
most instances for legal fees incurred in enforcing their rights under their
respective employment agreements and (iii) with regard to Messrs. Statile,
Barre, Meuchel and Reilly, confidentiality provisions applicable to the period
during and after the employment term and a provision prohibiting the
solicitation of our employees during the employment term and for a period of two
years afterwards.
ANNUAL PERFORMANCE INCENTIVE PLAN
Prior to the spin-off, our board of directors and USI, as our sole
stockholder, will adopt the Strategic Industries, Inc. Annual Performance
Incentive Plan (the 'Annual Plan'), which will be effective for fiscal 1999 and,
subject to stockholder approval at our annual meeting of stockholders in 2000,
for subsequent fiscal years. The purpose of the Annual Plan is to attract,
retain and motivate key employees by providing annual performance-based cash
awards to individuals who are selected to participate by the compensation
committee. The following summary of the Annual Plan is intended only as a
summary and is qualified in its entirety by reference to the Annual Plan, which
has been filed as an exhibit to the Registration Statement of which this
Information Statement is a part.
Participants in the Annual Plan will be eligible to receive an annual cash
performance award ('Annual Performance Award') based on attainment of specified
performance goals to be established annually by the Compensation Committee.
These performance goals will be based on one or more of the following criteria
selected by the Compensation Committee: (i) the attainment of certain target
levels of, or a percentage increase in, our after-tax or pre-tax profits
including, without limitation, that attributable to our continuing and/or other
operations (or that of any of our subsidiaries, divisions, or other operational
units), (ii) the attainment of certain target levels of, or a specified increase
in, our operational cash flow (or that of any of our subsidiaries, divisions or
other operational units), (iii) the attainment of a certain level of reduction
of, or other specified objectives with regard to limiting the level of increase
in, all or a portion of our bank debt or other of our long-term or short-term
public or private debt or other similar financial obligations, (iv) the
attainment of a specified percentage increase in earnings per share or earnings
per share from our continuing operations (or that of any of our subsidiaries,
divisions or other operational units), (v) the attainment of certain target
levels of, or a specified percentage increase in, our net sales, net income or
earnings before income tax (or that of any of our subsidiaries, divisions, or
other operational units); (vi) the attainment of certain target levels of, or a
specified increase in, our return on capital employed or return on invested
capital (or that of any of our subsidiaries, divisions or other operational
units); (vii) the attainment of certain target levels of, or a percentage
increase in, our after-tax or pre-tax return on stockholder equity (or that of
any of our subsidiaries, divisions or other operational units); (viii) the
attainment of certain target levels of, or a specified increase in, our
enterprise value targets (or that of any of our subsidiaries, divisions or other
operational units); (ix) the attainment of certain target levels in the fair
market value of our shares of common stock; and (x) the growth in the value of
an investment in our common stock assuming the reinvestment of dividends.
It is expected that the Compensation Committee will set, for fiscal 2000,
the performance goals applicable to all participants and the individual levels
for participation as a percentage of base pay
43
<PAGE>
(ranging from % to 100%). It is expected that the target Annual Performance
Award attainable by each of the individuals expected to be among the five most
highly compensated executive officers in fiscal year 2000 (expressed as a
percentage of base salary) will be as follows: Mr. Raos- 100%, Mr. Statile- 70%,
Mr. Reilly- 65%, Mr. Barre- 55% and Mr. Meuchel- 55%. It is also expected that
the Compensation Committee will also set minimum 'entry-level' performance goals
and maximum-level performance goals to achieve lower or higher levels of bonus.
No participant may receive an Annual Performance Award in any plan year that
exceeds $ .
It is expected that, upon the taking of certain corporate action following
the spin-off, compensation paid under the Annual Plan for fiscal year 2000 and
thereafter to participants who are 'covered employees' as defined in Code
Section 162(m) and the applicable regulations thereunder will qualify as
tax-deductible pursuant to the performance-based compensation exception provided
by Code Section 162(m).
It is anticipated that following the spin-off, we will adopt a long term
incentive plan that either will be incorporated into the Annual Plan or the
Stock Incentive Plan, or established as a separate plan.
STOCK INCENTIVE PLAN
Prior to the spin-off, our board of directors and USI, as our sole
stockholder, will approve the Strategic Industries, Inc. Stock Incentive Plan
(the 'SIP'). The following description of the SIP is qualified in its entirety
by reference to the SIP, which has been filed as an exhibit to the registration
statement of which this information statement is a part.
Purpose. The purpose of the SIP is to enhance our profitability and value
for the benefit of our stockholders by enabling us (i) to offer our employees
and our affiliates stock options, restricted stock and other stock-based awards,
thereby creating a means to raise the level of stock ownership by employees in
order to attract, retain and award such individuals and strengthen the mutuality
of interests between our employees and stockholders and (ii) to pay non-employee
directors a portion of their annual retainer fee in the form of shares of our
common stock and stock options and to make certain other awards of our common
stock and grants of stock options to non-employee directors thereby attracting,
retaining and rewarding such non-employee directors, and strengthening the
mutuality of interests between our non-employee directors and stockholders. It
is estimated that we and our affiliates will have approximately employees and
we will have four non-employee directors who will be eligible for participation
in the SIP.
Administration. The provisions of the SIP, as applied to eligible
employees, will be administered and interpreted by a committee of the board,
which will consist of two or more non-employee directors, each of whom is
intended to be a non-employee director as defined in Rule 16b-3 and an outside
director as defined under Code Section 162(m) (the 'Committee'). With respect to
awards to non-employee directors, the SIP will be administered by the board and
references to the Committee below will be deemed to refer to the board. Awards
under the SIP may not be made on or after the tenth anniversary of approval
thereof in , 2009, but awards granted prior to such date may extend
beyond that date.
Available Shares. The aggregate number of shares of our common stock
subject to awards under the SIP may not exceed million shares. The
maximum number of shares of common stock with respect to which any stock option
which may be granted under the SIP during any of our fiscal years to any
individual will be shares. The maximum number of shares of common
stock subject to other stock-based awards which may be granted under the SIP for
any fiscal year and which is based on the increase in the value of the common
stock (and whether paid out in stock or cash) will not exceed shares
and the maximum amount of any payment to be made with respect to any other stock
based award upon achievement of any specified performance criteria established
under the SIP with regard to any performance period of three fiscal years or
less and not based on an increase in the value of our common stock shall be
; provided that the foregoing limits do not apply to other stock-based
awards used to make payments under any other of our plans or those of our
subsidiaries.
In general, upon the cancellation or expiration of an award, the unissued
shares of common stock subject to such awards will again be available for awards
under the SIP. To the extent that shares of common stock for which awards are
permitted to be granted to an individual during a fiscal year are not covered by
an award in a fiscal year, the number of shares available for awards to such
individual will
44
<PAGE>
automatically increase in subsequent fiscal years until used. However, no award
of options may be granted under the SIP if such an award would cause the number
of shares of common stock subject to awards of options to exceed 9.9 percent of
the total number of shares of common stock issued and outstanding (assuming full
dilution for all other outstanding awards and other equity convertible into
common stock, including without limitation warrants), determined as of the close
of our most recent fiscal quarter in accordance with generally accepted
accounting principles.
Options. Under the SIP, the Committee may grant non-qualified stock options
and incentive stock options ('ISOs') to purchase shares of our common stock. The
Committee will determine the number of shares of common stock subject to each
option, the term of each option (which may not exceed ten years (or five years
in the case of an ISO granted to a 10% or greater shareholder), the exercise
price (which must equal 100% or, in the case of an ISO granted to a 10% or
greater shareholder, 110% of the fair market value of our common stock at the
time of grant), the time or times at which the option may be exercised and the
other material terms of each option. Payment of the exercise price may be made
(i) in cash or by check, bank draft or money order, (ii) the delivery of
irrevocable instructions to a broker to deliver promptly to us an amount equal
to the purchase price, or (iii) on such other terms and conditions as may be
acceptable to the Committee.
The SIP will authorize the Committee, if it decides in its sole discretion,
to permit 'reloads' of options exercised, including, without limitation,
permitting reloads under which options are granted for the same number of shares
as were used to pay the exercise price or withholding. The Committee may also at
any time offer to buy out a recipient's option subject to such terms and
conditions as the Committee may determine.
Restricted Stock. The Committee may also award shares of restricted stock
to replace the restricted shares of USI common stock forfeited upon an employee
ceasing employment with USI (a 'Former USI Employee'). The Committee will
determine the Former USI Employees eligible for such awards and the terms and
conditions of such awards, including, without limitation, the timing of such
awards, the number of shares awarded, the vesting schedule and the right to
acceleration thereof. Upon the award of any shares of restricted stock, the
recipient will have all rights of a stockholder with respect to the shares,
including voting, tender and dividend rights, subject to the conditions and
restrictions generally applicable to restricted stock or specifically set forth
in the recipient's restricted stock award agreement. Recipients of restricted
stock must enter into a restricted stock award agreement with Strategic, in such
form as the Committee determines, which shall state the restrictions to which
the shares are subject and the date or dates on which such restrictions will
lapse.
Other Stock-Based Awards. The Committee may also grant other stock-based
awards under the SIP to eligible employees that are payable in, valued in whole
or in part by reference to, or otherwise based on or related to shares of our
common stock, including but not limited to shares of common stock in payment of
the amounts due under an incentive or performance plan sponsored or maintained
by us or any of our subsidiaries. Subject to the provisions of the SIP, the
Committee will have the authority to determine the recipients to whom and the
time or times at which such awards will be made, the number of shares of common
stock to be awarded pursuant to or referenced by such award and all other
conditions of the awards. The Committee may also provide for the grant of such
awards upon the completion of a specified performance period and/or achievement
of performance goals. The performance criteria that may be selected by the
Committee shall consist of one or more of the attainment of certain target
levels of or percentage increases in our or our subsidiaries' (i) after-tax or
pre-tax profits earnings, (ii) earnings per share or earnings per share from
continuing operations, (iii) net sales, net income, or earnings before income
tax; (iv) operational cash flow, (v) return on capital employed or return on
investment, (vi) after-tax or pre-tax return on stockholder equity, and (vii)
enterprise value targets.
Non-Employee Director Awards. Upon the later of (i) the date the
non-employee director begins service as a non-employee director of the Board
(even if previously an employee director), or (ii) five business days after the
common stock opens for regular trading on a national securities exchange, the
non-employee director will receive an award of shares of common stock and
a grant of non-qualified stock options to purchase the number of shares of
common stock determined by dividing $50,000 by the fair market value of the
common stock on the date of grant.
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<PAGE>
In addition, on the first day of the month following Strategic's annual
meeting of stockholders in each fiscal year each non-employee director will
receive (1) an award of common stock determined by dividing $9,000 by the fair
market value of the common stock on the date of grant and (2) non-qualified
stock options to purchase the number of shares of common stock determined by
dividing $25,000 by the fair market value of the common stock on the date of
grant. Non-employee director options generally will vest 6 months following the
date of grant or, if earlier, upon death or disability and vested options will
generally be exercisable for a period of three years after the termination of
directorship, but in no event beyond the expiration of the ten year term. The
Committee may grant additional awards to non-employee directors and the Board
may amend the SIP to change the awards described above.
Change in Control. Unless determined otherwise by the Committee at the time
of grant, upon a Change in Control of Strategic (as defined in the SIP), except
as provided in this paragraph, all conditions, restrictions and limitations in
effect with respect to the exercise of any option or any restricted stock award
will immediately lapse and no other conditions will be applied. However, no
acceleration of exercisability shall occur with regard to certain options that
the Committee determines in good faith prior to a Change in Control will be
honored or assumed or new rights substituted therefor by a participant's
employer immediately following the Change in Control, unless the Committee
determines otherwise. Further, if the transaction constituting a Change in
Control is to be treated as a 'pooling of interests' for financial reporting
purposes, then there shall be no acceleration of exercisability or lapse of the
applicable restriction period to the extent Strategic's independent public
accountants determine in good faith that such acceleration would preclude
'pooling of interests' accounting.
Amendment and Termination. The Board may at any time amend any or all of
the provisions of the SIP, or suspend or terminate it entirely, retroactively or
otherwise, except that unless otherwise required by law or specially provided in
the SIP, the rights of a participant with respect to awards granted prior to
such amendment, suspension or termination, may not be impaired without the
consent of such participant. In addition, without the approval of the
stockholders of Strategic in accordance with Delaware law, to the extent
required under Code Section 162(m) or to the extent applicable to ISOs, Section
422 of the Internal Revenue Code, no amendment may be made which would: (1)
increase the aggregate number of shares of our common stock that may be issued;
(2) increase the maximum individual participant limitations for a fiscal year;
(3) change the classification of employees eligible to receive awards; (4)
extend the maximum option term; or (5) require stockholder approval in order for
the SIP to continue to comply with the applicable provisions of Code Section
162(m) or, to the extent applicable to ISOs, Section 422 of the Internal Revenue
Code. The board may amend the provisions of the Plan applicable to non-employee
director awards to provide for additional or different awards to non-employee
directors or to effect any other amendment deemed appropriate.
Nontransferability. Awards granted under the SIP generally will be
nontransferable, except that the Committee may, in its sole discretion and
subject to certain limitations, permit the transfer of nonqualified stock
options at the time of grant or thereafter to certain 'family members' of the
recipient.
Federal Income Tax Consequences. For information concerning the federal
income tax consequences of Awards and related matters, please see Annex C.
Post Spin-off Awards. Following completion of the spin-off, the
Compensation Committee is expected (1) to award, without consideration (other
than par value, if required by applicable law), an aggregate of shares
of restricted common stock to executive officers and other key employees to
replace the shares of restricted USI common stock which will be forfeited upon
ceasing employment with USI; and (2) to grant executives officers and other key
employees options to purchase the aggregate number of shares of Common Stock as
shall be determined by dividing a specified value (the 'Numerator') by the fair
market value (as defined in the SIP) of the common stock on the date of grant.
Five individuals (including the Chief Executive Officer) expected to be among
the five most highly compensated executives officers in fiscal 2000 are expected
to receive restricted stock awards (to be made within 90 days following the
Commencement Date) and/or option grants (with the total number of options to be
granted in three successive grants made during each of the three fifteen day
periods following the Commencement Date), as follows: Mr. Raos- shares
of restricted common stock and grants of stock options with an aggregate value
of $3,500,000; Mr. Statile-
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grants of stock options with an aggregate value of $1,500,000; Mr. Barre-
grants of stock options with an aggregate value of $720,000; Mr.
Muechel- grants of stock options with an aggregate value of $660,000; and
Mr. Reilly- shares of restricted common stock and grants of stock
options with an aggregate value of $1,100,000. With respect to all executive
officers and other key employees of Strategic as a group, the Committee is
expected to award an aggregate of shares of restricted common stock
and grant stock options with an aggregate numerator of $ million
(exercisable for a maximum of shares).
RETIREMENT PROGRAM
We anticipate adopting a tax-qualified retirement program to provide
pension benefits to our executive officers and corporate office employees.
Certain of our subsidiaries sponsor their own pension benefit plans.
Substantially all full-time U.S. employees who are at least 21 years old and
have completed at least one year of service with us or USI's subsidiaries will
be eligible to participate in the retirement program or retirement programs of
the operating company by which they are employed (each of our subsidiaries will
provide their own retirement programs and plans to their employees). Employees
will become vested in their benefits under the retirement programs after five
years of service, reflecting service with USI or its subsidiaries. Normal
retirement typically will be the later of age 65 or five years of service;
however, employees who work beyond their normal retirement age will continue to
accrue benefits.
It is anticipated that we will also adopt a non-qualified, unfunded,
deferred compensation plan to be known as the Strategic Industries, Inc.
Supplemental Retirement Plan (the 'SRP'). Certain of our subsidiaries also
sponsor non-qualified, unfunded deferred compensation plans for their employees.
The purpose of the SRP will be to maintain, as a minimum level of benefits,
benefits which were provided while employed by USI, including any benefits in
excess of the Internal Revenue Code Sections 415 and 401(a)(17) limitations. The
defined terms in this paragraph will have the same meanings as in the SRP, the
retirement plan or as stated herein.
Under our retirement program, comprised of a tax qualified pension plan and
the SRP, the annual retirement benefits of our executive officers will equal the
greater of (i) the product of (a) 2.67% of an employee's final average earnings
minus 2% of such employee's social security benefit, multiplied by the number of
years of credited service (to a maximum of 25). All defined terms have the same
meanings as in the retirement plan or SRP or as stated herein. The following
table shows the estimated annual retirement benefits that would be payable under
the retirement program to our executive officers, assuming retirement at age 65
on the basis of a straight-life annuity. The table includes benefits payable
from the tax qualified retirement plan and the SRP.
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------------------------
FINAL AVERAGE 10 15 20 25 30 35 40
------------- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C>
$ 100,000............ $ 23,200 $ 34,800 $ 46,400 $ 58,000 $ 58,000 $ 58,000 $ 58,000
200,000........... 49,900 74,850 99,800 124,750 124,750 124,750 124,750
300,000........... 76,600 114,900 153,200 191,500 191,500 191,500 191,500
400,000........... 103,300 154,950 206,600 258,250 258,250 258,250 258,250
500,000........... 130,000 195,000 260,000 325,000 325,000 325,000 325,000
600,000........... 156,700 235,050 313,400 391,750 391,750 391,750 391,750
700,000........... 183,400 275,100 366,800 458,500 458,500 458,500 458,500
800,000........... 210,100 315,150 420,200 525,250 525,250 525,250 525,250
900,000........... 236,800 355,200 473,600 592,000 592,000 592,000 592,000
1,000,000........... 263,500 395,250 527,000 658,750 658,750 658,750 658,750
</TABLE>
The following persons expected to become our five highest paid executive
officers after the spin-off will be credited with the indicated years of service
as of the spin-off under the USI retirement plan, rounded to the nearest
one-tenth of a year: Mr. Raos- years; Mr. Statile- years; Mr. Barre-
years; Mr. Meuchel- years; and Mr. Reilly- years. Other of our officers will
also be credited with their indicated years of service as recognized under the
USI Retirement Plan as of the spin-off.
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<PAGE>
PROJECTED OWNERSHIP OF OUR STOCK IMMEDIATELY AFTER THE SPIN-OFF
The following table sets forth the projected beneficial ownership of our
common stock immediately after the spin-off by each of our directors, the
executive officers who are expected to be our five most highly compensated
executive officers in fiscal 1999 and all directors and executive officers as a
group. The projections are based upon available information concerning these
individuals' ownership of USI common stock at , 1999. The projections
also assume the issuance of shares of restricted common stock under
the SIP and a total of shares of common stock to our non-employee
directors but do not take into account (1) any shares of USI common stock
acquired pursuant to the exercise of options previously granted under USI
compensation programs but not exercised as of , 1999 or (2) any shares
of our common stock that may be issued upon the exercise of stock options
expected to be granted to executive officers and other key employees pursuant to
the SIP after the spin-off. See 'Executive Compensation -- Stock Incentive
Plan.'
<TABLE>
<CAPTION>
NUMBER OF SHARES PROJECTED
TO BE BENEFICIALLY % OF SHARES
NAME OWNED OUTSTANDING
- ---- ----- -----------
<S> <C> <C>
John G. Raos......................................
Peter J. Statile..................................
[Other directors].................................
Steven C. Barre...................................
Gary K. Meuchel...................................
Peter F. Reilly...................................
All directors and executive officers as a group
( persons).....................................
</TABLE>
Based upon information available to USI concerning the ownership of USI
common stock at 1999, no person is projected to own beneficially more
than 5% of the outstanding common stock on the date of the spin-off except as
follows: .
For information concerning the projected beneficial ownership of our common
stock by our and USI's employee benefit plan trusts, see 'The
Spin-off -- Listing and Trading of Our Common Stock.'
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under our certificate of incorporation that will be in effect at the time
of the spin-off, the form of which is attached as Annex A to this information
statement, we will have authority to issue a total of shares of all
classes of stock, of which may be shares of preferred stock, par value
$ per share, and may be shares of common stock.
Based on the number of shares of USI common stock outstanding as of
, 1999 and the dividend ratio, it is expected that shares of
our common stock will be distributed to USI stockholders in the spin-off. All of
these shares will be fully paid and non-assessable. The common stock to be
distributed will constitute all the shares of our capital stock that will be
outstanding immediately after the spin-off. After giving effect to recommended
awards of shares of restricted common stock to executive officers and
other key employees and the issuance of a total of shares of common stock
to non-employee directors, the total expected number of outstanding shares of
common stock will be . In addition, shortly after the spin-off, we
will recommend the issuance to executive officers and other key employees of
options to purchase the aggregate number of shares of common stock as shall be
determined by dividing $ million by the fair market value of our common stock
on the date of grant (up to a maximum of shares); the number of shares
expected to be outstanding excludes any shares that may be issued upon exercise
of such options. See 'Executive Compensation -- Stock Incentive Plan.'
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on all
matters voted on by stockholders. Holders of common stock do not have cumulative
voting rights in the election of directors. The first annual meeting of
stockholders is expected to be held during calendar 2000.
Holders of our common stock do not have subscription, redemption or
conversion privileges. Subject to the preferences or other rights of any
preferred stock that we may issue from time to time, holders of our common stock
are entitled to participate ratably in dividends on our common stock as declared
by our board of directors. Holders of our common stock are entitled to share
ratably in all assets available for distribution to our stockholders in the
event of liquidation or dissolution, subject to distribution of the preferential
amount, if any, to be distributed to holders of preferred stock.
PREFERRED STOCK
The certificate of incorporation that will be in effect at the time of the
spin-off will authorize our board of directors, without any vote or action by
the holders of our common stock, to issue up to shares of preferred
stock from time to time in one or more series. Our board is authorized to
determine the number of shares and designation of any series of preferred stock
and the dividend rights, dividend rate, conversion rights and terms, voting
rights (full or limited, if any), redemption rights and terms, liquidation
preferences and sinking fund terms of any series of preferred stock. Issuances
of preferred stock would be subject to the applicable rules of the [NYSE] or
other organizations on whose systems the stock of may then be quoted or listed.
Depending upon the terms of preferred stock established by our board of
directors, any or all series of preferred stock could have preference over our
common stock with respect to dividends and other distributions and upon
liquidation. Issuance of any such shares with voting powers, or issuance of
additional shares of our common stock, would dilute the voting power of our
outstanding common stock. We have no present plans to issue any Preferred Stock.
NO PREEMPTIVE RIGHTS
No holder of any of our capital stock authorized at the time of the
spin-off will have any preemptive right to subscribe for or purchase any of our
securities of any class or kind.
TRANSFER AGENT AND REGISTRAR
will be the transfer agent and registrar for our common stock
commencing upon the date of the spin-off.
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RIGHTS PLAN
Each share of our common stock to be issued from and after the date of this
information statement (including common stock that will trade on a 'when issued'
basis) will have attached to it one right issued pursuant to the rights
agreement until the rights expire. Each right entitles the registered holder to
purchase from us one one-hundredth (1/100) of a share of our series A preferred
stock at an initial price of $ per one one-hundredth (1/100) of a share
(the 'exercise price'). Unless earlier redeemed, the rights will expire (the
'Final Expiration Time') at (1) the Stated Expiration Time (i.e., at the close
of business on the one year anniversary of the spin-off) or (2) if the Rights
Distribution Date (as defined below) shall have occurred before the Stated
Expiration Time, the close of business on the one year anniversary of the Rights
Distribution Date, provided that our board of directors in office subsequent to
the spin-off does not extend or otherwise modify the rights. There can be no
assurance, however, as to whether or not our board of directors will so extend,
modify or redeem the rights.
The rights, unless earlier redeemed by our board of directors or extended
or modified as described above, will become exercisable by each record holder
thereof, other than the Acquiring Person (as defined below), upon the close of
business on the day (the 'Rights Distribution Date') which is the earlier of
(1) the tenth day following a public announcement that a person or group of
affiliated or associated persons, with certain exceptions set forth below, has
acquired beneficial ownership of 15% or more of our outstanding voting stock (an
'Acquiring Person') and (2) the tenth business day (or such later date as may be
determined by our board of directors prior to such time as any person or group
of affiliated or associated persons becomes an Acquiring Person) after the date
of the commencement or announcement of a person's or group's intention to
commence a tender or exchange offer the consummation of which would result in
the ownership of 15% or more of our outstanding voting stock (even if no shares
are actually purchased pursuant to such offer). Before the rights distribution
date, the rights will not be exercisable, will not be represented by a separate
certificate, and will not be transferable apart from our common stock. An
Acquiring Person does not include (A) prior to the spin-off, USI, (B) us,
(C) any of our subsidiaries, (D) any of our employee benefit plans or employee
stock plans or those of any of our subsidiaries, or any trust or other entity
organized, appointed, established or holding our common stock for or pursuant to
the terms of any such plan (E) any person whose ownership of 15% or more of the
shares of our voting stock then outstanding results solely from its ownership
of 15% or more of the USI common stock outstanding on the spin-off record date
provided such person is not an Acquiring Person within the meaning of the USI
rights plan, or (F) any person or group whose ownership of 15% or more of
the shares of our voting stock then outstanding results solely from
(1) any action or transaction or transactions approved by our board of directors
before such person or group became an Acquiring Person or (2) a reduction in the
number of issued and outstanding shares of our voting stock pursuant to a
transaction or transactions approved by our board of directors (provided that
any person or group that does not become an Acquiring Person by reason of clause
(1) or (2) above shall become an Acquiring Person upon acquisition of an
additional 1% of our voting stock unless such acquisition of additional voting
stock will not result in such person or group becoming an Acquiring Person by
reason of such clause (1) or (2)). For purposes of the foregoing, our
outstanding voting stock that trades on a 'when issued' basis on a national
securities exchange (such as the NYSE), on the National Association of
Securities Dealers' Automated Quotation System or otherwise.
The rights agreement provides that when a person or group of affiliated or
associated persons becomes an Acquiring Person (other than pursuant to a
Qualifying Tender Offer (as defined below)), the Acquiring Person's rights will
thereupon become null and void.
The rights agreement provides that until the Rights Distribution Date, the
rights will be transferred with and only with our common stock. Until the Rights
Distribution Date (or earlier redemption or expiration of the rights), our
common stock certificates will contain a legend incorporating the rights
agreement by reference. Until the Rights Distribution Date (or earlier
redemption or expiration of the rights), the surrender for transfer of any of
our common stock certificates will also constitute the transfer of the rights
associated with our common stock represented by such certificate. As soon as
practicable following the Rights Distribution Date, separate certificates
evidencing the rights ('rights certificates') will be mailed to holders of
record of our common stock as of the close of business on the Rights
Distribution Date and such separate certificates alone will evidence the rights
from and after the Rights Distribution Date.
Our series A preferred stock is nonredeemable and, unless otherwise
provided in connection with the creation of a subsequent series of preferred
stock, subordinate to any other series of our preferred
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stock. Our series A preferred stock may not be issued except upon exercise of
rights. Each share of our series A preferred stock will be entitled to receive
when, as and if declared, a quarterly dividend in an amount equal to the greater
of $ per share or times the cash dividends declared on our common
stock. In addition, our series A preferred stock is entitled to times any
non-cash dividends (other than dividends payable in equity securities) declared
on our common stock, in like kind. In the event of our liquidation, the holders
of our series A preferred stock will be entitled to receive a payment in an
amount equal to the greater of $ per one one-hundredth share or times
the payment made per share of our common stock. Each share of our series A
preferred stock will have votes, voting together with our common stock. In
the event of any merger, consolidation or other transaction in which our common
stock is changed, exchanged or converted, each share of series A preferred stock
will be entitled to receive times the amount received per share of our
common stock. The rights of our series A preferred stock as to dividends,
liquidation and voting are protected by anti-dilution provisions.
The number of shares of our series A preferred stock issuable upon exercise
of the rights is subject to certain adjustments from time to time in the event
of a stock dividend on, or a subdivision, combination or issuance of capital
stock in a reclassification of, our common stock. The exercise price for the
rights is subject to adjustment in certain circumstances, including certain
distributions of cash or other property to holders of our common stock.
Unless the rights are earlier redeemed, in the event that, at any time on
or after the Rights Distribution Date (except for any transaction approved by a
majority of the disinterested directors (as defined in the rights agreement)),
we were to be acquired in a merger or other business combination (in which any
shares of our common stock are changed or converted into or exchanged for other
securities or assets) or more than 50% of our assets or earning power and those
of our subsidiaries (taken as a whole) were to be sold or transferred in one or
a series of related transactions, the rights agreement provides that proper
provision will be made so that each holder of record of a right, other than the
Acquiring Person, will from and after that date have the right to receive, upon
payment of the exercise price, that number of shares of common stock of the
acquiring company having a market value at the time of such transaction equal to
two times the exercise price. In addition, unless the rights are earlier
redeemed, in the event that a person or group becomes the beneficial owner of
15% or more of our voting stock (other than pursuant to a tender or exchange
offer (a 'Qualifying Tender Offer') for all outstanding shares of our common
stock that is approved by our board of directors, after taking into account our
long-term value and all other factors they consider relevant), the rights
agreement provides that proper provision will be made so that each holder of
record of a right, other than the Acquiring Person, will thereafter have the
right to receive, upon payment of the exercise price, that number of shares of
our series A preferred stock having a market value at the time of the
transaction equal to two times the exercise price (such market value to be
determined with reference to the market value of our common stock as provided in
the rights agreement).
Fractions of shares of our series A preferred stock (other than fractions
which are integral multiples of one one-hundredth of a share) may, at our
election, be evidenced by depositary receipts. We may also issue cash in lieu of
fractional shares which are not integral multiples of one one-hundredth of a
share.
At any time on or prior to the close of business on the earlier of (1) the
tenth day after the time that a person has become an Acquiring Person (or such
later date as a majority of our board of directors and a majority of our
disinterested directors may determine) and (2) the Final Expiration Time, we may
redeem the rights in whole, but not in part, at a price of $.01 per right,
subject to adjustment (the 'Redemption Price'). The rights may be redeemed after
the time that any person has become an Acquiring Person (other than pursuant to
a Qualifying Tender Offer) only if approved by a majority of our disinterested
directors. Immediately upon the effective time of the action of our board of
directors authorizing redemption of the rights, the right to exercise the rights
will terminate and the only right of the holders of rights will be to receive
the Redemption Price.
For as long as the rights are then redeemable, we may, except with respect
to the Redemption Price or shortening the Final Expiration Time, amend the
rights in any manner, including an amendment to extend the time period in which
the rights may be redeemed. At any time when the rights are not then
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redeemable, we may amend the rights in any manner that does not materially
adversely affect the interests of holders of the rights as such. Amendments to
the rights agreement from and after the time that any person becomes an
Acquiring Person (other than pursuant to a Qualifying Tender Offer) require the
approval of a majority of our disinterested directors (as provided in the rights
agreement).
Until a right is exercised, the holder, as such, will have no rights as a
holder of common stock, including, without limitation, the right to vote or to
receive dividends. Holders of our common stock may, depending upon the
circumstances, recognize taxable income should the rights become exercisable or
upon the occurrence of certain events thereafter.
A copy of the rights agreement has been filed as an exhibit to the
registration statement of which this information statement forms a part. This
summary description of the rights does not purport to be complete and is
qualified in its entirety by reference to the rights agreement which is
incorporated in this summary description herein by reference.
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PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF
CERTIFICATE OF INCORPORATION,
BY-LAWS AND DELAWARE STATUTORY LAW
GENERAL
The provisions of our Certificate of Incorporation, our By-Laws and
Delaware statutory law described in this section may delay or make it more
difficult for someone to acquire us without the approval of our board. These
provisions could have the effect of discouraging third parties from making
acquisition proposals although such proposals, if made, might be considered
desirable by a majority of our stockholders. These provisions may also have the
effect of making it more difficult for third parties to cause the replacement of
our current management without the concurrence of our board.
A copy of the Certificate of Incorporation is attached to this Information
Statement as Appendix A and is incorporated herein by reference. The following
description of certain provisions of the Certificate of Incorporation and the
By-Laws is qualified in its entirety by reference to the Certificate of
Incorporation and the By-Laws.
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation provides for our board, effective upon
completion of the spin-off, to be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one third of our
board will be elected each year. See 'Management -- Directors.'
We believe a classified board will help to assure the continuity and
stability of our board, and our business strategies and policies as determined
by our board, because a majority of the directors at any given time will have
prior experience as our directors. This provision should also help to ensure
that our board, if confronted with an unsolicited proposal from a third party
that has acquired a block of our voting stock, will have sufficient time to
review the proposal and appropriate alternatives and to seek the best available
result for all stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of our board until the
second annual stockholders' meeting following the date the acquiror obtains the
controlling stock interest, could have the effect of discouraging a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
us and could thus increase the likelihood that incumbent directors will retain
their positions.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
The Certificate of Incorporation and the By-Laws provide that the number of
directors shall not be less than three nor more than 11 and shall be determined
from time to time exclusively by a vote of a majority of our board then in
office. The Certificate of Incorporation also provides that our board shall have
the exclusive right to fill vacancies, including vacancies created by expansion
of our board. Furthermore, except as may be provided in the terms of any
preferred stock created by resolution of our board with respect to the election
of directors by the holders of such series, directors may be removed by
stockholders only for cause and only by the affirmative vote of at least
66 2/3% of the voting power of all of the shares of our capital stock then
entitled to vote generally in the election of directors, voting together as a
single class. These provisions, in conjunction with the provision of the
Certificate of Incorporation authorizing our board to fill vacant
directorships, could prevent stockholders from removing incumbent directors
without cause and filling the resulting vacancies with their own nominees.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation provides that, except as may be provided
in the terms of any series of preferred stock created by resolution of our
board, stockholder action can be taken only at an annual or special meeting of
stockholders and cannot be taken by written consent in lieu of a meeting. The
Certificate of Incorporation also provides that special meetings of the
stockholders can only be called by the Chairman of the Board or pursuant to a
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resolution approved by a majority of our board then in office. Stockholders are
not permitted to call a special meeting of stockholders.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The By-Laws establish an advance notice procedure with regard to
stockholder proposals and nominations of individuals for election to the Board
of Directors. In general, notice of a stockholder proposal or a director
nomination for an annual meeting must be delivered to us at our executive
offices 120 days or more before the date of the anniversary of the last annual
stockholders' meeting (unless the meeting is to be held more than 60 days in
advance of such anniversary date, in which event the stockholder proposal or
director nomination shall be delivered to us no later than the close of business
on the 15th day following the day on which notice of the meeting was given) and
must contain specified information and conform to certain requirements, as set
forth in the By-Laws. Notice of a stockholder proposal or a director nomination
for a special meeting must be received by us no later than the 15th day
following the day on which notice of the date of a special meeting of
stockholders was given. If the presiding officer at any stockholders' meeting
determines that a stockholder proposal or director nomination was not made in
accordance with the By-Laws, we may disregard such proposal or nomination.
The notice of any nomination for election as a director must set forth the
name, date of birth, business and residence address of the person or persons to
be nominated; the business experience during the past five years of such person
or persons; whether such person or persons are or have ever been at any time
directors, officers or owners of 5% or more of any class of capital stock,
partnership interests or other equity interest of any corporation, partnership
or other entity; any directorships held by such person or persons in any company
with a class of securities registered pursuant to Section 12 of the Exchange Act
or subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940, as
amended; and whether, in the last five years, such person or persons are or have
been convicted in a criminal proceeding or have been subject to a judgment,
order, finding or decree of any federal, state or other governmental entity,
concerning any violation of federal, state or other law, or any proceeding in
bankruptcy, which conviction, order, finding, decree or proceeding may be
material to an evaluation of the ability or integrity of the nominee; and the
consent of each such person to serve as a director if elected. The person
submitting the notice of nomination, and any person acting in concert with such
person, must provide their names and business addresses, the name and address
under which they appear on our books (if they so appear), and the class and
number of shares of our capital stock that are beneficially owned by them.
AMENDMENTS TO BY-LAWS
The Certificate of Incorporation provides that our board or the holders of
at least 66 2/3% of the voting power of all shares of our capital stock then
entitled to vote generally in the election of directors, voting together as a
single class, have the power to amend or repeal our By-Laws.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any proposal to amend, alter, change or repeal any provision of the
Certificate of Incorporation, except as may be provided in the terms of any
preferred stock created by resolution of our board and which relate to such
series of preferred stock, generally requires approval by the affirmative vote
of both a majority of the members of our board then in office and a majority
vote of the voting power of all of the shares of our capital stock entitled
to vote generally in the election of directors, voting together as a single
class. However, any proposal to amend, alter, change or repeal the provisions
of the Certificate of Incorporation relating to (1) the classification of our
board, (2) removal of Directors, (3) the prohibition of stockholder action by
written consent or stockholder calls for special meetings, (4) amendment of
By-Laws, or (5) amendment of the Certificate of Incorporation requires
approval by the affirmative vote of 66 2/3% of the voting power of all of
the shares of our capital stock entitled to vote generally in the election
of directors, voting together as a single class.
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PREFERRED STOCK AND ADDITIONAL COMMON STOCK
Under the Certificate of Incorporation, our board will have the authority
to provide by resolution for the issuance of shares of one or more series of
preferred stock. Our board is authorized to fix by resolution the terms and
conditions of each such other series. See 'Description of Capital Stock --
Preferred Stock.'
We believe that the availability of our preferred stock, in each case
issuable in series, and additional shares of common stock could facilitate
certain financings and acquisitions and provide a means for meeting other
corporate needs which might arise. The authorized shares of our preferred stock,
as well as authorized but unissued shares of common stock will be available for
issuance without further action by our stockholders, unless stockholder action
is required by applicable law or the rules of any stock exchange on which any
series of our stock may then be listed, or except as may be provided in the
terms of any preferred stock created by resolution of our board.
These provisions give our board the power to approve the issuance of a
series of preferred stock, or additional shares of common stock, that could,
depending on its terms, either impede or facilitate the completion of a merger,
tender offer or other takeover attempt. For example, the issuance of new shares
of preferred stock might impede a business combination if the terms of those
shares include voting rights which would enable a holder to block business
combinations or, alternatively, might facilitate a business combination if those
shares have general voting rights sufficient to cause an applicable percentage
vote requirement to be satisfied.
Moreover, the series A preferred stock is issuable under the circumstances
provided for in the rights agreement upon exercise of the rights. See 'Rights
Plan.'
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporations Loans (the 'DGCL'),
provides that, subject to certain exceptions specified therein, an 'interested
stockholder' of a Delaware corporation may not engage in any business
combination with the corporation for a three-year period following the time that
such stockholder becomes an 'interested stockholder' unless (1) prior to such
time, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
'interested stockholder', (2) upon consummation of the transaction which
resulted in the stockholder becoming an 'interested stockholder,' the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares), or
(3) at or subsequent to such time, the business combination is approved by the
board of directors of the corporation and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the 'interested stockholder.'
Except as otherwise specified in Section 203, an 'interested stockholder' is
defined to include (1) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within three years immediately prior to the
relevant date and (2) the affiliates and associates of any such person.
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. The Certificate of Incorporation does not exclude us from the
restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in acquiring us to negotiate in advance with our
board, since the stockholder approval requirement would be avoided if a majority
of the directors then in office approve either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.
These provisions also may have the effect of preventing changes in our
management. 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.
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LIMITATION ON LIABILITY AND
INDEMNIFICATION OF OFFICERS AND DIRECTORS
LIMITATION ON LIABILITY OF DIRECTORS
Pursuant to authority conferred by Section 102 of the DGCL, Article VII of
our Certificate of Incorporation eliminates the personal liability of our
directors to us or our stockholders for monetary damages for breach of fiduciary
duty, including without limitation directors serving on committees of the board
of directors. Directors remain liable for:
(1) any breach of the duty of loyalty to us or our stockholders,
(2) any act or omission not in good faith or which involves
intentional misconduct or a knowing violation of law,
(3) any violation of Section 174 of the DGCL, which proscribes the
payment of dividends and stock purchases or redemptions under certain
circumstances, and
(4) any transaction from which directors derive an improper personal
benefit.
Article VII further provides that any future repeal or amendment of its
terms will not adversely affect any rights of directors existing thereunder with
respect to acts or omissions occurring prior to such repeal or amendment.
Article VII also incorporates any future amendments to Delaware law which
further eliminate or limit the liability of directors.
INDEMNIFICATION AND INSURANCE
In accordance with Section 145 of the DGCL, which provides for the
indemnification of directors and officers under certain circumstances, Article
XIV of our By-Laws grants our directors, officers and employees a right to
indemnification, to the fullest extent permitted by law, for all expenses,
liabilities and losses relating to civil, criminal, administrative or
investigative proceedings to which they are a party (1) by reason of the fact
that they are or were our directors or officers or (2) by reason of the fact
that, while they are or were our directors or officers, they are or were serving
at our request as directors, officers, members, employees, fiduciaries or agents
of another corporation, partnership, joint venture, trust or enterprise. Article
XIV further provides for the mandatory advancement of expenses incurred by
present officers and directors in defending such proceedings in advance of their
final disposition upon delivery to us 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 under Article XIV. Article XIV
further provides that expenses incurred by our former directors or officers or
other employees or agents in defending such proceedings may be paid in advance
of their final disposition upon such terms and conditions, if any, as we deem
appropriate. We may not indemnify or make advance payments to any person in
connection with proceedings initiated against us by such person without the
authorization of our board of directors, except with respect to counterclaims,
cross-claims, third-party claims or as otherwise ordered by a court of competent
jurisdiction.
In addition, in the event that any such successor provisions or amendments
provide indemnification rights broader than permitted prior thereto, Article XIV
allows such broader indemnification rights to apply retroactively with respect
to any predating alleged action or inaction and also allows the indemnification
to continue after an indemnitee has ceased to be a director or officer of the
corporation and to inure to the benefit of the indemnitee's heirs, executors and
administrators.
Article XIV further provides that the right to indemnification is not
exclusive of any other right which any indemnitee may have or thereafter acquire
under any statute, the Certificate of Incorporation or By-Laws, any agreement or
vote of stockholders or disinterested directors or otherwise, and allows us to
indemnify and advance expenses to any person whom the corporation has the power
to indemnify under the DGCL or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors and officers and controlling persons pursuant to
the foregoing provisions, we have been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
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Our By-Laws authorize us to purchase insurance for our directors, officers
and employees, and persons who serve at our request as directors, officers,
members, employees, fiduciaries or agents of other enterprises against any
expense, liability or loss incurred in such capacity, whether or not we would
have the power to indemnify such persons against such expense or liability under
the By-Laws. We intend to maintain insurance coverage for our officers and
directors as well as insurance coverage to reimburse us for potential costs of
its corporate indemnification of directors and officers.
ADDITIONAL INFORMATION
We have filed the registration statement with the Commission with respect
to the common stock. This information statement does not contain all of the
information set forth in the registration statement and the exhibits thereto, to
which reference is hereby made. This information statement describes the
material terms and conditions of each contract, agreement or other document
referred to herein or filed as an exhibit to the registration statement;
however, with respect to each such contract, agreement or other document,
reference is made to such exhibit for a more complete description of the matter
involved, and each description thereof contained in this information statement
shall be deemed qualified in its entirety by such reference. The registration
statement and the exhibits thereto filed by us with the Commission may be
inspected at the public reference facilities of the Commission listed below.
After the spin-off, we will be subject to the information requirements of
the Exchange Act and, in accordance therewith, will file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at its principal offices at
450 Fifth Street, N.W., Washington, D.C. 10549, and at its regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may be obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. Materials that we file electronically with the Commission are available
at the Commission's website (http://www.sec.gov), which contains reports,
proxies and information statements and other information regarding issuers that
file electronically with the Commission. Application has been made to list our
common stock on the [NYSE] and, if and when such common stock commences trading
on the [NYSE], such reports, proxy statements and other information concerning
Strategic will be available for inspection at the [NYSE], 20 Broad Street, New
York, New York 10005.
------------------------
We intend to furnish its stockholders with annual reports containing
consolidated financial statements (beginning with fiscal 1999) audited by
independent accountants.
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STRATEGIC INDUSTRIES, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
COMBINED FINANCIAL STATEMENTS ----
<S> <C>
Report of Ernst & Young LLP................................. F-2
Report of PricewaterhouseCoopers LLP........................ F-3
Combined Statements of Operations........................... F-4
Combined Balance Sheets..................................... F-5
Combined Statements of Cash Flows........................... F-6
Combined Statements of Changes in Invested Capital
(Deficit)................................................. F-7
Notes to Combined Financial Statements...................... F-8
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
U.S. INDUSTRIES, INC.
We have audited the combined balance sheets of Strategic Industries, Inc.
(the 'Company') as of September 30, 1998 and 1997 and the related combined
statements of operations, cash flows, and changes in invested capital (deficit)
for each of the three years in the period ended September 30, 1998. Our audits
also included the financial statement schedule listed in the Index to Combined
Financial Statements. These financial statements and schedule are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. We did not audit the financial statements of a subsidiary which
statements reflect 26% and 17% of combined total assets as of September 30, 1997
and 1998, respectively, and 26%, 30% and 32% of combined net sales for the years
ended September 30, 1996, 1997 and 1998, respectively. Those statements and
Schedule II information were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
this subsidiary, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of the Company at September 30, 1998 and 1997,
and the combined results of its operations and its cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the report of other auditors, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
New York, New York
June 18, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Garden State Tanning, Inc.
(a wholly-owned subsidiary of
U.S. Industries, Inc.)
In our opinion, the consolidated balance sheets and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of Garden State Tanning, Inc. (a
wholly-owned subsidiary of U.S. Industries, Inc.) and its subsidiary at
September 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1998 (not
presented separately herein) in conformity with generally accepted accounting
principles. In addition, in our opinion, the Financial Statement Schedule II
(not presented separately herein), presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and Financial
Statement Schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Bloomfield Hills, Michigan
October 23, 1998
F-3
<PAGE>
STRATEGIC INDUSTRIES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE SIX
YEARS ENDED MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $738 $808 $888 $450 $448
Operating costs and expenses:
Cost of products sold.................... 522 576 669 331 337
Selling, general and administrative
expenses............................... 106 113 124 56 64
Management fees allocated from USI....... 9 10 7 3 5
Goodwill impairment and restructuring
charges................................ -- -- 63 -- --
---- ---- ---- ---- ----
Operating income.............................. 101 109 25 60 42
Interest expense to Affiliates................ 32 24 19 9 12
Interest expense.............................. -- 1 3 1 1
Interest income............................... -- -- (1) -- --
Gain on sale of subsidiary shares............. -- (1) -- -- --
Other expense, net............................ 1 1 1 1 1
---- ---- ---- ---- ----
Income before income taxes.................... 68 84 3 49 28
Provision for income taxes.................... 28 35 26 20 11
---- ---- ---- ---- ----
Net income (loss)............................. $ 40 $ 49 $(23) $ 29 $ 17
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
STRATEGIC INDUSTRIES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
---------------- ------------
1997 1998 1999
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 8 $ 12 $ 11
Trade receivables, net................................. 104 147 140
Inventories............................................ 127 139 136
Deferred income taxes.................................. -- 3 3
Other current assets................................... 15 19 16
---- ---- ----
Total current assets.............................. 254 320 306
Property, plant and equipment, net.......................... 100 133 135
Pension assets.............................................. 57 63 68
Other assets................................................ 16 19 18
Goodwill, net............................................... 157 110 113
---- ---- ----
$584 $645 $640
---- ---- ----
---- ---- ----
LIABILITIES AND INVESTED CAPITAL (DEFICIT)
Current liabilities:
Current maturities of long-term debt................... $ 1 $ 2 $ 1
Trade accounts payable................................. 41 64 47
Accrued expenses and other liabilities................. 50 56 53
Deferred income taxes.................................. 1 -- --
Income taxes payable................................... 1 3 6
---- ---- ----
Total current liabilities......................... 94 125 107
Long-term debt.............................................. 12 30 29
Deferred income taxes....................................... 1 2 2
Other liabilities........................................... 42 50 49
Notes and interest payable to Affiliates.................... 352 312 524
---- ---- ----
Total liabilities................................. 501 519 711
Commitments and contingencies
Invested capital (deficit).................................. 83 126 (71)
---- ---- ----
$584 $645 $640
---- ---- ----
---- ---- ----
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
STRATEGIC INDUSTRIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE SIX
YEARS ENDED MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)..................................... $ 40 $ 49 $(23) $ 29 $ 17
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization.................... 20 20 24 11 13
Provision (benefit) for deferred income taxes.... 4 3 (1) -- --
Provision for doubtful accounts.................. 2 (1) 4 -- --
Gain on sale of subsidiary stock................. -- (1) -- -- --
Goodwill impairment and restructuring charges.... -- -- 56 -- --
Changes in operating assets and liabilities, excluding
the effects of acquisitions and dispositions:
(Increase) decrease in trade receivables......... (18) (1) (37) (22) 6
(Increase) decrease in inventories............... (3) (1) 3 (8) 3
(Increase) decrease in other current assets...... (7) (1) (4) 2 4
(Increase) decrease in other non-current
assets......................................... (4) (15) (9) (3) (5)
Increase (decrease) in trade accounts payable.... 8 (9) 19 3 (16)
Increase in income taxes payable................. -- -- 1 -- 4
(Decrease) increase in accrued expenses and other
liabilities.................................... (4) 11 6 (6) (4)
Increase (decrease) in other non-current
liabilities.................................... 2 2 (4) (3) (4)
Other, net....................................... -- -- -- -- 3
---- ---- ---- ---- -----
Net cash provided by operating activities........ 40 56 35 3 21
Investing activities:
Proceeds from sale of subsidiary stock................ -- 4 -- -- --
Acquisition of companies, net of cash acquired........ -- -- (47) (16) (6)
Purchase of investment................................ (13) (1) (7) (7) --
Proceeds from sales of investments.................... 2 -- -- -- --
Purchases of property, plant and equipment............ (10) (17) (27) (14) (15)
Proceeds from sales of property, plant and
equipment........................................... -- -- 2 1 1
Other, net............................................ -- -- (1) (3) 1
---- ---- ---- ---- -----
Net cash used in investing activities............ (21) (14) (80) (39) (19)
Financing activities:
Proceeds from long-term debt.......................... 7 12 22 22 --
Repayment of long-term debt........................... -- (7) (1) -- (1)
Proceeds from notes payable to Affiliates............. -- 1 30 1 214
Repayment of notes payable to Affiliates.............. -- -- (70) (68) (2)
Dividends to USI...................................... (14) -- -- -- (203)
Net transfers with USI................................ (18) (42) 68 82 (10)
---- ---- ---- ---- -----
Net cash (used in) provided by financing
activities..................................... (25) (36) 49 37 (2)
Effect of exchange rate changes on cash.................... -- (1) -- -- (1)
---- ---- ---- ---- -----
Net (decrease) increase in cash and cash
equivalents.................................... (6) 5 4 1 (1)
Cash and cash equivalents at beginning of year............. 9 3 8 8 12
---- ---- ---- ---- -----
Cash and cash equivalents at end of period................. $ 3 $ 8 $ 12 $ 9 $ 11
---- ---- ---- ---- -----
---- ---- ---- ---- -----
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
STRATEGIC INDUSTRIES, INC.
COMBINED STATEMENTS OF CHANGES IN INVESTED CAPITAL (DEFICIT)
SEPTEMBER 30, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
INVESTED
CAPITAL
(DEFICIT)
-------------
(IN MILLIONS)
<S> <C>
Balance at September 30, 1995............................... $ 8
Net income.................................................. 40
Dividends to USI............................................ (14)
Net transactions with Affiliates............................ (11)
Translation adjustment...................................... 1
Minimum pension liability adjustment........................ (1)
-----
Balance at September 30, 1996............................... 23
Net income.................................................. 49
Net transactions with Affiliates............................ 11
Translation adjustment...................................... (1)
Minimum pension liability adjustment........................ 1
-----
Balance at September 30, 1997............................... 83
Net loss.................................................... (23)
Net transactions with Affiliates............................ 72
Translation adjustment...................................... (2)
Minimum pension liability adjustment........................ (4)
-----
Balance at September 30, 1998............................... 126
Net income (unaudited)...................................... 17
Dividends to USI (unaudited)................................ (203)
Net transactions with Affiliates (unaudited)................ (10)
Translation adjustment (unaudited).......................... (1)
-----
Balance at March 31, 1999 (unaudited)....................... $ (71)
-----
-----
</TABLE>
See notes to combined financial statements.
F-7
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY
The accompanying combined financial statements include the combined
operations, assets and liabilities of certain operations and other interests
currently owned, directly or indirectly, by U.S. Industries, Inc. ('USI').
In contemplation of the spin-off and distribution to its stockholders by
USI of the ownership in Strategic Industries, Inc. (the 'Company'), all the
issued and outstanding common stock or net operating assets of certain companies
and other assets and interests will be transferred to the Company (the 'Spin-off
Transactions'). At March 31, 1999, the Company had no separate legal status or
existence as a combined group. These financial statements are presented on a
going concern basis as if the Company had existed as a corporation separate from
USI during the periods presented and include the historical net assets and
results of operations directly related to the Company's operations. The combined
financial data for the six months ended March 31, 1998 and 1999 are unaudited.
In the opinion of the Company they have been prepared on a basis consistent with
that for the three year period ended September 30, 1998. The interim financial
data include all adjustments that management considered necessary for a fair
presentation of interim results.
USI and certain subsidiaries of USI (referred to herein as 'Affiliates')
have provided certain corporate general and administrative services to the
Company including legal, finance, tax, risk management and employee benefits. A
portion of the related costs has been allocated to the Company based on the
percentage of the Company's sales to the consolidated sales of USI. The
Company's management believes such amounts are reasonable and would not have
been materially different if the Company had operated on a separate company
basis.
The Company, through its subsidiaries, manufactures and distributes a broad
range of products. The subsidiaries are grouped into three segments: Consumer
Products, Automotive Interior Products and Precision Engineered Products.
In January 1997, an initial public offering of 25% of the shares of the
Company's then wholly owned subsidiary Jade Technologies Singapore Ltd ('Jade'),
a manufacturer of leadframes for the electronics industry, was completed. Jade
sold 8 million shares at approximately $0.53 per share, generating cash proceeds
of approximately $4 million. The Company recorded a gain of $1 million
($0.7 million after provision for deferred income taxes) in connection with the
sale. Immediately after the transaction, the Company owned approximately 75% of
the outstanding shares of Jade.
NOTE 2. ACCOUNTING POLICIES
Fiscal Year: The Company's fiscal year ends on the Saturday nearest to
September 30. All fiscal year data contained herein reflect results of
operations for the 52, 52 and 53 week periods ended on the Saturday nearest to
September 30, 1996, 1997 and 1998, respectively, but are presented as of such
date for convenience of reference. All interim March 31 data contained herein
reflect results of operations for the 27 and 26 week periods ending on the
Saturday nearest to March 31, 1998 and 1999, respectively, but are presented as
of such date for convenience of reference.
Principles of Combination: The combined financial statements include the
accounts of the Company and its subsidiaries. Intercompany accounts and
transactions are eliminated. Companies, which are 20% to 50% owned, are
accounted for using the equity method.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents: Cash equivalents represent short-term, highly liquid
investments, which have maturities of ninety days or less when purchased. Except
for certain cash balances owned by the Company, cash accounts have been
controlled on a centralized basis by an Affiliate. Accordingly, cash
F-8
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
receipts and disbursements have been made through Affiliates. The net results of
cash transactions between or on behalf of the Company, including intercompany
advances are included in the combined balance sheets in invested capital
(deficit).
Depreciation and Amortization:
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE SIX
YEARS ENDED MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------------ ---------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Depreciation................................. $14 $14 $18 $ 8 $11
Amortization of goodwill..................... 5 5 5 3 2
Amortization of unearned restricted stock
of USI..................................... 1 1 1 -- --
--- --- --- ------ ---
$20 $20 $24 $ 11 $13
--- --- --- ------ ---
--- --- --- ------ ---
</TABLE>
Trade Receivables and Concentrations of Credit Risk:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Trade receivables......................................... $108 $154
Allowance for doubtful accounts........................... (4) (7)
---- ----
$104 $147
---- ----
---- ----
</TABLE>
The Company operates in the United States and, to a lesser extent, in
Europe, Asia and Mexico. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral. Credit
losses have been within management's estimates. At September 30, 1997 and 1998
approximately 26.9% and 25.9%, respectively, of trade receivables were from four
customers in the automotive industry. Sales from these customers totaled 30.1%,
34.8% and 34.5% of the Company's sales in 1996, 1997 and 1998, respectively. The
Company may be impacted significantly by the economic stability of the
automotive industry or by the loss of one or more of these customers.
Inventories:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------- AT MARCH 31,
1997 1998 1999
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Finished products..................................... $ 62 $ 66 $ 68
In-process products................................... 39 41 36
Raw materials......................................... 26 32 32
---- ---- ----
$127 $139 $136
---- ---- ----
---- ---- ----
</TABLE>
Inventories are valued at the lower of cost, determined under the first-in,
first-out method, or market.
F-9
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------- AT MARCH 31,
1997 1998 1999
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Land and buildings.................................... $ 62 $ 62 $ 65
Machinery, equipment and furniture.................... 179 222 230
Accumulated depreciation.............................. (141) (151) (160)
---- ---- ----
$100 $133 $135
---- ---- ----
---- ---- ----
</TABLE>
Property, plant and equipment are stated on the basis of cost less
accumulated depreciation provided under the straight-line method.
In March 1998, the AICPA issued Statement of Position 98-1, Accounting For
the Costs of Computer Software Developed For or Obtained For Internal Use (the
'SOP'). The Company adopted the SOP on October 1, 1998. The SOP requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The impact of
adopting this SOP was not material.
Goodwill: Goodwill represents the excess of the purchase price over the
fair value of net assets acquired. The Company reviews operating results and
other relevant facts every fiscal quarter for each of its businesses to
determine if there are indications that the carrying value of an enterprise may
be impaired. The fair value methodology is used by the Company to ascertain the
recoverability of the carrying value of an enterprise, when there are
indications of impairment. In the event that such fair value is below the
carrying value of an enterprise, for those companies with goodwill, the Company
first reduces goodwill and then other long-lived assets to the extent such
differential exists.
The fair value methodology is applied to determine the recoverable value
for each business on a stand-alone basis using ranges of fair values obtained
from independent appraisers. In developing these ranges, the independent
appraisers consider (a) publicly available information, (b) financial
projections of each business based on management's best estimate, (c) the future
prospects of each business as discussed with senior operating and financial
management, (d) publicly available information regarding comparable publicly
traded companies in each industry, (e) market prices, capitalization and trading
multiples of comparable public companies and (f) other information deemed
relevant. In reviewing these valuations and considering the need to record a
charge for impairment of enterprise value and goodwill to the extent it is part
of the enterprise value, the Company also evaluates solicited and unsolicited
bids for the businesses of the Company.
Goodwill is amortized straight-line over periods not exceeding forty years.
Accumulated amortization aggregated $65 million and $49 million at
September 30, 1997 and 1998, respectively. Amortization and adjustments to the
carrying value of goodwill amounted to $5 million, $5 million and $60 million
for fiscal 1996, 1997 and 1998, respectively.
Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities (current) consist of the following:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Compensation related.............................. $22 $20
Deferred revenue.................................. 10 4
Other............................................. 18 32
--- ---
$50 $56
--- ---
--- ---
</TABLE>
F-10
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation: The functional currency of each of the
Company's foreign operations is the local currency. Assets and liabilities of
foreign subsidiaries are translated at the exchange rates in effect at the
balance sheet dates, while revenue, expenses and cash flows are translated at
average exchange rates for the period. Translation gains and losses are included
in invested capital (deficit).
Income Taxes: Deferred tax assets and liabilities are computed based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws. Deferred income tax expense or
benefit is based on the changes in the asset or liability from period to period.
Certain of the Company's United States earnings have been included in the
consolidated federal income tax return filed by USI. Pursuant to an informal tax
allocation agreement, the Company provided for income taxes as if it filed
separate income tax returns. Taxes currently payable have been included in
invested capital (deficit).
Upon completion of the anticipated spin-off, such operations would no
longer qualify to be members of the USI consolidated group and, accordingly,
will file the applicable income tax returns in the appropriate jurisdictions.
The Company and certain of its subsidiaries will enter into tax sharing and
indemnification agreements in which USI and certain of its subsidiaries
generally will agree to indemnify the Company and its subsidiaries for all
income tax liabilities in respect to periods prior to such spin-off.
Revenue Recognition: Revenue is recognized upon shipment of product to the
customer. Provisions are made for warranty and return costs at the time of sale.
Such provisions have not been material.
Advertising Costs: Advertising costs are expensed as incurred. Such amounts
totaled $2 million for each of fiscal 1996, 1997 and 1998, respectively.
Research and Development Costs: Research and development costs are expensed
as incurred. Such amounts totaled $1 million for each of fiscal 1996, 1997 and
1998, respectively.
Fair Value of Financial Instruments: The fair value of all short-term
financial instruments approximate their carrying value due to their short
maturity. The fair value of the notes payable to Affiliates is also estimated to
approximate their carrying amount since it is contemplated that these notes will
be repaid at face value upon the completion of the spin-off and distribution.
The fair value of all other long-term financial instruments approximated
carrying value as they were based on terms that continue to be available to the
Company.
Derivative Financial Instruments: The Company uses foreign exchange forward
contracts on a limited basis to manage exposure to fluctuating foreign
currencies. The foreign currency forward contracts are marked to market at the
end of each period and any resulting gain or loss is recognized immediately in
income.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted beginning in fiscal 2001. This statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Management does not anticipate that the adoption of the new statement
will have a significant effect on earnings or the financial position of the
Company.
Segment Reporting: In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (Statement 131), which is
effective for years beginning after December 15, 1997. This statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected
F-11
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements retroactively in fiscal 1999. Management does not anticipate that
the adoption of this statement will have a significant effect on the Company's
reported segments.
Stock Based Compensation: The Company has not historically had stock based
compensation plans separate from USI. However, the Company expects to adopt its
own stock based compensation plan upon the spin-off. After the spin-off, the
Company will apply Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees' and related interpretations in measuring compensation
costs for its stock options and will disclose pro forma net income and net
income per share as if compensation costs had been determined consistent with
the SFAS No. 123, 'Accounting for Stock-based Compensation'. The Company has no
stock options outstanding as of March 31, 1999.
Earnings Per Share: Historical earnings per share are not presented because
the Company was comprised of direct or indirect subsidiaries of the Parent.
NOTE 3. ACQUISITIONS
The pro forma effect of the acquisitions and the aggregate assets acquired
and liabilities assumed as detailed below are not material. These acquisitions
have been accounted for as purchases and their results of operations have been
included in the financial statements from the date of acquisition.
In July 1996, the Company acquired an equity interest in United Pacific
Industries Limited ('United Pacific'), a limited liability company incorporated
in Bermuda and listed on the Stock Exchange of Hong Kong. United Pacific
manufactures voltage converters, other electronic components and consumer
products. At September 30, 1998, the Company had beneficial ownership of
approximately 20% of United Pacific with a carrying value of approximately $18
million. The results of United Pacific are accounted for under the equity method
and are included in the Precision Engineered Products operations. At
September 30, 1998 and March 31, 1999, the market value of the Company's equity
investment in United Pacific was approximately $14 million and $6 million,
respectively.
In January 1998, the Company acquired certain semiconductor leadframe
assets from Philips Semi-Conductors B.V. for $16 million in cash. The acquired
operations facilities are located in the Netherlands. The results of these
acquired operations are included in the Precision Engineered Products
operations.
In May 1998, the Company purchased certain flat shadow mask assets from
Philips Components B.V. ('FSM') for $31 million, resulting in goodwill of
approximately $12 million. The Company and Philips have entered into a
multi-year supply agreement. The acquired operations are located in the
Netherlands. The results of FSM are included in the Precision Engineered
Products operations.
NOTE 4. GOODWILL IMPAIRMENT AND RESTRUCTURING CHARGES
In June 1998, USI reviewed its long-term strategy and reviewed each
operating company's performance and future prospects. As a result, USI adopted a
plan to improve efficiency and enhance competitiveness at some of its
operations, including some now held by the Company. In addition, due to
indications of impairment, USI evaluated the recoverability of certain of the
Company's long-lived assets, primarily goodwill at Garden State. In arriving at
the fair value of Garden State, USI considered a number of factors including:
(1) annual price concessions in the automotive industry and Garden State's
inability to reduce costs due to antiquated facilities and equipment, (2) a
dramatic decline in scrap leather prices attributable to the Asian economic
crisis, (3) the amount of capital investment that would be required to make
Garden State a lower cost manufacturer, (4) Garden State's long-term financial
plan and (5) analysis of values for similar companies. In determining the amount
of the impairment, USI compared the net book values to the estimated fair values
of Garden State. Based on
F-12
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the above, USI determined that an impairment to goodwill of $55 million was
necessary which will reduce future goodwill amortization by $2 million per
annum.
The restructuring plan included the closing of a manufacturing facility in
the footwear operation and the exit from the lace manufacturing business of the
textile operation. The production and distribution activities of the footwear
facility were either outsourced or consolidated into existing facilities. The
restructuring plan included a reduction in the work force by approximately 500
employees, which included salaried and administrative employees at the
restructured facilities as well as administrative and executive employees
throughout the Consumer Products Group. As of September 30, 1998 approximately
300 employees had been terminated. In certain cases severance and related
benefits will be paid subsequent to the termination date.
The restructuring is not anticipated to have a significant impact on the
ongoing operations during the periods that manufacturing is transitioned from
the facilities to be closed. The expected benefits from the restructuring are
primarily reduced depreciation; reduced fixed costs associated with leased
facilities and reduced compensation costs. The final anticipated benefit will be
approximately $1 million per year, which will be realized subsequent to the
completion of the restructuring plan. The Company expects that approximately
100% of the annual benefit will be realized in fiscal 1999 and thereafter.
The principal components of the goodwill impairment and restructuring
charges consist of:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Impairment of goodwill...................................... $55
Lease obligations and impairment of equipment............... 2
Severance and related costs................................. 6
---
Total.................................................. $63
---
---
Cash charges................................................ $ 7
Non-cash charges............................................ 56
---
Total.................................................. $63
---
---
</TABLE>
Cash charges of $2 million were paid prior to September 30, 1998. The
remaining cash charges will be paid by September 30, 1999, or through the
respective lease termination date.
In addition to the $63 million of goodwill impairment and restructuring
charges, the Company incurred $8 million of inventory obsolescence and other
costs related to the elimination of product lines and the reduction of
manufacturing and warehouse facilities at its operations, which have been
restructured. These costs are reflected in cost of products sold and selling,
general and administrative expenses.
After an income tax benefit of $6 million, the $71 million of charges
detailed above reduced net income for fiscal 1998 by $65 million.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------- AT MARCH 31,
1997 1998 1999
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Jade debt..................................... $12 $32 $30
Other......................................... 1 -- --
--- --- ---
$13 $32 $30
Less current maturities....................... 1 2 1
--- --- ---
Long-term debt................................ $12 $30 $29
--- --- ---
--- --- ---
</TABLE>
F-13
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Principal payments on long-term debt for the next five years ended
September 30 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1999............................................ $ 2
2000............................................ 3
2001............................................ 20
2002............................................ 1
2003............................................ 6
---
$32
---
---
</TABLE>
At September 30, 1998, the Company has unsecured notes and accrued interest
payable to Affiliates in the amount of $312 million which mature in fiscal 2005.
Interest is payable annually at 6.5% per annum. During 1997, Affiliates forgave
$53 million of notes which was included within net transactions with Affiliates
in the Statement of Invested Capital (Deficit) for such period.
Interest paid during the six months ended March 31, 1999 was $13 million,
including $12 million paid to an Affiliate. Interest paid was $32 million,
$25 million and $22 million for fiscal 1996, 1997 and 1998, respectively, which
included interest paid to an Affiliate of $32 million, $24 million and
$19 million, respectively.
At September 30, 1998, the Company had long-term indebtedness of
$14 million and $18 million denominated in Dutch guilders and Hong Kong dollars,
respectively (collectively 'Jade debt'). The interest rates on the Jade debt
range from 4.75% to 12.38%. A portion of the Jade debt is guaranteed by an
Affiliate with the remaining amount secured by the assets of the borrower. These
borrowings hedge a portion of the Company's net investments in a Dutch operating
company and a Hong Kong equity investment.
NOTE 6. PENSION PLANS
USI and its subsidiaries have noncontributory defined benefit pension plans
covering substantially all of its United States employees. The benefits under
these plans are based primarily on years of credited service and compensation as
defined under the respective plan provisions. USI's funding policy is to
contribute amounts to the plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as USI may determine to be appropriate from time to
time. During fiscal 1998, certain plans of the Company were consolidated with
other USI plans with no changes to benefit formulas. Information regarding the
components of net periodic cost and the funded status of the USI plans with
respect solely to the Company's employees is not available for 1998.
USI and certain of its subsidiaries sponsor defined contribution plans
which provide defined benefits to union employees of the Company's subsidiaries.
Contributions relating to defined contribution plans are made based upon the
respective plans' provisions.
Net periodic pension cost for the Company's defined benefit plans covering
employees in the United States and the total contributions charged to pension
expense for defined contribution plans covering employees in the United States
are presented below. Net periodic income for the Company's plans which were
consolidated with other USI plans is included in the cost of participation in a
USI plan:
F-14
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Defined benefit plans:
Service cost -- benefits earned during the period...... $ 4 $ 4 $ 2
Interest cost on projected benefit obligation.......... 9 9 2
Actual return on plan assets........................... (23) (52) 1
Net amortization and deferral.......................... 5 33 (3)
Gain due to curtailment................................ (1) (1) --
Cost of participation in a USI plan.................... -- -- (5)
---- ---- ---
Net periodic pension income for defined benefit plans....... (6) (7) (3)
Defined contribution plans.................................. 2 -- --
---- ---- ---
Net periodic pension income....................... $ (4) $ (7) $(3)
---- ---- ---
---- ---- ---
</TABLE>
Assumptions used in the accounting for the defined benefit plans were as
follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate............. 7.50% to 7.75% 7.00% to 7.50% 6.75%
Rates of increase in compensation levels... 4.50% to 7.75% 4.10% to 4.50% 4.5% to 5.75%
Expected long-term rate of return on
assets................................... 9% 9% 9%
</TABLE>
The change in the weighted average discount rate from a range of 7.0% to
7.5% for fiscal 1997 to 6.75% for fiscal 1998 and other actuarial assumptions
caused the projected benefit obligation at September 30, 1998 to increase by
approximately $14 million.
The funded status and amounts recognized in the combined balance sheets at
September 30, 1997 and 1998 for the Company's defined benefit pension plans are:
<TABLE>
<CAPTION>
1997 1998
----------------------------- -----------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
-------- ------------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation........... $(112) $ (1) $-- $(23)
Nonvested benefit obligation........ (4) -- -- (2)
----- ------- ------- ----
Accumulated benefit obligation........... (116) (1) -- (25)
----- ------- ------- ----
----- ------- ------- ----
Projected benefit obligation............. (124) (1) -- (25)
Plan assets at fair value................ 245 -- 18
----- ------- ------- ----
Projected benefit obligation less than
(or in excess of) plan assets.......... 121 (1) -- (7)
Add (deduct):
Unrecognized prior service cost..... 3 -- -- 3
Unrecognized net (gain) loss........ (66) -- -- 6
Unrecognized net asset at date of
adoption, net of amortization..... (6) -- -- --
Adjustment required to recognize
minimum liability................. -- -- -- (9)
----- ------- ------- ----
Prepaid (accrued) pension costs.......... 52 (1) -- (7)
Prepaid cost of participation in a USI
plan................................... -- -- 54 --
----- ------- ------- ----
Total prepaid (accrued) pension costs.... $ 52 $ (1) $ 54 $ (7)
----- ------- ------- ----
----- ------- ------- ----
</TABLE>
F-15
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's plan assets are included in a master trust managed by USI,
which principally invests in listed stocks and bonds, including common stock of
USI. USI's common stock included in plan assets was less than 2% of the master
trust's assets at September 30, 1997 and 1998, respectively.
The tables above set forth the historical components of net periodic
pension cost and a reconciliation of the funded status of the pension plans for
the employees associated with the Company and is not necessarily indicative of
the amounts to be recognized by the Company on a prospective basis.
NOTE 7. POSTRETIREMENT PLANS
The Company provides health care and life insurance benefits to certain
groups of retirees.
The following table presents the unfunded status of the plans reconciled
with amounts recognized in the Company's combined balance sheets:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................. $(4) $ (4)
Fully eligible active plan participants.............. (1) (1)
Other active plan participants....................... (3) (5)
--- ----
(8) (10)
Unrecognized prior service cost........................... -- --
Unrecognized gain......................................... (1) --
--- ----
$(9) $(10)
--- ----
--- ----
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
---------------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost............................................ $ -- $ -- $ --
Interest cost........................................... 1 1 1
------- ------- -------
Net periodic postretirement benefit cost................ $ 1 $ 1 $ 1
------- ------- -------
------- ------- -------
</TABLE>
The weighted average annual assumed rate of increase in the health care
cost trend rate ranged from 8.5% to 10.0% for fiscal 1998 and is assumed to
decrease 0.5% a year to 5.0% to 5.5%. The effect of increasing the assumed
health care cost trend rate by 1% in each year would increase the accumulated
post-retirement benefit obligation as of September 30, 1998 by $1 million and
the aggregate of service and interest components of net periodic post retirement
benefit for 1998 by less than $1 million.
The weighted average discount rate used was 7.75%, 7.50% and 6.75% at
September 30, 1996, 1997 and 1998, respectively.
The tables above set forth the historical components of net periodic post
retirement benefit cost and a reconciliation of the funded status of the post
retirement benefit plans for the employees associated with the Company and is
not necessarily indicative of the amounts to be recognized by the Company on a
prospective basis.
F-16
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. LEASES
Rental expense for operating leases was $4 million, $5 million and
$6 million for the fiscal years ended September 30, 1996, 1997 and 1998,
respectively.
Future minimum rental commitments under noncancellable operating leases as
of September 30, 1998 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1999............................................ $ 8
2000............................................ 6
2001............................................ 5
2002............................................ 3
2003............................................ 2
Thereafter...................................... 9
---
$33
---
---
</TABLE>
NOTE 9. INCOME TAXES
Income before income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
United States.............................................. $67 $81 $1
Foreign.................................................... 1 3 2
--- --- --
$68 $84 $3
--- --- --
--- --- --
</TABLE>
The provisions (benefit) for federal, foreign, and state income taxes
consist of:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................... $21 $27 $22
Foreign............................................... -- 1 3
State................................................. 3 4 2
--- --- ---
24 32 27
Deferred.............................................. 4 3 (1)
--- --- ---
$28 $35 $26
--- --- ---
--- --- ---
</TABLE>
F-17
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective income tax provision differs from the statutory
federal income tax provision as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Statutory federal income tax provision..................... $24 $30 $ 1
Foreign income tax differential............................ -- (1) 2
State income taxes (net of federal benefit)................ 2 2 1
Goodwill amortization...................................... 2 2 2
Goodwill impairment........................................ -- -- 19
Miscellaneous.............................................. -- 2 1
--- --- ---
$28 $35 $26
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment.......................... $ (6) $ (7)
Inventory.............................................. (3) --
Net pension assets..................................... (17) (17)
---- ----
Total deferred tax liabilities.................... (26) (24)
Deferred tax assets:
Accruals and allowances................................ 11 13
Postretirement benefits................................ 3 3
Deductible goodwill.................................... 10 9
---- ----
Total deferred tax assets......................... 24 25
---- ----
Net deferred tax (liability) asset................ $ (2) $ 1
---- ----
---- ----
</TABLE>
The classification of the deferred tax balances is:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Current asset............................................... $ 2 $ 3
Current liability........................................... (3) --
---- ----
(1) 3
Noncurrent asset............................................ 22 22
Noncurrent liability........................................ (23) (24)
---- ----
(1) (2)
---- ----
Net deferred tax (liability) asset.......................... $ (2) $ 1
---- ----
---- ----
</TABLE>
NOTE 10. STOCK COMPENSATION PLANS
Certain key employees of the Company participate in stock incentive plans
of USI that provide for awards of restricted stock and options to purchase USI
common stock at prices equal to the fair value of the underlying shares at the
date of grant. The compensation expense related to the award of USI restricted
stock to key employees of the Company was $1 million for each of fiscal 1996,
1997 and 1998, and is included in the combined financial statements of the
Company.
F-18
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Options awarded to employees of the Company under the USI plans vest 25%
per year until fully vested after four years. In accordance with the Company's
options policy, those options of each effected employee which are next scheduled
to vest, will vest immediately upon the spin-off. Any options, which are not
vested at that point, will be forfeited. Any vested options which are not
exercised within 90 days of the spin-off, subject to retirement provisions
within the USI plans, will also be forfeited.
Restrictions on stock awarded to employees of the Company under the USI
plans lapse either in tranches periodically throughout a seven-year period or at
the expiration of the seven-year period. Upon the Spin-off, the restrictions
will lapse for the next scheduled tranche or on a portion of the awards
proportionate to the period of time which has passed since the date of grant.
Any shares on which restrictions have not lapsed as of the spin-off date will be
forfeited.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company is subject to a wide range of environmental protection laws.
The Company has remedial and investigatory activities underway at approximately
five sites. In addition, the Company has been named as a Potentially Responsible
Party ('PRP') at seven 'Superfund' sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or comparable
statutes.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Reserves for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRP's, the extent of contamination and the
nature of required remedial actions. Such accruals are adjusted as further
information develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present fair
value unless the aggregate amount of the obligation and the amount and timing of
the cash payments are fixed or readily determinable. Recoveries of environmental
remediation costs from other parties are recognized as assets when their receipt
is deemed probable. Management expects that the amount reserved will be paid out
over the periods of remediation for the applicable sites which range up to 30
years and that such reserves are adequate based on all current data. Each of the
sites in question is at various stages of investigation or remediation; however,
no information currently available reasonably suggests that projected
expenditures associated with remedial action or compliance with environmental
laws for any single site or for all sites in the aggregate, will have a material
adverse affect on the Company's financial condition, results of operations or
cash flows.
At September 30, 1998, the Company had accrued approximately $4 million
($1 million accrued as current liabilities; $3 million as non-current
liabilities) for various environmental related liabilities of which the Company
is aware. The Company believes that the range of liability for such matters is
between approximately $1 million and $5 million.
Also, certain of the Company's subsidiaries are defendants or plaintiffs in
lawsuits that have arisen in the normal course of business. While certain of
these matters involve substantial amounts, it is management's opinion, based on
the advice of counsel, that the ultimate resolution of such litigation and
environmental matters will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
F-19
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. SEGMENT DATA
The Company's operations are classified into three business segments:
Consumer Products, Precision Engineered Products and Automotive Interior
Products. Net sales and operating income (loss) for each of the Company's
business segments were:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales
Consumer Products.................................. $413 $409 $410
Precision Engineered Products...................... 74 89 138
Automotive Interior Products....................... 251 310 340
---- ---- ----
Total Net Sales............................... $738 $808 $888
---- ---- ----
---- ---- ----
Operating Income (Loss)(1)
Consumer Products.................................. $ 80 $ 81 $ 48
Precision Engineered Products(2)................... 13 19 28
Automotive Interior Products....................... 17 19 (44)
---- ---- ----
Operating income before management fees............ $110 $119 $ 32
Management fees.................................... (9) (10) (7)
---- ---- ----
Total Operating Income........................ $101 $109 $ 25
---- ---- ----
---- ---- ----
</TABLE>
- ------------
(1) Operating income for the year ended September 30, 1998 includes goodwill
impairment and restructuring charges of $63 million and other related
charges of approximately $8 million. Of these charges, $16 million relates
to Consumer Products and $55 million relates to Automotive Interior
Products.
(2) Fiscal 1997 and 1998 operating income for the Precision Engineered Products
segment includes $2 million and $(3) million, respectively, of equity
earnings (loss) from the Company's investment in United Pacific. The fiscal
1998 equity loss of $3 million includes a charge of $4 million associated
with an impairment of a subsidiary of United Pacific.
F-20
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Identifiable Assets
Consumer Products...................................... $309 $324 $351
Precision Engineered Products.......................... 58 74 148
Automotive Interior Products........................... 191 186 143
---- ---- ----
558 584 642
Corporate.............................................. 5 -- 3
---- ---- ----
Total Identifiable Assets......................... $563 $584 $645
---- ---- ----
---- ---- ----
Depreciation and Goodwill Amortization
Consumer Products...................................... $ 9 $ 9 $ 10
Precision Engineered Products.......................... 3 3 6
Automotive Interior Products........................... 7 7 7
---- ---- ----
Total Depreciation and Goodwill Amortization...... $ 19 $ 19 $ 23
---- ---- ----
---- ---- ----
Capital Expenditures
Consumer Products...................................... $ 3 $ 5 $ 15
Precision Engineered Products.......................... 5 7 8
Automotive Interior Products........................... 2 5 4
---- ---- ----
Total Capital Expenditures........................ $ 10 $ 17 $ 27
---- ---- ----
---- ---- ----
</TABLE>
NOTE 13. GEOGRAPHIC AREAS FINANCIAL DATA
The Company's operations are conducted primarily in the United States, and
to a lesser extent, in other regions of the world. Exported sales represented
32%, 32% and 29% of the Company's total net sales for fiscal years 1996, 1997
and 1998, respectively.
Principal international markets served include Asia, Europe, South America,
and Canada. Export sales of U.S. operations were:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Asia.................................................... $ 89 $121 $153
Other................................................... 145 139 104
---- ---- ----
Total.............................................. $234 $260 $257
---- ---- ----
---- ---- ----
</TABLE>
F-21
<PAGE>
STRATEGIC INDUSTRIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents certain data by geographic areas:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
SEPTEMBER 30,
------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales
United States.......................................... $720 $772 $804
Foreign................................................ 18 36 84
Operating Income(1)
United States.......................................... 100 106 20
Foreign................................................ 1 3 5
Identifiable Assets
United States.......................................... 537 540 528
Foreign................................................ 26 44 117
</TABLE>
- ------------
(1) Operating income for the year ended September 30, 1998 includes goodwill
impairment and restructuring charges of $63 million and other related
charges of approximately $8 million. All of these charges and costs relate
to operating earnings within the United States.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial information for the fiscal years ended
September 30, 1997 and 1998 and the six months ended March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------------------- --------------------------------------- ------------------
QUARTER ENDED DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
- ------------- ------- -------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $192 $202 $210 $204 $216 $234 $214 $224 $221 $227
Gross profit......... 57 59 59 57 59 60 58 48 55 56
Net income (loss).... 11 13 13 12 15 14 (51) (1) 9 8
</TABLE>
The results for the quarters ended June 30 and September 30, 1998 include
$59 million and $4 million of goodwill impairment and restructuring charges,
respectively, and other related charges of $2 million and $6 million,
respectively. All periods presented are 13 weeks except for the quarter ended
December 31, 1998, which is 14 weeks.
NOTE 15. COMPREHENSIVE INCOME (UNAUDITED)
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, 'Reporting Comprehensive Income.' This statement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. Reclassification of financial statements for prior
periods is required. Comprehensive income is net income and other items, which
may include foreign currency translation adjustments, minimum pensions liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-----------------
1998 1999
---- ----
<S> <C> <C>
Net income.......................................... $29 $17
Foreign currency translation adjustment............. (1) (1)
--- ---
Total comprehensive income..................... $28 $16
--- ---
--- ---
</TABLE>
F-22
<PAGE>
SCHEDULE II
STRATEGIC INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------- ------------ ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1996
Deducted from asset accounts:
Allowance for doubtful accounts... $3 $ 2 $ -- $ -- $5
Year ended September 30, 1997
Deducted from asset accounts:
Allowance for doubtful accounts... 5 (1) -- -- 4
Year ended September 30, 1998
Deducted from asset accounts:
Allowance for doubtful accounts... 4 4 -- (1) 7
</TABLE>
S-1
<PAGE>
ANNEX A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION*
- ------------
* To be provided in an amendment to this filing.
A-1
<PAGE>
ANNEX B
STRATEGIC STOCK INCENTIVE PLAN*
- ------------
* To be provided in an amendment to this filing.
B-1
<PAGE>
ANNEX C
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF AWARDS AND
MATERIAL FEDERAL INCOME, ESTATE AND GIFT TAX CONSEQUENCES
RELATING TO THE TRANSFER OF OPTIONS
UNDER OUR STOCK INCENTIVE PLAN
The following discussions of the principal federal income tax consequences
with respect to awards under the SIP and the income, estate and gift tax
consequences relating to the transfer of options are based on statutory
authority and judicial and administrative interpretations as of the date of this
information statement, which are subject to change at any time (possibly with
retroactive effect). The discussions are limited to the U.S. tax consequences to
individuals who are citizens or residents of the U.S. other than those
individuals who are taxed on a residence basis in a foreign country. U.S. tax
law is technical and complex and the discussion below represents only a general
summary.
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND
DOES NOT PURPORT TO ADDRESS ALL THE TAX CONSIDERATIONS THAT MAY BE RELEVANT.
EACH RECIPIENT OF A GRANT IS URGED TO CONSULT HIS OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO SUCH GRANTEE OF THE GRANT AND THE DISPOSITION OF
COMMON STOCK.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
Options. No income will be recognized by the recipient at the time of the
grant of a non-qualified stock option.
On exercise of a non-qualified stock option (and provided the common stock
issued is not restricted stock), the amount by which the fair market value of
the common stock on the date of exercise exceeds the option exercise price will
be taxable to the recipient as ordinary income. The recipient's tax basis in the
shares of common stock received upon exercise of an option will be equal to the
amount of cash paid on exercise, plus the amount of ordinary income recognized
as a result of the receipt of such shares. The subsequent disposition of shares
acquired upon exercise of a non-qualified stock option will ordinarily result in
capital gain or loss. If the common stock received upon exercise of an option is
restricted stock, the rules described below with regard to restricted stock will
apply.
A recipient who is an officer or director of ours or a beneficial owner of
more than ten percent (10%) of any class of registered equity securities of ours
should consult with his or her tax advisor as to whether, as a result of
Section 16(b) of the Exchange Act and the rules and regulations thereunder that
are related thereto, the timing of income recognition is deferred for any period
following the exercise of an option (the 'Deferral Period'). If there is a
Deferral Period, absent a written election (pursuant to Section 83(b) of the
Internal Revenue Code) filed with the Internal Revenue Service within 30 days
after the date of transfer of the shares of common stock pursuant to the
exercise of the option to include in income, as of the transfer date, the excess
(on such date) of the fair market value of such shares over their exercise
price, recognition of income by the recipient could, in certain instances, be
deferred until the expiration of the Deferral Period.
The ordinary income recognized by employees with respect to the transfer of
shares upon exercise of an option under the SIP will be subject to both wage
withholding and employment taxes.
We will be generally be entitled, subject to the possible application of
Code Section 162(m) as discussed below and Section 280G of the Internal Revenue
Code as discussed below, to a deduction in connection with the recipient's
exercise of a stock option in an amount equal to the income recognized by the
recipient.
A recipient who is granted an ISO generally does not recognize any taxable
income at the time of the grant or exercise of the option. Similarly, we
generally are not entitled to any tax deduction at the time of the grant or
exercise of the ISO. The aggregate fair market value of common stock (determined
at the date of grant) with respect to which ISOs can be exercisable for the
first time by a recipient during any calendar year cannot exceed $100,000. Any
excess will be treated as a non-qualified stock
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option. If (i) the recipient makes no disposition of the shares acquired
pursuant to an ISO within two (2) years from the date of grant or within one
(1) year from the exercise of the option, and (ii) at all times during the
period beginning on the date of grant of the option and ending on the day three
(3) months before the date of such exercise, the recipient was an employee of
ours or any of our subsidiaries, any gain or loss recognized on a subsequent
disposition of the shares will be treated as a long-term capital gain or loss.
Under such circumstances, we will not be entitled to any deduction for federal
income tax purposes. If the recipient disposes of the shares before the later of
such dates or was not employed by us or any of our subsidiaries during the
entire applicable period, the recipient will have ordinary income equal to the
difference between the exercise price of the shares and the market value of the
shares on the date of exercise, and we will be entitled to a corresponding tax
deduction, subject to the application of Code Section 162(m) of the Code and
Section 280G of the Internal Revenue Code.
Restricted Stock. The recipient of a restricted stock award may elect under
Section 83(b) of the Internal Revenue Code, to include in ordinary income, as
compensation at the time restricted stock is first issued, the excess of the
fair market value of such shares at the time of issuance over the amount paid,
if any, by the employee for such shares. Unless an election under Section 83(b)
of the Internal Revenue Code is timely made (no later than the expiration of the
30 day period following the time of issuance), no taxable income will be
recognized by the recipient of a restricted stock award until such shares are no
longer subject to the restrictions or the risk of forfeiture (collectively, the
'Restrictions'). However, when the Restrictions lapse, the recipient will
recognize ordinary income in an amount equal to the excess of the fair market
value of the common stock on the date of lapse over the amount paid, if any, by
the recipient for such shares. The ordinary income recognized by a recipient
with respect to restricted stock awarded pursuant to the SIP will be subject to
both wage withholding and employment taxes.
If an election under Section 83(b) of the Internal Revenue Code is made,
dividends received on shares which are subject to Restrictions will be treated
as dividend income. If a recipient does not make an election under Section 83(b)
of the Internal Revenue Code, dividends received on the common stock prior to
the time the Restrictions on such shares lapse will be treated as additional
compensation, and not dividend income, for federal income tax purposes, and will
be subject to wage withholding and employment taxes.
In general, a deduction will be allowed to us for federal income tax
purposes (subject to the discussion above regarding Code Section 162(m) and the
discussion below) in an amount equal to the ordinary income recognized by a
recipient with respect to restricted stock awarded pursuant to the SIP.
If, subsequent to the lapse of Restrictions on his or her common stock, the
recipient sells such shares, the difference, if any, between the amount realized
from such sale and the tax basis of such shares to the holder will ordinarily
result in capital gain or loss. A recipient's tax basis in restricted stock
received pursuant to the SIP will be equal to the sum of the price paid for such
shares, if any, and the amount of ordinary income recognized by such recipient
of such shares on the lapse of Restrictions thereon.
If an election under Section 83(b) of the Internal Revenue Code is made
and, before the Restrictions on the shares lapse, the shares which are subject
to such election are resold to us or are forfeited, (i) no deduction would be
allowed to such recipient for the amount included in the income of such
recipient by reason of such election under Section 83(b) of the Internal Revenue
Code, and (ii) the recipient would recognize a loss in an amount equal to the
excess, if any, of the amount paid for such restricted stock over the amount
received by the recipient upon such resale or forfeiture (which loss would
ordinarily be a capital loss). In such event, we would be required to include in
its income the amount of any deduction previously allowable to it in connection
with the transfer of such shares.
Director's Common Stock Awards. The fair market value of an award of shares
of common stock will be includible in the non-employee director's income as
ordinary income at the time of the award, subject to the timely making of an
election under Section 83(b) of the Internal Revenue Code, as discussed above,
and will result in deferral of income recognition to the extent that as a result
of Section 16(b) of the Exchange Act the timing of recognition is deferred for a
period following the award. The recipient should consult with his or her tax
advisor with regard to the extent of such
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deferral. We will be entitled to a deduction for the value of such award when
the non-employee director recognizes income, but such amounts are not subject to
wage withholding or employment taxes by us.
Parachute Payments. In the event that the payment of any award under the
SIP is accelerated because of a change in ownership (as defined in
Section 280G(b)(2) of the Internal Revenue Code) and such payment of an award,
either alone or together with any other payments made to the recipient by us,
constitute parachute payments under Section 280G of the Internal Revenue Code,
then, subject to certain exceptions, a portion of such payments would be
nondeductible to us and the recipient would be subject to a 20% excise tax on
such portion of the payment.
Section 162(m) of the Code. Code Section 162(m) denies a deduction to any
corporation, whose common shares are publicly held, for compensation paid to
certain covered employees in a taxable year to the extent that such compensation
exceeds $1,000,000. Covered employees are a company's chief executive officer on
the last day of the taxable year and any other individual whose compensation is
required to be reported to shareholders under the Exchange Act by reason of
being among the four highest compensated officers for the taxable year and who
are employed on the last day of the taxable year. The amount of ordinary income
recognized by a recipient in the year of exercise of a stock option is
considered in determining whether a covered employee's compensation exceeds
$1,000,000. Compensation paid under certain qualified performance based
compensation arrangements, which (among other things) provide for compensation
based on pre-established performance goals established by a compensation
committee that is comprised solely of two or more outside directors and which is
disclosed to, and approved by, the majority of our stockholders, is not
considered in determining whether a covered employee's compensation exceeds
$1,000,000. It is intended that the options granted under the SIP (but not the
restricted stock), will satisfy the requirements of Code Section 162(m) so that
the awards will not be included in a covered employee's compensation for the
purposes of determining whether such covered recipient's compensation exceeds
$1,000,000; however the effect of Code Section 162(m) on the deductibility of
such covered employee compensation cannot be ascertained with certainty. As a
result, notwithstanding the foregoing discussion, no assurance can be given as
to the deductibility of the covered employee compensation under Code
Section 162(m).
MATERIAL FEDERAL INCOME, ESTATE AND GIFT TAX CONSEQUENCES RELATING TO THE
TRANSFER OF OPTIONS
Federal Income Taxation. The transfer of a non-qualified stock option by
the holder of a non-qualified stock option ('Optionee') to a permitted
transferee ('Permitted Transferee') will not cause the Optionee to recognize
taxable income or gain at the time of transfer. If and when the Permitted
Transferee subsequently exercises the non-qualified stock option, the Optionee
will recognize taxable income at that time in an amount equal to the excess, if
any, of the fair market value of the common shares received by the Permitted
Transferee on exercise (determined on the exercise date) over the exercise price
of the non-qualified stock option. The Permitted Transferee's tax basis with
respect to the shares received upon exercise of the non-qualified stock option
will be equal to the fair market value of the shares on the date that the
non-qualified stock option is exercised (i.e., the exercise price plus the
amount of income recognized by the Optionee).
Federal Gift and Estate Taxation. An Optionee's transfer of a non-qualified
stock option by gift will be subject to federal gift tax except to the extent it
is excludible by the gift tax annual exclusion of $10,000 per donee, is within
the combined federal estate and gift tax exception discussed below, or is to a
person's spouse. In addition, upon the death of a participant, the value of an
option that has not previously been 'transferred' will be includible in the
participant's gross estate for federal estate tax purposes. Transfers to spouses
are not subject to such taxes, and there is combined lifetime gift and estate
tax exclusion (known as the 'applicable exclusion amount'), which is $650,000
per person in 1999 and increases incrementally to $1,000,000 in 2006 under
current law).
In general, under IRS Revenue Ruling 98-21, the transfer to a family
member, for no consideration, of an option, is a completed gift on the later of
(1) the transfer or (2) the time when the donee's right to exercise the option
is no longer conditioned on the performance of services by the transferor. If
the option becomes exercisable in stages, each portion of the option that
becomes exercisable at a different time is treated as a separate option for the
purpose of applying this analysis.
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Pursuant to IRS Revenue Procedure 98-34, the Internal Revenue Service will
treat an option as properly valued for gift (and estate) tax purposes, provided
that the employee follows a generally recognized option pricing model, such as
the Black-Scholes model or an accepted version of the binomial model. The
selected model, however, must consider (as of the valuation date) the following
factors: (1) the option's exercise price; (2) the option's expected life;
(3) the current trading price of the underlying stock; (4) the expected
volatility of the underlying stock; (5) the expected dividends on the underlying
stock; and (6) the risk-free interest rate over the remaining option term. The
option pricing model must be applied properly and reasonable factors must be
used when applying the option pricing model. In addition, a discount to the
valuation produced by the option pricing model must not be considered in order
to rely on Revenue Procedure 98-34.
Reliance on Revenue Procedure 98-34 for valuing options is not mandatory,
but provides a 'safe harbor.' Moreover, to rely on IRS Revenue Procedure 98-34
for valuing options, the factors used in the valuation must be computed in the
manner described in that Revenue Procedure, including the option's expected
life, the expected volatility factor of the underlying stock, the expected
dividends on the underlying stock with respect to the option and the factor used
for determining a risk-free interest rate.
Employees who use the methodology described in IRS Revenue Procedure 98-34
to value their options should write 'FILED PURSUANT TO REV. PROC. 98-34' on the
applicable gift (or estate) tax return.
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