<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 2000.
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
-------------------
LCA GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
<TABLE>
<S> <C>
DELAWARE 51-0305205
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
C/O U.S. INDUSTRIES, INC. 08830-0169
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
Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
_______________________________________________________________________________
<PAGE>
LCA GROUP INC.
INFORMATION REQUIRED IN INFORMATION STATEMENT
ITEM 1. BUSINESS
The registrant, LCA Group Inc. ('LCA'), a Delaware corporation, is presently
a wholly-owned subsidiary of U.S. Industries, Inc. ('USI').
The information required by this item is contained in the sections entitled
'Summary,' 'The Spin-off,' 'Financial Statements' 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 Condensed 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 'Projected Ownership of Our Stock Immediately after
the Spin-off' 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 LCA 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.*
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,' 'The Spin-off -- Results of
the Spin-off,' 'Projected Ownership of Our Stock Immediately After the Spin-off'
and 'Description of Capital Stock' of the Information Statement.*
---------
* Incorporated by reference.
1
<PAGE>
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,' 'Rights Plan' 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>
Information Statement (attached to this Registration
2.1 -- Statement as Annex A)**
3.1 -- Amended and Restated Certificate of Incorporation of LCA
(attached to Exhibit 2.1 as Annex A)**
3.2 -- By-Laws of LCA***
Rights Agreement, dated , 2000, between LCA and
4.1 -- , as Rights Agent***
4.2 -- Specimen form of certificate evidencing LCA common stock***
Distribution Agreement, dated , 2000, between USI
10.1 -- and LCA***
Indemnification Agreement, dated , 2000, between USI
10.2 -- and LCA***
10.3 -- Tax Sharing and Indemnification Agreement dated , 2000,
between USI and LCA***
Transition Services Agreement, dated , 2000, between
10.4 -- USI and LCA***
10.5(a) -- Employment Agreements***
LCA Group Inc. Stock Incentive Plan (attached to Exhibit 2.1
10.7 -- as Annex B)**
10.8 -- Intercompany Promissory Notes together with index***
11.1 -- Statement re: Computation of Per Share Earnings***
12.1 -- Statement re: Computation of Ratios***
21.1 -- Subsidiaries of LCA***
24.1 -- Power of Attorney***
27.1 -- Financial Data Schedule***
</TABLE>
---------
* Incorporated by reference.
** Filed herewith
*** 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.
LCA GROUP INC.
By: /s/ STEVEN C. BARRE
.....................................
Name: Steven C. Barre
Title: Senior Vice President, General
Counsel and Secretary
November 8, 2000
3
STATEMENT OF DIFFERENCES
------------------------
The British pound sign shall be expressed as 'L'
<PAGE>
EXHIBIT 2.1
<PAGE>
[LETTERHEAD OF U.S. INDUSTRIES, INC.]
, 2000
Dear Stockholder:
I am pleased to enclose a copy of the information statement describing LCA
Group Inc. ('LCA'), the company through which we intend to spin-off our lighting
and industrial tools businesses to our stockholders. When the spin-off is
completed, LCA will be a New York Stock Exchange-listed company entirely
separate from USI. It will own and operate Lighting Corporation of America, the
fourth largest lighting fixture manufacturer in the United States, SiTeco, a
major European lighting fixture manufacturer, and Spear & Jackson, an
international manufacturer of industrial hand tools.
You will receive 1 share of LCA common stock for every 10 shares of USI
common stock you hold at the close of business on , 2000. You will
not be required to make any payment or take any other action to receive your LCA
common stock. However, you may be required to pay tax on the shares of LCA you
receive.
The spin-off is conditioned upon completion of the new financing
arrangements for LCA described in the information statement. Subject to this,
the spin-off is expected to occur, and regular way NYSE trading in LCA common
stock is expected to commence, on , 2000.
Our Board of Directors approved the spin-off following a full review of
various alternatives to improve company performance. The Board concluded that
repositioning USI as a company focused on consumer-oriented, branded building
products -- such as Jacuzzi, Ames, True Temper, Sundance Spas and Zurn -- would
achieve greater shareholder value over time.
Following the spin-off, we believe our lighting and industrial tools
businesses will be better able to develop along an independent strategic path
with increased senior management attention. We would like to thank Jim O'Leary
and the members of his team who are leaving USI for their many contributions to
our company and wish them tremendous success at LCA.
Sincerely,
David H. Clarke
Chairman and Chief Executive Officer
<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 NOVEMBER 8, 2000
SUBJECT TO COMPLETION OR AMENDMENT
INFORMATION STATEMENT
LCA GROUP INC.
COMMON STOCK
(INCLUDING ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS)
[LOGO]
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 lighting and industrial tools businesses of USI.
If you are a USI stockholder at the close of business on
, 2000, you will receive 1 share of our common stock
for every 10 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 , 2000. You will not be required to make
any payment for the shares of our common stock that you will
receive in the spin-off. However, you may be required to pay
tax on the shares you receive.
If you have any questions regarding the spin-off, you
may call ChaseMellon Shareholder Services, L.L.C., telephone
number 1-800-522-6645.
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
'LXA'
-------------------
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 ,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Questions and Answers About the
Spin-off............................ ii
Summary............................... 1
Risk Factors.......................... 7
Forward Looking Statements............ 10
The Spin-off.......................... 11
Capitalization........................ 16
Selected Combined Financial Data...... 17
Unaudited Pro Forma Combined Condensed
Financial Data...................... 18
Pro Forma Combined Condensed Statement
of Operations....................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 27
Management............................ 33
Executive Compensation................ 35
Projected Ownership of Our Stock
Immediately after the Spin-off...... 41
Description of Capital Stock.......... 42
<CAPTION>
PAGE
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<S> <C>
Rights Plan........................... 43
Purposes and Effects of Certain
Provisions of Certificate of
Incorporation, By-Laws and Delaware
Statutory Law....................... 46
Limitation on Liability and
Indemnification of Officers and
Directors........................... 49
Additional Information................ 50
Index to Combined Financial
Statements.......................... F-1
ANNEX
A Amended and Restated Certificate of
Incorporation of LCA Group Inc..... A-1
B LCA Group 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
<TABLE>
<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 lighting and industrial tools businesses of USI.
WHY IS USI SPINNING-OFF USI performed a full review of various alternatives to
LCA? improve company performance. The Board of Directors of USI
concluded that repositioning USI as a company focused on
consumer-oriented, branded building products -- such as
Jacuzzi, Ames, True Temper, Sundance Spas and Zurn -- would
achieve greater shareholder value over time. Following the
Spin-off, LCA will be better able to develop the lighting
and industrial tools businesses along an independent
strategic path with increased senior management attention.
WHAT WILL I RECEIVE IN For every 10 shares of USI stock that you hold at the close
THE SPIN-OFF? of business on , 2000, you will receive 1 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. You will receive these automatically without
any required payment or other action on your part. Under our
direct registration program, unless you give us instructions
to do otherwise, your ownership of our common stock will be
recorded electronically on our books and records rather than
evidenced by a physical stock certificate.
WHEN WILL THE SPIN-OFF The spin-off will be completed as soon as possible after the
OCCUR? conditions to the spin-off are met. These conditions include
completion of financing.
DO I HAVE TO PAY TAXES In general, the distribution of LCA stock (including the
ON THE RECEIPT OF value of fractional shares) by USI may be treated as a
LCA COMMON STOCK? dividend, return of basis, and/or taxable gain to USI's
stockholders. The receipt of cash in lieu of fractional
shares may result in the recognition of gain or loss to the
stockholder equal to the difference between the cash
received and the tax basis allocated to such stockholder's
fractional share interest. To review the material federal
income tax consequences in greater detail, see 'The
Spin-off -- Material Federal Income Tax Consequences'.
WILL LCA COMMON We do not expect to pay cash dividends on our stock for the
STOCK PAY DIVIDENDS? foreseeable future.
WILL MY LCA We anticipate that our common stock will be traded on the
COMMON STOCK BE LISTED NYSE under the symbol ' ,' subject to official notice of
ON THE NEW YORK STOCK issuance.
EXCHANGE?
WHAT WILL HAPPEN TO USI will continue to own and operate its other
USI AND MY EXISTING USI businesses -- including USI Bath and Plumbing, and USI
COMMON STOCK? Hardware and Tools. USI stock will continue to trade on the
NYSE 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 THE Beginning on or about , 2000, and continuing through
TRADING OF USI AND , 2000, you will only be able to sell your USI stock
LCA COMMON STOCK? with due bills for our stock. This means that you will give
up your right to receive our stock if you sell your stock
during this time.
Beginning on , 2000, we expect that regular way
trading in our stock will begin on the NYSE.
</TABLE>
ii
<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 'LCA,' 'the
Company,' 'we,' 'us' or 'our' mean LCA Group 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, LCA and its subsidiaries). References to
'fiscal' are to the applicable fiscal year ended September 30.
THE COMPANY
LCA, currently a wholly owned subsidiary of USI, is a major manufacturer and
distributor of lighting fixtures and industrial tools. In fiscal 1999, we had
net sales of $917.5 million and operating income of $54.5 million before
corporate costs.
We are a leading producer of lighting fixtures in North America and Europe.
Collectively, the lighting businesses produce and market a complete offering of
indoor and outdoor lighting for the commercial, institutional and residential
markets. Our business has in excess of 5,700 employees worldwide. It has
manufacturing facilities in six U.S. states, California, Connecticut, South
Carolina, Ohio, Arkansas and Pennsylvania, in addition to operations in Mexico,
Puerto Rico, Germany, Slovenia and Austria. The lighting business's sales
organization consists of both independent manufacturers' sales representatives
(agents) and its own factory sales force employees. Our division sells products
through a variety of distribution channels, including electrical distributors,
lighting showrooms, home centers and national accounts. The lighting business's
major brands hold substantial market positions within each of the product
segments in which they participate. Our lines cover the full range from
specification grade products, which meet the particular performance and design
standards of architects and other professional lighting specifiers, to commodity
grade products, which satisfy general requirements for varied applications.
Our industrial tools business was acquired by USI in 1997 through the
acquisition of Spear & Jackson, a leading European hand tools manufacturer
founded in 1760. Our industrial tools business manufactures and distributes a
broad range of industrial tools, metrology products and magnetic products. The
division has over 1,375 employees worldwide. Products are sold through various
distribution channels, including in-house sales managers and merchandisers,
independent sales agents and industrial and engineering distributors, as well as
direct sales to retailers and end users. Our industrial tools business's major
brands hold substantial market positions within many of the product segments in
which they participate.
The following table presents our major brands and product offerings:
<TABLE>
<S> <C>
LIGHTING
Progress Leading single source supplier of residential and light
commercial decorative lighting fixtures. Product offering
consists of over 3,000 stock keeping units including:
chandeliers, hall and foyer, pendants, close-to-ceiling,
bath and vanity, sconces, modular fluorescent, undercabinet,
outdoor, landscape, track and recessed lighting.
Kim Premier specification product line of architectural outdoor
lighting fixtures and equipment for the commercial and
residential markets. Product categories include:
pole-mounted luminaires, bollards, parking garage
luminaires, flood lights, wall-mounted luminaries and
landscape fixtures.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Spaulding Outdoor lighting systems for the commercial market. Products
include outdoor area luminaires and poles, canopy lights,
low level lights and flood lights.
Architectural Period-style and contemporary site lighting fixtures for the
Area Lighting commercial outdoor market. Product categories include: pole
and wall-mounted luminaires, concrete bollards and custom
fixtures/poles.
Dual-Lite; Complete offering of life safety lighting products for
Prescolite Life Safety commercial and institutional applications. Products include:
exit signage, emergency back-up lighting, high frequency
'powerpack' inverters and central AC inverter systems.
Columbia Full line of specification and commodity grade fluorescent
lighting fixtures for use in commercial and institutional
applications. Products include parabolic and lensed
troffers, strip lights, wraparounds and a variety of
recessed surface and specialty units.
Alera Linear fluorescent indirect, direct/indirect and direct
lighting systems.
Prescolite Extensive line of specification grade recessed downlighting,
track lighting and surface-mounted lighting for the
commercial and residential markets.
Moldcast High performance oriented rugged commercial outdoor
luminaires. Products include a broad selection of
contemporary and period style outdoor lighting fixtures with
precise optics.
SiTeco Major European source of technical lighting systems and
services including: industrial lighting, task lighting,
roadway lighting and sports arena lighting. Product lines
are 'Siemens,' 'SiTeco,' 'Knoblich Licht' and 'Elektrokovina
Svetilke' serving the commercial and industrial market.
INDUSTRIAL TOOLS
Spear & Jackson Extensive line of high quality lawn and garden and hand
tools including digging and cultivating tools, cutting and
shear tools, striking tools, contractor tools, agricultural
tools, pliers, retail hand tools, screwdrivers, hammers and
plumbers tools.
Eclipse Full line of top quality hand tools including: hacksaws,
frames and blades, riveters and engineer tools.
Eliot Lucas Pliers, woodsaws and builder tools.
Bowers; Moore & Wright Precision tools, measuring instruments and calibration
services.
</TABLE>
ADDRESS AND TELEPHONE NUMBER
We are a Delaware corporation. Our principal executive offices will be
located at Iselin, New Jersey and our telephone number at that address will be
(732) 767-0700.
2
<PAGE>
THE SPIN-OFF
<TABLE>
<S> <C>
Company Doing the Spin-off........... U.S. Industries, Inc., a Delaware corporation.
Company Resulting from the
Spin-off........................... LCA Group Inc., a Delaware corporation.
Conditions to the Spin-off........... Completion of the spin-off is subject to the availability of
proceeds under our new credit facility.
Spin-off Ratio....................... 1 share of our common stock for every 10 shares of USI
common stock held of record on the spin-off record date.
Spin-off Record Date................. , 2000 (5:00 p.m. New York City time).
Spin-off Effective Date.............. , 2000.
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 1 share of our
stock for every 10 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 77 million shares of USI common stock
outstanding at the close of business on , 2000,
approximately 7.7 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 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
directly to stockholders 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.'
Direct Registration.................. Upon completion of the spin-off, we will issue the
appropriate number of shares of our common stock to you
through direct registration rather than issuing a physical
stock certificate unless you give specific instructions to
do otherwise. See 'The Spin-off -- Direct Registration of
Our Common Stock.'
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Dividend Agent....................... The dividend agent is ChaseMellon Shareholder Services
L.L.C. Its address, telephone number and website are:
Chase Mellon Shareholder Services
Overpeck Centre
85 Challenger Rd.
Ridgefield Park, N.J. 07660
Phone: 1-800-522-6645
Website: www.chaseMellon.com
Material Federal Income Tax
Consequences to USI Stockholders... In general, the distribution of LCA's stock (including the
value of fractional shares) by USI may be treated as a
dividend, return of basis and/or taxable gain to USI's
Stockholders. The fractional shares to which the USI
Stockholders would otherwise be entitled will be sold and
the receipt of cash in lieu of fractional shares may result
in the recognition of gain or loss to the stockholder equal
to the difference between the cash received and the tax
basis allocated to such stockholder's fractional share
interest. The tax basis of the fractional shares will be the
fair market value thereof on or near the date of the
distribution. To review the material federal income tax
consequences in greater detail, 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
, 2000, for settlement on , 2000. 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
City time, on , 2000, 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....................... The transfer agent and registrar for our common stock will
be Chase Mellon Shareholder Services.
Agreements between LCA 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 LCA and USI
and Relationship after the Spin-off.'
</TABLE>
4
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The historical selected combined financial data of the Company set forth
below for each of the years in the three year period ended September 30, 1999
are derived from the audited combined financial statements of the Company, which
are included elsewhere in this information statement. The historical selected
combined financial data for the nine months ended June 30, 2000 and 1999 and for
the years ended September 30, 1996 and 1995 are unaudited but, in our opinion,
have been prepared on a basis consistent with that for the three-year period
ended September 30, 1999. 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 Condensed 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 the Company prior to the spin-off is not indicative of
its capital structure following the spin-off.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR ENDED
JUNE 30, SEPTEMBER 30,
--------------- -------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales....................... $698.9 $677.0 $917.5 $856.1 $537.7 $508.1 $ 492.0
Cost of products sold........... 475.8 461.1 628.7 590.5 374.3 356.1 351.1
Selling, general and
administrative expenses....... 191.9 175.8 234.3 203.9 119.5 116.1 115.7
Restructuring charges(A)........ -- -- -- 2.3 -- -- 99.7
Operating income(A)............. 26.6 33.7 46.6 51.1 34.7 29.6 (76.2)
Net income (loss)............... 9.8 14.4 20.2 23.1 13.0 12.9 (100.1)
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents....... $ 14.1 $ 5.0 $ 9.1 $ 12.4 $ 0.1 $ 0.1 $ 0.2
Working capital................. 246.0 230.5 231.9 214.4 122.5 118.5 111.5
Total assets.................... 706.7 669.6 688.1 617.3 285.5 280.5 266.1
Total debt(B)................... 208.7 203.3 205.8 201.7 195.0 195.0 195.0
Invested capital................ 309.0 287.0 290.1 234.1 17.1 12.9 13.1
OTHER DATA:
Capital expenditures............ 16.0 21.3 31.2 23.7 12.6 10.5 8.4
Depreciation and amortization... 19.4 17.7 23.8 21.0 9.8 9.0 13.2
</TABLE>
---------
(A) The Company changed its accounting policy for evaluating goodwill
impairment in fiscal 1995, resulting in a charge of $97.9 million to the
lighting segment. Fiscal 1995 operating income includes charges of $1.8
million to close certain underutilized facilities of the lighting
operations. Fiscal 1998 includes restructuring charges of $2.3 million
related to the closing of a manufacturing and distribution facility in the
lighting segment.
(B) Amounts primarily represent intercompany notes payable to affiliates.
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following summary unaudited pro forma combined condensed financial data
reflect the spin-off as if it occurred as of June 30, 2000 for unaudited pro
forma combined condensed balance sheet purposes and October 1, 1998 for the
unaudited pro forma combined condensed statement of operations of each of the
periods presented. The unaudited pro forma combined condensed financial data
reflect our expected capitalization as a result of the spin-off, the incurrence
of a total of approximately $207.0 million of indebtedness under the new credit
facility and interest expense (including amortization of capitalized costs)
relating to such borrowings. This data does 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 Condensed Financial Data.'
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30,
FISCAL YEAR ENDED -------------------
SEPTEMBER 30, 1999 2000 1999
------------------ ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
DATA:
Net sales............................................ $917.5 $698.9 $677.0
Operating income..................................... 44.5 23.7 32.6
Interest expense..................................... (20.7) (15.7) (15.7)
Net income........................................... 14.6 4.9 10.4
Basic and diluted earnings per share................. $ 1.90 $ 0.64 $ 1.34
Shares outstanding................................... 7.7 7.7 7.7
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 2000
----------------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C>
PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 14.1
Working capital......................................... 246.0
Total assets............................................ 713.7(A)
Total debt.............................................. 214.1
Total liabilities....................................... 382.6
Stockholders' equity.................................... 331.1(A)
Book value per share.................................... 43.06
</TABLE>
---------
(A) Subsequent to June 30, 2000, the Company will record a goodwill impairment
charge of $83 million with no related tax benefit. Accordingly, the pro
forma Total assets and Stockholders' equity will be reduced by such amount
due to this write-off.
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 June 30, 2000, after giving pro forma effect to the spin-off,
including our expected initial borrowings under the new credit facility we would
have had combined indebtedness of approximately $214.1 million and stockholders'
equity of approximately $331.1 million. Subsequent to June 30, 2000, we will
record a goodwill impairment charge amounting to approximately $83 million, with
no related tax benefit. Accordingly, stockholders' equity will be reduced by
such amount for this write-off. After giving pro forma effect to the additional
interest expense and other changes in expenses expected after the spin-off, we
would have had earnings per share of $1.90 for fiscal 2000 instead of earnings
per share of $2.63 based on the assumed number of shares outstanding of
7,690,000. See 'Capitalization' and 'Unaudited Pro Forma Combined Condensed
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 fund our 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. To the extent we engage in any of the
above referenced activities stockholders may be subject to a decrease in the
value of their shares or dilution of their equity interest in the Company. 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 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.'
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
7
<PAGE>
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.
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.
WE ARE A NEW COMPANY AND OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE USEFUL
IN PREDICTING FUTURE RESULTS.
The historical financial information included in this Information Statement
is that of USI's lighting and industrial tools businesses (i.e., those parts of
USI being distributed to LCA) and not of LCA and may not necessarily reflect the
results of operations, financial position and cash flows had LCA operated as a
separate stand-alone entity during the periods presented. This historical
financial information does not reflect any changes that may occur in the funding
and operations of LCA as a result of the Spin-off.
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, either because such rights are not available or because we do
not believe such protection is necessary. 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 1999, we derived
approximately 36.6% of our net sales from customers outside the United States.
At June 30, 2000, we held $293.8 million of assets outside of the United States.
WE DO NOT USE DERIVATIVE PRODUCTS TO HEDGE AGAINST FOREIGN CURRENCY EXCHANGE
RISK
Decreases in the value of foreign currencies relative to the U.S. dollar
could result in losses from foreign currency conversions. Subsequent to the
Spin-off, we may borrow in foreign currencies to effectively hedge a portion of
our net investment in our foreign subsidiaries.
8
<PAGE>
WE ARE DEPENDENT ON CERTAIN INDUSTRIES
A significant portion of our lighting business's sales are made to customers
in the new construction, renovation and remodeling industries. These industries
are cyclical in nature and subject to changes in general economic conditions. In
addition, sales of the industrial tools division are dependent on the retail,
wholesale and industrial markets for our product line. Economic downturns and
the potential declines in construction and demand for industrial tools may have
a material adverse effect on our net sales and operating income.
AN INCREASE IN THE PRICE OF RAW MATERIALS OR FINISHED GOODS COULD ADVERSELY
AFFECT OUR OPERATIONS
Our operating companies require certain raw materials for their products,
including plastics, aluminum, copper, nickel, cobalt, molybdenum, tungsten,
certain grades of steel, wood, glass, corregated packaging and petroleum. We
purchase most of these raw materials on the open market, and rely on third
parties for the sourcing of finished goods. As such, our cost of products sold
may be affected by changes in the market price of the above-mentioned raw
materials or sourcing services and finished goods. We do not 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
or sourcing 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.
OUR BUSINESS COULD SUFFER IN THE EVENT OF A WORK STOPPAGE BY OUR UNIONIZED LABOR
FORCE.
We believe that we have satisfactory relations with our unions and,
therefore, anticipate reaching new agreements on satisfactory terms as existing
agreements expire. However, new agreements may not be reached without a work
stoppage or strike or reached on terms satisfactory to us. A prolonged work
stoppage or strike could have a material adverse effect on our 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.'
WE HAVE NO OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY
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. After the spin-off, this will no longer be the case.
WE ARE DEPENDENT ON KEY PERSONNEL
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 have therefore entered into
employment agreements with the individuals who will be executive officers of
LCA. Additionally, these executive officers and selected key executives of our
subsidiaries will be awarded options and
9
<PAGE>
restricted stock which will not be completely vested until several years in the
future (four years for options and seven years for restricted stock, thereby
incentivizing these key executives to continue in their employment.
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 in November 2010. In addition, provisions of our charter and by-laws may
discourage, delay or prevent a merger or acquisition that our stockholders may
consider favorable, including transactions in which you might otherwise receive
a premium for your shares. For example, these provisions: (i) authorize the
issuance of 'blank check' preferred stock without any need for action by
stockholders; (ii) provide for a classified board of directors with staggered
three-year terms; (iii) require supermajority stockholder voting to effect
various amendments to our by-laws; (iv) eliminate the ability of stockholders to
call special meetings of stockholders; (v) prohibit stockholder action by
written consent; and (vi) establish advance notice requirements for nominations
for election to the board of directors or for proposing matters that can be
acted on by stockholders at stockholder meetings. 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.'
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,
the effect of changes in domestic and foreign laws and regulations
(including government subsidies, tariffs and international trade
regulations), and
product initiatives and other actions taken by competitors, changes in
raw material costs and our suppliers' continuing ability to fulfill our
purchasing requirements.
All of the forward-looking statements made in this information statement are
qualified by these cautionary statements, and we cannot assure you that the
results or developments we have anticipated
10
<PAGE>
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.
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 1 share of our common stock for
every 10 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 , 2000 and continuing through
, 2000, 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 1 share of our common stock for every 10 shares purchased. If the
spin-off is not completed, all due bills attached 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
, 2000.
The dividend agent is ChaseMellon Shareholder Services L.L.C. We have a
direct registration (book entry) program with respect to ownership of our common
stock. Upon completion of the spin-off, we will issue the appropriate shares of
our common stock to you through direct registration rather than issuing a
physical stock certificate unless you give specific instructions to do
otherwise. See ' -- Direct Registration of Our Common Stock.'
FRACTIONS OF SHARES
No certificates representing fractions of shares will be issued directly as
part of the spin-off. Instead of receiving a fraction of a share, each USI
Stockholder 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 lighting and industrial tools businesses. Immediately after the
spin-off, based on the number of outstanding shares of USI common stock and the
number of record holders on , 2000, we expect to have approximately 7.7
million shares of common stock outstanding, held by approximately
record holders (excluding 279,000 shares of our common stock that we
anticipate will be issued, subject to certain restrictions, to executive
officers and other key employees 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 USI Bath and Plumbing, and USI Hardware and Tools. The
spin-off will not affect the number of outstanding shares of USI common stock or
any rights of USI stockholders.
11
<PAGE>
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 , 2000, our common stock is expected to trade on a
'when-issued' basis on the NYSE for settlement when our common stock is issued
on , 2000. 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 , 2000, 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 and shares of our common
stock, respectively, and our plans are expected to hold approximately
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.'
DIRECT REGISTRATION OF OUR COMMON STOCK
We will have a direct registration (book entry) program with respect to
record ownership of our common stock. Direct registration is a service that
allows shares to be owned, reported and transferred electronically without
having a physical stock certificate issued. Persons who acquire shares of our
common stock will not receive a physical stock certificate (unless certificates
are requested); rather, ownership of the shares is recorded in the names of such
persons electronically on our books and records. Direct registration is intended
to alleviate problems relating to stolen, misplaced or lost stock certificates
and to reduce the paperwork relating to the transfer of ownership of our common
stock.
12
<PAGE>
Under direct registration, the voting, dividend and other rights and
benefits of holders of our common stock remain the same as with holders of
certificates.
Upon completion of the spin-off, we will mail you a statement confirming the
issuance to you of the appropriate shares of our common stock through direct
registration, rather than issuing a physical stock certificate unless you give
specific instructions to do so. The mailing will explain how to obtain a
physical certificate, if you wish.
The requirements for transferring book entry shares are the same as for
shares represented by a physical stock certificate except that, with direct
registration, there is no certificate to surrender. Our common stock owned
through the direct registration program may be sold and transferred through a
stock broker or through Chase Mellon Shareholder Services, the transfer agent
for our common stock.
In order to utilize the services of a stock broker, you must first add the
appropriate stock broker information to the direct registration account
maintained by the transfer agent. Thereafter, you may by telephone transfer our
common stock to a brokerage account with such stock broker and then may sell or
transfer such shares by giving instructions to the broker.
Alternatively, shares of our common stock owned through direct registration
may be sold or transferred through the services of the transfer agent. Sales
will be made through the transfer agent when practicable, but at least once each
week. The transfer agent cannot accept instructions to sell shares on a specific
day or at a specific price. The price per share will be the average price per
share of all of our common stock sold during the period by the transfer agent
for holders of book entry shares.
AGREEMENTS BETWEEN LCA 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 hold
certain of the other company's shares for up to two years following the
Spin-off). 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
lighting and industrial tools 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 provision of services and
the transfer of assets and liabilities under employee benefit plans.
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 Lighting and Industrial Tools
Businesses of USI. The assets and liabilities of USI's lighting and industrial
tools businesses will be transferred by USI and its subsidiaries to us. 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.
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
13
<PAGE>
USI against all liabilities, litigation and claims arising out of USI's lighting
and industrial tools 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 lighting and industrial tools
businesses, (2) liabilities (including liabilities under the Securities Exchange
Act of 1934) for statements included in this information statement and USI's
prior SEC filings and (3) certain other liabilities pertaining to USI's demerger
from Hanson plc. 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 (1) USI will be
responsible for, and will indemnify us and our subsidiaries against, tax
liabilities that relate to the period up to and including the date of the
spin-off and (2) we will be responsible for, and will indemnify USI and its
subsidiaries against, our tax liabilities for taxable periods beginning after
the date of the spin-off.
Transition Services Agreement. We will enter into a transition services
agreement with USI, pursuant to which we will perform for USI several services
on a transitional basis. These services will include, financial reporting,
payroll, stock options, employee benefits and certain risk management
administration, and treasury services, which includes cash management. The
corporate transition agreement will be for a term of no greater than 18 months,
terminable by USI upon 30 days notice.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Tax Consequences to U.S. Stockholders. The distribution by USI to its
holders of common stock of the stock of LCA is a taxable 'Spin-off' and may be
characterized as a dividend taxable as ordinary income to the extent of USI's
current and accumulated earnings and profits. The amount of the distribution
will be equal to the fair market value of the distributed shares (including the
value of fractional shares). (The fair market value of the shares will be its
market value determined on or near the date of distribution based on the NYSE
price of the LCA common stock on the first day of trading.) To the extent that
all or part of a distribution to a holder exceeds such holder's allocable share
of USI's current and accumulated earnings and profits, such amount will first be
treated as a return of capital that will reduce the holder's adjusted tax basis
in his shares of USI's stock and then to the extent that the distribution
exceeds such basis, such excess will be treated as gain received from a sale or
exchange of stock and taxed as either short term or long term capital gain,
(depending upon whether the holder's holding period for such stock has been
equal to or less than one year). In addition, each stockholder of USI who
receives cash proceeds in lieu of fractional interests in shares of LCA may
recognize gain or loss equal to the difference between such proceeds and the tax
basis allocated to such stockholder's fractional share interest.
A corporate stockholder will generally be entitled to a 70% (or 80%, if the
corporate holder owns more than 20% of USI's stock) dividends-received deduction
with respect to distributions that are treated as dividends on shares of USI's
stock that the corporate holder has held for more than 45 days during the 90 day
period that begins 45 days before the stock becomes ex-dividend. A corporation's
holding period for this purpose is reduced by periods during which the
corporation's risk of loss with respect to the shares is considered diminished
by reason of certain options, contracts to sell or other similar transactions.
In addition, the dividends-received deduction may be reduced or eliminated if a
corporation has indebtedness 'directly attributable to its investment' in
portfolio stock.
14
<PAGE>
A corporate holder is required to reduce its basis (but not below zero) in
USI's stock by the non-taxed portion (generally the portion eligible for the
dividends-received deduction described above) of an 'extraordinary dividend', if
the holder has not held such stock subject to a risk of loss for more than two
years before USI declared, announced, or agreed to, the amount or payment of
such dividend, whichever is earliest. (An 'extraordinary dividend' means any
dividend with respect to a share of stock if the amount of such dividend equals
or exceeds 10% of the corporate holder's adjusted basis in such share of stock.)
If any part of the non-taxed portion of an extraordinary dividend has not been
applied to reduce the basis as a result of the limitation on reducing basis
below zero, such part will be treated as gain from the sale or exchange of stock
for the taxable year in which the extraordinary dividend is received.
In addition, for purposes of computing its alternative minimum tax
liability, a corporate holder may, in general, be required to include in its
alternative minimum taxable income a portion of any dividends-received deduction
allowed in computing regular taxable income.
Tax Consequences to Non-U.S. Stockholders. Foreign Stockholders who receive
distributions of LCA's stock from USI may be subject to a 30-percent withholding
tax on the gross amount of the distribution unless an applicable tax treaty
reduces or eliminates that tax. However, if income from the investment in USI's
common stock is treated as effectively connected with a non-U.S. stockholder's
conduct of a U.S. trade or business (or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment), the non-U.S. stockholders
generally will be subject to federal income tax at graduated rates, in the same
manner as U.S. stockholders are treated with respect to such distributions (and
also may be subject to the 30-percent branch profits tax, in the case of a
non-U.S. stockholder that is a non-U.S. corporation).
Backup Withholding Requirements. The distribution of LCA's stock may be
subject to backup withholding at a rate of 31-percent on the amount due to
non-exempt United States Holders for whom backup holding applies with regard to
the payment of dividends and to certain foreign stockholders who do not
establish an exemption from backup withholding tax.
The summary of federal income tax consequences set forth above 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 June 30, 2000,
our capitalization as adjusted to reflect the spin-off and the incurrence of
indebtedness under the new credit facility, as if these transactions had
occurred as of that date. This data should be read in conjunction with
'Unaudited Pro Forma Combined Condensed 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 JUNE 30, 2000
--------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
------ ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Long-Term Debt (including current portion):
Notes payable......................................... $ 7.1 $ -- $ 7.1
New credit facility................................... -- 207.0 207.0
Notes and interest payable to affiliates.............. 222.1 (222.1) --
------ ------- ------
Total long-term debt (including current
portion)........................................ $229.2 $ (15.1) $214.1
Stockholders' Equity (Deficit):
Common stock, shares authorized, par value
$0.01 per share, shares issued and
outstanding (as adjusted)........................... $ -- $ -- $ --
Preferred stock, shares authorized, none
issued and outstanding.............................. -- -- --
Paid-in-Capital....................................... -- 331.1 (A) 331.1
Invested Capital...................................... 309.0 (309.0) --
------ ------- ------
Total invested capital/stockholders' equity....... 309.0 22.1 331.1(B)
------ ------- ------
Total capitalization.......................... $538.2 $ 7.0 $545.2(B)
------ ------- ------
------ ------- ------
</TABLE>
---------
(A) To reflect the net effect on invested capital.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Invested Capital............................................ $309.0
Portion of notes payable to affiliate forgiven.............. 22.1
------
$331.1
------
------
</TABLE>
(B) Subsequent to June 30, 2000, the Company will record a goodwill impairment
charge of approximately $83 million with no related tax benefit.
Accordingly, the pro forma Stockholders' equity and Total capitalization
will be reduced by such amount due to this write-off.
16
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The historical selected combined financial data of the Company set forth
below for each of the years in the three year period ended September 30, 1999
are derived from the audited combined financial statements of the Company, which
are included elsewhere in this information statement. The historical selected
combined financial data for the nine months ended June 30, 2000 and 1999 and for
the years ended September 30, 1996 and 1995 are unaudited but, in our opinion,
have been prepared on a basis consistent with that for the three-year period
ended September 30, 1999. 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 Condensed 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 the Company prior to the spin-off is not indicative of
its capital structure following the spin-off.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
NINE MONTHS ENDED FISCAL YEAR ENDED
JUNE 30, SEPTEMBER 30,
------------------------------------- ------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales.................... $698.9 $677.0 $917.5 $856.1 $537.7 $508.1 $492.0
Cost of products sold........ 475.8 461.1 628.7 590.5 374.3 356.1 351.1
Selling, general and
administrative expenses.... 191.9 175.8 234.3 203.9 119.5 116.1 115.7
Restructuring charges(A)..... -- -- -- 2.3 -- -- 99.7
Operating income(A).......... 26.6 33.7 46.6 51.1 34.7 29.6 (76.2)
Net income (loss)............ 9.8 14.4 20.2 23.1 13.0 12.9 (100.1)
BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents.... $ 14.1 $ 5.0 $ 9.1 $ 12.4 $ 0.1 $ 0.1 $ 0.2
Working capital.............. 246.0 230.5 231.9 214.4 122.5 118.5 111.5
Total assets................. 706.7 669.6 688.1 617.3 285.5 280.5 266.1
Total debt(B)................ 208.7 203.3 205.8 201.7 195.0 195.0 195.0
Invested capital............. 309.0 287.0 290.1 234.1 17.1 12.9 13.1
OTHER DATA:
Capital expenditures......... 16.0 21.3 31.2 23.7 12.6 10.5 8.4
Depreciation and
amortization............... 19.4 17.7 23.8 21.0 9.8 9.0 13.2
</TABLE>
---------
(A) The Company changed its accounting policy for evaluating goodwill
impairment in fiscal 1995, resulting in a charge of $97.9 million to the
lighting segment. Fiscal 1995 operating income includes charges of $1.8
million to close certain underutilized facilities of the lighting
operations. Fiscal 1998 includes restructuring charges of $2.3 million
related to the closing of a manufacturing and distribution facility in the
lighting segment.
(B) Amounts primarily represent intercompany notes payable to affiliates.
17
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data reflect
the spin-off as if it occurred as of June 30, 2000 for unaudited pro forma
combined condensed balance sheet purposes and as of October 1, 1998 for the
unaudited pro forma combined condensed statement of operations. The unaudited
pro forma combined condensed financial data reflect our expected capitalization
as a result of the spin-off, the incurrence of indebtedness under the new credit
facility and interest expense (including amortization of capitalized costs)
relating to such borrowings. This data do not necessarily reflect our results of
operations or financial position had the indebtedness actually been incurred and
the spin-off actually been consummated as of such dates. Also, this data are not
necessarily indicative of our future results of operations or future financial
position.
The pro forma combined condensed financial data will be revised in the
definitive information statement to reflect the information that will depend
upon market conditions at the time of the spin-off, including the amount and
other terms of the indebtedness we will incur under a new credit facility.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
--------------------------------
PRO-FORMA
ACTUAL ADJUSTMENTS PRO-FORMA
------ ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 14.1 $ $ 14.1
Trade receivables, net................................. 172.0 172.0
Inventories............................................ 169.7 169.7
Deferred income taxes.................................. 9.1 9.1
Other current assets................................... 7.2 7.2
------ ------- ------
Total current assets............................... 372.1 -- 372.1
Property, plant and equipment, net......................... 166.7 166.7
Pension assets............................................. 7.4 7.4
Other assets............................................... 1.1 7.0 (A) 8.1
Goodwill, net.............................................. 159.4 159.4(D)
------ ------- ------
$706.7 $ 7.0 $713.7
------ ------- ------
------ ------- ------
LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Notes payable.......................................... $ 7.1 $ 7.1
Trade accounts payable................................. 58.6 58.6
Accrued expenses and other liabilities................. 58.0 58.0
Income taxes payable................................... 2.4 2.4
------ ------- ------
Total current liabilities.......................... 126.1 -- 126.1
Long term debt............................................. 207.0 (B) 207.0
Deferred income taxes...................................... 2.5 2.5
Other liabilities.......................................... 47.0 47.0
Notes payable to Affiliates................................ 201.6 (201.6)(B)(C) --
Interest payable to Affiliates............................. 20.5 (20.5)(B) --
------ ------- ------
Total liabilities.................................. 397.7 (15.1) 382.6
Commitments and contingencies..............................
Invested capital........................................... 309.0 22.1 (C)(D) 331.1
------ ------- ------
$706.7 $ 7.0 $713.7
------ ------- ------
------ ------- ------
</TABLE>
---------
(A) To capitalize the cost of obtaining financing under the new credit
facility, which will be amortized over a five year period.
(footnotes continued on next page)
18
<PAGE>
(footnotes continued from previous page)
(B) To reflect initial borrowings under the new credit facility, of which $200
million will be utilized for the repayment of notes payable to affiliated,
including accrued interest thereon and $7 million for the payment of debt
financing costs.
(C) To reflect the amount of notes payable to affiliates that would be forgiven
by USI assuming $207 million in borrowings.
(D) Subsequent to June 30, 2000, the Company will record a goodwill impairment
charge amounting to approximately $83 million, with no related tax benefit.
Accordingly the pro forma goodwill and invested capital will be reduced by
such amount due to this write-off.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30, 2000
------------------------------------
PRO-FORMA
ACTUAL ADJUSTMENTS PRO-FORMA
------ ----------- ---------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales................................................... $698.9 $698.9
Operating costs and expenses:
Cost of products sold................................... 475.8 475.8
Selling, general and administrative expenses............ 191.9 7.5 (A) 199.4
Management fee and divisional overhead.................. 4.6 (4.6)(A) --
------ ------ ------
Operating income............................................ 26.6 (2.9) 23.7
Interest expense to Affiliates.............................. (9.8) 9.8 (B) --
Interest expense............................................ (0.6) (14.0)(B) (15.7)
(1.1)(C)
Interest income............................................. 0.4 -- 0.4
------ ------ ------
Income before income taxes.................................. 16.6 (8.2) 8.4
Provision for income taxes.................................. (6.8) 3.3 (D) (3.5)
------ ------ ------
Net income.................................................. $ 9.8 $ (4.9) $ 4.9
------ ------ ------
------ ------ ------
Basic and diluted earnings per share(E)..................... $ 1.27 $ 0.64
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30, 1999
------------------------------------
PRO-FORMA
ACTUAL ADJUSTMENTS PRO-FORMA
------ ----------- ---------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales................................................... $677.0 $677.0
Operating costs and expenses:
Cost of products sold................................... 461.1 461.1
Selling, general and administrative expenses............ 175.8 7.5 (A) 183.3
Management fee and divisional overhead.................. 6.4 (6.4)(A) --
------ ------ ------
Operating income............................................ 33.7 (1.1) 32.6
Interest expense to Affiliates.............................. (9.5) 9.5 (B) --
Interest expense............................................ (0.6) (14.0)(B) (15.7)
(1.1)(C)
Interest income............................................. 0.5 -- 0.5
------ ------ ------
Income before income taxes.................................. 24.1 (6.7) 17.4
Provision for income taxes.................................. (9.7) 2.7 (D) (7.0)
------ ------ ------
Net income.................................................. $ 14.4 $ (4.0) $ 10.4
------ ------ ------
------ ------ ------
Basic and diluted earnings per share(E)..................... $ 1.87 $ 1.35
------ ------
------ ------
</TABLE>
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1999
------------------------------------
PRO-FORMA
ACTUAL ADJUSTMENTS PRO-FORMA
------ ----------- ---------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales................................................... $917.5 $917.5
Operating costs and expenses:
Cost of products sold................................... 628.7 628.7
Selling, general and administrative expenses............ 234.3 10.0 (A) 244.3
Management fee and divisional overhead.................. 7.9 (7.9)(A) --
------ ------ ------
Operating income............................................ 46.6 (2.1) 44.5
Interest expense to Affiliates.............................. (12.7) 12.7 (B) --
Interest expense............................................ (0.7) (18.6)(B) (20.7)
(1.4)(C)
Interest income............................................. 0.6 -- 0.6
------ ------ ------
Income before income taxes.................................. 33.8 (9.4) 24.4
Provision for income taxes.................................. (13.6) 3.8 (D) (9.8)
------ ------ ------
Net income.................................................. $ 20.2 $ (5.6) $ 14.6
------ ------ ------
------ ------ ------
Basic and diluted earnings per share(E)..................... $ 2.63 $ 1.90
------ ------
------ ------
</TABLE>
---------
(A) To eliminate management fees allocated from USI and divisional overhead,
and to record estimated selling, general and administrative expenses that
we expect to incur following the spin-off, including management and
director compensation, net of a transition service agreement fee amounting
to $9 million, that will be charged to USI for services that we will
perform for USI. The transition services agreement with USI will be for a
period not to exceed 18 months and terminable by USI on 30 days notice.
(B) To reflect interest expense on initial borrowings under the new credit
facility at an assumed interest rate of 9% per year and eliminate interest
cost on notes payable to affiliates. For each 1/8% change in the assumed
interest rate, pro forma interest expense would change by approximately
$0.3 per year.
(C) To amortize the cost of obtaining financing ($7.0 million) over the term of
the credit facility.
(D) To reflect tax effects of above adjustments (A through C) at a tax rate of
40% (inclusive of federal, state and local taxes).
(E) Basic and diluted earnings per share have been determined assuming that
7,690,000 shares of our common stock will be issued upon the spin-off. One
share of our common stock will be issued for every ten USI shares.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We operate and manage lighting and industrial tools businesses. Our
operating companies are divided into two business groups: Lighting and
Industrial Tools.
The following table presents, for each of the last three fiscal years and
the nine months ended June 30, 2000 and 1999, net sales and operating income of
our two business groups. The historical net sales and operating income data for
the two business groups for the nine months ended June 30, 2000 and 1999 are
unaudited but have been prepared on a basis consistent with the audited periods.
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>
FOR NINE MONTHS FOR THE FISCAL YEARS ENDED
ENDED JUNE 30, SEPTEMBER 30,
--------------- ---------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NET SALES
Lighting................................... $603.2 $590.9 $804.0 $765.5 $537.7
Industrial Tools........................... 95.7 86.1 113.5 90.6 --
------ ------ ------ ------ ------
Total net sales........................ $698.9 $677.0 $917.5 $856.1 $537.7
------ ------ ------ ------ ------
------ ------ ------ ------ ------
OPERATING INCOME
Lighting(A)................................ $ 26.8 $ 35.9 $ 48.3 $ 53.5 $ 43.9
Industrial Tools........................... 4.4 4.2 6.2 5.9 --
Management fees and divisional overhead.... (4.6) (6.4) (7.9) (8.3) (9.2)
------ ------ ------ ------ ------
Total operating income................. $ 26.6 $ 33.7 $ 46.6 $ 51.1 $ 34.7
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
---------
(A) In fiscal 1998, operating income includes restructuring charges of $2.3
million other related charges of $0.5 million. See Note 4 to the Combined
Financial Statements.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
Net Sales and Operating Income
We had total net sales of $698.9 million and total operating income of $26.6
million for the nine months ended June 30, 2000, a sales increase of $21.9
million (3.2%) and a decrease in operating income of $7.1 million (21.1%) from
the nine months ended June 30, 1999.
Lighting had net sales of $603.2 million and operating income of $26.8
million for the nine months ended June 30, 2000, an increase in sales of $12.3
million (2.1%) and a decrease in operating income of $9.1 million (25.3%) from
the same period last year. Sales increased due to the full period inclusion of
Dual-Lite which was acquired in March 1999 of the prior year. This was offset by
sales decreases in the residential division where certain unprofitable product
lines were discontinued. The decrease in operating income is mainly the result
of discontinuing certain residential product lines, which resulted in
nonrecurring charges of $2.3 million, primarily related to inventory and
accounts receivable write-offs and $1.2 million of operating losses during the
wind down period. In addition, the residential division incurred approximately
$2 million in costs associated with moving some production offshore. Our
commercial and institutional indoor division reported lower operating income as
a result of inventory write-offs from a SKU rationalization program and lower
pricing due to competition.
Industrial Tools had net sales of $95.7 million and operating income of $4.4
million for the nine months ended June 30, 2000, increases in sales and
operating income of $9.6 million (11.1%) and $0.2
21
<PAGE>
million (4.8%), respectively, from the same period last year. The increase in
sales are mainly related to the acquisition of S&J France in December 1999 and
Bowers plc in January 1999. These increases were partially offset by the
unfavorable translation effect of converting UK results into US dollars. Also,
results have been impacted by severe competition in the United Kingdom market
due to lower cost imports from the Far East.
In June 2000, upon expiration of the contingency period related to the
December 1997 acquisition of Spear & Jackson, USI made additional cash payments
of `L'47 million ($71 million), to the former owners of Spear & Jackson. At the
end of a thirty month contingency period, the market value of USI's stock, which
was computed in accordance with the stock purchase agreement by averaging USI's
stock price on the NYSE during the last five trading days of the contingency
period, was below the guaranteed amount (i.e. the market value of USI's stock at
the acquisition date), which required USI to make a $36 million payment -- this
portion of the payment was recorded as an adjustment to invested capital as it
was based upon the market value of the USI's common stock price. The remainder
of the cash payment ($35 million) was recorded as additional goodwill as it
related to the settlement of additional contingent consideration based on
certain sales and other criteria set forth in the purchase agreement.
Due to indications of impairment based on the additional consideration paid
for Spear & Jackson and its current operating results, the Company evaluated the
recoverability of the Spear & Jackson goodwill in accordance with its accounting
policy as described in Note 2. In arriving at the fair value of Spear & Jackson
the Company considered a number of factors including 1) Competition from less
expensive imports; 2) declining margins on exports; 3) general decline in the
industrial sector in the United Kingdom 4) Spear & Jackson'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 value to the estimated fair values
of Spear & Jackson. Based on the above, the Company will record in September
2000 an impairment charge to the goodwill of Spear & Jackson of $83 million. The
effect of this charge will reduce future goodwill amortization by approximately
$2.2 million per annum.
Management fees and divisional overhead costs of $4.6 million, decreased
$1.8 million (28.1%) from prior year due to the elimination of the lighting
divisional office in November 1999 and the prior year included a severance
charge of $1.4 million related to division management.
Interest and Taxes
Total interest expense of approximately $10.4 million for the nine months
ended June 30, 2000, increased $0.3 million (3.0%) from the comparable period of
fiscal 1999. The increase reflects higher levels of outstanding notes payable to
affiliates.
Interest income was less than $1 million in both periods reflecting
short-term investments of excess cash at foreign operations.
Our provision for income taxes was $6.8 million on pre-tax income of $16.6
million (a 40.9% effective rate) for the nine months ended June 30, 2000,
compared to $9.7 million on pre-tax income of $24.1 million (a 40.2% effective
rate) for the nine months ended June 30, 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales and Operating Income
We had total net sales of $917.5 million and total operating income of $46.6
million for the fiscal year ended September 30, 1999, a sales increase of $61.4
million (7.2%) and a decrease in operating income of $4.5 million (8.8%) from
the same period in the prior year. Included in the fiscal 1998 operating income
were restructuring and other related costs of $2.8 million relating to the
closure of a manufacturing and distribution facility in the commercial and
institutional indoor division.
Lighting had net sales of $804.0 million and operating income of $48.3
million for the fiscal year ended September 30, 1999, a sales increase of $38.5
million (5.0%) and a decrease in operating income of $5.2 million (9.7%) from
the prior year. The increase in sales is mainly related to the first time
inclusion of the Dual-Lite safety division acquired in March 1999. Residential
lighting sales to the home
22
<PAGE>
center market and outdoor lighting were also higher. The decrease in operating
income is mainly the result of difficult conditions in the commercial and
institutional indoor markets, which were impacted by pricing pressures and
inventory write-downs relating to the exit of the light controls product lines.
The fiscal 1998 results included $2.8 million of restructuring and other related
costs. In addition, the European business reported a decrease in operating
income resulting from price declines and start-up costs to open new sales
offices in other European countries. These decreases were partially offset by
higher income from residential and outdoor lighting products and the first time
inclusion of Dual-Lite.
Industrial Tools had net sales of $113.5 million and operating income of
$6.2 million for the fiscal year ended September 30, 1999, reflecting a sales
increase of $22.9 million (25.3%) and an increase in operating income of $0.3
million (5.1%). The increase in sales is mainly related to the first time
inclusion of Bowers plc which was acquired in January 1999. This was partially
offset by generally lower margins resulting from pricing pressure of cheaper
imports into the UK market.
Management fees and divisional overhead costs of $7.9 million decreased $0.4
million (4.8%), mainly due to a decrease in the allocation from USI as a result
of lower USI corporate costs. Included in the fiscal 1999 costs is approximately
$1.4 million related to severance costs attributable to division management.
Restructuring
In June 1998, USI reviewed its long-term strategy and reviewed the operating
performance and future prospects of each of its businesses. As a result, USI
adopted a plan to improve efficiency and enhance competitiveness at some of our
operations. The restructuring plan included the closing of a manufacturing and
distribution facility in our Lighting segment. The restructuring did not have a
significant impact on our ongoing operations during the periods that
manufacturing was transitioned from the facility closed. The expected benefits
we expect from the restructuring are primarily reduced fixed costs associated
with leased facilities and reduced compensation costs.
The principal, pre-tax components of the fiscal 1998 restructuring charge
were $1.3 million in lease obligations and $1.0 million in severance costs.
During fiscal 1998 the Company made cash payments of $1.1 million, with the
remaining $1.2 million paid in fiscal 1999. In addition, we also incurred $0.5
million of product change costs related to the elimination of product lines.
After an income tax benefit of $1.1 million, the charges detailed above reduced
net income for the period ended September 30, 1998 by $1.7 million.
Interest and Taxes
Total interest expense of $13.4 million for the fiscal year ended
September 30, 1999, decreased $0.3 million (2.2%) from the comparable period of
fiscal 1998. The decrease reflects lower levels of third party debt outstanding,
as the interest expense to affiliates remained the same as the prior year.
Interest income was less than $1 million in both periods reflecting short-term
investments of excess cash at foreign operations.
The provision for income taxes was $13.6 million on pre-tax income of $33.8
million (a 40.2% effective rate) for the fiscal year ended September 30, 1999
compared to $15.3 million on pre-tax income of $38.4 million (a 39.8% effective
rate) for the fiscal year ended September 30, 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales and Operating Income
We had total net sales of $856.1 million and total operating income of $51.1
million for the fiscal year ended September 30, 1998, reflecting a sales
increase of $318.4 million (59.2%) and an operating income increase of $16.4
million (47.3%) from the same period in the prior year.
Lighting had net sales of $765.5 million and operating income of $53.5
million for the fiscal year ended September 30, 1998, reflecting a sales
increase of $227.8 million (42.4%) and an operating income increase of $9.6
million (21.9%) from the same period last year. The increase in sales is mainly
related
23
<PAGE>
to the first time inclusion of the European division acquired in October 1997.
Residential and outdoor lighting product sales and operating income both
increased due to further market penetration. However, these improvements were
offset by weakness in the commercial and institutional indoor market which was
negatively impacted by pricing pressures associated with competitive market
conditions.
Industrial Tools had net sales of $90.6 million and operating income of $5.9
million for the fiscal year ended September 30, 1998. Our Spear & Jackson
division was acquired in December 1997, and accordingly fiscal 1998 was the
first year of results for this division.
Interest and Taxes
Total interest expense of $13.7 million for the fiscal year ended September
30, 1998, increased $0.5 million (3.8%) from the comparable period in fiscal
1997. The increase reflects higher notes payable at the European lighting
division, which was acquired in October 1997. Interest income increased $1
million from fiscal 1997 due to the European lighting division investing excess
cash in short-term investments.
The provision for income taxes was $15.3 million on pre-tax income of $38.4
million (a 39.8% effective rate) for the fiscal year ended September 30, 1998
compared to $8.5 million on pre-tax income of $21.5 million (a 39.5% effective
rate) for the fiscal year ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to and during the nine months ended June 30, 2000, we financed our
operations and capital and other expenditures from a combination of cash
generated from operations, notes, credit lines, 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 our 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
minimal 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' below.
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
Operating activities provided cash of $21.4 million for the nine months
ended June 30, 2000, compared with $14.4 million for the prior year. The
increase was primarily due to lower working capital requirements reflecting
lower accounts receivable and inventories.
Investing activities used cash of $88.7 million for the nine months ended
June 30, 2000, compared with $90.6 million for the prior year. The nine months
ended June 30, 2000 cash was used for the Spear & Jackson additional
consideration and capital expenditures. The nine months ended June 30, 1999 cash
was used for the acquisitions of Dual-Lite and Bowers plc and capital
expenditures.
Financing activities provided cash of $78.5 million for the nine months
ended June 30, 2000, compared with $74.9 million for the prior year. The nine
months ended June 30, 2000 cash provided related to capital contributions from
affiliates that the Company used for the Spear & Jackson additional
consideration. The nine months ended June 30, 1999 cash provided related to
capital contributions from affiliates that the Company used for the Dual-Lite
and Bowers acquisitions.
24
<PAGE>
FISCAL 1999 COMPARED TO FISCAL 1998
Our operating activities provided cash of $34.0 million for fiscal 1999
compared with $9.3 million for the prior year. The increase was primarily due to
lower working capital requirements in fiscal 1999 as compared to fiscal 1998. In
fiscal 1998, we had to make working capital investments in the European lighting
division shortly after the October 1997 acquisition.
Investing activities used cash of $94.2 million for fiscal 1999, compared
with $61.2 million for the prior year. The fiscal 1999 cash was used for
acquisitions of Dual-Lite and Bowers plc and capital expenditures. The fiscal
1998 cash was used for capital expenditures and the acquisitions of the European
lighting division and Spear & Jackson.
Financing activities provided cash of $60.9 million for fiscal 1999,
compared with $62.7 million for the prior year. The fiscal 1999 cash provided
related to capital contributions from affiliates that the Company used for the
Dual-Lite and Bowers acquisitions. The fiscal 1998 cash provided related to
capital contributions from affiliates that the Company used for the European
lighting and Spear & Jackson acquisitions and repayment of long-term debt at
Spear & Jackson.
FISCAL 1998 COMPARED TO FISCAL 1997
Operating activities provided cash of $9.3 million for fiscal 1998 compared
with $21.9 million for the prior year. The decrease was primarily due to higher
working capital requirements in fiscal 1998 as compared to fiscal 1997. In
fiscal 1998, the Company had to make working capital investments in the European
lighting division shortly after the October 1997 acquisition.
Investing activities used cash of $61.2 million for fiscal 1998, compared
with $12.6 million for the prior year. The fiscal 1998 cash was used for capital
expenditures and for the acquisition of the European lighting division. The
fiscal 1997 cash was used for capital expenditures.
Financing activities provided cash of $62.7 million for fiscal 1998,
compared with cash used of $9.5 million for the prior year. The fiscal 1998 cash
provided related to capital contributions from affiliates that the Company used
for acquisitions and repayment of long-term debt at Spear & Jackson. The fiscal
1997 cash used related to net transfers with affiliates.
NEW CREDIT FACILITY
USI received a letter dated October 10, 2000 from Bank of America, N.A. in
which, subject to the satisfaction of certain conditions, Bank of America
proposed the terms on which it would provide LCA 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 and collateral agent and a syndicate of
lenders. The new credit facility will consist of a term loan of up to $50
million for five (5) years and a five year revolving credit line of up to $200
million.
All of our obligation under the new credit facility will be guaranteed on a
senior secured basis by each of our direct and indirect, existing and
subsequently acquired or organized domestic subsidiaries and parent companies.
The new credit facility will be secured by a first-priority perfected lien on
substantially all our assets and the assets of each guarantor.
Borrowings under the new credit facility will bear interest at a rate based
upon, at our option, Bank of America's reference rate or reserve adjusted LIBO
rate, plus, in each case, the applicable margins (as each is provided for in the
commitment letter). Pricing for the first year of the new credit facility will
be LIBOR + 2.50% and Reference Rate + 1.50%. After the first year, the
applicable margin will be adjusted quarterly based on the ratio of Funded Debt
to EBITDA, as provided for in the new credit facility. In addition to paying
interest on outstanding principal under the new credit facility, we will be
required to pay a commitment fee of 0.50% to the lenders on the unused portion
of the revolving credit line.
The term loan 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.
25
<PAGE>
It is expected that the new credit facility will contain representations and
warranties, covenants (including maximum leverage ratio, minimum fixed charge
ratio and either minimum EBITDA amounts or minimal capital expenditures)
restrictions on: incurrence of additional debt; the making of dividends and
similar distributions; incurrence of sufferance of liens or other encumbrances;
the sale of assets or similar transfers (other than in the normal course of
business); the making of investments or acquisitions; mergers, consolidations or
other similar combinations; transactions with affiliates; and capital
expenditures, 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.
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 various
hedging transactions. Subsequent to the Spin-off, we may borrow in foreign
currency-denominated borrowings to effectively hedge a portion of our net
investments in subsidiaries in foreign countries. 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 not made 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 1999, 1998 or 1997 or the nine months ended June 30, 2000.
26
<PAGE>
BUSINESS
GENERAL
LCA, currently a wholly owned subsidiary of USI, is a major manufacturer and
distributor of lighting fixtures and industrial tools. In fiscal 1999, we had
net sales of $917.5 million and operating income of $54.5 million before
corporate costs.
We are a leading producer of lighting fixtures in North America and Europe.
Collectively, the lighting businesses produce and market a complete offering of
indoor and outdoor lighting for the commercial, institutional and residential
markets. Our business has in excess of 5,700 employees worldwide. It has
manufacturing facilities in six U.S. states, California, Connecticut, South
Carolina, Ohio, Arkansas and Pennsylvania, in addition to operations in Mexico,
Puerto Rico, Germany, Slovenia and Austria. The lighting business's sales
organization consists of both independent manufacturers' sales representatives
(agents) and its own factory sales force employees. Our division sells products
through a variety of distribution channels, including electrical distributors,
lighting showrooms, home centers and national accounts. The lighting business's
major brands hold substantial market positions within each of the product
segments in which they participate. Our lines cover the full range from
specification grade products, which meet the particular performance and design
standards of architects and other professional lighting specifiers, to commodity
grade products, which satisfy general requirements for varied applications.
Our industrial tools business was acquired by USI in fiscal 1998 through the
acquisition of Spear & Jackson, a leading European hand tools manufacturer
founded in 1760. Our industrial tools business manufactures and distributes a
broad range of lawn and garden tools, hand tools, metrology products, magnetic
products, industrial saws and wood carving tools. The division has over 1,375
employees worldwide. Products are sold through various distribution channels,
including in-house sales managers and merchandisers, independent sales agents
and industrial and engineering distributors, as well as direct sales to
retailers and end users. Our industrial tools business's major brands hold
substantial market positions within many of the product segments in which they
participate.
The following table presents our major brands and product offerings:
<TABLE>
<S> <C>
LIGHTING
Progress Leading single source supplier of residential and light
commercial decorative lighting fixtures. Product offering
consists of over 3,000 stock keeping units including:
chandeliers, hall and foyer, pendants, close-to-ceiling,
bath and vanity, sconces, modular fluorescent, undercabinet,
outdoor, landscape, track and recessed lighting.
Kim Premier specification product line of architectural outdoor
lighting fixtures and equipment for the commercial and
residential markets. Product categories include:
pole-mounted luminaires, bollards, parking garage
luminaires, flood lights, wall-mounted luminaries and
landscape fixtures.
Spaulding Complete outdoor lighting systems for the commercial market.
Products include outdoor area luminaires, canopy lights, low
level lights and flood lights.
Architectural Period-style and contemporary site lighting fixtures for the
Area Lighting commercial outdoor market. Product categories include: pole
and wall-mounted luminaires, concrete bollards and custom
fixtures/poles.
Dual-Lite Complete offering of life safety lighting products for
Prescolite Life commercial and institutional applications. Products include:
Safety exit signage, emergency back-up lighting, high frequency
'powerpack' inverters and central AC inverter systems.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
Columbia Full line of specification and commodity grade fluorescent
lighting fixtures for use in commercial and institutional
applications. Products include parabolic and lensed
troffers, strip lights, wraparounds and a variety of
recessed surface and specialty units.
Alera Linear fluorescent indirect, direct/indirect and direct
lighting systems.
Prescolite Extensive line of specification grade recessed downlighting,
track lighting and surface-mounted lighting for the
commercial and residential markets.
Moldcast High performance oriented rugged commercial outdoor
luminaires. Products include a broad selection of
contemporary and period style outdoor lighting fixtures with
precise optics.
SiTeco Major European source of technical lighting systems and
services including: industrial lighting, task lighting,
roadway lighting and sports arena lighting. Product lines
are 'Siemens', 'SiTeco', 'Knoblich Licht' and 'Elektrokovina
Svetilke' serving the commercial and industrial market.
INDUSTRIAL TOOLS
Spear & Jackson Extensive line of high quality lawn and garden and hand
tools including digging and cultivating tools, cutting and
shear tools, striking tools, contractor tools, agricultural
tools, pliers, retail hand tools, screwdrivers, hammers and
plumbers tools.
Eclipse Full line of top quality hand tools including: hacksaws,
frames and blades, riveters and engineer tools.
Eliot Lucas Pliers, woodsaws and builder tools.
Bowers; Moore & Wright Precision tools, measuring instruments and calibration
services.
</TABLE>
LIGHTING
Our lighting business is international. We operate our domestic lighting
businesses through our Lighting Corporation of America subsidiary. We operate
our European lighting business through our SiTeco Holding GmbH subsidiary.
LIGHTING CORPORATION OF AMERICA
Our domestic lighting businesses are collectively known as Lighting
Corporation of America. Lighting Corporation of America subsidiaries manufacture
and distribute indoor and outdoor lighting fixtures for markets in North
America.
Lighting Corporation of America's size, broad range of quality products and
strong distribution network allow it to compete as a major supplier in the
commercial/institutional and residential markets. Our outdoor lighting products
are sold under the Kim, Spaulding, Moldcast and Architectural Area Lighting
brand names. These products include street, area, parking garage and landscape
lighting. Outdoor lighting products are sold to electrical distributors and
national accounts. National customer accounts include service stations,
automobile dealerships and fast food restaurants. Indoor commercial/industrial
lighting products, which are sold under the Columbia, Prescolite and Dual-Lite
brand names through electrical distributors and national accounts, include
incandescent and compact fluorescent, down light fixtures, emergency and exit
lighting, and other fluorescent lighting fixtures. Our sales organization
includes independent manufacturer's sales representatives (agents) as well as
factory sales force employees. Most of our agents also represent a complementary
line of lighting products for industrial applications, allowing us access to
essentially all categories of customers for lighting fixtures. While some of the
products in this complementary line are similar to the products we manufacture,
we do not believe there is a significant amount of overlap. The agreements we
have with our agents restrict
28
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our agents from representing another manufacturer that we consider to be a
competitor in our product lines.
LCA is a major residential lighting manufacturer in North America,
principally selling under the Progress brand name. Progress' products include
chandeliers, hall and foyer sconces, pendants, bath and vanity, ceiling,
fluorescent, under-cabinet, track, outdoor and landscape lighting. Residential
lighting products are sold to home centers, lighting showrooms and electrical
distributors, who sell to builders, electrical contractors and consumers.
Sales of lighting products are seasonal to a degree, with weather affecting
construction and outdoor installation.
Progress Lighting, Inc. Progress is a leading supplier of residential and
light commercial decorative lighting fixtures in North America. Progress' sales
are primarily classified as non-portable residential lighting fixtures. The
current product offering consists of over 3,000 stock keeping units (SKU's)
including: chandeliers, hall and foyer, close-to-ceiling, sconces, pendants,
modular fluorescent, undercabinet, bath and vanity, outdoor, landscape, track
and recessed.
Progress' products are marketed principally with a factory sales force.
Targeted market segments include single family and multi-family residential
construction, light commercial construction and consumer. Targeted international
markets are principally in North and South America. Its products are sold
through several channels of distribution, primarily electrical distributors,
lighting showrooms and home centers.
Progress has an in-house product development group which introduces major
new products semi-annually. The company's manufacturing facilities are in
Cowpens, South Carolina and Baja, Mexico.
Kim Lighting, Inc./Architectural Area Lighting, Inc. Kim Lighting Inc.
(which consists of both Kim and the Architectural Areas Lighting Unit 'AAL')
manufactures products for the architectural outdoor lighting market, primarily
for projects which are specified by architects, lighting consultants, landscape
architects and engineering consultants. This market is characterized by a strong
emphasis on aesthetics, architectural relevance, performance and quality.
Approximately 80% of the business is new construction with the balance serving
the renovation market.
Kim is a recognized innovator in the industry. Its products are primarily
designed for contemporary architecture and intended to be aesthetically
compatible with surrounding structures and an integral part of the architectural
design. In addition to aesthetics, Kim products place great emphasis on quality
and performance.
AAL products are designed for contemporary and traditional architecture. AAL
products are often selected as an accent to the site and architecture. Many AAL
products utilize Kim optical systems.
Spaulding Lighting, Inc. Spaulding has a broad array of products for the
outdoor lighting markets. Spaulding's principal markets are commercial and
institutional large area parking such as shopping malls and supermarkets,
petroleum service station areas and canopy lighting, automobile dealership
exterior illumination and quick service restaurant and convenience store outdoor
lighting. Spaulding exterior lighting projects are prominently displayed in Las
Vegas, Atlantic City, New York and other major U.S. cities.
Spaulding was started in 1955 as Whiteway Manufacturing and initially served
as a quick service lighting supplier to gasoline service stations. Over time it
expanded into a national, full-line outdoor lighting company.
Dual-Lite Inc. Dual-Lite is a leader in the United States life safety
market, participating in all three market segments: emergency lighting, exit
signs, and central inverter systems. The company has two brands, Dual-Lite and
Prescolite Life Safety. Headquartered in Cheshire, Connecticut, the majority of
the company's manufacturing occurs in Naguabo, Puerto Rico, with some products
manufactured by third parties using company designs.
The company produces some of the industry's most popular products, such as
the Dual-Lite EZ-2 and the 'Liteforms' collection. The Prescolite EMAX and PCX
Series are also well known brands.
Dual-Lite generally sells its products via Lighting's commercial and
institutional combined sales force, relying on independently contracted
manufacturer's representatives to market its products to electrical
distributors, contractors, specifiers and end users.
29
<PAGE>
Columbia Lighting, Inc. Columbia manufactures commercial and industrial
fluorescent lighting products. The company's manufacturing processes include
metal fabrication, finishing and final assembly. The company's products are sold
through independent lighting manufacturers/sales representatives and distributed
through electrical wholesalers and national accounts. End use applications are
primarily new commercial construction or renovation projects, which include
office, school, retail and institutional construction. Primary buying influences
include architects, consulting engineers, lighting designers, electrical
wholesalers, electrical contractors, building owners and facility managers.
Prescolite, Inc. Prescolite produces residential, light commercial and
specification grade point source lighting products for indoor lighting
applications. These products are segmented into residential and light commercial
downlighting, specification grade downlighting, track lighting, and surface
lighting product lines.
Prescolite's products are sold by commercial and industrial manufacturers
representatives to traditional electrical wholesalers/distributors for the
residential and light commercial markets. Primary buying influences for
Prescolite include lighting consultants and electrical engineers. Secondary
influences include architects, interior designers and contractors. Prescolite
was founded in 1944.
SITECO HOLDING GMBH
SiTeco, formerly Siemens Lighting, was acquired in October 1997 by USI.
SiTeco is a leading European provider of technical lighting systems and services
including industrial lighting, lighting solutions, task lighting, road lighting
and sports arena lighting. SiTeco is a major supplier of technical lighting
products, systems and services in Germany. In addition, SiTeco subsidiaries are
well established in most major southern and central European markets.
SiTeco is headquartered in Germany. It has manufacturing facilities in
Germany, Austria and Slovenia.
INDUSTRIAL TOOLS
We operate our industrial tools business through our Spear & Jackson
subsidiary. Spear & Jackson, established in 1760, is a leading European
manufacturer and distributor of a broad line of lawn and garden tools, hand
tools, metrology products, magnetic products, industrial saws and wood carving
tools. Products are sold under several brand names including Spear & Jackson,
Neill Tools, Eclipse, Bowers and Moore & Wright.
Spear & Jackson distributes products primarily through independent wholesale
distributors, home centers, mass merchants and large buying groups including
cooperatives.
RAW MATERIALS COSTS
Most of our businesses are dependent, to varying degrees, on the
availability of raw materials, including plastics, aluminum, copper, nickel,
cobalt, molybdenum, tungsten, certain grades of steel, wood, glass and
corrugated packaging materials as well as ballasts and sockets for lighting
fixtures. 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.
COMPETITION
We will encounter competition in all areas of our business. The methods of
competition vary depending on the market into which we are selling. We compete
primarily on the basis of product quality, brand name, technology or innovation,
price, performance and customer service. No single company will compete directly
with us in all of our product lines, but various companies will compete with us
in one or more product lines. In total, we have many competitors varying in
size. Some have substantially greater sales and assets than us while other
companies are smaller than us.
30
<PAGE>
EMPLOYEES
As of the date of this filing, we had approximately 5,700 employees in the
lighting business and 1,375 employees in the industrial tools business.
Approximately 51% of the employees in the lighting business were represented by
unions, and approximately 45% of the employees in the industrial tools business
were represented by unions. We believe that our relations with employees and
unions generally are good.
GOVERNMENT REGULATION
Our businesses 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 businesses are currently
operating in substantial compliance with, or under approved variances from such
various federal, state, local and foreign laws and regulations.
Approximately six of our present or 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 monitoring at one site to implementation of clean-up
or remediation of the other sites. We do not believe that any of these
proceedings will have a material adverse effect on our business or financial
condition.
In addition, certain of LCA's operating units have been named as potentially
responsible parties at three 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 claims in a responsible and
appropriate manner and the cleanup effort at each site is in the advanced stages
of remediation or monitoring. 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.
LCA's operating units make significant capital and maintenance expenditures
to comply with zoning, water, air and solid hazardous waste and related
environmental and health and safety regulations. The amount of expenditures in
future years will depend on legal and technological developments which cannot be
predicted at this time. Future costs for environmental compliance cannot be
predicted with precision and there can be no certainty with respect to any
remedial investigations or cleanup of affected property.
Laws and regulations protecting the environment 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, 1999, we had accrued approximately $5.0 million for various
known environmental related liabilities. We believe that the range of liability
for such matters is between $1.0 million and $5.2 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 conditions.
31
<PAGE>
BACKLOG ORDERS
The Company's backlogs believed to be firm as of September 30, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
---------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Lighting.................................................... $81.6 $74.7
Industrial Tools............................................ 0.2 0.6
----- -----
Total Backlogs.............................................. $81.8 $75.3
----- -----
----- -----
</TABLE>
PATENTS AND TRADEMARKS
Our businesses have numerous United States and foreign patents, patent
applications, registered trademarks and trade names, and licenses. We believe
that certain of our trademarks and trade names are of material importance to us.
None of our material trademarks or trade names are of limited duration. Although
protection of the our patents and related technologies are important components
of our business strategy, none of our individual patents is material to the
company.
PROPERTIES
Our lighting business owns or leases approximately 50 plants and other
properties. Our industrial tools business owns or leases approximately 27 plants
and other properties. None of our 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. Our
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
We are a party to legal proceedings that are considered to be either
ordinary, routine litigation incidental to our business, or immaterial to our
financial condition, results of operations or our cash flows. For information
concerning environmental proceedings, see 'Business -- Governmental Regulation.'
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MANAGEMENT
DIRECTORS
After the Spin-off, our board of directors will consist of persons who
will be divided into three equal classes each having a three-year term. The
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>
James O'Leary........................ Chairman and Chief Executive Officer
</TABLE>
James O'Leary, 37, has served USI as Executive Vice President since
September 1, 1999 and as a Director at USI since February 2000. He was Senior
Vice President and Chief Financial Officer at USI from June 1998. He served as
Corporate Controller of USI from its 1995 demerger from Hanson PLC until
June 1998 and was elected as a Vice President in January 1996. Mr. O'Leary is a
Director of Strategic Industries LLC and Rexair Holdings Inc.
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. Its functions will include recommending to the Board the
appointment of the Company's independent accountants; reviewing with
representatives of the independent accountants the scope of the audit of our
financial statements, results of audits, audit costs, recommendations with
respect to internal controls and financial matters and non-audit services;
and periodically meeting with or receiving reports from our principal
financial and accounting officers.
Fees. Non-employee directors will receive an annual cash retainer of $
plus $ for each board meeting and $ for each committee meeting attended
and reimbursement of all reasonable expenses incurred in connection with such
meetings. We will pay the premiums on directors' and officers' liability and
travel accident insurance policies insuring directors. Each non-employee
director will also receive an initial stock option grant. See 'Executive
Compensation -- Stock Incentive Plan'.
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. We will name additional officers in an
amendment to this filing.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
James O'Leary Chairman and Chief Executive Officer
Steven C. Barre Senior Vice President, General Counsel and Secretary
Joseph P. McPartland Group Vice President
Diana E. Burton Vice President
Nicola Rossi Corporate Controller
</TABLE>
For biographical information concerning Mr. O'Leary, see ' -- Directors'
above.
33
<PAGE>
Steven C. Barre, 41, has served USI as Vice President, General Counsel and
Secretary of USI since April 1, 2000. Previously, he served as Associate General
Counsel of USI since its 1995 demerger from Hanson in 1995. Prior thereto,
Mr. Barre served as Associate General Counsel of Hanson Industries, the U.S. arm
of Hanson PLC.
Joseph P. McPartland, 59, has served USI as Vice President and CFO of USI's
Hardware and Tools unit since June 1998. From July 1997 until June 1998 he
served as Executive Vice President and CFO of O. Ames Co., a USI Subsidiary.
From September 1996 until June 1997, he served on the corporate staff of USI
working on corporate development projects. Prior to September 1996,
Mr. McPartland was the President of Jade Corporation, then a USI subsidiary,
from March 1994 until September 1996.
Diana E. Burton, 55, has served USI as Vice President -- Investor Relations
since USI's demerger from Hanson in 1995. Previously, she was a Vice President
of Marine Harvest International, Inc., a company engaged in the farming and
distribution of seafood products, with principal responsibility for
administration and investor relations.
Nicola Rossi, 34, has served at USI as Corporate Controller since April 1,
2000 and was Assistant Corporate Controller from June 1999. Previously, he was
Director of Corporate Accounting for the Great Atlantic & Pacific Tea Company,
Inc. from November 1995 through May 1999.
34
<PAGE>
EXECUTIVE COMPENSATION
The following is a description of the executive compensation arrangements
and benefit plans adopted or expected to be adopted by us, most 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 vesting in restricted stock and/or to
exercise any vested USI stock options pursuant to such plans for a period of
time following the spin-off. For information regarding our assumption of certain
liabilities and assets of the USI plans, see 'The Spin-off -- Agreements Between
LCA and USI and Relationship after the Spin-off -- Corporate Transition
Agreement.'
We will disclose additional information with respect to our executive
compensation programs in an amendment to this filing.
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. O'Leary, McPartland, Barre,
Rossi and Ms. Burton to serve, commencing on the date of the spin-off (the
'Commencement Date'), respectively, as our Chairman, Chief Executive Officer and
Director; as Group Vice President; as Senior Vice President, General Counsel and
Secretary; as Corporate Controller; and as Vice President for Corporate
Communications. Unless terminated earlier as discussed below, the term of
employment under each agreement will expire on the second anniversary of the
Commencement Date subject to automatic extension for an additional year term on
each applicable anniversary unless either party gives at least 90 days' prior
written notice of non-extension (or, in the case of Mr. O'Leary, the term of
employment will expire on the third anniversary, subject to automatic extensions
for additional 3 year terms.)
The employment agreements provide that we will pay Messrs. O'Leary,
McPartland, Barre, Rossi and Ms. Burton annual base salaries at rates of not
less than $ , $ , $ , $ and $ , respectively. Commencing
with fiscal 2001, each executive will be eligible to receive an annual cash
bonus (the 'Target Bonus'), with a target bonus potential equal to at least
%, %, %, % and % of his or her base salary, respectively, based
on the achievement of a performance target established by the Compensation
Committee under a bonus plan qualifying the bonuses as 'performance-based' for
purposes of Code Section 162(m).
Messrs. O'Leary, McPartland, Barre, Rossi and Ms. Burton will be eligible to
participate in any incentive pay plan established by us for which they are
eligible at such level and on such terms as we establish, in each case subject
to full vesting of all equity grants that are effective on or within 6 months
after the Commencement Date upon a termination of employment without Cause, for
Good Reason, as a result of death of Disability or upon a Change in Control (as
each such term is defined in the applicable employment agreement) (or, in the
case of Mr. O'Leary, all equity grants effective on or after the Commencement
Date will vest in the above situations).
The executives will be entitled to participate in all pension, retirement,
savings, welfare and other employee benefit plans, arrangements, fringe benefits
and perquisites that we maintain from time to time for comparable level
executives (in the case of Mr. O'Leary, such plans will provide a level of
benefits and coverage no less favorable in the aggregate than what was provided
to him immediately prior to the spin-off). For the 2 year period after a Change
in Control (as such term is defined in the applicable employment agreement),
while employed, the executives will have coverage and benefits at least as equal
in the aggregate and fringe benefits and perquisites of at least equal value to
those provided to the executives by us immediately prior to the Change in
Control (or, in the case of Mr. O'Leary, he will receive such levels of benefits
and coverage without regard to the 2 year period limitation). In addition, we
will initially provide Messrs. McPartland, Barre, Rossi and Ms. Burton with a
leased automobile or an automobile allowance at a level determined by us (or, in
the case of Mr. O'Leary, we will continue to provide him with a leased
automobile or an allowance as exists on the Commencement Date).
35
<PAGE>
The employment agreements also provide that if an executive's employment
with us is terminated (1) by us other than for Cause, (2) by the Executive for
Good Reason, (3) in the case of Mr. O'Leary, for any reason or no reason during
the period commencing 6 months after a Change in Control through the second
anniversary of the Change in Control (as such terms are defined in the
applicable 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 other payments and amounts.
The payments and benefits to be made in such situations are: (i) 24 equal
monthly installments in an amount aggregating 2 times base salary and the Target
Bonus, but if the termination of employment is after a Change in Control such
amount will be paid in lump sum (or, in the case of Mr. O'Leary, a lump sum
based on 3 times base salary and the Target Bonus), (ii) any unreimbursed
business expenses payable in lump sum, (iii) the value of 2 additional years of
service and compensation credit (or, in the case of Mr. O'Leary 3 years) for
qualified or nonqualified pension plan purposes, (iv) the value of 2 years (or,
in the case of Mr. O'Leary 3 years) of our maximum contribution under any type
of qualified or nonqualified 401(k) plan, (v) continuation of the executive and
his or her dependents' health coverage under our health plans until the earlier
of 24 months after termination of employment or the executive becomes eligible
for health coverage as a result of other employment (or in the case of Mr.
O'Leary, for the lesser of 3 years, or until he is eligible for the health plan
of another employer) and (vi) 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 (all such payments being
collectively referred to as the 'Severance Payment'). The amounts described in
(i) through (vi) above are subject to the execution of a release of claims by
each executive.
In addition, if the Severance Payment to any executive under his or her
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 of 1986, as amended, the
employment agreement provides that the executive will receive an additional
amount to cover the federal excise tax and any interest or penalties with
respect to the Severance Payment and such other amounts on a 'grossed up' basis.
The employment agreements also provide that if the executive's employment is
terminated as a result of his or her death, the executive will receive (i) any
earned but unpaid base salary and bonus, (ii) a lump sum equal to any accrued
vacation pay and unreimbursed business expenses, (iii) a pro-rata Target Bonus,
(iv) any other amounts or benefits owed to executive under any employee benefit
plans, long-term incentive plans or equity plans, (v) payment on a monthly basis
of 3 months of base salary (or, in the case of Mr. O'Leary 12 months) and (vi)
payment of the spouse's and dependent's applicable COBRA coverage but for no
more than 3 years. The employment agreement also provides that if employment is
terminated as a result of Disability, the executive will be entitled to receive
the payments and benefits to which the executive's representatives would be
entitled in the event of a termination of employment by reason of his or her
death, except that the payment of base salary will be reduced by the projected
amount the executive would receive under any long-term disability program or
policy maintained by us during the 3 month period (or, in the case of Mr.
O'Leary 6 month period) during which the base salary is being paid and COBRA
coverage will be limited to a maximum of 18 months.
The employment agreements provide that if the executive is terminated for
Cause or voluntarily resigns without Good Reason, the executive will only
receive accrued compensation through the date of termination and unreimbursed
business expenses.
The employment agreements also provide for (i) indemnification of the
executives for actions in their corporate capacity and directors and officers
liability insurance, (ii) coverage in most instances for legal fees incurred in
enforcing their rights under their respective employment agreements and
(iii) confidentiality and non-competition 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 2
years afterwards.
36
<PAGE>
STOCK INCENTIVE PLAN
On October 26, 2000, our board of directors and USI, as our sole
stockholder, approved the LCA Group 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 employees of,
and approved consultants to, LCA and our affiliates, stock options, restricted
stock and other stock-based awards, thereby creating a means to provide equity
based incentives in order to attract, retain and award such individuals and
strengthen the mutuality of interests between such individuals and our
stockholders and (ii) to pay non-employee directors a portion of their initial
retainer fee in the form of stock options and to make certain other awards of
our common stock, grants of stock options and other stock-based awards 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
non-employee directors who will be eligible for participation in the SIP.
Administration. The provisions of the SIP, as applied to eligible employees
and consultants, 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, to the
extent required by Code Section 162(m), 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, 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 790,800 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
150,000 shares and of Restricted Stock subject to performance goals will be
90,000 shares. The maximum number of shares of common stock available as other
stock-based awards which may be granted under the SIP subject to specified
performance goals for any fiscal year to any individual will not exceed 90,000
shares; provided that the foregoing limit does not apply to other stock-based
awards used to make payments under any other of our plans or those of our
affiliates.
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, but will not be available for the individual limits.
Options. Under the SIP, the Committee may grant non-qualified stock options
and incentive stock options ('ISOs') to purchase shares of our common stock.
ISOs may not, however, be granted to prospective employees or consultants. 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.
37
<PAGE>
Restricted Stock. The Committee may also award shares of restricted stock.
The Committee will determine the employees or consultants 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. The Committee may condition the
grant or vesting of Restricted Stock upon the attainment of such factors as the
Committee may determine, in its sole discretion. 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 LCA, 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 and consultants 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
awarded as a bonus or as payment of consultant fees, shares of our common stock
in payment of the amounts due under an incentive or performance plan sponsored
or maintained by us or any of our affiliates and stock appreciation rights
(either separately or in tandem with stock options), and stock equivalent units,
awards valued by reference to book value of shares of our common stock and loans
to be used to purchase shares of our common stock. 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 will be based on one or more of the following criteria:
(i) the attainment of certain target levels of, or a specified increase in, our
enterprise value or value creation targets (or that of any of our affiliates,
divisions or other operational units); (ii) 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 affiliates, divisions, or other operational
units), (iii) the attainment of certain target levels of, or a specified
increase in, our operational cash flow (or that of any of our affiliates,
divisions or other operational units), (iv) 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,
(v) 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
affiliates, divisions or other operational units), (vi) the attainment of
certain target levels of, or a specified percentage increase in, our net sales,
net income or earnings before income tax or other exclusions (or that of any of
our affiliates, divisions, or other operational units); (vii) 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 affiliates,
divisions or other operational units); (viii) 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 affiliates, 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. Other
performance goals may be used to the extent such goals satisfy the requirements
of Code Section 162(m) or the award is not intended to satisfy the requirements
of Code Section 162(m).
Non-Employee Director Awards. Under the SIP, the Board will award each
non-employee director an initial grant of non-qualified stock options to
purchase 1,000 shares of our common stock, upon initially becoming a
non-employee director. The Board may, in its discretion, also make awards of our
common stock, additional non-qualified stock options and other stock-based
grants to non-employee directors. The exercise price of the non-qualified
options will be 100% of the fair market value of our common stock at the time of
grant (or the par value, if greater). Each initial option will be exercisable on
or after 6 months and one day after the date of grant if the director is then a
director. If the Board makes grants of additional options, such options will be
exercisable in accordance with the terms and
38
<PAGE>
conditions of the applicable option grant or agreement. Payment of the exercise
price may be made as described above with regard to options generally. If the
Board makes awards of our common stock, such shares of common stock will be
legended and may be subject to certain legal restrictions.
Change in Control. Unless determined otherwise by the Committee at the time
of grant, upon a Change in Control of LCA (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 at the time of grant. The award agreement issued in
connection with an other stock-based award will determine the effect of a Change
in Control on such award. 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, vesting or
lapse of the applicable restriction period to the extent LCA'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 LCA 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 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 or consultants 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 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. Employees and consultants who receive grants under the
SIP within the first 45 days following the Spin-off are restricted from
receiving additional grants of stock options or other awards until the later of
(1) the beginning of the second fiscal year following the Spin-off or (2) the
date the SIP is approved by stockholders following the Spin-off.
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 our affiliates 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 provide their own
retirement programs and plans to their respective 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.
39
<PAGE>
The assets currently maintained in the USI master pension trust for the tax
qualified retirement programs for the employees of our subsidiaries will be
transferred to a separate master trust sponsored by LCA, established prior to
the Spin-off, and the assets attributable to all subsidiaries' plans, which are
currently all stand-alone plans, will have been transferred into the new master
trust prior to the Spin-off. Additionally, effective on the Spin-off, assets
equal to the liabilities attributable to the employees who will become LCA's
corporate office staff who were participants in the USI corporate office plan,
will be transferred to the LCA master pension trust in accordance with the PBGC
Spin-off Rules.
It is anticipated that we will also adopt a non-qualified, unfunded,
deferred compensation plan to be known as the LCA Group Supplemental Executive
Retirement Plan (the 'SERP'). Certain of our subsidiaries also sponsor
non-qualified, unfunded deferred compensation plans for their employees. The
purpose of the SERP 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 SERP, the
retirement plan or as stated herein.
Under our retirement program, comprised of a tax qualified pension plan and
the SERP, the annual retirement benefits of our executive officers will equal
the greater of (i) the product of (a) 66 2/3% of an employee's final average
earnings (base salary only) minus 50% of such employee's social security
benefit, reduced for credited service under 25 years. All defined terms have the
same meanings as in the retirement plan or SERP 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 SERP.
<TABLE>
<CAPTION>
FINAL YEARS OF SERVICE
AVERAGE --------------------------------------------------------------------------
EARNINGS 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
</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: . 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.
40
<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 2000 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 , 2000. 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 , 2000 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>
James O'Leary.....................................
Steven C. Barre...................................
Joseph P. McPartland..............................
Diana E. Burton...................................
Nicola Rossi......................................
All directors and executive officers as a group
( persons).....................................
</TABLE>
Based upon information available to USI concerning the ownership of USI
common stock at 2000, 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:
<TABLE>
<CAPTION>
NAME AND ADDRSS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
----------------------------------- ---------------- ----------------
<S> <C> <C>
Harris Associates L.P. .................................
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602 -- --
AXA-UAP ................................................
23, Avenue Matigon
75008 Paris France; -- --
Franklin Mutual Advisers, LLC ..........................
777 Mariners Island Blvd.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078 -- --
SASCO Capital, Inc. ....................................
10 Sasco Hill Road
Fairfield, CT 06430 -- --
</TABLE>
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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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
$0.01 per share, and may be shares of common stock, par value $0.01 per
share.
Based on the number of shares of USI common stock outstanding as of ,
2000 and the dividend ratio, it is expected that 7.7 million 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 of 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 2001.
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. Series A preferred stock is issuable under the
circumstances described in 'Rights Plan' below. We have no other 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
Chase Mellon Shareholder Services 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
Our Rights Plan may have the effect of delaying or preventing a change of
control. See 'Risk Factors -- We Will Be Subject to Certain Provisions that
Could Delay or Prevent a Change of Control.' 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 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, or extended, the rights
will expire in October, 2010.
The rights, unless earlier redeemed, extended or modified 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 includes our 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.
Our 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 100 times the cash dividends declared on our common
stock. In addition, our series A preferred stock is entitled to 100 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 100 times
the payment made per share of our common stock. Each share of our series A
preferred stock will have 100 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 or has announced an intention
to become or intention to commence to 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) October , 2010, 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). 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 directors.
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 nor more than and, except as may be
provided in the terms of any series of preferred stock created by resolutions of
the board, 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, except as may be
provided in the terms of any series of preferred stock created by resolutions of
the board, 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
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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
by the Secretary pursuant to a 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 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
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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.
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 Laws (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 and officers 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 IV further permits us to indemnify other employees and agents 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 by reason of their employment or agency relationship.
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 compulsory
counterclaims, cross-claims, third-party claims or in connection with suits
seeking to enforce rights to indemnification or advancement of expenses as
otherwise ordered by a court of competent jurisdiction.
In addition, in the event that any successor provisions or amendments to the
DGCL 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.
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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.
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 LCA
will be available for inspection at the NYSE, 20 Broad Street, New York, New
York 10005.
-------------------
We intend to furnish our stockholders with annual reports containing
consolidated financial statements (beginning with fiscal 2000) audited by
independent accountants.
50
<PAGE>
LCA GROUP INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
COMBINED FINANCIAL STATEMENTS ----
<S> <C>
Report of Ernst & Young LLP................................. F-2
Combined Statement of Operations............................ F-3
Combined Balance Sheets..................................... F-4
Combined Statements of Cash Flows........................... F-5
Combined Statements of Changes in Invested Capital.......... F-6
Notes to Combined Financial Statements...................... F-7
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 accompanying combined balance sheets of LCA Group Inc.
(the 'Company') as of September 30, 1999 and 1998, and the related combined
statements of operations, cash flows, and changes in invested capital for each
of the three years in the period ended September 30, 1999. Our audits also
included the financial statement schedule listed in the index to the combined
financial statements. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company at
September 30, 1999 and 1998, and the combined results of its operations and its
cash flows for each of the three years in the period ended September 30, 1999,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
New York, New York
May 2, 2000
F-2
<PAGE>
LCA GROUP INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE FISCAL YEARS ENDED
JUNE 30, SEPTEMBER 30,
--------------- ---------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales........................................... $698.9 $677.0 $917.5 $856.1 $537.7
Operating costs and expenses:
Cost of products sold........................... 475.8 461.1 628.7 590.5 374.3
Selling, general and administrative expenses.... 191.9 175.8 234.3 203.9 119.5
Management fee and divisional overhead.......... 4.6 6.4 7.9 8.3 9.2
Restructuring charges........................... -- -- -- 2.3 --
------ ------ ------ ------ ------
Operating income.................................... 26.6 33.7 46.6 51.1 34.7
Interest expense to Affiliates...................... (9.8) (9.5) (12.7) (12.7) (13.2)
Interest expense.................................... (0.6) (0.6) (0.7) (1.0) --
Interest income..................................... 0.4 0.5 0.6 1.0 --
------ ------ ------ ------ ------
Income before income taxes.......................... 16.6 24.1 33.8 38.4 21.5
Provision for income taxes.......................... (6.8) (9.7) (13.6) (15.3) (8.5)
------ ------ ------ ------ ------
Net income.......................................... $ 9.8 $ 14.4 $ 20.2 $ 23.1 $ 13.0
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Pro-forma basic and diluted earnings per share...... $ 1.27 $ 2.63
------ ------
------ ------
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
LCA GROUP INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AT JUNE 30, AT SEPTEMBER 30,
----------- -----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 14.1 $ 9.1 $ 12.4
Trade receivables, net.................................. 172.0 173.4 158.9
Inventories............................................. 169.7 172.8 162.3
Deferred income taxes................................... 9.1 9.1 7.6
Other current assets.................................... 7.2 8.6 9.6
------ ------ ------
Total current assets................................ 372.1 373.0 350.8
Property, plant and equipment, net.......................... 166.7 176.4 168.6
Pension assets.............................................. 7.4 5.5 5.1
Other assets................................................ 1.1 1.6 1.7
Goodwill, net............................................... 159.4 131.6 91.1
------ ------ ------
$706.7 $688.1 $617.3
------ ------ ------
------ ------ ------
LIABILITIES AND INVESTED CAPITAL (DEFICIT)
Current liabilities:
Notes payable........................................... $ 7.1 $ 10.8 $ 6.7
Trade accounts payable.................................. 58.6 62.7 61.0
Accrued expenses and other liabilities.................. 58.0 64.8 63.0
Income taxes payable.................................... 2.4 2.8 5.7
------ ------ ------
Total current liabilities........................... 126.1 141.1 136.4
Deferred income taxes....................................... 2.5 2.5 2.1
Other liabilities........................................... 47.0 48.8 49.7
Notes payable to Affiliates................................. 201.6 195.0 195.0
Interest payable to Affiliates.............................. 20.5 10.6 --
------ ------ ------
Total liabilities................................... 397.7 398.0 383.2
Commitments and contingencies
Invested capital............................................ 309.0 290.1 234.1
------ ------ ------
$706.7 $688.1 $617.3
------ ------ ------
------ ------ ------
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
LCA GROUP INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE FISCAL YEARS ENDED
JUNE 30, SEPTEMBER 30,
--------------- ---------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income....................................... $ 9.8 $ 14.4 $ 20.2 $ 23.1 $ 13.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 19.4 17.7 23.8 21.0 9.8
Provision for deferred income taxes.......... -- -- (0.7) 0.5 (0.1)
Provision for doubtful accounts.............. 1.2 1.1 1.0 2.5 0.9
Changes in operating assets and liabilities,
excluding the effects of acquisitions and
dispositions:
(Increase) decrease in trade receivables..... 2.2 1.6 (3.5) (20.9) (3.0)
(Increase) decrease in inventories........... 5.0 (1.3) (1.1) (23.3) 1.8
Decrease in other current assets............. 1.4 2.7 1.1 10.5 0.9
Decrease (increase) in other non-current
assets..................................... (1.4) (1.2) 0.2 (1.0) (0.4)
Decrease in trade accounts payable........... (6.2) (9.4) (3.3) (3.2) (1.7)
(Decrease) increase in income taxes
payable.................................... (0.3) (0.6) (2.2) 4.9 (0.5)
(Decrease) increase in accrued expenses and
other liabilities.......................... (6.8) (4.4) (5.0) (8.0) 1.0
Increase (decrease) in other non-current
liabilities................................ (2.9) (5.5) 3.9 6.5 (0.1)
Other, net................................... -- (0.7) (0.4) (3.3) 0.3
------ ------ ------ ------ ------
Net cash provided by operating activities.... 21.4 14.4 34.0 9.3 21.9
Investing activities:
Acquisition of companies, net of cash acquired... (73.3) (64.9) (64.9) (37.6) --
Loan receivable from affiliates, net............. -- (5.5) -- -- --
Purchases of property, plant and equipment....... (16.0) (21.3) (31.2) (23.7) (12.6)
Proceeds from sales of property, plant and
equipment...................................... 0.6 1.1 1.9 0.1 --
------ ------ ------ ------ ------
Net cash used in investing activities........ (88.7) (90.6) (94.2) (61.2) (12.6)
Financing activities:
Proceeds from affiliate debt..................... 6.6 -- -- -- --
Proceeds from notes payable...................... 8.8 4.2 7.6 5.3 --
Repayment of notes payable....................... (11.8) (2.9) (3.0) (2.9) --
Proceeds from long-term debt..................... -- -- -- 0.2 --
Repayment of long-term debt...................... -- -- -- (33.3) --
Increase in interest payable to Affiliates....... 9.9 9.4 10.6 -- --
Capital contributions from Affiliates............ 71.4 69.6 62.6 76.4 --
Dividends to Affiliates.......................... (1.2) (1.4) (10.1) (6.3) --
Net transfers with Affiliates.................... (5.2) (4.0) (6.8) 23.3 (9.5)
------ ------ ------ ------ ------
Net cash provided by (used in) financing
activities................................. 78.5 74.9 60.9 62.7 (9.5)
Effect of exchange rate changes on cash.............. (6.2) (6.1) (4.0) 1.5 0.2
------ ------ ------ ------ ------
Net increase in cash and cash equivalents.... 5.0 (7.4) (3.3) 12.3 --
Cash and cash equivalents at beginning of year....... 9.1 12.4 12.4 0.1 0.1
------ ------ ------ ------ ------
Cash and cash equivalents at end of period........... $ 14.1 $ 5.0 $ 9.1 $ 12.4 $ 0.1
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
LCA GROUP INC.
COMBINED STATEMENTS OF CHANGES IN INVESTED CAPITAL
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Balance at September 30, 1996............................... $ 12.9
Net income.................................................. $ 13.0
Translation adjustment...................................... 0.2
Minimum pension liability adjustment........................ 0.5
------
Comprehensive income........................................ 13.7
Net transactions with Affiliates............................ (9.5)
------
Balance at September 30, 1997............................... 17.1
Net income.................................................. 23.1
Translation adjustment...................................... 7.2
Minimum pension liability adjustment........................ (2.3)
------
Comprehensive income........................................ 28.0
Capital contributions from Affiliates....................... 172.0
Dividends to Affiliates..................................... (6.3)
Net transactions with Affiliates............................ 23.3
------
Balance at September 30, 1998............................... 234.1
Net income.................................................. 20.2
Translation adjustment...................................... (11.4)
Minimum pension liability adjustment........................ 1.5
------
Comprehensive income........................................ 10.3
Capital contributions from Affiliates....................... 62.6
Dividends to Affiliates..................................... (10.1)
Net transactions with Affiliates............................ (6.8)
------
Balance at September 30, 1999............................... 290.1
Net income (unaudited)...................................... 9.8
Translation adjustment (unaudited).......................... (19.9)
------
Comprehensive income (unaudited)............................ (10.1)
Capital contributions from Affiliates (unaudited)........... 71.4
Dividends to Affiliates (unaudited)......................... (1.2)
Payment for guarantee of USI stock (unaudited).............. (36.0)
Net transactions with Affiliates (unaudited)................ (5.2)
------
Balance at June 30, 2000 (unaudited)........................ $309.0
------
------
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY
The accompanying combined financial statements include the combined
operations of LCA Group Inc. (the 'Company'), which is comprised of subsidiaries
currently owned, directly or indirectly by U.S. Industries, Inc. (the 'Parent'
or 'USI'). The Company, through these USI subsidiaries, manufactures and
distributes indoor and outdoor lighting fixtures, hand tools, saws and cutting
and industrial tools for markets in North America and Europe. These subsidiaries
are grouped into two segments: Lighting (Lighting Corporation of America, Inc.,
Columbia Lighting Inc., Dual Lite Inc., Kim Lighting Inc., Architectural Area
Lighting Inc., Spaulding Lighting Inc., Progress Lighting Inc., Prescolite Inc.
and SiTeco Holding GmbH) and Industrial Tools (Spear & Jackson plc, and Bowers
Group plc).
In contemplation of the spin-off and distribution to its stockholders by USI
of the ownership in 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 June 30, 2000, 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 nine months ended
June 30, 2000 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, 1999. 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 as management
fees. The Company's management believes such amounts are reasonable; however,
they may not be indicative of the Company's ongoing costs as a separate public
entity. Additionally, the direct costs attributable to division management are
included in management fees and divisional overhead in the accompanying combined
financial statements.
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, 53 and 52 week periods ended on the Saturday nearest to
September 30, 1999, 1998 and 1997, 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.
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 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 as invested capital.
F-7
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and Amortization:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE FISCAL
MONTHS ENDED YEARS ENDED
JUNE 30, SEPTEMBER 30,
------------- --------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Depreciation...................................... $16.7 $15.4 $20.7 $18.7 $8.8
Amortization of goodwill.......................... 2.7 2.3 3.1 2.3 1.0
----- ----- ----- ----- ----
$19.4 $17.7 $23.8 $21.0 $9.8
----- ----- ----- ----- ----
----- ----- ----- ----- ----
</TABLE>
Trade Receivables and Concentrations of Credit Risk:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, -----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Trade receivables............................... $183.5 $184.3 $168.8
Allowance for doubtful accounts................. (11.5) (10.9) (9.9)
------ ------ ------
$172.0 $173.4 $158.9
------ ------ ------
------ ------ ------
</TABLE>
The Company operates principally in the United States and Europe, and to a
lesser extent, in Mexico and Canada. 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.
Inventories:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, -----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Finished products............................... $ 80.8 $ 78.6 $ 70.2
In-process products............................. 24.7 26.7 28.5
Raw materials................................... 64.2 67.5 63.6
------ ------ ------
$169.7 $172.8 $162.3
------ ------ ------
------ ------ ------
</TABLE>
Inventories are valued at the lower of cost, determined under the first-in,
first-out method, or market.
Property, Plant and Equipment:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, -----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Land and buildings............................. $112.7 $ 117.0 $ 117.3
Machinery, equipment and furniture............. 201.1 193.3 170.8
Accumulated depreciation....................... (147.1) (133.9) (119.5)
------ ------- -------
$166.7 $ 176.4 $ 168.6
------ ------- -------
------ ------- -------
</TABLE>
Property, plant and equipment are stated on the basis of cost less
accumulated depreciation provided under the straight-line method. Buildings are
depreciated based on lives ranging from twenty to forty years, and machinery,
equipment and furniture based on lives ranging from three to ten years.
F-8
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the AICPA issued SOP 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 required 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, capitalizations 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 forty years, which is the estimated
future period to be benefited. Accumulated amortization aggregated $166.2
million and $163.1 million at September 30, 1999 and 1998, respectively.
Amortization of goodwill amounted to $3.1 million, $2.3 million and $1.0 million
for fiscal 1999, 1998 and 1997, respectively. See subsequent events note.
Accrued Expenses and Other Liabilities:
Accrued Expenses and other liabilities, consist of the following:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, -----------------
2000 1999 1998
---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Compensation related............................. $21.0 $27.4 $27.9
Other............................................ 37.0 37.4 35.1
----- ----- -----
$58.0 $64.8 $63.0
----- ----- -----
----- ----- -----
</TABLE>
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 and comprehensive income.
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.
The Company's United States earnings have been included in the consolidated
federal income tax return filed by USI. The Company provided for income taxes in
the accompanying financial statements as if it were a stand-alone entity and
filed separate income tax returns from USI. Federal taxes currently
F-9
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
payable have been included in Invested Capital. Income taxes paid to foreign
jurisdictions during fiscal 1999, 1998 and 1997 were $7.1 million, $1.1 million
and $1.5 million, respectively.
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 $12.4 million, $12.6 million, and $7.0 million for fiscal 1999, 1998,
and 1997, respectively.
Research and Development Costs: Research and development costs are expensed
as incurred. Such amounts totaled $6.1 million, $6.4 million, and $1.2 million
for fiscal 1999, 1998 and 1997, 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 its carrying amount since it is contemplated that these notes will
be repaid at face value upon the completion of the spin-off.
Derivative Financial Instruments: In June 1998, the Financial Accounting
Standards Board ('FASB') issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted beginning in
fiscal 2001. The 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 FASB 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. Statement 131 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.
Comprehensive Income: 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 pension liability adjustments and unrealized gains and
losses on marketable securities classified as available-for-sale. Accumulated
comprehensive income at September 30, 1999 and 1998 consists of ($0.3) million
and $11.1 million of cumulative translation adjustment, respectively, and ($1.0)
million and ($2.5) million of additional minimum pension liability, respectively
net of tax benefit.
Stock Based Compensation: The Company does not have stock-based compensation
plans separate from USI; however, the Company does participate in USI's
stock-based compensation plans. Consistent with USI, the Company accounts for
participation in these plans in accordance with Accounting Principles Board
Opinion No. 25 ('APB 25'), 'Accounting for Stock Issued to Employees' and
related
F-10
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
interpretations in measuring compensation costs for its stock options and
discloses pro forma net income 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 September 30, 1999.
Subsequent to the Spin-off, the Company anticipates issuing common stock
options to executive officers and other key employees. Such stock options will
be issued at a price that will equal its fair market value at date of grant. The
Company will account for its stock options under APB 25.
In March 2000, the FASB issued FIN No. 44 to APB 25 effective July 2000.
Management anticipates that this new interpretation will not have an effect on
earnings.
Earnings Per Share: Historical earnings per share are not presented because
the Company was comprised of direct or indirect subsidiaries of the Parent.
The pro-forma earnings per share were calculated assuming that 7,690,000
shares of the Company's common stock will be issued upon the Spin-off. One share
of the Company's common stock will be issued for every ten USI shares. The
pro-forma earnings per share do not include the effect of any options that might
be issued by the Company subsequent to the Spin-off.
Non-Cash Transactions: In fiscal 1998, the Company received a non-cash
capital contribution from USI of $95.6 million, which represents the 3,685,520
shares issued by USI for the acquisition of Spear & Jackson plc.
NOTE 3. ACQUISITIONS
In March 1999, the Company purchased the assets of the Dual-Lite business
('Dual-Lite') for approximately $46.1 million in cash, resulting in goodwill of
$36.4 million. Dual-Lite manufactures emergency lights and central inverter
systems. The results of Dual-Lite are included in the Lighting segment.
In January 1999, the Company purchased the Bowers Group PLC ('Bowers') for
approximately $15.6 million in cash, resulting in goodwill of $10.2 million.
Bowers manufactures metrology instruments. The results of Bowers are included in
Industrial Tools segment.
The proforma effect of the acquisitions and the aggregate assets acquired
and liabilities assumed detailed above is not material. These acquisitions have
been accounted for as purchases and their results of operations are included in
the financial statements from the date of acquisition.
In December 1997, the Company purchased Spear & Jackson plc ('Spear &
Jackson') for $11.1 million in cash and $95.6 million in the Company's Common
Stock (3,685,520 shares), resulting in initial goodwill of approximately $63.5
million. Spear & Jackson manufactures and distributes hand tools, saws, cutting
and industrial tools. The purchase price was subject to a cash contingency,
payable on or before June 2000. The cash contingency was based upon certain
performance criteria and the market value of the Company's stock. See subsequent
events note. The results of Spear & Jackson are included in the Industrial Tools
segment.
In October 1997, the Company purchased the assets of Siemens AG's European
commercial lighting operations for $67.0 million. The acquired business is a
European manufacturer and marketer of standard and customized indoor and outdoor
lighting products for commercial and industrial use. The business, renamed
SiTeco, operates manufacturing facilities in Germany, Austria, and Slovenia. The
results of SiTeco are included in the Lighting segment.
The following summarizes the allocation of the consideration paid for Spear
& Jackson and SiTeco to the fair market value of the aggregate assets acquired
and liabilities assumed by the Company (in millions):
F-11
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Assets, net of cash acquired................................ $ 212.7
Assumed liabilities......................................... (143.0)
Goodwill.................................................... 63.5
-------
$ 133.2
-------
-------
</TABLE>
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.
NOTE 4. RESTRUCTURING
In June 1998, USI reviewed its long-term strategy and reviewed the operating
performance and future prospects of each of its businesses. As a result, USI
adopted a plan to improve efficiency and enhance competitiveness at some of the
Company's operations. The restructuring plan included the closing of a
manufacturing and distribution facility in the Lighting segment. The
restructuring did not have a significant impact on the ongoing operations during
the periods that manufacturing was transitioned from the facility closed. The
expected benefits from the restructuring are primarily reduced fixed costs
associated with leased facilities and reduced compensation costs.
The principal, pre-tax components of the fiscal 1998 restructuring charge
were $1.3 million in lease obligations and $1.0 million in severance costs.
During fiscal 1998 the Company made cash payments of $1.1 million, with the
remaining $1.2 million paid in fiscal 1999. In addition, the Company also
incurred $0.5 million of product change costs related to the elimination of
product lines. After an income tax benefit of $1.1 million, the charges detailed
above reduced net income for the period ended September 30, 1998 by $1.7
million.
NOTE 5. NOTES PAYABLE
At September 30, 1999 and 1998 the Company had unsecured notes payable to
Affiliates of $195.0 million and $195.0, respectively. The notes mature in
fiscal 2005 and interest is payable at 6.5% per annum. Interest paid was $2.1
million, $12.7 million, and $13.2 million in fiscal 1999, 1998, and 1997,
respectively.
The European lighting business maintains working capital lines of credit
guaranteed by USI of $50.0 million and $9.1 million at September 30, 1999 and
1998, respectively, primarily denominated in German Marks. Amounts outstanding
under these lines of credit at September 30, 1999 and 1998 were $7.9 million and
$3.9 million, respectively, with interest rates ranging from 2.8% to 4.1%.
Interest paid was $0.3 million and $0.6 million in fiscal 1999 and 1998,
respectively.
Spear & Jackson maintains short-term credit facilities of $9.8 and $9.5 at
September 30, 1999 and 1998, respectively, primarily denominated in French
francs, British pounds and Australian dollars. Amounts outstanding under these
lines of credit at September 30, 1999 and 1998 were $2.9 million and $2.8
million, respectively, with interest rates ranging from 4.0% to 12.0%. Interest
paid was $0.4 million and $0.3 million in fiscal 1999 and 1998, respectively. In
addition, Spear & Jackson maintains a line of credit guaranteed by USI of $5.1
million and $5.0 million at September 30, 1999 and 1998, respectively. No
amounts were outstanding on this line of credit at September 30, 1999 and 1998.
NOTE 6. PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company has noncontributory defined benefit 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. The Company'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 amounts
as the Company may determine to be appropriate from time to time. The Company
also provides health care and life insurance benefits
F-12
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
for certain groups of retirees. These plans are typically partially contributory
by the retirees, but are reflected as liabilities in the Company's balance
sheets.
The Company sponsors defined contribution plans. Contributions relating to
defined contribution plans are made based upon the respective plans' provisions.
In the United States, the Company also participates in multi-employer plans,
which provide defined benefits to union employees of the Company's subsidiaries.
Contributions relating to multi-employer plans are based on negotiated
collective bargaining agreements.
The following table provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and the funded status of the
Company's U.S. defined benefit pension and post-retirement benefit plans with
the amounts recognized in the Company's balance sheet at September 30:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------ ---------------
1999 1998 1999 1998
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Changes in projected benefit obligation:
Benefit obligation at beginning of year................. $78.9 $63.6 $ 4.8 $ 4.5
Service cost............................................ 3.4 2.7 0.1 0.1
Interest cost........................................... 5.2 4.7 0.2 0.2
Actuarial (gain) loss................................... (8.2) 13.7 (0.1) 0.4
Benefits paid........................................... (5.5) (6.0) (0.5) (0.4)
Plan amendments......................................... -- 0.2 -- --
----- ----- ----- -----
Benefit obligation at end of year................... $73.8 $78.9 $ 4.5 $ 4.8
----- ----- ----- -----
----- ----- ----- -----
Changes in fair value of plan assets:
Fair value of assets at beginning of year............... $70.5 $77.9 $-- $--
Actual return on plan assets............................ 10.2 (2.0) -- --
Employer contributions.................................. 0.6 0.6 0.4 0.5
Benefits paid........................................... (5.5) (6.0) (0.4) (0.5)
----- ----- ----- -----
Fair value of assets at end of year................. $75.8 $70.5 $-- $--
----- ----- ----- -----
----- ----- ----- -----
Funded status of plans:
Plan assets greater (less) than projected benefit
obligation............................................ $ 2.0 $(8.4) $(4.5) $(4.8)
Unrecognized transition asset........................... (0.2) (0.3) -- --
Unrecognized net actuarial (gain) loss.................. (3.6) 8.8 2.2 2.6
Unamortized prior service cost.......................... 1.8 1.8 (1.9) (2.1)
----- ----- ----- -----
Net amount recognized............................... $-- $ 1.9 $(4.2) $(4.3)
----- ----- ----- -----
----- ----- ----- -----
Amounts recognized in the balance sheet consist of:
Accrued benefits........................................ $(7.0) $(6.8) $(4.2) $(4.3)
Prepaid benefits........................................ 4.7 4.0 -- --
Intangible asset........................................ 0.8 1.1 -- --
Accumulated other comprehensive income.................. 1.5 3.6 -- --
----- ----- ----- -----
Total amount recognized............................. $-- $ 1.9 $(4.2) $(4.3)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The aggregate projected benefit obligation and the aggregate fair value of
plan assets, for the plans that have projected benefit obligation in excess of
plan assets, are $60.5 million and $54.9 million, respectively, in 1999 and
$64.7 million and $51.1 million, respectively, in 1998.
The aggregate accumulated benefit obligation and the aggregate fair value of
plan assets, for the plans that have accumulated benefit obligation in excess of
plan assets, are $16.5 million and $14.0 million, in 1999 and $17.3 million and
$12.7 million, respectively, in 1998.
F-13
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's plan assets in the pension plans 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
983,100 and 783,100 shares at September 30, 1999 and 1998, representing $15.5
million and $11.8 million of the master trust's assets for the same respective
periods. During 1999, $0.2 million in dividends on USI stock was paid to the
master trust.
The assumptions used and the net periodic pension cost for the Company's
defined benefit plans, as well as the total contributions charged to pension
expense for the defined contribution plans covering employees in the United
States are presented below.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------- -------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as of
September 30:
Discount rate....................... 7.50% 6.75% 7.50% 7.50% 6.75% 7.50%
Expected return on plan assets...... 9.50% 9.50% 9.00% -- -- --
Rate of compensation increase....... 4.50% 4.25% 4.50% -- -- --
Components of net periodic benefit cost:
Defined benefit plans:
Service cost........................ $ 3.4 $ 2.7 $ 2.5 $ 0.1 $ 0.1 $ 0.1
Interest cost....................... 5.2 4.7 4.4 0.2 0.2 0.4
Expected return on plan assets...... (6.4) (6.0) (5.4) -- -- --
Amortization on unrecognized
transition asset.................. (0.1) (0.1) (0.1) -- -- --
Prior service cost.................. 0.3 0.2 0.3 (0.2) (0.2) --
Net actuarial losses................ 0.2 -- -- 0.2 0.2 0.1
----- ----- ----- ----- ----- -----
Net periodic benefit cost for defined
benefit plans......................... 2.6 1.5 1.7 0.3 0.3 0.6
Defined contribution plans.............. 0.6 0.3 0.6 -- -- --
Multi-employer plans.................... 0.5 0.8 0.4 -- -- --
----- ----- ----- ----- ----- -----
Net periodic benefit cost............... $ 3.7 $ 2.6 $ 2.7 $ 0.3 $ 0.3 $ 0.6
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., the health care cost trend rate) for the other
post-retirement benefit plans was 9.0% for 1999 and is assumed to decrease 0.5%
a year to 5.5%. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects at, and for the year ended,
September 30, 1999 (in millions):
<TABLE>
<S> <C>
Effect of a 1% increase in the health care cost trend rate
on:
Service cost plus interest cost......................... $--
Accumulated post-retirement benefit obligation.......... 0.3
Effect of a 1% decrease in the health care cost trend rate
on:
Service cost plus interest cost......................... --
Accumulated post-retirement benefit obligation.......... (0.3)
</TABLE>
The tables above set forth the historical components of the net periodic
pension cost and a reconciliation of the funded status of the pension and other
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-14
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Benefit Arrangements
The following table provides a reconciliation of changes in the projected
benefit obligation and the funded status of the Company's foreign defined
benefit pension plans with the amounts recognized in the Company's balance sheet
as of September 30:
<TABLE>
<CAPTION>
PENSION BENEFITS
-------------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................. $ 143.3 $ --
Service cost............................................ 4.0 3.4
Interest cost........................................... 8.5 7.5
Employee contributions.................................. 0.9 0.8
Foreign currency exchange rate changes.................. (5.9) 3.4
Actuarial (gain)/loss................................... (0.1) 11.6
Benefits paid........................................... (6.8) (5.9)
Acquisition............................................. -- 122.5
-------- --------
Benefit obligation at end of year................... 143.9 143.3
-------- --------
-------- --------
Change in fair value of plan assets:
Fair value of assets at beginning of year............... 101.2 --
Actual return on plan assets............................ 17.5 1.7
Employer contributions.................................. 1.6 0.2
Employee contributions.................................. 0.6 0.8
Foreign currency exchange rate changes.................. (3.0) 1.0
Benefits Paid........................................... (6.8) (5.9)
Acquisitions............................................ -- 103.4
-------- --------
Fair value of assets at end of year................. 111.1 101.2
-------- --------
-------- --------
Funded status of plans:
Plan assets in excess of (less than) projected benefit
obligation............................................ (32.8) (42.2)
Unrecognized net actuarial gains........................ 7.8 18.0
-------- --------
Total recognized in the consolidated balance
sheet............................................. (25.0) (24.2)
-------- --------
-------- --------
Amounts recognized in the balance sheet consist of:
Accrued benefits........................................ (25.0) (24.2)
-------- --------
Total recognized in the consolidated balance
sheet............................................. $ (25.0) $ (24.2)
-------- --------
-------- --------
</TABLE>
F-15
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The assumptions used and net periodic cost for the Company's foreign defined
benefit plans are presented below (in millions, except percentages):
<TABLE>
<CAPTION>
PENSION BENEFITS
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Weighted-average assumption as of September 30:
Discount rate................................... 5.75% to 6.5% 6.0% to 6.5%
Expected return on plan assets.................. 9.0% 9.0%
Rate of compensation increase................... 2.5% to 4.0% 2.5% to 4.5%
</TABLE>
<TABLE>
<CAPTION>
PENSION
BENEFITS
-------------
1999 1998
---- ----
<S> <C> <C>
Components of net periodic benefit cost
Service cost............................................ $ 4.0 $ 3.4
Interest cost........................................... 8.5 7.5
----- -----
Total periodic cost..................................... $12.5 $10.9
----- -----
----- -----
</TABLE>
NOTE 7. LEASES
Rental expense for operating leases was $8.9 million, $6.5 million and $4.2
million for the fiscal years ended September 30, 1999, 1998, and 1997.
Future minimum rental commitments under noncancellable operating leases as
of September 30, 1999 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
2000............................................ $ 9.4
2001............................................ 6.8
2002............................................ 6.0
2003............................................ 3.8
2004............................................ 3.4
Thereafter...................................... 3.2
-----
Total minimum lease payments.................... $32.6
-----
-----
</TABLE>
NOTE 8. INCOME TAXES
Income before taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
ENDED SEPTEMBER 30,
---------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
United States.......................................... $18.5 $22.3 $21.5
Foreign................................................ 15.3 16.1 --
----- ----- -----
$33.8 $38.4 $21.5
----- ----- -----
----- ----- -----
</TABLE>
F-16
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions (benefit) for federal, foreign, and state income taxes
consist of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
ENDED SEPTEMBER 30,
---------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................ $11.1 $ 8.8 $ 7.7
Foreign............................................ 2.4 5.3 --
State.............................................. 0.8 0.7 0.9
----- ----- -----
14.3 14.8 8.6
Deferred........................................... (0.7) 0.5 (0.1)
----- ----- -----
$13.6 $15.3 $ 8.5
----- ----- -----
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
ENDED SEPTEMBER 30,
--------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Statutory federal income tax provision.................. $11.8 $13.4 $7.6
Foreign income tax differential......................... 0.9 1.1 --
State income taxes (net of federal benefit)............. 0.5 0.4 0.6
Goodwill amortization................................... 0.3 0.3 0.3
Miscellaneous........................................... 0.1 0.1 --
----- ----- ----
$13.6 $15.3 $8.5
----- ----- ----
----- ----- ----
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment.......................... $(8.3) $(6.3)
Net pension assets..................................... (1.0) (0.3)
----- -----
Total deferred tax liabilities..................... (9.3) (6.6)
----- -----
Deferred tax assets:
Accruals and allowances................................ 11.2 9.8
Post retirement benefits............................... 1.8 1.8
Inventory.............................................. 1.3 0.1
Other.................................................. 1.6 0.4
----- -----
Total deferred tax assets.......................... 15.9 12.1
----- -----
Net deferred tax asset............................. $ 6.6 $ 5.5
----- -----
----- -----
</TABLE>
The classification of the deferred tax balances is:
<TABLE>
<S> <C> <C>
Current asset............................................... $10.0 $ 7.6
Current liability........................................... (0.9) --
----- -----
9.1 7.6
----- -----
Noncurrent asset............................................ 5.8 4.8
Noncurrent liability........................................ (8.3) (6.9)
----- -----
(2.5) (2.1)
----- -----
Net deferred tax asset.................................. $ 6.6 $ 5.5
----- -----
----- -----
</TABLE>
F-17
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. STOCK COMPENSATION PLANS
Certain key employees of the Company participate in stock incentive plans of
USI that provide for awards of restricted stock and stock 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 $0.2 million, $0.1 million
and $0.1 million for fiscal 1999, 1998 and 1997, respectively, and is included
in the combined financial statements of the Company. Options awarded to
employees of the Company under the USI plans vest 25% per year until fully
vested after four years. 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.
Under USI's compensation plans, the independent directors, officers and
employees may be granted options to purchase USI's stock at no less than the
fair market value of the date of the option grant. The Company has adopted the
disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for USI's
stock option plan been determined based on the fair market value at the grant
date for awards in fiscal 1999, 1998 and 1997, consistent with the provision of
SFAS 123, the Company's net income would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
---------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS, EXCEPT
PER SHARE)
<S> <C> <C> <C>
Net income-as reported................................. $20.2 $23.1 $13.0
Net income -- pro forma................................ 20.0 23.0 12.9
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the
Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
USI PLANS
---------
<S> <C>
Expected dividend yield at date of grant:
1999.................................................... 1.15%
1998.................................................... .74%
1997.................................................... 0.00%
Expected stock price volatility:
1999.................................................... 36.80%
1998.................................................... 40.40%
1997.................................................... 36.30%
Risk-free interest rate:
1999.................................................... 6.10%
1998.................................................... 5.83%
1997.................................................... 5.78%
Expected life of options.................................... 4 years
</TABLE>
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1999, 1998 and 1997 is $5.47,
$9.96 and $7.52, respectively. A summary of the
F-18
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company's stock option activity and related information for employees who worked
directly for the Lighting and Industrial Tools businesses for the years ended
September 30 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year........................ 207,687 $15.38 233,248 $11.84 262,817 $ 8.78
Granted....................... 136,500 16.98 46,750 27.03 72,250 20.50
Exercised..................... (11,427) 8.88 (53,869) 9.50 (75,021) 8.77
Cancelled/expired............. (28,563) 20.08 (18,442) 17.23 (26,798) 13.75
------- ------ ------- ------ ------- ------
Outstanding -- end of year.... 304,197 $15.90 207,687 $15.38 233,248 $11.84
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Exercisable -- end of year.... 131,179 $11.72 66,500 $10.51 48,815 $ 8.76
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
The following table summarizes the status of the stock options outstanding
and exercisable at September 30, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
-------------------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OF CONTRACTUAL EXERCISE OF EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
--------------- ------- ---- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$8.75 to $10.33...................... 104,560 5.70 $ 8.77 103,623 $ 8.76
$16.13 to $17.00..................... 123,000 9.15 16.98 -- --
$20.50 to $28.00..................... 76,637 7.75 23.91 27,556 22.87
------- ---- ------ ------- ------
Total............................ 304,197 7.61 $15.90 131,179 $11.72
------- ---- ------ ------- ------
------- ---- ------ ------- ------
</TABLE>
NOTE 10. 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 six
sites. In addition, the Company has been named as a Potentially Responsible
Party ('PRP') at three '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. The Company has not
discounted any obligations as these criteria have not been met. 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
F-19
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999, the Company had accrued approximately $5.0 million
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 $1.0 million and $5.2 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.
NOTE 11. SEGMENT DATA
The Company's operations are classified into two business segments: Lighting
and Industrial Tools. These operations are conducted primarily in the United
States, and to a lesser extent, in other regions of the world. The following
table presents certain information about the Company by segment:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
---------------------------------------------------
NET SALES OPERATING INCOME
------------------------ ------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Business segments:
Lighting(1).............................. $804.0 $765.5 $537.7 $ 48.3 $ 53.5 $ 43.9
Industrial Tools......................... 113.5 90.6 -- 6.2 5.9
Management fees and divisional
overhead............................... -- -- -- (7.9) (8.3) (9.2)
------ ------ ------ ------ ------ ------
$917.5 $856.1 $537.7 46.6 51.1 34.7
------ ------ ------
------ ------ ------
Interest expense to Affiliates........... (12.7) (12.7) (13.2)
Interest expense......................... (0.7) (1.0) --
Interest income.......................... 0.6 1.0 --
------ ------ ------
Income before income taxes............... 33.8 38.4 21.5
Provision for income taxes............... (13.6) (15.3) (8.5)
------ ------ ------
Net income............................... $ 20.2 $ 23.1 $ 13.0
------ ------ ------
------ ------ ------
</TABLE>
---------
(1) Operating income for the year ended September 30, 1998 includes
restructuring charges of $2.3 million and restructuring related charges of
$0.5 million.
F-20
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30,
----------------------------------------
OPERATING
NET SALES INCOME
------------------ ----------------
2000 1999 2000 1999
------ ------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Business segments:
Lighting............................................. $603.2 $590.9 $26.8 $35.9
Industrial Tools..................................... 95.7 86.1 4.4 4.2
Management fees and divisional overhead.............. (4.6) (6.4)
------ ------ ----- -----
$698.9 $677.0 26.6 33.7
------ ------ ----- -----
------ ------ ----- -----
Interest expense to Affiliates....................... (9.8) (9.5)
Interest expense..................................... (0.6) (0.6)
Interest income...................................... 0.4 0.5
----- -----
Income before income taxes........................... 16.6 24.1
Provision for income taxes........................... (6.8) (9.7)
----- -----
Net income........................................... $ 9.8 $14.4
----- -----
----- -----
</TABLE>
The following table presents certain information about the Company by
segment:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30,
---------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Assets
Lighting................................................ $525.9 $468.3 $286.8
Industrial Tools........................................ 162.2 149.0 --
------ ------ ------
Total Assets........................................ $688.1 $617.3 $286.8
------ ------ ------
------ ------ ------
Depreciation and Goodwill Amortization
Lighting................................................ $ 19.5 $ 17.6 $ 9.8
Industrial Tools........................................ 4.3 3.4 --
------ ------ ------
Total Depreciation and Goodwill Amortization........ $ 23.8 $ 21.0 $ 9.8
------ ------ ------
------ ------ ------
Capital Expenditures
Lighting................................................ $ 27.6 $ 19.0 $ 12.6
Industrial Tools........................................ 3.7 4.7 --
------ ------ ------
Total Capital Expenditures.......................... $ 31.3 $ 23.7 $ 12.6
------ ------ ------
------ ------ ------
</TABLE>
F-21
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. GEOGRAPHIC AREAS
The following table presents certain information about the Company by
geographic areas (in millions):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30,
---------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales
United States........................................... $582.6 $567.3 $533.4
Foreign
United Kingdom...................................... 53.7 45.6 --
Germany............................................. 131.9 138.9 --
Other............................................... 149.3 104.3 4.3
------ ------ ------
Total Net Sales................................. $917.5 $856.1 $537.7
------ ------ ------
------ ------ ------
Operating Income(1)
United States........................................... $ 30.8 $ 34.4 $ 34.6
Foreign
United Kingdom...................................... 2.9 3.0 --
Germany............................................. 6.9 10.9 --
Other............................................... 6.0 2.8 0.1
------ ------ ------
Total Operating Income.......................... $ 46.6 $ 51.1 $ 34.7
------ ------ ------
------ ------ ------
Long-lived Assets
United States........................................... $146.8 $102.5 $101.2
Foreign
United Kingdom...................................... 97.7 88.2 --
Germany............................................. 53.3 57.1 --
Other............................................... 10.2 11.9 0.2
------ ------ ------
Total long-lived assets......................... $308.0 $259.7 $101.4
------ ------ ------
------ ------ ------
</TABLE>
---------
(1) Operating earnings for the year ended September 30, 1998 included
restructuring charges of $2.3 million; all of these charges relate to
operating earnings within the United States.
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial information for the fiscal years ended
September 30, 1999 and 1998 is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- ---------------------------------------
QUARTER ENDED DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
------------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $217.0 $224.8 $235.2 $240.5 $198.0 $218.1 $212.8 $227.2
Gross profit............. 69.7 70.4 75.7 73.0 61.4 68.4 64.5 71.3
Net income............... 4.7 3.9 5.8 5.8 5.4 5.1 4.3 8.3
</TABLE>
The results for the quarters ended June 30 and September 30, 1998 include
$2.2 million and $0.1 million of restructuring costs, respectively. All periods
presented are 13 weeks except for the quarter ended December 31, 1998, which is
14 weeks.
F-22
<PAGE>
LCA GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. SUBSEQUENT EVENTS (UNAUDITED)
In June 2000, upon expiration of the contingency period related to the
December 1997 acquisition of Spear & Jackson, USI made additional cash payments
of `L'47 million ($71 million), to the former owners of Spear & Jackson. At the
end of a thrity month contingency period, the market value of USI's stock, which
was computed in accordance with the stock purchase agreement by averaging USI's
stock price on the NYSE during the last five trading days of the contingency
period, was below the guaranteed amount (i.e. the market value of USI's stock at
the acquisition date), which required USI to make a $36 million payment. This
portion of the payment was recorded as an adjustment to invested capital as it
was based upon the market value of the USI's common stock price. The remainder
of the cash payment ($35 million) was recorded as additional goodwill as it
related to the settlement of additional contingent consideration based on
certain sales and other criteria set forth in the purchase agreement.
Due to indications of impairment based on the additional consideration paid
for Spear & Jackson and its current operating results, the Company evaluated the
recoverability of the Spear & Jackson goodwill in accordance with its accounting
policy as described in Note 2. In arriving at the fair value of Spear & Jackson
the Company considered a number of factors including 1) Competition from less
expensive imports; 2) declining margins on exports; 3) general decline in the
industrial sector in the United Kingdom 4) Spear & Jackson'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 value to the estimated fair values
of Spear & Jackson. Based on the above, the Company will record in September
2000 an impairment charge to the goodwill of Spear & Jackson of $83 million. The
effect of this charge will reduce future goodwill amortization by approximately
$2.2 million per annum.
F-23
<PAGE>
SCHEDULE II
LCA GROUP INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
<S> <C> <C> <C> <C> <C>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO NET BALANCE AT
BEGINNING OF COSTS AND OTHER ADDITIONS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------------------------------ ------------ ---------- ---------- ---------- ----------
(IN MILLIONS)
Year ended September 30, 1997
Deducted from asset accounts:
Allowance for doubtful
accounts...................... $5.8 $0.9 $ -- $(1.2)(1) $ 5.5
Year ended September 30, 1998
Deducted from asset accounts:
Allowance for doubtful
accounts...................... $5.5 $2.5 $ -- $ 1.9(1)(2) $ 9.9
Year ended September 30, 1999
Deducted from asset accounts:
Allowance for doubtful
accounts...................... $9.9 $1.0 $ -- $10.9
</TABLE>
---------
(1) Uncollectible accounts written off, net of recoveries
(2) Amount in connection with acquisition.
S-1
<PAGE>
ANNEX A
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LCA GROUP INC.
LCA Group Inc., a corporation organized and existing under the laws of the
State of Delaware, hereby certifies as follows:
1. The name of the Corporation is LCA Group Inc. (the 'Corporation'). The
Corporation was originally incorporated under the name The Lighting Corporation
of America. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on September 30, 1987
under the name HKID 14 Inc. There have been two Certificates of Amendment to the
Certificate of Incorporation filed with the Secretary of State of Delaware. On
April 4, 1988, the name of the Corporation was changed to JWSP Holdings, Inc.
and on May 1, 1997 the name of the Corporation was changed to Lighting
Corporation of America. This Amended and Restated Certificate of Incorporation
restates and further amends the Certificate of Incorporation of the Corporation,
as heretofore amended, and has been adopted and approved in accordance with the
provisions of Sections 245 and 242 of the Delaware General Corporation Law.
Stockholder approval of this Amended and Restated Certificate of Incorporation
was effected by written consent in accordance with Section 228 of the Delaware
General Corporation Law.
2. The text of the Certificate of Incorporation of the Corporation, as
heretofore amended, hereby is amended and restated to read in its entirety is as
follows:
ARTICLE I
NAME
The name of the Corporation is LCA Group Inc.
ARTICLE II
ADDRESS OF REGISTERED OFFICE;
NAME OF REGISTERED AGENT
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of its registered agent at
that address in the State of Delaware is The Corporation Trust Company.
ARTICLE III
PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may now or hereafter be organized under the Delaware
General Corporation Law ('Delaware Law'). It shall have all powers that may now
or hereafter be lawful for a corporation to exercise under Delaware Law.
ARTICLE IV
CAPITAL STOCK
SECTION 4.1 Total Number of Shares of Stock. The total number of shares of
capital stock of all classes that the Corporation shall have authority to issue
is shares. The authorized capital stock is divided into 2,000,000 (Two
Million) shares of preferred stock, of the par value of $.01 each (the
A-1
<PAGE>
'Preferred Stock'), and shares of common stock, of the par value of $.01
each (the 'Common Stock').
SECTION 4.2 Preferred Stock. (a) The shares of Preferred Stock of the
Corporation may be issued from time to time in one or more series thereof, the
shares of each series to have such voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof, as are stated and expressed herein or in the resolution or resolutions
providing for the issue of such series, adopted by the board of directors of the
Corporation (the 'Board of Directors') as hereinafter provided.
(b) Authority is hereby expressly granted to the Board of Directors, subject
to the provisions of this Article IV and to the limitations prescribed by
Delaware Law, to authorize the issue of one or more series of Preferred Stock
and with respect to each such series to fix by resolution or resolutions
providing for the issue of each series the voting powers, full or limited, if
any, of the shares of such series and the designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, the
determination or fixing of the following:
(i) the maximum number of shares to constitute such series (which may
subsequently be increased or decreased by resolutions of the Board of
Directors unless otherwise provided in the resolution providing for the
issue of such series), the distinctive designation thereof and the stated
value thereof if different than the par value thereof;
(ii) the dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the relation that such dividends
shall bear to the dividends payable on any other class or classes of stock
or any other series of any class of stock of the Corporation, and whether
such dividends shall be cumulative or noncumulative;
(iii) whether the shares of such series shall be subject to redemption,
in whole or in part, and if made subject to such redemption the times,
prices and other terms and conditions of such redemption, including whether
or not such redemption may occur at the option of the Corporation or at the
option of the holder or holders thereof or upon the happening of a specified
event;
(iv) the terms and amount of any sinking fund established for the
purchase or redemption of the shares of such series;
(v) whether or not the shares of such series shall be convertible into
or exchangeable for shares of any other class or classes of any stock or any
other series of any class of stock of the Corporation, and, if provision is
made for conversion or exchange, the times, prices, rates, adjustments, and
other terms and conditions of such conversion or exchange;
(vi) the extent, if any, to which the holders of shares of such series
shall be entitled to vote with respect to the election of directors or
otherwise;
(vii) the restrictions, if any, on the issue or reissue of any
additional Preferred Stock;
(viii) the rights of the holders of the shares of such series upon the
dissolution of, or upon the subsequent distribution of assets of, the
Corporation; and (ix) the manner in which any facts ascertainable outside
the resolution or resolutions providing for the issue of such series shall
operate upon the voting powers, designations, preferences, rights and
qualifications, limitations or restrictions of such series.
SECTION 4.3 Common Stock. The shares of Common Stock of the Corporation
shall be of one and the same class. The holders of Common Stock shall have one
vote per share of Common Stock on all matters on which holders of Common Stock
are entitled to vote.
ARTICLE V
BOARD OF DIRECTORS
SECTION 5.1 Powers of Board of Directors. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors, which shall consist of not fewer than three
A-2
<PAGE>
or more than eleven members. In furtherance, and not in limitation, of the
powers conferred by Delaware Law, the Board of Directors is expressly authorized
to:
(a) adopt, amend, alter, change or repeal the By-Laws of the
Corporation; provided, however, that no By-Laws hereafter adopted shall
invalidate any prior act of the directors that would have been valid if such
new By-Laws had not been adopted;
(b) determine the rights, powers, duties, rules and procedures that
affect the power of the Board of Directors to manage and direct the business
and affairs of the Corporation, including the power to designate and empower
committees of the Board of Directors, to elect, appoint and empower the
officers and other agents of the Corporation, and to determine the time and
place of, and the notice requirements for, Board meetings, as well as the
quorum and voting requirements for, and the manner of taking, Board action;
and
(c) exercise all such powers and do all such acts as may be exercised or
done by the Corporation, subject to the provisions of Delaware Law, this
Certificate of Incorporation, and the By-Laws of the Corporation.
SECTION 5.2 Number of Directors. Except as may be provided in a resolution
or resolutions providing for any series of Preferred Stock pursuant to Article
IV hereof with respect to any directors elected by the holders of such series,
and subject to Section 5.1 of this Certificate of Incorporation, the number of
directors constituting the Board of Directors shall be determined from time to
time exclusively by a vote of a majority of the Board of Directors in office at
the time of such vote.
SECTION 5.3 Classified Board of Directors. The directors shall be divided
into three classes, with each class to be as nearly equal in number as
reasonably possible, and with the initial term of office of the first class of
directors to expire at the annual meeting of stockholders, the initial term
of office of the second class of directors to expire at the annual meeting
of stockholders and the initial term of office of the third class of directors
to expire at the annual meeting of stockholders, in each case upon the
election and qualification of their successors. Commencing with the annual
meeting of stockholders, directors elected to succeed those directors whose
terms have thereupon expired shall be elected to a term of office to expire at
the third succeeding annual meeting of stockholders after their election, and
upon the election and qualification of their successors. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain or attain the number of directors in each class as
nearly equal as reasonably possible, but in no case will a decrease in the
number of directors shorten the term of any incumbent director.
SECTION 5.4 Vacancies. Except as may be provided in a resolution or
resolutions providing for any series of Preferred Stock pursuant to Article IV
hereof with respect to any directors elected by the holders of such series, any
vacancies in the Board of Directors for any reason and any newly created
directorship resulting by reason of any increase in the number of directors may
be filled only by the Board of Directors, acting by a majority of the remaining
directors then in office, although less than a quorum, or by a sole remaining
director, and any directors so appointed shall hold office until the next
election of the class of which such directors have been chosen and until their
successors are elected and qualified.
SECTION 5.5 Removal of Directors. Except as may be provided in a resolution
or resolutions providing for any series of Preferred Stock pursuant to Article
IV hereof with respect to any directors elected by the holders of such series,
any director, or the entire Board of Directors, may be removed from office at
any time, but only for cause, and only by the affirmative vote of the holders of
at least 66 2/3% of the voting power of all of the shares of capital stock of
the Corporation then entitled to vote generally in the election of directors,
voting together as a single class.
ARTICLE VI
STOCKHOLDER ACTIONS AND MEETINGS OF STOCKHOLDERS
Except as may be provided in a resolution or resolutions providing for any
class or series of Preferred Stock pursuant to Article IV hereof, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of such
A-3
<PAGE>
holders and may not be effected by any written consent in lieu of a meeting by
such holders. Special meetings of stockholders of the Corporation may be called
only by the Chairman of the Board or by the Secretary upon direction of the
Board of Directors pursuant to a resolution adopted by a majority of the members
of the Board of Directors then in office. Elections of directors need not be by
written ballot, unless otherwise provided in the By-Laws. For purposes of all
meetings of stockholders, a quorum shall consist of a majority of the shares
entitled to vote at such meeting of stockholders, unless otherwise required by
law.
ARTICLE VII
LIMITATION ON LIABILITY OF DIRECTORS
No person shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, including
without limitation directors serving on committees of the Board of Directors;
provided, however, that the foregoing shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law, or (iv) for any transaction from which the
director derived an improper personal benefit. If Delaware Law is amended
hereafter to authorize corporate action further eliminating or limited the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
Delaware Law, as so amended. Any amendment, repeal or modification of this
Article VII shall not adversely affect any right or protection of a director of
the Corporation existing hereunder with respect to any act or omission occurring
prior to such amendment, repeal or modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
The Board of Directors shall have the power to adopt, amend, alter, change
or repeal any By-Laws of the Corporation. In addition, the stockholders of the
Corporation may adopt, amend, alter, change or repeal any By-Laws of the
Corporation by the affirmative vote of the holders of at least 66 2/3% of the
voting power of all of the shares of capital stock of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class (notwithstanding the fact that a lesser percentage may be specified
by Delaware Law).
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation hereby reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation in any manner
permitted by Delaware Law and all rights and powers conferred upon stockholders,
directors, and officers herein are granted subject to this reservation. Except
as may be provided in a resolution or resolutions providing for any series of
Preferred Stock pursuant to Article IV hereof and that relate to such series of
Preferred Stock, any such amendment, alteration, change or repeal shall require
the affirmative vote of both (a) a majority of the members of the Board of
Directors then in office and (b) a majority of the voting power of all of the
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class; except that any
proposal to amend, alter, change or repeal the provisions of Articles 5.3,
Article 5.5, Article VI, Article VIII and this Article IX shall require the
affirmative vote of 66 2/3% of the voting power of all of the shares of capital
stock entitled to vote generally in the election of directors, voting together
as a single class.
ARTICLE X
SEVERABILITY
In the event that any provision of this Certificate of Incorporation
(including any provision within a single Section, paragraph or sentence) is held
by a court of competent jurisdiction to be invalid, void or
A-4
<PAGE>
otherwise unenforceable, the remaining provisions are severable and shall remain
enforceable to the full extent permitted by law.
THE UNDERSIGNED, being the Senior Vice President, General Counsel and
Secretary of the Corporation, for the purpose of amending and restating the
Certificate of Incorporation of the Corporation pursuant to Delaware Law, does
make this Certificate, hereby declaring and certifying that this is the act and
deed of the Corporation and that the facts herein stated are true, and
accordingly have hereunto set my hand as of .
.....................................
STEVEN C. BARRE,
Senior Vice President, General Counsel
and Secretary
A-5
<PAGE>
Annex B
LCA GROUP INC.
STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. PURPOSE..................................................................1
ARTICLE II. DEFINITIONS..............................................................1
ARTICLE III. ADMINISTRATION...........................................................7
ARTICLE IV. SHARE AND OTHER LIMITATIONS.............................................11
ARTICLE V. ELIGIBILITY.............................................................13
ARTICLE VI. EMPLOYEE AND CONSULTANT STOCK OPTION GRANTS.............................14
ARTICLE VII. RESTRICTED STOCK AWARDS.................................................18
ARTICLE VIII. OTHER STOCK-BASED AWARDS................................................20
ARTICLE IX. NON-EMPLOYEE DIRECTOR STOCK AWARDS AND STOCK OPTION GRANTS..............21
ARTICLE X. NON-TRANSFERABILITY.....................................................24
ARTICLE XI. CHANGE IN CONTROL PROVISIONS............................................24
ARTICLE XII. TERMINATION OR AMENDMENT OF THE PLAN....................................27
ARTICLE XIII. UNFUNDED PLAN...........................................................28
ARTICLE XIV. GENERAL PROVISIONS......................................................28
ARTICLE XV. EFFECTIVE DATE OF PLAN..................................................31
ARTICLE XVI. TERM OF PLAN............................................................31
ARTICLE XVII. NAME OF PLAN............................................................31
</TABLE>
i
<PAGE>
LCA GROUP INC.
STOCK INCENTIVE PLAN
ARTICLE I.
PURPOSE
The purpose of this LCA Group Inc. Stock Incentive Plan (the "Plan") is
to enhance the profitability and value of LCA Group Inc. (the "Company") for the
benefit of its stockholders by enabling the Company (1) to offer employees of,
and Consultants to, the Company and its Affiliates, Stock Options, Restricted
Stock and Other Stock-Based Awards, thereby creating a means to raise the level
of stock ownership by employees and Consultants in order to attract, retain and
reward such individuals and strengthen the mutuality of interests between such
individuals and the Company's stockholders, and (2) to make an initial grant to
Non-Employee Directors of Stock Options upon their initial appointment and to
make certain other awards and grants of Common Stock, Stock Options and Other
Stock-Based Awards to Non-Employee Directors in order to attract, retain and
reward such Non-Employee Directors, and strengthen the mutuality of interests
between Non-Employee Directors and the Company's stockholders. The Plan is
effective as of the date set forth in Article XV.
ARTICLE II.
DEFINITIONS
For purposes of this Plan, the following terms shall have the following
meanings:
2.1 "Acquisition Events" shall have the meaning set forth in
Section 4.2(d).
2.2 "Affiliate" shall mean other than the Company, (i) any
corporation in an unbroken chain of corporations beginning with the
Company, or in the event the Company is a Subsidiary, beginning with
the Company's Parent, which owns stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain; (ii) any corporation,
trade or business (including, without limitation, a partnership or
limited liability company) which is controlled fifty percent (50%) or
more (whether by ownership of stock, assets or an equivalent ownership
interest or voting interest) by the Company and/or its Affiliates; or
(iii) any other entity, approved by the Committee as an Affiliate under
the Plan, in which the Company or any of its Affiliates has a material
equity interest.
1
<PAGE>
2.3 "Award" shall mean any award under this Plan of any Stock
Option, Restricted Stock, Other Stock-Based Awards or Common Stock. All
Awards shall be confirmed by, and subject to the terms of, a written
agreement executed by the Company and the Participant or in the
discretion of the Committee, a grant letter from the Company.
2.4 "Board" shall mean the Board of Directors of the Company.
2.5 "Cause" shall mean, with respect to a Participant's
Termination of Employment or Termination of Consultancy: (1) in the
case where there is no employment agreement or consulting agreement
between the Company or an Affiliate and the Participant in effect at
the time of the relevant grant or where there is an employment
agreement or consulting agreement in effect at such time, but such
agreement does not define cause (or words of like import), termination
due to a Participant's dishonesty, fraud, insubordination, willful
misconduct, refusal to perform services (for any reason other than
illness or incapacity) or materially unsatisfactory performance of his
or her duties for the Company or an Affiliate, as determined by the
Committee in its sole discretion; or (2) in the case where there is an
employment agreement or consulting agreement between the Company or an
Affiliate and the Participant in effect at the time of grant that
defines cause (or words of like import), termination that is or would
be deemed to be for cause (or words of like import) as defined under
such employment agreement or consulting agreement at the time of grant,
as determined by the Committee in its sole discretion; provided, that
any definition that is effective under an employment agreement or
consulting agreement after a Change in Control shall only be effective
for purposes of this Plan after a Change in Control. With respect to a
Participant's Termination of Directorship, Cause shall mean an act or a
failure to act that constitutes "cause" for removal of a director under
applicable Delaware law.
2.6 "Change in Control" shall have the meaning set forth in
Article XI.
2.7 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.8 "Committee" shall mean (a) with respect to the application
of this Plan to Eligible Employees and Consultants, a committee of the
Board appointed from time to time by the Board, which committee shall
be intended to consist of two or more Non-Employee Directors, each of
whom shall be (i) to the extent required by Rule 16b-3, a "non-employee
director" as defined in Rule 16b-3 and (ii) to the extent required by
Section 162(m) of the Code, an "outside director" as defined under
Section 162(m) of the Code and (b) with respect to the application of
this Plan to Non-Employee Directors, the Board. Notwithstanding the
foregoing, if and to the extent that no Committee exists which has the
authority to administer the Plan, the functions of the Committee shall
be exercised by the Board. If for any reason the appointed Committee
does not meet the requirements of Rule 16b-3 or Section 162(m) of the
2
<PAGE>
Code, such noncompliance with the requirements of Rule 16b-3 or Section
162(m) of the Code shall not affect the validity of the awards, grants,
interpretations or other actions of the Committee.
2.9 "Common Stock" shall mean subject to Article IV hereof,
the common stock, $.01 par value per share, of the Company.
2.10 "Consultant" shall mean any individual who is engaged to
perform services for the Company and/or its Affiliates other than as an
employee or director of the Company or any Affiliate.
2.11 "Company" shall mean LCA Group Inc. and any successors
and assigns.
2.12 "Detrimental Activity" shall mean (i) the disclosure to
anyone outside the Company or its Affiliates, or the use in other than
the Company's or its Affiliate's business, without written
authorization from the Company, of any confidential information or
proprietary information, relating to the business of the Company or its
Affiliates, acquired by a Participant prior to the Participant's
Termination of Relationship; (ii) activity while employed or retained
that results, or if known could result, in the Participant's
Termination of Relationship that is classified by the Company as a
termination for Cause; (iii) any attempt, directly or indirectly, to
solicit, induce or hire (or the identification for solicitation,
inducement or hiring of) any non-clerical employee of the Company or
its Affiliates to be employed by, or to perform services for, the
Participant or any person or entity with which the Participant is
associated (including, but not limited to, due to the Participant's
employment by, consultancy for, equity interest in, or creditor
relationship with such person or entity) or any person or entity from
which the Participant receives direct or indirect compensation or fees
as a result of such solicitation, inducement or hire (or the
identification for solicitation, inducement or hire) without, in all
cases, written authorization from the Company; (iv) any attempt,
directly or indirectly, to solicit in a competitive manner any current
or prospective customer of the Company or its Affiliates without, in
all cases, written authorization from the Company; (v) the
Participant's Disparagement, or inducement of others to do so, of the
Company or its Affiliates or their past and present officers,
directors, employees or products; (vi) without written authorization
from the Company, the rendering of services for any organization, or
engaging, directly or indirectly, in any business, which is competitive
with the Company or its Affiliates, or which organization or business,
or the rendering of services to such organization or business, is
otherwise prejudicial to or in conflict with the interests of the
Company or its Affiliates, provided however that competitive activities
shall only be those competitive with any business unit or Affiliate of
the Company with regard to which the Participant performed services at
any time within the two (2) years prior to the Termination of
Relationship of the Participant; or (vii) any other conduct or act
determined by the Committee, in its sole discretion, to be injurious,
detrimental or prejudicial to any interest of the Company or its
Affiliates.
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For purposes of subparagraphs (i), (iii), (iv) and (vi) above, the
Chief Executive Officer and the General Counsel of the Company shall
each have authority to provide the Participant with written
authorization to engage in the activities contemplated thereby and no
other person shall have authority to provide the Participant with such
authorization.
2.13 "Disability" shall mean: (1) in the case where there is
no employment agreement or consulting agreement between the Company or
an Affiliate and the Participant in effect at the time of the relevant
grant, or where there is an employment agreement or consulting
agreement in effect at such time, but such agreement does not define
disability, total and permanent disability, as defined in Section
22(e)(3) of the Code, as determined by the Committee in its sole
discretion; or (2) in the case where there is an employment agreement
or consulting agreement between the Company or an Affiliate and the
Participant at the time of the relevant grant that defines disability,
disability as defined under such employment agreement or consulting
agreement at the time of grant, as determined by the Committee in its
sole discretion.
2.14 "Disparagement" shall mean making comments or statements
to the press, the Company's or its Affiliates' employees or any
individual or entity with whom the Company or its Affiliates has a
business relationship which would adversely affect in any manner: (i)
the conduct of the business of the Company or its Affiliates
(including, without limitation, any products or business plans or
prospects), or (ii) the business reputation of the Company or its
Affiliates, or any of their products, or their past or present
officers, directors or employees.
2.15 "Effective Date" shall mean the effective date of the
Plan as defined in Article XV.
2.16 "Eligible Employees" shall mean the employees of the
Company and its Affiliates, including Prospective Employees, who are
eligible pursuant to Article V to be granted Awards under this Plan.
Notwithstanding the foregoing, with respect to the grant of Incentive
Stock Options, Eligible Employees shall mean the employees of the
Company, its Subsidiaries and its Parent who are eligible pursuant to
Article V to be granted Incentive Stock Options under the Plan.
2.17 "Exchange Act" shall mean the Securities Exchange Act of
1934.
2.18 "Fair Market Value" for purposes of this Plan, unless
otherwise required by any applicable provision of the Code or any
regulations issued thereunder, shall mean, as of any date, the last
sales price reported for the Common Stock on the applicable date, (i)
as reported by the principal national securities exchange in the United
States on which it is then traded or The Nasdaq Stock Market, Inc., or
(ii) if not traded on any such national securities exchange or The
Nasdaq Stock Market, Inc., as quoted on an automated quotation system
sponsored by the National Association of
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Securities Dealers, Inc., or if the Common Stock shall not have been
reported or quoted on such date, on the first day prior thereto on
which the Common Stock was reported or quoted; provided, that the
Committee may modify the definition of Fair Market Value to reflect any
changes in the trading practices of any exchange on which the Common
Stock is listed or traded. For purposes of the grant of any Stock
Option, the applicable date shall be the date on which the Option is
granted. If the Common Stock is not readily tradable on a national
securities exchange, The Nasdaq Stock Market, Inc. or any system
sponsored by the National Association of Securities Dealers, Inc., the
method of determining Fair Market Value or the Fair Market Value shall
be set in good faith by the Committee on the advice of a registered
investment adviser (as defined under the Investment Advisers Act of
1940).
2.19 "Good Reason" shall mean, with respect to a Participant's
Termination of Employment or Termination of Consultancy: (1) in the
case where there is no employment agreement or consulting agreement
between the Company or an Affiliate and the Participant in effect at
the time of the relevant grant, or where there is an employment
agreement or consulting agreement in effect at such time, but such
agreement does not define good reason (or words of like import), a
voluntary termination due to good reason, as the Committee, in its sole
discretion, decides to treat as a Good Reason termination; or (2) in
the case where there is an employment agreement or consulting agreement
between the Company or an Affiliate and the Participant in effect at
the time of the relevant grant that defines good reason (or words of
like import), a termination due to good reason (or words of like
import), as defined in such employment agreement or consulting
agreement at the time of grant, as determined by the Committee in its
sole discretion; provided that any definition that is effective under
an employment agreement or consulting agreement after a Change in
Control shall only be effective for purposes of this Plan after a
Change in Control.
2.20 "Incentive Stock Option" shall mean any Stock Option
awarded to an Eligible Employee under this Plan intended to be and
designated as an "Incentive Stock Option" within the meaning of Section
422 of the Code.
2.21 "Non-Employee Director" shall mean a director of the
Company who is not an active employee of the Company or an Affiliate.
2.22 "Non-Qualified Stock Option" shall mean any Stock Option
awarded under this Plan that is not an Incentive Stock Option.
2.23 "Other Stock-Based Awards" shall mean any Award granted
under Article VIII.
2.24 "Parent" shall mean any parent corporation of the Company
within the meaning of Section 424(e) of the Code.
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2.25 "Participant" shall mean a person to whom an Award has
been made pursuant to this Plan.
2.26 "Prospective Employee" shall mean an individual who has
committed to become an employee of the Company or an Affiliate within
sixty (60) days from the date an Award is to be granted to such
individual.
2.27 "Restricted Stock" shall mean an award of shares of
Common Stock under the Plan that is subject to restrictions under
Article VII.
2.28 "Restriction Period" shall have the meaning set forth in
Subsection 7.2(d) with respect to Restricted Stock for Eligible
Employees or Consultants.
2.29 "Retirement" shall mean Termination of Relationship of a
Participant (other than a Termination of Relationship for Cause or
within ninety (90) days after an event which would be grounds for a
Termination of Relationship for Cause) who has attained (1) at least
age sixty-five (65); (2) at least age sixty-two (62) and performed ten
(10) or more years of consecutive service with the Company (or, if the
Participant was employed by U.S. Industries, Inc. or its affiliates and
on the spinoff of the Company to the stockholders of U.S. Industries,
Inc. (the "Spinoff") the Participant became employed by the Company or
its Affiliates, service with U.S. Industries, Inc., and in certain
instances service with such other predecessors as determined by the
Committee) and/or an Affiliate; or (3) such earlier date after age
fifty-five (55) as approved by the Committee with regard to such
Participant.
2.30 "Rule 16b-3" shall mean Rule 16b-3 under Section 16(b) of
the Exchange Act as then in effect or any successor provisions.
2.31 "Section 162(m) of the Code" shall mean the exception for
performance-based compensation under Section 162(m) of the Code and any
Treasury regulations thereunder.
2.32 "Stock Option" or "Option" shall mean any Option to
purchase shares of Common Stock granted to Eligible Employees or
Consultants pursuant to Article VI and Non-Employee Directors pursuant
to Article IX.
2.33 "Subsidiary" shall mean any subsidiary corporation of the
Company within the meaning of Section 424(f) of the Code.
2.34 "Ten Percent Stockholder" shall mean a person owning
stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company, its Subsidiaries or its Parent.
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2.35 "Termination of Consultancy" shall mean the termination
of a Consultant's consultancy assignment with the Company and all
Affiliates. In the event an entity shall cease to be an Affiliate,
there shall be deemed a Termination of Consultancy of any individual
who is not otherwise a Consultant to the Company or another Affiliate
at the time the entity ceases to be an Affiliate.
2.36 "Termination of Directorship" shall mean, with respect to
a Non-Employee Director, that the Non-Employee Director has ceased to
be a director of the Company.
2.37 "Termination of Employment," except as provided in the
next sentence, shall mean (1) a termination of service (for reasons
other than a military or personal leave of absence granted by the
Company) of a Participant from the Company and its Affiliates; or (2)
an entity that is employing a Participant has ceased to be an
Affiliate, unless the Participant thereupon becomes employed by the
Company or another Affiliate. The Committee may otherwise define
Termination of Employment in the Award agreement or, if no rights of a
Participant are reduced, may otherwise define Termination of Employment
thereafter.
2.38 "Termination of Relationship" shall mean no longer being
an Eligible Employee, a Consultant or a Non-Employee Director.
2.39 "Transfer" or "Transferred" shall mean anticipate,
alienate, attach, sell, assign, pledge, encumber, charge or otherwise
transfer.
ARTICLE III.
ADMINISTRATION
3.1 The Committee. The Plan shall be administered and interpreted by
the Committee.
3.2 Awards. The Committee shall have full authority to grant, pursuant
to the terms of this Plan, Stock Options, Restricted Stock and Other Stock-Based
Awards to Eligible Employees and Consultants. The Board shall have full
authority to grant, pursuant to the terms of this Plan, Common Stock, Stock
Options and Other Stock-Based Awards to Non-Employee Directors in accordance
with Article IX hereof. In particular, the Committee (or the Board, as the case
may be) shall have the authority:
(a) to select the Eligible Employees, Consultants or
Non-Employee Directors to whom Awards may from time to time be granted
hereunder;
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(b) to determine whether and to what extent Awards, or any
combination thereof, are to be granted hereunder to one or more
Eligible Employees, Consultants and Non-Employee Directors;
(c) to determine the number of shares of Common Stock to be
covered by each Award to an Eligible Employee, Consultant or
Non-Employee Director granted hereunder;
(d) to determine the terms and conditions, not inconsistent
with the terms of this Plan, of any Award granted hereunder to an
Eligible Employee, Consultant or Non-Employee Director (including, but
not limited to, the share price, any restriction or limitation, any
vesting schedule or acceleration thereof, or any forfeiture
restrictions or waiver thereof, regarding any Award, and the shares of
Common Stock relating thereto, based on such factors, if any, as the
Committee shall determine, in its sole discretion);
(e) to determine whether and under what circumstances a Stock
Option may be settled in cash, Common Stock and/or Restricted Stock
under Subsection 6.3(d);
(f) to determine whether, to what extent and under what
circumstances to provide loans (which shall be on a recourse basis and
shall bear a reasonable rate of interest) to Eligible Employees,
Consultants and Non-Employee Directors in order to purchase shares of
Common Stock under the Plan;
(g) to modify, extend or renew a Stock Option, subject to
Sections 12.1 and 6.3(g) hereof, provided, however, that if a Stock
Option is modified, extended or renewed and thereby deemed to be the
issuance of a new Stock Option under the Code or the applicable
accounting rules, the exercise price of such Stock Option may continue
to be the original exercise price even if less than the Fair Market
Value of the Common Stock at the time of such modification, extension
or renewal;
(h) to determine whether a Stock Option is an Incentive Stock
Option or Non-Qualified Stock Option; and
(i) to determine whether to require an Eligible Employee,
Consultant or Non-Employee Director as a condition of the granting of
an Award, not to sell or otherwise dispose of shares acquired pursuant
to the exercise of an Option or an Award for a period of time as
determined by the Committee, in its sole discretion, following the date
of the acquisition of such Option or Award.
3.3 Guidelines.
(a) Subject to Article XII hereof, the Committee (or the
Board, as the case may be) shall have the authority to adopt, alter and
repeal such administrative rules,
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guidelines and practices governing this Plan and perform all acts,
including the delegation of its administrative responsibilities, as it
shall, from time to time, deem advisable; to construe and interpret the
terms and provisions of this Plan and any Award issued under this Plan
(and any agreements relating thereto); and to otherwise supervise the
administration of this Plan. The Committee (or the Board, as the case
may be) may correct any defect, supply any omission or reconcile any
inconsistency in this Plan or in any agreement relating thereto in the
manner and to the extent it shall deem necessary to carry this Plan
into effect. To the extent applicable, this Plan is intended to comply
with the applicable requirements of Rule 16b-3 and with regard to
Options and certain other Awards, the applicable provisions of Section
162(m) of the Code and shall be limited, construed and interpreted in a
manner so as to comply therewith.
(b) Without limiting the foregoing, the Committee (or the
Board, as the case may be) shall have the authority to establish
special guidelines, provisions and procedures applicable to Awards
granted to persons who are residing or employed in, or subject to, the
taxes of, countries other than the United States to accommodate
differences in applicable tax, securities or other local law. The
Committee (or the Board, as the case may be) may adopt supplements or
amendments to the Plan to reflect the specific requirements of local
laws and procedures of non-United States jurisdictions without
affecting the terms of the Plan as then in effect for any other
purposes.
3.4 Decisions Final. Any decision, interpretation or other action made
or taken in good faith by or at the direction of the Company, the Board, or the
Committee (or any of its members) arising out of or in connection with the Plan
shall be within the absolute discretion of all and each of them, as the case may
be, and shall be final, binding and conclusive on the Company and all employees
and Participants and their respective heirs, executors, administrators,
successors and assigns.
3.5 Procedures. If the Committee is appointed, the Board of Directors
shall designate one of the members of the Committee as chairman and the
Committee shall hold meetings, subject to the By-Laws of the Company, at such
times and places as the Committee shall deem advisable, including, without
limitation, by telephone conference or by written consent. A majority of the
Committee members shall constitute a quorum. All determinations of the Committee
shall be made by a majority of its members. Any decision or determination
reduced to writing and signed by all the Committee members in accordance with
the By-Laws of the Company, shall be fully as effective as if it had been made
by a vote at a meeting duly called and held. The Committee shall keep minutes of
its meetings and shall make such rules and regulations for the conduct of its
business as it shall deem advisable.
3.6 Designation of Advisors/Liability.
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(a) The Committee may designate employees of the Company and
professional advisors to assist the Committee in the administration of
the Plan and may grant authority to employees to execute agreements or
other documents on behalf of the Committee.
(b) The Committee may employ such legal counsel, advisors and
agents as it may deem desirable for the administration of the Plan and
may rely upon any opinion received from any such counsel or advisor and
any computation received from any such advisor or agent. Expenses
incurred by the Committee or Board in the engagement of any such
counsel, advisor or agent shall be paid by the Company. The Committee,
its members and any person designated pursuant to paragraph (a) above
shall not be liable for any action or determination made in good faith
with respect to the Plan. To the maximum extent permitted by applicable
law, no officer or former officer of the Company or member or former
member of the Committee or of the Board shall be liable for any action
or determination made in good faith with respect to the Plan or any
Award granted under it. To the maximum extent permitted by applicable
law and the Certificate of Incorporation and By-Laws of the Company and
to the extent not covered by insurance directly insuring such person,
each officer or former officer and member or former member of the
Committee or of the Board shall be indemnified and held harmless by the
Company against any cost or expense (including reasonable fees of
counsel reasonably acceptable to the Company) or liability (including
any sum paid in settlement of a claim with the approval of the
Company), and advanced amounts necessary to pay the foregoing at the
earliest time and to the fullest extent permitted, arising out of any
act or omission to act in connection with the administration of the
Plan, except to the extent arising out of such officer's or former
officer's, member's or former member's own fraud or bad faith. Such
indemnification shall be in addition to any rights of indemnification
the employee, officer, director or member or former employee, officer,
director or member may have under applicable law or under the
Certificate of Incorporation or By-Laws of the Company or any
Affiliate. Notwithstanding anything else herein, this indemnification
will not apply to the actions or determinations made by an individual
with regard to Awards granted to him or her under this Plan.
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ARTICLE IV.
SHARE AND OTHER LIMITATIONS
4.1 Shares.
(a) General Limitation. The aggregate number of shares of
Common Stock that may be the subject of Awards under this Plan at the
time of any new grant (and with no reduction of the outstanding Awards)
shall be limited to 790,800 shares (subject to any increase or decrease
pursuant to Section 4.2) which may be either authorized and unissued
Common Stock or Common Stock held in or acquired for the treasury of
the Company or both. If either (i) any Option granted under this Plan
expires, terminates or is canceled for any reason without having been
exercised in full or (ii) the Company repurchases any Option pursuant
to Section 6.3(e) the number of underlying shares of Common Stock shall
again be available for the purposes of Awards under the Plan. If any
shares of Restricted Stock or any Other Stock Based Award awarded under
this Plan to a Participant are forfeited, repurchased, terminated or
canceled by the Company for any reason the number of forfeited,
repurchased, terminated or canceled shares of Restricted Stock or
shares underlying the Other Stock Based Award shall again be available
for the purposes of Awards under the Plan. In addition, in determining
the number of shares of Common Stock available for Awards other than
Awards of Incentive Stock Options, if Common Stock has been exchanged
by a Participant as full or partial payment to the Company, or for
required withholding, in connection with the exercise of a Stock Option
or the number of shares of Common Stock otherwise deliverable has been
reduced for withholding, the number of shares of Common Stock exchanged
as payment in connection with the exercise or for withholding or
reduced for withholding shall again be available under the Plan.
(b) Individual Participant Limitations. (i) The maximum number
of shares of Common Stock subject to any Option which may be granted
under this Plan during any fiscal year of the Company to any Eligible
Employee or Consultant shall not exceed 150,000 shares (subject to any
increase or decrease pursuant to Section 4.2). There are no individual
share limitations for Awards of Restricted Stock or Other Stock-Based
Awards, except as set forth in (ii) or (iii) below or to the extent
that Other Stock-Based Awards are used to make awards under another
plan which has such a limitation.
(ii) The maximum number of shares of Restricted Stock subject
to specified performance goals in accordance with Section 7.1 awarded
in any fiscal year of the Company to any Eligible Employee or
Consultant shall not exceed 90,000 shares (subject to any increase or
decrease pursuant to Section 4.2).
(iii) The maximum number of shares of Common Stock available
as Other Stock Based Awards granted under this Plan during any fiscal
year of the Company to any Eligible Employee or Consultant which are
subject to performance goals shall not
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exceed 90,000 shares (subject to increase or decrease pursuant to
Section 4.2); provided the foregoing shall not apply to any Other
Stock-Based Awards used to make payments under any other plan of the
Company or its Affiliates.
4.2 Changes.
(a) The existence of the Plan and the Awards granted hereunder
shall not affect in any way the right or power of the Board or the
stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the
Company or its Affiliates, any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting Common Stock, the
dissolution or liquidation of the Company or its Affiliates, any sale
or transfer of all or part of its assets or business or any other
corporate act or proceeding.
(b) In the event of any such change in the capital structure
or business of the Company by reason of any stock dividend or
distribution, stock split or reverse stock split, recapitalization,
reorganization, merger, consolidation, split-up, combination or
exchange of shares, non-cash distribution with respect to its
outstanding Common Stock of capital stock other than Common Stock,
reclassification of its capital stock, any sale or transfer of all or
part of the Company's assets or business, or any similar change
affecting the Company's capital structure or business and the Committee
determines in good faith that an adjustment is necessary or appropriate
under the Plan to prevent substantial dilution or enlargement of the
rights granted to, or available for, Participants under the Plan or as
otherwise necessary to reflect the change, then the aggregate number
and kind of shares which thereafter may be issued under this Plan, the
number and kind of shares or other property (including cash) to be
issued upon exercise of an outstanding Option granted under this Plan
and the purchase price thereof, the number and kind of shares subject
to other Awards granted under this Plan and the number of shares of
Common Stock to be awarded pursuant to Article IX hereof shall be
appropriately adjusted consistent with such change, and such other
changes in the Awards may be made in such manner as the Committee may
deem equitable to prevent substantial dilution or enlargement of the
rights granted to, or available for, Participants under this Plan or as
otherwise necessary to reflect the change, and any such adjustment
determined by the Committee in good faith shall be binding and
conclusive on the Company and all Participants and employees and their
respective heirs, executors, administrators, successors and assigns.
Except as provided in this Section 4.2, a Participant shall have no
rights by reason of any issue by the Company of stock of any class or
securities convertible into stock of any class, any subdivision or
consolidation of shares of stock of any class, the payment of any stock
dividend, any other increase or decrease in the number of shares of
stock of any class, any sale or transfer of all or part of the
Company's assets or business or any other change affecting the
Company's capital structure or business.
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(c) Fractional shares of Common Stock resulting from any
adjustment in Options pursuant to Section 4.2(a) or (b) shall be
aggregated until, and eliminated at, the time of exercise. No
fractional shares of Common Stock shall be issued under the Plan. The
Committee must, in its sole discretion, pay cash settlements in lieu of
any fractional shares of Common Stock in settlement of awards under the
Plan. Notice of any adjustment shall be given by the Committee to each
Participant whose Option has been adjusted and such adjustment (whether
or not such notice is given) shall be effective and binding for all
purposes of the Plan. In the case of other Awards, fractional shares
resulting from adjustment pursuant to Sections 4.2(a) or (b) shall be
awarded under the Plan pursuant to the terms of the Plan.
(d) In the event of a merger or consolidation in which the
Company is not the surviving entity or in the event of any transaction
that results in the acquisition of substantially all of the Company's
outstanding Common Stock by a single person or entity or by a group of
persons and/or entities acting in concert, or in the event of the sale
or transfer of all or substantially all of the Company's assets (all of
the foregoing being referred to as "Acquisition Events"), then the
Committee may, in its sole discretion, terminate all outstanding
Options of Participants effective as of the date of the Acquisition
Event, by delivering notice of termination to each such Participant at
least twenty (20) days prior to the date of consummation of the
Acquisition Event; provided, that, unless otherwise determined at the
time of grant, during the period from the date on which such notice of
termination is delivered to the consummation of the Acquisition Event,
each Participant shall have the right to exercise in full all of his or
her Options that are then outstanding (whether vested or not vested and
without regard to any limitations on exercisability otherwise contained
in the Option) but contingent on occurrence of the Acquisition Event,
and, provided that, if the Acquisition Event does not take place within
a specified period after giving such notice for any reason whatsoever,
the notice and exercise shall be null and void. If an Acquisition Event
occurs, to the extent the Committee does not terminate the outstanding
Options pursuant to this Section 4.2(d), then the provisions of Section
4.2(b) shall apply.
4.3 Minimum Purchase Price. Notwithstanding any provision of this Plan
to the contrary, if authorized but previously unissued shares of Common Stock
are issued under this Plan, such shares shall not be issued for a consideration
which is less than par value.
ARTICLE V.
ELIGIBILITY
5.1 General Eligibility. All Eligible Employees and Consultants of the
Company and its Affiliates shall be eligible for grants of Non-Qualified Stock
Options, Restricted Stock and Other Stock-Based Awards. Eligibility for the
grant of an Award and actual participation in this Plan shall be determined by
the Committee in its sole discretion. Notwithstanding the
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foregoing, Eligible Employees or Consultants who receive grants under the Plan
within the first forty-five (45) days following the Spinoff are restricted from
receiving additional grants of Stock Options or other Awards under the Plan
until the later of: (x) the beginning of the second fiscal year following the
Spinoff and (y) the date the Plan is approved by stockholders following the
Spinoff.
5.2 Incentive Stock Options. All Eligible Employees of the Company, its
Subsidiaries and its Parent (if any) shall be eligible for grants of Incentive
Stock Options under this Plan. Eligibility for the grant of an Award and actual
participation in this Plan shall be determined by the Committee in its sole
discretion.
5.3 Non-Employee Directors. Non-Employee Directors shall be eligible
for Common Stock awards and Stock Option grants in accordance with Article IX of
the Plan.
ARTICLE VI.
EMPLOYEE AND CONSULTANT STOCK OPTION GRANTS
6.1 Options. Each Stock Option granted hereunder shall be one of two
types: (i) an Incentive Stock Option intended to satisfy the requirements of
Section 422 of the Code; or (ii) a Non-Qualified Stock Option.
6.2 Grants. Subject to the provisions of Article V, the Committee shall
have the authority to grant to any Eligible Employee one or more Incentive Stock
Options, Non-Qualified Stock Options or any combination thereof and to grant any
Consultant one or more Non-Qualified Stock Options. To the extent that any Stock
Option does not qualify as an Incentive Stock Option (whether because of its
provisions or the time or manner of its exercise or otherwise), such Stock
Option or the portion thereof which does not so qualify, shall constitute a
separate Non-Qualified Stock Option.
6.3 Terms of Options. Options granted under this Plan shall be subject
to the following terms and conditions, and, shall be in such form and contain
such additional terms and conditions, not inconsistent with the terms of this
Plan, as the Committee shall deem desirable:
(a) Exercise Price. The exercise price per share of Common
Stock subject to an Incentive Stock Option shall be determined by the
Committee at the time of grant, but shall not be less than 100% of the
Fair Market Value of a Common Stock at the time of grant; provided,
however, that if an Incentive Stock Option is granted to a Ten Percent
Stockholder, the exercise price shall be no less than 110% of the Fair
Market Value of a share of Common Stock. The exercise price per share
of Common Stock purchasable under a Non-Qualified Stock Option shall be
determined by the Committee but shall
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not be less than 100% of the Fair Market Value of a share of Common
Stock at the time of grant.
(b) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Stock Option shall be exercisable more than
ten (10) years after the date the Option is granted; provided, however,
the term of an Incentive Stock Option granted to a Ten Percent
Stockholder shall not exceed five (5) years. Unless the Committee
determines otherwise at grant, all Options shall be subject to
termination by the Committee prior to a Change in Control if the
Participant engages in Detrimental Activity.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee at grant. If the Committee provides, in its
discretion, that any Stock Option is exercisable subject to certain
limitations (including, without limitation, that it is exercisable only
in installments or within certain time periods), the Committee may
waive limitations on the exercisability at any time at or after grant
in whole or in part (including, without limitation, waiver of the
installment exercise provisions or acceleration of the time at which
Options may be exercised), based on such factors, if any, as the
Committee shall determine, in its sole discretion provided, that,
unless otherwise determined by the Committee at grant, the grant shall
provide that (i) as a condition of the exercise of an Option, the
Participant shall be required to certify at the time of exercise in a
manner acceptable to the Company that the Participant is in compliance
with the terms and conditions of the Plan and that the Participant has
not engaged in, and does not intend to engage in, any Detrimental
Activity and (ii) in the event the Participant engages in Detrimental
Activity prior to, or during the one year period after, any exercise of
the Option, the Company shall be entitled to recover from the
Participant at any time within two (2) years after such exercise, and
the Participant shall pay over to the Company, any gain realized as a
result of the exercise (whether at the time of exercise or thereafter).
The vesting and exercise of an Award granted to a Prospective Employee
are conditioned upon such individual actually becoming an Eligible
Employee.
(d) Method of Exercise. Subject to whatever installment
exercise and waiting period provisions apply under subsection (c)
above, Stock Options may be exercised in whole or in part at any time
during the Option term, by giving written notice of exercise to the
Company specifying the number of shares to be purchased accompanied by
payment in full of the purchase price. Such notice shall be accompanied
by payment in full of the purchase price (i) in cash or by check, bank
draft or money order payable to the order of Company; (ii) if the
Common Stock is traded on a national securities exchange, The Nasdaq
Stock Market, Inc. or quoted on a national quotation system sponsored
by the National Association of Securities Dealers, Inc. and the
Committee authorizes this method of exercise, through the delivery of
irrevocable instructions to a broker approved by the Committee to
deliver promptly to the Company an amount
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equal to the purchase price; or (iii) on such other terms and
conditions as may be acceptable to the Committee (which may include
payment in full or part in the form of Common Stock owned by the
Participant for a period of at least six (6) months (and for which the
Participant has good title free and clear of any liens and
encumbrances) based on the Fair Market Value of the Common Stock on the
payment date as determined by the Committee or the surrender of vested
Options owned by the Participant). No shares of Common Stock shall be
issued until payment, as provided herein, therefor has been made or
provided for.
(e) Buy Out and Settlement Provisions. The Committee may at
any time on behalf of the Company offer to buy out an Option previously
granted, based on such terms and conditions as the Committee shall
establish and communicate to the Participant at the time that such
offer is made.
(f) Incentive Stock Option Limitations. To the extent that the
aggregate Fair Market Value (determined as of the time of grant) of the
Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by an Eligible Employee during any
calendar year under this Plan and/or any other stock option plan of the
Company, any Subsidiary or any Parent exceeds $100,000, such Options
shall be treated as Non-Qualified Stock Options. In addition, if an
Eligible Employee does not remain employed by the Company, any
Subsidiary or any Parent at all times from the time an Incentive Stock
Option is granted until three (3) months prior to the date of exercise
thereof (or such other period as required by applicable law), such
Stock Option shall be treated as a Non-Qualified Stock Option. Should
any provision of this Plan not be necessary in order for the Stock
Options to qualify as Incentive Stock Options, or should any additional
provisions be required, the Committee may amend this Plan accordingly,
without the necessity of obtaining the approval of the stockholders of
the Company.
(g) Form, Modification, Extension and Renewal of Options.
Subject to the terms and conditions and within the limitations of the
Plan, an Option shall be evidenced by such form of agreement as is
approved by the Committee, and the Committee may modify, extend or
renew outstanding Options granted under the Plan, and accept the
surrender of outstanding Options (up to the extent not theretofore
exercised) and authorize the granting of new Options in substitution
therefor (to the extent not theretofore exercised). Notwithstanding the
foregoing, an outstanding Option may not be modified to reduce the
exercise price thereof nor may a new Option at a lower price be
substituted for a surrendered Option, provided that the foregoing shall
not apply to adjustments or substitutions in accordance with Section
4.2; and further provided, the foregoing limitations shall not apply
until ninety (90) days after the Spinoff.
(h) Other Terms and Conditions. Options may contain such other
provisions, which shall not be inconsistent with any of the foregoing
terms of the Plan, as the
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Committee shall deem appropriate including, without limitation,
permitting "reloads" such that the same number of Options are granted
as the number of shares used to pay for the exercise price of Options
or shares used to pay withholding taxes ("Reloads"). With respect to
Reloads, the exercise price of the new Stock Option shall be the Fair
Market Value on the date of the "reload" and the term of the Stock
Option shall be the same as the remaining term of the Options that are
exercised, if applicable, or such other exercise price and term as
determined by the Committee.
6.4 Termination of Relationship. The following rules apply with regard
to Options upon the Termination of Relationship of a Participant, unless
otherwise determined by the Committee at grant or, if no rights of the
Participant or in the case of his death his estate are reduced, thereafter.
(a) Termination by Reason of Death. If a Participant's
Termination of Relationship is by reason of death, any Stock Option
held by such Participant may be exercised, to the extent exercisable at
the Participant's death, by the legal representative of the estate, at
any time within a period of one (1) year from the date of such death,
but in no event beyond the expiration of the stated term of such Stock
Option.
(b) Termination by Reason of Disability. If a Participant's
Termination of Relationship is by reason of Disability, any Stock
Option held by such Participant, may be exercised, to the extent
exercisable at the Participant's termination, by the Participant (or
the legal representative of the Participant's estate if the Participant
dies after termination) at any time within a period of one (1) year
from the date of such termination, but in no event beyond the
expiration of the stated term of such Stock Option provided, however,
that, if the Participant dies within such exercise period, any
unexercised Stock Option held by such Participant shall thereafter be
exercisable, to the extent to which it was exercisable at the time of
death, for a period of one (1) year from the date of such death, but in
no event beyond the expiration of the stated term of such Stock Option.
(c) Termination by Reason of Retirement. If a Participant's
Termination of Relationship is by reason of Retirement, any Stock
Option held by such Participant, may thereafter be exercised, to the
extent exercisable at Retirement, by the Participant at any time within
a period of ninety (90) days from the date of such termination, but in
no event beyond the expiration of the stated term of such Stock Option;
provided, however, that, if the Participant dies within such exercise
period, any unexercised Stock Option held by such Participant shall
thereafter be exercisable, to the extent to which it was exercisable at
the time of death, for a period of one (1) year from the date of such
death, but in no event beyond the expiration of the stated term of such
Stock Option.
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(d) Involuntary Termination Without Cause or Termination for
Good Reason. If a Participant's Termination of Relationship is by
involuntary termination without Cause or for Good Reason, any Stock
Option held by such Participant, may be exercised, to the extent
exercisable at termination, by the Participant at any time within a
period of ninety (90) days from the date of such termination, but in no
event beyond the expiration of the stated term of such Stock Option.
(e) Termination Without Good Reason or By Mutual Agreement. If
a Participant's Termination of Relationship is voluntary but without
Good Reason or by mutual agreement between the Participant or the
Company and occurs prior to, or more than ninety (90) days after, the
occurrence of an event which would be grounds for Termination of
Relationship by the Company for Cause (without regard to any notice or
cure period requirements), any Stock Option held by such Participant,
may be exercised, to the extent exercisable at termination, by the
Participant at any time within a period of thirty (30) days from the
date of such termination, but in no event beyond the expiration of the
stated term of such Stock Option.
(f) Other Termination. In the event the termination is for
Cause or is a voluntary termination without Good Reason within ninety
(90) days after occurrence of an event which would be grounds for
Termination of Relationship by the Company for Cause (without regard to
any notice or cure period requirement), any Stock Option held by the
Participant at the time of occurrence of the event which would be
grounds for Termination of Relationship by the Company for Cause shall
be deemed to have terminated and expired upon occurrence of the event
which would be grounds for Termination of Relationship by the Company
for Cause.
ARTICLE VII.
RESTRICTED STOCK AWARDS
7.1 Awards of Restricted Stock. Shares of Restricted Stock may be
issued to Eligible Employees and Consultants, either alone or in addition to
other Awards under the Plan. The Committee shall determine the individuals
eligible for Restricted Stock Awards and the terms and conditions of any such
Awards, including without limitation, the timing of such Awards, the number of
shares to be awarded, the price (if any) to be paid by the recipient (subject to
Section 7.2), the time or times within which such Awards may be subject to
forfeiture, the vesting schedule and rights to acceleration thereof, and all
other terms and conditions of the Awards, provided, that, unless otherwise
determined by the Committee at grant, each Restricted Stock Award shall provide
that in the event a Participant engages in Detrimental Activity prior to, or
during the one (1) year period after, any vesting of Restricted Stock, the
Committee may direct (at any time within two (2) years thereafter) that all
unvested Restricted Stock shall be immediately forfeited to the Company and that
the Participant shall pay over to the Company an amount equal to the fair market
value at the time of vesting of
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any Restricted Stock which had vested in the period referred to above. The
Committee may condition the grant or vesting of Restricted Stock upon the
attainment of any performance goals specified in Section 8.1 hereof or such
other factors as the Committee may determine, in its sole discretion.
7.2 Awards and Certificates. An Eligible Employee or Consultant
selected to receive a Restricted Stock Award shall not have any rights with
respect to such Award, unless and until such Participant has delivered a fully
executed copy of the Restricted Stock Award agreement relating thereto and has
otherwise complied with the applicable terms and conditions of such Award.
Further, such Award shall be subject to the following conditions:
(a) Purchase Price. The purchase price of Restricted Stock
shall be fixed by the Committee. Subject to Section 4.3, the purchase
price for shares of Restricted Stock may be zero to the extent
permitted by applicable law, and, to the extent not so permitted, such
purchase price may not be less than par value.
(b) Legend. Each Participant receiving a Restricted Stock
Award shall be issued a stock certificate in respect of such shares of
Restricted Stock, unless the Committee elects to use another system,
such as book entries by the transfer agent, as evidencing ownership of
a Restricted Stock Award. Such certificate shall be registered in the
name of such Participant, and shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Award, substantially in the following form:
"The anticipation, alienation, attachment, sale, transfer,
assignment, pledge, encumbrance or charge of the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the LCA Group Inc. (the "Company") Stock Incentive Plan
and an Agreement entered into between the registered owner and the
Company dated _____________. Copies of such Plan and Agreement are on
file at the principal office of the Company."
(c) Custody. If stock certificates are issued in respect of
shares of Restricted Stock, the Committee may require that the stock
certificates evidencing such shares be held in custody by the Company
until the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock Award, the Participant shall have
delivered a duly signed stock power, endorsed in blank, relating to the
Common Stock covered by such Award.
(d) Restriction Period. The Participant shall not be permitted
to Transfer shares of Restricted Stock awarded under this Plan during
the period or periods set by the Committee (the "Restriction Period")
commencing on the date of such Award, as set forth in the Restricted
Stock Award agreement and such agreement shall set forth a vesting
schedule and any events which would accelerate vesting of the shares of
Restricted Stock. Within these limits, based on service, attainment of
performance
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goals pursuant to Section 8.1 below and/or such other factors or
criteria as the Committee may determine in its sole discretion, the
Committee may provide for the lapse of such restrictions in
installments in whole or in part, or may accelerate the vesting of all
or any part of any Restricted Stock Award.
(e) Rights as a Stockholder. Except as provided in this
subsection (e) and subsection (c) above, the Participant shall have,
with respect to the shares of Restricted Stock, all of the rights of a
holder of shares of Common Stock of the Company including, without
limitation, the right to receive any dividends and the right to vote or
tender such shares. The Committee may, in its sole discretion,
determine at the time of Award, that payment of dividends shall be
deferred until, and conditioned upon, expiration of the Restriction
Period.
(f) Lapse of Restrictions. Any stock certificates representing
shares of Restricted Stock awarded hereunder that (i) have not been
forfeited and (ii) have not previously been delivered to a Participant,
shall be delivered to the Participant upon expiration of the applicable
Restriction Period. All legends shall be removed from said certificates
at the time of delivery to the Participant, except as otherwise
required by applicable law or other limitations imposed by the
Committee.
ARTICLE VIII.
OTHER STOCK-BASED AWARDS
8.1 Other Stock-Based Awards. The Committee is authorized to grant to
Eligible Employees and Consultants Other Stock-Based Awards that are payable in,
valued in whole or in part by reference to, or otherwise based on or related to
shares of Common Stock, including but not limited to, shares of Common Stock
awarded purely as a bonus and not subject to any restrictions or conditions,
shares of Common Stock in payment of the amounts due under an incentive or
performance plan sponsored or maintained by the Company or a Subsidiary, stock
appreciation rights (either separately or in tandem with Stock Options), stock
equivalent units, Awards valued by reference to book value of shares of Common
Stock and loans to be used to purchase shares of Common Stock. Subject to the
provisions of this Plan, the Committee shall have authority to determine the
persons to whom and the time or times at which such Awards shall be made, the
number of shares of Common Stock to be awarded pursuant to or referenced by such
Awards, and all other conditions of the Awards. Grants of Other Stock-Based
Awards may be subject to such conditions, restrictions and contingencies as the
Committee may determine which may include, but are not limited to, continuous
service with the Company or an Affiliate and/or the achievement of performance
goals. Except as provided in the last sentence of this Section 8.1, the
performance criteria that may be used by the Committee in granting Other
Stock-Based Awards contingent on performance goals shall consist of the
attainment of one or more of the following criteria: (i) the attainment of
certain
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target levels of, or a specified increase in, enterprise value or value creation
targets of the Company (or any Affiliate, division or other operational unit of
the Company); (ii) the attainment of certain target levels of, or a percentage
increase in, after-tax or pre-tax profits of the Company, including without
limitation that attributable to continuing and/or other operations of the
Company (or in either case an Affiliate, division, or other operational unit of
the Company); (iii) the attainment of certain target levels of, or a specified
increase in, operational cash flow of the Company (or an Affiliate, division, or
other operational unit of the Company); (iv) 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 the Company's bank debt or other long-term
or short-term public or private debt or other similar financial obligations of
the Company, which may be calculated net of cash balances and/or other offsets
and adjustments as may be established by the Committee; (v) the attainment of a
specified percentage increase in earnings per share or earnings per share from
continuing operations of the Company (or an Affiliate, division or other
operational unit of the Company); (vi) the attainment of certain target levels
of, or a specified percentage increase in, net sales, net income or earnings
before income tax or other exclusions of the Company (or an Affiliate, division,
or other operational unit of the Company); (vii) the attainment of certain
target levels of, or a specified increase in, return on capital employed or
return on invested capital of the Company (or any Affiliate, division or other
operational unit of the Company); (viii) the attainment of certain target levels
of, or a percentage increase in, after-tax or pre-tax return on stockholder
equity of the Company (or any Affiliate, division or other operational unit of
the Company); (ix) the attainment of certain target levels in the fair market
value of the shares of the Company's Common Stock; and (x) the growth in the
value of an investment in the Company's Common Stock assuming the reinvestment
of dividends. The Committee may select one or more of the foregoing performance
criteria for measuring performance and the measuring may be stated in absolute
terms or relative to comparable companies. Other performance goals may be used
to the extent such goals satisfy Section 162(m) of the Code or the Award is not
intended to satisfy the requirements of Section 162(m) of the Code.
ARTICLE IX.
NON-EMPLOYEE DIRECTOR STOCK AWARDS AND STOCK OPTION GRANTS
9.1 Stock Options. The terms of this Section 9.1 shall apply only to
Options granted to Non-Employee Directors.
(a) (i) Without further action by the Board or the
stockholders of the Company, each Non-Employee Director shall, subject
to the terms of the Plan, be granted on the date he or she begins
service as a Non-Employee Director (even if previously an employee
director), Non-Qualified Stock Options to purchase 1,000 shares of
Common Stock.
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(ii) The Board shall have the authority to grant to any
Non-Employee Director additional Non-Qualified Stock Options, in such
amount and upon such terms as it may determine in accordance with the
provisions of Section 3.2 hereof.
Notwithstanding the foregoing provisions of Section 9.1 no
Option shall be granted under this Section 9.1 if on the date of grant
the Company has liquidated, dissolved or merged or consolidated with
another entity in such a manner that it is not the surviving entity
(unless the Plan has been assumed by such surviving entity with regard
to future grants).
(b) Option Agreement. Stock Options granted under this Section
9.1 shall be Non-Qualified Stock Options. Such Options shall be
evidenced by Option agreements or grants.
(c) Terms of Options:
(i) Option Price. The purchase price per share
("Purchase Price") deliverable upon the exercise of an Option
shall be 100% of the Fair Market Value of such Common Stock at
the time of the grant of the Option, or the par value of the
Common Stock, whichever is greater.
(ii) Exercisability. Except as otherwise provided
herein, each Option granted under Section 9.1(a)(i) hereof
shall be exercisable on or after six (6) months and one (1)
day after the date of grant if the director is then a
director. Each Option granted under Section 9.1(a)(ii) hereof
shall be exercisable as provided in the applicable Option
agreement or grant.
(iii) Method for Exercise. A Non-Employee Director
electing to exercise one or more Options shall give written
notice to the Company of such election and of the number of
Options he or she has elected to exercise. Common Stock
purchased pursuant to the exercise of Options shall be paid
for at the time of exercise (i) in cash, (ii) if the Common
Stock is traded on a national securities exchange, The Nasdaq
Stock Market, Inc. or quoted on a national quotation system
sponsored by the National Association of Securities Dealers,
Inc. and the Committee authorizes this method of exercise,
through the delivery of irrevocable instructions to a broker
approved by the Committee to deliver promptly to the Company
an amount equal to the purchase price, or (iii) by delivery of
unencumbered Common Stock owned by the Non-Employee Director
for at least six (6) months (or such longer period as required
by applicable accounting standards to avoid a charge to
earnings) or a combination thereof.
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(d) Expiration. Except as otherwise provided herein, if not
previously exercised each Option shall expire upon the tenth
anniversary of the date of the grant thereof.
(e) Termination of Directorship. The following rules apply
with regard to Options upon a Termination of Directorship, unless
otherwise provided at grant:
(i) Death, Disability or Otherwise Ceasing to be a
Director Other than for Cause. Except as otherwise provided
herein, upon the Termination of Directorship, on account of
Disability, death, resignation, failure to stand for
reelection or failure to be reelected or otherwise other than
as set forth in (ii) below, all outstanding Options then
exercisable and not exercised by the Participant prior to such
Termination of Directorship shall remain exercisable, to the
extent exercisable at the Termination of Directorship, by the
Participant or, in the case of death, by the Participant's
estate or by the person given authority to exercise such
Options by his or her will or by operation of law, for a three
(3) year period commencing on the date of the Termination of
Directorship, provided that such three (3) year period shall
not extend beyond the stated term of such Options.
(ii) Cause. Upon removal, failure to stand for
reelection or failure to be renominated for Cause, or if the
Company obtains or discovers information after Termination of
Directorship that such Participant had engaged in conduct that
would have justified a removal for Cause during such
directorship, all outstanding Options of such Participant
shall immediately terminate and shall be null and void.
(iii) Acceleration of Exercisability Upon Death or
Disability. All Options granted and not previously exercisable
shall become fully exercisable immediately upon a Termination
of Directorship due to death or Disability.
(iv) Cancellation of Options. Except as otherwise
provided herein, no Options that were not exercisable during
the period such person serves as a director shall thereafter
become exercisable upon a Termination of Directorship for any
reason or no reason whatsoever, and such Options shall
terminate and become null and void upon a Termination of
Directorship.
9.2 Awards for Non-Employee Directors. The Board shall have authority,
in its sole discretion, to make grants to Non-Employee Directors of shares of
Common Stock, Stock Options, or Other Stock-Based Awards on such terms and
conditions as determined by the Board.
9.3 Changes and Share Limitations. The Awards to a Non-Employee
Director shall be subject to Sections 4.2(a), (b), (c) and (d) of the Plan and
this Section 9.3. Notwithstanding
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anything else herein, if the grants to be made under this Article IX would
violate the limitations set forth in Sections 4.1(a) or (b), such grants shall
be proportionately reduced to an amount that would not violate such limitation
and, subject to the next sentence, an additional make-up grant of the portion of
any award that has not yet been granted shall be made on the first day of the
first month commencing at least twenty (20) days after such limitation is no
longer exceeded. Such make-up grant shall be made only to each director who is
Non-Employee Director of the Company at the time of such make-up grant and shall
be made in an amount equal to the prior reduction.
ARTICLE X.
NON-TRANSFERABILITY
10.1 Non-Transferability. Except as provided in the last sentence of
this Article X, no Stock Option or Other Stock-Based Award shall be Transferred
by the Participant otherwise than by will or by the laws of descent and
distribution. All Stock Options shall be exercisable, during the Participant's
lifetime, only by the Participant. No Stock Option shall, except as otherwise
specifically provided by law or herein, be Transferred in any manner, and any
attempt to Transfer any such Stock Option shall be void. Shares of Restricted
Stock under Article VII may not be Transferred prior to the date on which shares
are issued, or, if later, the date on which any applicable restriction,
performance or deferral period lapses. No Award shall in any manner be liable
for or subject to the debts, contracts, liabilities, engagements or torts of any
person who shall be entitled to such Award, nor shall it be subject to
attachment or legal process for or against such person. Notwithstanding the
foregoing, the Committee may determine at the time of grant or thereafter that a
Non-Qualified Stock Option that is otherwise not Transferable pursuant to this
Article X is Transferable, in whole or in part, to a "family member" as defined
in Securities Act Form S-8 and under such conditions as specified by the
Committee.
ARTICLE XI.
CHANGE IN CONTROL PROVISIONS
11.1 Benefits. In the event of a Change in Control of the Company (as
defined below), except as otherwise provided by the Committee upon the grant of
an Award, a Participant shall be entitled to the following benefits:
(a) Subject to paragraph (c) below with regard to Options
granted to Eligible Employees and Consultants and paragraph (e) below
with regard to all Options, all outstanding Stock Options of such
Participant (whether an Eligible Employee, Consultant or Non-Employee
Director) granted prior to the Change in Control shall be fully vested
and immediately exercisable in their entirety on the Change in Control.
The Committee, in its sole discretion, may provide for the purchase of
any such Stock Options by the Company or an Affiliate for an amount of
cash equal to the excess of
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the Change in Control price (as defined below) of the shares of Common
Stock covered by such Stock Options, over the aggregate exercise price
of such Stock Options. For purposes of this Section 11.1, Change in
Control price shall mean the higher of (i) the highest price per share
of Common Stock paid in any transaction related to a Change in Control
of the Company, or (ii) the highest Fair Market Value per share of
Common Stock at any time during the sixty (60) day period preceding a
Change in Control.
(b) Subject to paragraph (e) below, the restrictions to which
any shares of Restricted Stock of such Participant granted prior to the
Change in Control are subject shall lapse as if the applicable
Restriction Period had ended upon such Change in Control.
(c) Notwithstanding anything to the contrary herein, unless
the Committee provides otherwise at the time an Option is granted to an
Eligible Employee or Consultant hereunder, no acceleration of
exercisability shall occur with respect to such Option if the Committee
reasonably determines in good faith, prior to the occurrence of the
Change in Control, that the Options shall be honored or assumed, or new
rights substituted therefor (each such honored, assumed or substituted
option hereinafter called an "Alternative Option"), by a Participant's
employer (or the parent or a subsidiary of such employer) immediately
following the Change in Control, provided that any such Alternative
Option must meet the following criteria:
(i) the Alternative Option must be based on stock
which is traded on an established securities market, or which
will be so traded within thirty (30) days of the Change in
Control;
(ii) the Alternative Option must provide such
Participant with rights and entitlements substantially
equivalent to or better than the rights, terms and conditions
applicable under such Option, including, but not limited to,
an identical or better exercise schedule; and
(iii) the Alternative Option must have economic value
substantially equivalent to the value of such Option
(determined at the time of the Change in Control).
For purposes of Incentive Stock Options, any assumed
or substituted Option shall comply with the requirements of
Treasury regulation ss. 1.425-1 (and any amendments thereto).
(d) As provided in the Award, with regard to Other Stock-Based
Awards.
(e) If the Company and the other party to a transaction
constituting a Change in Control agree that such transaction shall be
treated as a "pooling of interests" for financial reporting purposes,
and if the transaction is in fact so treated, then
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acceleration of exercisability, vesting or lapse of the applicable
Restriction Period shall not occur to the extent the Company's
independent public accountants determine in good faith that such
acceleration would preclude "pooling of interests" accounting.
11.2 Change in Control. A "Change in Control" shall be deemed to have
occurred upon:
(a) any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, any trustee or other
fiduciary holding securities under any employee benefit plan of the
Company, or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of Common Stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the
Company's then outstanding securities;
(b) during any period of two (2) consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors, and any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a
transaction described in paragraph (a), (c), or (d) of this section)
whose election by the Board of Directors or nomination for election by
the Company's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were
directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute at least a majority of the Board of Directors;
(c) a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in
the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more
than fifty percent (50%) of the combined voting power of the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that
a merger or consolidation effected to implement a recapitalization of
the Company (or similar transaction) in which no person acquires more
than twenty-five percent (25%) of the combined voting power of the
Company's then outstanding securities shall not constitute a Change in
Control of the Company; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or the consummation of the sale or
disposition by the Company of all or substantially all of the Company's
assets other than (x) the sale or disposition of all or substantially
all of the assets of the Company to a person or persons who
beneficially own, directly or indirectly, at least fifty percent (50%)
or more of the combined voting power of the outstanding voting
securities of the Company at the time of the sale or
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(y) pursuant to a spinoff type transaction, directly or indirectly, of
such assets to the stockholders of the Company.
ARTICLE XII.
TERMINATION OR AMENDMENT OF THE PLAN
12.1 Termination or Amendment. Notwithstanding any other provision of
this Plan, the Board may at any time, and from time to time, amend, in whole or
in part, any or all of the provisions of the Plan (including any amendment
deemed necessary to ensure compliance with any regulatory requirement referred
to in Article XIV), or suspend or terminate it entirely, retroactively or
otherwise; provided, however, that, unless otherwise required by law or
specifically provided herein, 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 and, provided further, without the
approval of the stockholders of the Company in accordance with the laws of the
State of Delaware, to the extent required by the applicable provisions of
Section 162(m) of the Code, or to the extent applicable to Incentive Stock
Options, Section 422 of the Code, no amendment may be made that would (i) amend
Section 4.1(a) or any other plan provision to increase the aggregate maximum
number of shares of Common Stock that may be issued under the Plan; (ii)
increase the maximum individual Participant limitations under Section 4.1(b);
(iii) change the classification of employees or consultants eligible to receive
Awards under this Plan; (iv) extend the maximum option period under Section 6.3;
or (v) require stockholder approval in order for the Plan to comply with the
applicable provisions of Section 162(m) of the Code or to the extent applicable
to Incentive Stock Options, Section 422 of the Code. In no event may the Plan be
amended without the approval of the stockholders of the Company in accordance
with the applicable laws of the State of Delaware to increase the aggregate
number of shares of Common Stock that may be issued under the Plan or to make
any other amendment that would require stockholder approval under the rules of
any exchange or system on which the Company's securities are listed or traded at
the request of the Company.
The Committee may amend the terms of any Award theretofore granted,
prospectively or retroactively, but, subject to Article IV above or as otherwise
specifically provided herein, no such amendment or other action by the Committee
shall impair the rights of any holder without the holder's consent.
The Board may at any time or from time to time amend Article IX of the
Plan to provide additional or different Awards to Non-Employee Directors or to
effect any other amendment deemed appropriate.
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ARTICLE XIII.
UNFUNDED PLAN
13.1 Unfunded Status of Plan. This Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments as to which a Participant has a fixed and vested interest but which are
not yet made to a Participant by the Company, nothing contained herein shall
give any such Participant any rights that are greater than those of a general
creditor of the Company.
ARTICLE XIV.
GENERAL PROVISIONS
14.1 Legend. The Committee may require each person receiving shares
pursuant to an Award under the Plan to represent to and agree with the Company
in writing that the Participant is acquiring the shares without a view to
distribution thereof. In addition to any legend required by this Plan, the
certificates for such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on Transfer.
All certificates for shares of Common Stock delivered under the Plan
shall be subject to such stock transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other requirements
of the Securities and Exchange Commission, any stock exchange upon which the
Stock is then listed or any national securities association system upon whose
system the Stock is then quoted, any applicable Federal or state securities law,
and any applicable corporate law, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
14.2 Other Plans. Nothing contained in this Plan shall prevent the
Board from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases.
14.3 No Right to Employment/Consultancy/Directorship. Neither this Plan
nor the grant of any Award hereunder shall give any Participant or other
employee any right with respect to continuance of employment or consultancy by
the Company or any Affiliate, nor shall they be a limitation in any way on the
right of the Company or any Affiliate by which an employee is employed or a
consultant is retained to terminate his employment or consultancy at any time.
Neither this Plan nor the grant of any Award hereunder shall impose any
obligations on the Company to retain any Participant as a director nor shall it
impose on the part of any Participant to remain as a director of the Company.
14.4 Withholding of Taxes. The Company shall have the right to deduct
from any payment to be made to a Participant, or to otherwise require, prior to
the issuance or delivery of any shares of Common Stock or the payment of any
cash hereunder, payment by the
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Participant of, any Federal, state or local taxes required by law to be
withheld. Upon the vesting of Restricted Stock or upon making an election under
Code Section 83(b), a Participant shall pay all required withholding to the
Company.
The Committee may permit any such statutorily required withholding
obligation with regard to any Participant to be satisfied by reducing the number
of shares of Common Stock otherwise deliverable or by delivering shares of
Common Stock already owned. Any fraction of a share of Common Stock required to
satisfy such tax obligations shall be disregarded and the amount due shall be
paid in cash by the Participant.
14.5 Listing and Other Conditions.
(a) Unless otherwise determined by the Committee, as long as
the Common Stock is listed on a national securities exchange or system
sponsored by a national securities association, the issue of any shares
of Common Stock pursuant to an Award shall be conditioned upon such
shares being listed on such exchange or system. The Company shall have
no obligation to issue such shares unless and until such shares are so
listed, and the right to exercise any Option with respect to such
shares shall be suspended until such listing has been effected.
(b) If at any time counsel to the Company shall be of the
opinion that any sale or delivery of shares of Common Stock pursuant to
an Award is or may in the circumstances be unlawful or result in the
imposition of excise taxes on the Company under the statutes, rules or
regulations of any applicable jurisdiction, the Company shall have no
obligation to make such sale or delivery, or to make any application or
to effect or to maintain any qualification or registration under the
Securities Act of 1933, as amended, or otherwise with respect to shares
of Common Stock or Awards, and the right to exercise any Option shall
be suspended until, in the opinion of said counsel, such sale or
delivery shall be lawful or will not result in the imposition of excise
taxes on the Company.
(c) Upon termination of any period of suspension under this
Section 14.5, any Award affected by such suspension which shall not
then have expired or terminated shall be reinstated as to all shares
available before such suspension and as to shares which would otherwise
have become available during the period of such suspension, but no such
suspension shall extend the term of any Option.
(d) A Participant shall be required to supply the Company with
any certificates, representations and information that the Company
requests and otherwise cooperate with the Company in obtaining any
listing, registration, qualification, exemption, consent or approval
the Company deems necessary or appropriate.
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14.6 Governing Law. This Plan shall be governed and construed in
accordance with the laws of the State of Delaware (regardless of the law that
might otherwise govern under applicable Delaware principles of conflict of
laws).
14.7 Construction. Wherever any words are used in this Plan in the
masculine gender they shall be construed as though they were also used in the
feminine gender in all cases where they would so apply, and wherever any words
are used herein in the singular form they shall be construed as though they were
also used in the plural form in all cases where they would so apply.
14.8 Other Benefits. No Award payment under this Plan shall be deemed
compensation for purposes of computing benefits under any retirement plan of the
Company or its subsidiaries nor affect any benefits under any other benefit plan
now or subsequently in effect under which the availability or amount of benefits
is related to the level of compensation.
14.9 Costs. The Company shall bear all expenses included in
administering this Plan, including expenses of issuing Common Stock pursuant to
any Awards hereunder.
14.10 No Right to Same Benefits. The provisions of Awards need not be
the same with respect to each Participant, and such Awards to individual
Participants need not be the same in subsequent years.
14.11 Death/Disability. The Committee may in its discretion require the
transferee of a Participant to supply it with written notice of the
Participant's death or Disability and to supply it with a copy of the will (in
the case of the Participant's death) or such other evidence as the Committee
deems necessary to establish the validity of the transfer of an Option. The
Committee may also require that the agreement of the transferee to be bound by
all of the terms and conditions of the Plan.
14.12 Section 16(b) of the Exchange Act. All elections and transactions
under the Plan by persons subject to Section 16 of the Exchange Act involving
shares of Common Stock are intended to comply with all exemptive conditions
under Rule 16b-3. The Committee may establish and adopt written administrative
guidelines, designed to facilitate compliance with Section 16(b) of the Exchange
Act, as it may deem necessary or proper for the administration and operation of
the Plan and the transaction of business thereunder.
14.13 Successor and Assigns. The Plan shall be binding on all
successors and permitted assigns of a Participant, including, without
limitation, the estate of such Participant and the executor, administrator or
trustee of such estate.
14.14 Severability of Provisions. If any provision of the Plan shall be
held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and enforced
as if such provisions had not been included.
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14.15 Headings and Captions. The headings and captions herein are
provided for reference and convenience only, shall not be considered part of the
Plan, and shall not be employed in the construction of the Plan.
ARTICLE XV.
EFFECTIVE DATE OF PLAN
The Plan shall become effective upon adoption by the Board, subject to
the approval of this Plan by the stockholders of the Company in accordance with
the requirements of the laws of the State of Delaware or such later date as
provided in the adopting resolution; provided that no Stock Options or other
Awards subject to Section 162(m) shall be granted after the Company's first
annual stockholders' meeting held after twelve (12) months after the Company
ceases to be a subsidiary of U.S. Industries, Inc. unless at such meeting the
Plan provisions applicable to Stock Options or such other Awards, as the case
may be are approved by the stockholders to the extent required to qualify such
awards under Section 162(m) of the Code.
ARTICLE XVI.
TERM OF PLAN
No Award shall be granted pursuant to the Plan on or after the tenth
anniversary of the earlier of the date this Plan is adopted or the date of
stockholder approval, but Awards granted prior to such tenth anniversary may
extend beyond that date.
ARTICLE XVII.
NAME OF PLAN
This Plan shall be known as the "LCA Group Inc. Stock Incentive Plan."
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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 options, restricted stock and non-employee director 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
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 generally be entitled, subject to the possible application of Code
Section 162(m) as discussed below and Section 280G of the 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 Code.
Upon exercise of an ISO, the excess of the fair market value of the stock at
exercise over the exercise price is an adjustment in determining the recipient's
alternative minimum taxable income. The adjusted basis of the stock for
alternative minimum tax purposes will be the sum of the exercise price paid and
the amount included in the recipient's alternative minimum taxable income.
Restricted Stock. The recipient of a restricted stock award may elect under
Section 83(b) of the 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
recipient for such shares. Unless an election under Section 83(b) of the 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 an employee 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 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 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 below regarding Code Section 162(m)) 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 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 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 our income the amount of any deduction
previously allowable to us 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 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
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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 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 or exercisability of any
award under the SIP is accelerated because of a change in ownership (as defined
in Section 280G(b)(2) of the Code) and the value of such payment or
exercisability of an award, either alone or together with any other payments
made to the recipient by us, constitute 'excess 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 $675,000
per person in 2000 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
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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.
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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