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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10/A
(AMENDMENT NO. 4)
GENERAL REPORT FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
L&C SPINCO, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-2632672
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1420 PEACHTREE STREET, NE
ATLANTA, GEORGIA 30309-3002
(Address of Principal Executive Offices -- Zip code)
(404) 853-1000
(Registrant's Telephone Number, Including Area Code)
---------------------
Securities to be registered pursuant to section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
Common Stock, $.01 par value per share New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT HAS BEEN PREPARED ON A PROSPECTIVE BASIS ON THE
ASSUMPTION THAT, AMONG OTHER THINGS, THE DISTRIBUTION (AS DEFINED IN THE
INFORMATION STATEMENT WHICH IS A PART OF THIS REGISTRATION STATEMENT) AND THE
RELATED TRANSACTIONS CONTEMPLATED TO OCCUR PRIOR TO OR CONTEMPORANEOUSLY WITH
THE DISTRIBUTION WILL BE CONSUMMATED AS CONTEMPLATED BY THE INFORMATION
STATEMENT. THERE CAN BE NO ASSURANCE, HOWEVER, THAT ANY OR ALL OF SUCH
TRANSACTIONS WILL OCCUR OR WILL OCCUR AS SO CONTEMPLATED. ANY SIGNIFICANT
MODIFICATIONS OR VARIATIONS IN THE TRANSACTIONS CONTEMPLATED WILL BE REFLECTED
IN AN AMENDMENT OR SUPPLEMENT TO THIS REGISTRATION STATEMENT.
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CROSS REFERENCE
L&C SPINCO, INC.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY
REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
---- ------------------------------------- --------------------------------------------
1 Business............................. "SUMMARY;" "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS;" and "SPINCO'S BUSINESSES."
2 Financial Information................ "HISTORICAL AND PRO FORMA COMBINED
CAPITALIZATION;" "PRO FORMA FINANCIAL
INFORMATION;" "SELECTED FINANCIAL DATA;"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS;" and "COMBINED FINANCIAL
STATEMENTS OF NATIONAL SERVICE INDUSTRIES,
INC. LIGHTING EQUIPMENT AND CHEMICALS
BUSINESSES."
3 Properties........................... "SPINCO'S BUSINESSES -- Properties."
4 Security Ownership of Certain
Beneficial Owners and Management..... "BENEFICIAL OWNERSHIP OF SPINCO SHARES."
5 Directors and Executive Officers..... "SPINCO'S MANAGEMENT."
6 Executive Compensation............... "SPINCO'S MANAGEMENT."
7 Certain Relationships and Related
Transactions......................... "SUMMARY;" "RELATIONSHIP BETWEEN NSI AND
SPINCO FOLLOWING THE DISTRIBUTION;" and
"SPINCO'S MANAGEMENT."
8 Legal Proceedings.................... "SPINCO'S BUSINESSES -- Legal Proceedings."
9 Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters.......... "SUMMARY;" "THE DISTRIBUTION -- Listing and
Trading of the Spinco Shares;" and "DIVIDEND
POLICIES."
i
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
---- ------------------------------------- --------------------------------------------
11 Description of Registrant's
Securities to be Registered.......... "DESCRIPTION OF SPINCO'S CAPITAL STOCK."
12 Indemnification of Officers and
Directors............................ "LIABILITY AND INDEMNIFICATION OF DIRECTORS
AND OFFICERS."
13 Financial Statements and
Supplementary Data................... "PRO FORMA FINANCIAL INFORMATION;" "SELECTED
FINANCIAL DATA;" and "COMBINED FINANCIAL
STATEMENTS OF NATIONAL SERVICE INDUSTRIES,
INC. LIGHTING EQUIPMENT AND CHEMICALS
BUSINESSES."
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
Item 10. Recent Sales of Unregistered Securities.
On June 27, 2001, as part of its incorporation, the registrant issued 100
shares of its common stock, par value $.01 per share, to National Service
Industries, Inc., (formerly NSI Enterprises, Inc.), a California
corporation and wholly owned subsidiary of National Service Industries,
Inc., a Delaware corporation ("NSI"), for total consideration of $100.00.
The issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, because it did not involve any public
offering. NSI (or a subsidiary thereof) will be the registrant's sole
stockholder until the consummation of the distribution described in the
information statement. After such distribution, NSI and its subsidiaries
will hold no capital stock of the registrant.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
(a) List of Financial Statements. The following financial statements are
included in the information statement:
Report of Independent Public Accountants.
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Balance Sheets as of August 31, 2001 and 2000.
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Statements of Income for the Years Ended August 31,
2001, 2000, and 1999.
ii
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Statements of Parent's Equity and Comprehensive
Income for the Years Ended August 31, 2001, 2000 and 1999.
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Combined Statements of Cash Flows for the Years Ended August
31, 2001, 2000 and 1999.
Report of Independent Public Accountants on Schedule II.
National Service Industries, Inc. Lighting Equipment and Chemicals
Businesses Schedule II -- Valuation and Qualifying Accounts for the
Years Ended August 31, 2001, 2000 and 1999.
(b) Exhibits. The following documents are filed as exhibits hereto:
EXHIBIT
NO.
-------
2.1** -- Form of Agreement and Plan of Distribution.
3.1** -- Form of Restated Certificate of Incorporation of L&C Spinco,
Inc.
3.2** -- Amended and Restated By-Laws of L&C Spinco, Inc.
4.1* -- Form of certificate representing L&C Spinco, Inc. common
stock.
4.2** -- Form of Stockholder Protection Rights Agreement
10.1** -- Form of Tax Disaffiliation Agreement.
10.2** -- Form of Transition Services Agreement.
10.3** -- Form of Agreement and Plan of Distribution (see Exhibit
2.1).
10.4** -- Form of Employee Benefits Agreement.
10.5** -- L&C Spinco, Inc. Long-Term Incentive Plan.
10.6** -- L&C Spinco, Inc. 2001 Nonemployee Directors' Stock Option
Plan.
10.7** -- Form of Indemnification Agreement.
10.8** -- Form of Severance Protection Agreement.
10.9** -- Form of Lease Agreement
10.10** -- Form of First Supplemental Indenture to Indenture dated as
of January 26, 1999.
10.11** -- Indenture dated as of January 26, 1999.
10.12** -- Form of 6% Note due 2009.
10.13** -- Form of 8.375% Note due August 1, 2010.
10.14** -- L&C Spinco, Inc. Supplemental Deferred Savings Plan.
10.15** -- L&C Spinco, Inc. Executives' Deferred Compensation Plan.
10.16** -- L&C Spinco, Inc. Senior Management Benefit Plan.
10.17** -- L&C Spinco, Inc. Nonemployee Director Deferred Stock Unit
Plan.
10.18** -- L&C Spinco, Inc. Executive Benefits Trust.
10.19** -- L&C Spinco, Inc. Supplemental Retirement Plan for
Executives.
10.20** -- L&C Spinco, Inc. Management Compensation and Incentive Plan.
iii
EXHIBIT
NO.
-------
10.21** -- L&C Spinco, Inc. Benefits Protection Trust.
10.22(a)** -- Form of Employment Letter Agreement between L&C Spinco, Inc.
and James S. Balloun (incorporated herein by reference to
Exhibit 10(iii)A(2) of the Form 10-Q of National Service
Industries, Inc. for the quarter ended November 30, 1997).
10.22(b)** -- Form of Employment Letter Agreement between L&C Spinco, Inc.
and Joseph G. Parham, Jr. (incorporated herein by reference
to Exhibit 10(iii)A(2) of the Form 10-Q of National Service
Industries, Inc. for the quarter ended May 31, 2000).
10.22(c)** -- Assumption Letter of L&C Spinco, Inc., with respect to
Employment Letter Agreement between National Service
Industries, Inc. and James H. Heagle.
10.22(d)** -- Employment Letter Agreement between National Service
Industries, Inc. and James H. Heagle, dated March 28, 2000.
10.23 -- 364-Day Revolving Credit Agreement, dated as of October 3,
2001 among L&C Spinco, Inc., the Subsidiary Borrowers from
time to time parties thereto, the Leaders from time to time
parties thereto, Bank One, N.A., as Administrative Agent,
Wachovia Bank, N.A., as Syndication Agent and SunTrust Bank
as Documentation Agent.
21.1** -- List of Subsidiaries.
-------------------------
* To be filed by amendment.
** Previously filed.
iv
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
L&C SPINCO, INC.
By: /s/ KENYON W. MURPHY
-----------------------------------
Kenyon W. Murphy
Senior Vice President and
General Counsel
Date: October 29, 2001
v
[NSI LOGO]
, 2001
Dear Fellow Stockholder:
I am pleased to inform you that the board of directors of National Service
Industries, Inc. ("NSI") has approved a pro rata distribution to NSI
stockholders of 100% of the outstanding shares of common stock of L&C Spinco,
Inc. ("Spinco"), which is currently a wholly owned subsidiary of NSI. Spinco
will own and operate the lighting equipment and chemicals businesses of NSI.
The distribution will take place on , 2001. Each NSI stockholder
as of , 2001, the record date for the distribution, will receive one
Spinco share for every NSI share held on that date. Spinco's shares will be
listed on the New York Stock Exchange under the symbol " " following
completion of the distribution.
We believe that the distribution will meaningfully enhance value for NSI
stockholders and will give Spinco the financial and operational flexibility to
take advantage of significant growth opportunities in the lighting equipment and
chemicals businesses. We believe that separating the two companies will enhance
the ability of each of Spinco and NSI to focus on strategic initiatives and new
business opportunities, as well as to improve cost structures and operating
efficiencies and to design equity-based compensation programs targeted to its
own performance. In addition, we expect that the transition to an independent
company will heighten Spinco management's focus, provide Spinco with greater
access to capital, and allow the investment community to better measure Spinco's
performance relative to its peers.
The enclosed information statement describes the distribution and provides
important financial and other information about Spinco. Please read it
carefully.
You do not have to vote, or take any other action, to receive your Spinco
shares. You will not be required to pay anything or to surrender your NSI
shares. Account statements reflecting your ownership of Spinco shares will be
mailed to record holders of NSI stock shortly after , 2001. If you are
not a record holder of NSI stock, your Spinco shares should be credited to your
account with your stockbroker or nominee on or about , 2001. Following
the distribution, you may also request physical stock certificates if you wish.
Information for making that request will be furnished with your account
statement.
Sincerely,
James S. Balloun
Chairman and Chief Executive Officer
SUBJECT TO COMPLETION, DATED OCTOBER 29, 2001
INFORMATION STATEMENT RELATING TO THE SPINOFF OF
L&C SPINCO, INC.
FROM NATIONAL SERVICE INDUSTRIES, INC.
Common Stock
(Par Value $.01 Per Share)
National Service Industries, Inc. ("NSI") is sending you this information
statement to describe the pro rata distribution to NSI stockholders of 100% of
the outstanding common stock of L&C Spinco, Inc. ("Spinco"). In this
distribution, you will receive one share of Spinco common stock, together with
an associated preferred stock purchase right, for every share of NSI common
stock that you hold at the close of business on , 2001. Immediately
following the distribution, NSI and its subsidiaries will not own any shares of
Spinco and Spinco will be an independent public company. See "The Distribution"
beginning on page 18.
Spinco is currently a wholly owned subsidiary of NSI and will own and
operate the lighting equipment and chemicals businesses of NSI following the
distribution. These businesses represented approximately 73% of NSI's
consolidated assets and 78% of NSI's consolidated revenues as of and for the
fiscal year ended August 31, 2001. Following the distribution, NSI's operations
will consist of the textile rental and envelope businesses. See "Spinco's
Businesses" beginning on page 43.
The distribution of Spinco shares will be effected at 11:59 p.m., New York
City time, on , 2001. You do not have to vote or take any other action
to receive your Spinco shares. You will not be required to pay anything or to
surrender your NSI shares. The Spinco shares will be distributed by book entry.
The number of NSI shares that you own will not change as a result of the
distribution.
There is no current public trading market for the Spinco shares, although a
"when-issued" trading market will likely develop prior to completion of the
distribution. Spinco's shares will be listed on the New York Stock Exchange
under the symbol " " following completion of the distribution. See "The
Distribution -- Listing and Trading of the Spinco Shares" beginning on page 20.
-------------------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION.
NSI IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND A PROXY OR
YOUR SHARE CERTIFICATES.
AS YOU REVIEW THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
RISK FACTORS BEGINNING ON PAGE 8 IN EVALUATING THE BENEFITS AND RISKS OF HOLDING
OR DISPOSING OF THE SPINCO SHARES YOU WILL RECEIVE IN THE DISTRIBUTION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
INFORMATION STATEMENT OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES.
THE DATE OF THIS INFORMATION STATEMENT IS , 2001.
TABLE OF CONTENTS
PAGE
----
Questions and Answers About the Distribution................ i
Summary..................................................... 1
Cautionary Statement Regarding Forward-Looking Statements... 7
Risk Factors................................................ 8
The Distribution............................................ 18
Relationship Between NSI and Spinco Following the
Distribution.............................................. 26
Financing Arrangements for Spinco........................... 30
Historical and Pro Forma Combined Capitalization............ 31
Dividend Policies........................................... 32
Pro Forma Financial Information............................. 33
Selected Financial Data..................................... 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 35
Spinco's Businesses......................................... 43
Spinco's Management......................................... 53
Beneficial Ownership of Spinco Shares....................... 71
Description of Spinco's Capital Stock....................... 73
Certain Anti-Takeover Provisions of Spinco's Certificate of
Incorporation, Bylaws and Rights Agreement and Delaware
Law....................................................... 76
Liability and Indemnification of Directors and Officers..... 84
Independent Public Accountants.............................. 85
Additional Information...................................... 86
Index to Combined Financial Statements...................... F-1
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
The following section answers various questions that you may have with
respect to the pro rata distribution to NSI stockholders of 100% of the
outstanding shares of Spinco common stock. We refer to this distribution in this
information statement as the "Distribution."
Q: WHEN WILL THE DISTRIBUTION OCCUR?
A: NSI currently anticipates completing the Distribution on , 2001.
Q: WHAT WILL I RECEIVE AS A RESULT OF THE DISTRIBUTION?
A:For every share of NSI common stock that you own of record on ,
2001, you will receive one share of Spinco common stock. For example, if you
own 100 shares of NSI common stock on , you will receive 100 shares
of Spinco common stock.
NSI will distribute the Spinco shares by book entry. If you are a record
holder of NSI stock, instead of physical stock certificates, you will receive
from Spinco's transfer agent shortly after , 2001 a statement of
your book entry account for the Spinco shares distributed to you. Following
the Distribution, you may request physical stock certificates if you wish,
and instructions for making that request will be furnished with your account
statement. If you own a fractional share of NSI common stock, you will
receive a corresponding fractional share of Spinco common stock. If you are
not a record holder of NSI stock because your shares are held on your behalf
by your stockbroker or other nominee, your Spinco shares should be credited
to your account with your stockbroker or nominee on or about ,
2001.
You will also receive one preferred stock purchase right for each share of
Spinco common stock that you receive. These rights are similar to the rights
associated with your existing shares of NSI common stock and may have certain
anti-takeover effects similar to NSI's current preferred stock purchase
rights. See "The Distribution -- Manner of Effecting the Distribution"
beginning on page 19, "Risk Factors -- Certain Provisions of Spinco's
Certificate of Incorporation, Bylaws and Rights Plan and the Tax
Disaffiliation Agreement May Discourage Takeovers" beginning on page 16 and
"Certain Anti-Takeover Provisions of Spinco's Certificate of Incorporation,
Bylaws and Rights Agreement and Delaware Law" beginning on page 76.
Q: WHAT DO I HAVE TO DO TO RECEIVE MY SPINCO SHARES?
A:Nothing. Your Spinco shares will be either reflected in an account statement
that Spinco's transfer agent will send to you shortly after , 2001
or credited to your account with your broker or nominee on or about
, 2001.
Q: WHEN WILL I RECEIVE MY SPINCO SHARES?
A:If you hold your NSI shares in your own name, your account statement will be
mailed to you on or about , 2001. You should allow several days
for the mail to reach you.
If you hold your NSI shares through your stockbroker, bank or other nominee,
you are probably not a stockholder of record and your receipt of Spinco
shares depends on your arrangements with the nominee that holds your NSI
shares for you. NSI anticipates that stockbrokers and banks generally will
credit their customers' accounts with Spinco shares on or about ,
2001, but you should check with your stockbroker, bank or other
i
nominee. See "The Distribution -- Manner of Effecting the Distribution"
beginning on page 19.
Q: HOW WILL THE DISTRIBUTION AFFECT THE MARKET PRICE OF MY NSI SHARES?
A:Following the Distribution, NSI expects that its common stock will continue to
be listed and traded on the New York Stock Exchange under the symbol "NSI." As
a result of the Distribution, the trading price of NSI shares immediately
following the Distribution will be substantially lower than immediately prior
to the Distribution. The lighting equipment and chemicals businesses
represented approximately 73% of NSI's consolidated assets and 78% of NSI's
consolidated revenues as of and for the fiscal year ended August 31, 2001.
Until the market has fully analyzed the operations of NSI without these
businesses, the price of NSI shares may fluctuate significantly. See "The
Distribution -- Listing and Trading of the Spinco Shares" beginning on page
20.
Q: WHERE WILL MY SPINCO SHARES BE TRADED?
A:Spinco's shares will be listed on the New York Stock Exchange under the symbol
" " following completion of the Distribution. Trading of the Spinco
shares will likely commence on a when-issued basis after the record date. See
"The Distribution -- Listing and Trading of the Spinco Shares" beginning on
page 20.
Q: WHAT IF I WANT TO SELL MY NSI SHARES OR MY SPINCO SHARES?
A:You should consult with your own financial advisors, such as your stockbroker,
bank or tax advisor. NSI does not make recommendations on the purchase,
retention or sale of shares of NSI common stock or Spinco common stock.
If you do decide to sell any shares, you should make sure your stockbroker,
bank or other nominee understands whether you want to sell your NSI common
stock or your Spinco common stock, or both. The following information may be
helpful in discussions with your stockbroker, bank or other nominee.
There is not currently a public market for the Spinco common stock, although
a when-issued market will likely develop prior to completion of the
Distribution. When-issued trading refers to a transaction made conditionally
because the security has been authorized but is not yet issued or available.
Even though when-issued trading will likely develop, none of these trades
would settle prior to the effective date of the Distribution, and if the
Distribution does not occur, all when-issued trading will be null and void.
On the first trading day following the date of the Distribution, when-issued
trading in respect of Spinco's common stock will end and regular-way trading
will begin. Regular-way trading refers to trading after a security has been
issued and typically involves a transaction that settles on the third full
business day following the date of a transaction. Spinco's shares will be
listed on the New York Stock Exchange under the symbol " ."
NSI's common stock may also trade on a when-issued basis on the New York
Stock Exchange, reflecting an assumed post-Distribution value for NSI common
stock. When-issued trading in NSI common stock, if available, could last from
on or about the record date through the effective date of the Distribution.
If when-issued trading in NSI common stock is available, NSI stockholders may
trade their existing NSI common stock prior to the effective date of the
Distribution in either the when-issued market or in the regular market for
NSI common stock. If a stockholder trades in the when-issued market, he will
have no obligation to transfer to a purchaser of NSI common stock the Spinco
common stock such stockholder receives in the Distribution. If a stockholder
trades in the regular market, the shares of NSI common stock traded will be
accompanied by due bills
ii
representing the Spinco common stock to be distributed in the Distribution.
If when-issued trading in NSI common stock is not available, neither the NSI
common stock nor the due bills may be purchased or sold separately during the
period from the record date through the effective date of the Distribution.
If a when-issued market for NSI common stock develops, an additional listing
for NSI common stock will appear on the New York Stock Exchange. Differences
will likely exist between the combined value of when-issued Spinco common
stock plus when-issued NSI common stock and the price of NSI common stock
during this period.
Sales of NSI common stock with the right to receive shares of Spinco common
stock should generally settle in the customary three business day settlement
period. Sales of NSI common stock without the right to receive shares of the
Spinco common stock and sales of Spinco common stock without the right to
receive NSI common stock are expected to settle four business days following
the date account statements for the Spinco shares are mailed. You should
check with your stockbroker, bank or other nominee for details. See "The
Distribution -- Listing and Trading of the Spinco Shares" beginning on page
20.
Q: HOW WILL THE DISTRIBUTION AFFECT THE AMOUNT OF DIVIDENDS I CURRENTLY RECEIVE
ON MY NSI SHARES?
A:It is anticipated that following the Distribution, Spinco initially will pay
quarterly cash dividends which, on an annual basis, will equal $.60 per share,
and NSI initially will pay quarterly cash dividends which, on an annual basis,
will equal $.04 per share. Therefore, it is anticipated that the aggregate
cash dividends payable by Spinco and NSI after the Distribution, taken
together, in respect of (1) shares of NSI common stock held on the
Distribution date and (2) shares of Spinco common stock received in the
Distribution will be substantially less than the annual rate of the cash
dividend previously paid on NSI common stock of $1.32 per share. In
anticipation of the expected dividend policies of the companies, NSI declared
a quarterly dividend of $.16 per share payable on October 31, 2001, which on
an annual basis equals the $.64 per share combined dividend expected to be
paid by NSI and Spinco after the Distribution. However, no formal action has
been taken with respect to future dividends, and the declaration and payment
of dividends by Spinco and NSI will be at the sole discretion of their
respective boards of directors. See "Dividend Policies" on page 32.
Q: WILL I HAVE TO PAY TAXES ON THE SPINCO SHARES THAT I RECEIVE?
A:NSI and Spinco intend for the Distribution to be tax-free for U.S. federal
income tax purposes. The Distribution is conditioned upon the receipt by each
of NSI and Spinco of opinions from each of King & Spalding, counsel to NSI,
and Ernst & Young LLP, special tax advisor to NSI, that, for U.S. federal
income tax purposes, the receipt of Spinco shares by NSI stockholders will be
tax-free. Neither NSI nor Spinco has requested an advance ruling from the
Internal Revenue Service as to the tax consequences of the Distribution. The
opinions of King & Spalding and Ernst & Young LLP are subject to certain
assumptions and the accuracy and completeness of certain factual
representations and statements made by NSI and Spinco and certain other data,
documentation and other materials that each of King & Spalding and Ernst &
Young LLP deemed necessary for purposes of their respective opinions. These
opinions represent the views of King & Spalding and Ernst & Young LLP as to
the interpretation of existing tax law and, accordingly, such opinions are not
binding on the Internal Revenue Service or the courts and no assurance can be
given that the Internal Revenue Service or the courts will agree with their
opinions. You may have to pay taxes if you sell your Spinco shares. You are
advised to consult your own tax advisor as to the specific tax consequences of
the
iii
Distribution. See "Risk Factors -- Failure to Qualify as a Tax-Free
Transaction Could Result in Substantial Liability" beginning on page 10 and
"The Distribution -- Federal Income Tax Consequences of the Distribution"
beginning on page 22.
Q: WILL THERE BE ANY CHANGE IN THE UNITED STATES FEDERAL TAX BASIS OF MY NSI
SHARES AS A RESULT OF THE DISTRIBUTION?
A:Yes, your tax basis in your NSI shares will be reduced. If you are the record
holder of your NSI shares, you will receive information with your account
statement that will help you calculate the adjusted tax basis for your NSI
shares, as well as the tax basis for your Spinco shares. If you are not the
record holder of your NSI shares because your shares are held on your behalf
by your stockbroker or other nominee, you should contact your stockbroker or
nominee for help in determining the tax basis for your NSI shares, as well as
the tax basis for your Spinco shares. See "The Distribution -- Federal Income
Tax Consequences of the Distribution" beginning on page 22.
Q: WHERE CAN I GET MORE INFORMATION?
A:If you have any questions relating to the mechanics of the Distribution and
the delivery of account statements, you can contact the Distribution Agent:
Wells Fargo Bank Minnesota, N.A.
Shareowner Services
Shareowner Relations Department
P.O. Box 64854
South St. Paul, Minnesota 55075-1139
Phone: 1-800-468-9716
For other questions related to the Distribution, NSI or Spinco, please
contact:
After the Distribution, Spinco stockholders with inquiries relating to the
Distribution or their investment in Spinco should contact:
Wells Fargo Bank Minnesota, N.A.
Shareowner Services
Shareowner Relations Department
P.O. Box 64854
South St. Paul, Minnesota 55075-1139
Phone: 1-800-468-9716
After the Distribution, NSI stockholders with inquiries relating to the
Distribution or their investment in NSI should contact:
National Service Industries, Inc.
1420 Peachtree Street, NE
Atlanta, Georgia 30309
Attention: Investor Relations
(404)853-1000
iv
SUMMARY
This summary highlights selected information contained elsewhere in this
information statement. It is not complete and may not contain all of the
information that is important to you. To better understand the Distribution and
Spinco, you should read this entire information statement carefully, including
the risks described beginning on page 8 and the financial statements and the
notes thereto beginning on page F-1.
WHY NSI SENT THIS DOCUMENT TO YOU
National Service Industries, Inc. ("NSI") sent you this document because
you were an owner of NSI common stock on , 2001. This entitles you
to receive a pro rata distribution of one share of common stock of L&C Spinco,
Inc. ("Spinco"), which is currently a wholly owned subsidiary of NSI, for every
NSI share you owned on that date. This distribution is referred to in this
information statement as the "Distribution." No action is required on your part
to participate in the Distribution and you do not have to pay cash or other
consideration to receive your Spinco shares.
This document describes Spinco's businesses, the relationship between NSI
and Spinco, and how this transaction benefits NSI and its stockholders, and
provides other information to assist you in evaluating the benefits and risks of
holding or disposing of the Spinco shares that you will receive in the
Distribution. You should be aware of certain risks relating to the Distribution
and Spinco's businesses, which are described in this document beginning on page
8.
SPINCO'S BUSINESSES
Spinco will own and operate the lighting equipment and chemicals businesses
of NSI. These businesses represented approximately 73% of NSI's consolidated
assets and 78% of NSI's consolidated revenues as of and for the fiscal year
ended August 31, 2001. Following the Distribution, NSI's operations will consist
of the textile rental and envelope businesses.
LIGHTING EQUIPMENT
Spinco's lighting equipment business includes Lithonia Lighting and
Holophane. Management of Spinco believes that the lighting equipment business is
the world's largest manufacturer of lighting fixtures for both new construction
and renovation. Products include a full range of indoor and outdoor lighting for
commercial and institutional, industrial and residential applications. Lighting
products are manufactured in the United States, Canada, Mexico, and Europe and
are marketed under numerous brand names, including Lithonia, Holophane(R),
Home-Vue(R), Light Concepts(R), Gotham(R), Hydrel(R), Peerless(R), Antique
Street Lamps, and Reloc(R).
Principal customers include wholesale electrical distributors, retail home
centers, and lighting showrooms located in North America and select
international markets. In North America, the lighting equipment business's
products are sold through independent sales agents and factory sales
representatives who cover specific geographic areas and market segments.
Products are delivered through a network of distribution centers, regional
warehouses, and commercial warehouses using both common carriers and a company-
owned truck fleet. For international customers, the lighting equipment business
employs a
1
sales force that adopts distribution methods to meet individual customer or
country requirements. In fiscal 2001, North American sales accounted for more
than 97% of the lighting equipment business's gross sales.
CHEMICALS
Spinco's chemicals business, The Zep Group, includes Zep Manufacturing
Company, Enforcer Products, and Selig Industries. The Zep Group is a leading
provider of specialty chemical products in the institutional and industrial
(I&I) and retail markets. Products include cleaners, sanitizers, disinfectants,
polishes, floor finishes, degreasers, deodorizers, pesticides, insecticides, and
herbicides. Zep Manufacturing manufactures products in four North American
plants and two European plants. Enforcer operates a manufacturing facility in
Georgia.
The Zep Group provides products to customers primarily in North America and
Western Europe. In fiscal 2001, North American sales accounted for approximately
91% of the business's gross sales. Zep Manufacturing and Selig Industries serve
a range of institutional and industrial customers, from small sole
proprietorships to Fortune 1000 corporations. Individual markets in the
non-retail channel include automotive, vehicle wash, food, aviation, industrial
manufacturing, and contract cleaners and are serviced through a direct
commissioned sales force. Enforcer provides Enforcer-branded products and
Zep-branded products to retail channels such as home centers, hardware stores,
mass merchandisers, and drug stores.
THE DISTRIBUTION
Distributing Company............ National Service Industries, Inc., a
Delaware corporation.
Distributed Company............. L&C Spinco, Inc., a Delaware corporation.
Primary Purposes of
Distribution.................... NSI's board of directors and management
believe that separating the lighting
equipment and chemicals businesses from the
rest of NSI's operations will allow both
Spinco and NSI to focus on their respective
businesses and provide them with the
flexibility to pursue different strategies
and react quickly to changing market
environments. NSI's board of directors and
management believe that the Distribution
will enhance the ability of each of Spinco
and NSI to focus on strategic initiatives
and new business opportunities, improve cost
structures and operating efficiencies and
design equity-based compensation programs
targeted to its own performance. In
addition, NSI's board of directors believes
that Spinco will have greater access to
capital as an independent company and that
the investment community will be better able
to measure Spinco's performance relative to
its peers. The lighting equipment and
chemicals businesses also have some
important traits in common that
2
make these businesses distinct from NSI's
other operations with respect to markets,
products, capital needs and plans for
growth. For a more detailed discussion of
the reasons for the Distribution, see "The
Distribution -- Reasons for the
Distribution" beginning on page 18.
Spinco Shares to be
Distributed..................... NSI will distribute to NSI stockholders
approximately shares of common stock, par value $.01 per share, of Spinco
(together with the associated preferred
stock purchase rights, the "Spinco Shares"),
based on approximately NSI shares
outstanding on , 2001. The Spinco
Shares to be distributed will constitute
100% of the Spinco Shares outstanding after
the Distribution. Immediately following the
Distribution, NSI and its subsidiaries will
not own any Spinco Shares and Spinco will be
an independent public company.
Trading Market and Symbol....... There is no current trading market for the
Spinco Shares, although a when-issued market
will likely develop prior to completion of
the Distribution. The Spinco Shares will be
listed on the New York Stock Exchange under
the symbol " " following completion of
the Distribution. See "The
Distribution -- Listing and Trading of the
Spinco Shares" beginning on page 20.
Record Date..................... If you owned NSI shares at the close of
business on , 2001 (the "Record
Date"), then you will receive Spinco Shares
in the Distribution.
Distribution Date............... The Distribution will occur at 11:59 p.m.,
New York City time, on , 2001 (the
"Distribution Date"). If you are a record
holder of NSI stock, instead of physical
stock certificates you will receive from
Spinco's transfer agent shortly after
, 2001 a statement of your book
entry account for the Spinco Shares
distributed to you. Following the
Distribution, you may request physical stock
certificates if you wish, and instructions
for making that request will be furnished
with your account statement. If you are not
a record holder of NSI stock because such
shares are held on your behalf by your
stockbroker or other nominee, your Spinco
Shares should be credited to your account
with your stockbroker or other nominee on or
about , 2001.
Distribution Ratio.............. You will receive one Spinco Share for every
NSI share you held on the Record Date.
3
Distribution Agent.............. Wells Fargo Bank Minnesota, N.A.
Transfer Agent and Registrar for
the Spinco Shares............... Wells Fargo Bank Minnesota, N.A.
Fractional Share Interests...... Fractional Spinco Shares will be issued in
the Distribution. You will be entitled to
receive a fractional Spinco Share only if
you own a fractional share of NSI common
stock as of the Record Date. See "The
Distribution -- Manner of Effecting the
Distribution" beginning on page 19.
Tax Consequences................ NSI and Spinco intend for the Distribution
to be tax-free for U.S. federal income tax
purposes. The Distribution is conditioned
upon the receipt by each of NSI and Spinco
of opinions from each of King & Spalding,
counsel to NSI, and Ernst & Young LLP,
special tax advisor to NSI, that, for U.S.
federal income tax purposes, the receipt of
Spinco shares by NSI stockholders will be
tax-free. See "Risk Factors -- Failure to
Qualify as a Tax-Free Transaction Could
Result in Substantial Liability" beginning
on page 10 and "The Distribution -- Federal
Income Tax Consequences of the Distribution"
beginning on page 22.
Relationship with NSI After the
Distribution.................. Prior to the Distribution, NSI and Spinco
have entered or will enter into agreements
to transfer to Spinco selected assets and
liabilities of NSI related to Spinco's
business, to arrange for the temporary
continued provision of certain services by
each company to the other, to make
arrangements for the Distribution and to
define the ongoing relationships between NSI
and Spinco. In addition, NSI and Spinco will
enter into an agreement providing for the
sharing of taxes incurred by them prior to
the Distribution and providing certain
indemnification rights with respect to tax
matters. After the Distribution, NSI and
Spinco will not have any other material
contracts or other arrangements between them
other than arrangements made on an arm's
length basis. See "Relationship Between NSI
and Spinco Following the Distribution"
beginning on page 26.
Board of Directors of Spinco.... After the Distribution, Spinco is expected
to have an initial board of directors,
classified into three classes. After their
initial term, directors of each class will
serve three-year terms. Each person expected
to serve on Spinco's initial board of
directors is currently a director of NSI and
is
4
expected to resign from NSI's board as of
the Distribution Date. See "Spinco's
Management" beginning on page 56.
Management of Spinco............ Certain of NSI's current executive officers,
including the current senior management of
the lighting equipment and chemicals
businesses, will serve as executive officers
of Spinco after the Distribution. Each
Spinco executive officer is expected to
resign his position with NSI as of the
Distribution Date. See "Spinco's Management"
beginning on page 53.
Debt............................ Prior to the Distribution, Spinco is
expected to assume or refinance all but
approximately $5 million of NSI's total
outstanding debt including all of the
indebtedness under (1) NSI's indenture
relating to the $200 million principal
amount 8.375% Notes due August 1, 2010, and
the $160 million principal amount 6% Notes
due February 1, 2009, and (2) NSI's $150
million receivables facility. Spinco also
entered into an unsecured credit facility
and may establish a commercial paper program
that will be supported by the credit
facility. The credit facility contains,
among other terms, conditions precedent,
covenants, representations and warranties,
mandatory and voluntary prepayment
provisions and events of default customary
for similar facilities. See "Financing
Arrangements for Spinco" on page 30.
Post-Distribution
Dividend Policies............. It is anticipated that following the
Distribution, Spinco initially will pay
quarterly cash dividends which, on an annual
basis, will equal $.60 per share, and NSI
initially will pay quarterly cash dividends
which, on an annual basis, will equal $.04
per share. Therefore, the aggregate cash
dividends payable by Spinco and NSI after
the Distribution, taken together, in respect
of (1) shares of NSI common stock held on
the Distribution Date and (2) Spinco Shares
received in the Distribution will be
substantially less than the annual rate of
the cash dividend previously paid on NSI
common stock of $1.32 per share. In
anticipation of the expected dividend
policies of the companies, NSI declared a
quarterly dividend of $.16 per share payable
on October 31, 2001, which on an annual
basis equals the $.64 per share combined
dividend expected to be paid by NSI and
Spinco after the Distribution. However, no
5
formal action has been taken with respect to
future dividends and the declaration and
payment of dividends by Spinco and NSI will
be at the sole discretion of their
respective boards of directors. See
"Dividend Policies" on page 32.
Certain Anti-takeover
Effects....................... Certain provisions of Spinco's certificate
of incorporation and bylaws may have the
effect of making the acquisition of control
of Spinco in a transaction not approved by
Spinco's board of directors more difficult.
The stockholder protection rights agreement
that Spinco will enter into in connection
with the Distribution also would make such a
transaction more difficult. Moreover,
certain provisions of the agreement
providing for certain tax disaffiliation and
other tax-related matters that Spinco will
enter into in connection with the
Distribution could discourage potential
acquisition proposals. See "Risk Factors --
Certain Provisions of Spinco's Certificate
of Incorporation, Bylaws and Rights Plan and
the Tax Disaffiliation Agreement May
Discourage Takeovers" beginning on page 16
and "Certain Anti-Takeover Provisions of
Spinco's Certificate of Incorporation,
Bylaws and Rights Agreement and Delaware
Law" beginning on page 76.
Risk Factors.................... You should review the risks relating to the
Distribution and Spinco's businesses
described in "Risk Factors" beginning on
page 8.
6
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This information statement contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Spinco and NSI
base these forward-looking statements on their respective expectations and
projections about future events, which Spinco and NSI have derived from the
information currently available to them. In addition, from time to time, Spinco
or NSI or their representatives may make forward-looking statements orally or in
writing. Furthermore, forward-looking statements may be included in Spinco's and
NSI's filings with the Securities and Exchange Commission or press releases or
oral statements made by or with the approval of one of their executive officers.
For each of these forward-looking statements, Spinco and NSI claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to future events or Spinco's or NSI's future performance,
including but not limited to:
- benefits resulting from the spin-off;
- possible or assumed future results of operations;
- growth in revenue and earnings; and
- business and growth strategies.
You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology such as "may,"
"could," "will," "should," "likely," "expects," "anticipates," "contemplates,"
"estimates," "believes," "plans," "projected," "predicts," "potential" or
"continue" or the negative of these or similar terms. In evaluating these
forward-looking statements, you should consider various factors, including those
described under "Risk Factors" beginning on page 8.
Forward-looking statements are only predictions. The forward-looking events
discussed in this information statement and other statements made from time to
time by Spinco or NSI or their representatives may not occur, and actual events
and results may differ materially and are subject to risks, uncertainties and
assumptions about Spinco and NSI. Except for their ongoing obligations to
disclose material information as required by the federal securities laws, Spinco
and NSI are not obligated to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this information statement and in other statements made from
time to time by Spinco or NSI or their representatives might not occur.
7
RISK FACTORS
You should carefully consider each of the following risk factors and all of
the other information in this information statement. The following risks relate
principally to the Distribution and Spinco's businesses. The risks and
uncertainties described below are not the only ones Spinco will face. Additional
risks and uncertainties not presently known to Spinco or that it currently
believes to be immaterial may also adversely affect Spinco's businesses.
If any of the following risks and uncertainties develops into actual
events, the business, financial condition or results of operations of Spinco
could be materially adversely affected. If that happens, the trading prices of
Spinco Shares could decline significantly.
The risk factors below contain forward-looking statements regarding the
Distribution and Spinco. Actual results could differ materially from those set
forth in the forward-looking statements. See "Cautionary Statements Regarding
Forward-Looking Statements" on page 7.
RISKS RELATING TO THE DISTRIBUTION
THE DISTRIBUTION WILL CAUSE THE TRADING PRICE OF NSI COMMON STOCK TO DECLINE
SIGNIFICANTLY
Following the Distribution, NSI expects that its common stock will continue
to be listed and traded on the New York Stock Exchange under the symbol "NSI."
As a result of the Distribution, the trading price of NSI common stock
immediately following the Distribution will be substantially lower than the
trading price of NSI common stock immediately prior to the Distribution.
Following the Distribution, NSI's operations will consist of the textile rental
and envelope businesses. These businesses represented approximately 27% of NSI's
consolidated assets and 22% of NSI's consolidated revenues as of and for the
fiscal year ended August 31, 2001. Further, the combined trading prices of NSI
common stock and the Spinco Shares after the Distribution may be less than the
trading prices of NSI common stock immediately prior to the Distribution.
SUBSTANTIAL SALES OF NSI COMMON STOCK MAY HAVE AN ADVERSE IMPACT ON THE TRADING
PRICE OF THE NSI COMMON STOCK
After the Distribution, some NSI stockholders may decide that they do not
want shares in a company consisting of textile rental and envelope businesses,
and may sell their NSI common stock following the Distribution. Additionally, it
is expected that NSI will no longer comprise part of the S&P 500 Index. It is
expected that some stockholders, including certain mutual funds, will sell their
NSI common stock on this basis alone. If NSI stockholders sell large numbers of
shares of NSI common stock over a short period of time, or if investors
anticipate large sales of NSI common stock over a short period of time, this
could adversely affect the trading price of the NSI common stock.
SUBSTANTIAL SALES OF SPINCO SHARES MAY HAVE AN ADVERSE IMPACT ON THE TRADING
PRICE OF THE SPINCO SHARES
Based on the number of shares of NSI common stock outstanding on , 2001,
NSI will distribute to NSI's stockholders a total of approximately
Spinco Shares.
8
Under the United States federal securities laws, all of these shares may be
resold immediately in the public market, except for Spinco Shares held by
affiliates of Spinco. Some of the NSI stockholders who receive Spinco Shares may
decide that they do not want shares in a company consisting of lighting
equipment and chemicals businesses, and may sell their Spinco Shares following
the Distribution. Spinco cannot predict whether stockholders will resell large
numbers of Spinco Shares in the public market following the Distribution or how
quickly they may resell these Spinco Shares. If Spinco stockholders sell large
numbers of Spinco Shares over a short period of time, or if investors anticipate
large sales of Spinco Shares over a short period of time, this could adversely
affect the trading price of the Spinco Shares.
THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET FOR NSI COMMON STOCK
WILL RETURN
Even though NSI is currently a publicly held company, there can be no
assurance as to whether an active trading market for NSI common stock will be
maintained after the Distribution or as to the prices at which the NSI common
stock will trade. Some NSI stockholders may decide that they do not want shares
in a company consisting of textile rental and envelope businesses, and may sell
their NSI common stock following the Distribution. Additionally, it is expected
that NSI will no longer comprise part of the S&P 500 Index. It is expected that
some stockholders, including certain mutual funds, will sell their NSI common
stock on this basis alone. These and other factors may delay or hinder the
return to an orderly trading market in the NSI common stock following the
Distribution. Whether an active trading market for NSI common stock will be
maintained after the Distribution and the prices for NSI common stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the shares, NSI's results of
operations, what investors think of NSI and the textile rental and envelope
industries, the amount of dividends that NSI pays, changes in economic
conditions in the textile rental and envelope industries and general economic
and market conditions. Market fluctuations could have a material adverse impact
on the trading price of the NSI common stock.
THERE HAS NOT BEEN ANY PRIOR TRADING MARKET FOR THE SPINCO SHARES
There is no current trading market for the Spinco Shares, although a
when-issued trading market will likely develop prior to completion of the
Distribution. The Spinco Shares will be listed on the New York Stock Exchange
under the symbol " " following completion of the Distribution.
There can be no assurance as to whether the Spinco Shares will be actively
traded or as to the prices at which the Spinco Shares will trade. Although NSI
has been a part of the S&P 500 Index, there can be no assurance that Spinco will
become a part of the S&P 500 Index. Some of the NSI stockholders who receive
Spinco Shares may decide that they do not want shares in a company consisting of
lighting equipment and chemicals businesses, and may sell their Spinco Shares
following the Distribution. This may delay the development of an orderly trading
market in the Spinco Shares for a period of time following the Distribution.
Until the Spinco Shares are fully distributed and an orderly market develops,
the prices at which the Spinco Shares trade may fluctuate significantly and may
be lower than the price that would be expected for a fully distributed issue.
Prices for Spinco Shares will be determined in the marketplace and may be
influenced by many factors, including the depth and liquidity of the market for
the shares, Spinco's
9
results of operations, what investors think of Spinco and the lighting equipment
and chemicals industries, the amount of dividends that Spinco pays, changes in
economic conditions in the lighting equipment and chemicals industries and
general economic and market conditions. Market fluctuations could have a
material adverse impact on the trading price of the Spinco Shares.
FAILURE TO QUALIFY AS A TAX-FREE TRANSACTION COULD RESULT IN SUBSTANTIAL
LIABILITY
NSI and Spinco intend for the Distribution to be tax-free for U.S. federal
income tax purposes. The Distribution is conditioned upon the receipt by each of
NSI and Spinco of opinions from each of King & Spalding, counsel to NSI, and
Ernst & Young LLP, special tax advisor to NSI, that for U.S. federal income tax
purposes the receipt of Spinco Shares by NSI stockholders will be tax-free.
Neither NSI nor Spinco has requested an advance ruling from the Internal Revenue
Service as to the tax consequences of the Distribution. The opinions of King &
Spalding and Ernst & Young LLP are subject to certain assumptions and the
accuracy and completeness of certain factual representations and statements made
by NSI and Spinco and certain other data, documentation and other materials that
each of King & Spalding and Ernst & Young LLP deemed necessary for purposes of
their respective opinions. If these assumptions and factual representations were
incorrect or incomplete in a material respect, the conclusions set forth in the
opinions may not be correct. These opinions represent the views of King &
Spalding and Ernst & Young LLP as to the interpretation of existing tax law and
accordingly, such opinions are not binding on the Internal Revenue Service or
the courts and no assurance can be given that the Internal Revenue Service or
the courts will agree with their opinions.
If the Distribution does not qualify for tax-free treatment, a substantial
corporate tax would be payable by the consolidated group of which NSI is the
common parent measured by the difference between (1) the aggregate fair market
value of the Spinco Shares on the Distribution Date and (2) NSI's adjusted tax
basis in the Spinco Shares on the Distribution Date. The corporate level tax
would be payable by NSI. However, Spinco has agreed under certain circumstances
to indemnify NSI for all or a portion of this tax liability. This
indemnification obligation, if triggered, could have a material adverse effect
on the results of operations and financial position of Spinco. In addition,
under the applicable treasury regulations, each member of NSI's consolidated
group (including Spinco) is severally liable for such tax liability.
Furthermore, if the Distribution does not qualify as tax-free, each NSI
stockholder who receives Spinco Shares in the Distribution would be taxed as if
he had received a cash dividend equal to the fair market value of his Spinco
Shares on the Distribution Date.
Even if the Distribution qualifies as tax-free, NSI could nevertheless
incur a substantial corporate tax liability under Section 355(e) of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code" or the "Code"), if
NSI or Spinco were to undergo a change in control (whether by acquisition,
additional share issuance or otherwise) pursuant to a plan or series of related
transactions which include the Distribution. Any transaction which occurs within
the four-year period beginning two years prior to the Distribution is presumed
to be part of a plan or series of related transactions which includes the
Distribution unless NSI establishes otherwise. Under certain circumstances,
Spinco would be obligated to indemnify NSI for all or a portion of this
substantial corporate tax liability under the tax disaffiliation agreement. This
indemnification obligation would have a material adverse effect on the results
of operations and
10
financial position of Spinco. NSI stockholders would not recognize gain or loss
under Section 355(e) of the Code solely because either NSI or Spinco undergoes a
change in control after the Distribution.
CREDITORS OF NSI MAY CHALLENGE THE DISTRIBUTION AS A FRAUDULENT CONVEYANCE
On , 2001, the NSI board of directors made a determination that the
Distribution is permissible under applicable dividend and solvency laws. There
is no certainty, however, that a court would find the decision of the NSI board
to be binding on creditors of NSI and Spinco or that a court would reach the
same conclusions as the NSI board in determining whether NSI or Spinco was
insolvent at the time of, or after giving effect to, the Distribution. If a
court in a lawsuit by an unpaid creditor or representative of creditors, such as
a trustee in bankruptcy, were to find that at the time NSI effected the
Distribution, NSI or Spinco (1) was insolvent; (2) was rendered insolvent by
reason of the Distribution; (3) was engaged in a business or transaction for
which their respective remaining assets constituted unreasonably small capital;
or (4) intended to incur, or believed it would incur, debts beyond its ability
to pay as such debts matured, such court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and require that the
stockholders return the Spinco Shares (in whole or in part) to NSI or require
Spinco to fund certain liabilities for the benefit of creditors. The measure of
insolvency for purposes of the foregoing will vary depending upon the
jurisdiction whose law is being applied. Generally, however, NSI or Spinco would
be considered insolvent if the fair value of their respective assets were less
than the amount of their respective liabilities or if they incurred debt beyond
their ability to repay such debt as it matures.
RISKS RELATING TO SPINCO
SPINCO'S BUSINESSES ARE DEPENDENT ON CYCLICAL INDUSTRIES
A significant portion of the lighting equipment business's sales are made
to customers in the new construction and renovation industries. These industries
are cyclical in nature and subject to changes in general economic conditions. In
addition, sales of the chemicals business are dependent on the needs of the
retail, wholesale and industrial markets for its product line. Economic
downturns and the potential declines in construction and demand for specialty
chemicals may have a material adverse effect on Spinco's results of operations.
AN INCREASE IN THE PRICE OF RAW MATERIALS OR FINISHED GOODS COULD ADVERSELY
AFFECT SPINCO'S OPERATIONS
Spinco's businesses require certain raw materials for their products,
including aluminum, plastics, electrical components, solvents, surfactants,
certain grades of steel and glass. Spinco will purchase most of these raw
materials on the open market and rely on third parties for the sourcing of
finished goods. As such, the cost of products sold may be affected by changes in
the market price of the above-mentioned raw materials or sourcing services and
finished goods. Spinco does not expect to engage in commodity hedging
transactions for raw materials. Significant increases in the prices of Spinco's
products due to increases in the cost of raw materials or sourcing could have a
negative effect on demand for products and on profitability, as well as a
material adverse effect on Spinco's results of operations.
11
SPINCO'S BUSINESSES COULD SUFFER IN THE EVENT OF A WORK STOPPAGE OR INCREASED
ORGANIZED LABOR ACTIVITY
While Spinco management considers relations with employees to be generally
good, there can be no assurance that Spinco will not experience work stoppages,
strikes or slowdowns in the future. A prolonged work stoppage, strike or
slowdown could have a material adverse effect on Spinco's results of operations.
In addition, there can be no assurance that, upon expiration of any of existing
collective bargaining agreements, new agreements will be reached without union
action or that any new agreement will be on terms satisfactory to Spinco.
Moreover, there can be no assurance that Spinco's non-union facilities will not
become subject to labor union organizing efforts. If any current non-union
facilities were to unionize, Spinco would incur increased risk of work
stoppages, and possibly higher labor costs.
THE INDUSTRIES IN WHICH SPINCO WILL OPERATE ARE HIGHLY COMPETITIVE
The industries in which Spinco will operate are highly competitive. Spinco
will compete primarily on the basis of price, brand name recognition, product
quality, and customer responsiveness. Main competitors in the lighting equipment
industry include Cooper Industries, U.S. Industries and Genlyte Group.
Competitors in the chemicals industry include Ecolab, Unilever/Diversey, NCH and
SC Johnson.
Many of these competitors offer products which are substantially identical
to those to be offered by Spinco. As a result of competitive pressures, there
can be no assurance that Spinco will be able to compete effectively or increase
prices in the future. Price increases by Spinco, price reductions by
competitors, decisions by Spinco with regard to maintaining profit margins
rather than market share, or other competitive or market factors or strategies
could adversely affect market share or results of operations. Competition could
prevent the institution of price increases or could require price reductions or
increased spending on research and development and marketing and sales which
could adversely affect results of operations.
ADVERSE ECONOMIC CONDITIONS COULD AFFECT SPINCO'S ABILITY TO SERVICE DEBT
Spinco's ability to service its indebtedness will depend on its future
operating performance, which will be affected by prevailing economic conditions
and financial and other factors, certain of which Spinco cannot control. While
Spinco believes that future operating cash flow, together with financing
arrangements, will be sufficient to finance current operating requirements,
Spinco's leverage and debt service requirements may make Spinco more vulnerable
to economic downturns. If Spinco could not service its indebtedness, it would be
forced to pursue one or more alternative strategies such as reducing its capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital (which may substantially dilute the ownership
interest of holders of Spinco Shares). There can be no assurance that Spinco can
effect any of these strategies on satisfactory terms, if at all.
12
SPINCO STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION IF FUTURE EQUITY
OFFERINGS ARE USED TO FUND OPERATIONS OR ACQUIRE COMPLEMENTARY BUSINESSES OR AS
A RESULT OF OPTION EXERCISES
If future acquisitions are financed through the issuance of equity
securities, Spinco stockholders could experience significant dilution. In
addition, securities issued in connection with future financing activities or
potential acquisitions may have rights and preferences senior to the rights and
preferences of the Spinco Shares.
In connection with the Distribution, Spinco will replace options held by
NSI employees who become Spinco employees with options to purchase Spinco
Shares. The actual number of shares subject to these options will be determined
based on the relative trading prices of the NSI common stock and the Spinco
Shares on the Distribution Date. Currently, Spinco anticipates that options to
purchase approximately Spinco Shares will be outstanding immediately
following the Distribution. The issuance of Spinco Shares upon the exercise of
these options will result in dilution to the Spinco stockholders.
SPINCO IS DEPENDENT ON CERTAIN KEY PERSONNEL
Spinco's success depends to a significant extent on the continued service
of certain key management personnel. The loss or interruption of the services of
Spinco's senior management personnel or the inability to attract and retain
other qualified management, sales, marketing and technical employees could also
have an adverse effect on Spinco.
SPINCO HAS NO OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY AND MAY BE
UNABLE TO OPERATE PROFITABLY AS A STAND-ALONE COMPANY
Spinco does not have an operating history as an independent public company.
Historically, since the businesses that comprise each of Spinco and NSI have
been under one ultimate parent, they have been able to rely, to some degree, on
the earnings, assets, and cash flow of each other and former businesses owned by
NSI for capital requirements. After the Distribution, Spinco will be able to
rely only on the lighting equipment and chemicals businesses for such
requirements. While the lighting equipment and chemicals businesses have been
profitable segments of NSI, there can be no assurance that, as an independent
company, profits will continue at the same level, if at all. Additionally,
Spinco's businesses have relied on NSI for various financial, administrative and
managerial expertise in conducting their operations. Following the Distribution,
Spinco will maintain its own credit and banking relationships and perform its
own financial and investor relations functions. While a significant number of
key employees of NSI will be employed by Spinco following the Distribution,
there can be no assurance that Spinco will be able to successfully put in place
the financial, administrative and managerial structure necessary to operate as
an independent public company, or that the development of such structure will
not require a significant amount of management's time and other resources.
HISTORICAL FINANCIAL INFORMATION MAY BE OF LIMITED RELEVANCE
The historical financial information included in this information statement
does not reflect the results of operations, financial position and cash flows of
Spinco in the future and only estimates the results of operations, financial
position and cash flows of Spinco had it operated as a separate stand-alone
entity during the periods presented. The financial
13
information included herein does not reflect any changes that may occur in the
funding and operations of Spinco as a result of the Distribution.
MEMBERS OF SPINCO'S BOARD OF DIRECTORS AND MANAGEMENT MAY HAVE CONFLICTS OF
INTEREST AFTER THE DISTRIBUTION BECAUSE OF THEIR OWNERSHIP OF BOTH SPINCO AND
NSI COMMON STOCK
Members of the board of directors and management of Spinco will likely own
shares of both Spinco and NSI common stock after the Distribution because of
their prior relationship with NSI. This ownership could create, or appear to
create, potential conflicts of interest when Spinco's directors and management
are faced with decisions that could have different implications for Spinco and
NSI. Examples of these types of decisions might include the resolution of
disputes arising out of the agreements governing the relationship between NSI
and Spinco following the Distribution. Also, the appearance of conflicts, even
if such conflicts do not materialize, might adversely affect the public's
perception of Spinco following the Distribution.
SPINCO WILL CONDUCT OPERATIONS INTERNATIONALLY, WHICH ENTAILS CERTAIN RISKS AND
UNCERTAINTIES
Spinco will manufacture and assemble products at numerous facilities, some
of which are located outside the United States. Spinco will also obtain
components and finished goods from suppliers located outside the United States.
Changes in local economic or political conditions could affect Spinco's
manufacturing, assembly and distribution capabilities and have a material
adverse effect on Spinco's business, financial condition and results of
operations. Additional risks inherent in Spinco's international business
activities generally include unexpected changes in regulatory requirements,
tariffs and other trade barriers, changes in local economic or political
conditions, longer customer payment cycles, potentially adverse tax
consequences, restrictions on repatriation of earnings and the burdens of
complying with a wide variety of foreign laws.
As a specific example of the foregoing, approximately 28% of Spinco's
lighting equipment products are produced in facilities operated in Mexico.
Mexico has enacted legislation to promote the use of such manufacturing
operations, known as "Maquiladoras," by foreign companies. These operations are
authorized to operate as Maquiladoras by the Ministry of Commerce and Industrial
Development of Mexico. Maquiladora status allows Spinco to import certain items
from the United States into Mexico duty-free, provided that such items, after
processing, are re-exported from Mexico within six months. Maquiladora status,
which must be renewed every two years, is subject to various restrictions and
requirements, including compliance with the terms of the Maquiladora program and
other local regulations. Although manufacturing operations in Mexico continue to
be less expensive than comparable operations in the United States, in recent
years many companies have established Maquiladora operations to take advantage
of lower labor costs. Increasing demand for labor, particularly skilled labor
and professionals, from new and existing Maquiladora operations has in the past
and could in the future result in increased labor costs. Spinco may be required
to make additional investments in automating equipment to partially offset
increased labor costs. The loss of Maquiladora status, the inability to recruit,
hire and retain qualified employees, a significant increase in labor costs, or
interruptions in the trade relations between the United States and Mexico could
have a material adverse effect on Spinco's results of operations.
14
SPINCO WILL BE SUBJECT TO FOREIGN CURRENCY RISKS
Changes in the value of foreign currencies, specifically the Mexican peso
and Canadian dollar, relative to the U.S. dollar could result in losses from
foreign currency conversion. Spinco does not expect to use derivative products
to hedge against foreign currency exchange risk.
THE PAYMENT OF DIVIDENDS BY SPINCO'S BOARD OF DIRECTORS MAY LIMIT GROWTH
While the payment of dividends is at the discretion of Spinco's board of
directors and will be subject to Spinco's financial results, the availability of
surplus funds to pay dividends and other restrictions, it is expected that
Spinco will initially pay quarterly cash dividends which, on an annual basis,
will equal $.60 per share. While no assurance can be given that Spinco will pay
dividends at this rate or at all, payment of dividends at this rate may limit
Spinco's ability to grow its businesses internally or by acquisitions that may
be in its best interest.
COMPLIANCE WITH ENVIRONMENTAL RULES AND REGULATIONS MAY MAKE IT COSTLY TO
OPERATE SPINCO'S BUSINESSES, WHICH MAY HARM ITS OPERATING RESULTS
Spinco's operations will be subject to federal, state, local and foreign
laws and regulations relating to the generation, storage, handling,
transportation, and disposal of hazardous substances and solid and hazardous
wastes and to the remediation of contaminated sites. Permits and environmental
controls are required for certain of Spinco's operations to limit air and water
pollution, and these permits are subject to modification, renewal, and
revocation by issuing authorities. Spinco will incur capital and operating costs
relating to environmental compliance on an ongoing basis. Environmental laws and
regulations have generally become stricter in recent years, and the cost of
responding to future changes may be substantial. There can be no assurance that
Spinco will not incur significant costs to remediate violations of such laws and
regulations, particularly in connection with acquisitions of existing operating
facilities, or to comply with changes in, or stricter or different
interpretations of, existing laws and regulations. Such costs could have a
material adverse effect on Spinco's results of operations.
Spinco will assume certain environmental liabilities in the Distribution
relating to ongoing legal proceedings in connection with state and federal
Superfund sites. While Spinco does not believe these claims will result in
material liability, there can be no assurance that Spinco will not be required
to pay a substantial amount of money relating to these claims. Such payment
could have a material adverse effect on Spinco's results of operations.
SPINCO MAY INCUR INCREASED EXPENSES IF THE TRANSITION SERVICES AGREEMENT WITH
NSI IS TERMINATED
In connection with the Distribution, Spinco will enter into a transition
services agreement with NSI. This agreement will provide that NSI and Spinco
will provide each other services in such areas as information management and
technology, employee benefits administration, payroll, financial accounting and
reporting, claims administration and reporting, legal, and other areas where NSI
and Spinco may need transitional assistance and support following the
Distribution. The agreement will extend for one year after the Distribution, but
may be terminated earlier under certain circumstances, including a
15
default, bankruptcy event, or change in control. If the agreement is terminated,
Spinco may be required to obtain such services from a third party. This could be
more expensive than the fees which Spinco will be required to pay under the
transition services agreement.
CERTAIN PROVISIONS OF SPINCO'S CERTIFICATE OF INCORPORATION, BYLAWS AND RIGHTS
PLAN AND THE TAX DISAFFILIATION AGREEMENT MAY DISCOURAGE TAKEOVERS
Spinco's certificate of incorporation and bylaws contain certain
anti-takeover provisions that may make more difficult or expensive or that may
discourage a tender offer, change in control or takeover attempt that is opposed
by Spinco's board of directors. In particular, Spinco's certificate of
incorporation and bylaws:
(1) classify Spinco's board of directors into three groups, so that
stockholders elect only one-third of the board each year;
(2) permit stockholders to remove directors only for cause and only by
the affirmative vote of at least 80% of Spinco's voting shares;
(3) permit a special stockholders' meeting to be called only by a
majority of the board of directors;
(4) do not permit stockholders to take action except at an annual or
special meeting of stockholders;
(5) require stockholders to give Spinco advance notice to nominate
candidates for election to Spinco's board of directors or to make
stockholder proposals at a stockholders' meeting;
(6) permit Spinco's board of directors to issue, without stockholder
approval, preferred stock with such terms as the board may determine;
(7) require the vote of the holders of at least 80% of Spinco's voting
shares for stockholder amendments to Spinco's bylaws; and
(8) require, for the approval of a business combination with
stockholders owning 5% or more of Spinco's voting shares, the vote of at
least 50% of Spinco's voting shares not owned by such stockholder, unless
certain "fair price" requirements are met or the business combination is
approved by the continuing directors of Spinco.
The preferred stock purchase rights attached to the Spinco Shares would, in
effect, prevent a person or group from acquiring more than 15% of the total
number of Spinco Shares outstanding at any time after the Distribution without
approval from Spinco's board of directors. In addition, Delaware law generally
restricts mergers and other business combinations between Spinco and any holder
of 15% or more of the Spinco Shares, unless the transaction or the 15%
acquisition is approved in advance by Spinco's board of directors.
These provisions of Spinco's certificate of incorporation and bylaws,
Delaware law and the preferred stock purchase rights could discourage potential
acquisition proposals and could delay or prevent a change in control of Spinco,
even though a majority of Spinco's stockholders may consider such proposals, if
effected, desirable. Such provisions could also make it more difficult for third
parties to remove and replace the members of Spinco's board of directors.
Moreover, these provisions could diminish the opportunities for stockholders to
participate in certain tender offers, including tender offers at prices above
16
the then-current market value of the Spinco Shares, and may also inhibit
increases in the trading price of the Spinco Shares that could result from
takeover attempts or speculation.
In connection with the Distribution, Spinco has agreed to indemnify NSI for
all taxes and liabilities incurred as a result of (1) a breach of a
representation or covenant given to King & Spalding or Ernst & Young LLP in
connection with rendering their tax opinions, which contributes to an Internal
Revenue Service determination that the Distribution was not tax-free or (2)
Spinco or an affiliate's post-Distribution action or omission contributes to an
Internal Revenue Service determination that the Distribution was not tax-free.
Unless NSI effectively rebuts the presumption that a change in control
transaction involving Spinco or disposition of Spinco occurring within the
four-year period beginning two years prior to the Distribution Date is pursuant
to the same plan or series of related transactions as the Distribution, the
Internal Revenue Service might determine that the Distribution was not tax-free,
giving rise to Spinco's indemnification obligation. These provisions of the tax
disaffiliation agreement may have the effect of discouraging or preventing an
acquisition of Spinco or a disposition of Spinco's businesses, which may in turn
depress the market price for the Spinco Shares.
17
THE DISTRIBUTION
INTRODUCTION
On , 2001, NSI's board of directors declared a pro rata
distribution payable to the holders of record of outstanding NSI common stock at
the close of business on , 2001 (the "Record Date") of one share of
common stock (the "Spinco Common Stock") of Spinco, together with an associated
preferred stock purchase right (the shares of Spinco Common Stock and the
associated preferred stock purchase rights, collectively, the "Spinco Shares"),
for every share of NSI common stock outstanding on the Record Date. The
Distribution will be effected at 11:59 p.m., New York City time, on ,
2001 (the "Distribution Date"). As a result of the Distribution, 100% of the
outstanding Spinco Shares will be distributed to NSI stockholders. Immediately
following the Distribution, NSI and its subsidiaries will not own any Spinco
Shares and Spinco will be an independent public company. The Spinco Shares will
be distributed by book entry. Instead of stock certificates, each NSI
stockholder that is a record holder of NSI shares will receive a statement of
such stockholder's book entry account for the Spinco Shares distributed to such
stockholder. Account statements reflecting ownership of the Spinco Shares will
be mailed shortly after the Distribution Date. Spinco Shares should be credited
to accounts with stockbrokers, banks or nominees of NSI stockholders that are
not record holders on or about , 2001.
Spinco was incorporated on June 27, 2001. Spinco's principal executive
offices are located at 1420 Peachtree Street, NE, Atlanta, Georgia 30309, and
its telephone number is (404) 853-1000.
Spinco will own and operate the lighting equipment and chemicals businesses
of NSI. These businesses represented approximately 73% of NSI's consolidated
assets and 78% of NSI's consolidated revenues as of and for the fiscal year
ended August 31, 2001. Following the Distribution, NSI's operations will consist
of the textile rental and envelope businesses.
REASONS FOR THE DISTRIBUTION
The board of directors and management of NSI believe that the Distribution
is in the best interests of NSI, Spinco and NSI stockholders. NSI believes that
the Distribution will enhance value for NSI stockholders and give Spinco the
financial and operational flexibility to take advantage of significant growth
opportunities in the lighting equipment and chemicals businesses. NSI's board of
directors and management believe that the Distribution will enhance the ability
of each of Spinco and NSI to focus on strategic initiatives and new business
opportunities, improve cost structures and operating efficiencies and design
equity-based compensation programs targeted to its own performance. In addition,
NSI's board of directors expects that the transition to an independent company
will heighten Spinco management's focus, provide Spinco with greater access to
capital, and allow the investment community to measure Spinco's performance
relative to its peers. The lighting equipment and chemicals businesses also have
some important traits in common that make these businesses distinct from NSI's
other operations with respect to markets, products, capital needs and plans for
growth. For instance, both businesses sell primarily to commercial and
industrial customers through commissioned agents and both have a small but
growing portion of retail sales.
18
The Distribution will give Spinco direct access to capital markets. As part
of NSI, the lighting equipment and chemicals businesses competed with NSI's
other core business groups for capital to finance expansion and growth
opportunities. As a separate entity, Spinco will be free of NSI's capital
structure restrictions and should be in a better position to fund the
implementation of its business strategy. The Distribution will also enable
Spinco to provide its management and employees incentive compensation in the
form of equity ownership in Spinco, enhancing Spinco's ability to attract,
retain and motivate key employees.
The separation will also enable new NSI management to concentrate attention
on the remaining NSI businesses. NSI's board strongly believes that these
businesses may be managed more effectively and positioned for future growth if
new management is able to focus on the textile rental and envelope businesses.
In addition to focusing on existing businesses, new NSI management may also
consider further diversification into other businesses.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution will be set
forth in an Agreement and Plan of Distribution (the "distribution agreement")
between NSI and Spinco. See "Relationship between NSI and Spinco Following the
Distribution -- Distribution Agreement" on page 26.
The Distribution will be made on the basis of one Spinco Share for every
share of NSI common stock outstanding on the Record Date. The actual total
number of Spinco Shares to be distributed will depend on the number of NSI
shares outstanding on the Record Date. Based upon the number of NSI shares
outstanding on , 2001, approximately Spinco Shares will be
distributed to NSI stockholders. The Spinco Shares to be distributed will
constitute 100% of the outstanding Spinco Shares. Immediately following the
Distribution, NSI and its subsidiaries will not own any Spinco Shares and Spinco
will be an independent public company. The employee benefits agreement provides
that at the time of the Distribution NSI stock options held by Spinco employees
will generally be converted to, and replaced by, Spinco stock options in
accordance with a conversion ratio. Each employee holding NSI restricted stock
(all of which is unvested) will receive a dividend of one Spinco Share (subject
to the same restrictions as the NSI restricted stock) for each NSI restricted
share held. See "Relationship Between NSI and Spinco Following the
Distribution -- Employee Benefits Agreement" beginning on page 27. The Spinco
Shares will be fully paid and non-assessable and the holders thereof will not be
entitled to preemptive rights. See "Description of Spinco's Capital Stock"
beginning on page 73.
NSI will use a book entry system to distribute the Spinco Shares in the
Distribution. Following the Distribution, each record holder of NSI stock on the
Record Date will receive from the Distribution Agent a statement of the Spinco
Shares credited to the stockholder's account. If you are not a record holder of
NSI stock because your shares are held on your behalf by your stockbroker or
other nominee, your Spinco shares should be credited to your account with your
stockbroker or nominee on or about , 2001. After the Distribution,
stockholders may request stock certificates from Spinco's transfer agent instead
of participating in the book entry system.
19
Fractional Spinco Shares will be issued. If you own a fractional share of
NSI common stock as of the Record Date, you will receive a corresponding
fractional Spinco Share in the Distribution.
No NSI stockholder will be required to pay any cash or other consideration
for the Spinco Shares received in the Distribution, or to surrender or exchange
NSI shares in order to receive Spinco Shares. The Distribution will not affect
the number of, or the rights attaching to, outstanding NSI shares. No vote of
NSI stockholders is required or sought in connection with the Distribution, and
NSI stockholders will have no appraisal rights in connection with the
Distribution.
In order to receive Spinco Shares in the Distribution, NSI stockholders
must be stockholders at the close of business on the Record Date.
RESULTS OF THE DISTRIBUTION
After the Distribution, Spinco will be a separate public company operating
the lighting equipment and chemicals businesses. Immediately after the
Distribution, Spinco expects to have approximately holders of record of
Spinco Shares and approximately Spinco Shares outstanding, based on the
number of stockholders of record and outstanding NSI shares on , 2001
and the distribution ratio of one Spinco Share for every NSI share. The employee
benefits agreement provides that at the time of the Distribution NSI stock
options held by Spinco employees will generally be converted to, and replaced
by, Spinco stock options in accordance with a conversion ratio. Each employee
holding NSI restricted stock (all of which is unvested) will receive a dividend
of one Spinco Share (subject to the same restrictions as the NSI restricted
stock) for each NSI restricted share held. See "Relationship Between NSI and
Spinco Following the Distribution -- Employee Benefits Agreement" beginning on
page 27. The actual number of Spinco Shares to be distributed will be determined
as of the Record Date. The Distribution will not affect the number of
outstanding NSI shares or any rights of NSI stockholders.
LISTING AND TRADING OF THE SPINCO SHARES
You should consult with your own financial advisors, such as your
stockbroker, bank or tax advisor. NSI does not make recommendations on the
purchase, retention or sale of shares of NSI common stock or Spinco Shares.
If you do decide to sell any shares, you should make sure your stockbroker,
bank or other nominee understands whether you want to sell your NSI common stock
or your Spinco Shares, or both. The following information may be helpful in
discussions with your stockbroker, bank or other nominee.
There is not currently a public market for the Spinco Shares, although a
when-issued market will likely develop prior to completion of the Distribution.
When-issued trading refers to a transaction made conditionally because the
security has been authorized but is not yet issued or available. Even though
when-issued trading will likely develop, none of these trades would settle prior
to the effective date of the Distribution, and if the Distribution does not
occur, all when-issued trading will be null and void. On the first trading day
following the date of the Distribution, when-issued trading in respect of Spinco
Shares will end and regular-way trading will begin. Regular-way trading refers
to trading after a security has been issued and typically involves a transaction
that settles on the third
20
full business day following the date of a transaction. The Spinco Shares will be
listed on the New York Stock Exchange under the symbol " ."
NSI's common stock may also trade on a when-issued basis on the New York
Stock Exchange, reflecting an assumed post-Distribution value for NSI common
stock. When-issued trading in NSI common stock, if available, could last from on
or about the record date through the effective date of the Distribution. If
when-issued trading in NSI common stock is available, NSI stockholders may trade
their existing NSI common stock prior to the effective date of the Distribution
in either the when-issued market or in the regular market for NSI common stock.
If a stockholder trades in the when-issued market, he will have no obligation to
transfer to a purchaser of NSI common stock the Spinco Shares such stockholder
receives in the Distribution. If a stockholder trades in the regular market, the
shares of NSI common stock traded will be accompanied by due bills representing
the Spinco Shares to be distributed in the Distribution. If when-issued trading
in NSI common stock is not available, neither the NSI common stock nor the due
bills may be purchased or sold separately during the period from the record date
through the effective date of the distribution.
If a when-issued market for NSI common stock develops, an additional
listing for NSI common stock will appear on the New York Stock Exchange.
Differences will likely exist between the combined value of when-issued Spinco
Shares plus when-issued NSI common stock and the price of NSI common stock
during this period.
Sales of NSI common stock with the right to receive Spinco Shares should
generally settle in the customary three business day settlement period. Sales of
NSI common stock without the right to receive the Spinco Shares and sales of
Spinco Shares without the right to receive NSI common stock are expected to
settle four business days following the date account statements for the Spinco
Shares are mailed. You should check with your stockbroker, bank or other nominee
for details.
The Spinco Shares distributed to NSI stockholders will be freely
transferable, except for Spinco Shares received by persons who may be deemed to
be "affiliates" of Spinco under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of Spinco after
the Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, Spinco and may include certain
directors, officers and significant stockholders of Spinco. Persons who are
affiliates of Spinco will be permitted to sell their Spinco Shares only pursuant
to an effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as the exemptions
afforded by Section 4(1) of the Securities Act and the provisions of Rule 144
thereunder. It is believed that persons who may be deemed to be affiliates of
Spinco after the Distribution will beneficially own approximately Spinco
Shares, or approximately % of the outstanding Spinco Shares.
There can be no assurance as to whether the Spinco Shares will be actively
traded or as to the prices at which the Spinco Shares will trade. Although NSI
has been a part of the S&P 500 Index, there can be no assurance that Spinco will
become a part of the S&P 500 Index. Some of the NSI stockholders who receive
Spinco Shares may decide that they do not want shares in a company consisting of
lighting equipment and chemicals businesses, and may sell their Spinco Shares
following the Distribution. This may delay the development of an orderly trading
market in the Spinco Shares for a period of time following the Distribution.
Until the Spinco Shares are fully distributed and an orderly
21
market develops, the prices at which the Spinco Shares trade may fluctuate
significantly and may be lower than the price that would be expected for a fully
distributed issue. Prices for Spinco Shares will be determined in the
marketplace and may be influenced by many factors, including the depth and
liquidity of the market for the shares, Spinco's results of operations, what
investors think of Spinco and the lighting equipment and chemicals industries,
the amount of dividends that Spinco pays, changes in economic conditions in the
lighting equipment and chemicals industries and general economic and market
conditions.
Following the Distribution, NSI expects that its common stock will continue
to be listed and traded on the New York Stock Exchange under the symbol "NSI."
As a result of the Distribution, the trading price of NSI common stock
immediately following the Distribution will be substantially lower than the
trading price of NSI common stock immediately prior to the Distribution.
Following the Distribution, NSI's operations will consist of the textile rental
and envelope businesses. These businesses represented approximately 27% of NSI's
consolidated assets and 22% of NSI's consolidated revenues as of and for the
fiscal year ended August 31, 2001. Further, the combined trading prices of NSI
common stock and the Spinco Shares after the Distribution may be less than the
trading prices of NSI common stock immediately prior to the Distribution.
Even though NSI is currently a publicly held company, there can be no
assurance as to whether an active trading market for NSI common stock will be
maintained after the Distribution or as to the prices at which the NSI common
stock will trade. Some NSI stockholders may decide that they do not want shares
in a company consisting of textile rental and envelope businesses, and may sell
their NSI common stock following the Distribution. Additionally, it is expected
that NSI will no longer comprise part of the S&P 500 Index. It is expected that
some stockholders, including certain mutual funds, will sell their NSI common
stock on this basis alone. These and other factors may delay or hinder the
return to an orderly trading market in the NSI common stock following the
Distribution. Whether an active trading market for NSI common stock will be
maintained after the Distribution and the prices for NSI common stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the shares, NSI's results of
operations, what investors think of NSI and the textile rental and envelope
industries, the amount of dividends that NSI pays, changes in economic
conditions in the textile rental and envelope industries and general economic
and market conditions.
In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations could have a material
adverse impact on the trading price of the Spinco Shares and/or NSI common
stock.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion summarizes the material U.S. federal income tax
consequences resulting from the Distribution. This discussion is based upon the
U.S. federal income tax laws and regulations now in effect and as currently
interpreted and does not take into account possible changes in such tax laws or
such interpretations, any of which may be applied retroactively.
The following summary is for general information only and may not be
applicable to stockholders who received their shares of NSI stock pursuant to an
employee benefit plan
22
or who are not citizens or residents of the United States or who are otherwise
subject to special treatment under the Code. Each stockholder's individual
circumstances may affect the tax consequences of the Distribution to such
stockholder. In addition, no information is provided with respect to tax
consequences under any applicable foreign, state or local laws. Consequently,
each NSI stockholder is advised to consult his own tax advisor as to the
specific tax consequences of the Distribution and the effect of possible changes
in tax laws.
Neither NSI nor Spinco has requested an advance ruling from the Internal
Revenue Service as to the tax consequences of the Distribution.
GENERAL
NSI and Spinco intend for the Distribution to be tax-free for U.S. federal
income tax purposes. The Distribution is conditioned upon the receipt by each of
NSI and Spinco of opinions from each of King & Spalding, counsel to NSI, and
Ernst & Young LLP, special tax advisor to NSI, that for U.S. federal income tax
purposes (assuming that NSI common stock is a capital asset in the hands of an
NSI stockholder):
- Neither NSI nor Spinco will recognize any gain or loss on the
distribution of Spinco Shares to NSI stockholders.
- An NSI stockholder will not recognize any income, gain or loss as a
result of the receipt of Spinco Shares in the Distribution.
- An NSI stockholder's holding period for the Spinco Shares received in the
Distribution will include the holding period for which that stockholder's
NSI shares were held.
- An NSI stockholder's aggregate tax basis for his NSI shares and Spinco
Shares immediately after the Distribution will equal the aggregate tax
basis of that stockholder's NSI shares immediately before the
Distribution, with such aggregate basis being allocated between the NSI
shares and Spinco Shares in proportion to their respective fair market
values at the time of the Distribution.
- An NSI stockholder will not recognize any income, gain or loss as a
result of the receipt of the preferred stock purchase rights which are
attached to Spinco Common Stock in the Distribution, and the receipt of
such rights will have no effect on a stockholder's basis or holding
period in the Spinco Shares or the NSI shares.
The opinions of King & Spalding and Ernst & Young LLP are subject to
certain assumptions and the accuracy and completeness of certain factual
representations and statements made by NSI and Spinco and certain other data,
documentation and other materials that each of King & Spalding and Ernst & Young
LLP deemed necessary for purposes of their respective opinions. These opinions
represent the views of King & Spalding and Ernst & Young LLP as to the
interpretation of existing tax law and, accordingly, such opinions are not
binding on the Internal Revenue Service or the courts and no assurance can be
given that the Internal Revenue Service or the courts will agree with their
opinions.
If the Distribution does not qualify as a tax-free distribution under
Section 355 of the Code, (i) the corporate-level tax would be based upon the
excess of the fair market value of the Spinco Shares on the Distribution Date,
over NSI's adjusted tax basis for such
23
shares on such date, and (ii) each NSI stockholder who receives Spinco Shares in
the Distribution would generally be treated as receiving a taxable distribution
in an amount equal to the fair market value of such shares on the Distribution
Date, taxed first as a dividend to the extent of such holder's pro rata share of
NSI's current and accumulated earnings and profits (as increased to reflect any
NSI gain on a taxable distribution as discussed above), and then as a nontaxable
return of capital to the extent of such holder's tax basis in the shares of NSI
stock, with any remaining amount being taxed as capital gain (provided that the
NSI shares were held by the stockholder as a capital asset on the Distribution
Date). Stockholders which are corporations may be subject to additional special
provisions dealing with taxable distributions, such as the dividends received
deduction and the extraordinary dividend rules.
In addition, under Section 355(e) of the Code, even if the Distribution
qualifies as tax-free, the Distribution could nevertheless become taxable to NSI
(but not NSI stockholders) if NSI or Spinco were to undergo a change in control
pursuant to a plan or a series of related transactions which include the
Distribution. Any transaction which occurs within the four-year period beginning
two years prior to the Distribution is presumed to be part of a plan or a series
of related transactions which include the Distribution unless NSI establishes
otherwise. In this context, a change in control generally means a shift in 50%
or more of the ownership of either NSI or Spinco. Examples of such a change in
control could include an acquisition (including acquisitions which are neither
planned nor accepted by the board of the company being acquired), the issuance
of a significant amount of additional shares, and certain redemptions.
INDEMNIFICATION
Spinco would be obligated to indemnify NSI under the tax disaffiliation
agreement for the full amount of any liability of NSI incurred as a result of
(1) a breach of a representation made to King & Spalding or Ernst & Young LLP in
connection with rendering their respective tax opinions, which breach
contributes to an Internal Revenue Service determination that the Distribution
was not tax-free, or (2) Spinco or an affiliate's post-Distribution action or
omission contributes to an Internal Revenue Service determination that the
Distribution was not tax-free. NSI will indemnify Spinco for all taxes and
liabilities incurred solely because NSI or an affiliate's post-Distribution
action or omission contributes to an Internal Revenue Service determination that
the Distribution was not tax-free. If the Internal Revenue Service determines
that the Distribution was not tax-free for any other reason, NSI and Spinco will
indemnify each other against all taxes and liabilities pro rata based on
relative post-closing market capitalization values. If triggered, Spinco's
indemnification obligation would have a material adverse effect on the results
of operations and financial position of Spinco.
Spinco will indemnify NSI against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution Date.
For a description of the agreement pursuant to which NSI and Spinco have
provided for certain tax disaffiliation and other tax-related matters, see
"Relationship Between NSI and Spinco Following the Distribution -- Tax
Disaffiliation Agreement" on page 27.
24
INFORMATION REPORTING
Current Treasury regulations require each NSI stockholder who receives
Spinco Shares pursuant to the Distribution to attach to his federal income tax
return for the year in which the Distribution occurs a detailed statement
setting forth such data as may be appropriate in order to show the applicability
of Section 355 of the Code to the Distribution. NSI will provide appropriate
information to each holder of record of NSI common stock as of the Record Date.
REASONS FOR FURNISHING THIS DOCUMENT
This document is being furnished solely to provide information to NSI
stockholders who will receive Spinco Shares in the Distribution. It is not, and
is not to be construed as, an inducement or encouragement to buy or sell any
securities of NSI or Spinco. Neither NSI nor Spinco will update the information
contained in this document except in the normal course of their respective
public disclosure practices. However, this document will be amended if there is
any material change in the terms of the Distribution.
25
RELATIONSHIP BETWEEN NSI AND SPINCO
FOLLOWING THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between NSI
and Spinco after the Distribution and to provide for an orderly transition to
the status of two independent companies, NSI and Spinco have entered or will
enter into the agreements described in this section. The forms of agreements
summarized in this section are included as exhibits to the Registration
Statement on Form 10 (including any amendments thereto, the "Registration
Statement") that Spinco has filed with the Securities and Exchange Commission
(the "Commission") which relates to this information statement, and the
following summaries are qualified in their entirety by reference to the
agreements as filed. See "Additional Information" on page 86.
DISTRIBUTION AGREEMENT
On the Distribution Date, NSI and Spinco will enter into the distribution
agreement, which will provide for, among other things, the principal corporate
transactions required to effect the Distribution and certain other agreements
relating to the continuing relationship between Spinco and NSI after the
Distribution.
The distribution agreement will provide that on or prior to the
Distribution Date, Spinco will have issued to NSI a number of Spinco Shares
equal to the total number of shares of NSI common stock outstanding on the
Distribution Date. NSI will effect the Distribution by delivering a certificate
representing 100% of the Spinco Shares to the Distribution Agent.
Under the distribution agreement and effective as of the Distribution Date,
Spinco will assume, and will agree to indemnify NSI against, all liabilities,
litigation and claims, including related insurance costs, arising out of
Spinco's businesses (including discontinued or sold lighting equipment and
chemicals businesses), and NSI will retain, and will agree to indemnify Spinco
against, all other liabilities, litigation and claims, including related
insurance costs. The foregoing obligations will not entitle an indemnified party
to recovery to the extent any such liability is covered by proceeds received by
such party from any third party insurance policy.
Under the distribution agreement for a two-year period beginning on the
Distribution Date, except in limited circumstances, Spinco will not solicit or
recruit any NSI employee without NSI's prior written consent, and, likewise, NSI
will not solicit or recruit any Spinco employee without Spinco's prior written
consent.
The distribution agreement will also provide that each of NSI and Spinco
shall be granted access to certain records and information in the possession of
the other, and will require the retention by each of NSI and Spinco for a period
of six years following the Distribution Date of all such information in its
possession.
TRANSITION SERVICES AGREEMENT
On the Distribution Date, Spinco will have entered into a transition
services agreement with NSI. This agreement will provide that NSI and Spinco
will provide each other services in such areas as information management and
technology, employee benefits administration, payroll, financial accounting and
reporting, claims administration and reporting, legal, and other areas where NSI
and Spinco may need transitional assistance
26
and support. The transition services agreement will provide generally that each
of Spinco and NSI will undertake to provide substantially the same level of
service and use substantially the same degree of care as their respective
personnel provided and used in providing such services prior to the execution of
the agreement. The agreement will extend for a one year term, but may be
terminated earlier under certain circumstances, including a default, bankruptcy
event, or change in control. Spinco believes that the terms and conditions of
the transition services agreement are as favorable to Spinco as those available
from unrelated parties for a comparable arrangement.
LEASE AGREEMENT
On the Distribution Date, Spinco and NSI will have entered into a lease
agreement pursuant to which NSI will lease to Spinco a portion of NSI's
corporate headquarters, which will be owned by NSI. The term of the lease is 12
months, and the annual rent is $ .
TAX DISAFFILIATION AGREEMENT
NSI and Spinco will enter into a tax disaffiliation agreement on the
Distribution Date which sets out each party's rights and obligations with
respect to deficiencies and refunds, if any, of federal, state, local or foreign
taxes for periods before and after the Distribution and related matters such as
the filing of tax returns and the conduct of Internal Revenue Service and other
audits. Under the tax disaffiliation agreement, Spinco will indemnify NSI for
all taxes and liabilities incurred as a result of (1) a breach of a
representation made to King & Spalding or Ernst & Young LLP in connection with
rendering their respective tax opinions, which breach contributes to an Internal
Revenue Service determination that the Distribution was not tax-free or (2)
Spinco or an affiliate's post-Distribution action or omission contributes to an
Internal Revenue Service determination that the Distribution was not tax-free.
NSI will indemnify Spinco for all taxes and liabilities incurred solely because
NSI or an affiliate's post-Distribution action or omission contributes to an
Internal Revenue Service determination that the Distribution was not tax-free.
If the Internal Revenue Service determines that the Distribution was not
tax-free for any other reason, NSI and Spinco will indemnify each other against
all taxes and liabilities pro rata based on relative post-closing market
capitalization values.
Spinco will indemnify NSI against any taxes resulting from any internal
realignment undertaken to facilitate the Distribution on or before the
Distribution Date.
EMPLOYEE BENEFITS AGREEMENT
GENERAL. Spinco will enter into an employee benefits agreement with NSI on
the Distribution Date that will provide for the transition of employee plans and
programs sponsored by NSI for employees of the lighting equipment and chemicals
businesses and the employees of the corporate office hired by Spinco. This
agreement will allocate responsibility for certain employee benefits matters and
liabilities after the Distribution Date. Spinco will also generally assume the
liabilities for benefits for retirees and other former employees of the lighting
equipment and chemicals businesses and the corporate office. Under the employee
benefits agreement, Spinco will become liable for providing specified welfare
and retirement benefits to its employees after the Distribution Date, which will
generally be similar to the benefits currently provided to such employees by NSI
and its subsidiaries. In some cases, Spinco will adopt and assume the separate
plans
27
currently maintained by NSI for employees of the lighting equipment and
chemicals businesses and the corporate office, and in others, Spinco will adopt
new plans that will be similar to the plans maintained by NSI. Except as
specifically provided in the employee benefits agreement, nothing in that
agreement will restrict Spinco's or NSI's ability to amend or terminate any of
their respective employee benefit plans.
STOCK OPTIONS AND RESTRICTED STOCK. The employee benefits agreement
provides that, at the time of the Distribution, NSI stock options held by Spinco
employees will generally be converted to, and replaced by, Spinco stock options
in accordance with a conversion ratio. This conversion ratio will be determined
at the time of the Distribution and will generally equal (a) the closing price
of NSI's common stock on the New York Stock Exchange on the Distribution Date
(without giving effect to the Distribution), divided by (b) the closing price of
a Spinco Share on the Distribution Date (trading on a when-issued basis). As
part of the conversion, Spinco will multiply the number of shares purchasable
under each converted stock option by this conversion ratio and divide the
exercise price per share of each option by the ratio. Fractional shares will be
rounded down to the nearest whole number of shares. The other terms of the
converted stock options will generally remain the same as those in effect
immediately prior to the Distribution. With respect to options held by Spinco
employees in some foreign countries, if the above conversion method is not
permitted or desirable under the foreign tax, securities or other laws, a
different approach may be used. Each employee holding outstanding shares of NSI
restricted stock (all of which is unvested) will receive a dividend of one
Spinco Share for each NSI restricted share held. Any Spinco Shares received as a
dividend on NSI restricted stock will be subject to the same restrictions and
terms, including the vesting schedule, as the NSI restricted stock and will be
registered in the name of such employee on the books of Spinco's transfer agent.
Each Spinco employee who has a performance-based restricted stock award of NSI
that has not reached a vesting start date will not receive the dividend, and
will receive a replacement performance-based restricted stock award of Spinco,
adjusted to reflect the Distribution.
LONG-TERM INCENTIVE AWARDS. Under NSI's long-term incentive plan, with
respect to awards for the long-term incentive performance period that began
September 1, 1999, and will end August 31, 2002, the performance period was
terminated for corporate office employees on August 31, 2001 and NSI will be
responsible for determining the extent to which the established performance
criteria have been met at such date. NSI will be obligated to make any payments
under the plan to all qualifying participants, including Spinco employees. For
awards held by Spinco employees other than corporate office employees, such
awards will be assumed by Spinco and will be paid, to the extent earned, at the
end of the performance period (with such adjustments to the performance measures
as Spinco deems appropriate).
DEFERRED COMPENSATION PLANS. The employee benefits agreement provides that
at the time of the Distribution, Spinco will establish deferred compensation
plans for its employees which will be substantially similar to NSI's deferred
compensation plans as in effect at such time. The accounts and benefits of
current and former employees of the lighting equipment and chemicals businesses
and the corporate office (other than corporate office employees employed by NSI
after the Distribution Date) will be transferred to the new plans. In some
cases, assets that were held by NSI to help fund its obligations under the
deferred compensation plans will be transferred to Spinco to help fund the
obligations it is assuming.
28
PENSION PLANS. Effective as of the Distribution Date, Spinco will adopt
and assume all liabilities with respect to NSI's current separate defined
benefit pension plans that cover employees and former employees of the lighting
equipment and chemicals businesses and NSI's plan that covers employees and
former employees of the corporate office (other than corporate office employees
employed by NSI after the Distribution Date) ("Transferred Pension Plans"). As
soon as practical after the Distribution Date, all of the assets associated with
the Transferred Pension Plans will be transferred from the NSI's Defined Benefit
Plans Master Trust to the Spinco Defined Benefit Plans Master Trust in
accordance with the employee benefits agreement.
401(K) PLANS. Effective as of the Distribution Date, Spinco will adopt and
assume all liabilities with respect to NSI's separate 401(k) plans that cover
employees and former employees of the lighting equipment and chemicals
businesses and NSI's plan that covers employees and former employees of the
corporate office (other than corporate office employees employed by NSI after
the Distribution Date) ("Transferred 401(k) Plans"). During a transition period,
an NSI stock account and a Spinco stock account will be maintained under the
401(k) plans remaining with NSI and under the Transferred 401(k) Plans to hold
shares of NSI common stock and Spinco Shares distributed with respect to such
NSI common stock. Employees of one company will not be allowed to add to their
stock accounts of the other company through new contributions or balance
transfers. At the time of the Distribution, all of the assets associated with
the Transferred 401(k) Plans will be transferred from the NSI's Defined
Contribution Plans Master Trust to the Spinco Defined Contribution Plans Master
Trust.
HEALTH AND WELFARE PLANS. Spinco will assume all liabilities and
responsibilities for providing health and welfare benefits to its active
employees. As of the Distribution Date, Spinco intends to establish health and
welfare plans that are substantially similar to NSI's plans as in effect at such
time. During a transition period after the Distribution, Spinco will administer
some of its plans in conjunction with the respective NSI plans and provide
reimbursement to NSI for any costs or expenses it incurs in connection with such
administration. For those benefits that are provided through insurance, NSI will
take steps to have each insurance carrier agree to allow Spinco's employees to
continue to be covered by NSI policies or through separate contracts on
substantially the same basis during the transition period.
EMPLOYEE STOCK PURCHASE PLAN. On or shortly after the Distribution Date,
Spinco expects to adopt an employee stock purchase plan that is substantially
similar to NSI's current employee stock purchase plan. The plan will generally
permit eligible employees of Spinco to periodically purchase Spinco Shares at a
discount and will be structured to satisfy the requirements of Section 423 of
the Internal Revenue Code.
LITIGATION AGAINST NSI
Various legal claims, including product liability claims for personal
injury or wrongful death arising from the installation of asbestos-containing
insulation by a previously divested business of NSI, are pending or may be
instituted against NSI or its various operating subsidiaries. Because Spinco and
its subsidiaries are separate corporations which did not engage in the
activities giving rise to these legal claims, Spinco's management believes the
risk that Spinco's assets could be subject to these claims and liabilities
(except for those claims and liabilities expressly assumed in the distribution
agreement) is remote.
29
FINANCING ARRANGEMENTS FOR SPINCO
Based upon the relative financial conditions, results of operations,
historical transactions and prospects of Spinco and NSI, NSI determined that all
but approximately $5 million of NSI's total outstanding debt would be assumed by
Spinco or refinanced by new borrowings of Spinco as part of the Distribution.
Spinco and its lighting equipment subsidiary have assumed all of NSI's
rights and obligations under the Indenture, dated as of January 26, 1999,
relating to the $200 million principal amount 8.375% Notes due August 1, 2010,
and the $160 million principal amount 6% Notes due February 1, 2009, through the
execution of a supplemental indenture. Upon the execution of the supplemental
indenture, Spinco and its principal operating subsidiaries became the obligors
of the Notes, and NSI, effective upon the completion of the Distribution, will
be relieved of all obligations and covenants with respect to the Notes and the
Indenture.
In May 2001, NSI entered into a $150 million credit facility under which
borrowings are secured by certain accounts receivable of the lighting equipment
and chemicals businesses (the "Receivables Facility"). The Receivables Facility
permits NSI to borrow amounts from time to time against its then outstanding
accounts receivable. As of August 31, 2001, NSI had $105.1 million in
outstanding borrowings under the Receivables Facility. Effective on the
Distribution Date, Spinco will assume all of NSI's borrowings and other
obligations under the Receivables Facility. Spinco expects to maintain the
Receivables Facility and to continue to finance its receivables with borrowings
under the facility.
In October 2001, NSI, on behalf of Spinco, negotiated a $240 million,
364-day committed credit facility with six domestic and international banks that
will become effective and will replace NSI's existing $250 million credit
facility on the Distribution Date. The principal lighting equipment subsidiary
and the principal chemicals subsidiary of Spinco are guarantors of the facility.
The facility includes an option for additional lenders to enter the agreement to
provide up to a total of $300 million of commitments. The facility contains
financial covenants including a leverage ratio of total indebtedness to EBITDA
and an interest coverage ratio. Interest rates under the facility are based on
the LIBOR rate or other rates, at Spinco's option. Spinco will pay an annual fee
on the commitment based on Spinco's credit rating for unsecured long-term public
debt. Spinco may also establish a commercial paper program that will be
supported by this credit facility. Spinco will obtain funds for working capital
and other general corporate purposes through borrowings under the credit
facility, the Receivables Facility, the issuance of commercial paper or a
combination thereof.
30
HISTORICAL AND PRO FORMA COMBINED CAPITALIZATION
The following table sets forth Spinco's combined capitalization as of
August 31, 2001, on a historical and pro forma basis, to give effect to the
Distribution as if it had occurred on August 31, 2001. This table should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the "Combined Financial Statements" and the notes
thereto, and the "Pro Forma Financial Information" and discussion thereof,
included elsewhere in this information statement. The pro forma information may
not necessarily reflect the debt and capitalization of Spinco in the future or
as it would have been had Spinco been a separate, independent company at August
31, 2001, or had the Distribution actually been effected on that date.
Based upon the relative financial conditions, results of operations,
historical transactions and prospects of Spinco and NSI, NSI determined that all
but approximately $5 million of NSI's total outstanding debt would be assumed by
Spinco or refinanced by new borrowings of Spinco as part of the Distribution.
Spinco intends to take the necessary actions to effect the transfer of these
obligations to Spinco under the same terms existing with NSI; however, Spinco
does not have the ability to unilaterally effect the transfer in all cases. In
the event that any of NSI's creditors do not accept this transfer, Spinco would
be required to refinance the related borrowings. In addition, in October 2001
NSI, on behalf of Spinco, negotiated a $240 million, 364-day committed credit
facility with six domestic and international banks that will become effective
and will replace NSI's existing $250 million credit facility on the Distribution
Date. Spinco believes that the terms of the debt which will ultimately be
outstanding at Spinco will not differ materially from the terms of NSI's debt
currently outstanding.
(UNAUDITED) PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ---------
(IN THOUSANDS)
DEBT:
Credit line.............................................. $105,000 $ -- $ 105,000
Short-term secured borrowings............................ 105,100 -- 105,100
6% notes due February 2009............................... 159,690 -- 159,690
8.375% notes due August 2010............................. 199,781 -- 199,781
Other notes.............................................. 39,259 -- 39,259
-------- --------- ---------
608,830 -- 608,830
EQUITY:
NSI investment........................................... 400,296 (400,296) --
Common stock, $.01 par value, 500,000,000 shares
authorized, none issued and outstanding (historical)
and 41,188,504 issued and outstanding (pro forma), and
paid-in capital(1)..................................... -- 400,296 400,296
Preferred stock, $.01 par value, 50,000,000 shares
authorized, none issued and outstanding (historical)
and none issued and outstanding (pro forma)............ -- -- --
Accumulated other comprehensive income................... (16,998) -- (16,998)
-------- --------- ---------
Total equity........................................... 383,298 -- 383,298
-------- --------- ---------
Total capitalization................................... $992,128 $ -- $ 992,128
======== ========= =========
-------------------------
(1) The NSI investment will be classified as common stock and paid-in capital at
the time of the Distribution.
31
DIVIDEND POLICIES
After the Distribution, Spinco intends to pay quarterly dividends on its
common stock at an initial annual rate of $.60 per share. The declaration and
payment of dividends will be at the discretion of Spinco's board of directors
and will be subject to Spinco's financial results and the availability of
surplus funds to pay dividends. Delaware law prohibits Spinco from paying
dividends or otherwise distributing funds to its stockholders, except out of
legally available surplus. The amount of Spinco's future dividends will depend
on Spinco's ongoing financial condition, capital requirements, results of
operations, future business prospects and other factors the Spinco board of
directors may deem relevant. Spinco also may be restricted in the payment of
dividends by the terms of its credit facilities. There can be no assurance that
Spinco will continue to pay dividends on its common stock at the expected
initial annual rate of $.60 per share. See "Risk Factors -- The Payment of
Dividends by Spinco's Board of Directors May Limit Growth" on page 15.
After the Distribution, NSI intends to pay quarterly dividends on its
common stock at an initial annual rate of $.04 per share. The declaration and
payment of dividends are at the discretion of NSI's board of directors and are
subject to NSI's financial results and the availability of surplus funds to pay
dividends. Delaware law prohibits NSI from paying dividends or otherwise
distributing funds to its stockholders, except out of legally available surplus.
The amount of NSI's future dividends will depend on NSI's ongoing financial
condition, capital requirements, results of operations, future business
prospects and other factors the NSI board of directors may deem relevant. NSI
also may be restricted in the payment of dividends by the terms of its credit
facilities. There can be no assurance that NSI will continue to pay dividends on
its common stock at the expected initial annual rate of $.04 per share.
Although no formal action has been taken with respect to dividend policy of
NSI or Spinco after the Distribution, it is anticipated that the aggregate cash
dividends payable by Spinco and NSI after the Distribution, taken together, in
respect of (1) shares of NSI common stock held on the distribution date and (2)
shares of Spinco common stock received in the Distribution will be substantially
less than the annual rate of the cash dividend previously paid on NSI common
stock of $1.32 per share. In anticipation of the expected dividend policies of
the companies, NSI declared a quarterly dividend of $.16 per share payable on
October 31, 2001, which on an annual basis equals the $.64 per share combined
dividend expected to be paid by NSI and Spinco after the Distribution.
32
PRO FORMA FINANCIAL INFORMATION
On June 28, 2001, the board of directors of NSI authorized management to
evaluate and pursue the spin-off of its lighting equipment and chemicals
businesses, subject to certain conditions, into a separate publicly traded
company with its own management and board of directors. The Distribution is
expected to occur during the first fiscal quarter of 2002 and will be
accomplished by transferring the assets and liabilities of NSI's lighting
equipment and chemicals businesses to Spinco and then distributing all of the
shares of common stock of Spinco to NSI's stockholders. NSI's stockholders will
receive one share of Spinco common stock for each share of NSI common stock held
as of the Record Date. After the Distribution, Spinco and NSI will be two
separate public companies. Spinco was incorporated on June 27, 2001, as an
indirect wholly owned subsidiary of NSI and had no material assets or activities
until the contribution of the lighting and chemical businesses described in this
information statement.
Operating expenses in the historical income statements of Spinco reflect
direct expenses of the Spinco businesses together with allocations of certain
NSI corporate expenses that have been charged to Spinco based on usage or other
methodologies appropriate for such expenses. In the opinion of Spinco
management, these allocations have been made on a reasonable basis. As there are
no known material incremental costs to be incurred by Spinco as a direct result
of the Distribution, pro forma income statement information has not been
presented herein. In addition, the only pro forma adjustment that would be
applicable to the historical balance sheet of Spinco as of August 31, 2001 would
be the recording of common stock and additional paid-in-capital to reflect the
capitalization of NSI's investment in Spinco. Accordingly, no pro forma
financial statements for Spinco have been included in this information
statement.
33
SELECTED FINANCIAL DATA
The following table sets forth certain selected combined financial data of
Spinco, which have been derived from the combined financial statements of Spinco
for each of the five years in the period ended August 31, 2001. The historical
information may not be indicative of Spinco's future performance as an
independent company. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the "Combined Financial Statements" and the notes
thereto, and the "Pro Forma Financial Information" and the discussion thereof,
included elsewhere in this information statement. Operating expenses in the
historical income statements reflect direct expenses of the Spinco businesses
together with allocations of certain NSI corporate expenses that have been
charged to Spinco based on usage or other methodologies appropriate for such
expenses. In the opinion of Spinco management, these allocations have been made
on a reasonable basis. Actual per share data has not been presented since the
businesses that comprise Spinco were wholly owned subsidiaries of NSI during the
periods presented.
YEAR ENDED AUGUST 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Net sales...................................... $1,982,700 $2,023,644 $1,701,568 $1,555,559 $1,351,913
Net income..................................... 40,503 83,691 89,116 81,811 64,019
Total assets at period end..................... 1,330,575 1,422,880 1,337,038 700,112 638,636
Long-term debt (including current portion) at
year end..................................... 374,064 380,518 435,567 73,190 21,313
Pro forma basic earnings per share............. 0.99 n/a n/a n/a n/a
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Selected
Financial Data," the "Combined Financial Statements" including the notes
thereto, the "Pro Forma Financial Information" and discussion thereof and the
other financial information included elsewhere in this information statement.
This discussion contains forward-looking statements. Please see "Cautionary
Statement Regarding Forward-Looking Statements" on page 7 for a discussion of
the uncertainties, risks and assumptions associated with these statements.
SEPARATION FROM NATIONAL SERVICE INDUSTRIES, INC. (NSI)
Spinco was incorporated under the laws of the State of Delaware on June 27,
2001, as an indirect wholly owned subsidiary of NSI. Spinco had no material
assets or activities until the contribution of the lighting equipment and
chemicals businesses described in this information statement. After the
Distribution, Spinco will be an independent public company, with NSI having no
continuing ownership interest in Spinco.
Spinco's combined financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and reflect
the historical financial position, results of operations, and cash flows of the
businesses to be transferred to Spinco from NSI as part of the Distribution. The
financial information included in this information statement, however, is not
necessarily indicative of what Spinco's results of operations or financial
position would have been had it operated as an independent company during the
periods presented, nor is it necessarily indicative of its future performance as
an independent company.
All material intercompany transactions between entities included in
Spinco's combined financial statements have been eliminated. Spinco has been
allocated certain NSI corporate assets, liabilities and expenses based on an
estimate of the proportion of such amounts allocable to Spinco, utilizing such
factors as total revenues, employee headcount and other relevant factors. Spinco
believes that these allocations have been made on a reasonable basis. Spinco
believes that all costs allocated to Spinco are a reasonable representation of
the costs that Spinco would have incurred if Spinco had performed these
functions as a stand-alone company.
In conjunction with the separation of the lighting equipment and chemicals
businesses from NSI, Spinco will enter into various agreements with NSI that
address the allocation of assets and liabilities, and that define Spinco's
relationship with NSI after the Distribution, including a distribution
agreement, a tax disaffiliation agreement, an employee benefits agreement, and a
transition services agreement.
RESULTS OF OPERATIONS
FISCAL YEAR 2001 COMPARED WITH FISCAL YEAR 2000 AND FISCAL YEAR 2000 COMPARED
WITH FISCAL YEAR 1999
Revenues in 2001 were $1.98 billion, or $40.9 million lower than in 2000.
The decrease was due to lower revenue in the lighting equipment segment.
Spinco's businesses had revenues of $2.02 billion for the fiscal year ended
August 31, 2000. The revenue
35
increase in 2000 of $322.1 million over 1999 resulted from 1999 acquisitions,
primarily Holophane, as well as core growth in both business segments.
Net income in 2001 decreased $43.2 million due to lower operating profit in
both the lighting equipment and chemicals segments, as well as increased
corporate and interest expenses. Net income in fiscal 2000 decreased $5.4
million to $83.7 million, primarily as increased profit in the lighting
equipment and chemicals businesses was offset by increased interest expense
related to higher debt levels for financing capital expenditures, prior-year
acquisitions, and increased inventory and receivables.
Lighting equipment segment sales decreased $47.1 million, or 3.1%, to $1.5
billion in 2001. This decrease is the result of the continuing decline in
general economic conditions and a slowing in construction spending. Operating
profit in 2001 decreased $28.3 million, or 19.6%, due to the lower sales, higher
excess and obsolete inventory costs, and higher employee medical and casualty
insurance costs. Additionally in the fourth quarter of fiscal 2001, the lighting
equipment segment incurred severance charges of $1.6 million for the termination
of 116 manufacturing and salaried employees, all of whom were terminated prior
to the end of the fiscal year. As of August 31, 2001, $0.2 million of the
accrual had been paid to employees. Operating profit also included a loss on
disposal of certain fixed assets of $1.4 million. Lighting equipment segment
sales grew $299.8 million, or 24.7%, to $1.5 billion in 2000. The growth in
sales primarily related to the acquisitions of Holophane Corporation
("Holophane") and Peerless Corporation ("Peerless") late in fiscal 1999. These
acquisitions contributed $248.1 million of revenue that was not included in the
prior year results. Excluding revenue related to these acquisitions, lighting
equipment sales increased approximately $51.7 million during fiscal 2000. This
increase in revenue primarily related to continued strength in the
non-residential construction market. Operating profit increased primarily as a
result of the acquisitions of Holophane and Peerless, growth in the segment's
core business, and containment of fixed costs, offset somewhat by a $1.0 million
pretax charge during the first quarter of fiscal 2000 for closing a
manufacturing facility in California.
Chemical segment revenues for fiscal 2001 increased $6.2 million to $514.1
million. The increase was due to a $6.8 million increase in sales volume of the
retail channel and a $5.9 million increase in the sales volume of the North
American industrial and institutional channel, offset by a $6.5 million decline
in the revenue from operations in France and Australia, both of which were sold
late in fiscal 2001. The decrease in international revenue was also attributable
to unfavorable foreign currency fluctuations. Operating profit decreased $26.2
million to $22.5 million. The higher operating profit due to increased sales was
more than offset by a loss on the sale of the segment's French and Australian
operations, costs associated with the early termination of a purchase contract,
and higher medical costs. The segment was also negatively impacted by costs
incurred to integrate the chemical operations, increased energy costs, and
up-front costs associated with developing new sales representatives.
Additionally, in the fourth quarter of fiscal 2001, the segment recorded $0.7
million of severance costs related to the termination of 18 manufacturing and
salaried employees, all of whom were terminated by the end of the fiscal year.
None of the accrual had been paid to employees as of August 31, 2001.
As part of an initiative to refocus the overseas operations of the
chemicals segment, NSI sold its Australian subsidiary, NSI International Pty,
Ltd., resulting in a pretax loss of $5.6 million. In addition, NSI sold its
French operations, as well as certain trademarks and formulas for a pretax loss
of $9.0 million. The combined pretax loss of $14.6 million is included in "Loss
on sale of businesses" in the "Combined Statements of Income."
36
Chemicals segment revenues for fiscal 2000 increased $22.3 million, or
4.6%, to $508.0 million. Increased revenues related primarily to growth in the
retail channel and higher revenue in the institutional and industrial channels.
Retail channel revenue increased $7.8 million, or 10.8%, as a result of
additional home center openings and increased volume through existing stores.
The institutional and industrial channel revenue increase of $14.5 million, or
3.5%, was driven by higher United States core sales resulting from 40 additional
sales representatives in addition to higher volume from the specialty segments.
Operating profit increased $3.5 million, or 7.7%, to $48.7 million. The increase
in operating profit resulted from the increased revenue, offset somewhat by a
$2.0 million pretax charge for the disposal of obsolete retail chemical
inventories in the fourth quarter of fiscal 2000, which is included in "Cost of
products sold" in the accompanying "Combined Statements of Income," and lower
operating profit from the segment's international operations. The chemicals
segment's international operations were negatively impacted by severance costs
and weakening currencies. During fiscal 2000, NSI reorganized its three chemical
companies. Under the new structure, Spinco expects to benefit from shared
resources but will continue to maintain separate sales forces and product brand
identities.
Allocated corporate expenses increased $6.3 million in fiscal 2001
primarily due to an increase in employee medical and casualty insurance costs
and higher costs related to strategic and operational initiatives. Interest
expense in fiscal 2001 was $5.4 million higher than the prior year due to an
increase in the average debt levels and higher interest rates. Allocated
corporate expenses in fiscal 2000 increased $2.6 million over 1999, primarily
due to higher costs related to strategic initiatives, partially offset by lower
compensation expense. Net interest expense increased $30.6 million in fiscal
2000 as a result of higher debt levels required for financing acquisitions as
well as higher capital expenditures and working capital.
Combined income before taxes decreased $66.1 million to $69.2 million for
fiscal 2001 due to the lower operating profits at the lighting equipment and
chemicals segments, as well as higher corporate and interest expenses. Combined
income before taxes in 2000 decreased $7.3 million, or 5.1%, to $135.3 million
primarily due to increased interest expense partially offset by increased
operating profits in both the lighting equipment and chemicals segments. The
provision for income taxes was 41.4%, 38.1%, and 37.5% in fiscal years 2001,
2000, and 1999, respectively. The increase in the 2001 effective tax rate was
primarily the result of nondeductible losses associated with the chemicals
segment's divestiture of its French operations. The increase in the 2000
effective tax rate primarily related to goodwill recorded in the Holophane
acquisition, which is not deductible for tax purposes.
ACQUISITIONS
Management periodically implements strategic transactions that it believes
afford it the opportunity to redeploy resources to create value and position the
business for future growth. There were no acquisitions in fiscal 2001.
Acquisition spending in 2000 totaled $16.2 million and related to the
cash-out of remaining Holophane shares. NSI purchased Holophane, a manufacturer
of premium quality, highly engineered lighting fixtures and systems, in July
1999 for approximately $470.8 million. Of the total purchase price, $454.6
million was paid during fiscal 1999 and $16.2 million was paid during fiscal
2000.
37
In 1999, acquisition spending totaled approximately $514.4 million and was
primarily related to the Holophane acquisition. Other acquisitions in the
lighting equipment segment included the September 1998 purchase of certain
assets of Hydrel, a manufacturer of architectural-grade light fixtures for
landscape, in-grade, and underwater applications; the April 1999 purchase of
certain assets of Peerless, a manufacturer of high performance indirect/direct
suspended lighting products; and the July 1999 purchase of C&G Carandini SA, a
manufacturer of exterior lighting fixtures.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 2001 COMPARED WITH FISCAL YEAR 2000 AND FISCAL YEAR 2000 COMPARED
WITH FISCAL YEAR 1999
Operating Activities
Operations provided cash of $183.7 million in 2001, compared with $64.0
million in 2000 and $148.1 million in 1999. The increase in 2001 was the result
of improvements in accounts receivable, inventory, and accounts payable
partially offset by the decrease in net income. The decrease in 2000 related to
the increase in receivables and inventory, a decrease in current liabilities,
and an increase in income tax payments.
Investing Activities
Investing activities used cash of $42.9 million in 2001, $87.0 million in
2000, and $554.4 million in 1999. The decrease in 2001 was due to the absence of
acquisition spending and lower capital expenditures. The change in fiscal 2000
primarily related to a decrease in acquisition spending, offset somewhat by an
increase in capital expenditures.
Acquisition spending during fiscal 2000 was $16.2 million and related to
the cash-out of remaining Holophane shares. Acquisition spending in 1999 of
$514.4 million related to the lighting equipment segment's purchase of
Holophane, certain assets of Hydrel, certain assets of Peerless, and C&G
Carandini SA.
Capital expenditures were primarily related to the lighting equipment
segment and were $47.6 million in 2001 compared with $62.9 million in 2000 and
$38.6 million in 1999. In 2001, the lighting equipment segment investments were
made primarily in manufacturing cost improvements, new product tooling, and the
completion of a new corporate headquarters. In 2000, the lighting equipment
segment invested in land, buildings, and equipment for a new plant and in an
office facility. The lighting equipment segment's capital expenditures in 1999
related to the purchase of land and buildings for a new plant, manufacturing
improvements and upgrades for capacity expansion, and implementation of new
technology. In 2002, capital expenditures are expected to approximate $56.1
million as the company continues to invest capital in technology and facilities.
Contractual commitments for capital and acquisition spending for fiscal year
2002 approximate $21.7 million.
Financing Activities
Financing activities used cash of $132.1 million in 2001 and provided cash
of $22.6 million and $390.2 million in 2000 and 1999, respectively. The change
from 2000 to 2001 is due to the decrease in cash provided by net borrowings of
$120.6 million and an increase in the cash used for the net activity with NSI of
$34.1 million. The decrease in cash provided by financing activities in 2000
primarily related to the decrease in net borrowings
38
from $463.1 million to $91.9 million. Fiscal 2000 borrowings were used for
general operating purposes, including working capital requirements and capital
expenditures. Fiscal 1999 borrowings were used primarily to finance
acquisitions.
In May 2001, NSI entered into a three-year agreement to borrow, on an
ongoing basis, up to $150.0 million secured by undivided interests in a defined
pool of trade accounts receivable of the lighting equipment and chemicals
segments. At August 31, 2001, net trade accounts receivable pledged as security
for borrowings under the Receivables Facility totaled $227.8 million.
Outstanding borrowings at August 31, 2001 were $105.1 million. Interest rates
under the Receivables Facility vary with commercial paper rates plus an
applicable margin and the interest rate was 3.90% at August 31, 2002. Effective
on the Distribution Date, Spinco will assume all of NSI's borrowings and other
obligations under the Receivables Facility.
In July 1999, NSI entered into a $250.0 million, 364-day committed credit
facility, which was renewed in June 2001 and expires in June 2002. The credit
facility permits certain subsidiaries of NSI to borrow under such facility, and
NSI guarantees these borrowings. Interest rates under the credit facilities are
based on the LIBOR rate or other rates, at NSI's option. NSI pays an annual fee
on the commitments based on NSI's credit rating for unsecured long-term public
debt. Outstanding borrowings under the facility at August 31, 2001 were $105.0
million at an interest rate of 4.1 percent. No amounts were outstanding under
the facility at August 31, 2000. This facility will be discontinued at the time
of the Distribution.
In October 2001, NSI, on behalf of Spinco, negotiated a $240.0 million,
364-day committed credit facility with six domestic and international banks that
will become effective and will replace NSI's $250.0 million credit facility at
the Distribution Date. The facility includes an option for additional lenders to
enter the agreement to provide up to a total of $300.0 million of commitments.
The facility contains financial covenants including a leverage ratio of total
indebtedness to EBITDA and an interest coverage ratio. Interest rates under the
facility are based on the LIBOR rate or other rates, at Spinco's option. Spinco
will pay an annual fee on the commitment based on Spinco's credit rating for
unsecured long-term public debt. The principal lighting equipment subsidiary and
the principal chemicals subsidiary of Spinco are guarantors of the facility.
NSI's commercial paper program was discontinued in July 2001. Amounts
outstanding under the commercial paper program were replaced by borrowings under
the committed credit facility. The $235.6 million outstanding under NSI's
commercial paper program at August 31, 2000 had a weighted-average interest rate
of 6.8%.
At August 31, 2001, NSI had uncommitted lines of credit totaling $111.2
million for general operating purposes, of which $16.8 million is designated as
multi-currency. Outstanding borrowings under the uncommitted credit facilities
at August 31, 2001 were $24.7 million, at a weighted-average interest rate of
4.95%. At August 31, 2001, $74.4 million in letters of credit was outstanding,
primarily under the domestic uncommitted line of credit.
In January 1999, NSI issued $160.0 million in ten-year publicly traded
notes bearing a coupon rate of 6.0%. In August 2000, NSI issued $200.0 million
in ten-year publicly traded notes bearing a coupon rate of 8.375%. The fair
values of the $160.0 million and $200.0 million notes, based on quoted market
prices, were approximately $152.0 million and $219.4 million, respectively, at
August 31, 2001. Pursuant to a supplemental indenture
39
executed in contemplation of the Distribution, Spinco and its principal
operating subsidiaries have become the obligors of the notes, and NSI, effective
upon the completion of the Distribution, will be relieved of all obligations
with respect to the notes. Excluding the $160.0 million and $200.0 million
notes, long-term debt recorded in the accompanying balance sheets approximates
fair value based on the borrowing rates currently available to NSI for bank
loans with similar terms and average maturities.
As part of the distribution agreement between NSI and Spinco, all but
approximately $5 million of NSI's total outstanding debt will be assumed by
Spinco or refinanced with new borrowings by Spinco. Accordingly, for purposes of
the historical presentation of Spinco's financial position as of August 31, 2001
and August 31, 2000 included in this information statement, all but $5 million
of NSI's total outstanding debt has been presented as obligations of Spinco. For
purposes of the historical presentation of Spinco's results of operations,
Spinco has reflected all of NSI's interest expense related to the debt allocated
to it. Management intends to take the necessary actions to effect the transfer
of these obligations to Spinco under the same terms existing with NSI; however,
management does not have the ability to unilaterally effect the transfer in all
cases. In the event that any of NSI's creditors do not accept this transfer,
Spinco will be required to refinance the related borrowings. Management believes
that the terms of the debt which will ultimately be outstanding at Spinco will
not differ materially from the terms of NSI's debt currently outstanding.
Management believes current cash balances, anticipated cash flows from
operations, and available funds from the committed credit facility, the
Receivables Facility, and the uncommitted lines of credit are sufficient to meet
Spinco's planned level of capital spending and general operating cash
requirements for at least the next twelve months.
ACCOUNTING STANDARDS ADOPTED THIS FISCAL YEAR
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." Specifically, Issue 00-10 addresses how the seller of goods should
classify amounts billed to a customer for shipping and handling. The EITF
concluded that all amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as revenue. NSI adopted EITF 00-10 in fiscal 2001. NSI has
historically netted certain shipping and handling revenues charged to customers
in costs and expenses. During 2001, the EITF also reached a final consensus on
EITF Issue 00-22, "Accounting for 'Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to
Be Delivered in the Future." Among other items, Issue 00-22 addresses how the
seller of goods should classify offers to a customer for a rebate or refund of a
determinable cash amount if the customer completes a specified cumulative level
of revenue transactions. The EITF concluded that offers for cash rebates or
refunds should be classified as a reduction in revenue. NSI adopted EITF 00-22
during fiscal 2001. NSI historically included rebates in costs and expenses. The
adoption of these standards resulted in an immaterial offsetting
reclassification between sales and operating expenses for all periods presented.
40
ACCOUNTING STANDARDS YET TO BE ADOPTED
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 142 requires companies to
cease amortizing goodwill that existed at June 30, 2001 and establishes a new
method of testing goodwill for impairment on an annual basis (or on an interim
basis if an event occurs that might reduce the fair value of a reporting unit
below its carrying value). Any goodwill resulting from acquisitions completed
after June 30, 2001 will not be amortized. SFAS No. 142 also requires that an
identifiable intangible asset which is determined to have an indefinite useful
economic life not be amortized, but separately tested for impairment using a
fair value-based approach.
Spinco will adopt SFAS 142 in the first quarter of fiscal 2002. As a
result, the amortization of existing goodwill and those intangibles with
indefinite useful lives will cease on August 31, 2001, which will result in an
estimated decrease in amortization expense of approximately $11.7 million during
fiscal 2002. However, Spinco will be required to test its goodwill and
intangibles with indefinite useful lives for impairment under the new standard
beginning in the first quarter of fiscal 2002, which could have an adverse
effect on Spinco's future results of operations if these assets are deemed
impaired.
ENVIRONMENTAL MATTERS AND LITIGATION
See "Note 6: Commitments and Contingencies" in the "Notes to the Combined
Financial Statements" beginning on page F-17 for a discussion of environmental
and litigation matters.
OUTLOOK
Management continues to implement its growth plans. With both segments
anticipating higher material, labor, and fuel costs, the economic slowdown may
intensify pricing pressures and limit Spinco's ability to pass along these
additional costs in the form of price increases. Management's current forecasts
reflect a continuing weak economy in the near future, including a decline in
non-residential construction, with a slight recovery expected to start in the
late spring of next year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL. Spinco is exposed to market risks that may impact the "Combined
Balance Sheets," "Combined Statements of Income," and "Combined Statements of
Cash Flows" due to changing interest rates and foreign exchange rates. Spinco
does not currently participate in any significant hedging activities, nor does
it currently utilize any significant derivative financial instruments. The
following discussion provides additional information regarding Spinco's market
risks.
INTEREST RATES. Interest rate fluctuations expose Spinco's variable-rate
debt to changes in interest expense and cash flows. Spinco's variable-rate debt,
primarily short-term secured borrowings and amounts outstanding under NSI's
credit line, amounted to $245.9 million at August 31, 2001. Based on outstanding
borrowings at year-end, a 10% adverse change in market interest rates at August
31, 2001 would result in additional annual after-tax interest expense of
approximately $0.6 million. Although a fluctuation in
41
interest rates would not affect interest expense or cash flows related to the
$360 million publicly traded notes, Spinco's primary fixed-rate debt, a 10%
increase in market interest rates at August 31, 2001 would decrease the fair
value of these notes to approximately $356.1 million.
FOREIGN EXCHANGE RATES. The majority of Spinco's revenue, expense, and
capital purchases are transacted in U.S. dollars. Spinco does not believe a 10%
fluctuation in average foreign currency rates would have a material effect on
its combined financial position or results of operations. Spinco does not engage
in speculative transactions, nor does Spinco hold or issue financial instruments
for trading purposes. To the extent possible, Spinco mitigates its exposure to
unfavorable foreign currency translation adjustments through the use of
foreign-currency denominated debt agreements.
42
SPINCO'S BUSINESSES
GENERAL
Spinco will own and operate the lighting equipment and chemicals businesses
of NSI. These businesses represented approximately 73% of NSI's consolidated
assets and 78% of NSI's consolidated revenues as of and for the fiscal year
ended August 31, 2001. Following the Distribution, NSI's operations will consist
of the textile rental and envelope businesses.
LIGHTING EQUIPMENT
Spinco's lighting equipment business includes Lithonia Lighting and
Holophane. Management of Spinco believes that the lighting equipment business is
the world's largest manufacturer of lighting fixtures for both new construction
and renovation. Products include a full range of indoor and outdoor lighting for
commercial and institutional, industrial and residential applications. Lighting
products are manufactured in the United States, Canada, Mexico, and Europe and
are marketed under numerous brand names, including Lithonia, Holophane(R),
Home-Vue(R), Light Concepts(R), Gotham(R), Hydrel(R), Peerless(R), Antique
Street Lamps, and Reloc(R).
Principal customers include wholesale electrical distributors, retail home
centers, and lighting showrooms located in North America and select
international markets. In North America, the lighting equipment business's
products are sold through independent sales agents and factory sales
representatives who cover specific geographic areas and market segments.
Products are delivered through a network of distribution centers, regional
warehouses, and commercial warehouses using both common carriers and a company-
owned truck fleet. For international customers, the lighting equipment business
employs a sales force that adopts distribution methods to meet individual
customer or country requirements. In fiscal 2001, North American sales accounted
for more than 97% of the lighting equipment business's gross sales.
CHEMICALS
Spinco's chemicals business, The Zep Group, includes Zep Manufacturing
Company, Enforcer Products, and Selig Industries. The Zep Group is a leading
provider of specialty chemical products in the institutional and industrial
(I&I) and retail markets. Products include cleaners, sanitizers, disinfectants,
polishes, floor finishes, degreasers, deodorizers, pesticides, insecticides, and
herbicides. Zep Manufacturing manufactures products in four North American
plants and two European plants. Enforcer operates a single manufacturing
facility in Georgia.
The Zep Group provides products to customers primarily in North America and
Western Europe. In fiscal 2001, North American sales accounted for approximately
91% of the business's gross sales. Zep Manufacturing and Selig Industries serve
a range of institutional and industrial customers, from small sole
proprietorships to Fortune 1000 corporations. Individual markets in the
non-retail channel include automotive, vehicle wash, food, aviation, industrial
manufacturing, and contract cleaners and are serviced through a direct
commissioned sales force. Enforcer provides Enforcer-branded products and
Zep-branded products to retail channels such as home centers, hardware stores,
mass merchandisers, and drug stores.
43
INDUSTRY OVERVIEW
LIGHTING EQUIPMENT
The size of the world lighting fixture market in 2000 was estimated at
$19.0 billion. North America represents the largest market with a size of $8.5
billion, followed by Europe at $6.5 billion, and Asia/Pacific at $3.3 billion.
The U.S. market is relatively fragmented with the top four manufacturers
(including Spinco's lighting equipment business) representing approximately 50%
of the total lighting market.
Primary demand influences are non-residential and residential construction,
both new and renovation. Major trends include the on-going development of new
and more efficient lamp sources and optical designs, increased adoption of new
lighting ordinances, and continued emphasis on energy efficiency.
There has been a significant increase in the size and relative presence of
the retail home center segment. In addition, imports of foreign-sourced lighting
products continue to grow, including both the foreign production of U.S.
manufacturers, as well as low-cost fixtures from Asian manufacturers.
European-based electrical distributors have increased their presence in the U.S.
with the acquisition of U.S.-based local and regional distributor chains, and
smaller U.S. distributors continue to seek leverage through alignment with
buying groups.
CHEMICALS
The $7.6 billion U.S. industrial & institutional (I&I) janitorial cleaning
and sanitation market is highly fragmented with five major players (including
The Zep Group) possessing 50% of the total market and the remainder divided
between hundreds of regional players. In general, the market grows at a rate
approximating GDP. To some extent, consumption of janitorial cleaning and
sanitation products is discretionary, but in a health-driven, sophisticated
market such as the U.S., health and safety regulations and customer expectations
buffer demand downturns. Increasing legislation in the areas of food and
occupational health that require increased application ranges and frequency of
use is fueling demand increases. Demand decreases are being pushed by more
efficient product use and an increased awareness of the potential negative
impacts of occupational chemical exposure and residuals. In addition to the I&I
market, there is a U.S. retail chemical market of $5.4 billion, including a $3.4
billion market for cleaners and a $2.0 billion market for pest control.
Two major trends are reshaping the industry. First, health and safety
regulations are shrinking the pool of available chemicals, while at the same
time increasing the total use rates. This has pushed development of improved
physical product forms and application methods. Second, consolidation and
communication are forcing increased corporate buying and disintermediation of
the supply chain, threatening the reselling distributors and requiring increased
base manufacture logistics skills.
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PRODUCTS
LIGHTING EQUIPMENT
The lighting equipment business produces a wide variety of lighting
fixtures, used in the following applications:
- COMMERCIAL & INSTITUTIONAL -- Applications are represented by stores,
hotels, offices, schools, hospitals, as well as other government and
public buildings. Products that serve these applications include
recessed, surface and suspended fluorescent lighting products, recessed
downlighting and track-lighting, as well as "high-abuse" lighting
products. The outdoor areas associated with these application segments
are addressed by the lighting equipment business's outdoor lighting
products, such as area and floodlighting, decorative site lighting, as
well as landscape lighting.
- INDUSTRIAL -- Applications include primarily warehouses and manufacturing
facilities. The lighting equipment business serves these applications
with a variety of glass and acrylic high intensity discharge (HID) and
fluorescent lighting products.
- INFRASTRUCTURE -- Applications include highways, tunnels, airports,
railway yards and ports. Products that serve these applications include
high-mast lighting, off-set roadway and sign lighting.
- RESIDENTIAL -- Applications are addressed with a combination of
decorative fluorescent and downlighting products, as well as utilitarian
fluorescent products.
- OTHER APPLICATIONS & PRODUCTS -- Other applications and products include
emergency lighting products which are used in all non-residential
buildings, and lighting control and flexible wiring systems.
Recessed fluorescent lighting products accounted for approximately 15.5%,
15.2% and 18.1% of total consolidated revenue during fiscal years 2001, 2000 and
1999, respectively. No other product category accounted for more than 10% of
total consolidated revenue for these periods.
CHEMICALS
The Zep Group produces and supplies various specialty chemicals products,
such as:
- CLEANERS -- One of the largest ranges, with liquid, emulsion, aerosol,
acids, solvent and powdered products. New products (45 in the past 24
months) have been based on "micro emulsion technology" and are targeted
to maintain a competitive advantage in this fast changing area.
- SANITIZERS/DISINFECTANTS -- This area has seen increased regulatory
pressure on the choice of available chemistry. Application technology and
the use of non-residual products such as chlorine dioxide have
supplemented the broad existing range of oxidizing and non-oxidizing
range.
- POLISHES -- Historically a strong area for The Zep Group, decreasing
customer interest has limited additional products in this range.
- FLOOR FINISHES -- This continues to be a strong product segment. Products
covering stripping, burnishing, cleaning, polishing, and broadloom and
spot carpet care
45
provides customers with extensive choice. Little new technology has been
seen in this area recently.
- DEGREASERS -- Health and safety regulations have had a major impact in
this area. The Zep Group has introduced over 25 new products in this area
recently. These new introductions have coped with the requirement for
solvent elimination and/or reductions in the percentage of volatile
solvents.
- DEODORIZERS -- This market segment has seen significant growth, primarily
due to consumer demand. Driven more by application method, packaging and
physical form, this trend-based segment has required numerous new
introductions to strengthen the range, including metered dispensing
system and refillable delivery packages.
- PESTICIDES/INSECTICIDES/HERBICIDES -- There are few new molecules
available for The Zep Group to bring to market. As with solvents, this
segment has seen a decreasing pool of available chemistries and new
developments have targeted delivery systems and application methods.
STRATEGY
LIGHTING EQUIPMENT
Spinco's lighting equipment business intends to focus on the North American
market. Spinco believes that it must execute on a combination of rapid product
development and customer/channel focus in order to respond quickly and
effectively to specific opportunities. The lighting equipment business will
continue improving logistics, especially through Internet-based solutions, in
order to deliver timely and accurate information to customers. Management
believes the key challenge for the lighting equipment business is being able to
respond quickly to changing economic and market trends.
CHEMICALS
Spinco management believes the key objective for the chemicals business
will be the integration of all chemicals R&D, manufacturing, logistics and
support functions under The Zep Group. Management views the central challenge
ahead of the chemicals business as leveraging the strength and efficiencies
gained through the consolidation of support functions to grow revenues faster
than the overall market, and return the chemicals business to historical profit
margins.
CUSTOMERS
No single customer accounted for 10% or more of the lighting equipment and
chemicals businesses total revenues in fiscal year 2001. However, 12.6% of the
2001 fiscal year revenues of the chemicals business was related to a single
customer, the loss of which would adversely affect the chemicals business.
LIGHTING EQUIPMENT
The lighting equipment business's primary customer groups include
electrical distributors, retail home centers, national accounts, lighting
showrooms, and electric utilities. In addition, there are a variety of other
buying influences which, for any given
46
project, could represent a significant influence in the product specification
process. These generally include engineers, architects and lighting designers.
For the year ended August 31, 2001, the main customer base for NSI's lighting
equipment segment was electrical distributors, representing approximately 75% of
revenue. For the year ended August 31, 2001, retail home centers and national
accounts represented a combined 17% of revenue.
CHEMICALS
The Zep Group features both institutional and industrial (I&I) and retail
customers. I&I customers include automotive, vehicle wash, aviation,
restaurateurs, industrial manufacturing and contract cleaners. Customers range
from small sole proprietorships to Fortune 1000 corporations. The retail market
includes customers such as Lowe's, Ace Hardware, TruServ Hardware and HWI,
together marketing a wide variety of the Enforcer line of products.
Additionally, The Home Depot is the exclusive marketing arm for Enforcer's
industrial strength line of cleaner products sold under the Zep Commercial brand
name. For the year ended August 31, 2001, the main customer base for NSI's
chemicals segment was the I&I market, representing approximately 83% of revenue.
MANUFACTURING
Spinco will operate 31 manufacturing facilities and sites in seven
countries, including 19 facilities in the United States, five facilities in
Canada, three facilities in Mexico, and four facilities in Europe.
LIGHTING EQUIPMENT
In the lighting equipment business, key processes are evaluated on an
ongoing basis to promote an appropriate balance of vertical integration versus
outsourced capabilities to produce the most profitable outcomes for the
business. Investment is focused at offsetting rising labor costs through
increased labor efficiency. Local supplier factories and warehouses also provide
an opportunity to minimize these locations' inventory carrying costs through
frequent just-in-time deliveries.
Contract manufacturing for residential, commercial and industrial product
occurs via established supplier/partner relationships. Also, OEM purchases of
finished goods are outsourced from both pole manufacturers for the outdoor
product line, as well as from Asian and European sources for a variety of
residential and commercial lighting equipment.
U.S. operations represent approximately 56% of production; Mexico accounts
for approximately 28% of production; Canada accounts for approximately 6% of
production; and Europe accounts for approximately 2% of production. The
remaining 8% of production is outsourced using contract manufacturing and OEM
finished good suppliers.
CHEMICALS
The Zep Group manufactures products that comprise approximately 75% of the
chemicals segment's sales volume, with facilities located in the United States,
Canada, Holland and Italy. The remaining 25% of the chemicals segment's sales
volume is derived
47
from finished goods that supplement the manufactured product line. Approximately
4% of the inhouse manufactured goods are produced outside of the U.S.
Core manufacturing and distribution processes are being integrated to
provide the lowest possible costs. The Zep Group is focused on efforts to
maximize return on employed capital through Six Sigma to lead productivity
improvement programs. In addition, efforts are underway to optimize inventories
through a Stock Keeping Unit (SKU) reduction program.
The Zep Group controls a proprietary distribution network designed to
ensure continuation of customer service levels at the top end of the industrial
and retail markets. Given the freight systems and technology available in
today's marketplace, The Zep Group will continue to explore options for
reductions in distribution network assets while improving historically higher
service levels.
DISTRIBUTION
LIGHTING EQUIPMENT
Products are delivered through a network of strategically located
distribution centers, regional warehouses, and commercial warehouses using both
common carriers and a company-owned truck fleet. For international customers,
the lighting equipment business employs an inside sales force that adapts
distribution methods to meet individual customer or country requirements.
CHEMICALS
The Zep Group employs a direct sales force. The Zep and Selig brands
utilize numerous strategically located distribution centers, while the Enforcer
products are shipped via common carrier from the Cartersville, Georgia, plant
and warehouse.
RESEARCH AND DEVELOPMENT
In recent years, research and development for the lighting equipment and
chemicals segments of NSI has been focused on the development of new products
and improved delivery systems. NSI spent $17.0 million, $18.6 million and $8.1
million on research and development activities for the lighting equipment and
chemicals segments for the fiscal years ended August 31, 2001, 2000 and 1999,
respectively.
SALES AND MARKETING
LIGHTING EQUIPMENT
SALES. The lighting equipment business will sell its lighting products
through independent sales agents and factory sales representatives. Following
the Distribution, Spinco will employ approximately 500 people in sales and
marketing of lighting products, with 331 in the United States, 33 in Canada, 60
in Mexico, and 76 in other countries, including Europe and Asia.
MARKETING. The lighting equipment business will market its products
through a broad spectrum of marketing and promotion vehicles, including direct
customer contact, on-site training at a training facility, print advertising in
industry publications, product brochures and other literature, as well as
electronic media. Direct customer contact will be
48
performed by market development managers, whose primary role is the promotion of
select products to the many buying influences involved in the specification/bid
process common in the industry. On-site training is conducted at a dedicated
product training facility at the lighting equipment business's headquarters in
Conyers, Georgia.
CHEMICALS
SALES. Spinco will sell its chemicals products primarily through a direct
sales force. Following the Distribution, Spinco will employ approximately 2,100
people in sales and marketing of chemicals products, with 1,650 in the United
States, 190 in Canada, and 260 in Europe. In the United States, sales
representatives will be distributed in proportion to the relative size of the
economic centers.
MARKETING. Marketing efforts are focused on solving customer needs through
attention to solution-based programs that combine industry knowledge with
chemical products and delivery systems.
COMPETITION
LIGHTING EQUIPMENT
The lighting equipment industry in which Spinco will operate is highly
competitive, with the largest suppliers serving many of the same markets.
Competition is based on brand name recognition, price, product quality and
customer responsiveness. Main competitors in the lighting industry include
Cooper Industries, Genlyte Group and U.S. Industries. Spinco management believes
that, together with Spinco's lighting equipment business, the four largest
lighting manufacturers (including Spinco's lighting equipment business) possess
approximately a 50% share of the total lighting market.
CHEMICALS
The chemicals industry in which Spinco will operate is highly competitive.
Overall, competition is very fragmented, with numerous local and regional
operators and a few companies with national presences. Most competitors offer
products in some but not all of the markets served by Spinco. Competition is
based primarily on brand name recognition, price, product quality, and customer
responsiveness. Competitors in the chemicals industry include Ecolab,
Unilever/Diversey, NCH and SC Johnson. Management believes that the five major
players (including The Zep Group) have 50% of the total market and the remainder
is divided between hundreds of regional players.
ENVIRONMENTAL REGULATION
Spinco's operations will be subject to federal, state, local and foreign
laws and regulations relating to the generation, storage, handling,
transportation, and disposal of hazardous substances and solid and hazardous
wastes and to the remediation of contaminated sites. Permits and environmental
controls are required for certain of Spinco's operations to limit air and water
pollution, and these permits are subject to modification, renewal, and
revocation by issuing authorities. Spinco will incur capital and operating costs
relating to environmental compliance on an ongoing basis. Environmental laws and
regulations have generally become stricter in recent years, and the cost of
responding to future changes may be substantial. While Spinco believes that it
is currently in substantial compliance with all material environmental laws and
regulations, there can be no assurance
49
that Spinco will not incur significant costs to remediate violations of such
laws and regulations, particularly in connection with acquisitions of existing
operating facilities, or to comply with changes in, or stricter or different
interpretations of, existing laws and regulations. Such costs could have a
material adverse effect on Spinco's results of operations.
Spinco will assume certain environmental liabilities in the Distribution
relating to ongoing legal proceedings in connection with state and federal
Superfund sites. While Spinco does not believe these claims will result in
material liability, there can be no assurance that Spinco will not be required
pay a substantial amount of money relating to these claims. Such payment could
have a material adverse effect on Spinco's results of operations. See "Note 6:
Commitments and Contingencies" in the "Notes to the Combined Financial
Statements" beginning on page F-17 for a discussion of environmental matters.
RAW MATERIALS
Spinco's businesses require certain raw materials for their products,
including aluminum, plastics, electrical components, solvents, surfactants,
certain grades of steel and glass. Spinco will purchase most of these raw
materials on the open market and rely on third parties for the sourcing of
finished goods. As such, the cost of products sold may be affected by changes in
the market price of the above-mentioned raw materials or sourcing services and
finished goods. Spinco does not expect to engage in commodity hedging
transactions for raw materials. Significant increases in the prices of Spinco's
products due to increases in the cost of raw materials or sourcing could have a
negative effect on demand for products and on profitability as well as a
material adverse effect on Spinco's results of operations.
Each business utilizes multiple suppliers, with no single supplier
comprising more than 10% of purchased raw materials of either business. Each
business constantly monitors and investigates alternative suppliers and
alternative materials. Additionally, each business has participated in internet
auctions as a new method of competitive bidding.
BACKLOG ORDERS
Sales order backlogs of the lighting equipment business believed to be firm
as of August 31, 2001 and August 31, 2000 were $141.5 million and $155.2
million, respectively. Sales order backlogs for the chemicals business are not
material.
PATENTS, LICENSES AND TRADEMARKS
Spinco will own and have obtained licenses to various domestic and foreign
patents, patent applications and trademarks related to its products, processes
and businesses. These intellectual property rights, particularly the trademarks
relating to the brands of Spinco products, are important factors for Spinco's
business. To protect these proprietary rights, Spinco relies on copyright, trade
secret and trademark laws. Despite these protections, unauthorized parties may
attempt to infringe on Spinco's intellectual property. Management of Spinco is
not aware of any such material unauthorized use or of any claims that Spinco
does not have the right to use any intellectual property material to Spinco's
businesses. While patents and patent applications in the aggregate are important
to Spinco's competitive position, no single patent or patent application is
material to Spinco.
50
SEASONALITY AND CYCLICALITY
Spinco's businesses are seasonal in nature, with revenues being affected by
the impact of weather and seasonal demand on construction and installation
programs, in addition to the annual budget cycles of major customers. Because of
these seasonal factors, Spinco expects to experience its highest sales in the
last two quarters of its fiscal year ended August 31.
A significant portion of the lighting equipment business's revenues are
made to customers in the new construction and renovation industries. These
industries are cyclical in nature and subject to changes in general economic
conditions. In addition, sales of the chemicals business are dependent on the
retail, wholesale and industrial markets for its product line. Economic
downturns and the potential declines in construction and demand for specialty
chemicals may have a material adverse effect on Spinco's net sales and operating
income.
INTERNATIONAL OPERATIONS
Spinco will manufacture and assemble products at numerous facilities, some
of which are located outside the United States. Approximately 39% and 4% of the
lighting equipment and chemicals segments' products, respectively, are
manufactured outside the United States. Spinco will also obtain components and
finished goods from suppliers located outside the United States. Approximately
28% of Spinco's lighting equipment products are produced in facilities operated
in Mexico. Mexico has enacted legislation to promote the use of such
manufacturing operations, known as "Maquiladoras," by foreign companies. These
operations are authorized to operate as Maquiladoras by the Ministry of Commerce
and Industrial Development of Mexico. Maquiladora status allows Spinco to import
certain items from the United States into Mexico duty-free, provided that such
items, after processing, are re-exported from Mexico within six months.
Maquiladora status, which must be renewed every two years, is subject to various
restrictions and requirements, including compliance with the terms of the
Maquiladora program and other local regulations. Although manufacturing
operations in Mexico continue to be less expensive than comparable operations in
the United States, in recent years many companies have established Maquiladora
operations to take advantage of lower labor costs. Increasing demand for labor,
particularly skilled labor and professionals, from new and existing Maquiladora
operations has in the past and could in the future result in increased labor
costs. Spinco may be required to make additional investments in automating
equipment to partially offset increased labor costs.
For the fiscal year ended August 31, 2001, international sales represented
approximately 10% and 16% of the total sales of the lighting equipment and
chemicals businesses, respectively.
EMPLOYEES
Following the Distribution, Spinco will employ approximately 11,800
employees, of whom approximately 8,050 will be employed in the United States,
2,400 in Mexico, 720 in Canada, and 630 in other international locations,
including Europe and Asia/Pacific. Union recognition and collective bargaining
arrangements will be in place in six countries, covering a total of
approximately 5,500 persons (including approximately 2,950 in the United
States). Management believes that it generally has a good relationship with both
its unionized and non-unionized employees.
51
PROPERTIES
The general corporate offices of Spinco are located in Atlanta, Georgia.
Because of the diverse nature of operations and the large number of individual
locations, it is neither practical nor meaningful to describe each of the
operating facilities owned or leased by Spinco. The following listing summarizes
the significant facility categories by business:
DIVISION OWNED LEASED NATURE OF FACILITIES
-------- ----- ------ --------------------
Lighting Equipment................ 18 6 Manufacturing Facilities
1 9 Warehouses
1 1 Distribution Centers
9 11 Offices
Chemicals......................... 4 3 Manufacturing Plants
16 40 Warehouses
-- 10 Offices
-- 1 Training Center
The following table provides additional information related to Spinco's
manufacturing facilities:
UNITED
STATES CANADA MEXICO EUROPE TOTAL
------ ------ ------ ------ -----
Lighting Equipment
Owned.................................... 12 1 3 2 18
Leased................................... 4 2 -- -- 6
Chemicals
Owned.................................... 3 -- -- 1 4
Leased................................... -- 2 -- 1 3
-- -- -- ---- --
Total............................ 19 5 3 4 31
== == == ==== ==
None of Spinco's individual properties is considered to have a value that is
significant in relation to Spinco's assets as a whole. Spinco believes that its
properties are well maintained and are in good operating condition. Spinco's
properties are suitable and adequate for its present needs. Spinco believes that
it has additional capacity available at most of Spinco's production facilities
and that it could significantly increase production without substantial capital
expenditures.
LEGAL PROCEEDINGS
From time to time, as a normal incident of the nature and kind of
businesses in which Spinco is engaged, various claims or charges may be asserted
and litigation commenced against Spinco. In the opinion of Spinco's management,
no current claim or litigation would result in a material adverse effect on
Spinco's results of operations or financial condition. See "Note 6: Commitments
and Contingencies" in the "Notes to the Combined Financial Statements" beginning
on page F-17 for a discussion of litigation matters.
52
SPINCO'S MANAGEMENT
BOARD OF DIRECTORS
As provided in Spinco's certificate of incorporation, Spinco's board of
directors will be divided into three classes. Directors in each class initially
will serve until the annual meeting of stockholders held in the year in which
the term for such class expires and will serve thereafter for three-year terms.
Spinco initially intends to have a board of directors that will consist of
directors. Listed below is certain information concerning individuals who are
expected to serve as directors of Spinco following the Distribution. Each person
named below is currently a director of NSI and is expected to resign from NSI's
board as of the Distribution Date. Following the Distribution, there will be no
overlap between the respective boards of directors of NSI and Spinco.
POSITION WITH NSI AND PRINCIPAL
TERM BUSINESS AFFILIATIONS DURING PAST
NAME AGE EXPIRES POSITION WITH SPINCO FIVE YEARS
---- --- ------- -------------------- ---------------------------------
James S. Balloun..... 63 Chairman, President and Mr. Balloun has served as
Chief Executive Officer Chairman of the Board of
Directors and Chief Executive
Officer of NSI since February
1996 and President of NSI since
October 1996. He was previously
affiliated with the management
consulting firm McKinsey &
Company, Inc., where he served as
Director from June 1976 until
January 1996. Mr. Balloun is a
director of Georgia-Pacific
Corporation, Radiant Systems,
Inc., and Wachovia Corporation.
Leslie M. Baker, 59 Director Mr. Baker has served as a
Jr................. director of NSI since January
2000. He has served since April
1998 as Chairman of the Board of
Wachovia Corporation and Wachovia
Bank. Mr. Baker served as
President and Chief Executive
Officer of Wachovia Corporation
from 1994 until September 2001;
President and Chief Executive
Officer of Wachovia Bank since
June 1997 and from 1990 to 1993;
and President and Chief Operating
Officer of Wachovia Corporation
from February 1993 to December
1993.
53
POSITION WITH NSI AND PRINCIPAL
TERM BUSINESS AFFILIATIONS DURING PAST
NAME AGE EXPIRES POSITION WITH SPINCO FIVE YEARS
---- --- ------- -------------------- ---------------------------------
Peter C. Browning.... 60 Director Mr. Browing has served as a
director of NSI since January
2001. He has served as Non-
Executive Chairman of Nucor
Corporation since September 2000.
He previously served as President
and Chief Executive Officer (from
1998 to 2000) and President and
Chief Operating Officer (from
1995 to 1998) of Sonoco Products
Company. He is a director of
Wachovia Corporation, Lowe's
Companies, Inc., Phoenix
Companies, Inc., and Phoenix Home
Life Mutual Insurance Company.
John L. Clendenin.... 67 Director Mr. Clendenin has served as a
director of NSI since November
1996. He is Chairman Emeritus of
BellSouth Corporation, which he
served as Chairman from December
1996 to December 1997 and as
Chairman, President and Chief
Executive Officer from 1983 until
December 1996. Mr. Clendenin is a
director of Coca-Cola Enterprises
Inc., Equifax Inc., The Home
Depot, Inc., The Kroger Company,
Powerwave Technologies, and
Springs Industries, Inc. He
previously served as a director
of NSI from 1984 until 1995.
Ray M. Robinson...... 53 Director Mr. Robinson has served as a
director of NSI since January
2000. He has served as President
of the Southern Region of AT&T
Corporation since 1996. Mr.
Robinson served as Vice
President -- Corporate Relations
of AT&T from 1994 to 1996. He
joined AT&T in 1968 and has held
numerous senior management
positions in marketing, corporate
relations, engineering and
regulatory affairs. Mr. Robinson
is a director of Avnet, Inc.,
Citizens Bancshares Corporation,
and Mirant Corporation.
54
POSITION WITH NSI AND PRINCIPAL
TERM BUSINESS AFFILIATIONS DURING PAST
NAME AGE EXPIRES POSITION WITH SPINCO FIVE YEARS
---- --- ------- -------------------- ---------------------------------
Kathy Brittain 52 Director Ms. White has served as a
White.............. director of NSI since October
1999. She is Executive Vice
President, e-business and Chief
Information Officer of Cardinal
Health, Inc., a company that
provides healthcare products and
services, since April 1999. Ms.
White was Senior Vice President
and Chief Information Officer of
Allegiance Healthcare, Inc. from
1996 to April 1999, Corporate
Vice President and Chief
Information Officer of Baxter
International, Inc. from 1995 to
1996, and Vice President,
Information Systems of
AlliedSignal Corporation from
1993 to 1995. Ms. White is a
director of Certegy, Inc.
Neil Williams........ 65 Director Mr. Williams has served as a
director of NSI since January
2000. He has served as General
Counsel and Global Partner of
AMVESCAP PLC since October 1999.
AMVESCAP PLC offers investment
management and mutual fund
services primarily under the
names INVESCO and AIM. He was a
partner with the law firm Alston
& Bird LLP from 1965 to October
1999 and served as managing
partner from 1984 to 1996. Mr.
Williams began his career with
Alston & Bird in 1961. He is a
director of National Data
Corporation and Printpack, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
Spinco's board of directors will establish several standing committees to
assist in the discharge of its responsibilities. These committees will include
an audit committee, a governance committee, a compensation committee and an
executive committee. Spinco's board of directors will also establish such other
committees as it deems appropriate, in accordance with applicable Delaware law
and Spinco's bylaws.
DIRECTORS' COMPENSATION
After the Distribution, Spinco expects initially to compensate its
directors as described below. Spinco will review its compensation arrangements
for directors from time to time and may alter these arrangements after the
Distribution.
55
Directors who are salaried employees of Spinco will receive no additional
compensation for services as a director or as a member of a committee of
Spinco's board. Following the Distribution Date, all non-employee directors are
expected to receive an annual retainer of $40,000. The chair of each standing
committee of the board is expected to receive an additional annual fee of
$5,000. Spinco will also reimburse each non-employee director for out-of-pocket
expenses incurred in connection with attendance at board and committee meetings.
Spinco intends to adopt a deferred stock unit plan for the benefit of the
non-employee directors. Under this plan, each director will be paid one-half of
his annual fee and may elect to receive additional portions of his annual fee
and chairman fee in deferred stock units. Non-employee directors will receive a
one-time grant of deferred stock units upon their election and an annual grant
of deferred stock units. The value and return on the deferred stock units will
be equivalent to the value and return on Spinco Shares. The director's account
will generally be payable on or after retirement from the board.
The deferred stock units currently held by non-employee directors of NSI
who will become directors of Spinco (and certain former directors of NSI) will
be transferred and assumed by Spinco. As of the Distribution Date, the value of
such units will be converted into deferred stock units representing Spinco
Shares based upon the relative values of NSI's common stock and the Spinco
Shares.
Spinco expects its board will adopt, with the approval of NSI in its
capacity as sole stockholder, the Spinco 2001 Non-Employee Director Stock Option
Plan (the "Director Plan"). The full text of the Director Plan is filed as an
exhibit to the Registration Statement that Spinco has filed with the Commission
which relates to this information statement. Spinco will establish the plan to
encourage ownership of Spinco Shares by directors, which gives directors an
increased incentive to devote their efforts to Spinco's success on behalf of
stockholders.
Grants of awards under the Director Plan will be automatic. On the day
following the Distribution Date, each non-employee director will be granted an
option to purchase Spinco Shares. Each person who later becomes a
non-employee director will also be granted an option to purchase
Spinco Shares on the date that the person becomes a non-employee director. In
addition, as of the day following the first annual meeting of Spinco's
stockholders after the Distribution, and on the day following each subsequent
annual meeting of Spinco's stockholders, each non-employee director serving on
that date will be granted an option to purchase Spinco Shares.
The exercise price of each option granted under the Director Plan will be the
fair market value of the shares of common stock on the date of grant. Each
option granted under the Director Plan will become fully exercisable one year
after the date of grant and will remain exercisable for ten years from the grant
date.
Spinco Shares subject to the Director Plan may be authorized but unissued
shares or shares that were once issued and subsequently reacquired by Spinco.
The total number of Spinco Shares for which options may be granted under the
director plan will be , subject to adjustment. The Director Plan
will terminate automatically on the second day following Spinco's 2010 annual
meeting of stockholders, but the board of directors may terminate the Director
Plan at any time before that date.
With respect to outstanding options held by non-employee directors of NSI
who will become directors of Spinco (and certain former directors of NSI), at
the time of the
56
Distribution the NSI options will be converted to, and replaced by, Spinco stock
options in accordance with the option conversion ratio provided for in the
employee benefits agreement. See "Relationship Between NSI and Spinco Following
the Distribution -- Employee Benefits Agreement" beginning on page 27.
EXECUTIVE OFFICERS
Listed below is certain information concerning individuals who are expected
to serve as executive officers of Spinco following the Distribution. Spinco
expects to name its chief financial officer prior to the NSI board's approval of
the Distribution. Each person named below is currently an executive officer of
NSI and is expected to resign his position with NSI as of the Distribution Date.
POSITION WITH NSI AND
PRINCIPAL
BUSINESS AFFILIATIONS DURING
NAME AGE POSITION WITH SPINCO PAST FIVE YEARS
---- --- -------------------- ----------------------------
James S. Balloun....... 63 Chairman, President and Mr. Balloun has served as
Chief Executive Officer Chairman of the Board of
Directors and Chief
Executive Officer of NSI
since February 1996 and
President of NSI since
October 1996. He was
previously affiliated with
the management consulting
firm McKinsey & Company,
Inc., where he served as a
Director from June 1976
until January 1996. Mr.
Balloun is a director of
Georgia-Pacific Corporation,
Radiant Systems, Inc., and
Wachovia Corporation.
Kenneth W. Honeycutt... 50 President of Lithonia Mr. Honeycutt has served as
Lighting President of Lithonia
Lighting under NSI since
June 2000. He has been with
Lithonia since 1972 in a
variety of positions
covering a broad range of
processes and products.
57
POSITION WITH NSI AND
PRINCIPAL
BUSINESS AFFILIATIONS DURING
NAME AGE POSITION WITH SPINCO PAST FIVE YEARS
---- --- -------------------- ----------------------------
John K. Morgan......... 47 President of Holophane Mr. Morgan has served as
President of Holophane since
June 2000 and served as
Executive Vice President of
the Lithonia Lighting Group
from 1999 to 2001. He joined
Lithonia Lighting in 1977
and held a variety of senior
management positions prior
to 1999.
James H. Heagle........ 57 President of The Zep Mr. Heagle has served as
Group President of The Zep Group
(formerly known as NSI
Chemicals Group) since May
2000. He previously served
as President and Chief
Operating Officer of Calgon
Corporation from 1996 until
2000. Prior to Calgon, Mr.
Heagle spent 24 years in
various management positions
with Mobil Chemical.
Kenyon W. Murphy....... 44 Senior Vice President Mr. Murphy has served as
and General Counsel Senior Vice President and
General Counsel of NSI since
April 2000. Prior to that
role, he served NSI as Vice
President and Associate
Counsel from 1996 until
April 2000 and as Secretary
from 1992 until 1998. Mr.
Murphy joined NSI in 1985.
58
POSITION WITH NSI AND
PRINCIPAL
BUSINESS AFFILIATIONS DURING
NAME AGE POSITION WITH SPINCO PAST FIVE YEARS
---- --- -------------------- ----------------------------
Joseph G. Parham, 52 Senior Vice President, Mr. Parham has served as
Jr................... Human Resources Senior Vice President of
Human Resources of NSI since
May 2000. He had been
President and Chief
Operating Officer of
Polaroid Eyeware since 1999
and Senior Vice President of
Worldwide Human Resources of
Polaroid Corporation since
1994.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no family relationship between any of Spinco's executive officers
or directors, and there are no arrangements or understandings between any of
Spinco's executive officers or directors and any other person pursuant to which
any of them was elected an officer or director, other than arrangements or
understandings with directors or officers of Spinco acting solely in their
capacities as such. Generally, following the Distribution, Spinco's executive
officers will be elected annually and will serve at the pleasure of Spinco's
board of directors.
HISTORICAL COMPENSATION OF SPINCO EXECUTIVE OFFICERS
Spinco has never paid any compensation or granted any form of stock
options, stock units or stock appreciation rights to its executive officers.
During the fiscal years ended August 31, 2001, August 31, 2000, and August 31,
1999, Spinco's executive officers were compensated in accordance with NSI's
plans and policies. The following table sets forth certain information with
respect to the annual and long-term compensation for services to NSI for
Spinco's chief executive officer and the other four most highly compensated
executives of NSI who are expected to become executive officers of Spinco
following the Distribution (the "Named Executive Officers"). All references in
the following tables to stock and stock options relate to awards of stock and
stock options granted by NSI. Such amounts do not reflect the compensation such
persons will receive following the Distribution. The employee benefits agreement
provides that at the time of the Distribution NSI stock options held by Spinco
employees will generally be converted to, and replaced by, Spinco stock options
in accordance with a conversion ratio. Each employee holding NSI restricted
stock (all of which is unvested) will receive a dividend of one Spinco Share
(subject to the same restrictions as the NSI restricted stock) for each NSI
restricted share held. See "Relationship Between NSI and Spinco Following the
Distribution -- Employee Benefits Agreement" beginning on page 27.
59
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
----------------------
AWARDS PAYOUT
---------- ---------
ANNUAL COMPENSATION UNDERLYING
-------------------------------------------- OPTIONS/ LTIP ALL OTHER
FISCAL OTHER ANNUAL SARS PAYOUT COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) (#)(2) ($)(3) ($)(4)
--------------------------- ------ ---------- --------- ------------------- ---------- --------- ------------
James S. Balloun............. 2001 850,000 0 4,800 414,401 0 0
Chairman, President and 2000 850,000 0 4,800 312,489 0 0
Chief Executive Officer 1999 850,000 985,000 4,800 100,000 1,045,657 0
Kenneth W. Honeycutt......... 2001 317,750 0 0 64,600 163,170 7,710
President of Lithonia
Lighting 2000 283,750 123,425 0 6,000 560,000 21,008
1999 229,167 108,113 0 4,500 490,000 20,160
John K. Morgan............... 2001 317,750 0 0 64,600 148,666 12,825
President of Holophane 2000 283,750 123,425 0 6,000 518,000 22,931
1999 222,500 98,503 0 4,000 415,000 22,882
James H. Heagle(5)........... 2001 325,000 0 214,782 62,500 63,915 0
President of Zep 2000 100,000 59,940 1,600 10,000 0 0
Chemical Group 1999 0 0 0 0 0 0
Joseph G. Parham, Jr.(6)..... 2001 307,500 0 74,542 62,500 0 4,464
Senior Vice President, 2000 87,500 39,945 100,218 10,000 0 0
Human Resources 1999 0 0 0 0 0 0
-------------------------
(1) Each amount shown includes an automobile allowance of $400 per month. The
amounts shown also include reimbursement of relocation expenses of $209,982
in 2001 for Mr. Heagle and of $69,742 in 2001 and $98,818 in 2000 for Mr.
Parham.
(2) The amounts shown for Mr. Balloun include long-term options for 119,401
shares for fiscal year 2001 and 162,489 shares for fiscal year 2000 granted
in exchange for a portion of the respective 2000 and 1999 LTIP award
payouts, as discussed in note 3 below. The options were valued for purposes
of the exchange at $8.19 and $7.99, respectively, the approximate
Black-Scholes value at the time of the exchange election as determined by an
independent compensation consultant. The amounts shown for fiscal year 2001
also include performance-based restricted share awards, as follows: 45,000
shares for Mr. Balloun; 9,200 shares each for Mr. Honeycutt and Mr. Morgan;
and 8,900 shares each for Mr. Heagle and Mr. Parham. No stock appreciation
rights were granted during this period.
(3) Half of each amount was paid in shares of NSI stock (at a value of $23.60 in
2001, $19.9375 in 2000, and $32.00 in 1999, except for Mr. Balloun at
$32.8125 in 1999 in connection with the exchange for options) and the
remaining half was paid in cash. The amounts shown for Mr. Balloun for
fiscal years 2000 and 1999 exclude $978,297 and $1,298,287, respectively,
for that portion of the payout exchanged for long-term options in each year.
(4) The amounts shown for 2001 include matching 401(k) and profit-sharing
contributions in the amounts of $7,710 for Mr. Honeycutt and $7,351 for Mr.
Morgan and a matching 401(k) contribution of $4,464 for Mr. Parham.
(5) Mr. Heagle commenced employment with NSI effective as of May 1, 2000.
(6) Mr. Parham commenced employment with NSI effective as of May 15, 2000.
60
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning NSI stock options that
were granted to the Named Executive Officers of Spinco during the fiscal year
ended August 31, 2001, as disclosed in the Summary Compensation Table above. NSI
did not award any stock appreciation rights or reprice any stock options during
the year.
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS GRANT
UNDERLYING GRANTED TO EXERCISE OR DATE PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED FISCAL YEAR ($/SHARE) DATE(1) ($)(2)
---- ------------ ------------ ----------- ---------- ------------
James S. Balloun(3).... 369,401 19.9% 19.3125 10/23/10 2,498,998
Kenneth W. Honeycutt... 55,400 3.0% 19.3125 10/23/10 374,781
John K. Morgan......... 55,400 3.0% 19.3125 10/23/10 374,781
James H. Heagle........ 53,600 2.9% 19.3125 10/23/10 362,604
Joseph G. Parham,
Jr................... 53,600 2.9% 19.3125 10/23/10 362,604
---------------
(1) Options have a ten-year term, subject to earlier termination upon certain
events related to termination of employment, and generally vest in four
equal annual installments beginning on the first anniversary of the grant
date. Options granted in exchange for LTIP payments, as described in note 2
to the Summary Compensation Table above, are immediately exercisable. The
Executive Resource and Compensation Committee has discretion, subject to
limitations in the Long-Term Incentive Program and the Long-Term Achievement
Incentive Plan, to modify the terms of outstanding options, but not to
reprice these options or others granted on or after January 5, 2000.
(2) The amounts shown were calculated using a Black-Scholes option pricing
model. The estimated values assume a risk-free rate of return of 6.1%, a
dividend yield of 3.5%, an option term of ten years, and stock price
volatility having a standard deviation of .3215. The option values were not
discounted to reflect the vesting period of the options or to reflect any
exercise or lapse of the options prior to the end of the ten-year option
period. The actual value, if any, that an executive may realize will depend
upon the excess of the stock price over the exercise price on the date the
option is exercised, so that there is no assurance the value realized by an
executive will be at or near the value estimated by the Black-Scholes model.
(3) The amount shown for Mr. Balloun includes options granted in fiscal year
2001 in exchange for a portion of the 2000 LTIP payout, as described in note
2 to the Summary Compensation Table above, at an exercise price of $19.4375
per share and expiring October 3, 2010.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table contains information concerning the exercise of NSI
stock options during the 2001 fiscal year by the Named Executive Officers and
the aggregate value of
61
unexercised stock options held by the Named Executive Officers as of August 31,
2001. No stock appreciation rights are held by any Named Executive Officer.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
James S. Balloun..... 0 0 754,390 387,500 497,007 1,071,875
Kenneth W.
Honeycutt.......... 0 0 27,359 61,025 3,788 237,528
John K. Morgan....... 920 5,474 16,000 60,900 0 237,528
James H. Heagle...... 0 0 2,500 61,100 3,531 240,404
Joseph G. Parham,
Jr................. 0 0 2,500 61,100 1,188 233,372
---------------
(1) The amounts shown represent the aggregate excess of market value of shares
under option as of August 31, 2001 (using the $23.60 closing price on August
31, 2001) over the exercise price of the options.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
The following table contains information concerning performance-based
restricted share awards during the 2001 fiscal year to the Named Executive
Officers.
PERFORMANCE OR OTHER
PERIOD UNTIL
NUMBER OF SHARES, UNITS MATURATION OR
NAME OR OTHER RIGHTS (#)(1)(2) PAYOUT
---- ------------------------- --------------------
James S. Balloun........................... 45,000 5 years
Kenneth W. Honeycutt....................... 9,200 5 years
John K. Morgan............................. 9,200 5 years
James H. Heagle............................ 8,900 5 years
Joseph G. Parham, Jr....................... 8,900 5 years
---------------
(1) The amounts shown represent the total individual award of performance-based
restricted shares on October 24, 2000. Performance-based restricted share
awards are granted in 20 percent increments of the total shares awarded when
NSI's stock price equals or exceeds certain stock price targets ranging from
$22.14 to $38.50 for thirty consecutive calendar days. Shares vest ratably
in four equal annual installments beginning one year from the date a stock
price target is achieved and the shares are granted (the vesting start
date). During the vesting period, participants have voting rights and
receive dividends, but the shares may not be sold, assigned, transferred,
pledged, or otherwise encumbered. If the stock price targets are not
achieved on or before the fifth anniversary of the award date, the
corresponding shares are forfeited. Additionally, granted but unvested
shares are forfeited upon termination of employment, unless certain
retirement criteria are met.
(2) The amounts shown include shares granted on January 19, 2001, when the share
price target of $22.14 was achieved, as follows: 9,000 shares for Mr.
Balloun; 1,840 shares each for Mr. Honeycutt and Mr. Morgan; and 1,780
shares each for Mr. Heagle and Mr. Parham.
62
SPINCO LONG-TERM INCENTIVE PLAN
GENERAL
Spinco expects its board will adopt, with the approval of NSI in its
capacity as Spinco's sole stockholder, the Spinco Long-Term Incentive Plan
(referred to in this section as the "Plan"). The full text of the Plan is filed
as an exhibit to the Registration Statement that Spinco has filed with the
Commission which relates to this information statement. Spinco will establish
the Plan to provide long-term incentive compensation to officers and other key
management personnel who make substantial contributions to Spinco's success, and
to assist in attracting and retaining the highest quality individuals in key
executive positions.
Spinco's compensation committee (referred to in this section as the
"Committee") will administer the Plan and has the authority to amend, suspend,
or terminate the Plan as long as such action does not adversely affect any award
that is already outstanding under the Plan. No awards may be granted under the
Plan after the tenth anniversary of the date the board approves the Plan.
In connection with the Distribution, stock options granted to Spinco
employees under the NSI long-term incentive plans will be replaced by Spinco
options. The employee benefits agreement provides that at the time of the
Distribution NSI stock options held by Spinco employees will generally be
converted to, and replaced by, Spinco stock options in accordance with a
conversion ratio. Each employee holding NSI restricted stock (all of which is
unvested) will receive a dividend of one Spinco Share (subject to the same
restrictions as the NSI restricted stock) for each NSI restricted share held.
Each Spinco employee who has a performance-based restricted stock award of NSI
that has not reached a vesting start date will not receive the dividend, and
will receive a replacement performance-based restricted stock award of Spinco,
adjusted to reflect the Distribution. See "Relationship Between NSI and Spinco
Following the Distribution -- Employee Benefits Agreement" beginning on page 27.
DESCRIPTION OF THE PLAN
The Plan is a flexible plan that will provide the Committee broad
discretion to fashion the terms of several types of awards (described below),
including: stock options (both incentive stock options and nonqualified stock
options), aspiration achievement incentive awards, restricted stock, performance
units, and performance shares (individually and collectively, "Awards"). Not
more than % of the maximum number of shares that may be issued or transferred
pursuant to Awards under the Plan may be in the form of Awards of restricted
stock, aspiration achievement incentive awards, performance shares, and
performance units.
The Committee will (a) select those participants to whom Awards will be
granted and (b) determine the type, size and terms and conditions of Awards,
including the exercise price per share for each stock option and the
restrictions or performance criteria relating to aspiration achievement
incentive awards, restricted stock, performance units and performance shares.
The Committee will administer, construe, and interpret the Plan. Members of the
Committee will be ineligible to participate in the Plan.
An aggregate of Spinco Shares may be issued or transferred
pursuant to the Plan. In the event of any "Change in Capitalization" (as defined
in the Plan), the Committee may adjust the maximum number and class of shares
with respect to which
63
Awards may be granted, the number and class of shares which are subject to
outstanding Awards (subject to limitations imposed under Section 422 of the Code
in the case of incentive stock options), and the purchase price therefor, if
applicable.
AWARDS ISSUABLE UNDER THE PLAN
STOCK OPTIONS. Both incentive stock options and nonqualified stock options
may be granted pursuant to the Plan. The maximum number of Spinco Shares subject
to stock options which can be granted under the Plan to any participant during a
fiscal year of Spinco is . All stock options granted under the Plan
will have an exercise price per share equal to at least the fair market value of
a Spinco Share on the date the stock option is granted. The maximum term for all
stock options granted under the Plan is ten years. Unless the Committee provides
otherwise in the agreement evidencing the stock options granted, stock options
are nontransferable other than by will or the laws of descent and distribution
and during an optionee's lifetime may be exercised only by the optionee or his
guardian or legal representative. Stock options are exercisable at such time and
in such installments as the Committee may provide at the time the stock option
is granted. The Committee may accelerate the exercisability of any stock option
at any time, subject to any limitations required by Section 162(m) of the Code.
The purchase price for Spinco Shares acquired pursuant to the exercise of an
option must be paid, as determined by the Committee, in cash, by check, or by
transferring shares to Spinco or attesting to ownership of shares upon such
terms and conditions as may be determined by the Committee. The terms and
conditions of the stock options relating to their treatment upon termination of
the optionee's employment will be determined by the Committee at the time the
stock options are granted.
Upon a Change in Control (as defined in the Plan) all outstanding stock
options on the date of a Change in Control may become immediately and fully
exercisable.
ASPIRATION ACHIEVEMENT INCENTIVE AWARDS. Aspiration achievement incentive
awards granted by the Committee will be payable based on the level of
achievement of the performance measure or measures specified by the Committee,
over the performance period specified by the Committee. The performance measure
may relate to the performance of Spinco or its subsidiaries or business units,
or any combination of the foregoing. Performance measures and the length of the
performance period will be determined by the Committee at or near the beginning
of the performance period when the aspiration Award is granted. Performance
levels may be absolute or relative and may be expressed in terms of a
progression within a specified range. The agreement setting forth the grant of
an aspiration Award may provide for such adjustments to performance as the
Committee deems appropriate and are not inconsistent with Section 162(m) of the
Code. Aspiration Awards may also include performance levels that relate to
individual achievements or goals. No participant may receive an aspiration Award
in excess of $ million with respect to a single performance period.
After the applicable performance period has ended, the Committee may adjust
the achieved performance levels to exclude the effects of unusual charges or
income items or other events, such as acquisitions or divestitures, which are
distortive of financial results for the performance period; provided that with
respect to executive officers named in the Executive Compensation Table, the
Committee must, and can only, exclude items with the effect of increasing the
Aspiration Award payable if such items constitute "extraordinary" or "unusual"
events or items under generally accepted accounting principles. The
64
Committee will also adjust performance calculations to exclude the unanticipated
effect on financial results of changes in tax laws or regulations. The Committee
is allowed to decrease the aspiration Award otherwise payable if the performance
during the performance period justifies such adjustment, regardless of the
extent to which the applicable performance measure was achieved. Payment of an
earned aspiration Award will be made in cash, in shares, or in some combination
of cash and shares, as determined by the Committee. The agreement evidencing the
grant will also set forth the terms and conditions of the aspiration Award
applicable in the event of termination of the Participant's employment and in
the event of a Change in Control.
RESTRICTED STOCK. The aggregate maximum number of Spinco Shares that may
be awarded under a restricted stock Award and an Award of performance shares and
units to a participant during any fiscal year of Spinco is . The terms of
a restricted stock award, including the restrictions placed on such shares and
the time or terms at which such restrictions will lapse, shall be determined by
the Committee at the time the Award is made. The Committee may determine at the
time an Award of restricted stock is granted that dividends paid on shares may
be paid to the grantee or deferred. Deferred dividends (together with any
interest accrued thereon) will be paid upon the lapsing of restrictions on
shares of restricted stock or forfeited upon the forfeiture of shares of
restricted stock. The agreements evidencing Awards of restricted stock shall set
forth the terms and conditions of such Awards upon a grantee's termination of
employment. Unless the Committee provides otherwise in the agreements, all
restrictions on outstanding shares of restricted stock will lapse upon a Change
in Control.
PERFORMANCE UNITS AND PERFORMANCE SHARES. Each performance unit will
represent one share and payments in respect of vested performance units will be
made in cash, shares, or shares of restricted stock or any combination of the
foregoing, as determined by the Committee. Performance shares are awarded in the
form of shares of restricted stock. The vesting of performance units and
performance shares is based upon the level of achievement of the performance
measure or performance measures specified by the Committee, over the performance
period specified by the Committee. The performance measure may relate to the
performance of Spinco or its subsidiaries or business units, or any combination
of the foregoing. Performance measures and the length of the performance cycle
for performance units and performance shares will be determined by the Committee
at the time the Award is made. The Committee may make adjustments to achieved
performance levels and changes to performance measures to the same extent
described under aspiration achievement incentive awards above. The agreements
evidencing Awards of performance units and performance shares will set forth the
terms and conditions of such Awards, including those applicable in the event of
the grantee's termination of employment. The aggregate maximum number of
performance units, performance shares, and restricted stock a participant may be
awarded for any fiscal year is .
Upon a Change in Control, the Committee may provide that a percentage of
performance units will become vested and the grantee will be entitled to receive
a cash payment equal to the per share adjusted fair market value multiplied by
the number of performance units which become vested, and with respect to
performance shares, all restrictions shall lapse on a percentage of the
performance shares.
65
FEDERAL INCOME TAX CONSEQUENCES OF CERTAIN AWARDS
An optionee will not recognize taxable income upon grant or exercise of an
incentive stock option. However, upon the exercise of an incentive stock option,
the excess of the fair market value of the shares received over the exercise
price of the shares subject to such stock option will be treated as an
adjustment to alternative minimum taxable income. Any dividends paid on shares
will be taxable as ordinary income in the taxable year in which the dividend is
received. Spinco and its subsidiaries will not be entitled to any business
expense deduction with respect to the grant or exercise of an incentive stock
option, except as discussed below.
In order for the exercise of an incentive stock option to qualify for
favorable tax treatment, the optionee generally must be an employee of the
corporation, or a subsidiary (within the meaning of Section 422 of the Code)
from the date the incentive stock option is granted through a date within three
months before the date of exercise. In the case of an optionee who is disabled,
the three-month period for exercise following termination of employment may be
extended to one year. In the case of an optionee's death, the time for
exercising incentive stock options after termination of employment and the
holding period for stock received pursuant to the exercise of the incentive
stock options are waived.
If all of the requirements for incentive stock option treatment are met and
the optionee has held the shares for at least two years after the date of grant
and for at least one year after the date of exercise, upon disposition of the
shares by the optionee, the difference, if any, between the sales price of the
shares and the exercise price of the stock option will be treated as long-term
capital gain or loss. If the optionee does not hold the shares in accordance
with the holding period rules set forth above, the optionee will recognize
ordinary income at the time of the disposition of the shares, generally in an
amount equal to the excess of the fair market value of the shares at the time
the stock option was exercised over the exercise price of the stock option. The
ordinary income recognized by an optionee upon the disposition of the shares has
been determined by the IRS not to constitute wages for purposes of applicable
withholding tax requirements. The balance of the gain realized, if any, will be
long-term or short-term capital gain, depending upon whether or not the shares
were sold more than one year after the stock option was exercised. If the
optionee sells the shares prior to the satisfaction of the holding period rules
but at a price below the fair market value of the share at the time the stock
option was exercised, the amount of ordinary income will be limited to the
amount realized on the sale over the exercise price of the stock option. Spinco
and its subsidiaries will be allowed a business expense deduction to the extent
the optionee recognizes ordinary income.
An optionee to whom a nonqualified stock option is granted will recognize
no income at the time of the grant of the stock option. Upon exercise of a
nonqualified stock option, an optionee will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the stock option. If it complies with
applicable withholding requirements, Spinco and its subsidiaries will be
entitled to a business expense deduction in the same amount and at the same time
as the optionee recognizes ordinary income. Upon a subsequent sale or exchange
of shares acquired pursuant to the exercise of a nonqualified stock option, the
optionee will have taxable gain or loss, measured by the difference between the
amount realized on the disposition and the tax basis of the shares (generally,
the amount paid for the shares plus the amount treated as ordinary income at the
time the stock option was exercised).
66
PENSION PLANS
The employee benefits agreement provides for Spinco to adopt and assume the
obligations under NSI's qualified defined benefit retirement plan covering
corporate office employees who will become employees of Spinco and the
nonqualified supplemental executive retirement plan that covers certain
executives of Spinco. The combined benefit under the qualified retirement plan
and nonqualified retirement plan is 45% of average base salary and bonus (using
the highest three consecutive years of remuneration out of the ten years
preceding the individual's retirement), less 50% of the individual's primary
social security benefit, and less the actuarial equivalent of the participant's
account in the 401(k) plan, assuming an annual contribution of 4% of the
individual's annual compensation over $15,000 (subject to applicable limitations
on eligible compensation), any applicable matching contribution, and earnings on
those amounts at 8% per annum.
The following table shows the estimated aggregate annual benefits payable
to a covered participant at normal retirement age under the pension plan and
supplemental plan, without the reduction under the supplemental plan for the
actuarial equivalent of the 401(k) plan benefits (approximately $9,576 for Mr.
Balloun, $16,749 for Mr. Heagle, and $27,333 for Mr. Parham).
YEARS OF SERVICE
----------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
$ 400,000...................... $128,100 $170,800 $170,800 $170,800 $170,800
500,000..................... 161,800 215,800 215,800 215,800 215,800
600,000..................... 195,600 260,800 260,800 260,800 260,800
700,000..................... 229,300 305,800 305,800 305,800 305,800
800,000..................... 263,100 350,800 350,800 350,800 350,800
900,000..................... 296,800 395,800 395,800 395,800 395,800
1,000,000..................... 330,600 440,800 440,800 440,800 440,800
1,200,000..................... 398,100 530,800 530,800 530,800 530,800
The remuneration specified in the table above consists of salary and annual
incentive bonus. Benefits shown above are based on payment of a single life
annuity with 10 years certain. Equivalent payment options are offered.
The salary and bonus expected to be covered by the pension plan and the
supplemental plan for the named executive officers who are participants
substantially correspond to the amounts disclosed in the Summary Compensation
Table. The years of credited service for each of the following executive
officers as of August 31, 2001 were: Mr. Balloun, five years (ten years under
the supplemental plan); and Mr. Heagle and Mr. Parham, one year each.
Messrs. Honeycutt and Morgan are not currently participants in any pension
plans or supplemental retirement plans of NSI.
401(K) PLAN
The employee benefits agreement provides for Spinco to adopt and assume the
defined contribution 401(k) plan covering corporate office employees of NSI who
will become employees of Spinco. The 401(k) plan will provide for employee
pre-tax contributions and employer matching contributions, which may be in the
form of Spinco Shares. The account balances of Spinco employees in the 401(k)
plan as of the Distribution Date will
67
continue to be held under the Spinco plan. During a transition period, an NSI
stock account and a Spinco stock account will be maintained under the plan.
Spinco employees will be able to transfer amounts out of their NSI stock
account, but they will not be able to add to their NSI stock account.
EMPLOYMENT LETTER AGREEMENTS
Spinco will assume NSI's obligations under the employment letter agreements
with Messrs. Balloun, Heagle and Parham.
The employment agreement with Mr. Balloun provides for a lump sum severance
payment of $1.5 million in the event his employment is terminated after August
31, 1998. This provision does not apply in the event of voluntary termination,
termination upon death or disability, or termination for cause (as each such
term is defined in the agreement). In the event of a termination in connection
with a change in control which would entitle Mr. Balloun to benefits under his
Severance Protection Agreement (described below), he would receive the greater
of the benefits under the Severance Protection Agreement or the severance
benefits set forth in his employment agreement.
The employment agreement with Mr. Heagle provides for an annual base salary
of $300,000, subject to review for increases, and a target bonus equal to 45% of
base salary. The agreement also provides for annual grants of stock options and
aspiration awards through fiscal 2003 equal to 160% of salary at target level,
based on the performance of the chemicals group. Mr. Heagle's employment is at
will and may be terminated for any reason. If Mr. Heagle's employment is
terminated for any reason other than voluntary termination, upon death or
disability, or for cause (each as such term is defined in the agreement), he
will be entitled to receive a severance payment, in semi-monthly installments,
equal to his then current salary for a period of 12 months. In the event of a
termination in connection with a change in control which would entitle Mr.
Heagle to benefits under his Severance Protection Agreement (described below),
he would receive the greater of the benefits under the Severance Protection
Agreement or the severance benefits set forth in his employment agreement.
The employment agreement with Mr. Parham provides for an annual base salary
of $300,000, subject to review for increases, and a target bonus equal to 45% of
base salary. The agreement also provides for annual grants of stock options and
aspiration awards through fiscal 2003 equal to 160% of salary at target level,
based on the performance of the company. Mr. Parham's employment is at will and
may be terminated for any reason. If Mr. Parham's employment is terminated for
any reason other than voluntary termination, upon death or disability, or for
cause (each as such term is defined in the agreement), he will be entitled to
receive a severance payment, in semi-monthly installments, equal to his then
current salary for a period of 12 months. In the event of a termination in
connection with a change in control which would entitle Mr. Parham to benefits
under his Severance Protection Agreement (described below), he would receive the
greater of the benefits under the Severance Protection Agreement or the
severance benefits set forth in his employment agreement.
SEVERANCE PROTECTION AGREEMENTS
Effective as of the Distribution, Spinco intends to enter into severance
protection agreements with its executive officers which will be substantially
similar to the agreements such executives now have with NSI. Spinco intends for
the agreements to provide the
68
executives some measure of security against the possibility of employment loss
that may result following a Change in Control (as defined below) so that they
may devote their energies to meeting the business objectives and needs of Spinco
and its stockholders.
The agreement for Mr. Balloun is effective until his 65th birthday. The
agreements for the other executive officers are effective for a term of two
years, which is automatically extended for one year at the end of each year
unless terminated by either party. However, the term of the agreements will not
expire during a "Threatened Change in Control Period" (as defined in the
agreements) or prior to the expiration of 24 months following a Change in
Control. If the employment of the officer is terminated within 24 months
following a Change in Control or in certain other instances in connection with a
Change in Control (1) by Spinco other than for "Cause" or "Disability" or (2) by
the officer for "Good Reason" (as each term is defined in the agreements), the
officer will be entitled to receive (a) a pro rata bonus for the year of
termination, (b) a lump sum cash payment equal to two times the sum of his base
salary and bonus (in each case at least equal to his base salary and bonus prior
to a Change in Control), subject to certain adjustments, (c) continuation of
life insurance, disability, medical, dental and hospitalization benefits for a
period of up to 24 months, and (d) a lump sum cash payment reflecting certain
retirement benefits he would have been entitled to receive had he remained
employed by Spinco for an additional two years and a reduced requirement for
early retirement benefits. Additionally, all restrictions of any outstanding
incentive awards will lapse and become fully vested, all outstanding stock
options will become fully vested and immediately exercisable, and Spinco will be
required to purchase for cash, on demand, at the then per-share fair market
value, any shares of unrestricted stock and shares purchased upon exercise of
options.
The agreements provide that Spinco shall make an additional "gross-up
payment" to each officer to offset fully the effect of any excise tax imposed
under Section 4999 of the Internal Revenue Code, on any payment made to him
arising out of or in connection with his employment. In addition, Spinco will
pay all legal fees and related expenses incurred by the officer arising out of
his employment or termination of employment if, in general, the circumstances
for which he has retained legal counsel occurred on or after a Change in
Control.
A "Change in Control" means (1) the acquisition (other than from Spinco) by
any "person" (as that term is used for purposes of Sections 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than
a trustee of an employee benefit plan maintained by Spinco or certain related
entities, of beneficial ownership of 20% or more of the combined voting power of
Spinco's then outstanding voting securities, (2) a change in more than one-third
of the members of the Spinco board who were either members as of the
Distribution Date, or were nominated or elected by a vote of two-thirds of those
members or members so approved, (3) a merger, consolidation or reorganization
involving Spinco unless the stockholders of Spinco immediately before such
merger, consolidation or reorganization, as a result of such merger or
consolidation, own, directly or indirectly, at least 70% of the combined voting
power of the outstanding voting securities of the corporation resulting from or
surviving such merger, consolidation or reorganization, and (4) a complete
liquidation or dissolution of Spinco or an agreement for the sale or other
disposition of all or substantially all of the assets of Spinco.
69
DEFERRED COMPENSATION PLANS
The employee benefits agreement provides for Spinco to establish deferred
compensation plans covering its executives that are substantially similar to the
plans currently maintained by NSI covering such executives. The accounts and
benefits of Spinco employees (including former employees who were employed by
the lighting equipment and chemicals businesses and the corporate office) will
be transferred to the new plans (along with any assets intended to support such
obligations).
SPINCO MANAGEMENT COMPENSATION AND INCENTIVE PLAN
Spinco expects its board will adopt the Spinco Management Compensation and
Incentive Plan (referred to in this section as the "Plan"). The full text of the
Plan is filed as an exhibit to the Registration Statement that Spinco has filed
with the Commission which relates to this information statement. Spinco will
establish the Plan to provide annual bonuses to officers and other key
management personnel who make substantial contributions to Spinco's success, and
to assist in attracting and retaining the highest quality individuals in key
executive positions.
Spinco's compensation committee or another committee designated by the
board (referred to in this section as the "Committee") will administer the Plan
and has the authority to amend, suspend, or terminate the Plan. The Committee
may delegate to senior management its authority under the Plan with respect to
participants other than certain officers of Spinco.
Prior to, or as soon as practical after, the commencement of each fiscal
year, the Committee will establish plan rules for that year with respect to the
following matters: (a) employees who are eligible to participate: (b)
performance targets and the measurement criteria for determining the level of
achievement of the performance targets; (c) the percentage of a participant's
base salary which may be paid as an incentive award at specified levels of
achievement of the performance targets; and (d) the times and conditions subject
to which any incentive award may become payable. The maximum amount that may be
paid to any participant for any plan year is $1.5 million.
After the end of each fiscal year, incentive awards shall be approved by
the Committee based on the plan rules then in effect and the achievement of
performance criteria as certified by the Committee. Any award may be decreased,
at the Committee's discretion, based on such factors as the Committee may
determine, including the failure of Spinco or a business unit to meet additional
performance goals or the failure of the participant to meet personal performance
goals. The Committee may in its discretion grant awards to deserving
participants, except those who are Named Executive Officers, notwithstanding
levels of achievement of performance criteria.
Awards will generally be made in lump sum cash payments, unless the
Committee specifies otherwise at the beginning of the year. Payment will be made
as soon as practicable after determination of awards, subject to deferral as
provided by other plans of Spinco.
A partial incentive award may be authorized by the Committee for a
participant who is terminated without cause or who retires, dies, or becomes
permanently and totally disabled. Otherwise, no award will be paid to a
participant who is not an active employee of Spinco, a business unit, or an
affiliate at the end of the fiscal year to which the award relates.
70
BENEFICIAL OWNERSHIP OF SPINCO SHARES
All of the outstanding Spinco Shares are, and prior to the Distribution
will be, held beneficially and of record by NSI and no director or executive of
Spinco owns any Spinco Shares. The following table sets forth information
concerning the Spinco Shares that are projected to be beneficially owned after
the Distribution by each of the directors and each of the executive officers
named in the Summary Compensation Table and by all directors and executive
officers as a group. Unless otherwise indicated, the projections are based on
the number of NSI shares held by such persons as of October 25, 2001 and reflect
the Distribution Ratio of one Spinco Share for every share of common stock of
NSI held on the Record Date. No person or entity is expected to own beneficially
more than 5% of the Spinco Shares outstanding immediately following the
Distribution, based on the ownership of NSI common stock as known to Spinco.
NUMBER
OF SHARES
BENEFICIALLY
OWNED PERCENT
NAME OF BENEFICIAL OWNER (1)(2)(3) OF CLASS(4)
------------------------ ------------ ------------
James S. Balloun............................................ 981,931 2.3
Leslie M. Baker, Jr. ....................................... 4,000 *
Peter C. Browning........................................... 1,000 *
John L. Clendenin........................................... 9,300 *
James H. Heagle............................................. 19,034 *
Kenneth W. Honeycutt........................................ 72,248 *
John K. Morgan.............................................. 57,863(5) *
Joseph G. Parham, Jr. ...................................... 18,073 *
Ray M. Robinson............................................. 4,000 *
Kathy Brittain White........................................ 3,600 *
Neil Williams............................................... 4,000 *
All executive officers and directors as a group (12
persons).................................................. 1,517,903 3.6%
-------------------------
* Less than 1%.
(1) Subject to applicable community property laws, each beneficial owner has
sole voting and investment power with respect to all shares shown, except as
otherwise indicated and except that 18,385 shares shown for Mr. Morgan are
jointly held with his spouse.
(2) Includes shares that may be acquired within 60 days after the ownership date
reflected, upon exercise of employee and director stock options. Such shares
are deemed to be outstanding and to be beneficially owned by the person or
group holding the options for the purpose of computing the percentage
ownership of such person or group, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person or
group. Options are included for the following individuals: Mr. Balloun,
854,390 shares; Mr. Honeycutt, 44,669 shares; Mr. Morgan, 34,082 shares;
Messrs. Heagle and Parham, 15,900 shares each; Ms. White and Messrs. Baker,
Robinson and Williams, 3,000 shares each; Mr. Clendenin, 6,000 shares and
all current directors and executive officers as a group, 1,303,214 shares.
The employee benefits agreement provides that, at the time of the
Distribution, NSI stock options held by Spinco employees will generally be
converted to, and replaced by, Spinco stock options in accordance with a
conversion ratio. See "Relationship
71
Between NSI and Spinco Following the Distribution -- Employee Benefits
Agreement" beginning on page 27.
(3) Includes performance-based restricted shares, granted under NSI's Long-Term
Achievement Incentive Plan, which vest in equal installments through January
2005 and to which the executives have sole voting power. Restricted shares
are included for the following individuals: Mr. Balloun, 9,000 shares; Mr.
Heagle, 1,780 shares; Mr. Honeycutt, 1,840 shares; Mr. Morgan, 1,840 shares;
Mr. Parham, 1,780 shares; and all current executive officers as a group,
20,300 shares. The employee benefits agreement provides that each employee
holding NSI restricted stock (all of which is unvested) will receive a
dividend of one Spinco Share (subject to the same restrictions as the NSI
restricted stock) for each NSI restricted share held. See "Relationship
Between NSI and Spinco Following the Distribution -- Employee Benefits
Agreement" beginning on page 27.
(4) Based on an aggregate of 41,225,781 shares of NSI common stock issued and
outstanding as of August 31, 2001 and the Distribution ratio of one Spinco
Share for every share of common stock of NSI.
(5) Includes 72 shares held by Mr. Morgan's son and 284 shares held by his
spouse.
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DESCRIPTION OF SPINCO'S CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under Spinco's certificate of incorporation, the total number of shares of
all classes of stock that Spinco has authority to issue is 550,000,000, of which
500,000,000 are shares of common stock, par value $.01 per share, and 50,000,000
are shares of preferred stock, par value $.01 per share. Based on the number of
NSI shares outstanding on , 2001, approximately Spinco Shares will
be issued to stockholders of NSI on the Distribution Date, though the actual
number of Spinco Shares to be issued will be determined as of the Record Date.
All of the Spinco Shares to be distributed to NSI stockholders in the
Distribution will be fully paid and non-assessable. million Spinco Shares
have been reserved for issuance under Spinco's Long-Term Incentive Plan and
million Spinco Shares have been reserved for issuance under the Spinco 2001
Non-Employee Director Stock Option Plan. No shares of preferred stock have been
issued, although shares of preferred stock have been reserved for issuance under
the Rights Agreement (as defined below).
The following summary of certain terms of Spinco's capital stock describes
material provisions of, but does not purport to be complete and is subject to,
and qualified in its entirety by, Spinco's certificate of incorporation and
Spinco's bylaws, the forms of which are included as exhibits to the Registration
Statement, and by applicable provisions of law.
COMMON STOCK
The holders of the Spinco Shares will be entitled to one vote for each
share on all matters voted on by stockholders, and the holders of such shares
will possess all voting power, except as otherwise required by law or provided
in any resolution adopted by Spinco's board of directors with respect to any
series of preferred stock of Spinco. There are no cumulative voting rights.
Accordingly, the holders of a plurality of the Spinco Shares voting for the
election of directors can elect all of the directors, if they choose to do so,
subject to any rights of the holders of preferred stock to elect directors.
Subject to any preferential or other rights of any outstanding series of
preferred stock of Spinco that may be designated by Spinco's board of directors,
the holders of the Spinco Shares will be entitled to such dividends as may be
declared from time to time by Spinco's board of directors from funds available
therefor, and upon liquidation will be entitled to receive pro rata all assets
of Spinco available for distribution to such holders. See "Dividend Policies" on
page 32.
PREFERRED STOCK
Spinco's board of directors is authorized without further stockholder
approval (except as may be required by applicable law or New York Stock Exchange
regulations) to provide for the issuance of shares of preferred stock, in one or
more series, and to fix for each such series such voting powers, designations,
preferences and relative, participating, optional and other special rights, and
such qualifications, limitations or restrictions, as are stated in the
resolution adopted by Spinco's board of directors providing for the issuance of
73
such series and as are permitted by the Delaware General Corporation Law. The
terms and rights of any such series may include:
- the designation of the series,
- the number of shares of the series, which number the board of directors
may thereafter, except where otherwise provided in the applicable
certificate of designation, increase or decrease, but not below the
number of shares thereof then outstanding,
- whether dividends, if any, will be cumulative or noncumulative, and, in
the case of shares of any series having cumulative dividend rights, the
date or dates or method of determining the date or dates from which
dividends on the shares of such series shall be cumulative,
- the rate of any dividends or method of determining such dividends payable
to the holders of the shares of such series, any conditions upon which
such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable,
- the redemption rights and prices, if any, for shares of the series,
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series,
- the amounts payable on and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of Spinco,
- whether the shares of the series will be convertible or exchangeable into
shares of any other class or series, or any other security, of Spinco or
any other corporation, and, if so, the specification of such other class
or series or such other security, the conversion or exchange price or
prices or rate or rates, any adjustments thereof, the date or dates as of
which such shares will be convertible or exchangeable and all other terms
and conditions upon which such conversion or exchange may be made,
- restrictions on the issuance of shares of the same series or of any other
class or series,
- the voting rights, if any, of the holders of the shares of the series,
and
- any other relative rights, preferences and limitations of such series.
Should Spinco's board of directors elect to exercise this authority, the
rights and privileges of holders of the Spinco Shares could be made subject to
the rights and privileges of any such series of preferred stock. Presently,
Spinco has no plans to issue any preferred stock, except that Spinco's
Stockholder Protection Rights Agreement (the "Rights Agreement") provides for
the issuance of shares of participating preferred stock under the circumstances
specified in the Rights Agreement, upon exercise or exchange of rights (the
"Rights") issued thereunder. See "Certain Anti-Takeover Provisions of Spinco's
Certificate of Incorporation, Bylaws and Rights Agreement and Delaware Law --
Stockholder Protection Rights Agreement" beginning on page 80.
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NO PREEMPTIVE RIGHTS
No holder of any stock of Spinco of any class authorized at the
Distribution Date will have any preemptive right to subscribe to any securities
of Spinco of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Distribution Agent will be the Transfer Agent and Registrar for Spinco
immediately following the Distribution.
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CERTAIN ANTI-TAKEOVER PROVISIONS
OF SPINCO'S CERTIFICATE OF INCORPORATION, BYLAWS AND
RIGHTS AGREEMENT AND DELAWARE LAW
GENERAL
Spinco's certificate of incorporation, Spinco's bylaws, the Rights
Agreement and the Delaware General Corporation Law contain certain provisions
that could delay or make more difficult an acquisition of control of Spinco not
approved by Spinco's board of directors, whether by means of a tender offer,
open market purchases, a proxy contest or otherwise. These provisions have been
implemented to enable Spinco, particularly (but not exclusively) in the initial
years of its existence as an independent, publicly owned company, to develop its
business in a manner which will foster its long-term growth without disruption
caused by the threat of a takeover not deemed by Spinco's board of directors to
be in the best interests of Spinco and its stockholders. These provisions could
have the effect of discouraging third parties from making proposals involving an
acquisition or change of control of Spinco, although such a proposal, if made,
might be considered desirable by a majority of Spinco's stockholders. These
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current management of Spinco without the
concurrence of Spinco's board of directors. In addition, certain provisions of
the tax disaffiliation agreement to be entered into by NSI and Spinco may also
have the effect of discouraging third parties from making proposals involving an
acquisition or change of control of Spinco prior to the second anniversary of
the Distribution Date. See "Relationship Between NSI and Spinco Following the
Distribution -- Tax Disaffiliation Agreement" on page 27. Set forth below is a
description of the provisions contained in Spinco's certificate of incorporation
and bylaws, the Rights Agreement and the Delaware General Corporation Law that
could impede or delay an acquisition of control of Spinco that Spinco's board of
directors has not approved. This description is intended as a summary only and
is qualified in its entirety by reference to Spinco's certificate of
incorporation, Spinco's bylaws and the Rights Agreement, the forms of which are,
or will be, included as exhibits to the Registration Statement, as well as the
Delaware General Corporation Law.
CLASSIFIED BOARD OF DIRECTORS
Spinco's certificate of incorporation provides for Spinco's board of
directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of Spinco's board of
directors will be elected each year. The first class of directors will initially
serve a one-year term, and the second class of directors will initially serve a
two-year term. Thereafter, each class of directors will be elected for a
three-year term. See "Spinco's Management -- Board of Directors" beginning on
page 53.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of Spinco's board of
directors until the second annual stockholders meeting following the date on
which the acquiror obtains the controlling stock interest and could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of Spinco and could thus increase the
likelihood that incumbent directors will retain their positions.
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NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
Spinco's certificate of incorporation and bylaws provide that the number of
directors shall be fixed only by resolution of Spinco's board of directors from
time to time. Spinco's certificate of incorporation provides that the directors
may be removed by stockholders only both for cause and by the affirmative vote
of at least 80% of the shares entitled to vote.
Spinco's certificate of incorporation and bylaws provide that vacancies on
the board of directors may be filled only by a majority vote of the remaining
directors or by the sole remaining director.
STOCKHOLDER ACTION
Spinco's certificate of incorporation provides that stockholder action may
be taken only at an annual or special meeting of stockholders and that
stockholders may not act by written consent. Spinco's certificate of
incorporation and bylaws provide that special meetings of stockholders may be
called only by Spinco's board of directors. Stockholders are not permitted to
call a special meeting or to require Spinco's board of directors to call a
special meeting of stockholders.
ADVANCE NOTICE FOR STOCKHOLDER PROPOSALS OR NOMINATIONS AT MEETINGS
Spinco's bylaws establish an advance notice procedure for stockholder
proposals to be brought before any annual or special meeting of stockholders and
for nominations by stockholders of candidates for election as directors at an
annual meeting or a special meeting at which directors are to be elected.
Subject to any other applicable requirements, including, without limitation,
Rule 14a-8 under the Exchange Act, nominations of persons for election to the
board of directors and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
Spinco's notice with respect to such meeting, (ii) by or at the direction of the
board of directors or (iii) by any stockholder of record of Spinco who was a
stockholder of record at the time of the giving of notice for the annual
meeting, who is entitled to vote at the meeting and who has complied with
Spinco's notice procedures. Additionally, only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to Spinco's notice of meeting. Nominations of persons for
election to the board of directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to Spinco's notice of
meeting (a) by or at the direction of the board of directors or (b) by any
stockholder of record of Spinco who is a stockholder of record at the time of
the giving of notice for the special meeting, who is entitled to vote at the
meeting and who has complied with Spinco's notice procedures.
For nominations or other business to be properly brought before an annual
or special meeting by a stockholder, (i) the stockholder must have given timely
notice in writing to Spinco's secretary, (ii) such business must be a proper
matter for stockholder action under the Delaware General Corporation Law, (iii)
if the stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided Spinco with a Solicitation Notice (as defined
below), such stockholder or beneficial owner must, in the case of a proposal,
have delivered a proxy statement and form of proxy to holders of at least the
percentage of Spinco's voting shares required under applicable law to carry any
such proposal, or, in the case of a nomination or nominations, have delivered a
proxy statement and form of proxy to holders of a percentage of Spinco's voting
shares
77
reasonably believed by such stockholder or beneficial holder to be sufficient to
elect the nominee or nominees proposed to be nominated by such stockholder, and
must, in either case, have included in such materials the Solicitation Notice
and (iv) if no Solicitation Notice relating to the proposal has been timely
provided, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice.
For an annual meeting, to be timely, a stockholder's notice must be
delivered to Spinco's secretary at the principal executive offices of Spinco not
less than 45 or more than 75 days prior to the first anniversary (the
"Anniversary") of the date on which Spinco first mailed its proxy materials for
the preceding year's annual meeting of stockholders. However, if the date of the
annual meeting is advanced more than 30 days prior to or delayed by more than 30
days after the anniversary of the preceding year's annual meeting, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the later of (i) the 90th day prior to such annual meeting or (ii)
the 10th day following the day on which public announcement of the date of such
meeting is first made.
For a special meeting, to be timely, a stockholder's notice must be
delivered to Spinco's secretary at the principal executive offices of Spinco not
later than the close of business on the later of (i) the 90th day prior to such
special meeting or (ii) the 10th day following the day on which public
announcement of the date of such meeting is first made of the date of the
special meeting and of the nominees proposed by the board of directors to be
elected at such meeting.
A stockholder's notice must set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person as would be required to be disclosed in
solicitations of proxies for the election of such nominees as directors pursuant
to Regulation 14A under the Exchange Act and such person's written consent to
serve as a director if elected; (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of such
business, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; (iii) as to the stockholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (A) the name and address of such stockholder, as they appear on
Spinco's books, and of such beneficial owner, (B) the class and number of shares
of Spinco that are owned beneficially and of record by such stockholder and such
beneficial owner, and (C) whether either such stockholder or beneficial owner
intends to deliver a proxy statement and form of proxy to holders of, in the
case of a proposal, at least the percentage of Spinco's voting shares required
under applicable law to carry the proposal or, in the case of a nomination or
nominations, a sufficient number of holders of Spinco's voting shares to elect
such nominee or nominees (an affirmative statement of such intent, a
"Solicitation Notice").
In the event that the number of directors to be elected to the board of
directors is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased board of directors
made by Spinco at least 55 days prior to the Anniversary, a stockholder's notice
required by Spinco's bylaws also will be considered timely, but only with
respect to nominees for any new positions created by such increase, if it is
delivered to the secretary at the principal executive offices of Spinco not
later than the close of business on the 10th day following the day on which such
public announcement is first made by Spinco.
78
Only persons nominated in accordance with the procedures set forth in
Spinco's bylaws are eligible to serve as directors and only such business may be
conducted at an annual or special meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in
Spinco's bylaws. The chairman of an annual or special meeting shall have the
power and the duty to determine whether a nomination or any business proposed to
be brought before the meeting has been made in accordance with the procedures
set forth in Spinco's bylaws and, if any proposed nomination or business is not
in compliance with the bylaws, to declare that such defectively proposed
business or nomination may not be presented for stockholder action at the
meeting and shall be disregarded.
AMENDMENTS TO BYLAWS
Spinco's certificate of incorporation provides that only Spinco's board of
directors or the holders of 80% of the shares of Spinco's capital stock entitled
to vote at an annual or special meeting of stockholders have the power to amend
or repeal Spinco's bylaws.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any proposal to amend, alter, change or repeal any provision of Spinco's
certificate of incorporation requires approval by the affirmative vote of a
majority of the voting power of all of the shares of Spinco's capital stock
entitled to vote on such matters, with the exception of certain provisions of
Spinco's certificate of incorporation which require a vote of 80% or more of
such voting power.
FAIR PRICE PROVISION
Spinco's certificate of incorporation contains certain requirements for
business combinations between Spinco and Spinco stockholders owning 5% or more
of Spinco's voting shares (an "Interested Person"). A majority of the shares of
Spinco's voting stock, other than those shares owned by the Interested Person,
are required to approve such a transaction unless (i) Spinco's board of
directors approved the business combination prior to the time the Interested
Person became an owner of 5% or more of Spinco's voting shares, or approved it
later if a majority of the directors voting to approve such transaction were
members of the board of directors prior to the time the Interested Person became
an owner of 5% or more of Spinco's voting shares; or (ii) (A) the consideration
paid by the Interested Person in exchange for the shares held by Spinco's
stockholders has a fair market value per share of Spinco's stock of not less
than either (1) the highest price per share paid by the Interested Person in
acquiring any of Spinco's stock, or (2) a price per share equal to (x) the
aggregate earnings per share of Spinco for the four full consecutive fiscal
quarters immediately preceding the record date for solicitation of votes or
consents on the business combination, multiplied by (y) the figure obtained by
dividing the highest price per share paid by the Interested Person in acquiring
any of Spinco's stock by the earnings per share of Spinco for the four full
consecutive fiscal quarters immediately preceding the time when the Interested
Person became an owner of 5% or more of Spinco's voting shares, and (B) there
has been no significant reduction in Spinco's dividend rate subsequent to the
time the Interested Person acquired 5% or more of Spinco's voting shares, unless
such reduction was approved by the board of directors and a majority of the
directors approving such reduction were members of the board prior to the time
the Interested Person acquired a 5% position. Spinco's fair price provision may
be
79
amended only by the affirmative vote or consent of the holders of a majority of
the shares of Spinco's voting stock, excluding those shares owned by an
Interested Person.
PREFERRED STOCK
Spinco's certificate of incorporation authorizes Spinco's board of
directors by resolution to issue one or more series of Preferred Stock and to
determine, with respect to any series of preferred stock, the terms and rights
of such series.
Spinco believes that the availability of the preferred stock will provide
Spinco with increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs which might arise. Having such
authorized shares available for issuance will allow Spinco to issue shares of
preferred stock without the expense and delay of a special stockholders'
meeting. The authorized shares of preferred stock, as well as Spinco Shares,
will be available for issuance without further action by Spinco's stockholders,
unless such action is required by applicable law or the rules of the New York
Stock Exchange or any other stock exchange on which Spinco's securities may be
listed. Although Spinco's board of directors has no intention at the present
time of doing so, it would have the power (subject to applicable law) to issue a
series of preferred stock that could, depending on the terms of such series,
impede the completion of a merger, tender offer or other takeover attempt. For
instance, subject to applicable law, such series of preferred stock might impede
a business combination by including class voting rights which would enable the
holder to block such a transaction. See "-- Stockholder Protection Rights
Agreement" below.
STOCKHOLDER PROTECTION RIGHTS AGREEMENT
Each share of Spinco Common Stock has attached to it one right (a "Right").
Each Right entitles its registered holder to purchase from Spinco, on or after
the Separation Time (as hereinafter defined), one one-hundredth of a share of
Participating Preferred Stock, par value $.01 per share (the "Participating
Preferred"), for an exercise price which will be established by Spinco's board
of directors prior to the Distribution (the "Exercise Price"), which price will
be subject to future adjustment. The Rights will not trade separately from the
Spinco Common Stock until the Separation Time.
The Rights will be evidenced by common stock certificates until the
Separation Time. The Separation Time shall mean the earlier of (i) the close of
business on the tenth business day (or such later date as Spinco's board of
directors may from time to time fix by resolution adopted prior to the
Separation Time that would otherwise have occurred) after the date on which any
Person (as defined in the Rights Agreement) commences a tender or exchange offer
which, if consummated, would result in such Person's becoming an Acquiring
Person (as defined below) and (ii) the first date (the "Stock Acquisition Date")
of public announcement by Spinco (by any means) that a Person has become an
Acquiring Person; provided that if a tender or exchange offer referred to in
clause (i) is canceled, terminated or otherwise withdrawn prior to the
Separation Time without the purchase of any shares of stock pursuant thereto,
such offer shall be deemed never to have been made. An Acquiring Person is any
Person who is or becomes the Beneficial Owner (as defined in the Rights
Agreement) of 15% or more of the outstanding Spinco Shares after the
Distribution Date, excluding (i) Spinco, any majority-owned subsidiary of Spinco
or any employee stock ownership or other employee benefit plan of Spinco or a
subsidiary of Spinco (or any entity or trustee holding shares of Spinco Common
Stock pursuant to
80
the terms of any such plan or for the purpose of funding any such plan or
funding other employee benefits for employees of Spinco or any subsidiary of
Spinco), (ii) any Person who is the beneficial owner of 15% or more of the
outstanding shares of Spinco Common Stock on the date of the Rights Agreement or
any Person who became the Beneficial Owner of 15% or more of the outstanding
Spinco Shares solely as a result of an acquisition of Spinco Shares by Spinco,
until such time as such Person acquires additional Spinco Shares other than
through a dividend or stock split, (iii) any Person who becomes an Acquiring
Person without any plan or intent to seek or affect control of Spinco if such
Person, upon notice by Spinco, promptly divests sufficient securities to reduce
its Beneficial Ownership below 15% or (iv) any Person who Beneficially Owns
Spinco Shares that were solely (A) acquired upon exercise of an option granted
by Spinco in connection with an agreement to merge with, or acquire, Spinco
entered into prior to a Stock Acquisition Date, (B) owned by such Person and its
Affiliates and Associates (as defined in the Rights Agreement) at the time of
such grant or (C) amounting to less than 1% of the outstanding Spinco Shares,
acquired by Affiliates and Associates of such Person after the time of such
grant.
The Rights Agreement provides that, until the Separation Time, the Rights
will be transferred with and only with the Spinco common stock. Spinco Share
certificates issued after the Record Time but prior to the Separation Time shall
evidence one Right for each share of Spinco common stock represented thereby and
shall contain a legend incorporating by reference the terms of the Rights
Agreement (as it may be amended from time to time). Promptly following the
Separation Time, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of Spinco Shares at the
Separation Time.
The Rights will not be exercisable until the Separation Time. The Rights
will expire on the earliest of (i) the Exchange Time (as defined below), (ii)
the close of business on the tenth anniversary of the Record Time, unless
extended by action of Spinco's board of directors, (iii) the date on which the
Rights are redeemed as described below and (iv) immediately prior to the
effective time of a consolidation, merger or share exchange of Spinco (A) into
another corporation or (B) with another corporation where Spinco is the
surviving corporation but Spinco Shares are converted into cash or securities of
another corporation, in either case pursuant to an agreement that Spinco entered
into prior to a Stock Acquisition Date (in any such case, the "Expiration
Time").
The Exercise Price and the number of Rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the Rights, may be
adjusted from time to time to prevent dilution in the event of a common stock
dividend on, or a subdivision or a combination into a smaller number of shares
of, Spinco Common Stock, or the issuance or distribution of any securities or
assets in respect of, in lieu of or in exchange for Spinco Common Stock.
In the event that prior to the Expiration Time a Flip-in Date (as defined
below) occurs, each Right (other than Rights Beneficially Owned by the Acquiring
Person or any affiliate or associate thereof, which Rights shall become void)
shall constitute the right to purchase from Spinco, upon the exercise thereof in
accordance with the terms of the Rights Agreement, that number of shares of
Spinco Common Stock having an aggregate market price (as defined in the Rights
Agreement), on the Stock Acquisition Date equal to twice the Exercise Price for
an amount in cash equal to the then current Exercise Price. In addition,
Spinco's board of directors may, at its option, at any time after a Flip-in Date
and prior to the time that an Acquiring Person becomes the Beneficial Owner of
more
81
than 50% of the outstanding shares of Spinco Common Stock, elect to exchange all
(but not less than all) the then outstanding Rights (other than Rights
Beneficially Owned by the Acquiring Person or its Affiliates or Associates,
which Rights become void) for shares of Spinco Common Stock at an exchange ratio
of one share of Spinco Common Stock per Right, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
of the Separation Time (the "Exchange Ratio"). Immediately upon such action by
Spinco's board of directors (the "Exchange Time"), the right to exercise the
Rights will terminate and each Right will thereafter represent only the right to
receive a number of shares of Spinco Common Stock equal to the Exchange Ratio. A
"Flip-In Date" is defined in the Rights Agreement as any Stock Acquisition Date
or such later date as Spinco's board of directors may from time to time fix by
resolution adopted prior to the Flip-In Date that would otherwise have occurred.
Whenever Spinco becomes obligated under the preceding paragraph to issue
shares of Spinco Common Stock upon exercise of or in exchange for Rights,
Spinco, at its option, may substitute shares of participating preferred stock
for shares of Spinco Common Stock, at a ratio of one one-hundredth of a share of
the Participating Preferred for each share of Spinco Common Stock.
In the event that prior to the Expiration Time Spinco enters into,
consummates or permits to occur a transaction or series of transactions after
the time an Acquiring Person has become such in which, directly or indirectly,
(i) Spinco shall consolidate, merge or participate in a statutory share exchange
with any other Person if, at the time of the consolidation, merger or statutory
share exchange or at the time Spinco enters into any agreement with respect to a
consolidation, merger or share exchange, the Acquiring Person is the Beneficial
Owner of 90% or more of the outstanding shares of Spinco Common Stock or
controls Spinco's board of directors and either (A) any term of or arrangement
concerning the treatment of shares of Spinco Common Stock in such consolidation,
merger or statutory share exchange relating to the Acquiring Person is not
identical to the terms and arrangements relating to other holders of Spinco
Common Stock or (B) the person with whom the transaction or transactions occur
is the Acquiring Person or an affiliate or associate of the Acquiring Person or
(ii) Spinco or one or more of its subsidiaries sells or otherwise transfers
assets (A) aggregating more than 50% of the assets (measured by either book
value or fair market value) or (B) generating more than 50% of the operating
income or cash flow of Spinco and its subsidiaries taken as a whole to any other
Person (other than Spinco or one or more of its wholly owned subsidiaries) or to
two or more such Persons which are affiliated or otherwise acting in concert,
if, at the time of such sale or transfer of assets or at the time Spinco (or any
such subsidiary) enters into an agreement with respect to such sale or transfer,
the Acquiring Person controls Spinco's board of directors (a "Flip-over
Transaction or Event"), Spinco shall take such action as shall be necessary to
ensure, and shall not enter into, consummate or permit to occur such Flip-over
Transaction or Event until it shall have entered into a supplemental agreement
with the Person engaging in such Flip-over Transaction or Event or the parent
corporation thereof (the "Flip-over Entity"), for the benefit of the holders of
the Rights, provided that upon consummation or occurrence of the Flip-over
Transaction or Event (i) each Right shall thereafter constitute the right to
purchase from the Flip-over Entity, upon exercise thereof in accordance with the
terms of the Rights Agreement, that number of shares of common stock of the
Flip-over Entity having an aggregate market price on the date of consummation or
occurrence of such Flip-over Transaction or Event equal to twice the Exercise
Price for an amount in cash equal to the then current Exercise Price and (ii)
the Flip-over Entity shall thereafter be liable for, and shall assume, by virtue
of such Flip-over
82
Transaction or Event and such supplemental agreement, all the obligations and
duties of Spinco pursuant to the Rights Agreement.
Spinco's board of directors may, at its option, at any time prior to the
Flip-in Date, redeem all (but not less than all) the then outstanding Rights at
a redemption price of $.01 per Right. Immediately upon the action of Spinco's
board of directors to redeem the Rights, without any further action and without
any notice, the right to exercise the Rights will terminate and each Right will
thereafter represent only the right to receive the redemption price in cash or
securities.
The holders of Rights will, solely by reason of their ownership of Rights,
have no rights as stockholders of Spinco, including the right to vote or to
receive dividends.
Spinco and the Rights Agent may from time to time supplement or amend the
Rights Agreement without the approval of any holders of Rights (i) prior to the
Flip-In Date, in any respect and (ii) on or after the Flip-In Date, to make any
changes that Spinco may deem necessary or desirable and which shall not
materially adversely affect the interests of the holders of Rights generally or
in order to cure any ambiguity or correct or supplement any inconsistent or
defective provision contained therein.
The Rights will not prevent a takeover of Spinco. However, the Rights may
cause substantial dilution to a person or group that acquires 15% or more of the
Spinco Shares unless the Rights are first redeemed by Spinco's board of
directors. Nevertheless, the rights should not interfere with a transaction that
is in the best interests of Spinco and its stockholders because the Rights can
be terminated on or prior to the Flip-in Date and before the transaction is
consummated.
As long as the rights are attached to Spinco Common Stock, Spinco will
issue one Right with each new share of Spinco Common Stock so that all shares
will have Rights attached. Prior to the Distribution, Spinco's board of
directors will reserve an appropriate number of shares of participating
preferred stock for issuance upon exercise of the Rights.
The Rights Agreement (which includes as Exhibit A the forms of Rights
Certificate and Election to Exercise) will be filed as an exhibit to the
Registration Statement which relates to this information statement. The
foregoing description of the Rights is qualified in its entirety by reference to
the Rights Agreement and such exhibit.
DELAWARE LAW
Under Section 203 of the Delaware General Corporation Law ("Section 203"),
which will be applicable to Spinco after the Distribution, certain "business
combinations" (defined generally to include mergers or consolidations between
the Delaware corporation and an interested stockholder and transactions with an
interested stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase the interested
stockholder's percentage ownership of stock) between a publicly held Delaware
corporation and an "interested stockholder" (defined generally as those
stockholders who become beneficial owners of 15% or more of a Delaware
corporation's voting stock or their affiliates) are prohibited for a three-year
period following the date that such stockholder became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation not to be so governed, (ii) either the business combination or the
proposed acquisition of stock resulting in the person becoming an interested
stockholder was approved by the board of directors of the corporation before the
other party to the business combination became an interested stockholder, (iii)
upon
83
consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by officers who are also directors or held in employee benefit plans in which
the employees do not have a confidential right to tender or vote stock held by
the plan) or (iv) the business combination was approved by the board of
directors of the corporation and also ratified by two-thirds of the voting stock
which the interested stockholder did not own.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. Spinco's certificate of incorporation does not exclude Spinco from
restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in acquiring Spinco to negotiate in advance with
Spinco's board of directors, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approved either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in the management of Spinco. It is possible that such
provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION ON LIABILITY OF DIRECTORS
Pursuant to authority conferred by Section 102 of the Delaware General
Corporation Law, Article X of Spinco's certificate of incorporation ("Article
X") eliminates the personal liability of Spinco's directors to Spinco or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that such exemption from liability or limitation thereof is
not permitted under the Delaware General Corporation Law as currently in effect
or as it may hereafter be amended. Under the Delaware General Corporation Law as
in effect on the date hereof, Spinco's directors remain liable for (i) any
breach of the duty of loyalty to Spinco or its stockholders, (ii) any act or
omission not in good faith or which involves intentional misconduct or a knowing
violation of law, (iii) any violation of Section 174 of the Delaware General
Corporation Law, which proscribes the payment of dividends and stock purchases
or redemptions under certain circumstances and (iv) any transaction from which
directors derive an improper personal benefit.
Article X provides that any future repeal or amendment of its terms
(including any amendment or repeal of Article X made by virtue of any change in
the Delaware General Corporation Law) will not adversely affect any rights of
directors existing thereunder with respect to acts or omissions occurring prior
to such repeal or amendment.
INDEMNIFICATION
Spinco's bylaws and Section 145 of the Delaware General Corporation Law,
which allows, and in some cases requires, the indemnification of directors and
officers under certain circumstances, grant Spinco's directors and officers a
right to indemnification to the
84
fullest extent permitted by law for all expenses relating to civil, criminal,
administrative or investigative procedures to which they are a party (i) by
reason of the fact that they are or were directors or officers of Spinco or (ii)
by reason of the fact that, while they are or were directors or officers of
Spinco, they are or were serving at the request of Spinco as a director, officer
or employee of another enterprise. Spinco's bylaws further provide that an
advancement for any such expenses shall only be made upon delivery to Spinco by
the indemnitee of an undertaking to repay all amounts so advanced if it is
ultimately determined that such indemnitee is not entitled to be indemnified by
Spinco.
INDEMNIFICATION AGREEMENTS
In connection with the Distribution, Spinco will enter into indemnification
agreements with certain of its directors and officers. These agreements will
require Spinco to indemnify these directors and officers with respect to their
activities as directors or officers of Spinco or when serving at Spinco's
request as a director, officer or trustee of another corporation, trust or other
enterprise against expenses (including attorneys' fees, judgments, fines and
amounts paid in settlement) actually and reasonably incurred by them in any
threatened, pending or completed suit or proceeding (civil, criminal
administrative or investigative) to which they are, or are threatened to be
made, parties as a result of their service to Spinco. Spinco will agree to
indemnify each indemnitee for any one or a combination of the following,
whichever is most advantageous to the indemnitee, as determined by the
indemnitee (i) the benefits provided by Spinco's certificate of incorporation
and bylaws in effect on the date of the indemnification agreement; (ii) the
benefits provided by Spinco's certificate of incorporation and bylaws at the
time expenses are incurred by the indemnitee; (iii) the benefits allowable under
Delaware law in effect on the date of the indemnification agreement; (iv) the
benefits allowable under the law of the jurisdiction under which Spinco exists
at the time expenses are incurred by the indemnitee; (v) the benefits available
under liability insurance obtained by Spinco; and (vi) such other benefits as
may be otherwise available to indemnitee under Spinco's existing practices.
Under the indemnification agreements, each indemnitee will continue to be
indemnified even after ceasing to occupy a position as an officer, director,
employee or agent of Spinco with respect to suits or proceedings arising out of
acts or omissions during his service to Spinco.
Each indemnitee will agree to notify Spinco promptly of any proceeding
brought or threatened and not to make any admission or settlement without
Spinco's consent, unless the indemnitee determines to undertake his own defense
and waives the benefits of the indemnification agreement.
INDEPENDENT PUBLIC ACCOUNTANTS
The combined financial statements and schedule of the National Service
Industries, Inc. lighting equipment and chemicals businesses (to be reorganized
as L&C Spinco, Inc.) as of August 31, 2001 and August 31, 2000, and for each of
the three years in the period ended August 31, 2001, appearing in this
information statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
85
ADDITIONAL INFORMATION
Spinco has filed with the Commission the Registration Statement under the
Exchange Act, with respect to the Spinco Common Stock and the preferred stock
purchase rights associated with each share of Spinco Common Stock. This document
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, to which reference is hereby made.
Statements made in this document as to the contents of any contract, agreement
or other document referred to herein are not necessarily complete. With respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by Spinco with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Regional Office of the Securities and Exchange
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such information can be obtained by mail from the
Public Reference Branch of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's website is http://www.sec.gov.
After the Distribution, Spinco will be required to comply with the
reporting requirements of the Exchange Act and to file with the Commission
reports, proxy statements and other information as required by the Exchange Act.
Additionally, Spinco will be required to provide annual reports containing
audited financial statements to its stockholders in connection with its annual
meetings of stockholders. After the Distribution, these reports, proxy
statements and other information will be available to be inspected and copied at
the public reference facilities of the Commission or obtained by mail or over
the Internet from the Commission, as described above. The Spinco Shares will be
listed on the New York Stock Exchange under the symbol " " following completion
of the Distribution. When the Spinco Shares commence trading on the New York
Stock Exchange, such reports, proxy statements and other information will be
available for inspection at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
86
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Combined Balance Sheets as of August 31, 2001 and 2000...... F-3
Combined Statements of Income for the years ended August 31,
2001, 2000, and 1999...................................... F-4
Combined Statements of Parent's Equity and Comprehensive
Income for the years ended August 31, 2001, 2000, and
1999...................................................... F-5
Combined Statements of Cash Flows for the years ended August
31, 2001, 2000, and 1999.................................. F-6
Notes to Combined Financial Statements...................... F-7
Report of Independent Public Accountants on Schedule II..... F-25
Schedule II -- Valuation and Qualifying Accounts............ F-26
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Service Industries, Inc.:
We have audited the accompanying combined balance sheets of the National
Service Industries, Inc. lighting equipment and chemicals businesses (to be
reorganized as L&C Spinco, Inc. -- Note 1) as of August 31, 2001 and 2000 and
the related combined statements of income, parent's equity and comprehensive
income, and cash flows for each of the three years in the period ended August
31, 2001. These combined financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
National Service Industries, Inc. lighting equipment and chemicals businesses as
of August 31, 2001 and 2000 and the results of their operations and their cash
flows for each of the three years in the period ended August 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Atlanta, Georgia
October 12, 2001
F-2
COMBINED BALANCE SHEETS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS)
AUGUST 31,
-----------------------
2001 2000
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 10,337 $ 1,510
Receivables, less reserves for doubtful accounts of $8,195
in 2001 and $6,570 in 2000 ............................... 297,762 344,409
Inventories, at the lower of cost (on a first-in, first-out
basis) or market.......................................... 210,783 236,856
Deferred income taxes....................................... 16,326 15,631
Prepayments and other current assets........................ 23,908 22,573
---------- ----------
Total Current Assets...................................... 559,116 620,979
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land........................................................ 16,009 15,090
Buildings and leasehold improvements........................ 161,779 148,100
Machinery and equipment..................................... 326,160 300,946
---------- ----------
Total Property, Plant, and Equipment...................... 503,948 464,136
Less -- Accumulated depreciation and amortization........... 255,525 219,108
---------- ----------
Property, Plant, and Equipment -- net..................... 248,423 245,028
---------- ----------
OTHER ASSETS:
Goodwill and other intangibles.............................. 468,944 497,324
Other....................................................... 54,092 59,549
---------- ----------
Total Other Assets........................................ 523,036 556,873
---------- ----------
Total Assets.............................................. $1,330,575 $1,422,880
========== ==========
LIABILITIES AND PARENT'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................ $ 357 $ --
Commercial paper............................................ -- 235,631
Credit line................................................. 105,000 --
Short-term secured borrowings............................... 105,100 --
Notes payable............................................... 24,666 20,285
Accounts payable............................................ 108,380 103,672
Accrued salaries, commissions, and bonuses.................. 36,070 54,928
Current portion of self-insurance reserves.................. 3,588 2,679
Accrued taxes payable....................................... -- 1,700
Other accrued liabilities................................... 58,906 46,699
---------- ----------
Total Current Liabilities................................. 442,067 465,594
---------- ----------
Long-Term Debt, less current maturities..................... 373,707 380,518
---------- ----------
Deferred Income Taxes....................................... 31,759 36,902
---------- ----------
Self-Insurance Reserves, less current portion............... 14,350 10,942
---------- ----------
Other Long-Term Liabilities................................. 85,394 86,122
---------- ----------
Commitments and Contingencies (Note 6)
PARENT'S EQUITY:
NSI investment.............................................. 400,296 455,543
Accumulated other comprehensive income...................... (16,998) (12,741)
---------- ----------
Total Parent's Equity..................................... 383,298 442,802
---------- ----------
Total Liabilities and Parent's Equity..................... $1,330,575 $1,422,880
========== ==========
The accompanying notes are an integral part of these combined balance sheets.
F-3
COMBINED STATEMENTS OF INCOME
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
YEARS ENDED AUGUST 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
SALES.................................................. $1,982,700 $2,023,644 $1,701,568
COSTS AND EXPENSES:
Cost of products sold.................................. 1,140,391 1,167,524 978,207
Selling and administrative expenses.................... 684,939 657,742 564,042
Interest expense, net.................................. 48,696 43,299 12,697
Amortization expense................................... 17,965 18,441 5,802
Loss on sale of businesses............................. 14,557 -- --
Restructuring expense, asset impairments, and other
charges.............................................. 4,083 -- --
Other expense (income), net............................ 2,917 1,347 (1,765)
---------- ---------- ----------
Total costs and expenses............................. 1,913,548 1,888,353 1,558,983
---------- ---------- ----------
Income before provision for income taxes............... 69,152 135,291 142,585
Provision for income taxes............................. 28,649 51,600 53,469
---------- ---------- ----------
Net income............................................. $ 40,503 $ 83,691 $ 89,116
========== ========== ==========
PRO FORMA EARNINGS PER SHARE:
Basic earnings per share (Note 2)...................... $ .99 n/a n/a
========== ========== ==========
Basic weighted average number of shares outstanding
(Note 2)............................................. 41,068 n/a n/a
========== ========== ==========
The accompanying notes are an integral part of these combined statements.
F-4
COMBINED STATEMENTS OF PARENT'S EQUITY AND COMPREHENSIVE INCOME
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
NSI COMPREHENSIVE PARENT'S COMPREHENSIVE
INVESTMENT INCOME EQUITY INCOME
---------- ------------- -------- -------------
BALANCE AUGUST 31, 1998.......... $425,002 $(11,315) $413,687
Net income....................... 89,116 -- 89,116 $89,116
Foreign currency translation
adjustment..................... -- 2,022 2,022 2,022
Minimum pension liability........ -- (1) (1) (1)
-------
Comprehensive income............. -- -- -- $91,137
=======
Net transactions with NSI........ (72,970) -- (72,970)
-------- -------- --------
BALANCE AUGUST 31, 1999.......... 441,148 (9,294) 431,854
Net income....................... 83,691 -- 83,691 $83,691
Foreign currency translation
adjustment..................... -- (3,448) (3,448) (3,448)
Minimum pension liability........ -- 1 1 1
-------
Comprehensive income............. -- -- -- $80,244
=======
Net transactions with NSI........ (69,296) -- (69,296)
-------- -------- --------
BALANCE AUGUST 31, 2000.......... 455,543 (12,741) 442,802
Net income....................... 40,503 -- 40,503 $40,503
Foreign currency translation
adjustment..................... -- (2,374) (2,374) (2,374)
Reclassification adjustment for
translation loss included in
net income..................... -- 503 503 503
Minimum pension liability........ -- (2,386) (2,386) (2,386)
-------
Comprehensive income............. -- -- -- $36,246
=======
Net transactions with NSI........ (95,750) -- (95,750)
-------- -------- --------
BALANCE AUGUST 31, 2001.......... $400,296 $(16,998) $383,298
======== ======== ========
The accompanying notes are an integral part of these combined statements.
F-5
COMBINED STATEMENTS OF CASH FLOWS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
(IN THOUSANDS)
YEARS ENDED AUGUST 31,
----------------------------------
2001 2000 1999
--------- ---------- ---------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net income.......................................... $ 40,503 $ 83,691 $ 89,116
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 62,911 58,485 33,297
(Gain) loss on the sale of property, plant &
equipment......................................... (194) (156) 69
Loss on sale of businesses.......................... 14,557 -- --
Provision for losses on accounts receivable......... 4,930 2,667 2,744
Restructuring expense, asset impairments, and other
charges........................................... 4,083 -- --
Change in assets and liabilities net of effect of
acquisitions and dispositions -
Receivables....................................... 34,396 (37,464) (16,047)
Inventories....................................... 23,189 (40,054) 10,920
Deferred income taxes............................. (4,433) 321 (14,697)
Prepayments and other current assets.............. (1,806) (3,335) (3,940)
Accounts payable and accrued liabilities.......... 5,137 (12,202) 43,383
Self-insurance reserves and other long-term
liabilities.................................... 422 12,038 3,225
--------- ---------- ---------
Net Cash Provided by Operating Activities...... 183,695 63,991 148,070
--------- ---------- ---------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Purchases of property, plant, and equipment......... (47,611) (62,913) (38,555)
Proceeds from the sale of property, plant and
equipment......................................... 1,837 1,866 378
Proceeds from the sale of businesses................ 1,632 -- --
Acquisitions........................................ -- (16,214) (514,370)
Change in other assets.............................. 1,238 (9,764) (1,898)
--------- ---------- ---------
Net Cash Used for Investing Activities......... (42,904) (87,025) (554,445)
--------- ---------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Net borrowings of notes payable..................... 4,381 8,814 3,588
Issuances (repayments) of commercial paper, net
(less than 90 days)............................... (221,801) (87,762) 352,265
Issuances of commercial paper (greater than 90
days)............................................. 1,370 194,953 --
Repayments of commercial paper (greater than 90
days)............................................. (15,200) (222,750) --
Proceeds from credit line, net...................... 105,000 -- --
Proceeds from short-term secured borrowings, net.... 105,100 -- --
Proceeds from issuances of long-term debt........... -- 199,798 267,585
Repayments of long-term debt........................ (7,601) (1,196) (160,304)
Net activity with NSI............................... (103,386) (69,296) (72,970)
--------- ---------- ---------
Net Cash Provided by (Used for) Financing
Activities................................... (132,137) 22,561 390,164
--------- ---------- ---------
Effect of Exchange Rate Changes on Cash............... 173 (271) 9
--------- ---------- ---------
Net Change in Cash and Cash Equivalents............... 8,827 (744) (16,202)
Cash and Cash Equivalents at Beginning of Year........ 1,510 2,254 18,456
--------- ---------- ---------
Cash and Cash Equivalents at End of Year.............. $ 10,337 $ 1,510 $ 2,254
========= ========== =========
Supplemental Cash Flow Information:
Income taxes paid during the year................... $ 32,659 $ 55,302 $ 29,333
Interest paid during the year....................... 43,416 42,399 14,289
The accompanying notes are an integral part of these combined statements.
F-6
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1)
NOTE 1: SPIN-OFF AND BASIS OF PRESENTATION
In fiscal year 2001, management of National Service Industries, Inc. ("NSI"
or "Parent") began to evaluate and pursue the spin-off of its lighting equipment
and chemicals businesses, subject to certain conditions, into a separate
publicly traded company with its own management and Board of Directors (the
"Distribution" or the "Spinoff"). This distribution is expected to occur during
the first quarter of fiscal 2002 and will be accomplished by transferring the
assets and liabilities of the businesses that comprise the lighting equipment
and chemicals businesses to L&C Spinco, Inc., a recently formed holding company,
and then distributing all of the shares of common stock of L&C Spinco, Inc. to
NSI's stockholders. L&C Spinco, Inc. was initially incorporated as an indirect
wholly owned subsidiary of NSI and did not have any operations, assets, or
liabilities until the contribution of the lighting and chemical businesses prior
to the Distribution. NSI's stockholders will receive one share of L&C Spinco,
Inc. common stock for every one share of NSI common stock held as of the date of
distribution (the "Distribution Date"). After the Distribution, L&C Spinco, Inc.
and NSI will be two separate public companies.
These combined financial statements include the accounts of the NSI
businesses that comprise its lighting equipment and chemicals businesses
(collectively referred to herein as "Spinco"). The lighting equipment segment
produces a variety of fluorescent and non-fluorescent fixtures for markets
throughout the United States, Canada, Mexico, and overseas. The chemicals
segment produces maintenance, sanitation, and water treatment products for
customers throughout the United States, Canada, and Western Europe.
The combined financial statements have been prepared on the historical cost
basis in accordance with accounting principles generally accepted in the United
States and present Spinco's financial position, results of operations, and cash
flows as derived from NSI's historical financial statements. Certain NSI
corporate assets, liabilities and expenses have been allocated to Spinco based
on an estimate of the proportion of corporate amounts allocable to Spinco,
utilizing such factors as revenues, number of employees, and other relevant
factors. In the opinion of management, the allocations have been made on a
reasonable basis. Management believes that all amounts allocated to Spinco are a
reasonable representation of the costs that would have been incurred if Spinco
had performed these functions as a stand-alone company. The combined financial
statements reflect an allocation of debt and related interest expense, as
further described in Note 4.
In conjunction with the separation of their businesses, Spinco and NSI will
enter into various agreements that address the allocation of assets and
liabilities between them and that define their relationship after the
separation, including a distribution agreement, a tax disaffiliation agreement,
an employee benefits agreement, a lease agreement, and a transition services
agreement.
F-7
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
NOTE 2: SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Spinco after
elimination of significant intercompany transactions and accounts.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Spinco records revenues as products are shipped. A provision for estimated
returns, allowances, and warranty costs is recorded when products are shipped.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions, which include estimates of NSI costs allocated to
Spinco, that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash in excess of daily requirements is invested in time deposits and
marketable securities and is included in the accompanying balance sheets at
market value. Spinco considers time deposits and marketable securities purchased
with an original maturity of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to receivables are limited due
to the wide variety of customers and markets using Spinco's products, as well as
their dispersion across many different geographic areas. As a result, as of
August 31, 2001, Spinco does not consider itself to have any significant
concentrations of credit risk.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with current
year presentation.
F-8
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost (on a first-in, first-out
basis) or market and consisted of the following at August 31, 2001 and 2000:
2001 2000
-------- --------
(IN THOUSANDS)
Raw materials and supplies................................. $ 85,208 $ 99,089
Work in progress........................................... 18,262 19,677
Finished goods............................................. 107,313 118,090
-------- --------
$210,783 $236,856
======== ========
GOODWILL AND OTHER INTANGIBLES
Goodwill of $3.5 million was recognized in connection with a 1969
acquisition and is not being amortized. Remaining amounts of goodwill ($327.9
million in 2001 and $341.4 million in 2000) and other intangible assets are
being amortized on a straight-line basis over various periods ranging from 2 to
40 years.
The following table summarizes net goodwill and intangible assets including
the useful lives associated with each as of August 31:
USEFUL LIFE
2001 2000 (IN YEARS)
-------- -------- -----------
(IN THOUSANDS)
Unamortizable Goodwill............................... $ 3,460 $ 3,460 n/a
Amortizable Goodwill................................. 327,903 341,434 10-40
Trade names and Trademarks........................... 74,681 84,747 30-40
Distribution Network................................. 49,319 51,086 30
Other Intangibles.................................... 13,581 16,597 2-12
-------- --------
Total Goodwill and Intangibles..................... $468,944 $497,324
======== ========
Spinco reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss is recognized when the undiscounted future
cash flows estimated to be generated by the asset are not sufficient to recover
the unamortized balance of the asset. An impairment loss would be recognized
based on the difference between the carrying value of the asset and estimated
fair value, which would be determined based on either the discounted future cash
flows or other appropriate fair value methods. If the asset being tested for
recoverability was acquired in a business combination, intangible assets and
goodwill resulting from the acquisition that are related to the asset are
included in the assessment. Spinco also evaluates the amortization periods
assigned to its intangible assets to determine whether events or changes in
circumstances warrant revised estimates of useful lives.
F-9
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
EARNINGS PER SHARE
Earnings per share data has not been presented since the businesses that
comprise Spinco were wholly owned subsidiaries of NSI, or businesses thereof,
during the periods presented and will be recapitalized as part of the
Distribution.
PRO FORMA EARNINGS PER SHARE (UNAUDITED)
Pro forma basic earnings per share is calculated as net income divided by
the pro forma weighted average number of common shares outstanding. Pro forma
weighted average shares outstanding has been computed by applying the
distribution ratio of one share of Spinco common stock to the historical NSI
weighted average shares outstanding for the same period presented. Pro forma
earnings per share information is unaudited and has been presented for the year
ended August 31, 2001 only.
DEPRECIATION
For financial reporting purposes, depreciation is determined principally on
a straight-line basis using estimated useful lives of plant and equipment (25 to
40 years for buildings and 3 to 15 years for machinery and equipment) while
accelerated depreciation methods are used for income tax purposes. Leasehold
improvements are amortized over the life of the lease or the useful life of the
improvement, whichever is shorter.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development expenses amounted to $17.0 million, $18.6 million, and $8.1 million
during 2001, 2000, and 1999, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for Spinco's foreign operations is the local
currency in most cases. The translation of foreign currencies into U.S. dollars
is performed for balance sheet accounts using exchange rates in effect at the
balance sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. The gains or losses, net of applicable income
taxes, resulting from the translation are included in "Accumulated Other
Comprehensive Income" in the Combined Statements of Parent's Equity and
Comprehensive Income and are excluded from net income.
Gains or losses resulting from foreign currency transactions are included
in "Other expense (income), net" in the Combined Statements of Income and were
insignificant in 2001, 2000, and 1999.
F-10
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS
Spinco's retiree medical plans are financed entirely by retiree
contributions; therefore, Spinco has no liability in connection with them.
Several programs provide limited retiree life insurance benefits. The liability
for these plans is not material.
POSTEMPLOYMENT BENEFITS
Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers'
Accounting for Postemployment Benefits," requires the accrual of the estimated
cost of benefits provided by an employer to former or inactive employees after
employment but before retirement. Spinco's accrual, which is not material,
relates primarily to severance agreements and the liability for life insurance
coverage for certain eligible employees.
INTEREST EXPENSE, NET
Interest expense, net, is comprised primarily of interest expense on
long-term debt, credit facility borrowings, commercial paper, short-term secured
borrowings and line of credit borrowings offset by interest income on cash and
cash equivalents.
The following table summarizes the components of interest expense, net:
YEARS ENDED AUGUST 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Interest expense......................................... $49,008 $43,638 $15,526
Interest income.......................................... (312) (339) (2,829)
------- ------- -------
Interest expense, net.................................... $48,696 $43,299 $12,697
======= ======= =======
ACCOUNTING STANDARDS ADOPTED IN FISCAL 2001
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." Specifically, Issue 00-10 addresses how the seller of goods should
classify amounts billed to a customer for shipping and handling. The EITF
concluded that all amounts billed to a customer in a sale transaction related to
shipping and handling represent revenues earned for the goods provided and
should be classified as revenue. Spinco adopted EITF 00-10 in fiscal 2001.
Spinco has historically netted certain shipping and handling revenues charged to
customers in costs and expenses. During 2001, the EITF also reached a final
consensus on EITF Issue 00-22, "Accounting for 'Points' and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future." Among other items, Issue 00-22
addresses how the seller of goods should classify offers to a customer for a
rebate or refund of a determinable cash amount if the customer completes a
specified cumulative level of revenue transactions. The EITF concluded that
offers for cash rebates or refunds should be classified as a reduction in
revenue. Spinco adopted EITF 00-22 during fiscal 2001. Spinco historically
included
F-11
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
rebates in costs and expenses. The adoption of these standards resulted in an
immaterial reclassification between sales and operating expenses for all periods
presented.
ACCOUNTING STANDARDS YET TO BE ADOPTED
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prospectively prohibits the pooling of interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 142
requires companies to cease amortizing goodwill that existed at June 30, 2001
and establishes a new method of testing goodwill for impairment on an annual
basis (or on an interim basis if an event occurs that might reduce the fair
value of a reporting unit below its carrying value). Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also requires that an identifiable intangible asset which is determined to have
an indefinite useful economic life not be amortized, but separately tested for
impairment using a fair value-based approach.
Spinco will adopt SFAS 142 in the first quarter of fiscal 2002. As a
result, the amortization of existing goodwill and those intangibles with
indefinite useful lives will cease on August 31, 2001, which will result in an
estimated decrease in amortization expense of approximately $11.7 million during
fiscal 2002. However, Spinco will be required to test its goodwill and
intangibles with indefinite useful lives for impairment under the new standard
beginning in the first quarter of fiscal 2002, which could have an adverse
effect on Spinco's future results of operations if these assets are deemed
impaired.
NOTE 3: PENSION AND PROFIT SHARING PLANS
Spinco has several pension plans covering hourly and salaried employees.
Benefits paid under these plans are based generally on employees' years of
service and/or compensation during the final years of employment. Spinco makes
annual contributions to the plans to the extent indicated by actuarial
valuations. Plan assets are invested primarily in equity and fixed income
securities.
F-12
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
The following tables reflect the status of Spinco's pension plans at August
31, 2001 and 2000:
2001 2000
-------- -------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $ 77,590 $77,564
Service cost................................................ 2,553 2,877
Interest cost............................................... 6,270 5,851
Actuarial (gain) loss....................................... 5,095 (5,273)
Benefits paid............................................... (3,699) (3,553)
Other....................................................... (587) 124
-------- -------
Benefit obligation at end of year........................... $ 87,222 $77,590
======== =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. $ 86,917 $82,057
Actual return on plan assets................................ 46 7,577
Employer contributions...................................... 1,138 2,021
Employee contributions...................................... 229 254
Benefits paid............................................... (3,699) (3,553)
Other....................................................... (1,142) (1,439)
-------- -------
Fair value of plan assets at end of year.................... $ 83,489 $86,917
======== =======
FUNDED STATUS:
Funded status............................................... $ (3,733) $ 9,327
Unrecognized actuarial (gain) loss.......................... 11,164 (1,965)
Unrecognized transition asset............................... (629) (834)
Unrecognized prior service cost............................. 2,541 2,655
-------- -------
Prepaid pension expense..................................... $ 9,343 $ 9,183
======== =======
AMOUNTS RECOGNIZED IN THE COMBINED BALANCE SHEETS CONSIST
OF:
Prepaid benefit cost........................................ $ 14,330 $16,189
Accrued benefit liability................................... (10,570) (7,246)
Intangible asset............................................ 1,795 240
Accumulated other comprehensive income...................... 3,788 --
-------- -------
Net amount recognized at year-end........................... $ 9,343 $ 9,183
======== =======
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for defined benefit pension plans with accumulated benefit
obligations in excess of plan assets were $28.7 million, $27.4 million, and
$17.4 million, respectively, as of August 31, 2001, and $10.3 million, $8.0
million, and $1.1 million, respectively, as of August 31, 2000.
F-13
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
Components of net periodic pension (benefit) cost for the fiscal years
ended August 31, 2001, 2000, and 1999 included the following:
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Service cost..................................... $ 2,553 $ 2,877 $ 1,908
Interest cost.................................... 6,270 5,851 4,707
Expected return on plan assets................... (8,038) (7,511) (6,063)
Amortization of prior service cost............... 418 386 391
Amortization of transitional asset............... (140) (148) (149)
Recognized actuarial loss........................ (18) 53 227
------- ------- -------
Net periodic pension cost........................ $ 1,045 $ 1,508 $ 1,021
======= ======= =======
Weighted average assumptions in 2001 and 2000 included the following:
2001 2000
---- ----
Discount rate............................................... 7.7% 8.2%
Expected return on plan assets.............................. 9.3% 9.4%
Rate of compensation increase............................... 5.0% 5.1%
It is Spinco's policy to adjust, on an annual basis, the discount rate used
to determine the projected benefit obligation to approximate rates on
high-quality, long-term obligations.
Spinco also has profit sharing and 401(k) plans to which both employees and
the company contribute. Spinco's cost of these plans was $4.3 million in 2001,
$4.7 million in 2000 and $4.3 million in 1999.
NOTE 4: LONG-TERM DEBT AND LINES OF CREDIT
As part of the distribution agreement between NSI and Spinco, all but
approximately $5.0 million of NSI's total outstanding debt will be assumed by
Spinco or refinanced with new borrowings by Spinco. Accordingly, for purposes of
the historical presentation of Spinco's financial position as of August 31, 2001
and 2000, all but $5.0 million of NSI's total outstanding debt has been
presented as obligations of Spinco. For purposes of the historical presentation
of Spinco's results of operations, Spinco has reflected all of NSI's interest
expense related to the debt allocated to it. Management intends to take the
necessary actions to effect the transfer of these obligations to Spinco under
the same terms existing with NSI; however, management does not have the ability
to unilaterally effect the transfer in all cases. In the event any of NSI's
creditors do not accept this transfer, Spinco would be required to refinance the
related borrowings. Management believes that the terms of the debt which will
ultimately be outstanding at Spinco will not differ materially from the terms of
NSI's debt currently outstanding.
F-14
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
2001 2000
-------- --------
(IN THOUSANDS)
6% notes due February 2009 with an effective rate of 6.04%,
net of unamortized discount of $310 in 2001 and $351 in
2000..................................................... $159,690 $159,649
8.375% notes due August 2010 with an effective rate of
8.398%, net of unamortized discount of $219 in 2001 and
$244 in 2000............................................. 199,781 199,756
4.3% to 8.5% other notes, payable in installments to
2026..................................................... 14,593 21,113
-------- --------
374,064 380,518
Less -- Amounts payable within one year included in current
liabilities.............................................. 357 --
-------- --------
$373,707 $380,518
======== ========
Future annual principal payments of long-term debt are as follows:
FISCAL YEAR AMOUNT
----------- --------------
(IN THOUSANDS)
2002........................................................ $ 357
2003........................................................ 341
2004........................................................ 2,687
2005........................................................ --
2006........................................................ --
2007 and beyond............................................. 370,679
--------
$374,064
========
In May 2001, NSI entered into a three-year agreement (the "Receivables
Facility") to borrow, on an ongoing basis, up to $150.0 million secured by
undivided interests in a defined pool of trade accounts receivable of the
lighting equipment and chemicals segments. At August 31, 2001, net trade
accounts receivable pledged as security for the borrowings under the Receivables
Facility totaled $227.8 million. Outstanding borrowings under the Receivables
Facility at August 31, 2001 were $105.1 million. Interest rates under the
Receivables Facility vary with commercial paper rates plus an applicable margin
and the interest rate was 3.90% at August 31, 2001. Effective on the
Distribution Date, Spinco will assume all of NSI's borrowings and other
obligations under the Receivables Facility.
In July 1999, NSI entered into a $250.0 million, 364-day committed credit
facility, which was renewed in June 2001 and expires in June 2002. The credit
facility permits certain subsidiaries of NSI to borrow under such facility, and
NSI guarantees these borrowings. Interest rates under the credit facilities are
based on the LIBOR rate or other rates, at NSI's option. NSI pays an annual fee
on the commitments based on its credit rating for unsecured long-term public
debt. Outstanding borrowings under the facility at August 31, 2001 were $105.0
million at an interest rate of 4.1 percent. No amounts were outstanding under
the facility at August 31, 2000. This facility will be discontinued at the time
of the Distribution.
F-15
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
In October 2001, NSI, on behalf of Spinco, negotiated a $240.0 million,
364-day committed credit facility with six domestic and international banks that
will become effective and will replace NSI's $250.0 million credit facility at
the Distribution Date. The facility includes an option for additional lenders to
enter the agreement to provide up to a total of $300.0 million of commitments.
The facility contains financial covenants including a leverage ratio of total
indebtedness to EBITDA and an interest coverage ratio. Interest rates under the
facility are based on the LIBOR rate or other rates, at Spinco's option. Spinco
will pay an annual fee on the commitment based on Spinco's credit rating for
unsecured long-term public debt. The principal lighting equipment subsidiary and
the principal chemicals subsidiary of Spinco are guarantors of the facility.
NSI's commercial paper program was discontinued in July 2001. Amounts
outstanding under the commercial paper program were replaced by borrowings under
the committed credit facility. The $235.6 million outstanding under NSI's
commercial paper program at August 31, 2000 had a weighted-average interest rate
of 6.8%.
At August 31, 2001, NSI had uncommitted lines of credit totaling $111.2
million for general operating purposes, of which $16.8 million is designated as
multi-currency. Outstanding borrowings under the uncommitted credit facilities
at August 31, 2001 were $24.7 million, at a weighted-average interest rate of
4.95%. At August 31, 2001, $74.4 million in letters of credit was outstanding,
primarily under the domestic uncommitted line of credit.
In January 1999, NSI issued $160.0 million in ten-year publicly traded
notes bearing a coupon rate of 6.0%. In August 2000, NSI issued $200.0 million
in ten-year publicly traded notes bearing a coupon rate of 8.375%. The fair
values of the $160.0 million and $200.0 million notes, based on quoted market
prices, were approximately $152.0 million and $219.4 million, respectively, at
August 31, 2001. Pursuant to a supplemental indenture executed in contemplation
of the Distribution, Spinco and its principal operating subsidiaries have become
the obligors of the notes, and NSI, effective upon the completion of the
Distribution, will be relieved of all obligations with respect to the notes.
Excluding the $160.0 million and $200.0 million notes, long-term debt recorded
in the accompanying balance sheets approximates fair value based on the
borrowing rates currently available to NSI for bank loans with similar terms and
average maturities.
NOTE 5: PARENT'S EQUITY AND RELATED MATTERS
NSI'S INVESTMENT. NSI's investment includes its original investments in
Spinco, accumulated income of Spinco, and the net intercompany balances with
NSI. In connection with the Distribution, the net intercompany balances with NSI
will be capitalized.
Historically, Spinco participated in NSI's long-term incentive programs
which provided qualified and non-qualified stock options to officers and
employees of NSI at exercise prices not less than market value on the date of
grant. Generally, options vest proportionately over a four-year period and are
exercisable for ten years from the grant
F-16
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
date. Certain of the long-term incentive programs also provide for awards of
restricted shares of NSI's common stock.
Spinco recorded $1.0 million, $6.7 million and $8.1 million of compensation
expense related to long-term incentive programs in 2001, 2000 and 1999,
respectively. Spinco intends to establish similar long-term incentive programs
after the Distribution; however, the terms and benefits of these programs are
yet to be determined.
Pursuant to the employee benefits agreement, NSI stock options held by
Spinco's employees will be converted to Spinco stock options at the time of the
Distribution. Spinco will multiply the number of shares purchasable under each
converted stock option by a ratio determined at the time of Distribution, based
on the respective fair values of NSI and Spinco, and divide the exercise price
per share of each option by the same ratio. Fractional shares will be rounded
down to the nearest whole number of shares. All other terms of the converted
stock options will remain the same as those in effect immediately prior to the
Distribution. Accordingly, no compensation expense will result from the
replacement of the options. At August 31, 2001, the number of shares of NSI
common stock subject to options held by NSI employees was 4,532,387. The
exercise prices of such options range from $19.31 to $46.63. The ultimate number
of stock options to be held by Spinco employees and the number and exercise
prices of Spinco stock options to be issued subject to the above calculation
cannot yet be determined.
RIGHTS AGREEMENT. Spinco anticipates its Board of Directors will adopt a
Rights Agreement (the "Rights Agreement") on or prior to the Distribution. If
adopted, the Rights Agreement will contain provisions designed to deter bids and
other business combinations that are not approved by the Spinco Board of
Directors.
COMMON AND PREFERRED STOCK. Spinco expects to have 500 million shares of
common stock, par value $.01 per share, and 50 million shares of preferred
stock, par value $.01 per share (the "Preferred Stock"), authorized as of the
Distribution Date. No shares of Preferred Stock are expected to be issued as of
the Distribution Date.
EMPLOYEE STOCK PURCHASE PLAN. In 1998, NSI's stockholders approved the
National Service Industries, Inc. Employee Stock Purchase Plan for the benefit
of eligible employees. Under the plan, employees could purchase, through payroll
deduction, NSI's common stock at a 15% discount. Shares are purchased quarterly
at 85% of the lower of the fair market value of NSI's common stock on the first
business day of the quarterly plan period or on the last business day of the
quarterly plan period. Spinco intends to establish a similar Employee Stock
Purchase Plan upon the Distribution; however, the exact terms of this plan are
yet to be determined.
NOTE 6: COMMITMENTS AND CONTINGENCIES
SELF-INSURANCE
It is Spinco's policy to self insure for certain insurable risks consisting
primarily of physical loss to property; business interruptions resulting from
such loss; and workers'
F-17
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
compensation, comprehensive general, and auto liability. Insurance coverage is
obtained for catastrophic property and casualty exposures as well as those risks
required to be insured by law or contract. Based on an independent actuary's
estimate of the aggregate liability for claims incurred, a provision for claims
under the self-insured program is recorded and revised annually.
The activity in the self-insurance liability as allocated to Spinco for
each of the years ended August 31 was as follows:
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Reserve, beginning of period......................... $13,621 $15,158 $19,213
Expense.............................................. 11,254 5,055 2,618
Payments............................................. (6,937) (6,592) (6,673)
------- ------- -------
Reserve, end of period............................... $17,938 $13,621 $15,158
======= ======= =======
LEASES
Spinco leases certain of its buildings and equipment under noncancelable
lease agreements. Minimum lease payments under noncancelable leases for years
subsequent to August 31, 2001, are as follows: 2002 -- $11.2 million;
2003 -- $9.5 million; 2004 -- $6.7 million; 2005 -- $3.6 million; 2006 -- $1.5
million; after 2006 -- $7.1 million.
Total rent expense was $12.3 million in 2001, $14.5 million in 2000, and
$12.3 million in 1999.
LITIGATION
Spinco is subject to various legal claims arising in the normal course of
business out of the conduct of its current and prior businesses, including
patent infringement and product liability claims. Based on information currently
available, it is the opinion of management that the ultimate resolution of
pending and threatened legal proceedings will not have a material adverse effect
on Spinco's financial condition or results of operations. However, in the event
of unexpected future developments, it is possible that the ultimate resolution
of such matters, if unfavorable, could have a material adverse effect on
Spinco's results of operations in future periods. Spinco reserves for known
legal claims when payments associated with the claims become probable and the
costs can be reasonably estimated. The actual costs of resolving legal claims
may be substantially higher than that reserved.
ENVIRONMENTAL MATTERS
Spinco's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to
F-18
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
the remediation of contaminated sites. Permits and environmental controls are
required for certain of Spinco's operations to limit air and water pollution,
and these permits are subject to modification, renewal, and revocation by
issuing authorities. Spinco believes that it is in substantial compliance with
all material environmental laws, regulations, and permits. On an ongoing basis,
Spinco incurs capital and operating costs relating to environmental compliance.
Environmental laws and regulations have generally become stricter in recent
years, and the cost of responding to future changes may be substantial.
Spinco reserves for known environmental claims when payments associated
with the claims become probable and the costs can be reasonably estimated.
Spinco's environmental reserves, for all periods presented, are immaterial. The
actual cost of environmental issues may be higher than that reserved due to the
difficulty in estimating such costs, and potential changes in the status of
government regulations.
Certain environmental laws can impose liability regardless of fault. The
federal Superfund law is an example of such an environmental law. However,
liability under Superfund is mitigated by the presence of other parties who will
share in the costs associated with the clean-up of sites. The extent of
liability is determined on a case-by-case basis taking into account many
factors, including the number of other parties whose status or activities also
subjects them to liability regardless of fault.
Spinco is currently a party to, or otherwise involved in, legal proceedings
in connection with state and federal Superfund sites. Spinco believes its
liability is de minimis at each of the currently active sites which it does not
own where it has been named as a potentially responsible party ("PRP") due to
its limited involvement at the site and/or the number of viable PRPs.
Specifically, the preliminary allocation among 48 PRPs at the Crymes Landfill
site in Georgia indicates that Spinco's liability is not significant, and there
are more than 1,000 PRPs at the M&J Solvents site in Georgia. For property which
Spinco owns on Seaboard Industrial Boulevard in Atlanta, Georgia, Spinco has
conducted an investigation on its and adjoining properties and submitted a
Compliance Status Report ("CSR") to the State of Georgia Environmental
Protection Division ("EPD") pursuant to the Georgia Hazardous Site Response Act.
Spinco is currently addressing questions raised by EPD regarding the CSR. Until
the CSR is finalized and Spinco evaluates the necessity for and scope of any
appropriate clean-up action, Spinco will not be able to determine whether
clean-up will be required and what the costs of clean-up will be.
INDEMNIFICATIONS
As further discussed in Note 1, in connection with the Distribution, Spinco
and NSI will enter into various agreements that address the allocation of assets
and liabilities between them and that define their relationship after the
Distribution. Included in these agreements will be certain general
indemnifications granted by Spinco to NSI, and by NSI to Spinco as well as
specific limited tax liability indemnifications in the event that the
Distribution is deemed to be taxable, or if any of the internal reorganization
steps taken to effect the Distribution are not deemed to be on a tax free basis.
F-19
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
NOTE 7: ACQUISITIONS AND DISPOSITIONS
Spinco made no acquisitions in fiscal 2001.
Acquisition spending in 2000 totaled $16.2 million and related to the
cash-out of remaining Holophane Corporation ("Holophane") shares. NSI purchased
Holophane in July 1999 for approximately $470.8 million. Of the total purchase
price, $454.6 million was paid during fiscal 1999 and $16.2 million was paid
during fiscal 2000. Results of operations after the acquisition date are
included in the Combined Statements of Income.
In the first quarter of fiscal 2000, the lighting equipment segment
recorded a $1.0 million pretax charge for closing a manufacturing facility in
California. This charge represented termination benefits for 341 hourly
employees and was recorded in "Cost of products sold" in the 2000 "Combined
Statements of Income." All amounts accrued were paid during fiscal 2000 with no
significant revisions to either the number of terminated employees or the amount
of benefits initially accrued.
Acquisition spending in 1999 totaled $514.4 million and was primarily
related to the lighting equipment segment. The acquisitions were accounted for
as purchases and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on estimated fair values.
The lighting equipment segment acquired four companies during 1999. The
largest acquisition was Holophane, a manufacturer of premium quality, highly
engineered lighting fixtures and systems, which was purchased in July 1999 for
approximately $470.8 million. The preliminary allocation of the purchase price
resulted in goodwill of $274.7 million, which is being amortized over 40 years,
and identifiable intangibles of $145.7 million, which are being amortized over
periods ranging from 2 to 40 years. Identifiable intangibles include trade
names, trademarks, patented technology, distribution network, trained workforce,
and restrictive covenants. In 2000, certain adjustments were made to the
purchase price allocation resulting in additional goodwill of approximately $1.3
million. These adjustments primarily related to severance charges and costs
associated with the termination of a joint venture in Australia.
At August 31, 1999, the preliminary allocation of the purchase price was as
follows:
(IN THOUSANDS)
Current assets.............................................. $ 67,504
Property, plant, and equipment.............................. 64,582
Intangibles................................................. 145,725
Goodwill.................................................... 274,708
Other long-term assets...................................... 33,890
Liabilities................................................. (115,598)
---------
$ 470,811
=========
F-20
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
The following pro forma information has been prepared assuming the
Holophane acquisition had taken place at the beginning of the respective fiscal
year of Spinco. The pro forma information includes adjustments for interest
expense incurred on debt to effect the acquisition, the interest income forgone
on the cash portion paid for the acquisition, additional depreciation based on
the fair market value of property, plant, and equipment, and amortization of
goodwill and intangibles resulting from this transaction. The pro forma
financial information does not purport to reflect the financial position or
results of operations that actually would have resulted had the transaction
occurred as of the date indicated or to project the results of operations for
any future period.
1999
--------------
(IN THOUSANDS)
Pro Forma Information (Unaudited)
Sales..................................................... $1,905,330
Net income................................................ $ 84,969
Other acquisitions in the lighting equipment segment included the September
1998 purchase of certain assets of GTY Industries (d/b/a "Hydrel"), a
manufacturer of architectural-grade light fixtures for landscape, in-grade, and
underwater applications; the April 1999 purchase of certain assets of Peerless
Corporation, a manufacturer of high performance indirect/direct suspended
lighting products; and the July 1999 purchase of C&G Carandini SA, a
manufacturer of exterior lighting fixtures.
As part of an initiative to refocus the overseas operations of the
chemicals segment, NSI sold its Australian subsidiary, NSI International Pty,
Ltd., resulting in a pretax loss of $5.6 million. In addition, NSI sold its
French operations, as well as certain trademarks and formulas for a pretax loss
of $9.0 million. The combined pretax loss of $14.6 million is included in "Loss
on sale of businesses" in the "Combined Statements of Income."
NOTE 8: INCOME TAXES
Historically, Spinco has been included in the consolidated federal income
tax return of NSI. Spinco's provision for income taxes in the accompanying
statements of income reflects federal, state, and foreign income taxes
calculated using the separate return basis. Spinco accounts for income taxes
using the asset and liability approach as prescribed by SFAS No. 109,
"Accounting for Income Taxes." This approach requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Using the
enacted tax rates in effect for the year in which the differences are expected
to reverse, deferred tax liabilities and assets are determined based on the
differences between the financial reporting and the tax basis of an asset or
liability.
F-21
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
The provision for income taxes consists of the following components:
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Provision for current Federal taxes.................. $29,171 $40,527 $34,958
Provision for current state taxes.................... 1,744 2,134 2,132
Provision for current foreign taxes.................. 5,058 4,657 2,373
Provision for deferred taxes......................... (7,324) 4,282 14,006
------- ------- -------
Total provision for income taxes................... $28,649 $51,600 $53,469
======= ======= =======
A reconciliation from the Federal statutory rate to the total provision for
income taxes is as follows:
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Federal income tax computed at statutory rate........ $24,203 $47,352 $49,905
State income tax, net of Federal income tax
benefit............................................ 1,342 3,518 3,638
Foreign and other, net............................... 3,104 730 (74)
------- ------- -------
Total provision for income taxes................... $28,649 $51,600 $53,469
======= ======= =======
Components of the net deferred income tax liability at August 31, 2001 and
2000 include:
2001 2000
-------- --------
(IN THOUSANDS)
DEFERRED TAX LIABILITIES:
Depreciation............................................... $ 11,583 $ 9,598
Pension.................................................... 4,468 4,160
Intangibles................................................ 48,614 54,565
Other...................................................... 2,613 2,751
-------- --------
Total deferred tax liabilities........................... 67,278 71,074
-------- --------
DEFERRED TAX ASSETS:
Self-insurance............................................. (6,898) (9,607)
Deferred compensation...................................... (23,025) (23,520)
Bonuses.................................................... (35) (5,765)
Foreign tax losses......................................... (969) (643)
Restructuring and other accruals not yet deductible........ (12,804) (4,425)
Other assets............................................... (8,114) (5,843)
-------- --------
Total deferred tax assets................................ (51,845) (49,803)
-------- --------
Net deferred tax liability............................... $ 15,433 $ 21,271
======== ========
F-22
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
At August 31, 2001, Spinco had foreign net operating loss carryforwards of
$2.8 million.
NOTE 9: BUSINESS SEGMENT INFORMATION
CAPITAL
OPERATING EXPENDITURES
PROFIT TOTAL DEPRECIATION AMORTIZATION AND
SALES (LOSS) ASSETS EXPENSE EXPENSE ACQUISITIONS
---------- ------------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
2001
Lighting Equipment..... $1,468,558 $115,857 $1,082,676 $36,197 $14,861 $ 37,389
Chemicals.............. 514,142 22,536 211,579 8,131 3,104 8,912
---------- -------- ---------- ------- ------- --------
1,982,700 138,393 1,294,255 44,328 17,965 46,301
Corporate.............. -- (20,545) 36,320 618 -- 1,310
Interest Expense,
net.................. -- (48,696) -- -- -- --
---------- -------- ---------- ------- ------- --------
$1,982,700 $ 69,152 $1,330,575 $44,946 $17,965 $ 47,611
========== ======== ========== ======= ======= ========
2000
Lighting Equipment..... $1,515,652 $144,149 $1,142,227 $31,792 $14,994 $ 68,721
Chemicals.............. 507,992 48,699 241,645 7,705 3,447 9,946
---------- -------- ---------- ------- ------- --------
2,023,644 192,848 1,383,872 39,497 18,441 78,667
Corporate.............. -- (14,258) 39,008 547 -- 460
Interest Expense,
net.................. -- (43,299) -- -- -- --
---------- -------- ---------- ------- ------- --------
$2,023,644 $135,291 $1,422,880 $40,044 $18,441 $ 79,127
========== ======== ========== ======= ======= ========
1999
Lighting Equipment..... $1,215,837 $121,755 $1,073,936 $20,351 $ 2,322 $541,649
Chemicals.............. 485,731 45,206 233,461 6,681 3,480 10,980
---------- -------- ---------- ------- ------- --------
1,701,568 166,961 1,307,397 27,032 5,802 552,629
Corporate.............. -- (11,679) 29,641 463 -- 296
Interest Expense,
net.................. -- (12,697) -- -- -- --
---------- -------- ---------- ------- ------- --------
$1,701,568 $142,585 $1,337,038 $27,495 $ 5,802 $552,925
========== ======== ========== ======= ======= ========
F-23
NOTES TO COMBINED FINANCIAL STATEMENTS
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC. -- NOTE 1) -- (CONTINUED)
The geographic distribution of Spinco's sales and service revenues,
operating profit (loss), and long-lived assets is summarized in the following
table:
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
SALES(1)
United States................................ $1,749,498 $1,786,901 $1,545,245
Canada....................................... 105,825 102,821 84,692
European countries........................... 72,568 80,785 46,728
Other........................................ 54,809 53,137 24,903
---------- ---------- ----------
$1,982,700 $2,023,644 $1,701,568
========== ========== ==========
OPERATING PROFIT (LOSS)
United States................................ $ 75,523 $ 127,783 $ 139,733
Canada....................................... 5,394 6,342 1,170
European countries(2)........................ (8,490) (891) 934
Other(3)..................................... (3,275) 2,057 748
---------- ---------- ----------
$ 69,152 $ 135,291 $ 142,585
========== ========== ==========
LONG-LIVED ASSETS(4)
United States................................ $ 730,590 $ 746,548 $ 731,420
Canada....................................... 13,434 15,196 14,719
European countries........................... 18,279 26,041 32,491
Other........................................ 9,156 14,116 14,207
---------- ---------- ----------
$ 771,459 $ 801,901 $ 792,837
========== ========== ==========
-------------------------
(1) Sales are attributed to each country based on the selling location.
(2) Fiscal 2001 operating loss includes a $9,000 loss on the sale of the
chemical segment's French operations.
(3) Fiscal 2001 operating loss includes a $5,557 loss on the sale of the
chemical segment's Australian operations.
(4) Long-lived assets include net property, plant, and equipment, goodwill and
intangibles, and other long-term assets.
F-24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To National Service Industries, Inc.:
We have audited, in accordance with auditing standards generally accepted
in the United States, the combined financial statements of the NATIONAL SERVICE
INDUSTRIES, INC. lighting equipment and chemicals businesses (to be reorganized
as L&C Spinco, Inc.) as of August 31, 2001 and 2000 and for each of the three
years in the period ended August 31, 2001, included in this information
statement, and have issued our report thereon dated October 12, 2001. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The Schedule of Valuation and Qualifying Accounts for the years ended
August 31, 2001, 2000 and 1999 included in this information statement is the
responsibility of Spinco's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic combined financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic combined financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
combined financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
October 12, 2001
F-25
SCHEDULE II
NATIONAL SERVICE INDUSTRIES, INC. LIGHTING EQUIPMENT
AND CHEMICALS BUSINESSES
(TO BE REORGANIZED AS L&C SPINCO, INC.)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 2001, 2000, AND 1999
(IN THOUSANDS)
ADDITIONS CHARGED TO
BALANCE AT ----------------------- BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS PERIOD
---------- --------- ----------- ---------- ----------
YEAR ENDED AUGUST 31, 2001:
Reserve for doubtful accounts..... $6,570 4,930 -- 3,305 $8,195
====== ====== ===== ====== ======
Reserve for estimated returns,
allowances, and warranty
costs........................... $4,006 27,383 -- 27,310 $4,079
====== ====== ===== ====== ======
YEAR ENDED AUGUST 31, 2000:
Reserve for doubtful accounts..... $5,470 2,667 1,927 3,494 $6,570
====== ====== ===== ====== ======
Reserve for estimated returns,
allowances, and warranty
costs........................... $4,416 22,780 -- 23,190 $4,006
====== ====== ===== ====== ======
YEAR ENDED AUGUST 31, 1999:
Reserve for doubtful accounts..... $3,746 2,744 1,595 2,615 $5,470
====== ====== ===== ====== ======
Reserve for estimated returns,
allowances, and warranty
costs........................... $3,804 20,017 1,588 20,993 $4,416
====== ====== ===== ====== ======
-------------------------
(1) Recoveries credited to the reserve and reserves recorded in acquisitions.
F-26