-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R/uHnCMFwlsoumiG3WZy6yLhqEL2ECGBiLMFOk+bE5xewN9VvVu5giMBjmE941zs kGLgTIie3D262zbU+y0/ZQ== 0000950117-99-002051.txt : 19991018 0000950117-99-002051.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950117-99-002051 CONFORMED SUBMISSION TYPE: 10-12B/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19991001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRATEGIC INDUSTRIES INC /NJ/ CENTRAL INDEX KEY: 0001090389 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD APPLIANCES [3630] FILING VALUES: FORM TYPE: 10-12B/A SEC ACT: SEC FILE NUMBER: 001-15159 FILM NUMBER: 99721304 BUSINESS ADDRESS: STREET 1: 101 WOOD AVENUE SOUTH CITY: ISELIN STATE: NJ ZIP: 08830 BUSINESS PHONE: 7327672234 MAIL ADDRESS: STREET 1: 101 WOOD AVENUE SOUTH CITY: ISELIN STATE: NJ ZIP: 08830 10-12B/A 1 STRATEGIC INDUSTRIES, INC. 10-12B/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1999. ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ STRATEGIC INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 51-0305292 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) c/o U.S. INDUSTRIES, INC. 08830 101 WOOD AVENUE SOUTH (ZIP CODE) ISELIN, N.J. (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (732) 767-0700 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS TO BE REGISTERED EACH CLASS IS TO BE REGISTERED ------------------------------------ ------------------------------ Common stock, par value $0.01 per share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ________________________________________________________________________________ STRATEGIC INDUSTRIES, INC. INFORMATION REQUIRED IN INFORMATION STATEMENT ITEM 1. BUSINESS The registrant, Strategic Industries, Inc., a Delaware corporation, is presently an indirect wholly-owned subsidiary of U.S. Industries, Inc. The information required by this item is contained in the sections entitled 'Summary,' 'The Spin-off' and 'Business' of the Information Statement.* ITEM 2. FINANCIAL INFORMATION The information required by this item is contained in the sections entitled 'Summary,' 'Capitalization,' 'Selected Combined Financial Data,' 'Unaudited Pro Forma Combined Condensed Financial Data' and 'Management's Discussion and Analysis of Financial Condition and Results of Operations' of the Information Statement.* ITEM 3. PROPERTIES The information required by this item is contained in the section entitled 'Business' of the Information Statement.* ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the sections entitled 'Executive Compensation' and 'Security Ownership of Certain Beneficial Owners of Common Stock' of the Information Statement.* ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item is contained in the sections entitled 'Management -- Directors' and 'Management -- Executive Officers' of the Information Statement.* ITEM 6. EXECUTIVE COMPENSATION The information required by this item is contained in the section 'Executive Compensation' of the Information Statement.* ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in the section entitled 'The Spin-off -- Agreements between Strategic and USI and Relationship after the Spin-off' of the Information Statement.* ITEM 8. LEGAL PROCEEDINGS The information required by this item is contained in the section entitled 'Business -- Legal Proceedings' of the Information Statement.* - ------------ * Incorporated by reference. 1 ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is contained in the sections entitled 'The Spin-off -- Manner of Effecting the Spin-off,' 'The Spin-off -- Results of the Spin-off,' 'Projected Ownership of Our Stock Immediately After the Spin-off' and 'Description of Capital Stock' of the Information Statement.* ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES None. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED The information required by this item is contained in the sections entitled 'Description of Capital Stock,' 'Rights Plan' and 'Purposes and Effects of Certain Provisions of Certificate of Incorporation, By-Laws and Delaware Statutory Law' of the Information Statement.* ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS The information required by this item is contained in the sections entitled 'Purposes and Effects of Certain Provisions of the Certificate of Incorporation, By-Laws and Delaware Statutory Law' and 'Limitation on Liability and Indemnification of Officers and Directors' of the Information Statement.* ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is identified in 'Index to Combined Financial Statements' of the Information Statement.* ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements 1. See Index to Combined Financial Statements on page F-1 of the Information Statement.* 2. Financial Statement Schedules: II. Valuation and Qualifying Accounts All Schedules, other than that indicated above, are inapplicable, and are therefore omitted. (b) Exhibits Information Statement (attached to this Registration 2.1 -- Statement as Annex A) 3.1 -- Amended and Restated Certificate of Incorporation of Strategic (attached to Exhibit 2.1 as Annex A) 3.2 -- Amended and Restated By-Laws of Strategic **3.3 -- Rights Agreement, dated , 1999, between Strategic and , as Rights Agent **4.1 -- Specimen form of certificate evidencing Strategic common stock **10.1 -- Spin-off Agreement, dated , 1999, between USI and Strategic **10.2 -- Indemnification Agreement, dated , 1999, between USI and Strategic **10.3 -- Tax Sharing and Indemnification Agreement dated , 1999, between USI and Strategic **10.4 -- Corporate Transition Agreement, dated , 1999, between USI and Strategic 10.5(a) -- Interim Employment Agreement of John G. Raos, dated May 18, 1999 (b) -- Employment Agreement of John G. Raos, dated May 18, 1999 (c) -- Employment Agreement of Peter J. Statile, dated June 1, 1999 (d) -- Employment Agreement of Steven C. Barre, dated July 1, 1999 (e) -- Employment Agreement of Gary K. Meuchel, dated July 1, 1999 (f) -- Employment Agreement of Peter F. Reilly, dated July 1, 1999 **10.6 -- Strategic Industries, Inc. Value Creation Plan **10.7 -- Strategic Industries, Inc. Stock Incentive Plan (attached to Exhibit 2.1 as Annex B) **21.1 -- Subsidiaries of Strategic **27.1 -- Financial Data Schedule
- ------------ ** To be filed by amendment. 2 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. STRATEGIC INDUSTRIES, INC. By: /s/ STEVEN C. BARRE ................................. Name: Steven C. Barre Title: Vice President, General Counsel and Secretary September 30, 1999 3 EXHIBIT 2.1 [LETTERHEAD OF U.S. INDUSTRIES, INC.] , 1999 Dear USI Stockholder: I am pleased to enclose a copy of the information statement describing Strategic Industries, Inc., the company through which USI intends to spin-off the USI diversified group to our stockholders. When the spin-off is completed, Strategic will be a New York Stock Exchange-listed company entirely separate from USI. It will own and operate our present consumer products, precision engineered products and automotive products companies. You will receive one share of Strategic common stock for every ten shares of USI common stock you hold at the close of business on , 1999. You will not be required to make any payment or take any other action to receive your Strategic common stock. [We have received a tax ruling confirming that the receipt of Strategic common stock in the spin-off will be tax-free to our stockholders for U.S. tax purposes.] The spin-off is conditioned upon completion of the new financing arrangements for Strategic described in the information statement. Subject to this, the spin-off is expected to occur, and regular way NYSE trading in Strategic common stock is expected to commence, on , 1999. Our Board of Directors approved the spin-off following a full review of various alternatives to improve company performance. The Board concluded that repositioning USI from a wide-ranging conglomerate to a company focused on three large building products businesses -- USI Bath and Plumbing, Lighting Corporation of America, and USI Hardware and Tools -- would achieve greater shareholder value over time. The spin-off will also enable us to strengthen our balance sheet. Strategic will pay us approximately $600 million principally to retire intercompany debt. We will use these proceeds to reduce our own debt, make acquisitions for our ongoing businesses and continue repurchasing our shares. Following the spin-off, we believe the diversified companies will be better able to develop along an independent strategic path with increased senior management attention. We would like to thank John Raos and others of his team who are leaving USI for their many contributions to our company and wish them tremendous success in their future endeavors at Strategic Industries. Sincerely, David H. Clarke Chairman and Chief Executive Officer ANNEX A PRELIMINARY COPY, DATED SEPTEMBER 30, 1999 - SUBJECT TO COMPLETION OR AMENDMENT - INFORMATION STATEMENT STRATEGIC INDUSTRIES, INC. COMMON STOCK (INCLUDING ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) [LOGO] You should consider carefully the risk factors beginning on page 8 of this information statement. The spin-off does not require approval by USI stockholders. Therefore, USI is not asking you for a proxy and requests that you do not send USI a proxy. This information statement is not an offer to sell, or a solicitation of an offer to buy, any of our securities or those of USI. We have prepared this information statement to provide you with information regarding the proposed spin-off to U.S. Industries, Inc. stockholders of all of our shares of common stock. At the time of the spin-off, we will own and operate the diversified businesses of USI. If you are a USI stockholder at the close of business on , 1999, you will receive one share of our common stock for every ten shares of USI common stock you hold at that time (together with cash instead of any fraction of a share to which you would be entitled). The spin-off will take effect on , 1999 and certificates for our shares will be mailed to you on or about , 1999. You will not be required to make any payment for the shares of our common stock that you will receive in the spin-off. If you have any questions regarding the spin-off, you may call ChaseMellon Shareholder Services L.L.C., telephone number .
No public market currently exists for our common stock. However, we are seeking to list our common stock on the New York Stock Exchange. If the shares are accepted for listing on the New York Stock Exchange, we expect that a 'when-issued' market will develop on or shortly before the record date for the spin-off and regular way trading will begin on the first business day after the effective date of the spin-off. Proposed New York Stock Exchange Trading Symbol 'STG' ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OUR COMMON STOCK, OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We first mailed this information statement to USI stockholders on , 1999. TABLE OF CONTENTS
PAGE ---- Questions and Answers about the Spin-off............................ ii Expected Timetable for the Spin-off... iii Forward-Looking Statements............ iv Summary............................... 1 Risk Factors.......................... 8 The Spin-off.......................... 12 Capitalization........................ 17 Selected Combined Financial Data...... 18 Unaudited Pro Forma Combined Condensed Financial Data...................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23 Business.............................. 34 Management............................ 41 Executive Compensation................ 43 Projected Ownership of Our Stock Immediately after the Spin-off...... 50 Description of Capital Stock.......... 51
PAGE ---- Rights Plan........................... 52 Purposes and Effects of Certain Provisions of Certificate of Incorporation, By-Laws and Delaware Statutory Law....................... 55 Limitation on Liability and Indemnification of Officers and Directors....................... 58 Additional Information................ 59 Index to Combined Financial Statements.......................... F-1 ANNEXES A Amended and Restated Certificate of Incorporation...................... A-1 B Strategic Industries, Inc. Stock Incentive Plan..................... B-1 C Material Federal Income Tax Consequences of Awards and Material Federal Income, Estate and Gift Tax Consequences Relating to the Transfer of Options Under Our Stock Incentive Plan..................... C-1
i QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
WHAT IS THE SPIN-OFF? USI intends to pay a dividend to its stockholders consisting of all of our shares of common stock. The dividend is known as a spin-off. At the time of the spin- off, we will own and operate the diversified businesses of USI. WHAT WILL I RECEIVE IN For every ten shares of USI stock that you hold at the close of business on THE SPIN-OFF? , 1999, you will receive one share of our common stock. You will receive cash (net of applicable fees) instead of any fraction of a share to which you would be entitled. You will receive these automatically without any required payment or other action on your part. [Under our direct registration program, unless you give us instructions to do otherwise, your ownership of our common stock will be recorded electronically on our books and records rather than evidenced by a physical stock certificate.] WHEN WILL THE SPIN-OFF The spin-off will be completed as soon as possible after the conditions to the OCCUR? spin-off are met. These conditions include: USI's receipt of a tax ruling from the Internal Revenue Service to the effect that the spin-off will be tax-free to USI's stockholders and to USI for federal income tax purposes, and completion of financing. DO I HAVE TO PAY TAXES USI is seeking a tax ruling to the effect that the spin-off will be tax-free to ON THE RECEIPT OF USI stockholders and to USI for federal income tax purposes, except with respect STRATEGIC COMMON to cash received instead of fractional shares. To review the material federal STOCK? income tax consequences in greater detail, see page . WILL STRATEGIC COMMON We do not expect to pay cash dividends on our stock for the foreseeable future. STOCK PAY DIVIDENDS? WILL MY STRATEGIC Yes, we anticipate that our common stock will be traded on the NYSE under the COMMON STOCK BE LISTED symbol 'STG,' subject to official notice of issuance. ON THE NEW YORK STOCK EXCHANGE? WHAT WILL HAPPEN TO USI will continue to own and operate its other businesses -- including bath and USI AND MY EXISTING plumbing, lighting and hardware. USI stock will continue to trade on the NYSE USI COMMON STOCK? under the symbol 'USI.' The spin-off will not affect the number of outstanding shares of USI stock or any rights of USI stockholders. WHAT WILL HAPPEN TO Beginning on or about , 1999, and continuing through , 1999, THE TRADING OF USI AND you will only be able to sell your USI stock with due bills for our stock. This STRATEGIC COMMON means that you will give up your right to receive our stock if you sell your USI STOCK? stock during this time and you will have to deliver the certificate for our stock to the buyer of your USI stock once you receive our stock certificate. Beginning on , 1999, we expect that regular way trading in our stock will begin on the NYSE.
ii EXPECTED TIMETABLE FOR THE SPIN-OFF [day], [date], 1999........... 'When-issued' trading in our common stock commences on the NYSE. [day], [date], 1999........... USI common stock commences trading with due bills attached on the NYSE. [day], [date], 1999........... Spin-off record date for holders of USI common stock (5:00 p.m. New York time). [day], [date], 1999........... Spin-off effective date for holders of USI common stock. Regular way trading in our common stock commences on the NYSE. [day], [date], 1999........... Ex-entitlement date for the stock dividend for USI common stock trading on the NYSE. [day], [date], 1999........... Settlement date for 'when-issued' trading in our common stock on the NYSE.
iii FORWARD-LOOKING STATEMENTS We have made forward-looking statements in this information statement. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements are statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including such items as business strategy and measures to implement strategy, competitive strengths, objectives, goals, growth of our business and operations, plans and references to future success. Forward-looking statements also include any other statements that include words such as 'anticipate,' 'believe,' 'plan,' 'estimate,' 'intend' and other similar expressions. Forward-looking statements are based on certain assumptions and analyses we have made in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate. Whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties, including, among others noted in this information statement, the following: interest rates, foreign currency exchange rates, instability in domestic and foreign markets, consumer spending patterns, availability of consumer and commercial credit, levels of automotive production, the effect of changes in domestic and foreign laws and regulations (including government subsidies, tariffs and international trade regulations), product initiatives and other actions taken by competitors, changes in raw material costs and our suppliers' continuing ability to fulfill our purchasing requirements, and Year 2000 issues. All of the forward-looking statements made in this information statement are qualified by these cautionary statements, and we cannot assure you that the results or developments we have anticipated will be realized. Even if the results and developments in our forward-looking statements are substantially realized, we cannot assure you that they will have the expected consequences to, or effects on us, or our business or operations. iv SUMMARY This summary highlights selected information from this information statement, but does not contain all details concerning the spin-off of our common stock to USI stockholders, including information that may be important to you. To better understand the spin-off and our business and financial position, you should carefully review this entire document. References to 'Strategic,' 'we,' 'us' or 'our' mean Strategic Industries, Inc. and its subsidiaries and assume the spin-off has already occurred. References to 'USI' mean U.S. Industries, Inc. and its subsidiaries (excluding, if the reference is to a date or period of time after the spin-off, Strategic and its subsidiaries). References to 'fiscal' are to the applicable fiscal year ended September 30. THE COMPANY Strategic Industries, Inc. operates and manages a diversified group of businesses on a decentralized basis, with a corporate management team providing strategic direction and financial support. Our operating companies are divided into three business groups: Consumer Products, Precision Engineered Products and Automotive Interior Products. In fiscal 1998, we had net sales of $888.5 million and operating income of $25.2 million (after deducting goodwill impairment, restructuring and other related charges totalling $71.1 million). We believe our businesses generally have leading positions in niche markets, high quality products, attractive operating margins compared to their peers and experienced management. Our products are used in a variety of markets by a broad range of end-users in the U.S. and internationally. We believe the business trends that affect our operating companies and the markets we serve vary. As a result, we believe our diversity reduces our exposure to any single market. The following table presents the operating companies in each of our business groups. CONSUMER PRODUCTS Rexair Manufactures Rainbow'r' premium vacuum cleaners for sale through an extensive independent direct sales network EJ Footwear Manufactures Georgia Boot'r' western, work and outdoor sporting boots and Lehigh'r' industrial safety footwear Native Textiles Manufactures warp knit fabrics used in lingerie and activewear BiltBest Windows Manufactures windows and patio doors SCF Industries Manufactures folding and stacking chairs as a licensee of the Samsonite'r' brand name PRECISION ENGINEERED PRODUCTS Huron Manufactures precision metal products used in automobiles Bearing Inspection Inspects and overhauls aircraft engine bearings and other aircraft components FSM Manufactures flat shadow masks, a component of color television picture tubes Jade Technologies Manufactures customized leadframes for the semiconductor industry (an approximately 75%-owned Singapore public company) AUTOMOTIVE INTERIOR PRODUCTS Garden State Tanning Manufactures premium automotive leather Leon Plastics Manufactures molded plastic parts and assemblies for automotive interiors
We also own approximately 20% of the equity of United Pacific Industries Limited, a company listed on the Stock Exchange of Hong Kong. United Pacific manufactures voltage converters and other electronic components. This equity interest is included in the Precision Engineered Products Group. 1 BUSINESS STRATEGY Our objective is to build our equity value by consistently focusing on reducing our debt and increasing profitability and cash flow. Key elements of our business strategy are described below. DEBT REDUCTION. Historically, our operating companies have generated significant cash flow. We intend to use a substantial portion of any available cash flow to reduce our debt. In addition, we will regularly evaluate our businesses to determine whether our debt reduction strategy should be accelerated through selected dispositions. GROWTH INITIATIVES. We will seek to build upon our niche positions through internal and external growth in targeted markets. We will selectively commit capital to extend our markets, develop new products and expand manufacturing capabilities. We will also consider complementary acquisitions to augment these initiatives. For example, in fiscal 1998, to enhance its product offering and foster increased sales, Rexair introduced a redesigned product line and increased efforts to expand its independent direct sales network in the United States and abroad. Recently, we also invested in a new facility for Bearing Inspection to support future growth and acquired Atech Turbine Components to complement Bearing Inspection's operations. COST REDUCTION AND MARGIN EXPANSION. We will seek to reduce costs and improve operating margins at each of our individual businesses through process improvements and by focusing on higher margin products and markets. For example, our continuous productivity improvement techniques have reduced operating costs at Huron and Leon Plastics, and we intend to apply these techniques where appropriate to other operating companies. Ongoing programs also include the continued rationalization of manufacturing operations and increased use of foreign sources of supply at EJ Footwear. In addition Garden State is implementing process changes to increase hide-cutting yields and is focusing on higher margin products. DECENTRALIZED MANAGEMENT WITH PERFORMANCE-BASED INCENTIVES. Our operating companies will be managed on a decentralized basis by experienced executives. The chief executive officers of our operating companies average over 15 years in their industries. Incentive compensation for senior executives at our operating companies will depend on reaching short and long-term operating goals linked to the executives' respective businesses. Our corporate management team will supply strategic direction and financial support to the operating companies. They have extensive experience in senior management positions within multi-industry public companies including Hanson PLC and USI. Their compensation under our value creation plan will depend upon reaching operating goals linked to our overall performance. Both our corporate management team and our operating company management will have significant personal equity interests in us, principally in the form of stock options. ADDRESS AND TELEPHONE NUMBER We are a Delaware corporation. Our principal executive offices will be located at and our telephone number at that address will be . 2 THE SPIN-OFF Company Doing the U.S. Industries, Inc., a Delaware corporation. Spin-off.............. Company Resulting from the Spin-off.......... Strategic Industries, Inc., a Delaware corporation. Conditions to the Completion of the spin-off is subject to the following Spin-off.............. conditions: USI's receipt of a tax ruling from the Internal Revenue Service to the effect that the spin-off will be tax-free to USI's stockholders and to USI for federal income tax purposes; Availability of proceeds under our new credit facility and an offering of senior subordinated notes into the institutional debt market. We expect to use approximately $586.7 million of proceeds of the new credit facility and the offering of senior subordinated notes to repay existing indebtedness and accrued interest owed by our businesses to subsidiaries of USI, to repay other existing indebtedness, to pay expenses incurred in the spin-off and to pay a dividend of approximately $35.5 million to USI. The undrawn portion of the new credit facility will be available for working capital and to pay any spin-off adjustments that may be required to be paid by our subsidiaries to subsidiaries of USI. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources' and 'The Spin-off -- Agreements between Strategic and USI and Relationship after the Spin-off.' Spin-off Ratio.......... One share of our common stock for every ten shares of USI common stock held of record on the spin-off record date. Spin-off Record Date.... , 1999 (5:00 p.m. New York time). Spin-off Effective , 1999. The dividend agent will commence mailing our common Date.................. stock certificates on this date. Trading in USI Common Stock from the Spin-off Record Date up to and Including the Spin-off Effective Date........ During this period, USI stock will trade on the NYSE with due bills attached. The due bills will entitle a purchaser of USI stock during this period to receive one share of our stock for every ten shares purchased. If the spin-off conditions are not satisfied and the spin-off is not completed, the due bills will become null and void. Our Outstanding Stock... Based on approximately 88 million shares of USI common stock outstanding at the close of business on , 1999, approximately 8.8 million shares of our stock will be distributed in the spin-off. These shares will constitute all of our capital stock that will be outstanding immediately following the spin-off. After the spin-off, we will recommend the issuance to our executive officers and other key employees of a total of shares of our common stock, which will be subject to certain restrictions. In addition, we will issue a total of shares of our common stock to our non-employee directors. After taking into account these issuances, we will have shares of common stock outstanding. After the spin-off, we will also recommend the issuance to our executive officers and other
3 key employees of options to purchase the total number of shares of our common stock determined by dividing $ million by the fair market value of our common stock on the date of grant (up to a maximum of shares). See 'Executive Compensation -- Stock Incentive Plan.' Interests in Fractions of Shares............. Fractions of shares of our common stock will not be issued in the spin-off. Instead, fractions of shares will be aggregated by the dividend agent and sold on the NYSE. The net cash proceeds of these sales will be paid ratably to USI stockholders otherwise entitled to fractions of shares. See 'The Spin-off -- Fractions of Shares.' [Direct Registration.... Upon completion of the spin-off, we will issue the appropriate share of our common stock to you through direct registration rather than issuing a physical stock certificate unless you give specific instructions to do otherwise. See 'The Spin-off -- Direct Registration of Our Common Stock.'] Dividend Agent.......... The dividend agent is ChaseMellon Shareholder Services L.L.C. Its address and telephone number are: Material Federal Income Tax Consequences to USI Stockholders...... It is a condition to the spin-off that USI receives a tax ruling from the Internal Revenue Service to the effect that, for federal income tax purposes, the spin-off will qualify as a tax-free distribution to the stockholders of USI under Section 355 of the Internal Revenue Code. Therefore, you will not incur federal income tax upon the receipt of our common stock in the spin-off, except with respect to cash received instead of a fraction of a share. See 'The Spin-off -- Material Federal Income Tax Consequences.' Trading Market and Symbol for Our Common Stock................. We are seeking to list our common stock on the NYSE under the proposed symbol 'STG.' Prior to the spin-off, we do not expect there to be any public trading market for our common stock except that our common stock is expected to trade on a 'when-issued' basis on the NYSE beginning on , 1999, for settlement on , 1999. If the spin-off is not completed, all 'when-issued' trading in our common stock will be null and void. If the spin-off is completed, we expect that 'regular way' trading in our common stock on the NYSE will commence at 9:30 a.m. New York time, on , 1999, subject to official notice of issuance. See 'Risk Factors -- There Is No Trading History For Our Common Stock and We Do Not Expect to Pay Dividends' and 'The Spin-off -- Listing and Trading of Our Common Stock.' Transfer Agent and Registrar for the Common Stock..........
4 Agreements between Strategic and USI and Relationship after the Spin-off.............. After the spin-off, we and USI will operate independently of each other as separate public companies. Neither we nor USI will own each other's stock (except, in the near-term, for a limited number of shares held in employee benefit plan trusts). All directors, executives and employees of USI who join us will cease to be directors, executives or employees of USI. See 'The Spin-off -- Agreements between Strategic and USI and Relationship after the Spin-off.'
5 SUMMARY COMBINED FINANCIAL DATA The historical summary combined financial data set forth below for each of the fiscal years in the three-year period ended September 30, 1998 are derived from our audited combined financial statements included elsewhere in this information statement. The historical summary combined financial data for the nine months ended June 30, 1999 and 1998 are unaudited but, in our opinion, have been prepared on a basis consistent with that of each of the fiscal years in the three-year period ended September 30, 1998 (except for normal year-end adjustments). The interim financial data include all adjustments that management considers necessary for a fair presentation of interim results. Historical financial information may not be indicative of our future performance as an independent company. Furthermore, the historical financial data presented below do not reflect certain pro forma adjustments giving effect to the spin-off which are reflected in 'Unaudited Pro Forma Combined Condensed Financial Data.' The information set forth below should also be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Combined Financial Statements and notes. See 'Index to Combined Financial Statements.' We have not presented data about historical earnings per share or dividends because the capital structure of our businesses prior to the spin-off is not indicative of our capital structure following the spin-off.
FISCAL YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30, JUNE 30, ------------------------ ------------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- (IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales...................................... $737.7 $807.9 $888.5 $663.8 $651.0 Cost of products sold.......................... 521.9 575.8 669.5 488.7 494.4 Selling, general and administrative expenses... 105.8 112.8 124.2 94.3 94.6 Goodwill impairment and restructuring charges(A)................................... -- -- 62.8 59.1 1.1 Operating income(A)(B)......................... 101.2 108.9 25.2 16.6 54.3 Net income (loss).............................. 39.9 49.4 (22.3)(C) (22.0)(D) 19.3 (E) BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents...................... $ 3.3 $ 8.4 $ 12.4 $ 12.3 $ 8.7 Working capital................................ 156.2 159.8 195.1 217.8 193.9 Total assets................................... 563.4 584.2 644.6 632.5 625.4 Total debt(F).................................. 411.1 364.8 344.4 357.0 537.3 Invested capital (deficit)..................... 23.1 82.1 126.0 142.9 (65.1) OTHER DATA: Capital expenditures........................... 9.8 17.7 27.3 21.8 20.4 Depreciation and amortization.................. 19.2 19.2 23.3 17.6 18.7
- ------------ (A) In fiscal 1998, in addition to the goodwill impairment and restructuring charges, we incurred $8.3 million ($1.7 million of which was incurred through the nine months ended June 30, 1998) of other related charges which were included in cost of products sold and selling, general and administrative expenses. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and Note 4 to the Combined Financial Statements. (B) Operating income (loss) in fiscal 1997 and 1998, and for the nine months ended June 30, 1998 and 1999 included $1.7 million, $(2.4) million, $0.2 million and $(6.2) million, respectively, of equity earnings (loss) from our investment in United Pacific. Fiscal 1998 equity (loss) of $(2.4) million includes a charge of $4.0 million associated with an impairment of a United Pacific subsidiary. The equity (loss) in the nine months ended June 30, 1999 of $(6.2) million includes a write-down of $5.5 million. (C) After an income tax benefit of $6.5 million, the $71.1 million of charges detailed above reduced net income for fiscal 1998 by $64.6 million. (D) After an income tax benefit of $2.3 million, the $60.8 million of charges detailed above reduced net income for the nine months ended June 30, 1998 by $58.5 million. (E) After an income tax benefit of $0.4 million the $1.1 million of restructuring charges reduced net income for the nine months ended June 30, 1999 by $0.7 million. (F) Amounts primarily represent intercompany notes and interest payable to affiliates. 6 SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA The following summary unaudited pro forma combined condensed financial data reflect the spin-off as if it occurred as of October 1, 1997 for the year ended September 30, 1998 and the nine months ended June 30, 1998 and as of October 1, 1998 for the nine months ended June 30, 1999 for pro forma combined condensed statement of operations data purposes and as of June 30, 1999 for pro forma combined condensed balance sheet data purposes. The unaudited pro forma combined condensed financial data reflect our expected capitalization as a result of the spin-off, the incurrence of a total of approximately $586.7 million of indebtedness under the new credit facility and the senior subordinated notes and interest expense (including amortization of capitalized costs) relating to such borrowings. The unaudited pro forma combined condensed financial data do not include $10.4 million of expected non-recurring legal, investment banking and other advisory costs related to the spin-off which will be expensed by us at the time of the receipt of a favorable tax ruling from the Internal Revenue Service with regard to the spin-off. These data do not necessarily reflect our results of operations or financial position had the spin-off actually been completed as of the dates shown. Also, these data are not necessarily indicative of our future results of operations or future financial position. See 'Capitalization' and 'Unaudited Pro Forma Combined Condensed Financial Data.'
NINE MONTHS ENDED JUNE 30, FISCAL YEAR ENDED ------------------- SEPTEMBER 30, 1998 1998 1999 ------------------ ---- ---- (IN MILLIONS, EXCEPT PER SHARE DATA) PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS DATA: Net sales.............................................. $ 888.5 $663.8 $651.0 Operating income....................................... 19.0 (A) 11.9 (B) 52.1 (C) Interest expense....................................... 61.0 45.8 45.8 Net (loss) income...................................... (49.6)(A) (42.7)(B) 3.4 (C) Basic and diluted (loss) earnings per share(D)......... (5.64) (4.85) 0.39
AT JUNE 30, 1999 ---------------- (IN MILLIONS, EXCEPT PER SHARE DATA) PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 8.7 Working capital........................................ 193.9 Total assets........................................... 600.6 Total debt............................................. 600.0 Total liabilities...................................... 751.1 Stockholders' equity (deficit)......................... (150.5) Book value (deficit) per share(D)...................... (17.10)
- ------------ (A) Pro forma operating income for fiscal 1998 includes goodwill impairment and restructuring charges of $62.8 million and other related charges of $8.3 million. After an income tax benefit of $6.5 million, these charges reduced pro forma net income for fiscal 1998 by $64.6 million ($7.34 per share). (B) Pro forma operating income for the nine months ended June 30, 1998 includes goodwill impairment and restructuring charges of $59.1 million and other related charges of $1.7 million. After an income tax benefit of $2.3 million, these charges reduced pro forma net income for the nine months ended June 30, 1998 by $58.5 million ($6.65 per share). (C) Pro forma operating income for the nine months ended June 30, 1999 includes restructuring charges of $1.1 million. After an income tax benefit of $0.4 million, these charges reduced pro forma net income for the nine months ended June 30, 1999 by $0.7 million ($0.08 per share). (D) Pro forma basic and diluted (loss) earnings and book value (deficit) per share have been determined assuming that 8.8 million shares of our common stock will be issued in the spin-off. 7 RISK FACTORS You should carefully consider the following risk factors relating to the ownership of common stock in our company. WE WILL HAVE SUBSTANTIAL INDEBTEDNESS As of June 30, 1999, after giving pro forma effect to the spin-off, including our expected initial borrowings under the new credit facility and our issuance of the senior subordinated notes, we would have had combined indebtedness of approximately $600.0 million and stockholders' deficit of approximately $150.5 million. After giving pro forma effect to the additional interest expense and other costs of the spin-off, we would have incurred a $5.64 loss per share in fiscal 1998 instead of an actual loss per share of $2.53, and a $4.85 loss per share for the nine months ended June 30, 1998 instead of an actual loss per share of $2.50 and we would have had earnings per share of $0.39 for the nine months ended June 30, 1999 instead of actual earnings per share of $2.19. See 'Capitalization' and 'Unaudited Pro Forma Combined Condensed Financial Data.' The new credit facility will require us to repay $ million principal amount of term loans on or before . Accordingly, our excess cash flow from operations (after capital expenditures) during this period will be dedicated in substantial part to meeting debt service and amortization requirements, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes. Our ability to generate cash available for the repayment of debt will depend upon numerous business factors, many of which are outside our control. See 'Forward-Looking Statements.' We believe that our cash flow from operations, available cash and available borrowings under our new credit facility will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the new credit facility in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. To the extent that cash flow from operations is insufficient to cover our working capital, capital expenditure and debt service requirements, we, in order to pay such expenses, may seek to obtain funds from additional borrowings, sell a portion of our businesses, engage in sale/leaseback transactions and/or raise equity capital. We cannot assure you of the availability or accessibility of these or other similar transactions, or that these or other similar transactions could be accomplished on terms favorable to us. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. In addition, the new credit facility and the indenture governing the senior subordinated notes will contain covenants restricting, among other things, our ability to incur additional indebtedness and create liens. These restrictions could have important consequences to us. For example, they could: increase our vulnerability to general adverse economic and industry conditions; limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; and/or limit, along with the financial and other restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- New Credit Facility and Senior Subordinated Notes.' THERE IS NO TRADING HISTORY FOR OUR COMMON STOCK AND WE DO NOT EXPECT TO PAY DIVIDENDS Although we are seeking to list our common stock on the New York Stock Exchange, there is no existing market for our common stock. We cannot assure you as to the trading prices for our common stock either in the 'when issued' market or after 'regular way' trading begins. Until our common stock is fully distributed and an orderly market develops, the trading prices for our common stock may be adversely affected by the sale of a substantial number of shares. Prices for our common stock may also be influenced by the depth and liquidity of the market for our common stock, investor perceptions 8 about us and our businesses, our future financial results, the absence of cash dividends on our common stock and general economic and market conditions. We do not expect to pay cash dividends on our common stock for the foreseeable future. We will be restricted from paying dividends under the terms of our new credit facility and the senior subordinated notes. OUR BUSINESSES OPERATE IN HIGHLY COMPETITIVE MARKETS AND COMPETE WITH MANY LARGER AND BETTER CAPITALIZED COMPANIES Generally, our operating companies are subject to competition from a substantial number of regional, national and international competitors, many of which have greater financial, manufacturing, engineering and other resources than our operating companies. Many of these competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Many of our subsidiaries' products are not protected by any proprietary rights such as patents. Although we believe that our operating companies have certain advantages over their competitors, realizing and maintaining such advantages will require continued and, in some cases, increased investment by our operating companies in manufacturing, research and development, quality standards, marketing and customer service and support. We cannot assure you that our operating companies will have sufficient resources to continue to make such investments or that they will be successful in maintaining such advantages. Failure to make such investments or to maintain such advantages could have a material adverse effect on our business, financial condition and results of operations. THERE ARE NUMEROUS RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN INTERNATIONAL MARKETS Our operating companies manufacture and assemble products at numerous facilities, some of which are located outside the United States. We also obtain components and finished goods from suppliers located outside the United States. Although we have not experienced significant problems conducting operations in or obtaining supplies from these areas, changes in local economic or political conditions could affect our manufacturing, assembly and distribution capabilities and have a material adverse effect on our business, financial condition and results of operations. Additional risks inherent in our international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, changes in local economic or political conditions, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of foreign laws. In fiscal 1998, we derived approximately 38% of our net sales from customers outside the United States. At September 30, 1998, we held $117.0 million of assets outside of the United States. We intend to continue to expand our operations outside the United States and to enter additional international markets. With respect to our foreign sales that are U.S. dollar-denominated, decreases in the value of foreign currencies relative to the U.S. dollar have in the past, and could in the future, make our products less price competitive. Decreases in the value of foreign currencies relative to the U.S. dollar could result in losses from foreign currency conversions. We make limited use of derivative products in order to hedge our foreign exchange exposure. We also borrow in foreign currencies to effectively hedge a portion of our net investment in our foreign subsidiaries. WE ARE DEPENDENT ON CERTAIN INDUSTRIES A significant portion of our sales are made to customers in the automotive and consumer electronics industries. These industries are cyclical in nature and subject to changes in general economic conditions. Economic downturns and the likely resulting declines in automotive and consumer electronics sales, generally, may have a material adverse effect on our net sales and operating income. 9 SALES BY REXAIR ARE DEPENDENT ON AN INDEPENDENT DISTRIBUTION NETWORK AND THE AVAILABILITY OF CONSUMER CREDIT Rexair's sales are directly dependent on the efforts of independent distributors. Growth in future sales volume will require growth in the number of distributors and sales representatives and/or increased productivity by them. As is typical of most direct selling businesses, Rexair experiences a high level of turnover in its independent distribution network from year to year which requires the replacement of outgoing members in order to maintain its overall distribution network. Sales levels and distributor and sales representative retention levels are affected by changes in the level of distributor and sales representative motivation. This in turn can be affected by a number of factors such as new legislation or regulations affecting direct selling activities, general economic conditions including levels of unemployment (which, when low, adversely affects recruitment), and the perception of Rexair's products or of direct selling businesses generally. Historically, Rexair has experienced periodic increases and decreases in the number of distributors and sales representatives; however, we cannot predict the timing or degree of these changes. We estimate that over 60% of the purchases of Rexair products in the United States are financed either through independent consumer finance companies or, to a lesser extent, through the distributors. Accordingly, the inability to maintain or increase its distribution network or the unavailability of consumer credit could have a material adverse effect on Rexair's business, financial condition and results of operations. WE FACE ENVIRONMENTAL REGULATION OF OUR OPERATIONS Our businesses are subject to a variety of federal, state, local and foreign governmental regulations relating to the use, transportation, storage, discharge, emission or disposal of hazardous substances and wastes, remediation of contamination associated with releases of hazardous substances at our facilities and at off-site disposal locations, and worker health and safety. These regulations are complex, change frequently and have tended to become more stringent over time. Based on our experience to date, we believe that the future cost of compliance with existing environmental regulations and the future cost of necessary investigation or remediation of contamination will not have a material adverse effect on our business, financial condition or results of operations. Nevertheless, future events, such as discovery of unknown contamination, compliance with more stringent regulations, or more vigorous enforcement policies by regulatory agencies or stricter or different interpretations of existing regulations, could require us to make material expenditures. See 'Business -- Governmental Regulation.' AN INCREASE IN THE PRICE OF RAW MATERIALS COULD ADVERSELY AFFECT OUR OPERATIONS Our operating companies purchase most of the raw materials for their products on the open market, and as such, our cost of products sold may be affected by changes in the market price of such raw materials. We do not generally engage in commodity hedging transactions for raw materials. Significant increases in the prices of our operating companies' products due to increases in the cost of raw materials could have a negative effect on demand for their respective products and on profitability as well as a material adverse effect on our business, financial condition and results of operations. FAILURE BY US OR CERTAIN THIRD PARTIES TO BE YEAR 2000 COMPLIANT POSES CERTAIN RISKS The inability of our information systems to process dates on or after January 1, 2000 could have serious adverse effects on us. Our business operations are also dependent on the Year 2000 readiness of our customers and suppliers. We engaged outside technology consultants to review the Year 2000 readiness of our operating companies. We developed our Year 2000 plans based on this review. We cannot assure you that our Year 2000 plans will be effective, that our estimates about the timing and cost of completing our plans will be accurate or that our customers and third party suppliers will timely resolve any or all Year 2000 problems with their systems. Any failure by us, our customers or our suppliers to timely resolve Year 2000 issues could have a material adverse effect on our business, financial condition and results of 10 operations. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness Disclosure.' WE HAVE NO OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY AND ARE DEPENDENT ON KEY PERSONNEL We do not have an operating history as an independent public company. Our businesses have historically relied on USI for certain administrative services and financial support. After the spin-off, this will no longer be the case. Our success as an independent public company depends to a significant extent on the continued services of our senior management and other members of management. We could be adversely affected if any of these persons were unwilling or unable to continue in our employ. WE WILL BE SUBJECT TO CERTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE OF CONTROL Prior to the spin-off we will enter into a rights agreement under which preferred stock purchase rights will attach to our presently outstanding shares of common stock and to all shares of common stock to be issued afterwards (including common stock that will trade on a 'when issued' basis) until the rights expire. The rights may cause substantial dilution to a person or group that acquires 15% or more of our common stock unless the rights are first redeemed by our board of directors. Unless earlier redeemed, the rights will expire at the close of business on the date of our annual meeting of stockholders in 2001 and the rights agreement will not be extended or renewed beyond this date without the approval of our independent directors. In addition, our certificate of incorporation and by-laws and Delaware statutory law contain several provisions that could have the effect of delaying or preventing our change of control in a transaction not approved by our board of directors. Accordingly, our stockholders could be prevented from realizing a premium on their shares if such a transaction was not approved by our board of directors. Our agreements with our executive officers and certain other key employees may have the effect of making a change of control more expensive. See 'Executive Compensation,' 'Rights Plan,' and 'Purposes and Effects of Certain Provisions of Certificate of Incorporation, By-Laws and Delaware Statutory Law.' 11 THE SPIN-OFF MANNER OF EFFECTING THE SPIN-OFF The spin-off will be effected by a stock dividend paid to holders of record of USI common stock. The spin-off ratio will be one share of our common stock for every ten shares of USI common stock outstanding on the spin-off record date. USI stockholders will not be required to pay for shares of our common stock received in the spin-off or to surrender or exchange USI common stock in order to receive shares of our common stock. All shares of our common stock received by USI stockholders in connection with the spin-off will be fully paid and non-assessable. USI stockholders do not have any appraisal rights in connection with the spin-off. During the period beginning on or about , 1999 and continuing through , 1999, USI common stock will trade on the NYSE with due bills attached. The due bills will entitle a purchaser of USI common stock during this period to receive one share of our common stock for each ten shares purchased. If the spin-off is not completed, all due bills attaching to USI common stock will become null and void. In order to be entitled to receive shares of our common stock in the spin-off, USI stockholders must be holders of record of USI common stock at 5:00 p.m. New York time on the spin-off effective date, which is expected to be , 1999. The dividend agent is ChaseMellon Shareholder Services L.L.C. [We have a direct registration (book entry) program with respect to ownership of our common stock. Upon completion of the spin-off, we will issue the appropriate shares of our common stock to you through direct registration rather than issuing a physical stock certificate unless you give specific instructions to do otherwise. See ' -- Direct Registration of Our Common Stock.'] FRACTIONS OF SHARES No certificates representing fractions of shares will be issued as part of the spin-off. Instead of receiving a fraction of a share, each USI shareholder of record on the spin-off effective date who would otherwise be entitled to receive a fraction of a share will receive cash. As soon as practicable after the spin-off effective date, ChaseMellon will aggregate and sell all fractions of shares of our common stock on the NYSE at then prevailing market prices and distribute the aggregate proceeds (net of fees) ratably to stockholders entitled to them. See ' -- Material Federal Income Tax Consequences' below for a discussion of the federal income tax treatment of the sale of interests in fractions of shares. RESULTS OF THE SPIN-OFF Following the spin-off, we will be a separate, publicly-traded company that holds the USI diversified businesses. Immediately after the spin-off, based on the number of outstanding shares of USI common stock and the number of record holders on , 1999, we expect to have approximately 8.8 million shares of common stock outstanding, held by approximately record holders (excluding shares of our common stock that we anticipate will be issued, subject to certain restrictions, to executive officers and other key employees, and shares of our common stock that will be issued to our non-employee directors, after the spin-off effective date as described under 'Executive Compensation'). The actual number of shares of our common stock to be issued will be determined as of the spin-off effective date. Following the spin-off, USI will continue to own and operate its other businesses -- including bath and plumbing, lighting and hardware. The spin-off will not affect the number of outstanding shares of USI common stock or any rights of USI stockholders. 12 LISTING AND TRADING OF OUR COMMON STOCK Our common stock has been authorized for listing on the NYSE under the symbol 'STG', subject to official notice of issuance. Prior to the spin-off, we do not expect any public trading market for our common stock to exist except that, beginning on , 1999, our common stock is expected to trade on a 'when-issued' basis on the NYSE for settlement when our common stock is issued on , 1999. The term 'when-issued' means trading in shares prior to the time certificates are actually available or issued. If the spin-off conditions are not satisfied and the stock dividend is not paid, all such 'when-issued' trading will become null and void. If the spin-off conditions are satisfied and the stock dividend is paid on the spin-off effective date, it is expected that 'regular way' trading in our common stock on the NYSE will commence at 9:30 a.m. New York time on , 1999, subject to official notice of issuance. The shares of our common stock issued to USI stockholders will be freely transferable, except for shares received by persons who may be deemed to be our 'affiliates' under the Securities Act. Persons who may be deemed to be our affiliates after the spin-off generally include individuals or entities that control, are controlled by, or are under common control with us and may include certain of our officers and directors. Persons who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Section 4(1) of the Securities Act and Rule 144 under the Securities Act (with the exemption under Rule 144 not available until 90 days after the date of this information statement). Certain USI subsidiaries, including certain of the subsidiaries to be transferred to us, presently maintain tax-qualified profit-sharing and savings plans that hold, among other assets, USI common stock. Certain of our subsidiaries will continue to maintain these plans or establish new plans to which liabilities and assets, including USI common stock, will be transferred in connection with the spin-off. Based upon their ownership of USI common stock on the spin-off record date after giving effect to these transfers, USI plans and our plans are expected to hold approximately [53,200] and [62,648] shares of our common stock, respectively, and our plans are expected to hold approximately [626,480] shares of USI common stock. The trustees of the USI plans presently intend to dispose of all of our common stock acquired in the spin-off. We expect that participants in our plans will be permitted to redirect any investments in USI common stock to other permitted investments under such plans for a period of time. However, after such time, the trustees of our plans intend to dispose of all USI common stock held in our plans and invest the net proceeds of such dispositions in shares of our common stock, subject to the exercise of the trustee's fiduciary duties under applicable law. The dispositions will be made on behalf of participating employees and subject to the exercise of the trustees' fiduciary duties under applicable law. The timing of dispositions and acquisitions will be determined by plan administrators and trustees or by their independent institutional investment managers, subject to their exercise of fiduciary duties under applicable law. We and USI cannot predict the timing of dispositions and acquisitions, but we expect that they will occur during the first few months following the spin-off. Dispositions are expected to be made, to the extent practicable by exchanges of our common stock and USI common stock between plans at prices based upon publicly-reported trading prices and also by open market sales. See 'Projected Ownership of Our Stock Immediately after the Spin-off.' For a discussion of certain uncertainties that should be considered when trading in our common stock, see 'Risk Factors -- There is No Trading History for Our Common Stock and We Do Not Expect to Pay Dividends.' [DIRECT REGISTRATION OF OUR COMMON STOCK We will have a direct registration (book entry) program with respect to record ownership of our common stock. Direct registration is a service that allows shares to be owned, reported and transferred electronically without having a physical stock certificate issued. Persons who acquire shares of our common stock will not receive a physical stock certificate (unless certificates are requested); rather, ownership of the shares is recorded in the names of such persons electronically on our books and records. Direct registration is intended to alleviate problems relating to stolen, misplaced or lost stock certificates and to reduce the paperwork relating to the transfer of ownership of our common stock. 13 Under direct registration, the voting, dividend and other rights and benefits of holders of our common stock remain the same as with holders of certificates. Upon completion of the spin-off, we will mail you a statement confirming the issuance to you of the appropriate shares of our common stock through direct registration, rather than issuing a physical stock certificate unless you give specific instructions to do so. The mailing will explain how to obtain a physical certificate, if you wish. The requirements for transferring book entry shares are the same as for shares represented by a physical stock certificate except that, with direct registration, there is no certificate to surrender. Our common stock owned through the direct registration program may be sold and transferred through a stock broker or through , the transfer agent for our common stock. In order to utilize the services of a stock broker, you must first add the appropriate stock broker information to the direct registration account maintained by the transfer agent. Thereafter you may by telephone transfer our common stock to a brokerage account at such stock broker and then may sell or transfer such shares by giving instructions to the broker. Alternatively, shares of our common stock owned through direct registration may be sold or transferred through the services of the transfer agent. Sales will be made through the transfer agent when practicable, but at least once each week. The transfer agent cannot accept instructions to sell shares on a specific day or at a specific price. The price per share will be the average price per share of all of our common stock sold during the period by the transfer agent for holders of book entry shares.] AGREEMENTS BETWEEN STRATEGIC AND USI AND RELATIONSHIP AFTER THE SPIN-OFF After the spin-off, we and USI will operate independently of each other as separate public companies. Neither we nor USI will have any beneficial stock ownership interest in the other (although employee benefits plan trusts sponsored by us and USI and/or certain of our or their subsidiaries will, in the near term, hold certain of the other company's shares). All directors, executives and employees of USI who join us will cease to be directors, executives or employees of USI. We will enter into agreements with USI providing for the transfer of the USI diversified businesses to us prior to the spin-off. We will also enter into agreements with USI that will define our responsibilities regarding the following: indemnification against certain liabilities, including liabilities for taxes; and corporate transitional matters, including the transfer of assets and liabilities under employee benefit plans. These agreements will be negotiated before the spin-off and thus will be negotiated between affiliated parties. Accordingly, we cannot assure you that any of these agreements, or that any of the transactions provided for in these agreements, will be effected on terms at least as favorable to us or to USI as could have been obtained from unaffiliated third parties. Following the spin-off, additional or modified agreements, arrangements and transactions may be entered into by us and USI. Any such future agreements, arrangements and transactions will be determined through arm's-length negotiation between the parties. The following is a summary of certain agreements, arrangements and transactions to be entered into between us and USI and our and its respective subsidiaries. Certain of these agreements will be filed as exhibits to this information statement, and the following descriptions are qualified in their entirety by reference to such exhibits. Agreements to Effect the Transfer of the Diversified Businesses of USI. The assets and liabilities of USI's diversified businesses will be transferred by USI and its subsidiaries to us. The transfer will be subject to a post spin-off adjustment, if any. We and USI will each agree to execute and deliver such further assignments, documents of transfer, deeds and instruments as may be necessary for the more effective implementation of such transfers. Some assignments and transfers may require prior consent by third parties and various filings or recordings with governmental entities. Some permits or licenses may require reapplication by us, and reissuance in our name. If consent to the assignment or reissuance of any contract, license or permit being transferred is not obtained, we and USI will develop alternative approaches so that, to the 14 maximum extent possible, we will receive the benefits of the contract, license or permit and will discharge the duties and bear the costs and risks under the contract, license or permit. We will bear the risk that the alternative arrangements will not provide us with the full benefits of the contract, license or permit. We and USI, however, believe that all necessary consents and reissuances that are material to us will be obtained. Indemnification Agreement. In connection with the spin-off, we will enter into an indemnification agreement with USI. Under the agreement, subject to certain exceptions, we will agree to indemnify USI against all liabilities, litigation and claims arising out of USI's diversified businesses (including liabilities for claims relating to or arising out of the assets, businesses and operations previously conducted by these businesses or their predecessors, subject to certain exceptions). USI will agree to indemnify us against (1) all liabilities, litigation and claims arising out of all USI operations other than the diversified businesses, (2) liabilities (including liabilities under the Securities Exchange Act of 1934) for statements included in this information statement and (3) certain other liabilities. Neither we nor USI will be entitled to a recovery to the extent any liability is covered by proceeds received by it from any third-party insurance policy. In circumstances in which the potential liability is joint, we and USI will share responsibility for the liability on a mutually agreed basis consistent with the principles established in the indemnification agreement. The indemnification agreement will set forth procedures for notification and payment of claims, use and preservation of records and resolution of disputes. Liability for tax-related matters will be governed by the tax sharing and indemnification agreement described below. Tax Sharing and Indemnification Agreement. We will enter into a tax sharing and indemnification agreement with USI that will govern the allocation between us of federal, state, local and foreign tax liabilities and related tax matters, such as the preparation and filing of tax returns and the conduct of audits and other tax proceedings, for taxable periods before and after the spin-off. In general, the tax sharing agreement will provide that (i) USI will be responsible for, and will indemnify us and our subsidiaries against, tax liabilities for taxable periods ending on or prior to, the date of the spin-off and (ii) we will be responsible for, and will indemnify USI and its subsidiaries against, tax liabilities for taxable periods beginning on or after the date of the spin-off. In addition, USI will be liable for, and will indemnify us and our subsidiaries against, all tax liabilities incurred by us or our subsidiaries as a result of any event, action, or failure to act, wholly or partially within the control of USI or any of its subsidiaries, including any event, action or failure to act that results in a breach of any representation made to the Internal Revenue Service in connection with the ruling request, or any other event related to the acquisition of USI stock, resulting in taxes imposed on us or any of our subsidiaries with respect to any action taken pursuant to the spin-off or any related transaction. We will be liable for, and will indemnify USI and its subsidiaries against, all tax liabilities incurred by USI or any of its subsidiaries as a result of any event, action, or failure to act wholly or partially within our control or the control of any of our subsidiaries, including any event, action or failure to act that results in a breach of any representation made to the Internal Revenue Service in connection with the ruling request, or any other event related to the acquisition of our stock, resulting in taxes imposed on USI or any of its subsidiaries with respect to any action taken pursuant to the spin-off or any related transaction. Corporate Transition Agreement. We expect to enter into an agreement with USI providing for the transfer of certain corporate assets (including corporate-sponsored employee benefit plans) and related obligations by USI to us and our subsidiaries, and for the reimbursement by us of USI for certain expenses incurred in connection with our formation and related matters. Upon completion of the spin-off and satisfaction of certain conditions, we would assume sponsorship of and all responsibility for benefit liabilities under each of the plans with respect to our employees, including the retirement plan described under 'Executive Compensation.' Following the completion of the spin-off, assets attributable to our employees under plans maintained or sponsored by USI would be transferred from the master trusts maintained with respect to such plans to mirror trusts established by us. With respect to each of our plans which is a 'welfare plan,' including workers' compensation, we will be responsible for all claims by our employees and their dependents after completion of the spin-off. With respect to 15 each of our plans which is a nonqualified pension plan or bonus plan which is not funded, we will generally assume liability and be responsible for all benefits. MATERIAL FEDERAL INCOME TAX CONSEQUENCES The spin-off is conditioned upon receipt by USI of a private letter ruling from the Internal Revenue Service to the effect that, among other things, the spin-off will qualify as a tax-free spin-off to USI's stockholders and USI under Section 355 of the Internal Revenue Code. The following is a summary of the material federal income tax consequences to USI's stockholders and USI expected to result from the spin-off: (1) A USI stockholder will not recognize any income, gain or loss as a result of the spin-off except, as described below, in connection with the receipt of cash, if any, instead of a fraction of a share of our common stock. (2) A USI stockholder will apportion the tax basis for his USI stock on which our common stock is distributed between the USI stock and our common stock received in the spin-off (including any fraction of a share of our common stock deemed received) in proportion to the relative fair market values of USI stock and our common stock on the date of the spin-off. (3) The holding period for our common stock received by a USI stockholder in the spin-off will include the period during which he held the USI stock on which our common stock is distributed, provided that the USI stock is held as a capital asset by such holder on the date of the spin-off. (4) A USI stockholder who receives cash instead of a fraction of a share of our common stock will be treated as if he received a fraction of a share of our common stock as part of the spin-off and then sold the fraction of a share through the dividend agent. Accordingly, the USI stockholder will recognize gain or loss equal to the difference between the cash so received and the portion of the tax basis in our common stock that is allocable to the fraction of a share, which gain or loss will be capital gain or loss, provided that the fraction of a share was held as a capital asset at the time of the spin-off. (5) USI will not recognize any gain or loss as a result of the spin-off. Current Treasury regulations require each USI stockholder who receives our common stock in the spin-off to attach to his or her federal income tax return for the year in which the spin-off occurs a detailed statement setting forth such data as may be appropriate in order to show the applicability of Section 355 of the Internal Revenue Code to the spin-off. USI will provide the appropriate information to each stockholder of record as of the spin-off record date. Backup Withholding. Under the Internal Revenue Code, a USI stockholder may be subject, under certain circumstances, to backup withholding at a rate of 31% with respect to the amount of cash, if any, received instead of an interest in a fraction of a share pursuant to the spin-off unless the holder provides proof of an applicable exemption or correct taxpayer identification number, and otherwise complies with applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules are not additional tax and may be refunded or credited against the holder's federal income tax liability, provided the required information is furnished to the Internal Revenue Service. The summary of federal income tax consequences set forth above may not be applicable to stockholders who receive their shares of our common stock through the exercise of employee stock options or otherwise as compensation or who are otherwise subject to special treatment under the Internal Revenue Code. All stockholders should consult their own tax advisors as to the particular tax consequences to them, including the applicability and effect of state, local and foreign tax laws. REASONS FOR FURNISHING THIS INFORMATION STATEMENT This information statement is being furnished by USI solely to provide information to USI stockholders about, subject to the satisfaction of the spin-off conditions, the receipt of our common stock pursuant to the spin-off. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of our securities or those of USI. The information contained in this information statement is believed by us and USI to be accurate as of the date set forth on its front cover. Changes may occur after that date, and neither we nor USI will update the information except in the normal course of our respective public disclosure practices. 16 CAPITALIZATION The following table, which is unaudited, sets forth, as of June 30, 1999, our capitalization as adjusted to reflect the spin-off and the incurrence of indebtedness under the new credit facility and the senior subordinated notes, as if these transactions had occurred as of that date. This data should be read in conjunction with 'Unaudited Pro Forma Combined Condensed Financial Data,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Combined Financial Statements and notes. See 'Index to Combined Financial Statements.'
AS OF JUNE 30, 1999 -------------------------------------- PRO FORMA ACTUAL ADJUSTMENTS AS ADJUSTED ------ ----------- ----------- (IN MILLIONS, EXCEPT PER SHARE DATA) Long-Term Debt (including current portion): New credit facility and senior subordinated notes.... $ -- $ 586.7 $ 586.7 Notes and interest payable to affiliates............. 506.8 (506.8) -- Other................................................ 30.5 (17.2) 13.3 ------ ------- ------- Total long-term debt (including current portion)...................................... $537.3 $ 62.7 $ 600.0 Stockholders' Equity (Deficit): Common stock, 23,000,000 shares authorized, par value $0.01 per share, 8,800,000 shares issued and outstanding (as adjusted)...................................... $ -- $ -- $-- Preferred stock, 2,000,000 shares authorized, none issued and outstanding............................. -- -- -- Retained (deficit)................................... -- (150.5)(A) (150.5) Invested capital (deficit)........................... (65.1) 65.1 (A) -- ------ ------- ------- Total invested capital (deficit)/stockholders' equity (deficit).............................. (65.1) (85.4) (150.5) ------ ------- ------- Total capitalization....................... $472.2 $ (22.7) $ 449.5 ------ ------- ------- ------ ------- -------
- ------------ (A) To reflect the net effect on invested capital (deficit)/stockholders' equity (deficit) of the following (in millions): Net pension adjustment...................................... $ (39.5) Non-recurring transaction costs............................. (10.4) Dividend to USI............................................. (35.5) ------- $ (85.4) ------- ------- Adjustment to Retained (deficit)............................ $(150.5) Adjustment to Invested capital (deficit).................... 65.1 ------- $ (85.4) ------- -------
For further discussion, please see 'Unaudited Pro Forma Combined Condensed Financial Data -- Notes to Pro Forma Combined Condensed Balance Sheet.' 17 SELECTED COMBINED FINANCIAL DATA The historical selected combined financial data of Strategic set forth below for each of the years in the three-year period ended September 30, 1998 are derived from the audited combined financial statements of Strategic included elsewhere in this information statement. The historical selected combined financial data for the nine months ended June 30, 1999 and 1998 and the years ended September 30, 1995 and 1994 are unaudited but, in our opinion, have been prepared on a basis consistent with that for the three-year period ended September 30, 1998 (except, in the case of interim financial data, for normal year-end adjustments). The interim financial data include all adjustments that management considers necessary for a fair presentation of interim results. Historical financial information may not be indicative of our future performance as an independent company. Furthermore, the historical financial data presented below do not reflect certain pro forma adjustments giving effect to the spin-off which are reflected in 'Unaudited Pro Forma Combined Condensed Financial Data.' The information set forth below should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Combined Financial Statements and notes thereto. See 'Index to Combined Financial Statements.' Historical basic and diluted earnings per share and dividend data have not been presented, as the capital structure of the businesses that comprise Strategic prior to the spin-off is not indicative of its capital structure following the spin-off.
FISCAL YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30, JUNE 30, ------------------------------------------- ------------------ 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales................... $716.8 $714.9 $737.7 $807.9 $888.5 $663.8 $651.0 Cost of products sold....... 519.4 518.7 521.9 575.8 669.5 488.7 494.4 Selling, general and administrative expenses... 107.0 103.9 105.8 112.8 124.2 94.3 94.6 Goodwill impairment and restructuring charges(A)................ -- -- -- -- 62.8 59.1 1.1 Operating income(A)(B)...... 83.7 83.8 101.2 108.9 25.2 16.6 54.3 Net income (loss)........... 34.4 30.2 39.9 49.4 (22.3)(C) (22.0)(D) 19.3 (E) BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents... $ 5.1 $ 9.4 $ 3.3 $ 8.4 $ 12.4 $ 12.3 $ 8.7 Working capital............. 152.8 141.0 156.2 159.8 195.1 217.8 193.9 Total assets................ 534.9 530.5 563.4 584.2 644.6 632.5 625.4 Total debt(F)............... 379.6 404.5 411.1 364.8 344.4 357.0 537.3 Invested capital (deficit)................. 46.4 8.1 23.1 82.1 126.0 142.9 (65.1) OTHER DATA: Capital expenditures........ 16.7 22.1 9.8 17.7 27.3 21.8 20.4 Depreciation and amortization.............. 17.6 15.7 19.2 19.2 23.3 17.6 18.7
- ------------ (A) In fiscal 1998, in addition to the goodwill impairment and restructuring charges, we incurred $8.3 million ($1.7 million of which was incurred through the nine months ended June 30, 1998) of other related charges which were included in cost of products sold and selling, general and administrative expenses. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and Note 4 to the Combined Financial Statements. (B) Operating income (loss) in fiscal 1997 and 1998, and for the nine months ended June 30, 1998 and 1999 included $1.7 million, $(2.4) million, $0.2 million and $(6.2) million, respectively, of equity earnings (loss) from our investment in United Pacific. The fiscal 1998 equity loss of $(2.4) million includes a charge of $4.0 million associated with an impairment of a United Pacific subsidiary. The equity (loss) in the nine months ended June 30, 1999 of $(6.2) million includes a write-down of $5.5 million. (C) After an income tax benefit of $6.5 million, the $71.1 million of charges detailed above reduced net income for fiscal 1998 by $64.6 million. (D) After an income tax benefit of $2.3 million, the $60.8 million of charges detailed above reduced net income for the nine months ended June 30, 1998 by $58.5 million. (E) After an income tax benefit of $0.4 million, the $1.1 million of restructuring charges reduced net income for the nine months ended June 30, 1999 by $0.7 million. (F) Amounts primarily represent intercompany notes and interest payable to affiliates. 18 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA The following unaudited pro forma combined condensed financial data reflect the spin-off as if it occurred as of June 30, 1999 for pro forma combined condensed balance sheet purposes and as of October 1, 1997 for the year ended September 30, 1998 and the nine months ended June 30, 1998 and as of October 1, 1998 for the nine months ended June 30, 1999 for pro forma combined condensed statements of operations purposes. The unaudited pro forma combined condensed financial data reflect our expected capitalization as a result of the spin-off, the incurrence of indebtedness under the new credit facility and the senior subordinated notes and interest expense (including amortization of capitalized costs) relating to such borrowings. These data do not necessarily reflect our results of operations or financial position had the indebtedness actually been incurred and the spin-off actually been consummated as of such dates. Also, these data are not necessarily indicative of our future results of operations or future financial position. The pro forma combined condensed financial data will be revised in the definitive information statement to reflect the amount and other terms of Strategic's indebtedness anticipated at that time in light of prevailing market conditions. PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1999 ------------------------------------ PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA ------ ----------- --------- (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents.............................. $ 8.7 $ $ 8.7 Trade receivables, net................................. 129.7 129.7 Inventories............................................ 139.1 139.1 Deferred income taxes.................................. 2.4 2.4 Other current assets................................... 17.2 17.2 ------ ------- ------- Total current assets.............................. 297.1 297.1 Property, plant and equipment, net.......................... 133.9 133.9 Deferred income taxes....................................... -- 19.4 (A) 19.4 Pension assets.............................................. 69.8 (61.0)(A) 8.8 Other assets................................................ 13.2 16.8 (B) 30.0 Goodwill, net............................................... 111.4 111.4 ------ ------- ------- $625.4 $ (24.8) $ 600.6 ------ ------- ------- ------ ------- ------- LIABILITIES AND INVESTED CAPITAL (DEFICIT)/ STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt................... $ 1.0 $ $ 1.0 Trade accounts payable................................. 44.3 44.3 Accrued expenses and other liabilities................. 50.3 50.3 Income taxes payable................................... 7.6 7.6 ------ ------- ------- Total current liabilities......................... 103.2 103.2 Long-term debt.............................................. 29.5 569.5 (C) 599.0 Deferred income taxes....................................... 1.9 (1.9)(A) -- Other liabilities........................................... 49.1 (0.2)(A) 48.9 Notes and interest payable to affiliates.................... 506.8 (506.8)(C) -- ------ ------- ------- Total liabilities................................. 690.5 60.6 751.1 ------ ------- ------- Invested capital (deficit)/stockholders' equity (deficit)... (65.1) (85.4)(D) (150.5) ------ ------- ------- $625.4 $ (24.8) $ 600.6 ------ ------- ------- ------ ------- -------
19 NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET: (A) To reflect the anticipated changes in net pension assets and the related deferred tax balances resulting from the transfer of our employees from pension plans and trusts maintained by USI to plans and trusts to be maintained or established by us. This change is expected due to the actuarial method of allocating assets and liabilities which results in a portion of the net overfunding of the relevant plans being retained by USI. After giving effect to this pro forma adjustment, the net pension obligation will be $5.8 million, of which $14.6 million is classified in other liabilities (long-term). (B) To capitalize the cost of obtaining financing under the new credit facility and senior subordinated notes, which will be amortized over their respective terms. This does not include $10.4 million of expected non-recurring legal, investment banking and other advisory costs relating to the spin-off which will be expensed by us at the time of the receipt of a favorable tax ruling from the Internal Revenue Service with regard to the spin-off. (C) To reflect initial borrowings under the new credit facility and the proceeds from the issuance of senior subordinated notes, estimated to total $586.7 million, and repayment of notes payable to affiliates, including accrued interest thereon. In addition, we anticipate the repayment of $17.2 million of our Hong Kong dollar-denominated long-term debt. For additional information concerning the expected terms of the new credit facility and the senior subordinated notes, see 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- New Credit Facility and Senior Subordinated Notes.' (D) To reflect the net effect on invested capital (deficit)/stockholders' equity (deficit) of the following (in millions): Net pension adjustment (A).................................. $(39.5) Non-recurring transaction costs (B)......................... (10.4) Dividend to USI............................................. (35.5) ------ $(85.4) ------ ------
20 PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1998 --------------------------------------- PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA ------ ----------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net sales................................................ $ 888.5 $ 888.5 Operating costs and expenses: Cost of products sold............................... 669.5 669.5 Selling, general and administrative expenses........ 124.2 8.0 (A) 137.2 5.0 (D) Management fees and divisional overhead............. 6.8 (6.8)(A) -- Goodwill impairment and restructuring charges....... 62.8 62.8 ------- ------ ------- Operating income......................................... 25.2 (6.2) 19.0 Interest expense to affiliates........................... 19.1 (19.1)(B) -- Interest expense......................................... 2.6 56.3 (B) 61.0 2.1 (C) Interest income.......................................... (0.5) (0.5) Other expense, net....................................... 0.7 0.7 ------- ------ ------- Income before income taxes............................... 3.3 (45.5) (42.2) Provisions for income taxes.............................. 25.6 (18.2)(E) 7.4 ------- ------ ------- Net loss................................................. $ (22.3) $(27.3) $ (49.6) ------- ------ ------- ------- ------ ------- Basic and diluted loss per share(F)...................... $ (2.53) $ (5.64) ------- ------- ------- -------
NINE MONTHS ENDED JUNE 30, 1998 ------------------------------------ PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA ------ ----------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net sales................................................... $663.8 $663.8 Operating costs and expenses: Cost of products sold.................................. 488.7 488.7 Selling, general and adminintrative expenses........... 94.3 $ 6.0 (A) 104.1 3.8 (D) Management fees and divisional overhead................ 5.1 (5.1)(A) -- Goodwill impairment and restructuring charges.......... 59.1 59.1 ------ ------ ------ Operating income............................................ 16.6 (4.7) 11.9 Interest expense to affiliates.............................. 14.2 (14.2)(B) -- Interest expense............................................ 1.8 42.4 (B) 45.8 1.6 (C) Interest income............................................. (0.4) (0.4) Other expense, net.......................................... 0.9 0.9 ------ ------ ------ Income before income taxes.................................. 0.1 (34.5) (34.4) Provision for income taxes.................................. 22.1 (13.8)(E) 8.3 ------ ------ ------ Net income.................................................. $(22.0) $(20.7) $(42.7) ------ ------ ------ ------ ------ ------ Basic and diluted earnings per share(F)..................... $(2.50) $(4.85) ------ ------ ------ ------
21
NINE MONTHS ENDED JUNE 30, 1999 ------------------------------------ PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA ------ ----------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net sales................................................... $651.0 $651.0 Operating costs and expenses: Cost of products sold.................................. 494.4 494.4 Selling, general and administrative expenses........... 94.6 6.6 (A) 103.4 2.2 (D) Management fees and divisional overhead................ 6.6 (6.6)(A) -- Goodwill impairment and restructuring charges.......... 1.1 1.1 ------ ------ ------ Operating income............................................ 54.3 (2.2) 52.1 Interest expense to affiliates.............................. 20.3 (20.3)(B) -- Interest expense............................................ 1.2 43.0 (B) 45.8 1.6 (C) Interest income............................................. (0.4) (0.4) Other expense, net.......................................... 1.0 1.0 ------ ------ ------ Income before income taxes.................................. 32.2 (26.5) 5.7 Provisions for income taxes................................. 12.9 (10.6)(E) 2.3 ------ ------ ------ Net income.................................................. $ 19.3 $(15.9) $ 3.4 ------ ------ ------ ------ ------ ------ Basic and diluted earnings per share(F)..................... $ 2.19 $ 0.39 ------ ------ ------ ------
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS: (A) To eliminate management fees allocated from USI and divisional overhead, and to record estimated selling, general and administrative expenses that we expect to incur following the spin-off, including management and director compensation. Until the spin-off, USI will provide management, treasury, accounting, legal, insurance, employee benefits and tax services for which we will be charged a management fee based on the percentage that our net sales represent of USI's total net sales. While we believe that the amounts allocated from USI are reasonable, they may not be indicative of our ongoing costs as a separate public entity. (B) To reflect interest expense on initial borrowings under the new credit facility and senior subordinated notes at an assumed weighted average interest rate of 10% per year and eliminate interest cost on notes payable to affiliates. For each 1/8% change in the assumed interest rates, pro forma interest expense would change by approximately $0.8 million per year. (C) To amortize the cost of obtaining new financing ($16.8 million) over the terms of the new credit facility and senior subordinated notes. (D) To reflect the anticipated change in net periodic pension cost resulting from the transfer of our employees from pension plans and trusts maintained by USI to new plans and trusts to be maintained or established by us. This change is expected due to the actuarial method of allocating assets and liabilities which results in a portion of the net overfunding of the relevant plans will be retained by USI. (E) To reflect tax effects of above adjustments (A through D) at a tax rate of 40% (inclusive of federal, state and local taxes). (F) Basic and diluted earnings (loss) per share have been determined assuming that 8.8 million shares of our common stock will be issued upon the spin-off. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We operate and manage a diverse group of businesses on a decentralized basis, with a corporate management team providing strategic direction and financial support. Our operating companies are divided into three business groups: Consumer Products, Precision Engineered Products and Automotive Interior Products. The following table presents, for each of the last five fiscal years and the nine months ended June 30, 1998 and 1999, net sales and operating income (loss) of the three business groups under the ownership of USI and USI's predecessor. The historical net sales and operating income (loss) data for the three business groups for fiscal 1994 and 1995 and the nine months ended June 30, 1998 and 1999 are unaudited but, in our opinion, have been prepared on a basis consistent with that of fiscal 1996, 1997 and 1998 (except, in the case of interim financial data, for normal year-end adjustments). This historical financial information may not be indicative of our future financial performance as an independent company and does not reflect the pro forma adjustments giving effect to the spin-off presented in 'Unaudited Pro Forma Combined Condensed Financial Data.'
NINE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------------------- ------------------ 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS) ------------- NET SALES Consumer Products..... $389.8 $402.9 $413.1 $409.1 $410.7 $308.1 $270.7 Precision Engineered Products............ 63.4 68.8 73.9 89.2 138.1 97.8 142.5 Automotive Interior Products............ 263.6 243.2 250.7 309.6 339.7 257.9 237.8 ------ ------ ------ ------ ------ ------ ------ Total net sales.......... $716.8 $714.9 $737.7 $807.9 $888.5 $663.8 $651.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ OPERATING INCOME Consumer Products..... $ 61.3 $ 68.6 $ 80.6 $ 80.7 $ 48.5 (A) $ 46.0 (C) $ 27.0 (E) Precision Engineered Products............ 7.0 9.7 12.3 19.4 (B) 28.0 (B) 22.6 (D) 22.5 (D) Automotive Interior Products............ 22.1 14.0 17.1 19.2 (44.5)(A) (46.9)(C) 11.4 ------ ------ ------ ------ ------ ------ ------ 90.4 92.3 110.0 119.3 32.0 21.7 60.9 Management fees and divisional overhead............ (6.7) (8.5) (8.8) (10.4) (6.8) (5.1) (6.6) ------ ------ ------ ------ ------ ------ ------ Total operating income......... $ 83.7 $ 83.8 $101.2 $108.9 $ 25.2 $ 16.6 $ 54.3 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
- ------------ (A) In fiscal 1998, operating income includes goodwill impairment and restructuring charges of $62.8 million and other related charges of $8.3 million. See Note 4 to the Combined Financial Statements. Consumer Products' operating income gives affect to $15.7 million of these charges and Automotive Interior Products' operating income gives affect to $55.4 million of these charges. (B) In fiscal 1997 and 1998, operating income of Precision Engineered Products included $1.7 million and $(2.4) million, respectively, of equity earnings (loss) from our investment in United Pacific. The fiscal 1998 equity loss of $(2.4) million includes a charge of $4.0 million associated with an impairment of a United Pacific subsidiary. (C) In the nine months ended June 30, 1998, operating income includes goodwill impairment and restructuring charges of $59.1 million and other related charges of $1.7 million. Consumer Products' operating income gives affect to $5.3 million of these charges and Automotive Interior Products' operating income gives affect to $55.5 million of these charges. (D) In the nine months ended June 30, 1998 and 1999, operating income of Precision Engineered Products includes $0.2 million and $(6.2) million, respectively, of equity earnings (loss) from our investment in United Pacific. The loss in the nine months ended June 30, 1999 of $(6.2) million includes a write-down of $5.5 million. (E) In the nine months ended June 30, 1999, Consumer Products' operating income gives affect to net restructuring charges of $1.1 million and other related charges of $0.9. 23 General. Net sales increased from $716.8 million in fiscal 1994 to $888.5 million in fiscal 1998, while operating income decreased from $83.7 million in fiscal 1994 to $25.2 million in fiscal 1998. Excluding goodwill impairment, restructuring and other related charges of $71.1 million, operating income increased by $12.6 million from fiscal 1994 to fiscal 1998. Over this five-year period, a number of industry and company-specific developments have influenced the financial performance of our operating companies, both positively and negatively. During fiscal 1998 and the first nine months of fiscal 1999, several of our operating companies, including Rexair, EJ Footwear and Garden State, have initiated strategic actions to address specific issues that have affected profitability. Consumer Products. Net sales increased from $389.8 million in fiscal 1994 to $410.7 million in fiscal 1998, while operating income decreased from $61.3 million in fiscal 1994 to $48.5 million in fiscal 1998. Excluding restructuring and other related charges of $15.7 million, operating income increased by $2.9 million from fiscal 1994 to fiscal 1998. Changes in net sales and operating income in the 1994 through 1998 fiscal periods were principally attributable to Rexair and EJ Footwear. During this period Rexair increased its emphasis on international growth, with international net sales rising from 42% of total net unit sales in fiscal 1994 to 58% in fiscal 1997. Rexair's extraordinarily strong sales in several Central and Eastern European countries in fiscal 1996 and 1997 were primarily responsible for the increase in the group's operating income from $68.6 million in fiscal 1995 to $80.6 million in fiscal 1996 and $80.7 million in fiscal 1997. Sales in these countries declined substantially during fiscal 1998 due in part to severe flooding in June 1997, which disrupted Rexair's distribution network, and the strength of the U.S. dollar against local currencies, which significantly increased local product prices. Sales in these countries have not recovered to previous levels and in fiscal 1998 international sales declined to 51% of Rexair's total unit sales. In the second half of fiscal 1998, Rexair reorganized and strengthened its international operations by adding management resources. Rexair's results in fiscal 1998 and the first nine months of fiscal 1999 were also adversely affected by difficulties in introducing its first new product line in eight years as well as difficulties encountered by Rexair's distributors in recruiting and retaining sales representatives during a period of low domestic unemployment. Rexair has resolved the issues relating to the new product introduction and has significantly increased its promotion of recruitment initiatives by its domestic distributors. Since fiscal 1994, EJ Footwear has experienced a gradual decline in net sales and operating income (excluding the effect of non-recurring items) due to competition in the footwear industry. In response, EJ Footwear has increased its purchases of finished goods manufactured abroad and has continued initiatives to reduce production and administrative costs. In addition, it replaced its infant's and children's footwear manufacturing operations with products purchased from offshore suppliers. This resulted in restructuring and other related charges of approximately $2.6 million in the third quarter of fiscal 1999. Precision Engineered Products. Net sales and operating income grew from $63.4 million and $7.0 million, respectively, in fiscal 1994 to $138.1 million and $28.0 million, respectively, in fiscal 1998. Changes in net sales and operating income in the 1994 through 1998 fiscal periods were principally attributable to Huron and Bearing Inspection, as well as during the fiscal 1998 period, FSM, which was acquired in May 1998. Huron has increased its net sales and operating income by developing strategic supplier relationships in the automotive industry. Bearing Inspection's net sales and operating income have significantly increased as a result of continued growth in the market for overhauled bearings and an increase in Bearing Inspection's share of the market due to strategic alliances with major domestic and international airlines. The acquisition of Atech in January 1999 has allowed Bearing Inspection to expand into the business of refurbishing the 'hot sections' of turbo-prop engines. 24 The net sales and operating income of this group have also been aided by the acquisition of the flat shadow mask business of Philips Components in May 1998 and Jade's acquisition of the integrated circuit leadframe business of Philips Semiconductors in January 1998. Automotive Interior Products. Net sales increased from $263.6 million in fiscal 1994 to $339.7 million in fiscal 1998, while operating income declined from $22.1 million in fiscal 1994 to a loss of $44.5 million in fiscal 1998. Excluding goodwill impairment charges of $55.4 million, operating income decreased by $11.2 million from fiscal 1994 to fiscal 1998. Changes in net sales and operating income in the 1994 through 1998 fiscal periods were attributable to both Garden State and Leon Plastics. Over the past several years, Garden State's net sales have continued to benefit from the increased use of leather interiors in cars, light trucks and sport utility vehicles. The group demonstrated profit improvement during fiscal 1995 through 1997 as operating income rose from $14.0 million to $19.2 million, reflecting increased sales volumes at Garden State and improved operating margins at Leon Plastics. However, the group's profitability between fiscal 1994 and 1995 was affected by the U.S. Government's threatened trade sanctions against Japanese automobile manufacturers, which represent a significant portion of Garden State's sales base. Results declined in fiscal 1998 at Garden State due to poor hide-cutting yields, price concessions in the automobile industry and reduced scrap leather prices and at Leon Plastics due to the end of a major program. In the first nine months of fiscal 1999, Garden State improved profitability by phasing out a low margin customer and implementing process changes to improve hide-cutting yields and to reduce the amount of excess scrap leather. RESULTS OF OPERATIONS NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998 Net Sales and Operating Income We had total net sales of $651.0 million and total operating income of $54.3 million for the nine months ended June 30, 1999. Net sales decreased $12.8 million (2%) while operating income increased $37.7 million (227%) from the comparable period of fiscal 1998. Operating income in the nine months ended June 30, 1999 and 1998 included goodwill impairment and restructuring charges totaling $1.1 million and $59.1 million, respectively, as discussed below. Excluding these charges from both periods, operating income for the nine months ended June 30, 1999 decreased $20.3 million (27%) from the comparable period of the prior year. Operating income for the nine months ended June 30, 1999 included unusual costs relating to the closure of an unprofitable window operation at BiltBest ($6.1 million) and a write-down of our United Pacific investment ($5.5 million). Consumer Products had net sales of $270.7 million and operating income of $27.0 million for the nine months ended June 30, 1999, reflecting decreases of $37.4 million (12%) and $19.0 million (41%), respectively, from the comparable period of fiscal 1998. Operating income for the nine months ended June 30, 1999 and 1998 included restructuring charges totalling $1.1 million and $3.7 million, respectively, as discussed below. Excluding these charges from both periods, operating income for the nine months ended June 30, 1999 decreased $21.6 million (43%) from the comparable period of the prior year. Operating income for the nine months ended June 30, 1999 includes unusual costs of $6.1 million relating to the closure of an unprofitable window operation at BiltBest and $0.9 million to write-off excess and obsolete infant and children's footwear. The primary contributors to the decline in net sales were Rexair (13%) and Native Textiles (34%). The primary contributors to the decline in operating income were Rexair, EJ Footwear and the closure of a BiltBest window operation. As more fully discussed in ' -- Overview' above, Rexair's results reflected difficulties associated with the introduction of its new product line and the recruitment of dealers by its distributors. Native Textiles' net sales were reduced by the exit from its unprofitable lace business in the fourth quarter of fiscal 1998. EJ Footwear's operating income decreased due to competitive conditions in the market for safety shoes, loss of a key customer for certain lines of infant's and children's footwear and the write-off of excess and obsolete inventory noted above. Comparability of EJ Footwear's operating income was also affected by a $3.9 million favorable settlement of environmental obligations in the 1998 period. 25 Precision Engineered Products had net sales of $142.5 million and operating income of $22.5 million for the nine months ended June 30, 1999. Net sales increased $44.7 million (46%) while operating income decreased $0.1 million (0.4%) from the comparable period of fiscal 1998. Results for the nine months ended June 30, 1999 reflect the positive impact of the full period inclusion of FSM, acquired in May 1998, which accounted for $38.5 million of the change in sales. However, operating income was reduced by a $5.5 million write-down of our United Pacific investment. Automotive Interior Products had net sales of $237.8 million and operating income of $11.4 million for the nine months ended June 30, 1999. Net sales decreased $20.1 million (8%) while operating income increased $58.3 million from the comparable period of fiscal 1998. Operating loss for the nine months ended June 30, 1998 included goodwill impairment and restructuring charges $55.4 million as discussed below. Excluding these charges, operating income for the nine months ended June 30, 1999 increased $2.9 million (34%) from the comparable period of the prior year. An 11% decrease in Garden State's net sales reflected management's decision to phase out a low margin customer. The increase in operating income reflected improved sales (8% increase) and margins (operating margins improved from 3% to 7%) at Leon and, at Garden State, reduced goodwill amortization of $1.5 million and other costs, partially offset by lower prices for scrap leather as average prices declined approximately 19% from the comparable period of the prior fiscal year, due in part, to poor economic conditions in Asia. Goodwill Impairment, Restructuring and Other Related Charges During the quarter ended June 30, 1999 we announced the closure of our infant and children's footwear manufacturing facility and recorded a restructuring charge of $1.7 million which was comprised of the costs of terminating 110 employees and the write-off of impaired assets. Offsetting the restructuring charge was the reversal of $0.6 million of restructuring accruals established at Rexair and Native Textiles during fiscal 1998 that were deemed no longer necessary. We also recorded other charges during the nine months ended June 30, 1999. These included $0.9 million of excess and obsolete inventory related to the closure of our infant and children's footwear manufacturing facility, $5.5 million related to the write-down of our investment in United Pacific and $6.1 million related to the closure of an unprofitable window operation. After an income tax benefit of $5.3 million, the $13.6 million of net charges described above reduced net income for the nine months ended June 30, 1999 by $8.3 million. During the nine months ended June 30, 1998 we recorded goodwill impairment charges of $55.0 related to Garden State and other restructuring charges totalling $4.1 million primarily related to the closure of an EJ Footwear manufacturing facility and a reduction in the work force at Rexair. In addition to the $59.1 million of goodwill impairment and restructuring charges, we incurred $1.7 million of inventory obsolescence and other costs related to the elimination of product lines and the reduction of manufacturing and warehouse facilities of our restructured operations. After an income tax benefit of $2.3 million, the $60.8 million of charges described above reduced net income by $58.5 million. See also 'Fiscal 1998 Compared to Fiscal 1997 -- Goodwill Impairment, Restructuring and Other Related Charges' for a discussion of these charges for fiscal 1998. Interest and Taxes Interest expense was $21.5 million for the nine months ended June 30, 1999, a $5.5 million (34%) increase from the comparable period of fiscal 1998. The increase reflects higher levels of outstanding notes payable to affiliates. Interest income was $0.4 million in both periods. The provision for income taxes was $12.9 million on pre-tax income of $32.2 million (a 40% effective rate) for the nine months ended June 30, 1999 compared to $22.1 million on pre-tax income of $0.1 million for the nine months ended June 30, 1998. The decrease in the effective tax rate is primarily attributable to non-deductible goodwill and foreign losses with no associated tax benefits in the nine months ended June 30, 1998. 26 FISCAL 1998 COMPARED TO FISCAL 1997 Net Sales and Operating Income We had total net sales of $888.5 million in fiscal 1998, reflecting an increase of $80.6 million (10%) from fiscal 1997. Our operating income in fiscal 1998 was $25.2 million compared to $108.9 million in fiscal 1997, reflecting a decrease of $83.7 million (77%). Operating income in fiscal 1998 included goodwill impairment, restructuring and other related charges totalling $71.1 million, which are discussed below. Excluding these items, operating income in fiscal 1998 would have been $96.3 million, a decrease of $12.6 million (12%) from fiscal 1997. Operating income in fiscal 1998 also included unusual costs of $4.0 million relating to a write-down of our United Pacific investment. Consumer Products had sales of $410.7 million and operating income of $48.5 million in fiscal 1998, an increase of $1.6 million (0.4%) in net sales and a decrease of $32.2 million (40%) in operating income from fiscal 1997. Operating income in fiscal 1998 included restructuring and other related charges of $15.7 million discussed below. Excluding these charges, operating income would have been $64.2 million, a decrease of $16.5 million (20%) from fiscal 1997. Rexair's sales declined by 20% and its results reflected the disruption of its Central and Eastern European distribution network, the strength of the U.S. dollar, and difficulties associated with the new product introduction and the recruiting and retention of sales representatives. Precision Engineered Products had net sales of $138.1 million and operating income of $28.0 million, reflecting increases of $48.9 million (55%) and $8.6 million (44%), respectively, from fiscal 1997. Operating income in fiscal 1998 included unusual costs of $4.0 million relating to a write-down of our United Pacific investment. The results reflected the first time contributions of FSM, which was acquired in May 1998, and the integrated circuit leadframe operation acquired in January 1998. These two acquisitions contributed substantially all of the sales growth of Precision Engineered Products. Automotive Interior Products had net sales of $339.7 million and an operating loss of $44.5 million in fiscal 1998, an increase of $30.1 million (10%) in net sales and a decrease of $63.7 million (332%) in operating income from 1997. Operating income in fiscal 1998 included goodwill impairment, restructuring and other related charges of $55.4 million discussed below. Excluding these charges, operating income would have been $10.9 million, a decrease of $8.3 million (43%) from fiscal 1997. Net sales increased at Garden State by 16% on strong sales of automobile models using its leather products. However, Garden State's operating income declined 23% due to price concessions, poor hide-cutting yields and reduced scrap leather prices. Sales declined by 14% and operating income decreased by 79% at Leon Plastics due to the end of a major program. Goodwill Impairment, Restructuring and Other Related Charges In June 1998, USI reviewed its long-term strategy and reviewed each operating company's performance and future prospects. As a result, USI adopted a plan to improve efficiency and enhance competitiveness at some of its operations, including some now held by Strategic. In addition, due to indications of impairment, USI evaluated the recoverability of certain long-lived assets, primarily goodwill at Garden State. In arriving at the fair value of Garden State, USI considered a number of factors including: (1) annual price concessions in the automotive industry and Garden State's inability to reduce costs due to antiquated facilities and equipment, (2) a dramatic decline in scrap leather prices attributable to the Asian economic crisis, (3) capital investment that would be required to make Garden State a lower cost manufacturer, (4) Garden State's long-term financial plan and (5) analysis of values for similar companies. In determining the amount of the impairment, USI compared the net book values to the estimated fair values of Garden State. Based on the above, USI determined that an impairment to goodwill of $55.0 million was necessary which will reduce future goodwill amortization by $2.1 million a year. The restructuring plan included the closing of an EJ Footwear manufacturing facility and Native Textiles' exit from its lace manufacturing business. The production and distribution activities of the footwear facility were either outsourced or consolidated into existing facilities. The restructuring plan included a reduction in the work force of approximately 500 employees throughout the Consumer Products Group including salaried and administrative employees at the restructured facilities as well as 27 other administrative and executive employees. As of September 30, 1998, approximately 300 employees had been terminated. In certain cases, severance and related benefits will be paid subsequent to the termination date. The restructuring is not anticipated to have a significant impact on the ongoing operations during the periods that manufacturing is transitioned from the facilities to be closed. The expected benefits from the restructuring are primarily reduced depreciation, reduced fixed costs associated with leased facilities and reduced compensation costs. The final anticipated benefit will be approximately $1.0 million per year, which will be realized subsequent to the completion of the restructuring plan. We expect that approximately 100% of the annual benefit will be realized in fiscal 1999 and thereafter. The principal components of the goodwill impairment and restructuring charges are:
(IN MILLIONS) ------------- Impairment of goodwill...................................... $55.0 Lease obligations and impairment of equipment............... 1.6 Severance and related costs................................. 6.2 ----- Total.................................................. $62.8 ----- ----- Cash charges................................................ $ 6.4 Non-cash charges............................................ 56.4 ----- Total.................................................. $62.8 ----- -----
Cash charges of $1.5 million were paid prior to September 30, 1998. By June 30, 1999 amounts paid totalled $4.2 million. Additionally, $0.6 million of such charges were reversed during the nine months ended June 30, 1999 due to revision of estimates and amounts paid which were less than originally anticipated. This reversal is included in Goodwill impairment and restructuring charges. The remaining cash charges will be paid by September 30, 1999, or through the respective lease termination dates. In addition to the $62.8 million of goodwill impairment and restructuring charges, we incurred $8.3 million of inventory obsolescence and other costs related to the elimination of product lines and the reduction of manufacturing and warehouse facilities at our restructured operations. These costs are reflected in cost of products sold and selling, general and administrative expenses. After an income tax benefit of $6.5 million, the $71.1 million of charges detailed above reduced net income for fiscal 1998 by $64.6 million. Interest and Taxes Interest expense was $21.7 million for fiscal 1998, a $3.3 million (13%) decrease from fiscal 1997. The decrease reflects lower levels of outstanding notes payable to affiliates. Interest income was $0.5 million in both fiscal 1998 and 1997. The provision for income taxes was $25.6 million on pre-tax income of $3.3 million for fiscal 1998 compared to $35.3 million on pre-tax income of $84.7 million (a 42% effective rate) for fiscal 1997. The fiscal 1998 provision included the impact of nondeductible goodwill impairment and other non-recurring charges. Excluding these items, the effective rate would have been approximately 43%. FISCAL 1997 COMPARED TO FISCAL 1996 Net Sales and Operating Income We had total net sales of $807.9 million and total operating income of $108.9 million in fiscal 1997, reflecting increases of $70.2 million (10%) and $7.7 million (8%), respectively, from fiscal 1996. Consumer Products had net sales of $409.1 million and operating income of $80.7 million, reflecting a decrease of $4.0 million (1%) and an increase of $0.1 million (0.1%), respectively, from fiscal 1996. The decrease in net sales was primarily due to decreases at EJ Footwear (8%) and Rexair (3%) partially offset by increased sales at Native Textiles (3%). The increase in operating income primarily 28 reflected an increase at Native Textiles, offset by small decreases at EJ Footwear and Rexair. Native Textiles benefitted from improved knit fabric sales of 11% and better manufacturing performance. Precision Engineered Products had net sales of $89.2 million and operating income of $19.4 million, reflecting increases of $15.3 million (21%) and $7.1 million (58%), respectively. Each of the operations showed improved performance. Automotive Interior Products had sales of $309.6 million and operating income of $19.2 million, increases of $58.9 million (24%) and $2.1 million (12%), respectively, from fiscal 1996. Net sales at Garden State increased 30% primarily due to a significant increase in volume while operating income only increased 4% due to lower margins. Garden State's profit margins decreased approximately 20% due to highly competitive market conditions, a decline in the quality of hides available in the marketplace, reduced hide cutting yields and lower scrap leather prices. Gain on Sale of Subsidiary Stock In January 1997, an initial public offering of 25% of the shares of Jade Technologies was completed. Jade sold 8 million shares generating cash proceeds of approximately $3.8 million. We recorded a gain of approximately $0.8 million ($0.7 million after provision for deferred income taxes) in connection with the sale. Immediately after the transaction, we owned approximately 75% of the outstanding shares of Jade. Interest and Taxes Interest expense was $25.0 million for fiscal 1997, a $7.1 million (22%) decrease from the prior fiscal year. The decrease reflects lower levels of outstanding notes payable to affiliates. Interest income was $0.5 million and $0.2 million for fiscal 1997 and 1996, respectively. The provision for income taxes was $35.3 million on pre-tax income of $84.7 million (a 42% effective rate) for fiscal 1997 compared to a $28.4 million provision on pre-tax income of $68.3 million (a 42% effective rate) for fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Prior to and during the nine months ended June 30, 1999, we financed our operations and capital and other expenditures from a combination of cash generated from operations and notes and invested capital provided by USI or its affiliates. This arrangement will continue to be in effect until the consummation of the spin-off, after which we expect to meet all cash requirements through internally-generated funds and borrowings under the new credit facility and other available sources. Our ability to generate cash available for the repayment of debt will depend upon numerous business factors, including conditions in the U.S. and world economies, the level of demand for our products, changes in raw material costs, the level of capital expenditures and working capital requirements. Excess cash flow from operations (after capital expenditures) is expected to satisfy our amortization requirements under the new credit facility after the spin-off. If our excess cash flow from operations (after capital expenditures), together with any net disposition proceeds realized by us, is insufficient to satisfy debt amortization requirements under the new credit facility, we will be required to renegotiate the terms of, or refinance, the new credit facility. See ' -- New Credit Facility and Senior Subordinated Notes' below and 'Risk Factors -- We Will Have Substantial Indebtedness.' NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998 Operating activities provided cash of $35.5 million for the nine months ended June 30, 1999, compared with $12.7 million for the nine months ended June 30, 1998. The increase was primarily due to lower working capital requirements at Garden State combined with cash provided by operations of newly acquired companies. Investing activities used cash of $24.4 million for the nine months ended June 30, 1999, compared with $74.9 million for the nine months ended June 30, 1998. The fiscal 1999 period included net cash used for the acquisition of Atech, as well as capital expenditures. The fiscal 1998 period included cash 29 used in the acquisition of the Philips leadframe business and an additional equity interest in United Pacific, as well as capital expenditures. Financing activities used net cash of $17.7 million for the nine months ended June 30, 1999, compared with cash provided of $64.5 million for the nine months ended June 30, 1998. Financing activities during both periods principally resulted from intercompany transactions with USI. During the fiscal 1998 period, third party financing was principally used to finance the acquisitions of the Philips leadframe business and an additional equity interest in United Pacific. FISCAL 1998 COMPARED TO FISCAL 1997 Operating activities provided cash of $35.3 million in fiscal 1998, compared with $56.0 million in fiscal 1997. The decrease was due to reduced cash flow from Rexair and Leon Plastics, partially offset by cash provided by operations of newly acquired FSM. Investing activities used net cash of $80.0 million in fiscal 1998, compared with $14.4 million in fiscal 1997. Fiscal 1998 included net cash used in acquisitions of the Philips leadframe operations and FSM, and an additional equity interest in United Pacific. In addition, net cash used for capital expenditures included capital used for the new product introduction at Rexair. Fiscal 1997 included net cash used for capital expenditures, partially offset by proceeds from the sale of a minority interest in Jade. Financing activities provided $49.2 million in fiscal 1998, and used net cash of $35.7 million in fiscal 1997. Financing activities during both periods principally resulted from intercompany transactions with USI. During the fiscal 1998 period, third party financing was principally used to finance the acquisitions of the Philips leadframe business and an additional equity investment in United Pacific. NEW CREDIT FACILITY AND SENIOR SUBORDINATED NOTES New Credit Facility. USI has entered into commitment letters with lenders in which such lenders have, subject to the satisfaction of certain conditions, agreed to provide us financing at or about the time of the spin-off. At such time, we will enter into a new credit facility with Bank of America as administrative agent and a syndicate of lenders. The new credit facility will consist of three term loans ranging from six to eight years and a six year revolving credit line. All of our obligations under the new credit facility will be unconditionally guaranteed by each of our existing and each subsequently acquired or organized domestic subsidiaries. The new credit facility and the related guarantees will be secured by substantially all of our assets and the assets of each guarantor. Borrowings under the new credit facility will bear interest at a floating rate based upon, at our option, (1) the applicable margin plus the base rate (as such terms are defined in the new credit facility) in effect from time to time, or (2) the applicable margin plus the eurodollar rate (as such term is defined in the new credit facility), adjusted for maximum reserves. The applicable margin in each case will be determined in accordance with a performance pricing grid. In addition to paying interest on outstanding principal under the new credit facility, we will be required to pay a commitment fee to the lenders on the unused portion of the revolving credit line in an amount to be determined in accordance with the performance pricing grid. Each of the term loans will be subject to scheduled quarterly amortization of principal. Advances made under the revolving credit facility will be due and payable in full at maturity. The new credit facility will contain mandatory prepayment provisions, subject to certain exceptions to be agreed upon. It is expected that the new credit facility will contain representations and warranties, covenants (including a maximum ratio of consolidated indebtedness to consolidated EBITDA, a minimum ratio of consolidated EBITDA to consolidated interest expense and specified minimum levels of consolidated EBITDA, as such terms are defined in the facility) and limitations on incurrence of liens, incurrence of debt, voluntary prepayment of debt, modification of equity interests and agreements, issuance of equity interests, payment of dividends, transactions with affiliates, capital expenditures, loans, advances and investments), events of default and other provisions customary for credit facilities of this type. We will pay the lenders certain facility, syndication and administration fees, reimburse certain expenses and provide certain indemnities, in each case which are customary for credit facilities of this type. 30 Senior Subordinated Notes. At or about the time of the spin-off, we intend to offer senior subordinated notes to the institutional debt market. The net proceeds of the offering will be primarily used to repay existing intercompany indebtedness to USI. It is anticipated that the senior subordinated notes will mature 10 years after the date of issuance, will be subordinated to all of our obligations under the new credit facility, and will rank equal to or senior in right of payment to all of our subordinated debt. The senior subordinated notes are expected to be unsecured and will have no mandatory redemption or sinking fund payments. We expect to have the option to redeem the senior subordinated notes in whole or in part, after the fifth year, at redemption prices to be determined. In addition, it is expected that upon a change of control, as defined in the indenture that will govern the senior subordinated notes, each holder of the notes will have the right to require us to repurchase all or any part of such holder's notes at a repurchase price in cash equal to 101% of the aggregate principal amount thereof plus accrued interest. Furthermore, we anticipate that the indenture governing the senior subordinated notes will contain covenants which, among other things, will limit our ability and that of our subsidiaries to incur debt, merge or consolidate, sell, lease or transfer assets, make dividend payments and engage in transactions with affiliates. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of doing business, we are exposed to the risks associated with changes in interest rates and currency exchange rates. To limit the risks from such fluctuations, USI has in the past entered into and we anticipate in the future entering into various hedging transactions that have been authorized pursuant to our policies and procedures. See Note 2 to the Combined Financial Statements. We do not engage in such transactions for trading purposes. We utilize foreign currency-denominated borrowings to effectively hedge a portion of our net investments in subsidiaries in foreign countries. At September 30, 1998 these borrowings were denominated in Dutch guilders and Hong Kong dollars. We estimate that a 10% change in the relevant currency exchange rates would have an impact of $3.1 million on the fair value of these borrowings. This quantification of our exposure to the market risk of foreign exchange sensitive financial instruments does not take into account the offsetting impact of our underlying investment exposures. We are also exposed to foreign currency exchange risk related to our international operations and our U.S. businesses which import or export goods. We have made limited use of financial instruments to manage this risk. EFFECT OF INFLATION Because of the relatively low levels of inflation experienced in our principal markets, inflation did not have a material impact on our results of operations in fiscal 1996, 1997 or 1998 or the nine months ended June 30, 1998 or 1999. YEAR 2000 READINESS DISCLOSURE Many computer systems and other equipment with embedded technology use only two digits to define the applicable year and may recognize a date using '00' as the year 1900 rather than the year 2000. This could result in failures or miscalculations causing disruptions of normal business activities and operations (the 'Year 2000 issue'). We are actively addressing the Year 2000 issue. Our compliance program is led by information technology staff at each operating company, with assistance from manufacturing staff and outside technology consultants where necessary. Progress is being monitored by each operating company president and reported to management. We engaged outside technology consultants at various operating locations to provide independent reviews of Year 2000 readiness and to augment the efforts of local Year 2000 teams or provide expertise in certain areas. Our Year 2000 efforts focus on three areas: information technology ('IT') related systems and processes, such as operating systems, applications and programs; embedded logic ('non-IT') systems and processes, such as manufacturing machinery, telecommunications equipment and security devices; and compliance efforts of third parties (such as customers, suppliers and service providers). Within each 31 of the IT and non-IT areas, the project spans four phases for both critical and non-critical systems: assessment of programs and devices to identify those that are affected by the Year 2000 issue; development of remediation strategies; testing such strategies; and implementing the solutions. Critical systems are those systems (both IT and non-IT) that would have a severe impact on our business and revenue if not made Year 2000 ready. We are presently evaluating each of our critical and principal customers, suppliers, service providers and other business associates to determine each of such party's Year 2000 readiness status. These critical and principal third parties have either material system interfaces or other material relationships that an operating company is dependent upon. The evaluation of each third party includes a request for a Year 2000 readiness certification. Then, depending upon each party's response, evaluation procedures may be expanded to include obtaining Year 2000 disclosures contained in SEC filings of those third parties, where available; testing interfaced systems; holding face-to-face discussions with third parties; and developing and refining contingency plans to address the possibility of a third party failure to complete their year 2000 initiatives on a timely basis. We anticipate that this evaluation will be ongoing through the remainder of 1999. To date, 56% of all third parties and 90% of all critical and principal third parties queried for information relating to Year 2000 compliance have responded, of which 17% of all third parties and 14% of critical and principal third parties indicated that they were not currently compliant. Each operating company has developed contingency plans to address those third parties that either indicated that they were not compliant, or who did not respond. We have completed an assessment of our critical IT and non-IT systems and, as a result, the operating companies have decided to modify, upgrade or replace portions of their systems. The development of these remediation strategies is complete. Most operating companies have fully tested and implemented the solutions and are Year 2000 compliant. The remaining operating companies are approximately 70% complete and expect to complete the testing and implementation phases by December 1999. Year 2000 costs for computer equipment, software and outside consultants incurred through June 30, 1999 are approximately $2.1 million, of which $1.1 million was expensed and $1.0 million was capitalized. Estimated future costs to complete the Year 2000 program are $1.6 million, of which $0.6 million are expected to be expensed as incurred and the remaining $1.0 million are expected to be capitalized. These costs have been, and will continue to be, funded by USI through the date of the spin-off, after which they will be funded from operating cash flow and amounts available under the new credit facility. Most of the costs are for new systems and improved functionality. These costs include approximately $0.5 million of internal payroll costs for employees who are involved in the Year 2000 program. We have developed contingency plans to address the possibility of our failure or that of third parties to complete our or their Year 2000 initiatives on a timely basis. We will continue to make further refinements to the contingency plans based on our ongoing evaluation of our readiness as well as the status of compliance of third parties. Such contingency plans may include using alternative processes, such as manual procedures to substitute for non-compliant systems; arranging for alternate suppliers and service providers; increasing inventory levels; and developing procedures internally and in conjunction with significant third parties to address compliance issues as they arise. No amount of preparation and testing can guarantee Year 2000 compliance. However, we believe we are taking appropriate preventive measures and will be successful in avoiding any material adverse effect on our operations or financial condition. Nevertheless, we recognize that failing to resolve our Year 2000 issues on a timely basis would, in a worst case scenario, significantly limit our ability to manufacture and distribute products and process daily business transactions for a period of time, especially if such failure is coupled with third party or infrastructure failures. Similarly, we could be significantly affected by the failure of one or more significant suppliers, customers or components of the infrastructure to conduct their respective operations without interruption after 1999. Because of the difficulty of assessing the Year 2000 compliance of such third parties, we consider the potential disruptions caused by such parties to present the most reasonably likely worst-case scenarios. Adverse 32 effects on us could include business disruption, increased costs, loss of sales and other similar ramifications. The costs of our Year 2000 initiatives, the dates on which we believe that we will complete such activities and our evaluation of third-party effects are estimates and subject to change. Actual results could differ from those currently anticipated. Factors that could cause such differences include, but are not limited to, the availability of key Year 2000 personnel, our ability to respond to unforeseen Year 2000 complications, the readiness of third parties, the accuracy of third party assurances regarding Year 2000 compliance, our ability to monitor progress and provide oversight to Year 2000 initiatives in the periods leading up to and subsequent to the spin-off and similar uncertainties. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their sovereign currencies and a single European currency. During a transition period from January 1, 1999 through December 31, 2001, legacy sovereign currencies will continue to be in use; however, the value of such currencies will be set at fixed and irrevocable conversion rates to the Euro. Beginning in January 2002, new Euro-denominated bills and coins will be issued and the legacy currencies will be withdrawn from circulation. We are addressing issues raised by the conversion to the Euro, such as assessing whether cross-border price transparency will limit our flexibility to charge different prices for similar products and adapting its information technology systems. Our efforts to adapt systems differ at our various European operations. Our significant European operations have formulated plans to accommodate all Euro-denominated transactions and conversion conventions by January 1, 2002. We anticipate that its costs in connection with the Euro conversion will not be material. We do not anticipate that the conversion from the legacy currencies to the Euro would have a material adverse impact on our financial condition or results of operations. To date there have not been, and we do not anticipate there being, any material adverse impact on our financial condition or result of operations as a result of the introduction of the Euro. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted beginning in fiscal 2001. This statement will require us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. We do not anticipate that the adoption of the new statement will have a significant effect our earnings or financial position. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which is effective for years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. We will adopt the new requirements retroactively in fiscal 1999. We do not anticipate that the adoption of this statement will have a significant effect on our reported segments. 33 BUSINESS GENERAL We operate and manage a diversified group of businesses on a decentralized basis, with a corporate management team providing strategic direction and financial support. Our operating companies are divided into three business groups: Consumer Products, Precision Engineered Products and Automotive Interior Products. In fiscal 1998, we had net sales of $888.5 million and operating income of $25.2 million (after deducting goodwill impairment, restructuring and other related charges totalling $71.1 million). We believe our businesses generally have leading positions in niche markets, high quality products, attractive operating margins compared to their peers and experienced management. Our products are used in a variety of markets by a broad range of end-users in the U.S. and internationally. We believe the business trends that affect our operating companies and the markets we serve vary. As a result, we believe our diversity reduces our exposure to any single market. The following table presents the operating companies in each of our business groups. CONSUMER PRODUCTS Rexair Manufactures Rainbow'r' premium vacuum cleaners for sale through an extensive independent direct sales network EJ Footwear Manufactures Georgia Boot'r' western, work and outdoor sporting boots and Lehigh'r' industrial safety footwear Native Textiles Manufactures warp knit fabrics used in lingerie and activewear BiltBest Windows Manufactures windows and patio doors SCF Industries Manufactures folding and stacking chairs as a licensee of the Samsonite'r' brand name PRECISION ENGINEERED PRODUCTS Huron Manufactures precision metal products used in automobiles Bearing Inspection Inspects and overhauls aircraft engine bearings and other aircraft components FSM Manufactures flat shadow masks, a component of color television picture tubes Jade Technologies Manufactures customized leadframes for the semiconductor industry (an approximately 75%-owned Singapore public company) AUTOMOTIVE INTERIOR PRODUCTS Garden State Tanning Manufactures premium automotive leather Leon Plastics Manufactures molded plastic parts and assemblies for automotive interiors
We also own approximately 20% of the equity of United Pacific Industries Limited, a company listed on the Stock Exchange of Hong Kong. United Pacific manufactures voltage converters and other electronic components. This equity interest is included in the Precision Engineered Products Group. BUSINESS STRATEGY Our objective is to build our equity value by consistently focusing on reducing our debt and increasing profitability and cash flow. Key elements of our business strategy are described below. DEBT REDUCTION. Historically, our operating companies have generated significant cash flow. We intend to use a substantial portion of any available cash flow to reduce our debt. In addition, we will regularly evaluate our businesses to determine whether our debt reduction strategy should be accelerated through selected dispositions. GROWTH INITIATIVES. We will seek to build upon our niche positions through internal and external growth in targeted markets. We will selectively commit capital to extend our markets, develop new products and expand manufacturing capabilities. We will also consider complementary acquisitions to augment these initiatives. For example, in fiscal 1998, to enhance its product offering and foster increased sales, Rexair introduced a redesigned 34 product line and increased efforts to expand its independent direct sales network in the United States and abroad. Recently, we also invested in a new facility for Bearing Inspection to support future growth and acquired Atech Turbine Components to complement Bearing Inspection's operations. COST REDUCTION AND MARGIN EXPANSION. We will seek to reduce costs and improve operating margins at each of our individual businesses through process improvements and by focusing on higher margin products and markets. For example, our continuous productivity improvement techniques have reduced operating costs at Huron and Leon Plastics, and we intend to apply these techniques where appropriate to other operating companies. Ongoing programs also include the continued rationalization of manufacturing operations and increased use of foreign sources of supply at EJ Footwear. In addition, Garden State is implementing process changes to increase hide-cutting yields and is focusing on higher margin products. DECENTRALIZED MANAGEMENT WITH PERFORMANCE BASED INCENTIVES. Our operating companies will be managed on a decentralized basis by experienced executives. The chief executive officers of our operating companies average over 15 years in their industries. Incentive compensation for senior executives at our operating companies will depend on reaching short and long-term operating goals linked to the executives' respective businesses. Our corporate management team will supply strategic direction and financial support to the operating companies. They have extensive experience in senior management positions within multi-industry public companies including Hanson PLC and USI. Their compensation under our annual bonus and long-term deferred compensation plans will depend upon reaching operating goals linked to our overall performance. Both our corporate management team and our operating company management will have significant personal equity interests in us, principally in the form of stock options. CONSUMER PRODUCTS GROUP Our Consumer Products Group designs, manufactures and markets a wide variety of products serving numerous, diverse end markets. Several companies in this group sell products which generate attractive margins as compared with those of their peers and strong cash flows. The companies in this group are engaged in the manufacture and distribution of premium vacuum cleaners, footwear, textiles for apparel, folding chairs, windows and patio doors. In fiscal 1998, the Consumer Products Group had net sales of $410.7 million and operating income of $48.5 million, after deducting restructuring and other related charges of $15.7 million. These amounts represented 46% of our net sales and 152% of our operating income before management fees charged by USI and divisional overhead in fiscal 1998. REXAIR. Rexair, founded in 1933, is a leading manufacturer of premium vacuum cleaner systems. Rexair markets its Rainbow'r' vacuum cleaner system through an extensive network of independent distributors. Rexair products are sold to consumers by direct sale throughout the United States and Canada and over 70 other countries. In 1998, Rexair introduced a redesigned vacuum cleaner system, the Rainbow'r' e SERIES'TM', a full-service cleaning system that collects dirt particles by means of a combination water filtration and separator system. This new product line offers updated styling and improved filtration through the addition of High Efficiency Particulate Arresting (HEPA) filters to the system. Rexair believes this system provides a technologically superior alternative to traditional vacuum cleaners. The full system has optional accessories including a motorized power nozzle; the RainbowMate'r', a motorized, hand-held attachment for cleaning upholstery, stairs and other hard-to-reach areas; and the AquaMate'r' carpet shampooing attachment. Rexair distributes the Rainbow'r' and its accessories through a network of over 1,000 independent authorized distributors and subdistributors, which together employ over 10,000 full and part-time sales representatives. Sales to consumers are made through in-home demonstrations by sales representatives and are typically arranged by referrals from other consumers. We estimate that over 60% of the purchases of Rexair products in the United States are financed either by independent consumer finance companies or, to a lesser extent, by the distributors. Rexair supports the distribution network with 35 training about product features and sales techniques and sponsors sales incentive and recruitment programs. In fiscal 1998, sales in the United States and Canada accounted for approximately 49% of Rexair's total unit sales. The remaining sales were spread over a number of foreign markets, with significant sales made in Portugal, Austria, Japan and Poland. In the domestic market, the vacuum cleaner industry is mature and highly competitive. Rexair's most significant competitors in the premium segment of the domestic vacuum cleaner industry are the Kirby division of Scott-Fetzer (a subsidiary of Berkshire Hathaway Inc.), Electrolux, Inc. (U.S.A.) and, to a lesser extent, Health-Mor (Filter Queen vacuum cleaners). Competition in direct sales of vacuum cleaners is based primarily on the quality of the product and on sales technique and personnel, as well as marketing and distribution approaches. Management believes that Rexair does not compete on the basis of price. Rexair also experiences competition in recruiting its distributors. In addition, its distributors experience competition in recruiting and retaining sales representatives. Rexair manufactures the Rainbow'r' system at its facility in Cadillac, Michigan. It purchases motors and other components from third-party vendors. Rexair considers its suppliers to be reliable. Rexair's strategy focuses on providing premier quality products, supported by strong customer service, through effective marketing techniques. It seeks to achieve growth by increasing its distribution network through ongoing recruiting efforts. EJ FOOTWEAR. EJ Footwear, founded in 1890, is a designer, manufacturer and marketer of work, hiking, hunting and western boots and children's footwear. Its products are sold in niche markets under well-known specialty brand names, including Georgia Boot'r', Lehigh'r', Northlake'r', Durango'r' and Baby Deer'r'. EJ Footwear operates five companies: Georgia Boot produces boots in the mid-range price segment of the industry and markets its products to sporting goods stores, and farm and ranch stores. It competes with Wolverine, Carolina, Timberland and Rocky. Lehigh Safety Shoe is a direct service provider of occupational safety footwear. Lehigh utilizes a nationwide network of shoemobiles, shoe centers, independent distributors and on-site commissary locations to sell directly to industrial and commercial facilities. It competes with Iron-Age and Hy-Test. Durango Boot markets a diversified line of western and farm and ranch boots primarily to farm, ranch and independent western stores. It competes with Justin, Wolverine, Acme and Laredo. Trimfoot sells infant's and children's footwear through various distribution channels offering extensive product lines. It competes with Step-N-Stride, Carter's, Capezio and Goldbug. Empire Footwear supplies domestic department stores, catalog merchants and mass merchants with imported footwear products, primarily on a private label basis as well as under the Northlake'r' brand name. EJ Footwear seeks to maintain its competitive position in the markets it serves by offering comfortable, technologically advanced products at moderate price points. EJ Footwear has a modern distribution center located in Endicott, New York, as well as two domestic manufacturing facilities located in Blairsville, Georgia and Franklin, Tennessee. To improve operating efficiencies and margins, EJ Footwear recently introduced several initiatives to refocus its strategic orientation. These initiatives include rationalizing its manufacturing facilities and sourcing specific products from the Far East and the Dominican Republic through long-standing supplier relationships. NATIVE TEXTILES. Native Textiles, founded in 1929, is a leading supplier of warp knit fabrics to domestic apparel manufacturers in both the activewear and intimate apparel markets. It also commission-dyes lace and other specialty fabrics for third parties. Native's customers include Nike, Champion, Adidas and W.L. Gore (the maker of Gore-Tex) in the activewear market, and Playtex, Hanes, Bali, Warner and Fruit of the Loom in the intimate apparel market. 36 Native employs sales representatives in New York City and Los Angeles and also distributes its products through non-company selling agents. Its manufacturing facilities are located in Glens Falls, New York. Its competitors include Guilford Mills, Inc. and Fab Industries. BILTBEST WINDOWS. BiltBest, founded in 1947, manufactures and distributes wood windows, aluminum-clad windows and patio doors. BiltBest, located in Ste. Genevieve, Missouri, primarily sells its products to lumber yards, building products dealers and manufactured housing companies in the mid-western United States. It competes with regional and national window companies by offering quality products at moderate price points. SCF INDUSTRIES. SCF, formed in 1997, manufactures folding and stacking chairs as a licensee of the Samsonite'r' name. The Samsonite'r' brand name has been in use for over 80 years and has been associated with folding chairs since the 1940's. SCF's current license agreement for the brand name extends to 2012. SCF has a strong position in selling folding chairs to the party rental market. It also sells its products to office product wholesalers. Key competitors include Krueger, Bevis, ABCO and Office Star. PRECISION ENGINEERED PRODUCTS GROUP Our Precision Engineered Products Group serves specialized markets requiring high-quality, value-added products and services designed to meet exacting standards and customer specifications. To satisfy these precise standards, our companies provide significant design, engineering and manufacturing expertise as well as tailored technical support. Substantially all of the products and services provided by this group are critical to our customers. We expect to expand these businesses through both organic growth and by making selected complementary acquisitions in this fragmented market. The group has a significant international presence, with approximately 33% and 15% of fiscal 1998 net sales generated in Europe and Asia, respectively. The group had annual net sales of $138.1 million and operating income of $28.0 million in fiscal 1998. This group represented 16% of our net sales and 88% of our operating income before management fees charged by USI and divisional overhead in fiscal 1998. HURON. Huron, founded in 1943, is a manufacturer of value-added precision machined products for the automotive industry. Products include screw machined parts, tubular assemblies, dowels, fittings, shafts and air-conditioning and fuel manifolds. Huron's manufacturing facilities are strategically located in Port Huron, Michigan and Lexington, Michigan near its principal customers. Huron has developed strategic supplier relationships with domestic and foreign automobile manufacturers and their suppliers. Huron's largest customers are Visteon (a Tier I supplier to Ford), Ford and Chrysler. Huron is a long-term supplier to several Ford divisions, and has supplied Ford with virtually all of its brake bolt requirements for light trucks and sports utility vehicles since 1976. Industry over-capacity has resulted in consolidation among original equipment manufacturers and their supplier base. In order to address these market conditions and the impact of price concessions sought by manufacturers, Huron seeks to introduce new and efficient products and processes to maintain a low-cost position in the market. Huron has a well-developed continuous process improvement program that has been in place since 1995. Huron also provides a high degree of engineering and logistical support to its key customers to further Huron's goal of maintaining and improving its competitive position with them. The market for the manufacture of machined automotive components is fragmented. Many of our competitors are small and privately owned. Key competitors include Master Automatic, Black River Manufacturing and Horizon. BEARING INSPECTION. Bearing Inspection, founded in 1955, inspects and overhauls jet aircraft engine bearings for customers located worldwide. In January 1999, Bearing Inspection acquired Atech Turbine Components, allowing Bearing Inspection to expand into the business of refurbishing the 'hot sections' of turbo-prop engines. These companies offer fleet operators cost-effective alternatives to the purchase of new parts from original equipment manufacturers. The demand for jet and turbo-prop engine overhaul products and services reflects the number of engine hours flown by the commercial airline industry. Our customers include international, domestic and regional carriers and independent engine overhaul companies. Bearing Inspection has recently moved into a larger, ISO9002 accredited facility in Los Almitos, California and continues to operate its Atech facility located in Worcester, Massachusetts. 37 Bearing Inspection's primary competitors are the MRC Bearings division of AB SKF (Sweden), the PBC division of Timken, the SNR Bearing, USA division of SNR (France) and FAG Bearings Corp, a division of FAG Group (Germany). These companies manufacture new bearings and also have bearing overhaul operations. Bearing Inspection believes that it is the only major independent overhauler of aircraft engine bearings. Our growth strategy includes expansion of our strategic relationships with engine manufacturers and further marketing initiatives with international air carriers. FSM EUROPE BV. FSM, founded in 1967, is located in Sittard, The Netherlands. USI acquired FSM from Philips Components B.V. in May 1998. FSM manufactures flat shadow masks, a component in color television picture tubes. A flat shadow mask is the screen within a picture tube that directs the colors emitted by each of the blue, red and green color guns. In connection with the acquisition from Phillips, FSM entered into a long-term contract to supply Philips, with a specified number of flat shadow masks annually. This contract, denominated in U.S. dollars, expires in May 2004, presently accounts for substantially all of FSM's sales, and is subject to annual price adjustments based on world market prices. JADE TECHNOLOGIES SINGAPORE LTD. Jade, founded in 1981, is a public company based in Singapore. The shares of Jade are listed on the Stock Exchange of Singapore Dealing and Automated Quotation system. We own approximately 75% of Jade's shares, with the remainder being owned by the public. Jade manufactures stamped and plated integrated circuit leadframes. A leadframe is a customized product that holds a semiconductor chip and acts as the electrical connection between the chip and a circuit board. In January 1998, Jade acquired the leadframe business of Philips Semiconductors B.V., which is located in Sittard, The Netherlands. Jade sells primarily to electronics manufacturers with all sales denominated in U.S. dollars. The leadframe industry is competitive, with competition based on delivery lead-times, price and quality. Jade has a long-term contract to supply Philips Semiconductors B.V., its largest customer, with a specified number of leadframes annually. This contract expires in January 2001 and is subject to annual price adjustments based on world market prices. AUTOMOTIVE INTERIOR PRODUCTS GROUP Our Automotive Interior Products Group provides specialty products to the automotive market. The companies within this group have developed many 'strategic supplier' relationships with leading automotive original equipment manufacturers and Tier 1 suppliers and provide strong product and customer support. The group had fiscal 1998 net sales of $339.7 million and operating loss of $44.5 million, after deducting goodwill impairment, restructuring and other related charges of $55.4 million. This group represented 38% of our net sales in fiscal 1998. Our strategy is to be a leading manufacturer and supplier of high quality products, supported by superior customer service and a strong design team. We seek to maximize our profitability by focusing on profit margins and implementing continuous process improvement programs in these companies to reduce costs while optimizing quality and delivery capabilities. GARDEN STATE TANNING. Garden State, founded in 1933, is a leading manufacturer and marketer of high quality leather upholstery products in various colors, patterns and grains, primarily for installation as automotive seating and trim. Garden State has earned a reputation within the automotive industry for producing high quality products. Among Garden State's customers for finished leather are Toyota (including Lexus), Ford, General Motors, BMW, Mazda and Honda (including Acura) or their Tier I suppliers. Garden State believes it is positioned to benefit from the current trend of increasing demand for leather interiors in the automobile industry. This trend is particularly strong within the light truck and sport utility vehicle segments of the automobile market. Garden State has received many customer awards for product, service and cost reduction achievements. Recently it was designated by Toyota Motor Corporation as one of only five 'Superior Suppliers' worldwide. Garden State produces cut leather 'sets' that are shipped to customers' facilities where they are sewn and attached to automobile seats and other vehicle parts. In addition, Garden State generates operating income through the sale of byproducts (i.e., split hides and scrap leather). Hides comprise approximately one-half of Garden State's costs of production, and Garden State procures approximately one-half of its hides from the largest U.S. supplier of hides, with whom it has a long standing relationship. The balance is purchased from various other suppliers. 38 Garden State has three primary manufacturing facilities located in Williamsport, Maryland, Fleetwood, Pennsylvania and Reading, Pennsylvania along with cutting facilities in Adrian, Michigan and Saltillo, Mexico. All of Garden State's facilities are ISO9002/QS9000 accredited. Major manufacturers in the worldwide automotive leather industry include Garden State and two of its major competitors, Eagle Ottawa Leather Corporation and Seton Corporation. Garden State is focused on increasing profitability by providing high quality products, improving production yields and streamlining operations. LEON PLASTICS. Leon Plastics, founded in 1958, manufactures molded plastic parts and assemblies for the automotive industry. Its products range from plastic console and instrument panel components to functional components such as the complete rear door panel for the Ford Ranger pickup truck. Among Leon Plastics' customers are Ford, Chrysler, General Motors, Nissan and/or their Tier I suppliers. Leon Plastics operates manufacturing facilities in Grand Rapids, Michigan and Grand Island, Nebraska. Leon Plastics has an industry-wide reputation for its expertise in molding flexible vinyl over foam to fabricate cushioned trim components with high quality characteristics. We believe that Leon Plastics' extensive product knowledge and innovative engineering allow it to shorten the overall product development cycle. Key competitors at the Tier I level include Lear, Plastech, JCI/Becker Group and Woodbridge. EQUITY INTERESTS We own approximately 20% of the equity of United Pacific Industries, a limited liability company incorporated in Bermuda and listed on the Stock Exchange of Hong Kong. United Pacific is an investment holding company whose subsidiaries are engaged in the manufacture of voltage converters as component parts for low voltage consumption electronic products, rechargeable batteries and other electronic components and toy products. This investment is accounted for using the equity method of accounting within our Precision Engineered Products Group. RAW MATERIALS COSTS Most of our businesses are dependent, to varying degrees, on the availability of raw materials, including plastics, hides, copper, nickel, certain grades of steel, wood, glass and corrugated packaging materials. The impact of raw material price increases on the operating income of our businesses depends on their ability to pass along cost increases to our customers. Although raw material shortages or price increases from time to time may have an adverse effect on the results of operations of our individual businesses, we do not believe that these factors are material to us on a consolidated basis. EMPLOYEES At September 30, 1998, we had approximately 5,000 employees (excluding employees of United Pacific and Jade). Approximately 48% of our employees were represented by unions. We believe that the relations of our operating subsidiaries with employees and unions are generally good. GOVERNMENTAL REGULATION Our operating units are subject to numerous federal, state, local and foreign laws and regulations concerning such matters as zoning, health and safety and protection of the environment. We believe that our operating units are currently operating in substantial compliance with, or under approved variances from such various federal, state, local and foreign laws and regulations. Approximately five present and former operating sites, or portions thereof are the subject of investigations, monitoring or remediation under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ('CERCLA'), the federal Resource Conservation and Recovery Act or comparable state statutes or agreements with third parties. These proceedings are in various stages ranging from monitoring at two sites to implementation of the clean-up or remediation of the other sites. We do not believe that any of these proceedings will have a material adverse effect on our business or financial condition or will otherwise interfere with our operations at these sites. A number of our present and former operating units have been named as potentially responsible parties at seven off-site disposal sites under CERCLA or comparable state statutes in a number of federal and state proceedings. We are not currently utilizing any of these sites for our disposal needs. In each of these matters our operating units are working with the governmental agencies involved and 39 other potentially responsible parties to address the environmental claims in a responsible and appropriate manner and the cleanup effort at each site is in the advanced stages of remediation or monitoring. Under CERCLA and other similar statutes, any generator of hazardous waste sent to a hazardous waste disposal site is potentially responsible for all clean-up, remediation and response costs required for such site, irrespective of the amount of waste which the generator sent to the site. We do not believe that any of the pending proceedings will have a material adverse effect on our business or financial condition. In the past, our subsidiaries have made significant capital and maintenance expenditures to comply with zoning, water, air and solid and hazardous waste regulations. While the amount of expenditures in future years will depend on legal and technological developments which cannot be predicted at this time, these expenditures may progressively increase as regulations become more stringent. Future costs for compliance cannot be predicted with precision and there can be no certainty with respect to any costs we may be forced to incur in connection with historical on-site or off-site waste disposal. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose 'strict liability,' rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. In addition, we cannot predict whether modifications of existing laws or regulations or the adoption of new laws or regulations, or presently unidentified environmental conditions or unanticipated enforcement actions, particularly with respect to environmental standards, could require material capital expenditures or otherwise have a material adverse effect on our business or financial condition. At September 30, 1998, we had accrued approximately $3.7 million for various known environmental-related liabilities. We believe that the range of liability for such matters is between $1.5 million and $4.5 million. We cannot predict whether future developments in laws and regulations concerning environmental protection will affect our earnings or cash flow in a materially adverse manner or whether our operating units will be successful in meeting future demands of regulatory agencies in a manner which will not have a material adverse effect on our business or financial condition. PATENTS AND TRADEMARKS Our subsidiaries have numerous United States and foreign patents, patent applications, registered trademarks and trade names, and licenses. Certain of the trademarks and trade names, some of which are described above, are of material importance to our businesses, including our Rainbow'r', Georgia Boot'r', Durango'r', Lehigh'r' and BiltBest'r' trademarks. The Samsonite'r' trademark is used under a license that extends to 2012. None of our other material trademarks are of limited duration. Although protection of our patents and related technologies are important components of our business strategy, none of the individual patents is material to our business as a whole. PROPERTIES Our operating subsidiaries own or lease approximately 45 plants and other properties. None of the individual properties is considered to have a value that is significant in relation to our assets as a whole. We believe that our properties are well maintained and are in good operating condition. The properties are deemed to be suitable and adequate for our present needs. We believe that we have additional capacity available at most of our production facilities and that we could significantly increase production without substantial capital expenditures. LEGAL PROCEEDINGS Various of our subsidiaries are defendants in ordinary, routine litigation incidental to present and former operations. Even if we do not prevail, we do not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material adverse effect upon our business or financial condition. 40 MANAGEMENT DIRECTORS After the spin-off, our board of directors will consist of six persons, who will be divided into three equal classes each having a three-year term. The two executive officers who are expected to serve as directors after the spin-off are presented below. [We will name our additional directors in an amendment to this filing.]
NAME POSITION - ---- -------- John G. Raos......................... Chairman and Chief Executive Officer Peter J. Statile..................... Executive Vice President -- Operations
John G. Raos, 50, has served as President and Chief Operating Officer of USI and as a director of USI since USI's demerger from Hanson PLC in 1995. For the balance of the past five years, Mr. Raos served as President and Chief Operating Officer of Hanson Industries, the U.S. arm of Hanson, and was a director of Hanson. Peter J. Statile, 43, has served as President and CEO of Hanson North America, Inc. and as an associate director of Hanson PLC from 1998 to 1999. For the balance of the past five years, he served Hanson's U.S. group as Vice President -- Corporate Controller and subsequently as Executive Vice President -- Chief Financial Officer. COMMITTEES After the spin-off, our board of directors is expected to establish and designate a compensation committee and an audit committee. Directors who are also our officers or employees will not be permitted to serve on either committee. The functions of these standing committees will be as follows: Compensation Committee. The compensation committee will set the compensation of all executive officers subject to the terms of their employment agreements and administer and make awards under our stock incentive plan and other incentive plans. The committee will also review the competitiveness of management compensation and benefit programs and principal employee relations policies and procedures. All of the members of the compensation committee are intended to be 'disinterested' within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, and 'outside directors' within the meaning of Section 162(m) of the Internal Revenue Code ('Code Section 162(m)'). Audit Committee. The audit committee will be responsible for matters relating to accounting policies and practices, financial reporting and internal controls. It will recommend to our board of directors the appointment of a firm of independent accountants to audit our financial statements and will review with representatives of the independent accountants the scope of the audit of our financial statements, results of audits, audited financial statements, audit costs and recommendations with respect to internal controls and financial matters. It will also review non-audit services rendered by our independent accountants and will periodically meet with or receive reports from our principal financial and accounting officers. FEES Non-employee directors will receive an annual cash retainer of $9,000 plus $1,000 for each board and $500 for each committee meeting attended and reimbursement of all reasonable expenses incurred in connection with such meetings. We will pay the premiums on directors' and officers' liability and travel accident insurance policies insuring directors. Each non-employee director will also receive initial and annual stock grants and stock option grants. See Executive Compensation--Stock Incentive Plan. EXECUTIVE OFFICERS The following individuals are expected to serve as our executive officers at the time of the spin-off. Our board of directors may appoint additional executive officers from time to time. 41
NAME POSITION - ---- -------- John G. Raos Chairman and Chief Executive Officer Peter J. Statile Executive Vice President -- Operations Steven C. Barre Vice President, General Counsel and Secretary Gary K. Meuchel Vice President -- Human Resources Peter F. Reilly Vice President, Chief Financial Officer and Treasurer Robert J. Vander Meulen Corporate Controller
For biographical information concerning Messrs. Raos and Statile, see ' -- Directors' above. Steven C. Barre, 39, has served as Associate General Counsel of USI since 1995. For the balance of the past five years, Mr. Barre served as Associate General Counsel of Hanson Industries. Gary K. Meuchel, 45, has served since 1997 as Vice President -- Human Resources of Lighting Corporation of America, which is a USI subsidiary. For the balance of the past five years, Mr. Meuchel served as Vice President -- Human Resources of Progress Lighting Inc., another subsidiary of USI. Peter F. Reilly, 35, has served as Treasurer of USI since 1997. Earlier in his career at USI, he served as Assistant Treasurer and subsequently as a Group Controller. For the balance of the past five years, he served as a financial advisor to Hanson Industries and, previously, as Assistant Treasurer of Marine Harvest International, Inc., a public company engaged in the farming and distribution of seafood products. Robert J. Vander Meulen, 36, has served as Director of Audit and Internal Control of USI since 1999. Earlier in his career at USI, he served as Assistant Corporate Controller and subsequently as Assistant Treasurer. For the balance of the past five years, Mr. Vander Meulen served as Director of Financial Analysis of Hanson Industries and, previously, as an Audit Senior Manager for Ernst & Young LLP. 42 EXECUTIVE COMPENSATION The following is a description of the executive compensation arrangements and benefit plans adopted or expected to be adopted by us, some of which are substantially similar to those in effect at USI. After completion of the spin-off, none of our officers will participate in any USI benefit plans, except to the extent they are entitled to exercise any vested USI stock options pursuant to such plans for a period of 90 days following the spin-off or in the case of Mr. Raos, the later of January 15, 2000 or 90 days following the spin-off. For information regarding our assumption of certain liabilities and assets of the USI plans, see 'The Spin-off -- Agreements between Strategic and USI and Relationship after the Spin-off -- Corporate Transition Agreement.' EMPLOYMENT AGREEMENTS The following is a summary of the employment agreements of each of the individuals who is expected to become one of our five most highly compensated executive officers after the spin-off. The employment agreements provide for Messrs. Raos, Statile, Barre, Meuchel and Reilly to serve, commencing on the date of the spin-off (the 'Commencement Date'), respectively, as our Chairman, Chief Executive Officer and Director; as Executive Vice President -- Operations and Director; as Vice President, General Counsel and Secretary; as Vice President -- Human Resources; and as Vice President, Chief Financial Officer and Treasurer. Unless terminated earlier as discussed below, the term of employment under each agreement will expire on the second (or, in the case of Mr. Raos, the third) anniversary of the Commencement Date subject to automatic extension for additional two (or, in the case of Mr. Raos, three) year terms on each applicable anniversary unless either party gives at least 90 days' prior written notice of non-extension. The employment agreements provide that we will pay Messrs. Raos, Statile, Barre, Meuchel and Reilly annual base salaries at rates of not less than $500,000, $250,000, $180,000, $165,000 and $200,000, respectively. Commencing with fiscal 2000, each executive will be eligible to receive an annual cash bonus, with a target bonus potential equal to at least 100%, 70%, 55%, 55% and 65% of his base salary, respectively, based on the achievement of a performance target established by the Compensation Committee under a bonus plan qualifying the bonuses as 'performance-based' for purposes of Code Section 162(m). Mr. Statile's employment agreement also provides that he will be entitled to receive a special bonus in the amount of $50,000, which will be paid on the later of 30 days following the Commencement Date or January 15, 2000 (the 'Special Bonus'). Mr. Raos and Mr. Statile acknowledge in their employment agreements their intention to purchase our common stock after the Commencement Date. In the case of Mr. Raos, he acknowledges his intention to purchase the lesser of (i) $1,000,000 worth of our common stock or (ii) 0.5% of our issued and outstanding common stock on the day after the Commencement Date, within the 120 day period following the Commencement Date. In the case of Mr. Statile, he acknowledges his intention to purchase the lesser of (i) $250,000 worth of our common stock or (ii) 0.125% of our issued and outstanding common stock on the day after the Commencement Date, within the 365 day period following the Commencement Date. In addition, we have agreed to recommend to the Compensation Committee of our Board of Directors that (i) within 90 days after the Commencement Date, Messrs. Raos and Reilly be granted awards of and shares of our restricted common stock, respectively, to replace the shares of restricted USI common stock which were forfeited upon ceasing employment with USI (and in the case of Mr. Reilly, the Compensation Committee is required to recommend that such shares of restricted common stock vest over a period not to exceed 5 years), and (ii) Messrs. Raos, Statile, Barre, Meuchel and Reilly receive grants of stock options to purchase a number of shares of our common stock with a value in the aggregate of $3,500,000, $1,500,000, $720,000, $660,000 and $1,100,000, respectively (the total number of options will be granted in three successive grants made during each of the three fifteen day periods following the Commencement Date with each grant determined by dividing one third of the foregoing amounts by the fair market value on the date of grant ). The recommended exercise price of the stock options is to be equal to the fair market value of the common stock on the date of grant. We also will recommend that the options vest in equal installments on each of the first four anniversaries of 43 October 1, 1999, in each case subject to (i) full acceleration upon a Change in Control of us (as defined in each employment agreement) and (ii) except with respect to Mr. Raos, vesting of the portion of the options which would have vested on the next vesting date, and with respect to Mr. Raos, vesting of all outstanding options, following the date of termination upon any termination other than by us for Cause (as defined in each employment agreement) or a voluntary termination by the executive without Good Reason (as defined in each employment agreement). The employment agreement for Mr. Raos provides that we do not intend to recommend to the Compensation Committee that any additional stock options or restricted stock be granted to Mr. Raos for two years after the Commencement Date. The executives will be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites that we maintain from time to time for comparable level executives. The employment agreement for Mr. Raos also provides that Mr. Raos will have coverage and benefits at least equal in the aggregate and fringe benefits and perquisites of at least equal value to those provided to him by USI in accordance with the provisions of his employment agreement with USI in effect immediately before the Commencement Date. To the extent the executives currently participate in any long-term incentive plan sponsored by USI or its subsidiaries (the 'USI LTIP') and any supplemental executive retirement plan sponsored by USI or its subsidiaries (the 'USI SERP'), each executive's account balance in the USI LTIP and benefit accruals under the USI SERP will be transferred to similar arrangements with us. The employment agreements provide that if the executive's employment with us is terminated by reason of death or disability, the executive or his legal representative will receive, in addition to accrued compensation, the prorated target annual bonus of the executive for the fiscal year of the executive's death or disability, payment on a monthly basis of, in the case of Mr. Raos, 12 months, in the case of Mr. Statile, 6 months, and, in the case of Messrs. Barre, Meuchel and Reilly, 3 months of base salary (subject in the case of a termination due to disability to offset by the amount the executive receives under any long-term disability program maintained by us), payment of spouses' and dependents' COBRA coverage premiums for no more than 3 years and any other benefits owing to the executive under the then applicable employee benefit, long term incentive and equity plans of Strategic. The employment agreements with Messrs. Raos and Statile provide that if the executive's employment with us is terminated (1) by us other than for Cause (as defined in each employment agreement), (2) by the executive for Good Reason (as defined in each employment agreement), (3) in the case of Mr. Raos for any or no reason within two years after a Change in Control of us (as defined in his employment agreement), or in the case of Mr. Statile, during the 30 day period commencing 6 months after a Change in Control of us (as defined in his employment agreement), or (4) as a result of our giving notice of non-extension at the end of any employment term, then the executive will be entitled to receive accrued compensation and certain payments and amounts. Payments to Mr. Statile are subject to the execution of a release of claims by him and, in the case of the amounts and benefits described in (a)(2), (3) and (4) below, only if termination is after a Change in Control of us (as defined in his employment agreement). The payments and benefits to be made in that situation are: (a) a lump sum equal to three (or, in the case of Mr. Statile, two) times (1) base salary, (2) the highest annual bonus paid or payable to the executive by us for any of the previous three completed fiscal years, (3) the value of an additional year of service and compensation credit for qualified and nonqualified pension plan purposes, and (4) the value of our maximum contribution under any type of qualified or nonqualified 401(k) plan, (b) our payment of the premiums for the executive and his dependents' health coverage for three years (or in the case of Mr. Statile, for two years), (c) any other amounts or benefits due under any employee benefit, long-term incentive or equity plans and programs in which the executive participates at that time in accordance with such plans and (d) in the case of Mr. Statile, if not vested in a tax-qualified defined benefit plan maintained by us, a pro rata payment based upon his then accrued benefit under our qualified pension plan (all such payments being collectively referred to as the 'Severance Payment'). In addition, if the Severance Payment to either of the executives under his employment agreement, together with other amounts paid to the executive, exceeds certain threshold amounts and results from a change in ownership as defined in Section 280G(b)(2) of the Internal Revenue Code, the employment 44 agreement provides that the executive will receive an additional amount to cover the federal excise tax and any interest or penalties with respect thereto on a 'grossed up' basis. The employment agreements provide that if the executive is terminated for Cause (as defined in the employment agreement) or voluntarily resigns without Good Reason (as defined in the employment agreement) (which right the executive has on 60 days notice), the executive will only receive accrued compensation through the date of termination and unreimbursed business expenses. The employment agreements with Messrs. Barre, Meuchel and Reilly provide for substantially similar provisions on termination as those provided for in Mr. Statile's employment agreement except that (i) payment of the two times base salary will be made to the executive in installments if termination occurs prior to a Change in Control of us and (ii) the executive may only resign and collect severance based purely on the Change in Control of us during a 30-day window after the first anniversary of the Change in Control. The employment agreements also will provide for (i) indemnification of the executives for actions in their corporate capacity and directors and officers liability insurance, (ii) with regard to Messrs. Raos and Statile, coverage in most instances for legal fees incurred in enforcing their rights under their respective employment agreements and (iii) with regard to Messrs. Statile, Barre, Meuchel and Reilly, confidentiality provisions applicable to the period during and after the employment term and a provision prohibiting the solicitation of our employees during the employment term and for a period of two years afterwards. VALUE CREATION PLAN On , 1999 our board of directors and USI, as our sole stockholder, adopted the Strategic Industries, Inc. Value Creation Plan (the 'VCP'). The purpose of the VCP is to attract, retain and motivate key employees by providing performance-based awards payable on a current and a deferred basis to key employees who are selected to participate by the Compensation Committee. The following summary of the VCP is intended only as a summary and is qualified in its entirety by reference to the VCP, which has been filed as an exhibit to the Registration Statement of which this Information Statement is a part. Participants in the VCP will be eligible to receive a performance award ('Performance Award') based on attainment of specified performance goals to be established by the Compensation Committee. These performance goals will be based on one or more of the following criteria selected by the Compensation Committee: (i) the attainment of certain target levels of, or a specified increase in, our enterprise value or value creation targets (or that of any of our subsidiaries, divisions or other operational units); (ii) the attainment of certain target levels of, or a percentage increase in, our after-tax or pre-tax profits including, without limitation, that attributable to our continuing and/or other operations (or that of any of our subsidiaries, divisions, or other operational units), (iii) the attainment of certain target levels of, or a specified increase in, our operational cash flow (or that of any of our subsidiaries, divisions or other operational units), (iv) the attainment of a certain level of reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of our bank debt or other of our long-term or short-term public or private debt or other similar financial obligations, (v) the attainment of a specified percentage increase in earnings per share or earnings per share from our continuing operations (or that of any of our subsidiaries, divisions or other operational units), (vi) the attainment of certain target levels of, or a specified percentage increase in, our net sales, net income or earnings before income tax or other exclusions (or that of any of our subsidiaries, divisions, or other operational units); (vii) the attainment of certain target levels of, or a specified increase in, our return on capital employed or return on invested capital (or that of any of our subsidiaries, divisions or other operational units); (viii) the attainment of certain target levels of, or a percentage increase in, our after-tax or pre-tax return on stockholder equity (or that of any of our subsidiaries, divisions or other operational units); (ix) the attainment of certain target levels in the fair market value of our shares of common stock; and (x) the growth in the value of an investment in our common stock assuming the reinvestment of dividends. The Performance Awards may, in the Compensation Committee's discretion, be paid in cash or in Common Stock (as permitted under another plan) and such awards may be paid on a current basis when earned or deferred, subject to such conditions as determined by the Committee. 45 It is expected that the Compensation Committee will set, for fiscal 2000, the performance goals applicable to all participants and the individual levels for participation as a percentage of base pay. We contemplate that under the VCP, the Compensation Committee will make Performance Awards based, in part, on the level of our earnings before interest and taxes as compared to our cost of capital and, in part, on the incremental year-by-year changes in these levels. Further, it is expected that a portion of the Performance Awards earned for any performance period will be deferred, subject to reduction in the amount deferred if continued specified performance levels are not achieved in subsequent years. Payment of amounts after the first annual meeting of shareholders occurring more than twelve (12) months after the spin-off is conditioned on future stockholder approval. No participant may receive or be credited with a Performance Award based on the achievement of performance goals for any performance period (which period may be one to three years) that exceeds $3,000,000. Performance periods may overlap and the payments in any one year, as long as from different performance periods, may exceed such amount. It is expected that, upon the taking of certain corporate action following the spin-off, compensation paid under the VCP for fiscal year 2000 and thereafter to participants who are 'covered employees' as defined in Code Section 162(m) and the applicable regulations thereunder will qualify as tax-deductible pursuant to the performance-based compensation exception provided by Code Section 162(m). STOCK INCENTIVE PLAN On , 1999, our board of directors and USI, as our sole stockholder, approved the Strategic Industries, Inc. Stock Incentive Plan (the 'SIP'). The following description of the SIP is qualified in its entirety by reference to the SIP, which has been filed as an exhibit to the registration statement of which this information statement is a part. Purpose. The purpose of the SIP is to enhance our profitability and value for the benefit of our stockholders by enabling us (i) to offer our employees and our affiliates stock options, restricted stock and other stock-based awards, thereby creating a means to raise the level of stock ownership by employees in order to attract, retain and award such individuals and strengthen the mutuality of interests between our employees and stockholders and (ii) to pay non-employee directors a portion of their annual retainer fee in the form of shares of our common stock and stock options and to make certain other awards of our common stock and grants of stock options to non-employee directors thereby attracting, retaining and rewarding such non-employee directors, and strengthening the mutuality of interests between our non-employee directors and stockholders. It is estimated that we and our affiliates will have approximately employees and we will have four non-employee directors who will be eligible for participation in the SIP. Administration. The provisions of the SIP, as applied to eligible employees, will be administered and interpreted by a committee of the board, which will consist of two or more non-employee directors, each of whom is intended to be a non-employee director as defined in Rule 16b-3 and an outside director as defined under Code Section 162(m) (the 'Committee'). With respect to awards to non-employee directors, the SIP will be administered by the board and references to the Committee below will be deemed to refer to the board. Awards under the SIP may not be made on or after the tenth anniversary of approval thereof, but awards granted prior to such date may extend beyond that date. Available Shares. The aggregate number of shares of our common stock subject to awards under the SIP may not exceed shares. The maximum number of shares of common stock with respect to which any stock option which may be granted under the SIP during any of our fiscal years to any individual will be 500,000 shares and of Restricted Stock subject to performance goals will be 100,000 shares. The maximum number of shares of common stock subject to other stock-based awards which may be granted under the SIP for any fiscal year to any individual will not exceed 200,000 shares; provided that the foregoing limit does not apply to other stock-based awards used to make payments under any other of our plans or those of our subsidiaries. In general, upon the cancellation or expiration of an award, the unissued shares of common stock subject to such awards will again be available for awards under the SIP, but will not be available for the individual limits. 46 Options. Under the SIP, the Committee may grant non-qualified stock options and incentive stock options ('ISOs') to purchase shares of our common stock. The Committee will determine the number of shares of common stock subject to each option, the term of each option (which may not exceed ten years (or five years in the case of an ISO granted to a 10% or greater shareholder), the exercise price (which must equal 100% or, in the case of an ISO granted to a 10% or greater shareholder, 110% of the fair market value of our common stock at the time of grant), the time or times at which the option may be exercised and the other material terms of each option. Payment of the exercise price may be made (i) in cash or by check, bank draft or money order, (ii) the delivery of irrevocable instructions to a broker to deliver promptly to us an amount equal to the purchase price, or (iii) on such other terms and conditions as may be acceptable to the Committee. The SIP will authorize the Committee, if it decides in its sole discretion, to permit 'reloads' of options exercised, including, without limitation, permitting reloads under which options are granted for the same number of shares as were used to pay the exercise price or withholding. The Committee may also at any time offer to buy out a recipient's option subject to such terms and conditions as the Committee may determine. Restricted Stock. The Committee may also award shares of restricted stock to replace the restricted shares of USI common stock forfeited upon an employee ceasing employment with USI (a 'Former USI Employee'). The Committee will determine the Former USI Employees eligible for such awards and the terms and conditions of such awards, including, without limitation, the timing of such awards, the number of shares awarded, the vesting schedule and the right to acceleration thereof. The Committee may condition the grant or vesting of Restricted Stock upon the attainment of any of the performance goals specified above for the Value Creation Plan or upon such other factors as the Committee may determine, in its sole discretion. Upon the award of any shares of restricted stock, the recipient will have all rights of a stockholder with respect to the shares, including voting, tender and dividend rights, subject to the conditions and restrictions generally applicable to restricted stock or specifically set forth in the recipient's restricted stock award agreement. Recipients of restricted stock must enter into a restricted stock award agreement with Strategic, in such form as the Committee determines, which shall state the restrictions to which the shares are subject and the date or dates on which such restrictions will lapse. Other Stock-Based Awards. The Committee may also grant other stock-based awards under the SIP to eligible employees that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares of our common stock, including but not limited to shares of common stock in payment of the amounts due under an incentive or performance plan sponsored or maintained by us or any of our subsidiaries and stock appreciation rights (either separately or in tandem with stock options and stock equivalent units). Subject to the provisions of the SIP, the Committee will have the authority to determine the recipients to whom and the time or times at which such awards will be made, the number of shares of common stock to be awarded pursuant to or referenced by such award and all other conditions of the awards. The Committee may also provide for the grant of such awards upon the completion of a specified performance period and/or achievement of performance goals. The performance criteria that may be selected by the Committee are the same as those described above for the Value Creation Plan. Other performance goals may be used to the extent such goals satisfy the requirements of Code Section 162(m) or the award is not intended to satisfy the requirements of Code Section 162(m). Non-Employee Director Awards. Upon the date the non-employee director begins service as a non-employee director of the Board (even if previously an employee director), except as provided in the next sentence, the non-employee director will receive an award of shares of common stock equal to $20,000 divided by the fair market value of the common stock on the date of grant and a grant of non-qualified stock options to purchase the aggregate number of shares of common stock determined by dividing $50,000 by the fair market value of the common stock on the date of grant. For non-employee directors who begin service within 15 days after the Commencement Date, the common stock awards will be made within 90 days after the Commencement Date, and the stock options will be granted in three successive grants made during each of the three fifteen days periods following the Commencement Date, on the same dates as the grants to executive officers described in Post Spin-Off Awards, below. In addition, on the first day of the month following Strategic's annual meeting of stockholders in each fiscal year each non-employee director will receive (1) an award of common stock determined by dividing $9,000 by the fair market value of the common stock on the date of grant and (2) non-qualified stock options to purchase the number of shares of common stock determined by dividing $25,000 by the 47 fair market value of the common stock on the date of grant. Non-employee director options generally will vest 6 months following the date of grant or, if earlier, upon death or disability and vested options will generally be exercisable for a period of three years after the termination of directorship, but in no event beyond the expiration of the ten year term. The Committee may grant additional awards to non-employee directors and the Board may amend the SIP to change the awards described above. Change in Control. Unless determined otherwise by the Committee at the time of grant, upon a Change in Control of Strategic (as defined in the SIP), except as provided in this paragraph, all conditions, restrictions and limitations in effect with respect to the exercise of any option or any restricted stock award will immediately lapse and no other conditions will be applied. However, no acceleration of exercisability shall occur with regard to certain options that the Committee determines in good faith prior to a Change in Control will be honored or assumed or new rights substituted therefor by a participant's employer immediately following the Change in Control, unless the Committee determines otherwise. The award agreement issued in connection with an other stock-based award will determine the effect of a Change in Control on such award. Further, if the transaction constituting a Change in Control is to be treated as a 'pooling of interests' for financial reporting purposes, then there shall be no acceleration of exercisability, vesting or lapse of the applicable restriction period to the extent Strategic's independent public accountants determine in good faith that such acceleration would preclude 'pooling of interests' accounting. Amendment and Termination. The Board may at any time amend any or all of the provisions of the SIP, or suspend or terminate it entirely, retroactively or otherwise, except that unless otherwise required by law or specially provided in the SIP, the rights of a participant with respect to awards granted prior to such amendment, suspension or termination, may not be impaired without the consent of such participant. In addition, without the approval of the stockholders of Strategic in accordance with Delaware law, to the extent required under Code Section 162(m) or to the extent applicable to ISOs, Section 422 of the Internal Revenue Code, no amendment may be made which would: (1) increase the aggregate number of shares of our common stock that may be issued; (2) increase the maximum individual participant limitations for a fiscal year; (3) change the classification of employees eligible to receive awards; (4) extend the maximum option term; or (5) require stockholder approval in order for the SIP to continue to comply with the applicable provisions of Code Section 162(m) or, to the extent applicable to ISOs, Section 422 of the Internal Revenue Code. The board may amend the provisions of the Plan applicable to non-employee director awards to provide for additional or different awards to non-employee directors or to effect any other amendment deemed appropriate. Nontransferability. Awards granted under the SIP generally will be nontransferable, except that the Committee may, in its sole discretion and subject to certain limitations, permit the transfer of nonqualified stock options at the time of grant or thereafter to certain 'family members' of the recipient. Federal Income Tax Consequences. For information concerning the federal income tax consequences of Awards and related matters, please see Annex C. Post Spin-off Awards. Following completion of the spin-off, the Compensation Committee is expected (1) to award, without consideration (other than par value, if required by applicable law), an aggregate of shares of restricted common stock to executive officers and other key employees to replace the shares of restricted USI common stock which will be forfeited upon ceasing employment with USI; and (2) to grant executives officers and other key employees options to purchase the aggregate number of shares of Common Stock as shall be determined by dividing a specified value (referred to in this paragraph as 'value') by the fair market value (as defined in the SIP) of the common stock on the date of grant. Five individuals (including the Chief Executive Officer) expected to be among the five most highly compensated executives officers in fiscal 2000 are expected to receive restricted stock awards (to be made within 90 days following the Commencement Date) and/or option grants (with the total number of options to be granted in three successive grants made during each of the three fifteen day periods following the Commencement Date), as follows: Mr. Raos - grants of stock options with an aggregate value of $3,500,000 and shares of restricted common stock; Mr. Statile - grants of stock options with an aggregate value of $1,500,000; Mr. Barre - grants of stock options with an aggregate value of $720,000; Mr. Meuchel - grants of stock options with an aggregate value of $660,000; and Mr. Reilly - grants of stock 48 options with an aggregate value of $1,100,000 and shares of restricted common stock. With respect to all executive officers and other key employees of Strategic as a group, the Committee is expected to award an aggregate of shares of restricted common stock and grant stock options with an aggregate value of $ million (exercisable for a maximum f shares). RETIREMENT PROGRAM We anticipate adopting a tax-qualified retirement program to provide pension benefits to our executive officers and corporate office employees. Certain of our subsidiaries sponsor their own pension benefit plans. Substantially all full-time U.S. employees who are at least 21 years old and have completed at least one year of service with us or USI's subsidiaries will be eligible to participate in the retirement program or retirement programs of the operating company by which they are employed (each of our subsidiaries will provide their own retirement programs and plans to their employees). Employees will become vested in their benefits under the retirement programs after five years of service, reflecting service with USI or its subsidiaries. Normal retirement typically will be the later of age 65 or five years of service; however, employees who work beyond their normal retirement age will continue to accrue benefits. It is anticipated that we will also adopt a non-qualified, unfunded, deferred compensation plan to be known as the Strategic Industries, Inc. Supplemental Retirement Plan (the 'SRP'). Certain of our subsidiaries also sponsor non-qualified, unfunded deferred compensation plans for their employees. The purpose of the SRP will be to maintain, as a minimum level of benefits, benefits which were provided while employed by USI, including any benefits in excess of the Internal Revenue Code Sections 415 and 401(a)(17) limitations. The defined terms in this paragraph will have the same meanings as in the SRP, the retirement plan or as stated herein. Under our retirement program, comprised of a tax qualified pension plan and the SRP, the annual retirement benefits of our executive officers will equal the greater of (i) the product of (a) 2.67% of an employee's final average earnings minus 2% of such employee's social security benefit, multiplied by the number of years of credited service (to a maximum of 25). All defined terms have the same meanings as in the retirement plan or SRP or as stated herein. The following table shows the estimated annual retirement benefits that would be payable under the retirement program to our executive officers, assuming retirement at age 65 on the basis of a straight-life annuity. The table includes benefits payable from the tax qualified retirement plan and the SRP.
YEARS OF SERVICE -------------------------------------------------------------------------- FINAL AVERAGE 10 15 20 25 30 35 40 ------------- -- -- -- -- -- -- -- $ 100,000........... $ 23,200 $ 34,800 $ 46,400 $ 58,000 $ 58,000 $ 58,000 $ 58,000 200,000........... 49,900 74,850 99,800 124,750 124,750 124,750 124,750 300,000........... 76,600 114,900 153,200 191,500 191,500 191,500 191,500 400,000........... 103,300 154,950 206,600 258,250 258,250 258,250 258,250 500,000........... 130,000 195,000 260,000 325,000 325,000 325,000 325,000 600,000........... 156,700 235,050 313,400 391,750 391,750 391,750 391,750 700,000........... 183,400 275,100 366,800 458,500 458,500 458,500 458,500 800,000........... 210,100 315,150 420,200 525,250 525,250 525,250 525,250 900,000........... 236,800 355,200 473,600 592,000 592,000 592,000 592,000 1,000,000........... 263,500 395,250 527,000 658,750 658,750 658,750 658,750
The following persons expected to become our five highest paid executive officers after the spin-off will be credited with the indicated years of service as of the spin-off under the USI retirement plan, rounded to the nearest one-tenth of a year: Mr. Raos - years; Mr. Statile - years; Mr. Barre - years; Mr. Meuchel - years; and Mr. Reilly - years. Other of our officers will also be credited with their indicated years of service as recognized under the USI Retirement Plan as of the spin-off. 49 PROJECTED OWNERSHIP OF OUR STOCK IMMEDIATELY AFTER THE SPIN-OFF The following table sets forth the projected beneficial ownership of our common stock immediately after the spin-off by each of our directors, the executive officers who are expected to be our five most highly compensated executive officers in fiscal 1999 and all directors and executive officers as a group. The projections are based upon available information concerning these individuals' ownership of USI common stock at , 1999. The projections also assume the issuance of shares of restricted common stock under the SIP and a total of shares of common stock to our non-employee directors but do not take into account (1) any shares of USI common stock acquired pursuant to the exercise of options previously granted under USI compensation programs but not exercised as of , 1999 or (2) any shares of our common stock that may be issued upon the exercise of stock options expected to be granted to executive officers and other key employees pursuant to the SIP after the spin-off. See 'Executive Compensation -- Stock Incentive Plan.'
NUMBER OF SHARES PROJECTED TO BE BENEFICIALLY % OF SHARES NAME OWNED OUTSTANDING - ---- ----- ----------- John G. Raos...................................... Peter J. Statile.................................. [Other directors]................................. Steven C. Barre................................... Gary K. Meuchel................................... Peter F. Reilly................................... All directors and executive officers as a group ( persons).....................................
Based upon information available to USI concerning the ownership of USI common stock at 1999, no person is projected to own beneficially more than 5% of the outstanding common stock on the date of the spin-off except as follows: . For information concerning the projected beneficial ownership of our common stock by our and USI's employee benefit plan trusts, see 'The Spin-off -- Listing and Trading of Our Common Stock.' 50 DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK Under our certificate of incorporation that will be in effect at the time of the spin-off, the form of which is attached as Annex A to this information statement, we will have authority to issue a total of 25,000,000 shares of all classes of stock, of which 2,000,000 may be shares of preferred stock, par value $0.01 per share, and 23,000,000 may be shares of common stock, par value $0.01 per share. Based on the number of shares of USI common stock outstanding as of , 1999 and the dividend ratio, it is expected that shares of our common stock will be distributed to USI stockholders in the spin-off. All of these shares will be fully paid and non-assessable. The common stock to be distributed will constitute all the shares of our capital stock that will be outstanding immediately after the spin-off. After giving effect to recommended awards of shares of restricted common stock to executive officers and other key employees and the issuance of a total of shares of common stock to non-employee directors, the total expected number of outstanding shares of common stock will be . In addition, shortly after the spin-off, we will recommend the issuance to executive officers and other key employees of options to purchase the aggregate number of shares of common stock as shall be determined by dividing $ million by the fair market value of our common stock on the date of grant (up to a maximum of shares); the number of shares expected to be outstanding excludes any shares that may be issued upon exercise of such options. See 'Executive Compensation -- Stock Incentive Plan.' COMMON STOCK Holders of our common stock are entitled to one vote for each share on all matters voted on by stockholders. Holders of common stock do not have cumulative voting rights in the election of directors. The first annual meeting of stockholders is expected to be held during calendar 2000. Holders of our common stock do not have subscription, redemption or conversion privileges. Subject to the preferences or other rights of any preferred stock that we may issue from time to time, holders of our common stock are entitled to participate ratably in dividends on our common stock as declared by our board of directors. Holders of our common stock are entitled to share ratably in all assets available for distribution to our stockholders in the event of liquidation or dissolution, subject to distribution of the preferential amount, if any, to be distributed to holders of preferred stock. PREFERRED STOCK The certificate of incorporation that will be in effect at the time of the spin-off will authorize our board of directors, without any vote or action by the holders of our common stock, to issue up to 2,000,000 shares of preferred stock from time to time in one or more series. Our board is authorized to determine the number of shares and designation of any series of preferred stock and the dividend rights, dividend rate, conversion rights and terms, voting rights (full or limited, if any), redemption rights and terms, liquidation preferences and sinking fund terms of any series of preferred stock. Issuances of preferred stock would be subject to the applicable rules of the NYSE or other organizations on whose systems the stock of may then be quoted or listed. Depending upon the terms of preferred stock established by our board of directors, any or all series of preferred stock could have preference over our common stock with respect to dividends and other distributions and upon liquidation. Issuance of any such shares with voting powers, or issuance of additional shares of our common stock, would dilute the voting power of our outstanding common stock. Series A preferred stock is issuable under the circumstances described in 'Rights Plan,' below. We have no other present plans to issue any Preferred Stock. NO PREEMPTIVE RIGHTS No holder of any of our capital stock authorized at the time of the spin-off will have any preemptive right to subscribe for or purchase any of our securities of any class or kind. TRANSFER AGENT AND REGISTRAR will be the transfer agent and registrar for our common stock commencing upon the date of the spin-off. 51 RIGHTS PLAN Each share of our common stock to be issued from and after the date of this information statement (including common stock that will trade on a 'when issued' basis) will have attached to it one right issued pursuant to the rights agreement until the rights expire. Each right entitles the registered holder to purchase from us one one-hundredth (1/100) of a share of our series A preferred stock at an initial price of $ per one one-hundredth (1/100) of a share (the 'exercise price'). Unless earlier redeemed, the rights will expire (the 'Final Expiration Time') at (1) the Stated Expiration Time (i.e., at the close of business on the one year anniversary of the spin-off) or (2) if the Rights Distribution Date (as defined below) shall have occurred before the Stated Expiration Time, the close of business on the one year anniversary of the Rights Distribution Date, provided that our board of directors in office subsequent to the spin-off does not extend or otherwise modify the rights. There can be no assurance, however, as to whether or not our board of directors will so extend, modify or redeem the rights. The rights, unless earlier redeemed by our board of directors or extended or modified as described above, will become exercisable by each record holder thereof, other than the Acquiring Person (as defined below), upon the close of business on the day (the 'Rights Distribution Date') which is the earlier of (1) the tenth day following a public announcement that a person or group of affiliated or associated persons, with certain exceptions set forth below, has acquired beneficial ownership of 15% or more of our outstanding voting stock (an 'Acquiring Person') and (2) the tenth business day (or such later date as may be determined by our board of directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date of the commencement or announcement of a person's or group's intention to commence a tender or exchange offer the consummation of which would result in the ownership of 15% or more of our outstanding voting stock (even if no shares are actually purchased pursuant to such offer). Before the rights distribution date, the rights will not be exercisable, will not be represented by a separate certificate, and will not be transferable apart from our common stock. An Acquiring Person does not include (A) prior to the spin-off, USI, (B) us, (C) any of our subsidiaries, (D) any of our employee benefit plans or employee stock plans or those of any of our subsidiaries, or any trust or other entity organized, appointed, established or holding our common stock for or pursuant to the terms of any such plan (E) any person whose ownership of 15% or more of the shares of our voting stock then outstanding results solely from its ownership of 15% or more of the USI common stock outstanding on the spin-off record date provided such person is not an Acquiring Person within the meaning of the USI rights plan, or (F) any person or group whose ownership of 15% or more of the shares of our voting stock then outstanding results solely from (1) any action or transaction or transactions approved by our board of directors before such person or group became an Acquiring Person or (2) a reduction in the number of issued and outstanding shares of our voting stock pursuant to a transaction or transactions approved by our board of directors (provided that any person or group that does not become an Acquiring Person by reason of clause (1) or (2) above shall become an Acquiring Person upon acquisition of an additional 1% of our voting stock unless such acquisition of additional voting stock will not result in such person or group becoming an Acquiring Person by reason of such clause (1) or (2)). For purposes of the foregoing, our outstanding voting stock that trades on a 'when issued' basis on a national securities exchange (such as the NYSE), on the National Association of Securities Dealers' Automated Quotation System or otherwise. The rights agreement provides that when a person or group of affiliated or associated persons becomes an Acquiring Person (other than pursuant to a Qualifying Tender Offer (as defined below)), the Acquiring Person's rights will thereupon become null and void. The rights agreement provides that until the Rights Distribution Date, the rights will be transferred with and only with our common stock. Until the Rights Distribution Date (or earlier redemption or expiration of the rights), our common stock certificates will contain a legend incorporating the rights agreement by reference. Until the Rights Distribution Date (or earlier redemption or expiration of the rights), the surrender for transfer of any of our common stock certificates will also constitute the transfer of the rights associated with our common stock represented by such certificate. As soon as practicable following the Rights Distribution Date, separate certificates evidencing the rights ('rights certificates') will be mailed to holders of record of our common stock as of the close of business on the 52 Rights Distribution Date and such separate certificates alone will evidence the rights from and after the Rights Distribution Date. Our series A preferred stock is nonredeemable and, unless otherwise provided in connection with the creation of a subsequent series of preferred stock, subordinate to any other series of our preferred stock. Our series A preferred stock may not be issued except upon exercise of rights. Each share of our series A preferred stock will be entitled to receive when, as and if declared, a quarterly dividend in an amount equal to the greater of $ per share or times the cash dividends declared on our common stock. In addition, our series A preferred stock is entitled to times any non-cash dividends (other than dividends payable in equity securities) declared on our common stock, in like kind. In the event of our liquidation, the holders of our series A preferred stock will be entitled to receive a payment in an amount equal to the greater of $ per one one-hundredth share or times the payment made per share of our common stock. Each share of our series A preferred stock will have votes, voting together with our common stock. In the event of any merger, consolidation or other transaction in which our common stock is changed, exchanged or converted, each share of series A preferred stock will be entitled to receive times the amount received per share of our common stock. The rights of our series A preferred stock as to dividends, liquidation and voting are protected by anti-dilution provisions. The number of shares of our series A preferred stock issuable upon exercise of the rights is subject to certain adjustments from time to time in the event of a stock dividend on, or a subdivision, combination or issuance of capital stock in a reclassification of, our common stock. The exercise price for the rights is subject to adjustment in certain circumstances, including certain distributions of cash or other property to holders of our common stock. Unless the rights are earlier redeemed, in the event that, at any time on or after the Rights Distribution Date (except for any transaction approved by a majority of the disinterested directors (as defined in the rights agreement)), we were to be acquired in a merger or other business combination (in which any shares of our common stock are changed or converted into or exchanged for other securities or assets) or more than 50% of our assets or earning power and those of our subsidiaries (taken as a whole) were to be sold or transferred in one or a series of related transactions, the rights agreement provides that proper provision will be made so that each holder of record of a right, other than the Acquiring Person, will from and after that date have the right to receive, upon payment of the exercise price, that number of shares of common stock of the acquiring company having a market value at the time of such transaction equal to two times the exercise price. In addition, unless the rights are earlier redeemed, in the event that a person or group becomes the beneficial owner of 15% or more of our voting stock (other than pursuant to a tender or exchange offer (a 'Qualifying Tender Offer') for all outstanding shares of our common stock that is approved by our board of directors, after taking into account our long-term value and all other factors they consider relevant), the rights agreement provides that proper provision will be made so that each holder of record of a right, other than the Acquiring Person, will thereafter have the right to receive, upon payment of the exercise price, that number of shares of our series A preferred stock having a market value at the time of the transaction equal to two times the exercise price (such market value to be determined with reference to the market value of our common stock as provided in the rights agreement). Fractions of shares of our series A preferred stock (other than fractions which are integral multiples of one one-hundredth of a share) may, at our election, be evidenced by depositary receipts. We may also issue cash in lieu of fractional shares which are not integral multiples of one one-hundredth of a share. At any time on or prior to the close of business on the earlier of (1) the tenth day after the time that a person has become an Acquiring Person (or such later date as a majority of our board of directors and a majority of our disinterested directors may determine) and (2) the Final Expiration Time, we may redeem the rights in whole, but not in part, at a price of $.01 per right, subject to adjustment (the 'Redemption Price'). The rights may be redeemed after the time that any person has become an Acquiring Person (other than pursuant to a Qualifying Tender Offer) only if approved by a majority of our disinterested directors. Immediately upon the effective time of the action of our board 53 of directors authorizing redemption of the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price. For as long as the rights are then redeemable, we may, except with respect to the Redemption Price or shortening the Final Expiration Time, amend the rights in any manner, including an amendment to extend the time period in which the rights may be redeemed. At any time when the rights are not then redeemable, we may amend the rights in any manner that does not materially adversely affect the interests of holders of the rights as such. Amendments to the rights agreement from and after the time that any person becomes an Acquiring Person (other than pursuant to a Qualifying Tender Offer) require the approval of a majority of our disinterested directors (as provided in the rights agreement). Until a right is exercised, the holder, as such, will have no rights as a holder of common stock, including, without limitation, the right to vote or to receive dividends. Holders of our common stock may, depending upon the circumstances, recognize taxable income should the rights become exercisable or upon the occurrence of certain events thereafter. A copy of the rights agreement has been filed as an exhibit to the registration statement of which this information statement forms a part. This summary description of the rights does not purport to be complete and is qualified in its entirety by reference to the rights agreement which is incorporated in this summary description herein by reference. 54 PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION, BY-LAWS AND DELAWARE STATUTORY LAW GENERAL The provisions of our Certificate of Incorporation, our By-Laws and Delaware statutory law described in this section may delay or make it more difficult for someone to acquire us without the approval of our board. These provisions could have the effect of discouraging third parties from making acquisition proposals although such proposals, if made, might be considered desirable by a majority of our stockholders. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management without the concurrence of our board. A copy of the Certificate of Incorporation is attached to this Information Statement as Appendix A and is incorporated herein by reference. The following description of certain provisions of the Certificate of Incorporation and the By-Laws is qualified in its entirety by reference to the Certificate of Incorporation and the By-Laws. CLASSIFIED BOARD OF DIRECTORS The Certificate of Incorporation provides for our board, effective upon completion of the spin-off, to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one third of our board will be elected each year. See 'Management -- Directors.' We believe a classified board will help to assure the continuity and stability of our board, and our business strategies and policies as determined by our board, because a majority of the directors at any given time will have prior experience as our directors. This provision should also help to ensure that our board, if confronted with an unsolicited proposal from a third party that has acquired a block of our voting stock, will have sufficient time to review the proposal and appropriate alternatives and to seek the best available result for all stockholders. This provision could prevent a party who acquires control of a majority of the outstanding voting stock from obtaining control of our board until the second annual stockholders' meeting following the date the acquiror obtains the controlling stock interest, could have the effect of discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us and could thus increase the likelihood that incumbent directors will retain their positions. NUMBER OF DIRECTORS; REMOVAL; VACANCIES The Certificate of Incorporation and the By-Laws provide that the number of directors shall not be less than three nor more than 11 and, except as may be provided in the terms of any series of preferred stock created by resolutions of the board, shall be determined from time to time exclusively by a vote of a majority of our board then in office. The Certificate of Incorporation also provides that our board shall have the exclusive right, except as may be provided in the terms of any series of preferred stock created by resolutions of the board, to fill vacancies, including vacancies created by expansion of our board. Furthermore, except as may be provided in the terms of any preferred stock created by resolution of our board with respect to the election of directors by the holders of such series, directors may be removed by stockholders only for cause and only by the affirmative vote of at least 66 2/3% of the voting power of all of the shares of our capital stock then entitled to vote generally in the election of directors, voting together as a single class. These provisions, in conjunction with the provision of the Certificate of Incorporation authorizing our board to fill vacant directorships, could prevent stockholders from removing incumbent directors without cause and filling the resulting vacancies with their own nominees. NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS The Certificate of Incorporation provides that, except as may be provided in the terms of any series of preferred stock created by resolution of our board, stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. The 55 Certificate of Incorporation also provides that special meetings of the stockholders can only be called by the Chairman of the Board or by the Secretary pursuant to a resolution approved by a majority of our board then in office. Stockholders are not permitted to call a special meeting of stockholders. ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS The By-Laws establish an advance notice procedure with regard to stockholder proposals and nominations of individuals for election to the Board of Directors. In general, notice of a stockholder proposal or a director nomination for an annual meeting must be delivered to us at our executive offices 120 days or more before the date of the anniversary of the last annual stockholders' meeting (unless the meeting is to be held more than 60 days in advance of such anniversary date, in which event the stockholder proposal or director nomination shall be delivered to us no later than the close of business on the 15th day following the day on which notice of the meeting was given) and must contain specified information and conform to certain requirements, as set forth in the By-Laws. Notice of a director nomination for a special meeting must be received by us no later than the 15th day following the day on which notice of the date of a special meeting of stockholders was given. If the presiding officer at any stockholders' meeting determines that a stockholder proposal or director nomination was not made in accordance with the By-Laws, we may disregard such proposal or nomination. The notice of any nomination for election as a director must set forth the name, date of birth, business and residence address of the person or persons to be nominated; the business experience during the past five years of such person or persons; whether such person or persons are or have ever been at any time directors, officers or owners of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; any directorships held by such person or persons in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; and whether, in the last five years, such person or persons are or have been convicted in a criminal proceeding or have been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; and the consent of each such person to serve as a director if elected. The person submitting the notice of nomination, and any person acting in concert with such person, must provide their names and business addresses, the name and address under which they appear on our books (if they so appear), and the class and number of shares of our capital stock that are beneficially owned by them. AMENDMENTS TO BY-LAWS The Certificate of Incorporation provides that our board or the holders of at least 66 2/3% of the voting power of all shares of our capital stock then entitled to vote generally in the election of directors, voting together as a single class, have the power to amend or repeal our By-Laws. AMENDMENT OF THE CERTIFICATE OF INCORPORATION Any proposal to amend, alter, change or repeal any provision of the Certificate of Incorporation, except as may be provided in the terms of any preferred stock created by resolution of our board and which relate to such series of preferred stock, generally requires approval by the affirmative vote of both a majority of the members of our board then in office and a majority vote of the voting power of all of the shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class. However, any proposal to amend, alter, change or repeal the provisions of the Certificate of Incorporation relating to (1) the classification of our board, (2) removal of Directors, (3) the prohibition of stockholder action by written consent or stockholder calls for special meetings, (4) amendment of By-Laws, or (5) amendment of the Certificate of Incorporation requires approval by the affirmative vote of 66 2/3% of the voting power of all of the shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class. 56 PREFERRED STOCK AND ADDITIONAL COMMON STOCK Under the Certificate of Incorporation, our board will have the authority to provide by resolution for the issuance of shares of one or more series of preferred stock. Our board is authorized to fix by resolution the terms and conditions of each such other series. See 'Description of Capital Stock -- Preferred Stock.' We believe that the availability of our preferred stock, in each case issuable in series, and additional shares of common stock could facilitate certain financings and acquisitions and provide a means for meeting other corporate needs which might arise. The authorized shares of our preferred stock, as well as authorized but unissued shares of common stock will be available for issuance without further action by our stockholders, unless stockholder action is required by applicable law or the rules of any stock exchange on which any series of our stock may then be listed, or except as may be provided in the terms of any preferred stock created by resolution of our board. These provisions give our board the power to approve the issuance of a series of preferred stock, or additional shares of common stock, that could, depending on its terms, either impede or facilitate the completion of a merger, tender offer or other takeover attempt. For example, the issuance of new shares of preferred stock might impede a business combination if the terms of those shares include voting rights which would enable a holder to block business combinations or, alternatively, might facilitate a business combination if those shares have general voting rights sufficient to cause an applicable percentage vote requirement to be satisfied. Moreover, the series A preferred stock is issuable under the circumstances provided for in the rights agreement upon exercise of the rights. See 'Rights Plan.' DELAWARE BUSINESS COMBINATION STATUTE Section 203 of the Delaware General Corporations Loans (the 'DGCL'), provides that, subject to certain exceptions specified therein, an 'interested stockholder' of a Delaware corporation may not engage in any business combination with the corporation for a three-year period following the time that such stockholder becomes an 'interested stockholder' unless (1) prior to such time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an 'interested stockholder', (2) upon consummation of the transaction which resulted in the stockholder becoming an 'interested stockholder,' the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (3) at or subsequent to such time, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the 'interested stockholder.' Except as otherwise specified in Section 203, an 'interested stockholder' is defined to include (1) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date and (2) the affiliates and associates of any such person. Under certain circumstances, Section 203 makes it more difficult for a person who would be an 'interested stockholder' to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Certificate of Incorporation does not exclude us from the restrictions imposed under Section 203. The provisions of Section 203 may encourage companies interested in acquiring us to negotiate in advance with our board, since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the stockholder becoming an interested stockholder. These provisions also may have the effect of preventing changes in our management. It is possible that such provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests. 57 LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS LIMITATION ON LIABILITY OF DIRECTORS Pursuant to authority conferred by Section 102 of the DGCL, Article VII of our Certificate of Incorporation eliminates the personal liability of our directors to us or our stockholders for monetary damages for breach of fiduciary duty, including without limitation directors serving on committees of the board of directors. Directors remain liable for: (1) any breach of the duty of loyalty to us or our stockholders, (2) any act or omission not in good faith or which involves intentional misconduct or a knowing violation of law, (3) any violation of Section 174 of the DGCL, which proscribes the payment of dividends and stock purchases or redemptions under certain circumstances, and (4) any transaction from which directors derive an improper personal benefit. Article VII further provides that any future repeal or amendment of its terms will not adversely affect any rights of directors existing thereunder with respect to acts or omissions occurring prior to such repeal or amendment. Article VII also incorporates any future amendments to Delaware law which further eliminate or limit the liability of directors. INDEMNIFICATION AND INSURANCE In accordance with Section 145 of the DGCL, which provides for the indemnification of directors and officers under certain circumstances, Article XIV of our By-Laws grants our directors and officers a right to indemnification, to the fullest extent permitted by law, for all expenses, liabilities and losses relating to civil, criminal, administrative or investigative proceedings to which they are a party (1) by reason of the fact that they are or were our directors or officers or (2) by reason of the fact that, while they are or were our directors or officers, they are or were serving at our request as directors, officers, members, employees, fiduciaries or agents of another corporation, partnership, joint venture, trust or enterprise. Article IV further permits us to indemnify other employees and agents to the fullest extent permitted by law, for all expenses, liabilities and losses relating to civil, criminal, administrative or investigative proceedings to which they are a party by reason of their employment or agency relationship. Article XIV further provides for the mandatory advancement of expenses incurred by present officers and directors in defending such proceedings in advance of their final disposition upon delivery to us by the indemnitee of an undertaking to repay all amounts so advanced if it is ultimately determined that such indemnitee is not entitled to be indemnified under Article XIV. Article XIV further provides that expenses incurred by our former directors or officers or other employees or agents in defending such proceedings may be paid in advance of their final disposition upon such terms and conditions, if any, as we deem appropriate. We may not indemnify or make advance payments to any person in connection with proceedings initiated against us by such person without the authorization of our board of directors, except with respect to compulsory counterclaims, cross-claims, third-party claims or in connection with suits seeking to enforce rights to indemnification or advancement of expenses as otherwise ordered by a court of competent jurisdiction. In addition, in the event that any successor provisions or amendments to the DGCL provide indemnification rights broader than permitted prior thereto, Article XIV allows such broader indemnification rights to apply retroactively with respect to any predating alleged action or inaction and also allows the indemnification to continue after an indemnitee has ceased to be a director or officer of the corporation and to inure to the benefit of the indemnitee's heirs, executors and administrators. Article XIV further provides that the right to indemnification is not exclusive of any other right which any indemnitee may have or thereafter acquire under any statute, the Certificate of Incorporation or By-Laws, any agreement or vote of stockholders or disinterested directors or otherwise, and allows us to indemnify and advance expenses to any person whom the corporation has the power to indemnify under the DGCL or otherwise. 58 Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors and officers and controlling persons pursuant to the foregoing provisions, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Our By-Laws authorize us to purchase insurance for our directors, officers and employees, and persons who serve at our request as directors, officers, members, employees, fiduciaries or agents of other enterprises against any expense, liability or loss incurred in such capacity, whether or not we would have the power to indemnify such persons against such expense or liability under the By-Laws. We intend to maintain insurance coverage for our officers and directors as well as insurance coverage to reimburse us for potential costs of its corporate indemnification of directors and officers. ADDITIONAL INFORMATION We have filed the registration statement with the Commission with respect to the common stock. This information statement does not contain all of the information set forth in the registration statement and the exhibits thereto, to which reference is hereby made. This information statement describes the material terms and conditions of each contract, agreement or other document referred to herein or filed as an exhibit to the registration statement; however, with respect to each such contract, agreement or other document, reference is made to such exhibit for a more complete description of the matter involved, and each description thereof contained in this information statement shall be deemed qualified in its entirety by such reference. The registration statement and the exhibits thereto filed by us with the Commission may be inspected at the public reference facilities of the Commission listed below. After the spin-off, we will be subject to the information requirements of the Exchange Act and, in accordance therewith, will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at its principal offices at 450 Fifth Street, N.W., Washington, D.C. 10549, and at its regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Materials that we file electronically with the Commission are available at the Commission's website (http://www.sec.gov), which contains reports, proxies and information statements and other information regarding issuers that file electronically with the Commission. Application has been made to list our common stock on the NYSE and, if and when such common stock commences trading on the NYSE, such reports, proxy statements and other information concerning Strategic will be available for inspection at the NYSE, 20 Broad Street, New York, New York 10005. ------------------------ We intend to furnish our stockholders with annual reports containing consolidated financial statements (beginning with fiscal 1999) audited by independent accountants. 59 STRATEGIC INDUSTRIES, INC. INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE COMBINED FINANCIAL STATEMENTS ---- Report of Ernst & Young LLP................................. F-2 Report of PricewaterhouseCoopers LLP........................ F-3 Combined Statements of Operations........................... F-4 Combined Balance Sheets..................................... F-5 Combined Statements of Cash Flows........................... F-6 Combined Statements of Changes in Invested Capital (Deficit)................................................. F-7 Notes to Combined Financial Statements...................... F-8 Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of U.S. INDUSTRIES, INC. We have audited the combined balance sheets of Strategic Industries, Inc. (the 'Company') as of September 30, 1998 and 1997 and the related combined statements of operations, cash flows, and changes in invested capital (deficit) for each of the three years in the period ended September 30, 1998. Our audits also included the financial statement schedule listed in the Index to Combined Financial Statements. These financial statements and schedule are the responsibility of the management of the Company. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of a subsidiary which statements reflect 26% and 17% of combined total assets as of September 30, 1997 and 1998, respectively, and 26%, 30% and 32% of combined net sales for the years ended September 30, 1996, 1997 and 1998, respectively. Those statements and Schedule II information were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for this subsidiary, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at September 30, 1998 and 1997, and the combined results of its operations and its cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the report of other auditors, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP New York, New York June 18, 1999 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Garden State Tanning, Inc. (a wholly-owned subsidiary of U.S. Industries, Inc.) In our opinion, the consolidated balance sheets and the related consolidated statements of operations and of cash flows present fairly, in all material respects, the financial position of Garden State Tanning, Inc. (a wholly-owned subsidiary of U.S. Industries, Inc.) and its subsidiary at September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998 (not presented separately herein) in conformity with generally accepted accounting principles. In addition, in our opinion, the Financial Statement Schedule II (not presented separately herein), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and Financial Statement Schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Bloomfield Hills, Michigan October 23, 1998 F-3 STRATEGIC INDUSTRIES, INC. COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, --------------------------------------------------------- 1996 1997 ---- ---- (IN MILLIONS) Net sales..................................... $737.7 $807.9 Operating costs and expenses: Cost of products sold.................... 521.9 575.8 Selling, general and administrative expenses............................... 105.8 112.8 Management fees and divisional overhead............................... 8.8 10.4 Goodwill impairment and restructuring charges................................ -- -- ------ ------ Operating income.............................. 101.2 108.9 Interest expense to Affiliates................ 31.7 24.0 Interest expense.............................. 0.4 1.0 Interest income............................... (0.2) (0.5) Gain on sale of subsidiary shares............. -- (0.8) Other expense, net............................ 1.0 0.5 ------ ------ Income before income taxes.................... 68.3 84.7 Provision for income taxes.................... 28.4 35.3 ------ ------ Net income (loss)............................. $ 39.9 $ 49.4 ------ ------ ------ ------ FOR THE NINE FOR THE FISCAL YEARS ENDED MONTHS ENDED SEPTEMBER 30, JUNE 30, --------------------------- ----------------------------- 1998 1998 1999 ---- ---- ---- (UNAUDITED) (IN MILLIONS) Net sales..................................... $888.5 $663.8 $651.0 Operating costs and expenses: Cost of products sold.................... 669.5 488.7 494.4 Selling, general and administrative expenses............................... 124.2 94.3 94.6 Management fees and divisional overhead............................... 6.8 5.1 6.6 Goodwill impairment and restructuring charges................................ 62.8 59.1 1.1 ------ ------ ------ Operating income.............................. 25.2 16.6 54.3 Interest expense to Affiliates................ 19.1 14.2 20.3 Interest expense.............................. 2.6 1.8 1.2 Interest income............................... (0.5) (0.4) (0.4) Gain on sale of subsidiary shares............. -- -- -- Other expense, net............................ 0.7 0.9 1.0 ------ ------ ------ Income before income taxes.................... 3.3 0.1 32.2 Provision for income taxes.................... 25.6 22.1 12.9 ------ ------ ------ Net income (loss)............................. $(22.3) $(22.0) $ 19.3 ------ ------ ------ ------ ------ ------
See notes to combined financial statements. F-4 STRATEGIC INDUSTRIES, INC. COMBINED BALANCE SHEETS
AT SEPTEMBER 30, AT JUNE 30, ---------------- ----------- 1997 1998 1999 ---- ---- ---- (UNAUDITED) (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents.............................. $ 8.4 $ 12.4 $ 8.7 Trade receivables, net................................. 104.2 146.5 129.7 Inventories............................................ 127.0 139.1 139.1 Deferred income taxes.................................. -- 2.4 2.4 Other current assets................................... 14.8 19.3 17.2 ------ ------ ------ Total current assets.............................. 254.4 319.7 297.1 Property, plant and equipment, net.......................... 99.9 132.9 133.9 Pension assets.............................................. 57.0 62.9 69.8 Other assets................................................ 15.5 19.0 13.2 Goodwill, net............................................... 157.4 110.1 111.4 ------ ------ ------ $584.2 $644.6 $625.4 ------ ------ ------ ------ ------ ------ LIABILITIES AND INVESTED CAPITAL (DEFICIT) Current liabilities: Current maturities of long-term debt................... $ 0.5 $ 2.1 $ 1.0 Trade accounts payable................................. 41.3 63.5 44.3 Accrued expenses and other liabilities................. 49.7 56.3 50.3 Deferred income taxes.................................. 1.6 -- -- Income taxes payable................................... 1.5 2.7 7.6 ------ ------ ------ Total current liabilities......................... 94.6 124.6 103.2 Long-term debt.............................................. 12.0 30.1 29.5 Deferred income taxes....................................... 1.3 1.9 1.9 Other liabilities........................................... 41.9 49.8 49.1 Notes and interest payable to Affiliates.................... 352.3 312.2 506.8 ------ ------ ------ Total liabilities................................. 502.1 518.6 690.5 Commitments and contingencies Invested capital (deficit).................................. 82.1 126.0 (65.1) ------ ------ ------ $584.2 $644.6 $625.4 ------ ------ ------ ------ ------ ------
See notes to combined financial statements. F-5 STRATEGIC INDUSTRIES, INC. COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE FOR THE FISCAL YEARS ENDED MONTHS ENDED SEPTEMBER 30, JUNE 30, --------------------------- ---------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- (UNAUDITED) (IN MILLIONS) Operating activities: Net income (loss)...................................... $ 39.9 $ 49.4 $(22.3) $(22.0) $ 19.3 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization..................... 19.2 19.2 23.3 17.6 18.7 Provision (benefit) for deferred income taxes..... 4.2 2.5 (1.0) -- -- Provision for doubtful accounts................... 2.4 (0.7) 4.2 0.9 0.3 Gain on sale of excess real estate................ -- (0.1) -- -- -- Gain on sale of subsidiary stock.................. -- (0.7) -- -- -- Gain on sale of property, plant and equipment..... 0.1 -- -- -- -- Goodwill impairment and restructuring charges..... -- -- 56.0 56.0 -- Equity in (income) loss of investee............... -- (1.7) 2.4 (0.2) 6.2 Changes in operating assets and liabilities, excluding the effects of acquisitions and dispositions: (Increase) decrease in trade receivables.......... (17.9) (0.7) (37.1) (15.2) 16.5 (Increase) decrease in inventories................ (2.4) (1.0) 2.7 (12.8) (0.1) (Increase) decrease in other current assets....... (7.1) (0.7) (3.7) (1.0) 2.1 (Increase) decrease in other non-current assets... (4.4) (14.8) (11.3) (3.7) (7.1) Increase (decrease) in trade accounts payable..... 7.6 (9.5) 18.8 1.3 (19.1) Increase in income taxes payable.................. 0.4 (0.4) 1.2 2.0 4.9 (Decrease) increase in accrued expenses and other liabilities.................................... (3.8) 11.4 5.7 (9.0) (5.7) Increase (decrease) in other non-current liabilities.................................... 2.5 2.4 (3.5) (1.0) (1.0) Other, net........................................ -- 1.4 (0.1) (0.2) 0.5 ------ ------ ------ ------ ------- Net cash provided by operating activities......... 40.7 56.0 35.3 12.7 35.5 Investing activities: Proceeds from sale of subsidiary stock................. -- 3.8 -- -- -- Proceeds from sale of excess real estate............... -- 0.4 -- -- -- Acquisition of companies, net of cash acquired......... -- -- (46.7) (46.7) (6.2) Purchase of investment................................. (13.5) (1.1) (7.0) (7.0) -- Proceeds from sales of investments..................... 2.1 -- -- -- -- Purchases of property, plant and equipment............. (9.8) (17.7) (27.3) (21.8) (20.4) Proceeds from sales of property, plant and equipment... -- 0.2 2.0 0.7 2.5 Other, net............................................. -- -- (1.0) (0.1) (0.3) ------ ------ ------ ------ ------- Net cash used in investing activities............. (21.2) (14.4) (80.0) (74.9) (24.4) Financing activities: Proceeds from long-term debt........................... 7.0 12.0 22.4 22.4 0.1 Repayment of long-term debt............................ (0.5) (7.5) (1.0) (1.0) (1.9) Proceeds from notes payable to Affiliates.............. -- 1.1 30.2 24.5 203.0 Repayment of notes payable to Affiliates............... -- -- (69.6) (68.0) (27.2) Dividends to USI....................................... (13.6) -- -- -- (203.0) Net transfers with USI................................. (18.3) (41.3) 67.2 86.6 11.3 ------ ------ ------ ------ ------- Net cash (used in) provided by financing activities..................................... (25.4) (35.7) 49.2 64.5 (17.7) Effect of exchange rate changes on cash..................... (0.2) (0.8) (0.5) 1.6 2.9 ------ ------ ------ ------ ------- Net (decrease) increase in cash and cash equivalents.................................... (6.1) 5.1 4.0 3.9 (3.7) Cash and cash equivalents at beginning of year.............. 9.4 3.3 8.4 8.4 12.4 ------ ------ ------ ------ ------- Cash and cash equivalents at end of period.................. $ 3.3 $ 8.4 $ 12.4 $ 12.3 $ 8.7 ------ ------ ------ ------ ------- ------ ------ ------ ------ -------
See notes to combined financial statements. F-6 STRATEGIC INDUSTRIES, INC. COMBINED STATEMENTS OF CHANGES IN INVESTED CAPITAL (DEFICIT) SEPTEMBER 30, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED JUNE 30, 1999
INVESTED CAPITAL (DEFICIT) ------------- (IN MILLIONS) Balance at September 30, 1995............................... $ 8.1 Net income.................................................. 39.9 Dividends to USI............................................ (13.6) Net transactions with Affiliates............................ (12.1) Translation adjustment...................................... 1.0 Minimum pension liability adjustment........................ (0.2) ------ Balance at September 30, 1996............................... 23.1 Net income.................................................. 49.4 Net transactions with Affiliates............................ 10.0 Translation adjustment...................................... (1.0) Minimum pension liability adjustment........................ 0.6 ------ Balance at September 30, 1997............................... 82.1 Net loss.................................................... (23.5) Net transactions with Affiliates............................ 73.3 Translation adjustment...................................... (1.9) Minimum pension liability adjustment........................ (4.0) ------ Balance at September 30, 1998............................... 126.0 Net income (unaudited)...................................... 19.3 Dividends to USI (unaudited)................................ (203.0) Net transactions with Affiliates (unaudited)................ (9.7) Translation adjustment (unaudited).......................... 2.3 ------ Balance at June 30, 1999 (unaudited)........................ $(65.1) ------ ------
See notes to combined financial statements. F-7 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY The accompanying combined financial statements include the combined operations, assets and liabilities of certain operations and other interests currently owned, directly or indirectly, by U.S. Industries, Inc. ('USI'). In contemplation of the spin-off and distribution to its stockholders by USI of the ownership in Strategic Industries, Inc. (the 'Company'), all the issued and outstanding common stock or net operating assets of certain companies and other assets and interests will be transferred to the Company (the 'Spin-off Transactions'). At June 30, 1999, the Company had no separate legal status or existence as a combined group. These financial statements are presented on a going concern basis as if the Company had existed as a corporation separate from USI during the periods presented and include the historical net assets and results of operations directly related to the Company's operations. The combined financial data for the nine months ended June 30, 1998 and 1999 are unaudited. In the opinion of the Company they have been prepared on a basis consistent with that for the three year period ended September 30, 1998. The interim financial data include all adjustments that management considered necessary for a fair presentation of interim results. USI and certain subsidiaries of USI (referred to herein as 'Affiliates') have provided certain corporate general and administrative services to the Company including legal, finance, tax, risk management and employee benefits. A portion of the related costs has been allocated to the Company based on the percentage of the Company's sales to the consolidated sales of USI as management fees. The Company's management believes such amounts are reasonable; however, they may not be indicative of the Company's ongoing costs as a separate public entity. Additionally, the direct costs attributable to division management are included in management fees and divisional overhead in the accompanying combined financial statements. The Company, through its subsidiaries, manufactures and distributes a broad range of products. The subsidiaries are grouped into three segments: Consumer Products, Automotive Interior Products and Precision Engineered Products. In January 1997, an initial public offering of 25% of the shares of the Company's then wholly owned subsidiary Jade Technologies Singapore Ltd ('Jade'), a manufacturer of leadframes for the electronics industry, was completed. Jade sold 8 million shares generating cash proceeds of approximately $3.8 million. The Company recorded a gain of $0.8 million ($0.7 million after provision for deferred income taxes) in connection with the sale. Immediately after the transaction, the Company owned approximately 75% of the outstanding shares of Jade. NOTE 2. ACCOUNTING POLICIES Fiscal Year: The Company's fiscal year ends on the Saturday nearest to September 30. All fiscal year data contained herein reflect results of operations for the 52, 52 and 53 week periods ended on the Saturday nearest to September 30, 1996, 1997 and 1998, respectively, but are presented as of such date for convenience of reference. All interim June 30 data contained herein reflect results of operations for the 40 and 39 week periods ending on the Saturday nearest to June 30, 1998 and 1999, respectively, but are presented as of such date for convenience of reference. Principles of Combination: The combined financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions are eliminated. Companies, which are 20% to 50% owned, are accounted for using the equity method. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-8 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Cash Equivalents: Cash equivalents represent short-term, highly liquid investments, which have maturities of ninety days or less when purchased. Except for certain cash balances owned by the Company, cash accounts have been controlled on a centralized basis by an Affiliate. Accordingly, cash receipts and disbursements have been made through Affiliates. The net results of cash transactions between or on behalf of the Company, including intercompany advances are included in the combined balance sheets in invested capital (deficit). Depreciation and Amortization:
FOR THE FISCAL FOR THE NINE YEARS ENDED MONTHS ENDED SEPTEMBER 30, JUNE 30, --------------------- ------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- (UNAUDITED) (IN MILLIONS) Depreciation..................................... $13.2 $13.3 $17.3 $13.2 $15.6 Amortization of goodwill......................... 5.4 5.4 5.5 4.1 2.9 Amortization of unearned restricted stock of USI......................................... 0.6 0.5 0.5 0.3 0.2 ----- ----- ----- ----- ----- $19.2 $19.2 $23.3 $17.6 $18.7 ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Trade Receivables and Concentrations of Credit Risk:
AT SEPTEMBER 30, ----------------- 1997 1998 ---- ---- (IN MILLIONS) Trade receivables........................................... $108.3 $153.3 Allowance for doubtful accounts............................. (4.1) (6.8) ------ ------ $104.2 $146.5 ------ ------ ------ ------
The Company operates in the United States and, to a lesser extent, in Europe, Asia and Mexico. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management's estimates. At September 30, 1997 and 1998 approximately 26.9% and 25.9%, respectively, of trade receivables were from four customers in the automotive industry. Sales from these customers totaled 30.1%, 34.8% and 34.5% of the Company's sales in 1996, 1997 and 1998, respectively. The Company may be impacted significantly by the economic stability of the automotive industry or by the loss of one or more of these customers. Inventories:
AT SEPTEMBER 30, ----------------- AT JUNE 30, 1997 1998 1999 ---- ---- ---- (UNAUDITED) (IN MILLIONS) Finished products........................................ $ 61.7 $ 66.6 $ 66.8 In-process products...................................... 39.5 40.5 37.5 Raw materials............................................ 25.8 32.0 34.8 ------ ------ ------ $127.0 $139.1 $139.1 ------ ------ ------ ------ ------ ------
Inventories are valued at the lower of cost, determined under the first-in, first-out method, or market. F-9 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Property, Plant and Equipment:
AT SEPTEMBER 30, ----------------- AT JUNE 30, 1997 1998 1999 ---- ---- ---- (UNAUDITED) (IN MILLIONS) Land and buildings...................................... $ 61.7 $ 62.0 $ 64.0 Machinery, equipment and furniture...................... 178.9 221.9 233.4 Accumulated depreciation................................ (140.7) (151.0) (163.5) ------ ------ ------ $ 99.9 $132.9 $133.9 ------ ------ ------ ------ ------ ------
Property, plant and equipment are stated on the basis of cost less accumulated depreciation provided under the straight-line method. In March 1998, the AICPA issued Statement of Position 98-1, Accounting For the Costs of Computer Software Developed For or Obtained For Internal Use (the 'SOP'). The Company adopted the SOP on October 1, 1998. The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The impact of adopting this SOP was not material. Goodwill: Goodwill represents the excess of the purchase price over the fair value of net assets acquired. The Company reviews operating results and other relevant facts every fiscal quarter for each of its businesses to determine if there are indications that the carrying value of an enterprise may be impaired. The fair value methodology is used by the Company to ascertain the recoverability of the carrying value of an enterprise, when there are indications of impairment. In the event that such fair value is below the carrying value of an enterprise, for those companies with goodwill, the Company first reduces goodwill and then other long-lived assets to the extent such differential exists. The fair value methodology is applied to determine the recoverable value for each business on a stand-alone basis using ranges of fair values obtained from independent appraisers. In developing these ranges, the independent appraisers consider (a) publicly available information, (b) financial projections of each business based on management's best estimate, (c) the future prospects of each business as discussed with senior operating and financial management, (d) publicly available information regarding comparable publicly traded companies in each industry, (e) market prices, capitalization and trading multiples of comparable public companies and (f) other information deemed relevant. In reviewing these valuations and considering the need to record a charge for impairment of enterprise value and goodwill to the extent it is part of the enterprise value, the Company also evaluates solicited and unsolicited bids for the businesses of the Company. Goodwill is amortized on a straight-line basis over the estimated future periods to be benefitted (ranging from 20 to 40 years, primarily 40 years). Accumulated amortization aggregated $65.1 million and $49.3 million at September 30, 1997 and 1998, respectively. Amortization and adjustments to the carrying value of goodwill amounted to $5.4 million, $5.4 million and $60.5 million for fiscal 1996, 1997 and 1998, respectively. Accrued Expenses and Other Liabilities: Accrued expenses and other liabilities (current) consist of the following:
AT SEPTEMBER 30, ----------------- 1997 1998 ---- ---- (IN MILLIONS) Compensation related............................... $24.8 $22.7 Deferred revenue................................... 10.2 3.5 Other.............................................. 14.7 30.1 ----- ----- $49.7 $56.3 ----- ----- ----- -----
F-10 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Foreign Currency Translation: The functional currency of each of the Company's foreign operations is the local currency. Assets and liabilities of foreign subsidiaries are translated at the exchange rates in effect at the balance sheet dates, while revenue, expenses and cash flows are translated at average exchange rates for the period. Translation gains and losses are included in invested capital (deficit). Income Taxes: Deferred tax assets and liabilities are computed based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws. Deferred income tax expense or benefit is based on the changes in the asset or liability from period to period. Certain of the Company's United States earnings have been included in the consolidated federal income tax return filed by USI. Pursuant to an informal tax allocation agreement, the Company provided for income taxes as if it filed separate income tax returns. Taxes currently payable have been included in invested capital (deficit). Upon completion of the anticipated spin-off, such operations would no longer qualify to be members of the USI consolidated group and, accordingly, will file the applicable income tax returns in the appropriate jurisdictions. The Company and certain of its subsidiaries will enter into tax sharing and indemnification agreements in which USI and certain of its subsidiaries generally will agree to indemnify the Company and its subsidiaries for all income tax liabilities in respect to periods prior to such spin-off. Revenue Recognition: Revenue is recognized upon shipment of product to the customer. Provisions are made for warranty and return costs at the time of sale. Such provisions have not been material. Advertising Costs: Advertising costs are expensed as incurred. Such amounts totaled $2.0 million, $2.2 million and $2.3 million for fiscal 1996, 1997 and 1998, respectively. Research and Development Costs: Research and development costs are expensed as incurred. Such amounts totaled $1.5 million, $1.3 million and $0.9 million for fiscal 1996, 1997 and 1998, respectively. Fair Value of Financial Instruments: The fair value of all short-term financial instruments approximate their carrying value due to their short maturity. The fair value of the notes payable to Affiliates is also estimated to approximate their carrying amount since it is contemplated that these notes will be repaid at face value upon the completion of the spin-off and distribution. The fair value of all other long-term financial instruments approximated carrying value as they were based on terms that continue to be available to the Company. Derivative Financial Instruments: The Company uses foreign exchange forward contracts on a limited basis to manage exposure to fluctuating foreign currencies. The foreign currency forward contracts are marked to market at the end of each period and any resulting gain or loss is recognized immediately in income. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted beginning in fiscal 2001. This statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Management does not anticipate that the adoption of the new statement will have a significant effect on earnings or the financial position of the Company. Segment Reporting: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131), which is effective for years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected F-11 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements retroactively in fiscal 1999. Management does not anticipate that the adoption of this statement will have a significant effect on the Company's reported segments. Stock Based Compensation: The Company has not historically had stock based compensation plans separate from USI. However, the Company expects to adopt its own stock based compensation plan upon the spin-off. After the spin-off, the Company will apply Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees' and related interpretations in measuring compensation costs for its stock options and will disclose pro forma net income and net income per share as if compensation costs had been determined consistent with the SFAS No. 123, 'Accounting for Stock-based Compensation'. The Company has no stock options outstanding as of March 31, 1999. Earnings Per Share: Historical earnings per share are not presented because the Company was comprised of direct or indirect subsidiaries of the Parent. NOTE 3. ACQUISITIONS The pro forma effect of the acquisitions and the aggregate assets acquired and liabilities assumed as detailed below are not material. These acquisitions have been accounted for as purchases and their results of operations have been included in the financial statements from the date of acquisition. In July 1996, the Company acquired an equity interest in United Pacific Industries Limited ('United Pacific'), a limited liability company incorporated in Bermuda and listed on the Stock Exchange of Hong Kong. United Pacific manufactures voltage converters, other electronic components and consumer products. At September 30, 1998, the Company had beneficial ownership of approximately 20% of United Pacific with a carrying value of approximately $18.1 million. The results of United Pacific are accounted for under the equity method and are included in the Precision Engineered Products operations. At September 30, 1998 and June 30, 1999, the market value of the Company's equity investment in United Pacific was approximately $14.4 million and $9.6 million, respectively. In January 1998, the Company acquired certain semiconductor leadframe assets from Philips Semi-Conductors B.V. for $15.8 million in cash. The acquired operations facilities are located in the Netherlands. The results of these acquired operations are included in the Precision Engineered Products operations. In May 1998, the Company purchased certain flat shadow mask assets from Philips Components B.V. ('FSM') for $30.9 million, resulting in goodwill of approximately $11.7 million. The Company and Philips have entered into a multi-year supply agreement. The acquired operations are located in the Netherlands. The results of FSM are included in the Precision Engineered Products operations. NOTE 4. GOODWILL IMPAIRMENT AND RESTRUCTURING CHARGES In June 1998, USI reviewed its long-term strategy and reviewed each operating company's performance and future prospects. As a result, USI adopted a plan to improve efficiency and enhance competitiveness at some of its operations, including some now held by the Company. In addition, due to indications of impairment, USI evaluated the recoverability of certain of the Company's long-lived assets, primarily goodwill at Garden State. In arriving at the fair value of Garden State, USI considered a number of factors including: (1) annual price concessions in the automotive industry and Garden State's inability to reduce costs due to antiquated facilities and equipment, (2) a dramatic decline in scrap leather prices attributable to the Asian economic crisis, (3) the amount of capital investment that would be required to make Garden State a lower cost manufacturer, (4) Garden State's long-term financial plan and (5) analysis of values for similar companies. In determining the amount of the impairment, USI compared the net book values to the estimated fair values of Garden State. Based on F-12 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the above, USI determined that an impairment to goodwill of $55.0 million was necessary which will reduce future goodwill amortization by $2.1 million per annum. The restructuring plan included the closing of a manufacturing facility in the footwear operation and the exit from the lace manufacturing business of the textile operation. The production and distribution activities of the footwear facility were either outsourced or consolidated into existing facilities. The restructuring plan included a reduction in the work force by approximately 500 employees, which included salaried and administrative employees at the restructured facilities as well as administrative and executive employees throughout the Consumer Products Group. As of September 30, 1998 approximately 300 employees had been terminated. In certain cases severance and related benefits will be paid subsequent to the termination date. The restructuring is not anticipated to have a significant impact on the ongoing operations during the periods that manufacturing is transitioned from the facilities to be closed. The expected benefits from the restructuring are primarily reduced depreciation; reduced fixed costs associated with leased facilities and reduced compensation costs. The final anticipated benefit will be approximately $1 million per year, which will be realized subsequent to the completion of the restructuring plan. The Company expects that approximately 100% of the annual benefit will be realized in fiscal 1999 and thereafter. The principal components of the goodwill impairment and restructuring charges consist of:
(IN MILLIONS) Impairment of goodwill...................................... $55.0 Lease obligations and impairment of equipment............... 1.6 Severance and related costs................................. 6.2 ----- Total.................................................. $62.8 ----- ----- Cash charges................................................ $ 6.4 Non-cash charges............................................ 56.4 ----- Total.................................................. $62.8 ----- -----
Cash charges of $1.5 million were paid prior to September 30, 1998. By June 30, 1999 amounts paid totalled $4.2 million. Additionally, $0.6 million of such charges were reversed during the nine months ended June 30, 1999 due to a revision of estimates and amounts paid which were less than originally anticipated. This reversal is included in goodwill impairment and restructuring charges. The remaining cash charges will be paid by September 30, 1999, or through the respective lease termination date. In addition to the $62.8 million of goodwill impairment and restructuring charges, in connection with the restructuring plan noted above, the Company incurred inventory obsolescence and other related costs aggregating $8.3 million. These costs are reflected in cost of products sold and selling, general and administrative expenses. After an income tax benefit of $6.5 million, the $71.1 million of charges detailed above reduced net income for fiscal 1998 by $64.6 million. F-13 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. LONG-TERM DEBT Long-term debt consists of the following:
AT SEPTEMBER 30, ----------------- AT JUNE 30, 1997 1998 1999 ---- ---- ---- (UNAUDITED) (IN MILLIONS) Jade debt....................................... $12.0 $32.2 $30.5 Other........................................... 0.5 -- -- ----- ----- ----- 12.5 32.2 30.5 Less current maturities......................... 0.5 2.1 1.0 ----- ----- ----- Long-term debt.................................. $12.0 $30.1 $29.5 ----- ----- ----- ----- ----- -----
Principal payments on long-term debt for the next five years ended September 30 are as follows:
(IN MILLIONS) 1999............................................ $ 2.1 2000............................................ 3.0 2001............................................ 20.2 2002............................................ 1.0 2003............................................ 5.9 ----- $32.2 ----- -----
At September 30, 1998, the Company has unsecured notes and accrued interest payable to Affiliates in the amount of $312.2 million which mature in fiscal 2005. Interest is payable annually at 6.5% per annum. During 1997, Affiliates forgave $53.0 million of notes which was included within net transactions with Affiliates in the Statement of Invested Capital (Deficit) for such period. Interest paid during the nine months ended June 30, 1999 was $20.4 million, including $20.3 million paid to an Affiliate. Interest paid was $31.9 million, $25.0 million and $21.8 million for fiscal 1996, 1997 and 1998, respectively, which included interest paid to an Affiliate of $31.7 million, $24.0 million and $19.1 million, respectively. At September 30, 1998, the Company had long-term indebtedness of $14.2 million and $18.0 million denominated in Dutch guilders and Hong Kong dollars, respectively (collectively 'Jade debt'). The interest rates on the Jade debt range from 4.75% to 12.38%. A portion of the Jade debt is guaranteed by an Affiliate with the remaining amount secured by the assets of the borrower. These borrowings hedge a portion of the Company's net investments in a Dutch operating company and a Hong Kong equity investment. NOTE 6. PENSION PLANS USI and its subsidiaries have noncontributory defined benefit pension plans covering substantially all of its United States employees. The benefits under these plans are based primarily on years of credited service and compensation as defined under the respective plan provisions. USI's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as USI may determine to be appropriate from time to time. During fiscal 1998, certain plans of the Company were consolidated with other USI plans with no changes to benefit formulas. Information regarding the components of net periodic cost and the funded status of the USI plans with respect solely to the Company's employees is not available for 1998. F-14 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) USI and certain of its subsidiaries sponsor defined contribution plans which provide defined benefits to union employees of the Company's subsidiaries. Contributions relating to defined contribution plans are made based upon the respective plans' provisions. Net periodic pension cost for the Company's defined benefit plans covering employees in the United States and the total contributions charged to pension expense for defined contribution plans covering employees in the United States are presented below. Net periodic income for the Company's plans which were consolidated with other USI plans is included in the cost of participation in a USI plan:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, ----------------------- 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Defined benefit plans: Service cost -- benefits earned during the period...... $ 4.2 $ 4.0 $ 1.9 Interest cost on projected benefit obligation.......... 9.3 8.9 2.1 Actual return on plan assets........................... (22.8) (52.2) 1.0 Net amortization and deferral.......................... 5.2 33.2 (3.2) Gain due to curtailment................................ (1.4) (0.8) -- Cost of participation in a USI plan.................... -- -- (4.5) ------ ------ ----- Net periodic pension income for defined benefit plans....... (5.5) (6.9) (2.7) Defined contribution plans.................................. 1.7 0.2 0.2 ------ ------ ----- Net periodic pension income....................... $ (3.8) $ (6.7) $(2.5) ------ ------ ----- ------ ------ -----
Assumptions used in the accounting for the defined benefit plans were as follows:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, ---------------------------------------------- 1996 1997 1998 ---- ---- ---- Weighted average discount rate............. 7.50% to 7.75% 7.00% to 7.50% 6.75% Rates of increase in compensation levels... 4.50% to 7.75% 4.10% to 4.50% 4.5% to 5.75% Expected long-term rate of return on assets................................... 9% 9% 9%
The change in the weighted average discount rate from a range of 7.0% to 7.5% for fiscal 1997 to 6.75% for fiscal 1998 and other actuarial assumptions caused the projected benefit obligation at September 30, 1998 to increase by approximately $14.0 million. F-15 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The funded status and amounts recognized in the combined balance sheets at September 30, 1997 and 1998 for the Company's defined benefit pension plans are:
1997 1998 ----------------------------- ----------------------------- PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS -------- ------------- -------- ------------- (IN MILLIONS) Actuarial present value of benefit obligations: Vested benefit obligation........... $(111.9) $(0.9) -$- $(23.2) Nonvested benefit obligation........ (3.7) (0.3) -- (1.6) ------- ----- ----- ------ Accumulated benefit obligation........... $(115.6) $(1.2) -$- $(24.8) ------- ----- ----- ------ ------- ----- ----- ------ Projected benefit obligation............. $(124.6) $(1.3) -$- $(24.9) Plan assets at fair value................ 244.6 0.2 18.1 ------- ----- ----- ------ Projected benefit obligation less than (or in excess of) plan assets.......... 120.0 (1.1) -- (6.8) Add (deduct): Unrecognized prior service cost..... 2.9 0.3 -- 3.0 Unrecognized net (gain) loss........ (65.9) 0.1 -- 6.2 Unrecognized net asset at date of adoption, net of amortization..... (6.1) -- -- (0.2) Adjustment required to recognize minimum liability................. -- (0.3) -- (9.0) ------- ----- ----- ------ Prepaid (accrued) pension costs.......... 50.9 (1.0) -- (6.8) Prepaid cost of participation in a USI plan................................... -- -- 54.3 -- ------- ----- ----- ------ Total prepaid (accrued) pension costs.... $ 50.9 $(1.0) $54.3 $ (6.8) ------- ----- ----- ------ ------- ----- ----- ------
The Company's plan assets are included in a master trust managed by USI, which principally invests in listed stocks and bonds, including common stock of USI. USI's common stock included in plan assets was less than 2% of the master trust's assets at September 30, 1997 and 1998, respectively. The tables above set forth the historical components of net periodic pension cost and a reconciliation of the funded status of the pension plans for the employees associated with the Company and is not necessarily indicative of the amounts to be recognized by the Company on a prospective basis. F-16 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7. POSTRETIREMENT PLANS The Company provides health care and life insurance benefits to certain groups of retirees. The following table presents the unfunded status of the plans reconciled with amounts recognized in the Company's combined balance sheets:
AT SEPTEMBER 30, ------------------- 1997 1998 ---- ---- (IN MILLIONS) Accumulated postretirement benefit obligation: Retirees.............................................. $(3.6) $(4.3) Fully eligible active plan participants............... (1.3) (0.9) Other active plan participants........................ (3.5) (4.6) ----- ----- (8.4) (9.8) Unrecognized prior service cost............................ 0.3 0.4 Unrecognized gain.......................................... (1.2) (0.4) ----- ----- $(9.3) $(9.8) ----- ----- ----- -----
Net periodic postretirement benefit cost includes the following components:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, --------------------------- 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Service cost............................................ $ 0.3 $ 0.3 $ 0.3 Interest cost........................................... 0.6 0.6 0.6 ------- ------- ------- Net periodic postretirement benefit cost................ $ 0.9 $ 0.9 $ 0.9 ------- ------- ------- ------- ------- -------
The weighted average annual assumed rate of increase in the health care cost trend rate ranged from 8.5% to 10.0% for fiscal 1998 and is assumed to decrease 0.5% a year to 5.0% to 5.5%. The effect of increasing the assumed health care cost trend rate by 1% in each year would increase the accumulated post-retirement benefit obligation as of September 30, 1998 by $1.2 million and the aggregate of service and interest components of net periodic post retirement benefit for 1998 by less than $1.6 million. The weighted average discount rate used was 7.75%, 7.50% and 6.75% at September 30, 1996, 1997 and 1998, respectively. The tables above set forth the historical components of net periodic post retirement benefit cost and a reconciliation of the funded status of the post retirement benefit plans for the employees associated with the Company and is not necessarily indicative of the amounts to be recognized by the Company on a prospective basis. F-17 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. LEASES Rental expense for operating leases was $4.2 million, $4.7 million and $5.5 million for the fiscal years ended September 30, 1996, 1997 and 1998, respectively. Future minimum rental commitments under noncancellable operating leases as of September 30, 1998 are:
(IN MILLIONS) 1999............................................ $ 7.7 2000............................................ 6.1 2001............................................ 4.7 2002............................................ 3.3 2003............................................ 2.4 Thereafter...................................... 9.1 ----- $33.3 ----- -----
NOTE 9. INCOME TAXES Income before income taxes consists of:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, -------------------- 1996 1997 1998 ---- ---- ---- (IN MILLIONS) United States........................................... $66.8 $81.6 $1.1 Foreign................................................. 1.5 3.1 2.2 ----- ----- ---- $68.3 $84.7 $3.3 ----- ----- ---- ----- ----- ----
The provisions (benefit) for federal, foreign, and state income taxes consist of:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, --------------------- 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Current: Federal........................................... $21.4 $27.3 $21.6 Foreign........................................... 0.5 1.0 3.0 State............................................. 2.9 3.7 2.1 ----- ----- ----- 24.8 32.0 26.7 Deferred.......................................... 3.6 3.3 (1.1) ----- ----- ----- $28.4 $35.3 $25.6 ----- ----- ----- ----- ----- -----
F-18 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Company's effective income tax provision differs from the statutory federal income tax provision as follows:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, --------------------- 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Statutory federal income tax provision................. $23.9 $29.6 $ 1.2 Foreign income tax differential........................ -- (0.6) 1.8 State income taxes (net of federal benefit)............ 1.9 2.4 1.4 Goodwill amortization.................................. 2.0 1.8 1.6 Goodwill impairment.................................... -- -- 19.3 Miscellaneous.......................................... 0.6 2.1 0.3 ----- ----- ----- $28.4 $35.3 $25.6 ----- ----- ----- ----- ----- -----
AT SEPTEMBER 30, --------------------- 1997 1998 ---- ---- (IN MILLIONS) Deferred tax liabilities: Property, plant and equipment.......................... $ (5.7) $ (6.9) Inventory.............................................. (3.0) (0.3) Net pension assets..................................... (17.3) (17.1) ------ ------ Total deferred tax liabilities.................... (26.0) (24.3) Deferred tax assets: Accruals and allowances................................ 10.2 12.6 Postretirement benefits................................ 2.8 3.0 Deductible goodwill.................................... 10.1 9.2 ------ ------ Total deferred tax assets......................... 23.1 24.8 ------ ------ Net deferred tax (liability) asset................ $ (2.9) $ 0.5 ------ ------ ------ ------
The classification of the deferred tax balances is:
AT SEPTEMBER 30, --------------------- 1997 1998 ---- ---- (IN MILLIONS) Current asset............................................... $ 1.4 $ 2.7 Current liability........................................... (3.0) (0.3) ------ ------ (1.6) 2.4 Noncurrent asset............................................ 21.7 22.1 Noncurrent liability........................................ (23.0) (24.0) ------ ------ (1.3) (1.9) ------ ------ Net deferred tax (liability) asset.......................... $ (2.9) $ 0.5 ------ ------ ------ ------
NOTE 10. STOCK COMPENSATION PLANS Certain key employees of the Company participate in stock incentive plans of USI that provide for awards of restricted stock and options to purchase USI common stock at prices equal to the fair value of the underlying shares at the date of grant. The compensation expense related to the award of USI restricted stock to key employees of the Company was $0.6 million, $0.5 million and $0.5 milion for F-19 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) fiscal 1996, 1997 and 1998, respectively, and is included in the combined financial statements of the Company. Options awarded to employees of the Company under the USI plans vest 25% per year until fully vested after four years. In accordance with the Company's options policy, those options of each effected employee which are next scheduled to vest, will vest immediately upon the spin-off. Any options, which are not vested at that point, will be forfeited. Any vested options which are not exercised within 90 days of the spin-off, subject to retirement provisions within the USI plans, will also be forfeited. Restrictions on stock awarded to employees of the Company under the USI plans lapse either in tranches periodically throughout a seven-year period or at the expiration of the seven-year period. Upon the spin-off, the restrictions will lapse for the next scheduled tranche or on a portion of the awards proportionate to the period of time which has passed since the date of grant. Any shares on which restrictions have not lapsed as of the spin-off date will be forfeited. Under USI's compensation plans, the independent directors, officers and employees may be granted options to purchase USI's stock at no less than the fair market value of the date of the option grant. The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for USI's stock option plan been determined based on the fair market value at the grant date for awards in fiscal 1998, 1997 and 1996, consistent with the provision of SFAS 123, the Company's net income (loss) would have been adjusted to the pro forma amounts indicated below:
FOR THE FISCAL YEARS ENDED ------------------------------------ 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Net income (loss) -- as reported............... $ 39.9 $49.4 $(22.3) Net income (loss) -- pro forma................. 39.9 49.2 (22.5)
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The fair value for these options was estimated at the date of grant using the Black-Scholes model with the following assumptions:
USI PLANS --------- Expected dividend yield at date of grant: 1998............................................... 1% 1997 and 1996...................................... 0% Expected stock price volatility: 1998............................................... 40% 1997 and 1996...................................... 36% Risk-free interest rate: 1998............................................... 5.42% 1997............................................... 5.85% 1996............................................... 5.89% Expected life of options................................ 4 years
The weighted-average fair value of options, calculated using the Black-Scholes option pricing model, granted during 1996, 1997 and 1998 is $4.23, $6.69 and $6.95, respectively. F-20 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Company's stock option activity and related information for the years ended September 30 follows:
1996 1997 1998 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- -------- --------- -------- Outstanding -- beginning of year........................... 1,130,455 $ 8.75 1,213,719 $ 9.09 1,206,277 $10.38 Granted.......................... 104,648 12.69 145,973 20.60 13,500 24.04 Exercised........................ (18,571) 8.75 (76,515) 8.96 (383,476) 9.32 Non-exercised.................... (2,813) 10.33 (76,900) 10.77 (31,640) 13.35 --------- ------ --------- ------ --------- ------ Outstanding -- end of year....... 1,213,719 $ 9.09 1,206,277 $10.38 804,661 $11.00 --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ Exercisable -- end of year....... 277,971 $ 8.75 512,154 $ 8.92 519,411 $ 9.67 --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------
The following table summarizes the status of the stock options outstanding and exercisable at September 30, 1998:
STOCK OPTIONS STOCK OPTIONS OUTSTANDING EXERCISABLE ---------------------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE - ------------------------ --------- ----------- -------- --------- -------- $8.75 to $10.33................... 650,776 6.69 $ 8.86 476,761 $ 8.83 $14.92 to $17.67.................. 32,213 8.01 16.39 14,607 16.31 $20.50 to $26.00.................. 121,672 8.27 21.02 28,043 20.60 ------- ---- ------ ------- ------ Total............................. 804,661 7.22 $11.00 519,411 $ 9.67 ------- ---- ------ ------- ------ ------- ---- ------ ------- ------
NOTE 11. COMMITMENTS AND CONTINGENCIES The Company is subject to a wide range of environmental protection laws. The Company has remedial and investigatory activities underway at approximately five sites. In addition, the Company has been named as a Potentially Responsible Party ('PRP') at seven 'Superfund' sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable statutes. It is often difficult to estimate the future impact of environmental matters, including potential liabilities. The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily upon internal or third party environmental studies, and estimates as to the number, participation level and financial viability of any other PRP's, the extent of contamination and the nature of required remedial actions. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present fair value unless the aggregate amount of the obligation and the amount and timing of the cash payments are fixed or readily determinable. Recoveries of environmental remediation costs from other parties are recognized as assets when their receipt is deemed probable. Management expects that the amount reserved will be paid out over the periods of remediation for the applicable sites which range up to 30 years and that such reserves are adequate based on all current data. Each of the sites in question is at various stages of investigation or remediation; however, no information currently available reasonably suggests that projected expenditures associated with remedial action or compliance with environmental laws for any single site or for all sites in the aggregate, will have a material adverse affect on the Company's financial condition, results of operations or cash flows. F-21 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) At September 30, 1998, the Company had accrued approximately $3.7 million ($0.5 million accrued as current liabilities; $3.2 million as non-current liabilities) for various environmental related liabilities of which the Company is aware. The Company believes that the range of liability for such matters is between approximately $1.5 million and $4.5 million. Also, certain of the Company's subsidiaries are defendants or plaintiffs in lawsuits that have arisen in the normal course of business. While certain of these matters involve substantial amounts, it is management's opinion, based on the advice of counsel, that the ultimate resolution of such litigation and environmental matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. NOTE 12. SEGMENT DATA The Company's operations are classified into three business segments: Consumer Products, Precision Engineered Products and Automotive Interior Products. Net sales and operating income (loss) for each of the Company's business segments were:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, ------------------------ 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Net Sales Consumer Products.............................. $413.1 $409.1 $410.7 Precision Engineered Products.................. 73.9 89.2 138.1 Automotive Interior Products................... 250.7 309.6 339.7 ------ ------ ------ Total Net Sales........................... $737.7 $807.9 $888.5 ------ ------ ------ ------ ------ ------ Operating Income (Loss)(1) Consumer Products.............................. $ 80.6 $ 80.7 $ 48.5 Precision Engineered Products(2)............... 12.3 19.4 28.0 Automotive Interior Products................... 17.1 19.2 (44.5) ------ ------ ------ 110.0 119.3 32.0 Management fees and divisional overhead........ (8.8) (10.4) (6.8) ------ ------ ------ Total Operating Income.................... $101.2 $108.9 $ 25.2 ------ ------ ------ ------ ------ ------
- ------------ (1) Operating income for the year ended September 30, 1998 includes goodwill impairment and restructuring charges of $62.8 million and other related charges of approximately $8.3 million. Of these charges, $15.7 million relates to Consumer Products and $55.4 million relates to Automotive Interior Products. (2) Fiscal 1997 and 1998 operating income for the Precision Engineered Products segment includes $1.7 million and $(2.4) million, respectively, of equity earnings (loss) from the Company's investment in United Pacific. The fiscal 1998 equity loss of $(2.4) million includes a charge of $4.0 million associated with an impairment of a subsidiary of United Pacific. F-22 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, ------------------------ 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Identifiable Assets Consumer Products...................................... $309.3 $324.3 $351.3 Precision Engineered Products.......................... 58.2 73.7 150.2 Automotive Interior Products........................... 191.2 186.2 143.0 ------ ------ ------ 558.7 584.2 644.5 Corporate.............................................. 4.7 -- 0.1 ------ ------ ------ Total Identifiable Assets......................... $563.4 $584.2 $644.6 ------ ------ ------ ------ ------ ------ Depreciation and Goodwill Amortization Consumer Products...................................... $ 8.9 $ 8.5 $ 9.8 Precision Engineered Products.......................... 2.7 3.1 6.4 Automotive Interior Products........................... 7.0 7.1 6.6 ------ ------ ------ Total Depreciation and Goodwill Amortization...... $ 18.6 $ 18.7 $ 22.8 ------ ------ ------ ------ ------ ------ Capital Expenditures Consumer Products...................................... $ 3.2 $ 5.8 $ 15.4 Precision Engineered Products.......................... 4.5 7.3 7.8 Automotive Interior Products........................... 2.1 4.6 4.1 ------ ------ ------ Total Capital Expenditures........................ $ 9.8 $ 17.7 $ 27.3 ------ ------ ------ ------ ------ ------
NOTE 13. GEOGRAPHIC AREAS FINANCIAL DATA The Company's operations are conducted primarily in the United States, and to a lesser extent, in other regions of the world. Exported sales represented 32%, 32% and 29% of the Company's total net sales for fiscal years 1996, 1997 and 1998, respectively. Principal international markets served include Asia, Europe, South America, and Canada. Export sales of U.S. operations were:
FOR THE YEAR ENDED SEPTEMBER 30, ------------------------ 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Asia................................................ $ 89.1 $120.9 $152.8 Other............................................... 145.0 139.4 103.9 ------ ------ ------ Total.......................................... $234.1 $260.3 $256.7 ------ ------ ------ ------ ------ ------
F-23 STRATEGIC INDUSTRIES, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents certain data by geographic areas:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, ------------------------ 1996 1997 1998 ---- ---- ---- (IN MILLIONS) Net Sales United States.......................................... $719.9 $771.9 $804.2 Foreign................................................ 17.8 36.0 84.3 Operating Income(1) United States.......................................... 100.0 106.2 19.9 Foreign................................................ 1.2 2.7 5.3 Identifiable Assets United States.......................................... 537.4 540.1 527.6 Foreign................................................ 26.0 44.1 117.0
- ------------ (1) Operating income for the year ended September 30, 1998 includes goodwill impairment and restructuring charges of $62.8 million and other related charges of approximately $8.3 million. All of these charges and costs relate to operating earnings within the United States. NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial information for the fiscal years ended September 30, 1997 and 1998 and the nine months ended June 30, 1999 is as follows:
1997 1998 1999 --------------------------------------- --------------------------------------- ------------------ QUARTER ENDED DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 - ------------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Net sales............ $192.3 $201.8 $209.5 $204.3 $215.6 $234.4 $213.8 $224.7 $220.7 $227.3 Gross profit......... 57.3 58.4 59.5 56.9 59.4 59.6 56.1 43.9 54.7 55.9 Net income (loss).... 11.4 12.9 12.8 12.3 14.8 14.4 (51.2) (0.3) 9.1 7.9 1999 ------- QUARTER ENDED JUNE 30 - ------------- ------- Net sales............ $203.0 Gross profit......... 46.0 Net income (loss).... 2.3
The results for the quarters ended June 30 and September 30, 1998 include $59.1 million and $3.7 million of goodwill impairment and restructuring charges, respectively, and other related charges of $1.7 million and $6.6 million, respectively. The results for the quarter ended June 30, 1999 include $1.1 million of restructuring charges and other related charges of $0.9 million. All periods presented are 13 weeks except for the quarter ended December 31, 1998, which is 14 weeks. NOTE 15. COMPREHENSIVE INCOME (UNAUDITED) During fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive Income.' This statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. Reclassification of financial statements for prior periods is required. Comprehensive income is net income and other items, which may include foreign currency translation adjustments, minimum pensions liability adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. The Company's total comprehensive income was as follows:
NINE MONTHS ENDED JUNE 30, -------------------- 1998 1999 ---- ---- Net (loss) income............................... $(22.0) $19.3 Foreign currency translation adjustment......... (2.2) 2.3 ------ ----- Total comprehensive (loss) income.......... $(24.2) $21.6 ------ ----- ------ -----
F-24 SCHEDULE II STRATEGIC INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------------- ------------ ---------- ---------- ---------- ---------- (IN MILLIONS) Year ended September 30, 1996 Deducted from asset accounts: Allowance for doubtful accounts... $3.1 $ 2.4 $ -- $(0.4) $5.1 Year ended September 30, 1997 Deducted from asset accounts: Allowance for doubtful accounts... 5.1 (0.7) -- (0.3) 4.1 Year ended September 30, 1998 Deducted from asset accounts: Allowance for doubtful accounts... 4.1 4.2 -- (1.4) 6.9
S-1 ANNEX A FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF STRATEGIC INDUSTRIES, INC. Strategic Industries, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is Strategic Industries, Inc. (the `Corporation'). The Corporation was originally incorporated under the name HKID 11 Inc. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on September 30, 1987. The Certificate of Incorporation of the Corporation was previously amended on April 4, 1988 and July 8, 1999. This Amended and Restated Certificate of Incorporation restates and further amends the Certificate of Incorporation of the Corporation, as heretofore amended, and has been adopted and approved in accordance with the provisions of Sections 245 and 242 of the Delaware General Corporation Law. Stockholder approval of this Amended and Restated Certificate of Incorporation was effected by written consent in accordance with Section 228 of the Delaware General Corporation Law. 2. The text of the Certificate of Incorporation of the Corporation, as heretofore amended, hereby is amended and restated to read in its entirety as follows: ARTICLE I NAME The name of the Corporation is Strategic Industries, Inc. ARTICLE II ADDRESS OF REGISTERED OFFICE; NAME OF REGISTERED AGENT The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801. The name of its registered agent at that address in the State of Delaware is The Corporation Trust Company. ARTICLE III PURPOSE AND POWERS The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may now or hereafter be organized under the Delaware General Corporation Law (`Delaware Law'). It shall have all powers that may now or hereafter be lawful for a corporation to exercise under Delaware Law. ARTICLE IV CAPITAL STOCK SECTION 4.1 Total Number of Shares of Stock. The total number of shares of capital stock of all classes that the Corporation shall have authority to issue is 25,000,000 (Twenty-Five Million) shares. The authorized capital stock is divided into 2,000,000 (Two Million) shares of preferred stock, of the par value of $.01 each (the `Preferred Stock'), and 23,000,000 (Twenty-Three Million) shares of common stock, of the par value of $.01 each (the `Common Stock'). SECTION 4.2 Preferred Stock. (a) The shares of Preferred Stock of the Corporation may be issued from time to time in one or more series thereof, the shares of each series to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, A-1 optional or other special rights, and qualifications, limitations or restrictions thereof, as are stated and expressed herein or in the resolution or resolutions providing for the issue of such series, adopted by the board of directors of the Corporation (the `Board of Directors') as hereinafter provided. (b) Authority is hereby expressly granted to the Board of Directors, subject to the provisions of this Article IV and to the limitations prescribed by Delaware Law, to authorize the issue of one or more series of Preferred Stock and with respect to each such series to fix by resolution or resolutions providing for the issue of each series the voting powers, full or limited, if any, of the shares of such series and the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, the determination or fixing of the following: (i) the maximum number of shares to constitute such series (which may subsequently be increased or decreased by resolutions of the Board of Directors unless otherwise provided in the resolution providing for the issue of such series), the distinctive designation thereof and the stated value thereof if different than the par value thereof; (ii) the dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the relation that such dividends shall bear to the dividends payable on any other class or classes of stock or any other series of any class of stock of the Corporation, and whether such dividends shall be cumulative or noncumulative; (iii) whether the shares of such series shall be subject to redemption, in whole or in part, and if made subject to such redemption the times, prices and other terms and conditions of such redemption, including whether or not such redemption may occur at the option of the Corporation or at the option of the holder or holders thereof or upon the happening of a specified event; (iv) the terms and amount of any sinking fund established for the purchase or redemption of the shares of such series; (v) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes of any stock or any other series of any class of stock of the Corporation, and, if provision is made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; (vi) the extent, if any, to which the holders of shares of such series shall be entitled to vote with respect to the election of directors or otherwise; (vii) the restrictions, if any, on the issue or reissue of any additional Preferred Stock; (viii) the rights of the holders of the shares of such series upon the dissolution of, or upon the subsequent distribution of assets of, the Corporation; and (ix) the manner in which any facts ascertainable outside the resolution or resolutions providing for the issue of such series shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such series. SECTION 4.3 Common Stock. The shares of Common Stock of the Corporation shall be of one and the same class. The holders of Common Stock shall have one vote per share of Common Stock on all matters on which holders of Common Stock are entitled to vote. ARTICLE V BOARD OF DIRECTORS SECTION 5.1 Powers of Board of Directors. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which shall consist of not fewer than three or more than eleven members. In furtherance, and not in limitation, of the powers conferred by Delaware Law, the Board of Directors is expressly authorized to: (a) adopt, amend, alter, change or repeal the By-Laws of the Corporation; provided, however, that no By-Laws hereafter adopted shall invalidate any prior act of the directors that would have been valid if such new By-Laws had not been adopted; A-2 (b) determine the rights, powers, duties, rules and procedures that affect the power of the Board of Directors to manage and direct the business and affairs of the Corporation, including the power to designate and empower committees of the Board of Directors, to elect, appoint and empower the officers and other agents of the Corporation, and to determine the time and place of, and the notice requirements for, Board meetings, as well as the quorum and voting requirements for, and the manner of taking, Board action; and (c) exercise all such powers and do all such acts as may be exercised or done by the Corporation, subject to the provisions of Delaware Law, this Certificate of Incorporation, and the By-Laws of the Corporation. SECTION 5.2 Number of Directors. Except as may be provided in a resolution or resolutions providing for any series of Preferred Stock pursuant to Article IV hereof with respect to any directors elected by the holders of such series, and subject to Section 5.1 of this Certificate of Incorporation, the number of directors constituting the Board of Directors shall be determined from time to time exclusively by a vote of a majority of the Board of Directors in office at the time of such vote. SECTION 5.3 Classified Board of Directors. The directors shall be divided into three classes, with each class to be as nearly equal in number as reasonably possible, and with the initial term of office of the first class of directors to expire at the 2001 annual meeting of stockholders, the initial term of office of the second class of directors to expire at the 2002 annual meeting of stockholders and the initial term of office of the third class of directors to expire at the 2003 annual meeting of stockholders, in each case upon the election and qualification of their successors. Commencing with the 2001 annual meeting of stockholders, directors elected to succeed those directors whose terms have thereupon expired shall be elected to a term of office to expire at the third succeeding annual meeting of stockholders after their election, and upon the election and qualification of their successors. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain or attain the number of directors in each class as nearly equal as reasonably possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. SECTION 5.4 Vacancies. Except as may be provided in a resolution or resolutions providing for any series of Preferred Stock pursuant to Article IV hereof with respect to any directors elected by the holders of such series, any vacancies in the Board of Directors for any reason and any newly created directorship resulting by reason of any increase in the number of directors may be filled only by the Board of Directors, acting by a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director, and any directors so appointed shall hold office until the next election of the class of which such directors have been chosen and until their successors are elected and qualified. SECTION 5.5 Removal of Directors. Except as may be provided in a resolution or resolutions providing for any series of Preferred Stock pursuant to Article IV hereof with respect to any directors elected by the holders of such series, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause, and only by the affirmative vote of the holders of at least 66 2/3% of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. ARTICLE VI STOCKHOLDER ACTIONS AND MEETINGS OF STOCKHOLDERS Except as may be provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV hereof, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any written consent in lieu of a meeting by such holders. Special meetings of stockholders of the Corporation may be called only by the Chairman of the Board or by the Secretary upon direction of the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office. Elections of directors need not be by written ballot, unless otherwise provided in the By-Laws. For purposes of all meetings of stockholders, a A-3 quorum shall consist of a majority of the shares entitled to vote at such meeting of stockholders, unless otherwise required by law. ARTICLE VII LIMITATION ON LIABILITY OF DIRECTORS No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, including without limitation directors serving on committees of the Board of Directors; provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. If Delaware Law is amended hereafter to authorize corporate action further eliminating or limited the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by Delaware Law, as so amended. Any amendment, repeal or modification of this Article VII shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such amendment, repeal or modification. ARTICLE VIII AMENDMENT OF BY-LAWS The Board of Directors shall have the power to adopt, amend, alter, change or repeal any By-Laws of the Corporation. In addition, the stockholders of the Corporation may adopt, amend, alter, change or repeal any By-Laws of the Corporation by the affirmative vote of the holders of at least 66 2/3% of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class (notwithstanding the fact that a lesser percentage may be specified by Delaware Law). ARTICLE IX AMENDMENT OF CERTIFICATE OF INCORPORATION The Corporation hereby reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in any manner permitted by Delaware Law and all rights and powers conferred upon stockholders, directors, and officers herein are granted subject to this reservation. Except as may be provided in a resolution or resolutions providing for any series of Preferred Stock pursuant to Article IV hereof and that relate to such series of Preferred Stock, any such amendment, alteration, change or repeal shall require the affirmative vote of both (a) a majority of the members of the Board of Directors then in office and (b) a majority of the voting power of all of the shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class; except that any proposal to amend, alter, change or repeal the provisions of Articles 5.3, Article 5.5, Article VI, Article VIII and this Article IX shall require the affirmative vote of 66 2/3% of the voting power of all of the shares of capital stock entitled to vote generally in the election of directors, voting together as a single class. ARTICLE X SEVERABILITY In the event that any provision of this Certificate of Incorporation (including any provision within a single Section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law. A-4 THE UNDERSIGNED, being the Vice President and Secretary of the Corporation, for the purpose of amending and restating the Certificate of Incorporation of the Corporation pursuant to Delaware Law, does make this Certificate, hereby declaring and certifying that this is the act and deed of the Corporation and that the facts herein stated are true, and accordingly have hereunto set my hand as of . ..................................... STEVEN C. BARRE, Vice President and Secretary A-5 ANNEX B STRATEGIC STOCK INCENTIVE PLAN* - ------------ * To be provided in an amendment to this filing. B-1 ANNEX C MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF AWARDS AND MATERIAL FEDERAL INCOME, ESTATE AND GIFT TAX CONSEQUENCES RELATING TO THE TRANSFER OF OPTIONS UNDER OUR STOCK INCENTIVE PLAN The following discussions of the principal federal income tax consequences with respect to options, restricted stock and non-employee director awards under the SIP and the income, estate and gift tax consequences relating to the transfer of options are based on statutory authority and judicial and administrative interpretations as of the date of this information statement, which are subject to change at any time (possibly with retroactive effect). The discussions are limited to the U.S. tax consequences to individuals who are citizens or residents of the U.S. other than those individuals who are taxed on a residence basis in a foreign country. U.S. tax law is technical and complex and the discussion below represents only a general summary. THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND DOES NOT PURPORT TO ADDRESS ALL THE TAX CONSIDERATIONS THAT MAY BE RELEVANT. EACH RECIPIENT OF A GRANT IS URGED TO CONSULT HIS OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH GRANTEE OF THE GRANT AND THE DISPOSITION OF COMMON STOCK. MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF AWARDS Options. No income will be recognized by the recipient at the time of the grant of a non-qualified stock option. On exercise of a non-qualified stock option (and provided the common stock issued is not restricted stock), the amount by which the fair market value of the common stock on the date of exercise exceeds the option exercise price will be taxable to the recipient as ordinary income. The recipient's tax basis in the shares of common stock received upon exercise of an option will be equal to the amount of cash paid on exercise, plus the amount of ordinary income recognized as a result of the receipt of such shares. The subsequent disposition of shares acquired upon exercise of a non-qualified stock option will ordinarily result in capital gain or loss. If the common stock received upon exercise of an option is restricted stock, the rules described below with regard to restricted stock will apply. A recipient who is an officer or director of ours or a beneficial owner of more than ten percent (10%) of any class of registered equity securities of ours should consult with his or her tax advisor as to whether, as a result of Section 16(b) of the Exchange Act and the rules and regulations thereunder that are related thereto, the timing of income recognition is deferred for any period following the exercise of an option (the 'Deferral Period'). If there is a Deferral Period, absent a written election (pursuant to Section 83(b) of the Internal Revenue Code) filed with the Internal Revenue Service within 30 days after the date of transfer of the shares of common stock pursuant to the exercise of the option to include in income, as of the transfer date, the excess (on such date) of the fair market value of such shares over their exercise price, recognition of income by the recipient could, in certain instances, be deferred until the expiration of the Deferral Period. The ordinary income recognized by employees with respect to the transfer of shares upon exercise of an option under the SIP will be subject to both wage withholding and employment taxes. We will be generally be entitled, subject to the possible application of Code Section 162(m) as discussed below and Section 280G of the Internal Revenue Code as discussed below, to a deduction in connection with the recipient's exercise of a stock option in an amount equal to the income recognized by the recipient. A recipient who is granted an ISO generally does not recognize any taxable income at the time of the grant or exercise of the option. Similarly, we generally are not entitled to any tax deduction at the time of the grant or exercise of the ISO. The aggregate fair market value of common stock (determined at the date of grant) with respect to which ISOs can be exercisable for the first time by a recipient C-1 during any calendar year cannot exceed $100,000. Any excess will be treated as a non-qualified stock option. If (i) the recipient makes no disposition of the shares acquired pursuant to an ISO within two (2) years from the date of grant or within one (1) year from the exercise of the option, and (ii) at all times during the period beginning on the date of grant of the option and ending on the day three (3) months before the date of such exercise, the recipient was an employee of ours or any of our subsidiaries, any gain or loss recognized on a subsequent disposition of the shares will be treated as a long-term capital gain or loss. Under such circumstances, we will not be entitled to any deduction for federal income tax purposes. If the recipient disposes of the shares before the later of such dates or was not employed by us or any of our subsidiaries during the entire applicable period, the recipient will have ordinary income equal to the difference between the exercise price of the shares and the market value of the shares on the date of exercise, and we will be entitled to a corresponding tax deduction, subject to the application of Code Section 162(m) of the Code and Section 280G of the Internal Revenue Code. Restricted Stock. The recipient of a restricted stock award may elect under Section 83(b) of the Internal Revenue Code, to include in ordinary income, as compensation at the time restricted stock is first issued, the excess of the fair market value of such shares at the time of issuance over the amount paid, if any, by the employee for such shares. Unless an election under Section 83(b) of the Internal Revenue Code is timely made (no later than the expiration of the 30 day period following the time of issuance), no taxable income will be recognized by the recipient of a restricted stock award until such shares are no longer subject to the restrictions or the risk of forfeiture (collectively, the 'Restrictions'). However, when the Restrictions lapse, the recipient will recognize ordinary income in an amount equal to the excess of the fair market value of the common stock on the date of lapse over the amount paid, if any, by the recipient for such shares. The ordinary income recognized by a recipient with respect to restricted stock awarded pursuant to the SIP will be subject to both wage withholding and employment taxes. If an election under Section 83(b) of the Internal Revenue Code is made, dividends received on shares which are subject to Restrictions will be treated as dividend income. If a recipient does not make an election under Section 83(b) of the Internal Revenue Code, dividends received on the common stock prior to the time the Restrictions on such shares lapse will be treated as additional compensation, and not dividend income, for federal income tax purposes, and will be subject to wage withholding and employment taxes. In general, a deduction will be allowed to us for federal income tax purposes (subject to the discussion above regarding Code Section 162(m) and the discussion below) in an amount equal to the ordinary income recognized by a recipient with respect to restricted stock awarded pursuant to the SIP. If, subsequent to the lapse of Restrictions on his or her common stock, the recipient sells such shares, the difference, if any, between the amount realized from such sale and the tax basis of such shares to the holder will ordinarily result in capital gain or loss. A recipient's tax basis in restricted stock received pursuant to the SIP will be equal to the sum of the price paid for such shares, if any, and the amount of ordinary income recognized by such recipient of such shares on the lapse of Restrictions thereon. If an election under Section 83(b) of the Internal Revenue Code is made and, before the Restrictions on the shares lapse, the shares which are subject to such election are resold to us or are forfeited, (i) no deduction would be allowed to such recipient for the amount included in the income of such recipient by reason of such election under Section 83(b) of the Internal Revenue Code, and (ii) the recipient would recognize a loss in an amount equal to the excess, if any, of the amount paid for such restricted stock over the amount received by the recipient upon such resale or forfeiture (which loss would ordinarily be a capital loss). In such event, we would be required to include in its income the amount of any deduction previously allowable to it in connection with the transfer of such shares. Director's Common Stock Awards. The fair market value of an award of shares of common stock will be includible in the non-employee director's income as ordinary income at the time of the award, subject to the timely making of an election under Section 83(b) of the Internal Revenue Code, as discussed above, and will result in deferral of income recognition to the extent that as a result of Section 16(b) of the Exchange Act the timing of recognition is deferred for a period following the award. The recipient should consult with his or her tax advisor with regard to the extent of such C-2 deferral. We will be entitled to a deduction for the value of such award when the non-employee director recognizes income, but such amounts are not subject to wage withholding or employment taxes by us. Parachute Payments. In the event that the payment of any award under the SIP is accelerated because of a change in ownership (as defined in Section 280G(b)(2) of the Internal Revenue Code) and such payment of an award, either alone or together with any other payments made to the recipient by us, constitute parachute payments under Section 280G of the Internal Revenue Code, then, subject to certain exceptions, a portion of such payments would be nondeductible to us and the recipient would be subject to a 20% excise tax on such portion of the payment. Section 162(m) of the Code. Code Section 162(m) denies a deduction to any corporation, whose common shares are publicly held, for compensation paid to certain covered employees in a taxable year to the extent that such compensation exceeds $1,000,000. Covered employees are a company's chief executive officer on the last day of the taxable year and any other individual whose compensation is required to be reported to shareholders under the Exchange Act by reason of being among the four highest compensated officers for the taxable year and who are employed on the last day of the taxable year. The amount of ordinary income recognized by a recipient in the year of exercise of a stock option is considered in determining whether a covered employee's compensation exceeds $1,000,000. Compensation paid under certain qualified performance based compensation arrangements, which (among other things) provide for compensation based on pre-established performance goals established by a compensation committee that is comprised solely of two or more outside directors and which is disclosed to, and approved by, the majority of our stockholders, is not considered in determining whether a covered employee's compensation exceeds $1,000,000. It is intended that the options granted under the SIP (but not the restricted stock), will satisfy the requirements of Code Section 162(m) so that the awards will not be included in a covered employee's compensation for the purposes of determining whether such covered recipient's compensation exceeds $1,000,000; however the effect of Code Section 162(m) on the deductibility of such covered employee compensation cannot be ascertained with certainty. As a result, notwithstanding the foregoing discussion, no assurance can be given as to the deductibility of the covered employee compensation under Code Section 162(m). MATERIAL FEDERAL INCOME, ESTATE AND GIFT TAX CONSEQUENCES RELATING TO THE TRANSFER OF OPTIONS Federal Income Taxation. The transfer of a non-qualified stock option by the holder of a non-qualified stock option ('Optionee') to a permitted transferee ('Permitted Transferee') will not cause the Optionee to recognize taxable income or gain at the time of transfer. If and when the Permitted Transferee subsequently exercises the non-qualified stock option, the Optionee will recognize taxable income at that time in an amount equal to the excess, if any, of the fair market value of the common shares received by the Permitted Transferee on exercise (determined on the exercise date) over the exercise price of the non-qualified stock option. The Permitted Transferee's tax basis with respect to the shares received upon exercise of the non-qualified stock option will be equal to the fair market value of the shares on the date that the non-qualified stock option is exercised (i.e., the exercise price plus the amount of income recognized by the Optionee). Federal Gift and Estate Taxation. An Optionee's transfer of a non-qualified stock option by gift will be subject to federal gift tax except to the extent it is excludible by the gift tax annual exclusion of $10,000 per donee, is within the combined federal estate and gift tax exception discussed below, or is to a person's spouse. In addition, upon the death of a participant, the value of an option that has not previously been 'transferred' will be includible in the participant's gross estate for federal estate tax purposes. Transfers to spouses are not subject to such taxes, and there is combined lifetime gift and estate tax exclusion (known as the 'applicable exclusion amount'), which is $650,000 per person in 1999 and increases incrementally to $1,000,000 in 2006 under current law). In general, under IRS Revenue Ruling 98-21, the transfer to a family member, for no consideration, of an option, is a completed gift on the later of (1) the transfer or (2) the time when the donee's right to exercise the option is no longer conditioned on the performance of services by the transferor. If the option becomes exercisable in stages, each portion of the option that becomes exercisable at a different time is treated as a separate option for the purpose of applying this analysis. C-3 Pursuant to IRS Revenue Procedure 98-34, the Internal Revenue Service will treat an option as properly valued for gift (and estate) tax purposes, provided that the employee follows a generally recognized option pricing model, such as the Black-Scholes model or an accepted version of the binomial model. The selected model, however, must consider (as of the valuation date) the following factors: (1) the option's exercise price; (2) the option's expected life; (3) the current trading price of the underlying stock; (4) the expected volatility of the underlying stock; (5) the expected dividends on the underlying stock; and (6) the risk-free interest rate over the remaining option term. The option pricing model must be applied properly and reasonable factors must be used when applying the option pricing model. In addition, a discount to the valuation produced by the option pricing model must not be considered in order to rely on Revenue Procedure 98-34. Reliance on Revenue Procedure 98-34 for valuing options is not mandatory, but provides a 'safe harbor.' Moreover, to rely on IRS Revenue Procedure 98-34 for valuing options, the factors used in the valuation must be computed in the manner described in that Revenue Procedure, including the option's expected life, the expected volatility factor of the underlying stock, the expected dividends on the underlying stock with respect to the option and the factor used for determining a risk-free interest rate. Employees who use the methodology described in IRS Revenue Procedure 98-34 to value their options should write 'FILED PURSUANT TO REV. PROC. 98-34' on the applicable gift (or estate) tax return. C-4 STATEMENT OF DIFFERENCES ------------------------ The registered trademark symbol shall be expressed as..........'r' EX-3 2 EXHIBIT 3.2 BY-LAWS STRATEGIC INDUSTRIES, INC. (a Delaware corporation) ARTICLE I Stockholders SECTION 1. Annual Meetings. (a) All annual meetings of the Stockholders for the election of directors shall be held at such place as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. (b) Annual meetings of Stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At the annual meeting, a Board of Directors shall be elected or, during such time as the Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") provides for a classified Board of Directors, that class of directors the term of which shall expire at the meeting shall be elected, and the Stockholders shall transact such other business as may properly be brought before the meeting. (c) Written notice of the annual meeting stating the place, date, and hour of the meeting shall be given to each Stockholder entitled to vote at such meeting not less than ten days nor more than sixty days prior to the date of the meeting. A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting in person or by proxy shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (d) The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of Stockholders, a complete list of the Stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in the name of each Stockholder. Such list shall be open to the examination of any Stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Stockholder who is present. The stock ledger shall be the only evidence as to the Stockholders entitled to examine 1 the stock ledger, the list required by this section or the books of the Corporation, or to vote in person or by proxy at any meeting of Stockholders. SECTION 2. Special Meetings. (a) Special meetings of the Stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation of the Corporation, shall be called only by the Chairman of the Board or by the Secretary upon direction of the Board of Directors pursuant to a resolution adopted by a majority of the Directors then in office. Such request shall state the purpose or purposes of the proposed meeting. (b) Written notice of a special meeting stating the place, date, and hour of the meeting and, in general terms, the purpose or purposes for which the meeting is called, shall be given not less than ten days nor more than sixty days prior to the date of the meeting, to each Stockholder entitled to vote at such meeting. Special meetings may be held at such place as shall be designated by the Board of Directors. Whenever the directors shall fail to fix such place, the meeting shall be held at the principal executive offices of the Corporation. (c) Business transacted at any special meeting of Stockholders, other than procedural matters and matters relating to the conduct of the meeting, shall be limited to the purpose or purposes stated in the notice. SECTION 3. Quorums. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the Stockholders for the transaction of business except as otherwise provided by the Delaware General Corporation Law ("Delaware Law") or by the Certificate of Incorporation. Unless these By-Laws otherwise require, when a meeting is adjourned to another time or place, whether or not a quorum is present, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Stockholder of record entitled to vote at the meeting. When a quorum is once present it is not broken by the subsequent withdrawal of any Stockholder. SECTION 4. Organization. Meetings of Stockholders shall be presided over by the Chairman of the Board, if any, or if none or in the Chairman's absence, by the President, if any, or if none or in the President's absence, by the Executive Vice President, if any, or if none or in the Executive Vice President's absence, by a chairman to be designated by the Chairman of the Board. The Secretary of the Corporation, or in the Secretary's absence an Assistant Secretary, shall act as Secretary of every meeting and keep the minutes thereof, but if neither the Secretary nor an Assistant Secretary is present, the presiding officer of the meeting shall appoint any person present to act as secretary of the meeting. The order of business at all meetings of stockholders shall be as determined by the Chairman of the meeting. 2 SECTION 5. Voting; Proxies; Required Vote. (a) At each meeting of Stockholders, every Stockholder shall be entitled to vote in person or by proxy (but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period) and, unless Delaware Law or the Certificate of Incorporation (including resolutions designating any class or series of preferred stock pursuant to Article IV of the Certificate of Incorporation) provides otherwise, shall have one vote for each share of stock entitled to vote registered in the name of such Stockholder on the books of the Corporation on the applicable record date fixed pursuant to these By-Laws. Except as otherwise required by law or the Certificate of Incorporation, at all elections of directors the voting may but need not be by ballot and a plurality of the votes entitled to vote thereon that are cast shall elect directors. Except as otherwise required by law or the Certificate of Incorporation, any other action shall be authorized by a majority of the votes entitled to vote thereon that are cast. (b) Where a separate vote by a class or classes is required on a matter by law or the Certificate of Incorporation, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to vote on that matter, and the affirmative vote of the majority of shares of such class or classes entitled to vote thereon that are cast shall be the act of such class, unless otherwise provided in the Certificate of Incorporation. SECTION 6. Inspector of Election. The Board of Directors, in advance of any meeting, may, but need not, unless required by Delaware Law, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not so appointed, the person presiding at the meeting may, but need not, unless required by Delaware Law, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all Stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by such inspector or inspectors and execute a certificate of any fact found by such inspector or inspectors. SECTION 7. Stockholder Proposals and Nominations. (a) No proposal for a stockholder vote shall be submitted by a Stockholder (a "Stockholder Proposal") to the Corporation's Stockholders unless the Stockholder submitting such proposal (the "Proponent") shall have filed a written notice in accordance with subsection (c) hereof setting forth with particularity (i) the names and business addresses of the Proponent and all persons or entities 3 (collectively, the "Persons") acting in concert with the Proponent; (ii) the name and address of the Proponent and the Persons identified in clause (i), as they appear on the Corporation's books (if they so appear); (iii) the class and number of shares of the Corporation beneficially owned by the Proponent and the Persons identified in clause (i); (iv) a description of the Stockholder Proposal containing all material information relating thereto; and (v) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and Stockholders of the Corporation to consider the Stockholder Proposal. The presiding officer at any Stockholders' meeting may determine that any Stockholder Proposal was not made in accordance with the procedures prescribed in these By-Laws or is otherwise not in accordance with law, and if it is so determined, such officer shall so declare at the meeting and the Stockholder Proposal shall be disregarded. (b) Only persons who are selected and recommended by the Board of Directors or the committee of the Board of Directors designated to make nominations (if any), or who are nominated by Stockholders in accordance with the procedures set forth in this Section 7, shall be eligible for election, or qualified to serve, as directors. Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of Stockholders at which directors are to be elected may be made by any Stockholder of the Corporation entitled to vote for the election of directors at that meeting by compliance with the procedures set forth in this Section 7. Nominations by Stockholders shall be made by written notice filed in accordance with subsection (c) hereof (a "Nomination Notice"), which shall set forth (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual; (B) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience; (C) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; (D) any directorships held by such nominee in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; and (E) whether, in the last five years, such nominee has been convicted in a criminal proceeding or has been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; and (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (x) the name and business address of such Person, (y) the name and address of such Person as they appear on the Corporation's books (if they so appear), and (z) the class and number of shares of the Corporation that are beneficially owned by such Person. A written consent to being named in a proxy statement as a nominee, and to serve as a director if elected, signed by the nominee, shall be filed with any Nomination Notice. If the presiding officer at any Stockholders' meeting determines that a nomination was 4 not made in accordance with the procedures prescribed by these By-Laws, he shall so declare to the meeting and the defective nomination shall be disregarded. (c) Stockholder Proposals and Nomination Notices shall be delivered to the Secretary at the principal executive office of the Corporation 120 days or more before the date of the anniversary of the last annual Stockholders' meeting if such Stockholder Proposal or Nomination Notice is to be submitted at an annual Stockholders' meeting, unless the meeting is to be held more than 60 days in advance of such anniversary date, in which event the Stockholder Proposal or Nomination Notice shall be delivered to the Secretary at the principal executive office of the Corporation no later than the close of business on the 15th day following the day on which notice of the meeting was given. Nomination Notices shall be delivered to the Secretary at the principal executive office of the Corporation no later than the close of business on the 15th day following the day on which notice of the date of a special meeting of Stockholders was given if the Nomination Notice is to be submitted at a special Stockholders' meeting. ARTICLE II Board of Directors SECTION 1. General Powers. The business, property and affairs of the Corporation shall be managed by, or under the direction of, the Board of Directors. SECTION 2. Qualification; Number; Term; Remuneration. (a) Each director shall be at least 18 years of age. A director need not be a Stockholder, a citizen of the United States, or a resident of the State of Delaware. The number of directors constituting the entire Board shall be such number as may be fixed from time to time by the Board of Directors, but shall be not less than three or more than eleven. One of the directors shall be selected by the Board of Directors to be its Chairman, who shall preside at meetings of the Stockholders and the Board of Directors and shall have such other duties, if any, as may from time to time be assigned by the Board of Directors. The use of the phrase "entire Board" herein refers to the total number of directors which the Corporation would have if there were no vacancies. (b) Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing Committees may be allowed like compensation for attending Committee meetings. SECTION 3. Quorum and Manner of Voting. Except as otherwise provided by law, a majority of the entire Board of Directors shall constitute a quorum. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting from time to time to another time and place without notice. The vote of the majority of the directors present at a 5 meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place, whether or not a quorum is present, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. SECTION 4. Annual Meeting. At the next regular meeting following the annual meeting of Stockholders, the newly elected Board of Directors shall meet for the purpose of the election of officers and the transaction of such other business as may properly come before the meeting. SECTION 5. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times as the Board of Directors shall from time to time by resolution determine. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given. SECTION 6. Special Meetings. Notice of the date, time and place of each special meeting shall be mailed by regular mail to each director at his designated address at least six days before the meeting; or sent by overnight courier to each director at his designated address at least two days before the meeting (with delivery scheduled to occur no later than the day before the meeting); or given orally by telephone or other means, or by telegraph or telecopy, or by any other means comparable to any of the foregoing, to each director at his designated address at least 24 hours before the meeting; provided, however, that if less than five days' notice is provided and one third of the members of the Board of Directors then in office object in writing prior to or at the commencement of the meeting, such meeting shall be postponed until five days after such notice was given pursuant to this sentence (or such shorter period to which a majority of those who objected in writing agree), provided that notice of such postponed meeting shall be given in accordance with this Section 6. The notice of the special meeting shall state the general purpose of the meeting, but other routine business may be conducted at the special meeting without such matter being stated in the notice. SECTION 7. Organization. At all meetings of the Board of Directors, the Chairman or in the Chairman's absence or inability to act, a chairman chosen by the directors, shall preside. The Secretary of the Corporation shall act as secretary at all meetings of the Board of Directors when present, and, in the Secretary's absence, the presiding officer may appoint any person to act as Secretary. SECTION 8. Resignation and Removal. Any director may resign at any time upon written notice to the Corporation and such resignation shall take effect upon receipt thereof by the Chairman or Secretary, unless otherwise specified in the resignation. Directors may be removed only in the manner provided in the Certificate of Incorporation. SECTION 9. Vacancies. Unless otherwise provided in these By-Laws or the Certificate of Incorporation, vacancies on the Board of Directors, whether caused by 6 resignation, death, disqualification, removal, an increase in the authorized number of directors or otherwise, may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum, or by a sole remaining director. SECTION 10. Preferred Directors. Notwithstanding anything else contained herein, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the Certificate of Incorporation. ARTICLE III Committees SECTION 1. Appointment; Powers. The Board of Directors may designate one or more Committees, each Committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any Committee, who may replace any absent or disqualified member at any meeting of the Committee. In the absence or disqualification of a member of a Committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such Committee, to the extent provided in the resolution, shall, have and may exercise, to the extent permitted by Delaware Law, the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such Committee shall have the power or authority to: (i) approve or adopt, or recommend to the stockholders, any action or matter required to be submitted to the Stockholders for approval, (ii) adopt, amend or repeal any By-Law or (iii) take any action that it is not permitted to take pursuant to Delaware Law. Such Committee or Committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. SECTION 2. Procedures, Quorum and Manner of Acting. Each Committee shall fix its own rules of procedure, and shall meet where and as provided by such rules or by resolution of the Board of Directors. Except as otherwise provided by law, the presence of a majority of the then appointed members of a Committee shall constitute a quorum for the transaction of business by that Committee, and in every case where a quorum is present the affirmative vote of a majority of the members of the Committee present shall be the act of the Committee. Each Committee shall keep minutes of its proceedings, and actions taken by a Committee shall be reported to the Board of Directors. SECTION 3. Termination. In the event any person shall cease to be a director of the Corporation, such person shall simultaneously therewith cease to be a member of any Committee appointed by the Board of Directors. 7 ARTICLE IV Officers SECTION 1. Election and Qualifications. The Board of Directors at its first meeting held after each annual meeting of Stockholders shall elect the officers of the Corporation, which shall include a President and a Secretary, and may include, by election or appointment, a Chairman of the Board, one or more Vice-Presidents (any one or more of whom may be given an additional designation of rank or function), a Treasurer and such Assistant Secretaries, such Assistant Treasurers and such other officers as the Board of Directors may from time to time deem proper. Each officer shall have such powers and duties as may be prescribed by these By-Laws and as may be assigned by the Board of Directors or the President. Any two or more offices may be held by the same person. SECTION 2. Term of Office and Remuneration. The term of office of all officers shall be until their respective successors have been elected and qualified or their earlier death, resignation or removal. The remuneration of all officers of the Corporation may be fixed by the Board of Directors or in such manner as the Board of Directors shall provide. SECTION 3. Resignation; Removal. Any officer may resign at any time upon written notice to the Corporation and such resignation shall take effect upon receipt thereof by the President or Secretary, unless otherwise specified in the resignation. Any officer shall be subject to removal, with or without cause, at any time by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine. SECTION 4. Powers and Duties of Officers. (a) The Chairman of the Board of Directors, if there be one, shall be the chief executive officer of the Corporation and shall preside at all meetings of the Stockholders and the Board of Directors and shall have general management of and supervisory authority over the property, business and affairs of the Corporation and its other officers. The Chairman of the Board may execute and deliver in the name of the Corporation powers of attorney, contracts, bonds and other obligations and instruments, and shall have such other authority and perform such other duties as from time to time may be assigned by the Board of Directors. The Chairman of the Board shall see that all orders and resolutions of the Board of Directors are carried into effect and shall perform such additional duties that usually pertain to the office of chief executive officer. (b) If there be no Chairman of the Board, the President shall be the chief executive officer and shall exercise the powers listed in (a) above. Otherwise, the President may execute and deliver in the name of the Corporation powers of attorney, contracts, bonds and other obligations and instruments, and shall have such other authority and perform such other duties as from time to time may be assigned by the Board of Directors or the Chairman of the Board. 8 (c) A Vice President may execute and deliver in the name of the Corporation powers of attorney, contracts, bonds and other obligations and instruments, and shall have such other authority and perform such other duties as from time to time may be assigned by the Board of Directors, the Chairman of the Board or the President. (d) The Treasurer shall in general have all duties and authority incident to the position of Treasurer and such other duties and authority as may be assigned by the Board of Directors, the Chairman of the Board or the President. The Treasurer shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by or at the direction of the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chairman of the Board or the President, and shall render, upon request, an account of all such transactions. (e) The Secretary shall in general have all the duties and authority incident to the position of Secretary and such other duties and authority as may be assigned by the Board of Directors, the Chairman of the Board or the President. The Secretary shall attend all meetings of the Board of Directors and all meetings of Stockholders and record all the proceedings thereat in a book or books to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the Stockholders and special meetings of the Board of Directors. The Secretary shall have custody of the seal of the Corporation and any officer of the Corporation shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or any other officer. (f) The Corporate Controller, if there be one, shall be the Corporation's principal accounting officer, and shall have all duties and authority in connection with financial reporting and related matters that are incident to such position. (g) Any assistant officer shall have such duties and authority as the officer such assistant officer assists and, in addition, such other duties and authority as the Board of Directors, the Chairman of the Board or President shall from time to time assign. ARTICLE V Contracts, Etc. SECTION 1. Contracts. The Board of Directors may authorize any person or persons, in the name and on behalf of the Corporation, to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. In addition, the officers may enter into, execute and deliver such undertakings in the ordinary course of business, and authorize other persons to enter into, execute and deliver such undertakings in the ordinary course of 9 business, in connection with the officers' exercise of their powers enumerated in these By-Laws. SECTION 2. Proxies; Powers of Attorney; Other Instruments. (a) The Chairman of the Board, the President, any Vice President, the Treasurer or any other person designated by any of them shall have the power and authority to execute and deliver proxies, powers of attorney and other instruments on behalf of the Corporation in connection with the execution of contracts, the purchase of real or personal property, the rights and powers incident to the ownership of stock by the Corporation and such other situations as the Chairman of the Board, the President, such Vice President or the Treasurer shall approve (to the extent in the ordinary course of business or, in other instances, as may be authorized by the Board of Directors), such approval to be conclusively evidenced by the execution of such proxy, power of attorney or other instrument on behalf of the Corporation. (b) The Chairman of the Board, the President, any Vice President, the Treasurer or any other person to the extent authorized by proxy or power of attorney executed and delivered by any of them on behalf of the Corporation may vote any and all stock or other equity interest held by the Corporation in any other corporation or other business entity, and may exercise on behalf of the Corporation any and all of the rights and powers incident to the ownership of such stock or other equity interest. The Board of Directors, from time to time, may confer like powers upon any other person. ARTICLE VI Books and Records SECTION 1. Location. The books and records of the Corporation may be kept at such place or places as the Board of Directors or the respective officers in charge thereof may from time to time determine. The record books containing the names and addresses of all Stockholders, the number and class of shares of stock held by each and the dates when they respectively became the owners of record thereof shall be kept by the Secretary as prescribed in the By-Laws or by such officer or agent as shall be designated by the Board of Directors. SECTION 2. Addresses of Stockholders. Notices of meetings and all other corporate notices may be delivered personally or mailed to each Stockholder at the Stockholder's address as it appears on the records of the Corporation, and shall be deemed given when delivered personally or deposited in the mails for mailing to such address. SECTION 3. Fixing Date for Determination of Stockholders of Record. (a) In order that the Corporation may determine the Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date shall not be more than 60 days nor less than 10 days before the date of such meeting. If no record date is fixed by the 10 Board of Directors, the record date for determining Stockholders entitled to notice of or to vote at a meeting of Stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of Stockholders of record entitled to notice of or to vote at a meeting of Stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the Stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the Stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action not contemplated by paragraph (a) of this Section 3, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining Stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. ARTICLE VII Certificates Representing Stock SECTION 1. Certificates; Signatures. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate, signed by or in the name of the Corporation by the Chairman or Vice-Chairman of the Board of Directors, or the President or any Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, representing the number of shares registered in certificate form. Any or all of the signatures on any such certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. In furtherance and not in limitation of the foregoing, the Board of Directors shall have authority to authorize a direct registration system whereby the registration of the issuance and transfer of any or all of the shares of any or all classes and series of capital stock of the Company may, to the extend permitted by applicable law, be entered in the Company's stock records in book-entry form without the issuance of certificates therefor. 11 SECTION 2. Record Ownership. The names and addresses of the holders of record of the shares of each class and series of the Corporation's capital stock, together with the number of shares of each class and series held by each record holder and the date of issue of such shares, shall be entered on the books of the Corporation. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by Delaware Law. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates representing shares of the Corporation. SECTION 3. Transfer of Record Ownership. Transfer of stock in certificated form shall be made on the books of the Corporation only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby, which certificate shall be canceled before the new certificate is issued. SECTION 4. Fractional Shares. The Corporation may, but shall not be required to, issue certificates for fractions of a share where necessary to effect authorized transactions, or the Corporation may pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or it may issue scrip in registered or bearer form over the manual or facsimile signature of an officer of the Corporation or of its agent, exchangeable as therein provided for full shares, but such scrip shall not entitle the holder to any rights of a Stockholder except as therein provided. SECTION 5. Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate in place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Board of Directors may require the owner of any lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. SECTION 6. Transfer Agents; Registrants; Rules Respecting Certificates. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. The Board of Directors may make such further rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates of the Corporation. ARTICLE VIII Dividends 12 Subject to the provisions of Delaware Law and the Certificate of Incorporation, the Board of Directors shall have full power to declare and pay dividends on the capital stock of the Corporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, may determine for any proper purpose, and the Board of Directors may modify or abolish any such reserve. ARTICLE IX Ratification Any transaction, questioned in any lawsuit on the ground of lack of authority, defective or irregular execution, adverse interest of director, officer or Stockholder, non-disclosure, miscomputation, or the application of improper principles or practices of accounting, may be ratified before or after judgment, by the Board of Directors or by the requisite majority of Stockholders, to the fullest extent permitted by Delaware Law, and if so ratified shall have the same force and effect as if the questioned transaction had been originally duly authorized. Such ratification shall be binding upon the Corporation and its Stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction. ARTICLE X Corporate Seal The corporate seal shall be in form of a circular inscription which contains the words "Corporate Seal" and such additional information as the officer inscribing such seal shall determine in such officer's sole discretion. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise displayed or it may be manually inscribed. ARTICLE XI Fiscal Year The fiscal year of the Corporation shall be fixed, and shall be subject to change, by the Board of Directors. Unless otherwise fixed by the Board of Directors, the fiscal year of the Corporation shall end on the Saturday closest to September 30. ARTICLE XII 13 Waiver of Notice Whenever notice is required to be given by these By-Laws or by the Certificate of Incorporation or by law, a written waiver thereof, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE XIII Amendments By-Laws may be adopted, amended or repealed by either the Board of Directors or the affirmative vote of the holders of at least 66 2/3% of the voting power of all shares of the Corporation's capital stock then entitled to vote generally in the election of directors. ARTICLE XIV Indemnification SECTION 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact (a) that he or she is or was a director or officer of the Corporation, or (b) that he or she, being at the time a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (collectively, "another enterprise" or "other enterprise"), shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware Law as the same exists or may hereafter be amended (but, in the case of any such amendment, with respect to alleged action or inaction occurring prior to such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including, without limitation, attorneys' and other professionals' fees and expenses, claims, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) ("Losses") actually and reasonably incurred or suffered by such person in connection with such Proceeding. Without diminishing the scope of indemnification provided by this Section 1, such persons shall also be entitled to the further rights set forth below. SECTION 2. Permissive Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed Proceeding, by reason of the fact (a) that he or she is or was an employee or agent of the Corporation or (b) that he or she, not being at the time a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, member, employee, fiduciary or agent of another corporation or of another enterprise, may be 14 indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware law as the same exists or may hereafter be amended, against all Losses actually and reasonably incurred or suffered by such person in connection with such Proceeding. SECTION 3. Authorization of Indemnification. Any indemnification under this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of a person is proper in the circumstances because such person has met the applicable standards of conduct, if any, required by Delaware Law. Such determination shall be made, with respect to a person who is a director or officer of the Corporation at the time of such determination, in a reasonably prompt manner (i) by the Board of Directors by a majority vote of directors who were not parties to such action, suit or proceeding, whether or not they constitute a quorum of the Board of Directors, (ii) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, (iv) by the Stockholders or (v) as Delaware Law may otherwise permit. To the extent, however, that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any Proceeding, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' and other professionals' fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case. SECTION 4. Good Faith Defined. To the extent that Delaware Law requires a determination that a person has acted in good faith before indemnification is permitted under this Article, then, to the extent permitted by law, for purposes of any determination under Section 3 of this Article, a person shall be deemed to have acted in good faith if the action is based on (a) the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties or on (b) the advice of legal counsel for the Corporation or another enterprise, or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant, independent financial adviser, appraiser or other expert selected with reasonable care by the Corporation or the other enterprise. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met any applicable standard of conduct. SECTION 5. Proceedings Initiated by Indemnified Persons; Settlements. (a) Notwithstanding any provisions of this Article to the contrary, the Corporation shall not indemnify any person or make advance payments in respect of Losses to any person pursuant to this Article in connection with any Proceeding (or portion thereof) initiated against the Corporation by such person unless such Proceeding (or portion thereof) is authorized by the Board of Directors or its designee; provided, however, that this prohibition shall not apply to a compulsory counterclaim, cross-claim or third-party claim brought in any 15 Proceeding or to the extent required by Section 7 of this Article in connection with a suit to enforce a claim for indemnification or advancement of expenses under this Article. (b) Notwithstanding any provisions of this Article to the contrary, the Corporation shall not be required to indemnify any person pursuant to this Article in respect of amounts paid in settlement of any Proceeding effected without the written consent of the Corporation. The Corporation shall not unreasonably withhold or delay its consent to any proposed settlement. SECTION 6. Expenses Payable In Advance. Expenses (including attorneys' and other professionals' fees) reasonably incurred by a present officer or director in defending any threatened or pending Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. Expenses shall be reasonably documented by the officer or director and required payments shall be made promptly by the Corporation. Expenses (including attorneys' and other professionals' fees) reasonably incurred by former directors and officers or other employees and agents in defending any threatened or pending Proceeding may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. SECTION 7. Suits Seeking to Enforce Right to Indemnification or Advancement of Expenses. If a claim under Section 1 or under the first sentence of Section 6 of this Article is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to enforce his or her right to indemnification or advancement of expenses, as the case may be, and if successful in whole or in part, the claimant shall be entitled to be paid also the reasonable expenses (including attorney's and other professionals' fees) of prosecuting such suit. It shall be a defense to any such suit seeking to enforce a right to indemnification (but not to a suit seeking to enforce a right to advancement of expenses) that the claimant has not met any applicable standard of conduct required by Delaware Law for the Corporation to indemnify such claimant, but the burden of proving such defense shall be on the Corporation. In any suit brought by a claimant to enforce a right to indemnification or to advancement of expenses under this Section 7, or brought by the Corporation to recover an advancement of expenses to any person (whether pursuant to an undertaking or otherwise), the burden of proving that the claimant or other person to whom expenses were advanced is not entitled to be indemnified or to such advancement of expenses, shall be on the Corporation. SECTION 8. Non-exclusivity and Survival of Indemnification. The indemnification and advancement of expenses provided by or granted pursuant to this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any By-Law, agreement, contract, vote of Stockholders or of disinterested directors, or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise. The provisions of this Article shall not be deemed to preclude the indemnification of any person 16 who is not specified in Section 1 or 2 of this Article but whom the Corporation has the power or obligation to indemnify under the provisions of Delaware Law, or otherwise. The rights to indemnification conferred by this Article shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of such person and the heirs, executors, administrators and other comparable legal representatives of such person. The rights conferred in this Article shall be enforceable as contract rights, and shall continue to exist after any rescission or restrictive modification hereof with respect to events occurring prior thereto. No rights are conferred in this Article for the benefit of any person (including, without limitation, officers, directors and employees of subsidiaries of the Corporation) in any capacity other than as explicitly set forth herein. SECTION 9. Meaning of certain terms in connection with Employee Benefit Plans, etc. For purposes of this Article, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; references to "serving at the request of the Corporation" shall include any service as a director, officer or employee of the Corporation which imposes duties on, or involves services by, such director, officer or employee, with respect to an employee benefit plan, its participants or beneficiaries; and a person who has acted in good faith and in a manner reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. SECTION 10. Insurance. The Corporation may, but shall not be required to, purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, member, employee, fiduciary or agent of another enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article. Dated: _________ ___, 1999. 17 EX-10 3 EXHIBIT 10.5(A) EXHIBIT 10.5(a) INTERIM EMPLOYMENT AGREEMENT INTERIM EMPLOYMENT AGREEMENT, dated as of May 18, 1999 (the "Commencement Date") by and between U.S. Industries, Inc., a Delaware corporation, with its principal United States office at 101 Wood Avenue South, Iselin, New Jersey 08830, (the "Company") and John G. Raos, residing at 16 Castle Hill Way, Stuart, Florida 34966 ("Executive"). W I T N E S S E T H: WHEREAS, Executive is currently employed as the President and Chief Operating Officer of the Company pursuant to an employment agreement dated February 22, 1995 (the "Old Employment Agreement"); WHEREAS, the Company intends to transfer all or a part of the assets constituting USI's diversified segment (the "Diversified Segment"), and other assets of the Company (such assets collectively "USI Diversified") to a newly constituted wholly owned subsidiary of the Company ("Newco") and to spinoff Newco to the shareholders of the Company (a spinoff of Newco including at a minimum Bearing Inspection, Inc., Atech Turbine Components, Inc., Huron Inc. and Rexair Inc. with Executive as Chairman and Chief Executive Officer of Newco is referred to herein as the "Spinoff"); WHEREAS, the Company and Executive desire to enter into this agreement (this "Agreement") as to the terms of his employment by the Company, between the dates hereof and the Spinoff or the earlier termination of Executive's employment as provided herein and to hereby supersede and replace the Old Employment Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a term (the "Employment Term") commencing on the Commencement Date and terminating on the earliest to occur of the events specified in Section 7(a) hereof. 2. Positions. (a) As of the Commencement Date, Executive shall serve as President and Chief Operating Officer of the Company. It is the intention of the parties that during the Employment Term, Executive shall also serve on the Board of Directors of the Company (the "Board") without additional compensation. Executive shall also serve, if requested by the Board, as an executive officer and director of subsidiaries and a director of associated companies of the Company and shall comply with the policy of the Compensation Committee of the Company's Board (the "Compensation Committee") with regard to retention or forfeiture of the director's fees. Effective September 15, 1999, the Executive shall cease to be, and hereby resigns as, President and Chief Operating Officer of the Company, but shall continue as a director and employee of the Company for the remainder of the Employment Term. Executive shall be elected Chairman and Chief Executive Officer of Newco on or before the Spinoff. (b) Executive shall report directly to the Board or the Chief Executive Officer of the Company and shall have such duties and authority, consistent with his then position, as shall be determined from time to time by the Board or the Chief Executive Officer of the Company provided that it is recognized that Executive's primary responsibilities during the Employment Term shall be with regard to the Spinoff. (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder; provided, however, that Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial and legal affairs and to serve on corporate, civic, or charitable boards or committees. Notwithstanding the foregoing, the 2 Executive shall not serve on any corporate board of directors if such service would be inconsistent with his fiduciary responsibilities to the Company. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $500,000. Base salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary shall be subject to annual review by the Board or the Compensation Committee during the Employment Term and may be increased, but not decreased, from time to time by the Board or the Compensation Committee, except that, prior to a Change in Control, as defined in Section 10 hereof, it may be decreased proportionately in connection with an across the board decrease applying to all senior executives of the Company. The base salary as determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement; provided, however, for purposes of calculating amounts payable upon termination of Executive's employment hereunder "Base Salary" shall be deemed to be the Base Salary immediately prior to any decrease thereof in connection with an across the board decrease. 4. Incentive Compensation. (a) Bonus. For each fiscal year or portion thereof during the Employment Term, Executive shall continue to participate in an incentive pay plan of the Company substantially similar to that in effect immediately prior the Commencement Date that provides an annualized cash target bonus opportunity equal to at least 100% of Base Salary. (b) Restricted Stock. The Company shall recommend to the Compensation Committee that, to the extent it has not already done so during May 1999, at its next meeting it award Executive, subject to his execution of a Restricted Stock Agreement in the form customarily used by the Company for other grants, 20,000 shares of restricted Company common stock ("Restricted Stock"), which shall vest on such terms and conditions as set by the Compensation Committee but which will in any event vest or be forfeited as provided in Section 8 hereof and will vest upon a Change in Control. 3 (c) Other Compensation. The Company may, upon recommendation of the Compensation Committee, award to the Executive such other bonuses and compensation as it deems appropriate and reasonable. Notwithstanding anything else herein, other than the Restricted Stock provided for in Section 4(b) above, the Company shall not be obligated to grant or recommend any other equity awards for Executive during the Employment Term. 5. Employee Benefits and Vacation. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites maintained by the Company from time to time for the benefit of the senior executives of the Company in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive). Executive shall be entitled to (i) coverage and benefits at least equal in the aggregate to the benefits provided under the benefit plans and programs, including, without limitation, any life insurance, medical insurance, disability, pension, savings, incentive, retirement and other plans and programs, of the Company applicable to Executive immediately prior to the Commencement Date and (ii) fringe benefits and perquisites of at least equal value to those provided by the Company to the Executive immediately prior to the Commencement Date. (b) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than four (4) weeks paid vacation per calendar year. The Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6. Business Expenses. The Company shall reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 4 7. Termination. (a) The employment of Executive under this Agreement shall terminate upon the occurrence of the earliest of the following events: (i) the death of the Executive; (ii) the termination of the Executive's employment by the Company due to the Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of the Executive's employment by the Company without Cause; (v) the termination of employment by the Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by the Executive with or without Good Reason during the period running from the date of a Change in Control to twenty-four (24) months after the date of such Change in Control (the "Change in Control Protection Period"), provided that the foregoing commencement date of such right to terminate employment pursuant to this Section 7(a)(vi) shall be delayed until six (6) months after the Change in Control if simultaneous with the Change in Control the Company or the person or entity triggering the Change in Control delivers to the Executive an irrevocable direct pay letter of credit with regard to the amounts under Section 8(c)(A)(i) and (ii) and satisfying the requirements of Section 7(g) hereof (and further provided that the foregoing shall in no way affect full vesting of Restricted Stock upon a Change in Control); 5 (vii) the termination of the Executive's employment by the Company for Cause pursuant to Section 7(e); (viii) A Spinoff occurring prior to September 30, 2000 (the "Outside Date"), an Abandoned Spinoff or a Sale Event, in all cases prior to a Change in Control, where (x) "Sale Event" shall mean that prior to the earliest of the Spinoff, an Abandoned Spinoff or the Outside Date, one or more closings occur that results in more than seventy-five percent (75%) of the assets constituting the Diversified Segment as of the date hereof being sold (or otherwise disposed of) to one or more persons or entities and/or distributed to shareholders through a dividend (but not including the Spinoff or an event which would be an Abandoned Spinoff); and (y) "Abandoned Spinoff" shall mean that (A) no Sale Event or Spinoff occurs prior to the Outside Date, (B) the Company publicly announces that its Board has abandoned the Spinoff, (C) Bearing Inspection, Inc., Atech Turbine Components, Inc., Huron Inc. or Rexair Inc. is sold by the Company other than as part of a Sale Event or the Company determines not to include any of such companies in the Spinoff, or (D) a transaction which would be a Spinoff occurs except that Executive is not Chairman and Chief Executive Officer of Newco at such time and the reason therefor is because Executive is incapable of performing the duties of such position as a result of physical or mental incapacity. (b) Disability. If, by reason of the same or related physical or mental reasons, Executive is unable to carry out his material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period, the Company may terminate Executive's employment for Disability upon thirty (30) days prior written notice, by a Notice of 6 Disability Termination, at any time thereafter during such twelve (12) month period in which Executive is unable to carry out his duties as a result of the same or related physical or mental illness. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. (c) Termination for Good Reason. A Termination for Good Reason means a termination by Executive by written notice given within ninety (90) days after the occurrence of the Good Reason event unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof). For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances: (i) any material diminution of Executive's then positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence or as otherwise provided in Section 2(a) hereof), or the assignment to Executive of duties or responsibilities (other than with regard to the Spinoff) that are inconsistent with Executive's then position, (ii) removal of, or the nonreelection of, the Executive from the positions with the Company specified herein except on or after September 15, 1999 and prior to a Change in Control; (iii) relocation of the Company's executive offices to a location more than twenty-five (25) miles from their locations on the Commencement Date; (iv) a failure by the Company, except as otherwise specifically provided herein, (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate on the Commencement Date (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus and substantially the same level of criteria for achievability thereof as Executive participated in on the Commencement Date; (v) any material breach by the Company of any provision of this Agreement, including without limitation Section 11 hereof; (vi) Executive's removal from 7 the Board; (vii) failure of any successor to assume in a writing delivered to Executive upon the assignee becoming such, the obligations of the Company hereunder; or (viii) a failure of the Compensation Committee to grant the Executive awards of Restricted Stock in accordance with Section 4(b). (d) Notice of Termination for Good Reason. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than ten (10) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given, provided that in the case of the events set forth in Section 7(c)(ii) or (iii) the date may be two (2) days after the giving of such notice. (e) Cause. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business which has a material adverse effect on the Company; (ii) the refusal of Executive to follow the proper written direction of the Board or the Chief Executive Officer, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board or the Chief Executive Officer; (iii) the Executive being convicted of a felony (other than a felony involving a motor vehicle) and either (x) exhausting all appeals without a reversal of the conviction or (y) commencing a term of incarceration in a house of detention; (iv) the breach by Executive of any fiduciary duty owed by Executive to the Company which has a material adverse effect on the Company; or (v) Executive's material fraud with regard to the Company. 8 (f) Notice of Termination for Cause. A Notice of Termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. Further, a Notification for Cause shall be required to include a copy of a resolution duly adopted by at least two-thirds of the entire membership of the Board at a meeting of the Board which was called for the purpose of considering such termination and which Executive and his representative had the right to attend and address the Board, finding that, in the good faith opinion of the Board, Executive engaged in conduct set forth in the definition of Cause herein and specifying the particulars thereof in reasonable detail. The date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a Termination by the Company without Cause. (g) The irrevocable direct pay letter of credit required to be delivered pursuant to Section 7(a)(vi) hereof shall be in amount equal to the amount the Executive would be entitled to under Section 8(c)(A)(i) and (ii) hereof if he were terminated without Cause upon the Change in Control (the "Occurrence") and have an expiration date of no less than two (2) years after the Occurrence. The Executive shall be entitled to draw on the letter of credit upon presentation to the issuing bank of a demand for payment signed by the Executive that states that (i) (A) a Good Reason event has occurred and the Executive would be entitled to payment under Section 8(c) of this Agreement if he elected to terminate employment for Good Reason or (B) six (6) months has expired since the Occurrence or (C) the Executive is entitled to payment under Section 8(c) of this Agreement and (ii) assuming the event set forth in (i) entitled him to payment under Section 8(c) of this Agreement, the amount the Company would be indebted to him at the time of presentation under Section 8(c)(A)(i) and (ii) if he then was eligible to receive payments under Section 8(c). There shall be no other requirements (including no requirement that the Executive first makes demand upon the Company or that the Executive actually terminates employment) with regard to payment of the letter of credit. To the extent the letter of credit is not adequate to cover the amount owed to the Executive by the Company under this Agreement, is not submitted 9 by the Executive or is not paid by the issuing bank, the Company shall remain liable to the Executive for the remainder owed the Executive pursuant to the terms of this Agreement. To the extent any amount is paid under the letter of credit it shall be a credit against any amounts the Company then or thereafter would owe to the Executive under Section 8(c) of this Agreement. The letter of credit shall be issued by a national money center bank with a rating of at least A by Standard & Poors Ratings Services. The Company shall bear the cost of the letter of credit. 8. Consequences of Termination of Employment. (a) Death. If Executive's employment is terminated during the Employment Term by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including and without limitation, any bonus if declared or earned but not yet paid for a completed fiscal year, any amount of Base Salary earned but unpaid, any accrued vacation pay payable pursuant to the Company's policies and any unreimbursed business expenses payable pursuant to Section 6 (collectively "Accrued Amounts"), which amounts shall be promptly paid in a lump sum to Executive's estate; (ii) the product of (x) the target annual bonus for the fiscal year of the Executive's death, multiplied by (y) a fraction, the numerator of which is the number of days of the current fiscal year during which the Executive was employed by the Company, and the denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives; (iii) any other amounts or benefits owing to the Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company, which shall be paid in accordance with such plans and programs, provided that Executive shall be fully vested in his outstanding stock options and Restricted Stock of the Company; (iv) payment on a monthly basis of twelve (12) months of Base Salary, which shall be paid to Executive's spouse, or if she shall predecease him, then to Executive's children (or their guardian if one is appointed) in equal shares; and (v) payment of the spouse's and dependent's COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than three (3) years. Section 11 hereof shall also continue to apply. 10 (b) Disability. If Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death (other than life insurance benefits), provided that the payment of Base Salary shall be reduced by the projected amount he would receive under any long-term disability policy or program maintained by the Company during the twelve (12) month period during which Base Salary is being paid. Section 11 hereof shall also continue to apply. (c) Termination by Executive for Good Reason or for any Reason During the Change in Control Protection Period or Termination by the Company without Cause. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) if a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, or (iii) if Executive's employment with the Company is terminated by the Company without Cause, Executive shall be entitled to receive (A) in a lump sum within five (5) days after such termination (i) three times Base Salary, (ii) three times the highest annual bonus paid or, if declared or earned but not yet paid for a completed fiscal year, payable to Executive for any of the previous three (3) completed fiscal years by the Company and (iii) any Accrued Amounts at the date of termination; (B) any other amounts or benefits owing to Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company, which shall be paid in accordance with such plans and programs, provided that Executive shall be fully vested in his outstanding stock options and Restricted Stock of the Company; (C) three years of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (D) three (3) years of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); and (E) payment by the Company of the premiums for the Executive and his 11 dependents' health coverage for three (3) years under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (E) above may at the discretion of the Company be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his dependents, or by covering Executive and his dependents under substitute arrangements, provided that, to the extent Executive incurs tax that he would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, he shall receive from the Company an additional payment in the amount necessary so that he will have no additional cost for receiving such items or any additional payment. In the circumstances described in each of (i) through (iv) above, Section 11 hereof shall also continue to apply. (d) Termination with Cause or Voluntary Resignation without Good Reason. If Executive's employment hereunder is terminated (i) by the Company for Cause, or (ii) by Executive without Good Reason outside of the Change in Control Protection Period, the Executive shall be entitled to receive only his Base Salary through the date of termination, any bonus that has been declared or earned but not yet paid for a completed fiscal year, and any unreimbursed business expenses payable pursuant to Section 6. All other benefits (including, without limitation, restricted stock and options, and the vesting thereof) due Executive following such termination of employment shall be determined in accordance with the Company's plans and programs. (e) Termination as a result of a Spinoff. If Executive's employment hereunder is terminated as a result of a Spinoff, (i) the Executive shall be entitled to receive his Accrued Amounts, except to the extent the obligations with regard to them are assumed by Newco, (ii) the Executive shall vest in his 1995 Restricted Stock grant, but forfeit all other Company Restricted Stock grants, (iii) the Executive shall be treated as if he had a Termination without Cause with regard to all his outstanding Company stock options and vest in them, but the exercise period of such stock options shall only extend to the later of January 15, 2000 or ninety (90) days after the termination event (the "Stock Option Treatment") (iv) the Executive's benefit accruals and Company obligations under the Long-Term Incentive Plan (the "LTIP") and the Supplemental Executive Retirement 12 Plan (the "SERP"), as well as any other employment related entitlements shall be transferred to Newco and the Company shall have no further liability with regard to such amounts and entitlements and (v) the Executive shall receive a fiscal year 1999 bonus in accordance with the terms of the Annual Performance Incentive Plan (but with no requirement of employment on the date of payment), provided that, if the Spinoff occurs prior to the end of the 1999 fiscal year of the Company, the Executive shall receive a pro rata bonus based on the number of days during the fiscal year that he was employed by the Company and the bonus he would have received if employed by the Company at the end of the fiscal year of the Spinoff (the "1999 Bonus"). The Executive shall not be entitled to any other amounts or benefits from the Company, except as may become due pursuant to Section 11 hereof with regard to indemnification or the Special Tax Provisions of Section 12 hereof or as required by law. (f) Termination as a result of a Sale Event. If Executive's employment hereunder is terminated as a result of a Sale Event, (i) the Executive shall be entitled to receive his Accrued Amounts (ii) the Executive shall vest in all of his Company Restricted Stock, (iii) the Executive shall be entitled to the Stock Option Treatment, (iv) the Executive's benefit accruals under the LTIP shall immediately vest and be paid to him in a lump sum within ninety (90) days after the Sale Event and any LTIP contributions that thereafter are made with regard to the 1999 Bonus shall be promptly paid out to him after deposit, without in either case any regard to any requirement that he be employed by the Company on a specified date, (v) the Executive shall receive the 1999 Bonus based on the date of the Sale Event as if it was the date of the Spinoff, (vi) the Executive shall vest in his accrued benefit under the SERP and it shall be paid out at Retirement in accordance with the term of the SERP (the "SERP Treatment") and (vii) provided the Executive delivers and does not revoke the Release referred to in Section 9(b) hereof and fulfills his obligations under Section 13(b) hereof, the Executive shall be entitled to receive within thirty (30) days after the Sale Event a lump sum incentive payment equal to $1,500,000. The Executive shall not be entitled to any other amounts or benefits from the Company, except as may become due pursuant to Section 11 hereof with regard to indemnification or under the Special Tax Provision of Section 12 hereof or as required by law. The lump sum incentive payment shall not be treated as compensation for purposes of any incentive or benefit plan or arrangement. 13 (g) Termination as a result of an Abandoned Spinoff. If Executive's employment hereunder is terminated as a result of an Abandoned Spinoff, (i) the Executive shall be entitled to receive his Accrued Amounts (ii) provided the Executive delivers and does not revoke the Release referred to in Section 9(b) hereof, the Executive shall fully vest in all of his Company Restricted Stock, (iii) provided the Executive delivers and does not revoke the Release referred to in Section 9(b) hereof, the Executive shall be entitled to his Stock Option Treatment, (iv) provided the Executive delivers and does not revoke the Release referred to in Section 9(b) hereof, the Executive shall be entitled to the SERP Treatment, (v) provided the Executive delivers and does not revoke the Release referred to in Section 9(b) hereof, the Executive's benefit entitlements under the LTIP (taking into consideration the bonuses described in clause (vi) below) shall immediately vest and shall be paid out to him in accordance with the terms of the LTIP (without regard to the employment requirement as a condition of payment) and (vi) the Executive shall be entitled to the 1999 Bonus and, if the Abandoned Spinoff is during fiscal 2000, provided the Executive delivers and does not revoke the Release referred to in Section 9(b) hereof, a pro rata fiscal 2000 bonus equal to the product of (x) the target annual bonus for fiscal 2000 (one hundred percent (100%) of Base Salary), multiplied by (y) a fraction, the numerator of which is the number of days of the 2000 fiscal year prior to the Abandoned Spinoff, and the denominator of which is 365, such pro rated fiscal year 2000 bonus to be paid out within ninety (90) days of the Abandoned Spinoff. In addition, if prior to or within ninety (90) days after an Abandoned Spinoff (other than as a result of reaching the Outside Date), the Company has entered into a definitive agreement or agreements to effect a sale or sales of assets which would result in the requirements of Section 7(a)(viii)(x) being satisfied, upon the closing of such transactions such that the above criteria is satisfied prior to the Outside Date, based on such transactions and those that closed prior to the Abandoned Spinoff, the Company shall pay to Executive the incentive payment provided for in Section 8(f)(vii) provided the Executive satisfies the conditions of such subsection. The Executive shall not be entitled to any other amounts or benefits from the Company, except as may become due pursuant to Section 11 hereof with regard to indemnification or the Special Tax Provisions of Section 12 hereof or as otherwise required by law. 14 9. No Mitigation; No Set-Off. (a) In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Section 8 are in the nature of severance payments and are not in the nature of a penalty. Such amounts are inclusive, and in lieu of, any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. (b) The Release required by Sections 8(f) and 8(g) shall be a release of the Company, its affiliates, officers, directors, employees, agents and shareholders in the standard form used by the Company for senior executives (but without release of any right of indemnifications or rights under this Agreement, equity grants or benefit plans that by their terms are intended to survive termination of Executive's employment). 10. Change in Control. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the Commencement Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; 15 (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets other than (x) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (y) pursuant to a spinoff type transaction, directly or indirectly, of such assets to the stockholders of the Company. In no event shall the Spinoff constitute a Change in Control for purposes of this Agreement. 11. Indemnification. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company and/or any affiliate of the Company, or is or was serving at the request of any of such companies as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law (or, if other than the Company, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and 16 such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed by the applicable company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by the Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. 17 (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 11 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company agrees to obtain Officer and Director liability insurance policies covering Executive and shall maintain at all times during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than $20 million. The Company shall maintain for a six (6) year period commencing on the date the Executive ceased to be an employee of the Company, Officer and Director liability insurance coverage for events occurring during the period the Executive was an employee or director of the Company in the same aggregate amount and under the same terms as are maintained for its active officers and directors. The phrase "in the same aggregate amount and under the same terms" shall include the same level of self-insurance by the Company as shall be maintained for active officers and directors. 12. Special Tax Provision. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Internal Revenue Code (the "Code") Section 280G(b)(2) or any person affiliated with the Company or such person) as a result of a change in ownership of the Company or a 18 direct or indirect parent thereof covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income or payroll tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 12 is that (a) the Executive, after paying his Federal, state and local income and payroll tax, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 12 and (b) that Executive should never be "out-of-pocket" with respect to any tax or other amount subject to this Section 12, whether payable to any taxing authority or repayable to the Company, and this Section 12 shall be interpreted accordingly. (b) Except as otherwise provided in Section 12(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such 19 appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and the Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state, local income and/or payroll taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income and payroll tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. 20 (d)(i)(A) In the event that prior to the time the Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, the Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by the Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by the Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, the Executive shall file at the request of the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion (less any tax the Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event the Executive receives a refund pursuant to (B) above and repays such amount to the Company, the Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. (D) The Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if the Executive's claim for refund or credit is denied. 21 (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 12, subject to subpart (i)(D) above, the Executive shall permit the Company to control issues related to this Section 12 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany him and the Executive and his representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 12 (other than by mutual agreement) or, if not required, agreed to by the Company and the Executive, the Executive shall cooperate fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of the Executive. (e) The Tax Reimbursement Payment, or any portion thereof payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant and any payment made after such fifth (5th) day shall bear interest at the rate provided in Section 1274(b)(2)(B) of the Code). The Company shall use its best efforts to cause the Accountant to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the 22 change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay the Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by the Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. (g) The Company and the Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 12 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 12(d)(i)(D) hereof. (h) In no event shall this provision apply with regard to any change in ownership of Newco covered by Code Section 280G(b)(2) after the Spinoff. 13. Other Provisions. (a) Upon the Spinoff, Sale Event or Abandoned Spinoff, Executive hereby resigns as an officer (if he has not already resigned pursuant to Section 1 hereof), director and employee of the Company and its subsidiaries and affiliates (other than, in the case of a Spinoff of Newco and those entities that become part of Newco), as well as a fiduciary or trustee of any benefit plan or similar arrangement of the Company and its subsidiaries and affiliates (other than, in the case of a Spinoff, as a fiduciary or trustee of any benefit plan or similar arrangement of Newco and those entities that became part of Newco). Upon request of the Company at such time Executive shall execute such documents as necessary to additionally document the foregoing. (b) Executive shall fully cooperate with the Company in connection with the Spinoff or Sale Event, provided, however, he shall not be obligated to work for an acquirer after any Sale Event. 23 (c) Executive agrees that upon a Spinoff, Sale Event or other termination of employment he shall promptly return to the Company all Company property or confidential information in his possession, except to the extent, in the case of a Spinoff, where such property or information is transferred to Newco. Executive further agrees that following a Spinoff, Sale Event or termination, he will cooperate and provide information to the Company with regard to matters arising during his period of employment with the Company or its predecessors, including with regard to any litigation related to such periods; provided that the Company shall reimburse him for his reasonable out-of-pocket expenses incurred in connection therewith. (d) Executive agrees that upon a Spinoff he will serve as Chairman and Chief Executive Officer of Newco unless he is incapable of doing so because of physical or mental incapacity. Refusal of the Executive to comply with the foregoing sentence shall be deemed to be a voluntary resignation without Good Reason by him under this Agreement and all equity plans and grants. 14. Legal and Other Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by Executive in pursuing such claim, unless the claim by the Executive is found to be frivolous by any court or arbitrator. 15. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to principles of conflict of laws. (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company and Executive with respect thereto, including the 24 Old Employment Agreement, provided that: (i) any option or restricted stock agreements executed by the Company and Executive and in effect prior to the Commencement Date shall be superceded only to the extent the terms thereof are modified herein and (ii) the provisions of Section 11 of the Old Employment Agreement shall not be superceded as they relate to obligations of Hanson Industries and Hanson PLC. This Agreement, however, is in addition to the Employment Agreement being signed simultaneous herewith by the Company and the Executive that will become effective upon the Spinoff. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) Assignment. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only to an acquiror of all or substantially all of the assets of the Company, provided such acquiror promptly assumes all of the obligations hereunder of the Company in a writing delivered to the Executive and otherwise complies with the provisions hereof with regard to such assumption. (e) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. (f) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) 25 business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Senior Vice President, General Counsel and Secretary of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (h) Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (i) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the ____ day of May, 1999. U.S. INDUSTRIES, INC. By: ----------------------------------- Name: Title: -------------------------------------- John G. Raos 26 EX-10 4 EXHIBIT 10.5(B) Exhibit 10.5(b) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of May 18, 1999 by and between U.S. Industries, Inc., a Delaware corporation, with its principal United States office at 101 Wood Avenue South, Iselin, New Jersey 08830, ("USI") and John G. Raos, residing at 16 Castle Hill Way, Stuart, Florida 34966 ("Executive"). W I T N E S S E T H: WHEREAS, Executive is currently employed as the President and Chief Operating Officer of USI; WHEREAS, USI intends to transfer all or a part of the assets constituting USI's diversified segment, and other assets of USI (such assets collectively "USI Diversified") to a newly constituted wholly owned subsidiary of USI (the "Company") and to spinoff the Company to the shareholders of USI (a spinoff including at a minimum Bearing Inspection, Inc., Atech Turbine Components, Inc., Huron Inc. and Rexair Inc. with Executive as Chairman and Chief Executive Officer of the Company is referred to herein as the "Spinoff"); WHEREAS, effective as of the consummation of the Spinoff (the "Commencement Date"), the Company desires to employ Executive as its Chairman and Chief Executive Officer and the Executive is willing to serve in such capacities; WHEREAS, USI and Executive desire to enter into this agreement (this "Agreement") as to the terms of his employment by the Company, under which Executive's employment shall commence on the Commencement Date and which Agreement will be assigned by USI to the Company upon or prior to consummation of the spinoff. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a three-year term (the "Employment Term") commencing on the Commencement Date; provided that if Executive is not physically or mentally capable of performing the duties set forth in Section 2 herein on the Commencement Date or Executive is not employed by USI or an affiliate of USI on the day immediately prior to the Commencement Date this Agreement shall be null and void ab initio. Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive three (3) year periods unless the Company or Executive gives written notice to the other at least ninety (90) days prior to the expiration of the then current Employment Term of the termination of Executive's employment hereunder at the end of such current Employment Term. Notwithstanding the foregoing, this Agreement shall be null and void if the Spinoff is not consummated on or prior to September 30, 2000. 2. Positions. (a) As of the Commencement Date, Executive shall serve as Chairman and Chief Executive Officer of the Company. It is the intention of the parties that during the Employment Term, Executive shall also serve on the Board of Directors of the Company (the "Board") without additional compensation. During the term of this Agreement, the Company shall recommend the Executive for election as a director. Executive shall also serve, if requested by the Board, as an executive officer and director of subsidiaries and a director of associated companies of the Company and shall comply with the policy of the Compensation Committee of the Company's Board (the "Compensation Committee") with regard to retention or forfeiture of the director's fees. (b) Executive shall report directly to the Board or other managing body of the Company and shall have such duties and authority, consistent with his position as Chairman and Chief Executive Officer of the Company, as shall be determined from time to time by the Board, provided that Executive shall, at all times during the Employment Term, have such authority comparable to that of chief executive officers of United States public companies the size of the Company. 2 (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder; provided, however, that Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial and legal affairs and to serve on corporate, civic, or charitable boards or committees. Notwithstanding the foregoing, the Executive shall not serve on any corporate board of directors if such service would be inconsistent with his fiduciary responsibilities to the Company. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $500,000. Base salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary shall be subject to annual review by the Board or the Compensation Committee during the Employment Term and may be increased, but not decreased, from time to time by the Board or the Compensation Committee, except that, prior to a Change in Control, as defined in Section 10 hereof, it may be decreased proportionately in connection with an across the board decrease applying to all senior executives of the Company. The base salary as determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. Incentive Compensation. (a) Bonus. For each fiscal year or portion thereof during the Employment Term, beginning with the first fiscal year commencing after the Commencement Date, Executive shall, subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended ("Section 162(m)"), be eligible to participate in an incentive pay plan of the Company that provides an annualized cash target bonus opportunity equal to at least 100% of Base Salary. (b) Equity. (i) Common Stock Purchase. The parties acknowledge that the Executive has indicated that, within the one hundred twenty (120) day period following the Commencement Date (the "120 Day Period"), the Executive intends to purchase, at his own expense and in the open market, the number of shares of Common Stock of the Company 3 ("Common Stock") equal to the lesser of: (i) the number of shares of Common Stock with an aggregate value at the time of purchase equal to $1,000,000 or (ii) 0.5 percent of the issued and outstanding Common Stock on the day after the Commencement Date; provided that the 120 Day Period shall be extended day for day to the extent that the Executive is restricted by legal constraints from purchasing the required amount of such Common Stock during the last forty (40) days during the 120 Day Period. (ii) Options. Pursuant to a stock option plan satisfying the requirements of Section 162(m), the Company shall, after the Commencement Date, recommend to the Compensation Committee that the Executive be granted three separate grants of nonqualified stock options (the "Options") to purchase the number of shares of Common Stock determined for each grant by dividing $1,166,666.67 by the fair market value of the Common Stock on the date of grant as determined under the applicable stock option plan (the "Fair Market Value"). It shall be recommended that the first grant of options be made within the fifteen (15) day period following the date regular way trading of the Common Stock commences, excluding the period of when issued trading ("Regular Way Trading"), the second grant of options be made after the fifteenth (15th) day and before the thirtieth (30th) day following the commencement of Regular Way Trading, and the third grant of options be made after the thirtieth (30th) day and before the forty-fifth (45th) day following the commencement of Regular Way Trading. The Company shall recommend that the Options shall have an exercise price equal to the Fair Market Value. In addition, the Company shall recommend that the Options shall have a duration of ten years; provided that in the event of termination of employment, the remaining duration, as determined by the Compensation Committee, shall be at least the lesser of (x) the remainder of the ten (10) year term or (y) (A) three (3) years on death, Disability, termination without Cause, termination for Good Reason, nonextension of the Employment Term by the Company, termination during the Change in Control Protection Period, (B) thirty (30) days if the termination is a voluntary resignation not covered by (A) above and (C) the day before the date a Notice of Termination for Cause is given to the Executive if the termination is a termination for Cause; and further provided that such Options shall be subject to the provisions of the stock option plan with regard to duration in the event of a corporate transaction. The Company shall recommend that the stock option plan and/or the grants thereunder shall provide that the Options shall become exercisable with respect to 25% of such Options on 4 each of the first four anniversaries of October 1, 1999, provided that Executive is employed by the Company on such vesting date, and shall fully vest upon a Change in Control, as defined in Section 10 hereof. (iii) Restricted Stock. After the Commencement Date, the Company shall recommend to the Compensation Committee that, on or prior to the ninetieth (90th) business day after the Commencement Date, Executive be granted the number of restricted shares (the "Restricted Stock") of Common Stock (the "Company Restricted Stock") that Donaldson, Lufkin & Jenrette ("DLJ") determines is required to provide the Executive with a Company Restricted Stock award with an aggregate value that is equivalent to the aggregate value of the restricted shares of USI common stock which were forfeited upon Executive ceasing employment with USI (the "Forfeited USI Shares"). For purposes of determining the number of shares of Company Restricted Stock to be granted pursuant to this Section 4(b)(iii) the value of the Forfeited USI Shares shall be based on the closing price of USI common stock reported on the New York Stock Exchange on the day before the Dividend Record Date applicable to holders of USI common stock in connection with the Spinoff and the value of the Common Stock shall be based on the fair market value of the Common Stock as determined by DLJ in a report issued to the Board of Directors of USI in connection with the final approval of the Spinoff. The Company Restricted Stock award shall be subject to such terms and conditions as specified by the Compensation Committee on the date of grant. (c) Long Term Compensation/SERP Benefits. USI currently maintains the Long Term Incentive Plan ("LTIP") and the Supplemental Executive Retirement Plan (the "SERP"). Upon the Spinoff the Executive's account balance in the LTIP and benefit accruals under the SERP shall be transferred to similar arrangements with the Company. The Company shall have no obligation to put additional amounts in or provide additional accruals under an LTIP or SERP type plan and may continue them or discontinue them in the judgment of its Compensation Committee or Board, but the Executive shall at all times be fully vested in his transferred account balance benefit accruals thereunder and earnings (if any) thereon. 5 (d) Other Compensation. The Company may, upon recommendation of the Compensation Committee, award to the Executive such other bonuses and compensation as it deems appropriate and reasonable. Notwithstanding anything else herein, the Executive recognizes that in view of the amount of Restricted Stock and Options intended to be granted in accordance with Section 4(b), the Company does not intend to recommend to the Compensation Committee that any additional stock options or restricted stock be granted to the Executive for two (2) years after the Commencement Date. The Company hereby acknowledges that the preceding sentence does not limit the Executive's right to acquire an interest in Common Stock pursuant to the terms of any deferred compensation or tax-qualified retirement plan. 5. Employee Benefits and Vacation. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites maintained by the Company from time to time for the benefit of the senior executives of the Company in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive). Except as otherwise determined by the Compensation Committee, Executive shall be entitled to (i) coverage and benefits at least equal in the aggregate to the benefits provided under the benefit plans and programs, including, without limitation, any life insurance, medical insurance, disability, pension, savings, incentive, retirement and other plans and programs, of USI applicable to Executive in accordance with the provisions of any employment agreement between USI and the Executive in effect immediately prior to the Commencement Date (the "USI Employment Agreement") and (ii) fringe benefits and perquisites of at least equal value to those provided by USI to the Executive pursuant to the USI Employment Agreement. (b) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than four (4) weeks paid vacation per calendar year. The Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6 6. Business Expenses. The Company shall reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. Termination. (a) The employment of Executive under this Agreement shall terminate upon the occurrence of any of the following events: (i) the death of the Executive; (ii) the termination of the Executive's employment by the Company due to the Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of the Executive's employment by the Company without Cause; (v) the termination of employment by the Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by the Executive with or without Good Reason during the period running from the date of a Change in Control to twenty-four (24) months after the date of such Change in Control (the "Change in Control Protection Period"), provided that the foregoing commencement date of such right to terminate employment pursuant to this Section 7(a)(vi) shall be delayed until six (6) months after the Change in Control if simultaneous with the Change in Control the Company or the person or entity 7 triggering the Change in Control delivers to the Executive an irrevocable direct pay letter of credit with regard to the amounts under Section 8(c)(A)(i) and (ii) and satisfying the requirements of Section 7(g) hereof; (vii) the termination of the Executive's employment by the Company for Cause pursuant to Section 7(e); (viii) the retirement of the Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits. (b) Disability. If, by reason of the same or related physical or mental reasons, Executive is unable to carry out his material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period, the Company may terminate Executive's employment for Disability upon thirty (30) days prior written notice, by a Notice of Disability Termination, at any time thereafter during such twelve (12) month period in which Executive is unable to carry out his duties as a result of the same or related physical or mental illness. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. (c) Termination for Good Reason. A Termination for Good Reason means a termination by Executive by written notice given within ninety (90) days after the occurrence of the Good Reason event unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof). For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances: (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence), or the assignment to Executive of duties or responsibilities that are inconsistent with Executive's position as Chairman and 8 Chief Executive Officer; (ii) removal of, or the nonreelection of, the Executive from the positions with the Company specified herein; (iii) relocation of either of the Company's Florida or New Jersey executive offices to a location more than twenty-five (25) miles from, in the case of the New Jersey office, the location of USI's executive offices in New Jersey on the Commencement Date or, in the case of the Florida office, the location of the Executive's principal offices in Florida on the Commencement Date; (iv) a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate within thirty (30) days after the Commencement Date (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus as Executive participated in within thirty (30) days after the Commencement Date; (v) any material breach by the Company of any provision of this Agreement, including without limitation Section 11 hereof; (vi) Executive's removal from or failure to be reelected to the Board; or (vii) failure of any successor to assume in a writing delivered to Executive upon the assignee becoming such, the obligations of the Company hereunder. (d) Notice of Termination for Good Reason. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than ten (10) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given, provided that in the case of the events set forth in Section 7(c)(ii) or (iii) the date may be two (2) days after the giving of such notice. 9 (e) Cause. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business which has a material adverse effect on the Company; (ii) the refusal of Executive to follow the proper written direction of the Board, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board; (iii) the Executive being convicted of a felony (other than a felony involving a motor vehicle) and either (x) exhausting all appeals without a reversal of the conviction or (y) commencing a term of incarceration in a house of detention; (iv) the breach by Executive of any fiduciary duty owed by Executive to the Company which has a material adverse effect on the Company; or (v) Executive's material fraud with regard to the Company. (f) Notice of Termination for Cause. A Notice of Termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. Further, a Notification for Cause shall be required to include a copy of a resolution duly adopted by at least two-thirds of the entire membership of the Board at a meeting of the Board which was called for the purpose of considering such termination and which Executive and his representative had the right to attend and address the Board, finding that, in the good faith opinion of the Board, Executive engaged in conduct set forth in the definition of Cause herein and specifying the particulars thereof in reasonable detail. The date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a Termination by the Company without Cause. (g) The irrevocable direct pay letter of credit required to be delivered pursuant to Section 7(a)(vi) hereof shall be in amount equal to the amount the Executive would be entitled to under Section 8(c)(A)(i) and (ii) hereof if he were terminated without Cause upon the Change in Control (the "Occurrence") and have an expiration date of no less than two (2) years 10 after the Occurrence. The Executive shall be entitled to draw on the letter of credit upon presentation to the issuing bank of a demand for payment signed by the Executive that states that (i) (A) a Good Reason event has occurred and the Executive would be entitled to payment under Section 8(c) of this Agreement if he elected to terminate employment for Good Reason or (B) six (6) months has expired since the Occurrence or (C) the Executive is entitled to payment under Section 8(c) of this Agreement and (ii) assuming the event set forth in (i) entitled him to payment under Section 8(c) of this Agreement, the amount the Company would be indebted to him at the time of presentation under Section 8(c)(A)(i) and (ii) if he then was eligible to receive payments under Section 8(c). There shall be no other requirements (including no requirement that the Executive first makes demand upon the Company or that the Executive actually terminates employment) with regard to payment of the letter of credit. To the extent the letter of credit is not adequate to cover the amount owed to the Executive by the Company under this Agreement, is not submitted by the Executive or is not paid by the issuing bank, the Company shall remain liable to the Executive for the remainder owed the Executive pursuant to the terms of this Agreement. To the extent any amount is paid under the letter of credit it shall be a credit against any amounts the Company then or thereafter would owe to the Executive under Section 8(c) of this Agreement. The letter of credit shall be issued by a national money center bank with a rating of at least A by Standard & Poor's Ratings Services. The Company shall bear the cost of the letter of credit. 8. Consequences of Termination of Employment. (a) Death. If Executive's employment is terminated during the Employment Term by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including and without limitation, any bonus if declared or earned but not yet paid for a completed fiscal year, any amount of Base Salary earned but unpaid, any accrued vacation pay payable pursuant to the Company's policies and any unreimbursed business expenses payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum to Executive's estate; (ii) the product of (x) the target annual bonus for the fiscal year of the Executive's death, multiplied by (y) a fraction, the numerator of which is the number of days of the current fiscal year during which the Executive was employed by the Company, and the 11 denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives; (iii) any other amounts or benefits owing to the Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company, which shall be paid in accordance with such plans and programs; (iv) payment on a monthly basis of twelve (12) months of Base Salary, which shall be paid to Executive's spouse, or if she shall predecease him, then to Executive's children (or their guardian if one is appointed) in equal shares; and (v) payment of the spouse's and dependent's COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than three (3) years. Section 11 hereof shall also continue to apply. (b) Disability. If Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death (other than life insurance benefits), provided that the payment of Base Salary shall be reduced by the projected amount he would receive under any long-term disability policy or program maintained by the Company during the twelve (12) month period during which Base Salary is being paid. Section 11 hereof shall also continue to apply. (c) Termination by Executive for Good Reason or for any Reason During the Change in Control Protection Period or Termination by the Company without Cause or Nonextension of the Term by the Company. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) if a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) if Executive's employment with the Company is terminated by the Company without Cause or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to receive (A) in a lump sum within five (5) days after such termination (i) three times Base Salary, (ii) three times the highest annual bonus paid or, if declared or earned but not yet paid for a completed fiscal year, payable to Executive for any of the previous three (3) completed fiscal years by the Company or USI, (iii) any unreimbursed business expenses payable pursuant to Section 6, and (iv) any Base Salary, bonus if declared or earned but 12 not yet paid for a completed fiscal year, vacation pay or other amounts earned but not yet paid at the date of termination; (B) any other amounts or benefits owing to Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company, which shall be paid in accordance with such plans and programs; (C) three years of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (D) three (3) years of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); and (E) payment by the Company of the premiums for the Executive and his dependents' health coverage for three (3) years under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (E) above may at the discretion of the Company be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his dependents, or by covering Executive and his dependents under substitute arrangements, provided that, to the extent Executive incurs tax that he would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, he shall receive from the Company an additional payment in the amount necessary so that he will have no additional cost for receiving such items or any additional payment. In the circumstances described in each of (i) through (iv) above, Section 11 hereof shall also continue to apply. (d) Termination with Cause or Voluntary Resignation without Good Reason or Retirement. If Executive's employment hereunder is terminated (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, the Executive shall be entitled to receive only his Base Salary through the date of termination, any bonus that has been declared or earned but not yet paid for a completed fiscal year, and any unreimbursed business expenses payable pursuant to Section 6. All other benefits (including, 13 without limitation, restricted stock and options, and the vesting thereof) due Executive following such termination of employment shall be determined in accordance with the Company's plans and programs. 9. No Mitigation; No Set-Off. In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Section 8 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. Such amounts are inclusive, and in lieu of, any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. 10. Change in Control. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the Commencement Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result 14 in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets other than (x) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (y) pursuant to a spinoff type transaction, directly or indirectly, of such assets to the stockholders of the Company. In no event shall the Spinoff in and of itself constitute a Change in Control for purposes of this Agreement; provided, however, that the provisions of this Section 10 shall be operative immediately after consummation of the Spinoff. 11. Indemnification. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company and/or any affiliate of the Company, or is or was serving at the request of any of such companies as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law (or, if other than the Company, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and 15 such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed by the applicable company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by the Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. 16 (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 11 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company agrees to obtain Officer and Director liability insurance policies covering Executive and shall maintain at all times during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than $20 million. The Company shall maintain for a six (6) year period commencing on the date the Executive ceased to be an employee of the Company, Officer and Director liability insurance coverage for events occurring during the period the Executive was an employee or director of the Company in the same aggregate amount and under the same terms as are maintained for its active officers and directors. The phrase "in the same aggregate amount and under the same terms" shall include the same level of self-insurance by the Company as shall be maintained for active officers and directors. 12. Special Tax Provision. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Internal Revenue Code (the "Code") Section 280G(b)(2) or any person affiliated with the Company or such person) as a result of a change in ownership of the Company or a 17 direct or indirect parent thereof after the Spinoff covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income or payroll tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 12 is that (a) the Executive, after paying his Federal, state and local income and payroll tax, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 12 and (b) that Executive should never be "out-of-pocket" with respect to any tax or other amount subject to this Section 12, whether payable to any taxing authority or repayable to the Company, and this Section 12 shall be interpreted accordingly. (b) Except as otherwise provided in Section 12(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such 18 appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and the Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state, local income and/or payroll taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income and payroll tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. (d)(i)(A) In the event that prior to the time the Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason 19 whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, the Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by the Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by the Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, the Executive shall file at the request of the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion (less any tax the Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event the Executive receives a refund pursuant to (B) above and repays such amount to the Company, the Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. (D) The Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if the Executive's claim for refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made 20 (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 12, subject to subpart (i)(D) above, the Executive shall permit the Company to control issues related to this Section 12 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany him and the Executive and his representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 12 (other than by mutual agreement) or, if not required, agreed to by the Company and the Executive, the Executive shall cooperate fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of the Executive. (e) The Tax Reimbursement Payment, or any portion thereof payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant and any payment made after such fifth (5th) day shall bear interest at the rate provided in Section 1274(b)(2)(B) of the Code). The Company shall use its best efforts to cause the Accountant to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay the Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by the 21 Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. (g) The Company and the Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 12 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 12(d)(i)(D) hereof. 13. Legal and Other Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by Executive in pursuing such claim, unless the claim by the Executive is found to be frivolous by any court or arbitrator. 14. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to principles of conflict of laws. (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company and Executive with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. 22 (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) Assignment. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only to an acquirer of all or substantially all of the assets of the Company, provided such acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to the Executive and otherwise complies with the provisions hereof with regard to such assumption. This Agreement may be assigned by USI to the Company and upon assumption of the Agreement by the Company, USI shall be released from any further obligations or liabilities hereunder. (e) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. (f) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Senior Vice President, General Counsel and Secretary of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 23 (h) Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (i) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 24 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the ____ day of May, 1999. U.S. INDUSTRIES, INC. By: -------------------------------- Name: Title: ------------------------------------ John G. Raos 25 EX-10 5 EXHIBIT 10.5(C) EXHIBIT 10.5(c) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of June 1, 1999, by and between, Strategic Capital Management, Inc., a Delaware corporation, with its principal United States office at 101 Wood Avenue South, Iselin, New Jersey 08830 (the "Company"), and Peter J. Statile, residing at 37 Belfast Avenue, Staten Island, New York 10306 ("Executive"). W I T N E S S E T H: WHEREAS, U.S. Industries, Inc., a Delaware corporation, with its principal United States office at 101 Wood Avenue South, Iselin, New Jersey 08830 ("USI") intends to transfer all or a part of the assets constituting USI's diversified segment (the "Diversified Segment") and other assets of USI (such assets collectively "USI Diversified") to a newly constituted wholly owned subsidiary of USI ("Newco") and to spinoff Newco to the shareholders of USI (a spinoff with John Raos as Chairman and Chief Executive Officer of Newco is referred to herein as the "Spinoff"); WHEREAS, effective on June 1, 1999 (the "Commencement Date"), the Company desires to employ the Executive as an executive of the Company; WHEREAS, the Company and Executive desire to enter into this agreement (the "Agreement") as to the terms of his employment by the Company and to embody the terms of Executive's prospective employment by Newco subsequent to the Spinoff; WHEREAS, effective on the consummation of the Spinoff (the "Spinoff Date"), Strategic Capital Management, Inc. and USI shall cause Newco to employ the Executive as Executive Vice President - Operations and the Agreement will be assigned to, and assumed by, Newco. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment; Assignment to Newco. (a) Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a two-year term (the "Employment Term") commencing on the Commencement Date and ending two (2) years thereafter; provided that if the Executive is not physically or mentally capable of performing the duties set forth in Section 2 herein on the Commencement Date (as reasonably determined by the Company in its sole discretion) this Agreement shall be null and void ab initio. Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive two (2) year periods unless the Company or the Executive gives written notice to the other at least ninety (90) days prior to the expiration of the then current Employment Term of the termination of Executive's employment hereunder at the end of such current Employment Term. (b) On the Spinoff Date, this Agreement shall, without any further action of the parties, be deemed assigned to and assumed by Newco, and USI and Strategic Capital Management, Inc. shall be released from all obligations hereunder (and USI shall be released from all obligations under the Guaranty annexed hereto) except as set forth in Section 13 hereof and the Guaranty as it applies to such Section. Unless the context otherwise clearly requires, subject to Section 16(d), the term "Company" as used herein shall be deemed to refer to Strategic Capital Management, Inc. prior to the Spinoff Date and Newco on and after the Spinoff Date. 2. Positions. (a) Executive shall serve as Executive Vice President - Operations of the Company. If requested by the Board of Directors of the Company (the "Board") or the Chairman and so elected by the stockholders of the Company, Executive shall also serve on the Board without additional compensation. Executive shall also serve, if requested by the Board, the Chairman or the President, as an executive officer and director of subsidiaries and a director of associated companies of the Company and shall comply with the policy of the Compensation Committee of the Company's Board (the "Compensation Committee") with regard to retention or forfeiture of the director's fees. (b) Executive shall report to any more senior officer of the Company as designated by the Chairman or the President and, shall have such duties and authority, consistent with his then position as shall be assigned to him from time to time by the Board, the Chairman, the President or such other more senior officer(s) of the Company. 2 (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder; provided, however, that Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial and legal affairs and to serve on corporate, civic, or charitable boards or committees Notwithstanding the foregoing, the Executive shall only serve on corporate boards of directors if approved in advance by the Board and shall not serve on any corporate board of directors if such service would be inconsistent with his fiduciary responsibilities to the Company, as determined by the Board. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $250,000. Base salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary shall be subject to annual review by the Board or the Compensation Committee (commencing on the first day of the Company's 2001 fiscal year) during the Employment Term and may be increased, but not decreased, from time to time by the Board or the Compensation Committee, except that, prior to a Change in Control, as defined in Section 11 hereof, and after the Spinoff Date, it may be decreased proportionately in connection with an across the board decrease applying to all senior executives of the Company. The base salary as determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. Incentive Compensation. (a) Bonus. Provided the Spinoff is consummated, for each fiscal year or portion thereof during the Employment Term, beginning October 1, 1999, Executive shall, subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), be eligible to participate in an incentive pay plan of the Company that provides an annualized cash target bonus opportunity equal to at least 70% of Base Salary. (b) Long Term Compensation. For each fiscal year or portion thereof during the Employment Term, after the Spinoff Date, Executive shall be eligible to participate in any long-term incentive compensation plan generally made available to senior executives of the Company in accordance with and subject to the terms of such plan. (c) Equity. (i) Options. Pursuant to a stock option plan satisfying the requirements of Code Section 162(m), the Company shall, after the Spinoff Date, recommend to the Compensation Committee that Executive be granted, three separate grants of nonqualified stock options (the "Options") to purchase the number of shares of Common Stock of the Company 3 ("Common Stock") determined for each grant by dividing $500,000 by the fair market value of the Common Stock on the date of grant as determined under the applicable stock option plan (the "Fair Market Value"). It shall be recommended that the first grant of options be made within the fifteen (15) day period following the date "regular way trading" of the Common Stock commences, excluding the period of "when issued trading" ("Regular Way Trading"), the second grant of options be made after the fifteenth (15th) day and before the thirtieth (30th) day following the commencement of Regular Way Trading, and the third grant of options be made after the thirtieth (30th) day and before the forty-fifth (45th) day following the commencement of Regular Way Trading. The Company shall recommend that the Options shall have an exercise price equal to the Fair Market Value. It shall be recommended that the stock option grants shall provide that the Options shall become exercisable with respect to 25% of such Options on each of the first four anniversaries of October 1, 1999, provided that Executive is employed by the Company on such vesting date, and further provided that it shall be recommended that such Options shall fully vest upon a Change in Control, as defined in Section 11 hereof, and that the next tranche vest upon a termination event described in Section 7(a)(i), (ii), (iii) or (iv). (ii) Common Stock Purchase. The parties acknowledge that the Executive has indicated that, within the one year period following the Spinoff Date, assuming he is then employed by the Company, the Executive intends to purchase the number of shares of Common Stock of the Com pany ("Common Stock") equal to the lesser of: (x) the number of shares of Common Stock with an aggregate value at the time of purchase of $250,000 or (y) 0.125 percent of the issued and outstanding Common Stock on the day after the Spinoff Date; provided that the one year period shall be extended day for day to the extent that the Executive is restricted by legal constraints from purchasing the required amount of such Common Stock and further provided that any shares of Common Stock of the Company owned within any employee benefit plan qualified under Section 401(a) of the Internal Revenue Code (referred to herein as "Tax Qualified") or any individual retirement account may be counted towards such requirement. (iii) Special Bonus. If the Spinoff occurs, Executive shall be entitled to receive on the later of (x) thirty (30) days following the Spinoff Date or (y) January 15, 2000, a special bonus for his efforts with regard to the Spinoff, in the amount of fifty thousand dollars ($50,000) (the "Special Bonus"). (d) Other Compensation. The Company may, upon recommendation of the Compensation Committee, award to the Executive such other bonuses and compensation as it deems appropriate and reasonable. 4 5. Employee Benefits and Vacation. (a) During the portion of the Employment Term prior to the Spinoff Date, Executive shall be entitled to participate in welfare benefit plans and arrangements and car allowances and other fringe benefits and perquisite programs substantially similar to those provided to comparable executives of USI, but not in any pension or profit sharing type plans. During the portion of the Employment Term effective on and after the Spinoff, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites generally maintained by the Company from time to time for the benefit of senior executive officers of the Company in each case in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive) and shall be given service credit under such plans from the Commencement Date for all purposes under such plans and arrangements. Except as otherwise required by the Employee Retirement Income Security Act of 1974, as amended or other applicable law, or as provided in the prior sentence, Executive's employment with USI, Hanson Industries, or their respective predecessors or any other prior employer of Executive prior to the Spinoff Date shall not be used or otherwise recognized for any purpose under any Company sponsored employee benefit plan or program. (b) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than four (4) weeks paid vacation per calendar year. The Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6. Business Expenses. The Company shall reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. Termination. (a) The employment of Executive under this Agreement shall terminate upon the earliest to occur of any of the following events: (i) the death of the Executive; (ii) the termination of the Executive's employment by the Company due to the Executive's Disability pursuant to Section 7(b) hereof; 5 (iii) the termination of the Executive's employment by the Executive on or after the Spinoff Date in connection with events that occur or occurred on or after the Spinoff Date for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of the Executive's employment by the Company without Cause; (v) the termination of employment by the Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by the Executive with or without Good Reason during the thirty (30) day period commencing six (6) months after a Change in Control (such thirty (30) day period being referred to herein as the "Change in Control Protection Period"), provided that the Executive shall have a right to terminate employment pursuant to this Section 7(a)(vi) and receive the amounts under Section 8(c)(A)(i) and (ii) unless simultaneous with the Change in Control, the Company or the person or entity triggering the Change in Control delivers to the Executive an irrevocable direct pay letter of credit with regard to the amounts under Section 8(c)(A)(i) and (ii) and satisfying the requirements of Section 7(g) hereof; (vii) the termination of the Executive's employment by the Company for Cause pursuant to Section 7(e); (viii) the retirement of the Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits; (ix) the occurrence of: (I) a Sale Event, (II) an Abandoned Spinoff or (III) a Change in Control of USI. For purposes of this Agreement: (x) "Sale Event" shall mean, prior to the Spinoff occurring or being publicly announced as being abandoned by the Board of Directors of USI and in both cases prior to June 30, 2000 (provided, however, that this date shall be extended to September 30, 2000 if, prior to June 30, 2000, USI receives a private letter ruling from the Internal Revenue Service providing that the stock dividend that will occur pursuant 6 to the Spinoff will be a tax-free distribution and providing such other relief and approvals as requested in the ruling (the "Outside Date")) and prior to a Change in Control of USI, one or more closings occur that result in more than 75% of the assets constituting the Diversified Segment as of the date hereof being sold (or otherwise disposed of) to one or more persons or entities and/or distributed to shareholders through a dividend (but not including the Spinoff or an event which would be an Abandoned Spinoff); (y) "Abandoned Spinoff" shall mean, no Sale Event or Spinoff occurs prior to the Outside Date, USI publicly announces that its Board has abandoned the Spinoff or a transaction which would be a Spinoff occurs except that John Raos is not Chairman and Chief Executive Officer of Newco at such time; and (z) "Change in Control of USI" shall mean a Change in Control (within the meaning of Section 11 hereof but substituting USI for the Company) prior to the earliest of the Spinoff, a Sale Event or an Abandoned Spinoff (each of (a)(ix) (I),(II) or (III) referred to as a "Section 7(a)(ix) Event"). (b) Disability. If by reason of the same or related physical or mental illness or incapacity, (i) the Executive is unable to carry out his material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period or (ii) the Chairman of USI determines in good faith that that Executive will not be able to be a full time active executive of the Company on the Spinoff Date and for a continuing period thereafter, the Company may terminate Executive's employment for Disability. In the case of (i) such termination shall be upon thirty (30) days written notice by a Notice of Disability Termination, at any time thereafter during such twelve month period while Executive is unable to carry out his duties as a result of the same or related physical or mental illness or incapacity and, in the case of (ii) immediately upon written notice at any time on or prior to the Spinoff Date. In the case of (ii), the Agreement will not be assigned to, or assumed by, Newco and the Executive shall be treated under Section 8(b) as if he was terminated for a Disability immediately after the Spinoff Date. A Termination under (i) shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day period. (c) Termination for Good Reason. A Termination for Good Reason means a termination by Executive by written notice given within ninety (90) days after the occurrence of the Good Reason event, unless such circumstances are fully 7 corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof). For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances that occur on or after the Spinoff Date: (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence), or, after a Change in Control, the assignment to Executive of duties or responsibilities that are inconsistent with Executive's then position; (ii) removal of, or the nonreelection of, the Executive from the officer positions, if any, with the Company specified herein without election to a higher position; (iii) a relocation of the Company's executive office in New Jersey to a location more than both thirty-five (35) miles from Iselin, New Jersey and thirty-five (35) miles from the Executive's residence at the time of relocation; (iv) after a Change of Control, a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate immediately prior to the Change of Control (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus as Executive participated in prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any provision of this Agreement, including without limitation Section 13 hereof; (vi) if on the Board at the time of a Change in Control, Executive's removal from or failure to be reelected to the Board thereafter; (vii) a failure of any successor to assume in a writing delivered to Executive upon the assignee becoming such, the obligations of the Company hereunder; or (viii) a failure of the Company to grant stock options within ninety (90) days after the Spinoff Date in an aggregate amount of exercise price (which shall be fair market value at the time of grant) multiplied by number of options of at least $1,500,000 and, as to other provisions materially in the aggregate no less favorable to the Executive than the recommendations required by Section 4(c)(ii) hereof. (d) Notice of Termination for Good Reason. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of 8 Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than ten (10) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given, provided that in the case of the events set forth in Section 7(c)(ii) or (iii) the date may be two (2) days after the giving of such notice. (e) Cause. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business, assets or employees; (ii) the refusal of Executive to follow the proper written direction of the Board or a more senior officer of the Company, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board or the more senior officer (whichever is applicable); (iii) substantial and continuing willful refusal by the Executive to attempt to perform the duties required of him hereunder (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board or a more senior officer of the Company which specifically identifies the manner in which it is believed that the Executive has substantially and continually refused to attempt to perform his duties hereunder; (iv) the Executive being convicted of a felony (other than a felony involving a motor vehicle); (v) the breach by Executive of any material fiduciary duty owed by Executive to the Company; or (vi) Executive's dishonesty, misappropriation or fraud with regard to the Company (other than good faith expense account disputes). (f) Notice of Termination for Cause. A Notice of Termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. The date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a Termination by the Company without Cause. 9 (g) The irrevocable direct pay letter of credit required to be delivered pursuant to Section 7(a)(vi) hereof shall be in amount equal to the amount the Executive would be entitled to under Section 8(c)(A)(i) and (ii) hereof if he were terminated without Cause upon the Change in Control and have an expiration date of no less than two (2) years after the Change in Control. The Executive shall be entitled to draw on the letter of credit upon presentation to the issuing bank of a demand for payment signed by the Executive that states that (i) (A) a Good Reason event has occurred and the Executive would be entitled to payment under Section 8(c) of this Agreement if he elected to terminate employment for Good Reason or (B) six (6) months and not more than six (6) months and thirty (30) days has expired since the Change in Control or (C) the Executive is entitled to payment under Section 8(c) of this Agreement and (ii) assuming the event set forth in (i) entitled him to payment under Section 8(c) of this Agreement, the amount the Company would be indebted to him at the time of presentation under Section 8(c)(A)(i) and (ii) if he then was eligible to receive payments under Section 8(c). There shall be no other requirements (including no requirement that the Executive first makes demand upon the Company or that the Executive actually terminates employment) with regard to payment of the letter of credit. To the extent the letter of credit is not adequate to cover the amount owed to the Executive by the Company under this Agreement, is not submitted by the Executive or is not paid by the issuing bank, the Company shall remain liable to the Executive for the remainder owed the Executive pursuant to the terms of this Agreement. To the extent any amount is paid under the letter of credit it shall be a credit against any amounts the Company then or thereafter would owe to the Executive under Section 8(c) of this Agreement. The letter of credit shall be issued by a national money center bank with a rating of at least A by Standard & Poor's Ratings Services. The Company shall bear the cost of the letter of credit. 8. Consequences of Termination of Employment on or After the Spinoff. (a) Death. If, Executive's employment is terminated during the Employment Term on or after the Spinoff Date by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including and without limitation, any bonus if declared or earned but not yet paid for a completed fiscal year, any amount of Base Salary earned but unpaid, any accrued vacation pay payable pursuant to the Company's policies, the Special Bonus to the extent earned but not paid and any unreimbursed business expenses payable pursuant to Section 6 (collectively "Accrued Amounts") which amounts shall be promptly paid in a lump sum to Executive's estate; (ii) the product of (x) the target annual bonus for the fiscal year of the Executive's death, multiplied by (y) a fraction, the numerator of which is the 10 number of days of the current fiscal year during which the Executive was employed by the Company, and the denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives; (iii) subject to Sections 10 and 12, any other amounts or benefits owing to the Executive under the then applicable employee benefit plans, long term incentive plans or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (iv) payment on a monthly basis of six (6) months of Base Salary, which shall be paid to Executive's spouse, or if he is not married to the Executive's estate or if she shall predecease him, then to the Executive's children (or their guardian if one is appointed) in equal shares; and (v) payment of the spouse's and dependent's COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than three (3) years. (b) Disability. If, Executive's employment is terminated during the Employment Term and on or after the Spinoff Date by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death (other than life insurance benefits), provided that the payment of Base Salary shall be reduced by the projected amount he would receive under any long-term disability policy or program maintained by the Company during the six (6) month period during which Base Salary is being paid. (c) Termination by Executive for Good Reason or for any Reason During the Change in Control Protection Period or Termination by the Company without Cause or Nonextension of the Term by the Company. If on or after the Spinoff Date (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) if a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) Executive's employment with the Company is terminated by the Company without Cause or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1(a) hereof, Executive shall be entitled to receive the Accrued Amounts and shall, subject to Section 10(b) hereof, be entitled to receive, (A) in a lump sum within ten (10) days after compliance with such Section 10(b), (i) two (2) times Base Salary and (ii) if such termination is after a Change in Control, two (2) times the highest annual bonus paid or, if declared or earned but not yet paid for a completed fiscal year, payable to Executive for any of the previous three (3) completed fiscal years by the Company (provided that, if this Section 8(c) becomes applicable in reference to the bonus for the fiscal years ending on or about September 30, 11 2000 or 2001, the bonus to be used for the foregoing calculation shall be deemed to be the higher of the respective bonus declared or earned for such year or $175,000); (B) any other amounts or benefits owing to Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (C) if not vested in a Company maintained Tax Qualified defined benefit plan, a payment equal to the product of (i) the lump sum value of any benefit accrued under such Tax Qualified defined benefit plan, if any, on the date of termination (as determined in accordance with the provisions of such plan as then in effect, including the applicable mortality factor, but utilizing a lump sum discount rate equal to the plan's long-term investment rate of return assumption for valuation purposes), and (ii) a fraction, the numerator of which is equal to the number of full months worked by the Executive following the Commencement Date and the denominator of which is sixty (60); (D) if such termination is after a Change in Control, two (2) years of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (E) if such termination is after a Change in Control, two (2) years of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); and (F) payment by the Company of the premiums for the Executive and his dependents' health coverage for two (2) years under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (F) above may at the discretion of the Company be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his dependents, or by covering Executive and his dependents under substitute arrangements. (d) Termination with Cause or Voluntary Resignation without Good Reason or Retirement. If, Executive's employment hereunder is terminated on or after the Spinoff Date (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, the Executive shall be entitled to receive only his Base Salary through the date of termination, the Special Bonus if earned but unpaid and any unreimbursed business expenses payable pursuant to Section 6 and, if the Executive has retired pursuant to the Company's retirement programs, any bonus that has been declared or earned but not yet paid for a completed fiscal year. All other benefits (including, without limitation, 12 options and the vesting thereof) due Executive following such termination of employment shall be determined in accordance with the Company's plans and programs. 9. Consequences of Termination of Employment Prior to the Spinoff Date. (a) Death, Disability, Termination with Cause, Voluntary Resignation. If Executive's employment hereunder is terminated prior to the Spinoff Date and prior to a Section 7(a)(ix) Event (i) by reason of death, (ii) by reason of Executive's Disability, (iii) by the Company for Cause, or (iv) by Executive, the Executive shall be entitled to receive only his Base Salary through the date of termination, any earned but unpaid bonus, if any, and any unreimbursed business expenses payable pursuant to Section 6, provided that if such termination is by Executive and occurs within fifteen (15) days after the earlier of the Company notifying Executive in writing or issuing a formal public announcement that the Spinoff will take place but at least one of Bearing Inspection, Inc., Atech Turbine Components, Inc., Huron, Inc. or Rexair, Inc. is not part of the Spinoff, Executive shall be treated as provided in (b) below. All other benefits due Executive following such termination of employment shall be determined in accordance with the Company's plans and programs. (b) Termination by the Company without Cause or Occurrence of Section 7(a)(ix) Event. If (i) prior to the earlier to occur of a Section 7(a)(ix) Event or Spinoff Date, Executive's employment hereunder is terminated by the Company without Cause or (ii) Executive's employment hereunder is terminated as a result of the occurrence of a Section 7(a)(ix) Event, the Executive shall, subject to Sections 10 and 12, be entitled to receive (A) if such termination occurs prior to January 1, 2000, in a lump sum within five (5) days after such termination, an amount equal to six (6) month's Base Salary or (B) if such termination occurs after December 31, 1999 and prior to the Outside Date, in a lump sum within five (5) days after such termination, an amount equal to twelve (12) month's Base Salary plus $14,583 per month for each complete month (and pro rata for any partial month) of employment on or after October 1, 1999. In addition to the foregoing, Executive shall be entitled to receive the amounts and benefits described in Section 9(a) above. 10. (a) No Mitigation; Set-Off. In the event of any termination of employment under Sections 8 or 9, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Sections 8 and 9 are in the nature of severance payments and are not in the nature of a penalty. Such amounts are inclusive, 13 and in lieu of any, amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. (b) Executive agrees that, as a condition to receiving the payments and benefits provided under Sections 8(c) and 9(b) hereunder he will execute, deliver and not revoke (within the time period permitted by applicable law) a release of all claims of any kind whatsoever against the Company, its affiliates, officers, directors, employees, agents and shareholders in the then standard form being used by the Company for senior executives (but without release of right of indemnification hereunder, equity grants, or benefit plans that by their terms are intended to survive termination of his employment). 11. Change in Control. For purposes of this Agreement, the term "Change in Control" shall mean the occurrence of any of the following on or after the Spinoff Date (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the Spinoff Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding 14 securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets other than (x) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (y) pursuant to a spinoff type transaction, directly or indirectly, of such assets to the stockholders of the Company. In no event shall the Spinoff in and of itself constitute a Change in Control for purposes of this Agreement. 12. Confidential Information and Non-Solicitation of the Company. (a) (i) Executive acknowledges that as a result of his employment by the Company, Executive will obtain secret and confidential information as to the Company and its affiliates and the Company and its affiliates will suffer substantial damage, which would be difficult to ascertain, if Executive should use such confidential information and that because of the nature of the information that will be known to Executive it is necessary for the Company and its affiliates to be protected by the Confidentiality restrictions set forth herein. (ii) Executive acknowledges that the retention of nonclerical employees employed by the Company and its affiliates in which the Company and its affiliates have invested training and depends on for the operation of their businesses is important to the businesses of the Company and its affiliates, that Executive will obtain unique information as to such employees as an executive of the Company and will develop a unique relationship with such persons as a result of being an executive of the Company and, therefore, it is necessary for the Company and its affiliates to be protected from Executive's Solicitation of such employees as set forth below. (iii)Executive acknowledges that the provisions of this Agreement are reasonable and necessary for the protection of the businesses of the Company and its affiliates and that part of the compensation paid under this Agreement and the agreement to pay severance in certain instances is in consideration for the agreements in this Section 12. (b) Solicitation shall mean: recruiting, soliciting or inducing, of any nonclerical employee or employees of the Company or its affiliates to terminate their employment with, or otherwise cease their relationship with, the Company or its affiliates or hiring or assisting another person or entity to hire any nonclerical employee of the Company or its affiliates or any person 15 who within six (6) months before had been a nonclerical employee of the Company or its affiliates and were recruited or solicited for such employment or other retention while an employee of the Company, provided, however, that solicitation shall not include any of the foregoing activities engaged in with the prior written approval of the Chief Executive Officer of the Company. (c) If any restriction set forth with regard to Solicitation is found by any court of competent jurisdiction, or an arbitrator, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. If any provision of this Section 12 shall be declared to be invalid or unenforceable, in whole or in part, as a result of the foregoing, as a result of public policy or for any other reason, such invalidity shall not affect the remaining provisions of this Section which shall remain in full force and effect. (d) During and after the Employment Term, Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates all secret or confidential information, knowledge or data relating to the Company and its affiliates, and their respective businesses, including any confidential information as to customers of the Company and its affiliates, (i) obtained by Executive during his employment by the Company and its affiliates and (ii) not otherwise public knowledge or known within the applicable industry. Executive shall not, without prior written consent of the Company, unless compelled pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In the event Executive is compelled by order of a court or other governmental or legal body to communicate or divulge any such information, knowledge or data to anyone other than the foregoing, he shall promptly notify the Company of any such order and he shall cooperate fully with the Company in protecting such information to the extent possible under applicable law. (e) Upon termination of his employment with the Company and its affiliates, or at any time as the Company may request, Executive will promptly deliver to the Company, as requested, all documents (whether prepared by the Company, an affiliate, Executive or a third party) relating to the Company, an affiliate or any of their businesses or property which he may possess or have under his direction or control other than documents provided to Executive in his capacity as a participant in any employee benefit 16 plan, policy or program of the Company or any agreement by and between Executive and the Company with regard to Executive's employment or severance. (f) Furthermore, in the event of any termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non-extension of the Employment Term, Executive for two (2) years thereafter will not engage in Solicitation. (g) In the event of a breach or potential breach of this Section 12, Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agree that the Company and its affiliates shall be entitled to injunctive relief (in addition to its other remedies at law) to have the provisions of this Section 12 enforced. It is hereby acknowledged that the provisions of this Section 12 are for the benefit of the Company and all of the affiliates of the Company before and after the Spinoff Date and each such entity may enforce the provisions of this Section 12 and only the applicable entity can waive the rights hereunder with respect to its confidential information and employees. (h) Furthermore, in the event of breach of this Section 12 by Executive, while he is receiving amounts under Section 8(c) or 9(b) hereof, Executive shall not be entitled to receive any future amounts pursuant to Sections 8(c) or 9(b) hereof. 13. Indemnification. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, employee or officer of the Company and/or any affiliate of the Company, or is or was serving at the request of any of such companies as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law (or, if other than the Company, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed 17 by the applicable company, and shall inure to the benefit of his heirs, executors and administrators. With respect to the obligations set forth in this Section 13, the Company shall retain such obligations in respect of any act, omission or circumstance that occurred on or prior to the Spinoff, and Newco shall become liable hereunder with respect to any Proceeding which arises out of or relates to events occurring after the Spinoff, except to the extent that the liability relates to service with or for another assignee under Section 16(d) hereof. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by the Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner 18 which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 13 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the applicable company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company agrees to obtain Officer and Director liability insurance policies covering Executive and shall maintain at all times during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than $20 million. The Company shall maintain for a six (6) year period commencing on the date the Executive ceased to be an employee of the Company, Officer and Director liability insurance coverage for events occurring during the period the Executive was an employee or director of the Company in the same aggregate amount and under the same terms as are maintained for its active officers and directors. The phrase "in the same aggregate amount and under the same terms" shall include the same level of self-insurance by the Company as shall be maintained for active officers and directors. (i) This Section 13 shall not create or expand any rights to indemnification in favor of Executive with respect to service with USI, the Company or their affiliates prior to the date hereof. 14. Special Tax Provision. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a change in ownership of the Company or a direct or indirect parent thereof after the Spinoff covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, is hereinafter collectively referred to as the "Excise Tax"), the 19 Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income or payroll tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 14 is that (a) the Executive, after paying his Federal, state and local income tax and any payroll taxes on Executive, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 14 and (b) that Executive should never be "out-of-pocket" with respect to any tax or other amount subject to this Section 14, whether payable to any taxing authority or repayable to the Company, and this Section 14 shall be interpreted accordingly. (b) Except as otherwise provided in Section 14(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and the Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and 20 (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state, local income and/or payroll taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income and payroll tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. (d)(i)(A) In the event that prior to the time the Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, the Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by the Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by the Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, the Executive shall file at the request of the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to the Executive, 21 and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion (less any tax the Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event the Executive receives a refund pursuant to (B) above and repays such amount to the Company, the Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. (D) The Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if the Executive's claim for refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 14, subject to subpart (i)(D) above, the Executive shall permit the Company to control issues related to this Section 14 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany him and the Executive and his representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 14 (other than by mutual agreement) or, if not required, agreed to by the Company and the Executive, the Executive shall cooperate 22 fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of the Executive. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant and any payment made after such fifth (5th) day shall bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant, to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay the Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by the Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. (g) The Company and the Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 14 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 14(d)(i)(D) hereof. 15. Legal and Other Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by Executive in pursuing such claim, provided the Executive is successful with regard to a material portion of his claim. 16. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to principles of conflict of laws. 23 (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company and Executive with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) Assignment. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only (i) as contemplated in Section 1(b), (ii) prior to the Spinoff to either an entity which is owned in whole by USI or (iii) after the Spinoff to an acquirer of all or substantially all of the assets of the Company, provided such acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to the Executive and otherwise complies with the provisions hereof with regard to such assumption. Upon such assignment and assumption, all obligations of the Company herein, shall be the obligations the assignee entity or acquirer, as the case may be. Executive acknowledges that he is aware that the Company contemplates assigning this Agreement to Newco on or promptly after the Spinoff. (e) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. (f) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to 24 the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Senior Vice President, General Counsel and Secretary of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (h) Survivorship. The respective rights and obligations of the parties hereunder, including without limitation Section 13 hereof, shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (i) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. (k) Executive's Representation. The Executive represents and warrants to the Company that there is no legal impediment to him performing his obligations under this Agreement and neither entering into this Agreement nor performing his contemplated service hereunder will violate any agreement to which he is a party or any other legal restriction. 25 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. STRATEGIC CAPITAL MANAGEMENT, INC. By: ------------------------------- Name: Title: ------------------------------- Peter J. Statile 26 GUARANTY The undersigned entity, U.S. Industries, Inc. ("USI"), does hereby agree to the terms contained herein, and guarantee the payment of the obligations of Strategic Capital Management Inc. (the "Company") under the employment agreement by and between Peter J. Statile and the Company, dated as of June 1, 1999 (the "Employment Agreement") that become due prior to or upon the earliest to occur of the Spinoff Date, a Sale Event, an Abandoned Spinoff and a Change of Control of USI (all as defined in the Employment Agreement), including the payments of any and all monies which the Company is obligated to pay to Executive prior to the Spinoff Date in accordance with the terms of the Employment Agreement, as well as the obligations under Section 13 of the Employment Agreement. Upon the Spinoff, this Guaranty shall become of no further force or effect except with regard to Section 13 of the Employment Agreement as it applies to the period prior to the Spinoff and obligations for the period prior to the Spinoff that remain unfulfilled as of the Spinoff Date. This is a guaranty of payment and not collection. U.S. Industries, Inc. By ----------------------------- Name: -------------------------- Title: ------------------------- Date: ------------------------- 27 EX-10 6 EXHIBIT 10.5(D) EXHIBIT 10.5(d) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of July 1, 1999, by and between, U.S. Industries, Inc., a Delaware corporation, with its principal United States office at 101 Wood Avenue South, Iselin, New Jersey 08830 ("USI"), and Steven C. Barre, residing at 48 Oak Avenue, Metuchen, New Jersey 08840 ("Executive"). W I T N E S S E T H: -------------------- WHEREAS, Executive is currently employed as Associate General Counsel of USI; WHEREAS, USI intends to transfer all or a part of the assets constituting USI's diversified segment (the "Diversified Segment") and other assets of USI (such assets collectively "USI Diversified") to a newly constituted wholly owned subsidiary of USI (the "Company") and to spinoff the Company to the shareholders of USI (a spinoff with John Raos as Chairman and Chief Executive Officer of the Company is referred to herein as the "Spinoff"); WHEREAS, effective on the consummation of the Spinoff (the "Commencement Date"), the Company desires to employ the Executive as Vice President, General Counsel and Secretary of the Company and the Executive is willing to serve in such capacities; WHEREAS, USI and the Executive desire to enter into this agreement (the "Agreement") as to the terms of his employment by the Company, under which the Executive's employment shall commence on the Commencement Date and which Agreement will be assigned by USI to the Company upon or prior to consummation of the Spinoff, and to embody the terms of Executive's prospective employment by the Company subsequent to the Spinoff. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a two-year term (the "Employment Term") commencing on the Commencement Date and ending two (2) years thereafter; provided that if the Executive is not physically or mentally capable of performing the duties set forth in Section 2 herein on the Commencement Date (as reasonably determined by the Company in its sole discretion) this Agreement shall be null and void ab initio. Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive two (2) year periods unless the Company or the Executive gives written notice to the other at least ninety (90) days prior to the expiration of the then current Employment Term of the termination of Executive's employment hereunder at the end of such current Employment Term. Notwithstanding the foregoing, this Agreement shall be null and void if the Spinoff is not consummated by June 30, 2000; provided, however, that this date will be extended to September 30, 2000 if prior to June 30, 2000 USI receives a private letter ruling from the Internal Revenue Service providing that the stock dividends that will occur pursuant to the Spinoff will be a tax-free distribution and providing such other relief and approvals as requested in the ruling. 2. Positions. (a) Executive shall serve as Vice President, General Counsel and Secretary of the Company. If requested by the Board of Directors of the Company (the "Board") or the Chairman and so elected by the stockholders of the Company, Executive shall also serve on the Board without additional compensation. Executive shall also serve, if requested by the Board, the Chairman or the President, as an executive officer and director of subsidiaries and a director of associated companies of the Company and shall comply with the policy of the Compensation Committee of the Company's Board (the "Compensation Committee") with regard to retention or forfeiture of the director's fees. (b) Executive shall report to any more senior officer of the Company as designated by the Chairman or the President and, shall have such duties and authority, consistent with his then position as shall be assigned to him from time to time by the Board, the Chairman, the President or such other more senior officer(s) of the Company. (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder; provided, however, that Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial and legal affairs and to serve on corporate, civic, or charitable boards or committees. Notwithstanding the foregoing, the Executive shall only serve on corporate boards of directors if approved in advance by the Board and shall not serve on any corporate board of directors if such service would be inconsistent with his fiduciary responsibilities to the Company, as determined by the Board. 2 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $180,000. Base salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary shall be subject to annual review by the Board or the Compensation Committee (commencing on the first day of the Company's 2001 fiscal year) during the Employment Term and may be increased, but not decreased, from time to time by the Board or the Compensation Committee, except that, prior to a Change in Control, as defined in Section 10 hereof, it may be decreased proportionately in connection with an across the board decrease applying to all senior executives of the Company. The base salary as determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. Incentive Compensation. (a) Bonus. For each fiscal year or portion thereof during the Employment Term, Executive shall, subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), be eligible to participate in an incentive pay plan of the Company that provides an annualized cash target bonus opportunity equal to at least 55% of Base Salary. (b) Equity. Pursuant to a stock option plan satisfying the requirements of Code Section 162(m), the Company shall, after the Commencement Date, recommend to the Compensation Committee that Executive be granted, three separate grants of nonqualified stock options (the "Options") to purchase the number of shares of Common Stock of the Company ("Common Stock") determined for each grant by dividing $240,000 by the fair market value of the Common Stock on the date of grant as determined under the applicable stock option plan (the "Fair Market Value"). It shall be recommended that the first grant of options be made within the fifteen (15) day period following the date "regular way trading" of the Common Stock commences, excluding the period of "when issued trading" ("Regular Way Trading"), the second grant of options be made after the fifteenth (15th) day and before the thirtieth (30th) day following the commencement of Regular Way Trading, and the third grant of options be made after the thirtieth (30th) day and before the forty-fifth (45th) day following the commencement of Regular Way Trading. The Company shall recommend that the Options shall have an exercise price equal to the Fair Market Value. It shall be recommended that the stock option grants shall provide that the Options shall become exercisable with respect to 25% of such Options on each of the first four anniversaries of October 1, 1999, provided that Executive is employed by the Company on such vesting date, and further provided that 3 it shall be recommended that such Options shall fully vest upon a Change in Control, as defined in Section 10 hereof, and that the next tranche vest upon a termination event described in Section 7(a)(i), (ii), (iii) or (iv). (c) Long Term Compensation/SERP Benefits. USI currently maintains the Long Term Incentive Plan ("LTIP"). Upon the Spinoff the Executive's account balance in the LTIP shall be transferred to similar arrangements with the Company. The Company shall have no obligation to put additional amounts in or provide additional accruals under an LTIP type plan and may continue them or discontinue them in the judgment of its Compensation Committee or Board, but the Executive shall at all times be fully vested in his transferred account balance benefit accruals thereunder and earnings (if any) thereon. For each fiscal year or portion thereof during the Employment Term, after the Spinoff Date, Executive shall be eligible to participate in any long-term incentive compensation plans or supplemental executive retirement plans made available to vice presidents of the Company. (d) Other Compensation. The Company may, upon recommendation of the Compensation Committee, award to the Executive such other bonuses and compensation as it deems appropriate and reasonable. 5. Employee Benefits and Vacation. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites generally maintained by the Company from time to time for the benefit of vice presidents of the Company in each case in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive) and, except as otherwise determined by the Compensation Committee, the Executive's employment with USI or any of its predecessors prior to the Commencement Date (as reflected in USI's books and records) shall be recognized for all purposes under any Company sponsored pension, retirement, savings, welfare and other employee benefit plans or arrangements established within the six (6) month period following the Commencement Date. (b) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than four (4) weeks paid vacation per calendar year. The Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 4 6. Business Expenses. The Company shall reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. Termination. (a) The employment of Executive under this Agreement shall terminate upon the earliest to occur of any of the following events: (i) the death of the Executive; (ii) the termination of the Executive's employment by the Company due to the Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of the Executive's employment by the Company without Cause; (v) the termination of employment by the Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by the Executive with or without Good Reason during the thirty (30) day period commencing one (1) year after a Change in Control (such thirty (30) day period being referred to herein as the "Change in Control Protection Period"), provided that the Executive shall have a right to terminate employment pursuant to this Section 7(a)(vi) and receive the amounts under Section 8(c)(A)(i) and (ii) unless simultaneous with the Change in Control, the Company or the person or entity triggering the Change in Control delivers to the Executive an irrevocable direct pay letter of credit with regard to the amounts under Section 8(c)(A)(i) and (ii) and satisfying the requirements of Section 7(g) hereof; 5 (vii) the termination of the Executive's employment by the Company for Cause pursuant to Section 7(e); (viii) the retirement of the Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits; (b) Disability. If by reason of the same or related physical or mental illness or incapacity, the Executive is unable to carry out his material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period, the Company may terminate Executive's employment for Disability upon thirty (30) days written notice by a Notice of Disability Termination, at any time thereafter during such twelve month period while Executive is unable to carry out his duties as a result of the same or related physical or mental illness or incapacity. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. (c) Termination for Good Reason. A Termination for Good Reason means a termination by Executive by written notice given within ninety (90) days after the occurrence of the Good Reason event, unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof). For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances: (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence); (ii) removal of, or the nonreelection of, the Executive from the officer positions, if any, with the Company specified herein without election to a materially comparable or higher position; (iii) a relocation of the Company's executive office in New Jersey to a location more than both thirty-five (35) miles from Iselin, New Jersey and thirty-five (35) miles from the Executive's residence at the time of relocation or a relocation of Executive more than thirty-five (35) miles from the Company's executive offices in New Jersey; provided, however, the foregoing shall not apply if such executive offices are relocated to Florida and/or Executive is relocated to Florida if Executive is given reasonable notice and if the Company reimburses Executive for all reasonable expenses incurred by Executive in relocating (on a fully grossed up basis such that on an after tax basis Executive shall have no after tax cost for such relocation) with regard to relocation 6 costs historically reimbursed by the Company (or USI before the Company has spun off) with regard to relocation of senior executives (iv) after a Change of Control, a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate immediately prior to the Change of Control (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus as Executive participated in prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any provision of this Agreement, including without limitation Section 12 hereof; (vi) a failure of any successor to assume in a writing delivered to Executive upon the assignee becoming such, the obligations of the Company hereunder; or (vii) a failure of the Company to grant stock options within ninety (90) days after the Commencement Date in an aggregate amount of exercise price (which shall be fair market value at the time of grant) multiplied by number of options of at least $720,000 and, as to other provisions materially in the aggregate no less favorable to the Executive than the recommendations required by Section 4(b) hereof. (d) Notice of Termination for Good Reason. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than ten (10) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given, provided that in the case of the events set forth in Section 7(c)(ii) or (iii) the date may be two (2) days after the giving of such notice. (e) Cause. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business, assets or employees; (ii) the refusal of Executive to follow the 7 proper written direction of the Board or a more senior officer of the Company, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board or the more senior officer (whichever is applicable); (iii) substantial and continuing willful refusal by the Executive to attempt to perform the duties required of him hereunder (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board or a more senior officer of the Company which specifically identifies the manner in which it is believed that the Executive has substantially and continually refused to attempt to perform his duties hereunder; (iv) the Executive being convicted of a felony (other than a felony involving a motor vehicle); (v) the breach by Executive of any material fiduciary duty owed by Executive to the Company; or (vi) Executive's dishonesty, misappropriation or fraud with regard to the Company (other than good faith expense account disputes). (f) Notice of Termination for Cause. A Notice of Termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. The date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a Termination by the Company without Cause. (g) The irrevocable direct pay letter of credit required to be delivered pursuant to Section 7(a)(vi) hereof shall be in amount equal to the amount the Executive would be entitled to under Section 8(c)(A)(i) and (ii) hereof if he were terminated without Cause upon the Change in Control and have an expiration date of no less than two (2) years after the Change in Control. The Executive shall be entitled to draw on the letter of credit upon presentation to the issuing bank of a demand for payment signed by the Executive that states that (i) (A) a Good Reason event has occurred and the Executive would be entitled to payment under Section 8(c) of this Agreement if he elected to terminate employment for Good Reason or (B) one (1) year and not more than one (1) year and thirty (30) days has expired since the Change in Control or (C) the Executive is entitled to payment under Section 8(c) of this Agreement and (ii) assuming the event set forth in (i) entitled him to payment under Section 8(c) of this Agreement, the amount the Company would be indebted to him at the time of presentation under Section 8(c)(A)(i) and (ii) if he then was eligible to receive payments under Section 8 8(c). There shall be no other requirements (including no requirement that the Executive first makes demand upon the Company or that the Executive actually terminates employment) with regard to payment of the letter of credit. To the extent the letter of credit is not adequate to cover the amount owed to the Executive by the Company under this Agreement, is not submitted by the Executive or is not paid by the issuing bank, the Company shall remain liable to the Executive for the remainder owed the Executive pursuant to the terms of this Agreement. To the extent any amount is paid under the letter of credit it shall be a credit against any amounts the Company then or thereafter would owe to the Executive under Section 8(c) of this Agreement. The letter of credit shall be issued by a national money center bank with a rating of at least A by Standard & Poor's Ratings Services. The Company shall bear the cost of the letter of credit. 8. Consequences of Termination of Employment. (a) Death. If Executive's employment is terminated during the Employment Term on or after the Spinoff Date by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including and without limitation, any bonus if declared or earned but not yet paid for a completed fiscal year, any amount of Base Salary earned but unpaid, any accrued vacation pay payable pursuant to the Company's policies, and any unreimbursed business expenses payable pursuant to Section 6 (collectively "Accrued Amounts") which amounts shall be promptly paid in a lump sum to Executive's estate; (ii) the product of (x) the target annual bonus for the fiscal year of the Executive's death, multiplied by (y) a fraction, the numerator of which is the number of days of the current fiscal year during which the Executive was employed by the Company, and the denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives; (iii) subject to Sections 9 and 11, any other amounts or benefits owing to the Executive under the then applicable employee benefit plans, long term incentive plans or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (iv) payment on a monthly basis of three (3) months of Base Salary, which shall be paid to Executive's spouse, or if he is not married to the Executive's estate or if she shall predecease him, then to the Executive's children (or their guardian if one is appointed) in equal shares; and (v) payment of the spouse's and dependent's COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than three (3) years. (b) Disability. If, Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of 9 employment by reason of his death (other than life insurance benefits), provided that the payment of Base Salary shall be reduced by the projected amount he would receive under any long-term disability policy or program maintained by the Company during the three (3) month period during which Base Salary is being paid. (c) Termination by Executive for Good Reason or for any Reason During the Change in Control Protection Period or Termination by the Company without Cause or Nonextension of the Term by the Company. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) if a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) Executive's employment with the Company is terminated by the Company without Cause or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1(a) hereof, Executive shall be entitled to receive the Accrued Amounts and shall, subject to Sections 9(b) and 11(h) hereof, be entitled to receive, (A) (i) two (2) times Base Salary, to be paid, if such termination is after a Change in Control, in one lump sum within ten (10) days after compliance with Section 9(b) hereof, or otherwise to be paid one (1) times Base Salary in a lump sum and one (1) times Base Salary in twelve (12) equal monthly installments commencing one (1) month after the aforementioned lump sum is paid and (ii) if such termination is after a Change in Control, two (2) times the highest annual bonus paid or, if declared or earned but not yet paid for a completed fiscal year, payable to Executive for any of the previous two (2) completed fiscal years by the Company or USI; (B) any Accrued Amounts at the date of termination; (C) any other amounts or benefits owing to Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (D) if such termination is after a Change in Control, two (2) years of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (E) if such termination is after a Change in Control, two (2) years of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); and (F) payment by the Company of the premiums for the Executive and his dependents' health coverage for two (2) years under the Company's health plans which cover the 10 senior executives of the Company or materially similar benefits. Payments under (F) above may at the discretion of the Company be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his dependents, or by covering Executive and his dependents under substitute arrangements. (d) Termination with Cause or Voluntary Resignation without Good Reason or Retirement. If, Executive's employment hereunder is terminated (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, the Executive shall be entitled to receive only his Base Salary through the date of termination and any unreimbursed business expenses payable pursuant to Section 6 and, if the Executive has retired pursuant to the Company's retirement programs, any bonus that has been declared or earned but not yet paid for a completed fiscal year. All other benefits (including, without limitation, options and the vesting thereof) due Executive following such termination of employment shall be determined in accordance with the Company's plans and programs. 9. (a) No Mitigation; Set-Off. In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Sections 8 and 9 are in the nature of severance payments and are not in the nature of a penalty. Such amounts are inclusive, and in lieu of any, amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. (b) Executive agrees that, as a condition to receiving the payments and benefits provided under Section 8(c) hereunder he will execute, deliver and not revoke (within the time period permitted by applicable law) a release of all claims of any kind whatsoever against the Company, its affiliates, officers, directors, employees, agents and shareholders in the then standard form being used by the Company for senior executives (but without release of right of indemnification hereunder, equity grants, or benefit plans that by their terms are intended to survive termination of his employment). 10. Change in Control. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or 11 indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the Commencement Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets other than (x) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (y) pursuant to a spinoff type transaction, directly or indirectly, of such assets to the stockholders of the Company. In no event shall the Spinoff in and of itself constitute a Change in Control for purposes of this Agreement; provided, however, that the provisions of this Section 10 shall be operative immediately after consummation of the Spinoff. 11. Confidential Information and Non-Solicitation of the Company. (a) (i) Executive acknowledges that as a result of his employment by the Company, Executive will obtain secret and confidential information as to the Company and its affiliates and the Company and its affiliates will suffer substantial damage, which would be difficult to ascertain, if Executive should 12 use such confidential information and that because of the nature of the information that will be known to Executive it is necessary for the Company and its affiliates to be protected by the Confidentiality restrictions set forth herein. (ii) Executive acknowledges that the retention of nonclerical employees employed by the Company and its affiliates in which the Company and its affiliates have invested training and depends on for the operation of their businesses is important to the businesses of the Company and its affiliates, that Executive will obtain unique information as to such employees as an executive of the Company and will develop a unique relationship with such persons as a result of being an executive of the Company and, therefore, it is necessary for the Company and its affiliates to be protected from Executive's Solicitation of such employees as set forth below. (iii) Executive acknowledges that the provisions of this Agreement are reasonable and necessary for the protection of the businesses of the Company and its affiliates and that part of the compensation paid under this Agreement and the agreement to pay severance in certain instances is in consideration for the agreements in this Section 11. (b) Solicitation shall mean: recruiting, soliciting or inducing, of any nonclerical employee or employees of the Company or its affiliates to terminate their employment with, or otherwise cease their relationship with, the Company or its affiliates or hiring or assisting another person or entity to hire any nonclerical employee of the Company or its affiliates or any person who within six (6) months before had been a nonclerical employee of the Company or its affiliates and were recruited or solicited for such employment or other retention while an employee of the Company, provided, however, that solicitation shall not include any of the foregoing activities engaged in with the prior written approval of the Chief Executive Officer of the Company. (c) If any restriction set forth with regard to Solicitation is found by any court of competent jurisdiction, or an arbitrator, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. If any provision of this Section 11 shall be declared to be invalid or unenforceable, in whole or in part, as a result of the foregoing, as a result of public policy or for any other reason, such invalidity shall not affect the remaining provisions of this Section which shall remain in full force and effect. 13 (d) During and after the Employment Term, Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates all secret or confidential information, knowledge or data relating to the Company and its affiliates, and their respective businesses, including any confidential information as to customers of the Company and its affiliates, (i) obtained by Executive during his employment by the Company and its affiliates and (ii) not otherwise public knowledge or known within the applicable industry. Executive shall not, without prior written consent of the Company, unless compelled pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In the event Executive is compelled by order of a court or other governmental or legal body to communicate or divulge any such information, knowledge or data to anyone other than the foregoing, he shall promptly notify the Company of any such order and he shall cooperate fully with the Company in protecting such information to the extent possible under applicable law. (e) Upon termination of his employment with the Company and its affiliates, or at any time as the Company may request, Executive will promptly deliver to the Company, as requested, all documents (whether prepared by the Company, an affiliate, Executive or a third party) relating to the Company, an affiliate or any of their businesses or property which he may possess or have under his direction or control other than documents provided to Executive in his capacity as a participant in any employee benefit plan, policy or program of the Company or any agreement by and between Executive and the Company with regard to Executive's employment or severance. (f) Furthermore, in the event of any termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non-extension of the Employment Term, Executive for two (2) years thereafter will not engage in Solicitation. (g) In the event of a breach or potential breach of this Section 11, Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agree that the Company and its affiliates shall be entitled to injunctive relief (in addition to its other remedies at law) to have the provisions of this Section 11 enforced. It is hereby acknowledged that the provisions of this Section 11 are for the benefit of the Company and all of the 14 affiliates of the Company before and after the Spinoff Date and each such entity may enforce the provisions of this Section 11 and only the applicable entity can waive the rights hereunder with respect to its confidential information and employees. (h) Furthermore, in the event of breach of this Section 11 by Executive, while he is receiving amounts under Section 8(c) hereof, Executive shall not be entitled to receive any future amounts pursuant to Section 8(c) hereof. 12. Indemnification. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, employee or officer of the Company and/or any affiliate of the Company, or is or was serving at the request of any of such companies as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law (or, if other than the Company, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed by the applicable company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by the Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. 15 (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 12 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the applicable company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company agrees to obtain Officer and Director liability insurance policies covering Executive and shall maintain at all times during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than the greater of: (i) the amount of coverage maintained by the Company for the Chairman and Chief Executive Officer of the Company or (ii) $10 million. The Company shall maintain for a six (6) year period commencing on the date the Executive ceased to be an employee of the Company, Officer and Director liability insurance coverage for events occurring during the period the Executive was an employee or director of the Company in the same aggregate amount and under the same terms as are maintained for its active officers and directors. The phrase "in the same aggregate amount and under the same terms" shall include the same level of self-insurance by the Company as shall be maintained for active officers and directors. 16 (i) This Section 12 shall not create or expand any rights to indemnification in favor of Executive with respect to service with USI, the Company or their affiliates prior to the date hereof. 13. Special Tax Provision. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a change in ownership of the Company or a direct or indirect parent thereof after the Spinoff covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income or payroll tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 13 is that (a) the Executive, after paying his Federal, state and local income tax and any payroll taxes on Executive, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 13 and (b) that Executive should never be "out-of-pocket" with respect to any tax or other amount subject to this Section 13, whether payable to any taxing authority or repayable to the Company, and this Section 13 shall be interpreted accordingly. (b) Except as otherwise provided in Section 13(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, 17 (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and the Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state, local income and/or payroll taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income and payroll tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. (d)(i)(A) In the event that prior to the time the Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax 18 Reimbursement Payment was made, the Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by the Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by the Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, the Executive shall file at the request of the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion (less any tax the Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event the Executive receives a refund pursuant to (B) above and repays such amount to the Company, the Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. (D) The Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if the Executive's claim for refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. 19 (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 13, subject to subpart (i)(D) above, the Executive shall permit the Company to control issues related to this Section 13 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany him and the Executive and his representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 13 (other than by mutual agreement) or, if not required, agreed to by the Company and the Executive, the Executive shall cooperate fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of the Executive. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant and any payment made after such fifth (5th) day shall bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant, to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay the Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by the Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. 20 (g) The Company and the Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 13 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 13(d)(i)(D) hereof. 14. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to principles of conflict of laws. (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company and Executive with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) Assignment. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only to an acquirer of all or substantially all of the assets of the Company, provided such acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to the Executive and otherwise complies with the provisions hereof with regard to such assumption. This Agreement may be assigned by USI to the Company and upon assumption of the Agreement by the Company, USI shall be released from any further obligations or liabilities hereunder. 21 (e) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. (f) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman and Chief Executive Officer of the Company or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (h) Survivorship. The respective rights and obligations of the parties hereunder, including without limitation Section 12 hereof, shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (i) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. (k) Executive's Representation. The Executive represents and warrants to the Company that there is no legal impediment to him performing his obligations under this Agreement and neither entering into this Agreement nor performing his contemplated service hereunder will violate any agreement to which he is a party or any other legal restriction. 22 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. U.S. INDUSTRIES, INC. By: -------------------------------- Name: Title: ----------------------------------- Steven C. Barre 23 EX-10 7 EXHIBIT 10.5(E) Exhibit 10.5(e) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of July 1, 1999, by and between, U.S. Industries, Inc., a Delaware corporation, with its principal United States office at 101 Wood Avenue South, Iselin, New Jersey 08830 ("USI"), and Gary K. Meuchel residing at 304 Greenview Ridge, Duncan, South Carolina 29334-9244 ("Executive"). W I T N E S S E T H: WHEREAS, Executive is currently employed as Vice President-Human Resources of Lighting Corporation of America, a subsidiary of USI; WHEREAS, USI intends to transfer all or a part of the assets constituting USI's diversified segment (the "Diversified Segment") and other assets of USI (such assets collectively "USI Diversified") to a newly constituted wholly owned subsidiary of USI (the "Company") and to spinoff the Company to the shareholders of USI (a spinoff with John Raos as Chairman and Chief Executive Officer of the Company is referred to herein as the "Spinoff"); WHEREAS, effective on the consummation of the Spinoff (the "Commencement Date"), the Company desires to employ the Executive as Vice President-Human Resources of the Company at its principle executive offices to be established in New Jersey and the Executive is willing to serve in such capacities; WHEREAS, USI and the Executive desire to enter into this agreement (the "Agreement") as to the terms of his employment by the Company, under which the Executive's employment shall commence on the Commencement Date and which Agreement will be assigned by USI to the Company upon or prior to consummation of the Spinoff, and to embody the terms of Executive's prospective employment by the Company subsequent to the Spinoff. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a two-year term (the "Employment Term") commencing on the Commencement Date and ending two (2) years thereafter; provided that if the Executive is not physically or mentally capable of performing the duties set forth in Section 2 herein on the Commencement Date (as reasonably determined by the Company in its sole discretion) this Agreement shall be null and void ab initio. Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive two (2) year periods unless the Company or the Executive gives written notice to the other at least ninety (90) days prior to the expiration of the then current Employment Term of the termination of Executive's employment hereunder at the end of such current Employment Term. Notwithstanding the foregoing, this Agreement shall be null and void if the Spinoff is not consummated by June 30, 2000; provided, however, that this date will be extended to September 30, 2000 if prior to June 30, 2000 USI receives a private letter ruling from the Internal Revenue Service providing that the stock dividends that will occur pursuant to the Spinoff will be a tax-free distribution and providing such other relief and approvals as requested in the ruling. 2. Positions. (a) Executive shall serve as Vice President-Human Resources of the Company. If requested by the Board of Directors of the Company (the "Board") or the Chairman and so elected by the stockholders of the Company, Executive shall also serve on the Board without additional compensation. Executive shall also serve, if requested by the Board, the Chairman or the President, as an executive officer and director of subsidiaries and a director of associated companies of the Company and shall comply with the policy of the Compensation Committee of the Company's Board (the "Compensation Committee") with regard to retention or forfeiture of the director's fees. (b) Executive shall report to any more senior officer of the Company as designated by the Chairman or the President and, shall have such duties and authority, consistent with his then position as shall be assigned to him from time to time by the Board, the Chairman, the President or such other more senior officer(s) of the Company. (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder; provided, however, that Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial and legal affairs and to serve on corporate, civic, or charitable boards or committees. Notwithstanding the foregoing, the Executive shall only serve on 2 corporate boards of directors if approved in advance by the Board and shall not serve on any corporate board of directors if such service would be inconsistent with his fiduciary responsibilities to the Company, as determined by the Board. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $165,000. Base salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary shall be subject to annual review by the Board or the Compensation Committee (commencing on the first day of the Company's 2001 fiscal year) during the Employment Term and may be increased, but not decreased, from time to time by the Board or the Compensation Committee, except that, prior to a Change in Control, as defined in Section 10 hereof, it may be decreased proportionately in connection with an across the board decrease applying to all senior executives of the Company. The base salary as determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. Incentive Compensation. (a) Bonus. For each fiscal year or portion thereof during the Employment Term, Executive shall, subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), be eligible to participate in an incentive pay plan of the Company that provides an annualized cash target bonus opportunity equal to at least 55% of Base Salary. (b) Equity. Pursuant to a stock option plan satisfying the requirements of Code Section 162(m), the Company shall, after the Commencement Date, recommend to the Compensation Committee that Executive be granted, three separate grants of nonqualified stock options (the "Options") to purchase the number of shares of Common Stock of the Company ("Common Stock") determined for each grant by dividing $220,000 by the fair market value of the Common Stock on the date of grant as determined under the applicable stock option plan (the "Fair Market Value"). It shall be recommended that the first grant of options be made within the fifteen (15) day period following the date "regular way trading" of the Common Stock commences, excluding the period of "when issued trading" ("Regular Way Trading"), the second grant of options be made after the fifteenth (15th) day and before the thirtieth (30th) day following the commencement of Regular Way Trading, and the third grant of options be made after the thirtieth (30th) day and before the forty-fifth (45th) day following the commencement of Regular Way Trading. The Company shall recommend that the Options shall have an exercise price equal to the Fair Market Value. It shall be recommended that the stock option grants shall provide that the Options shall become exercisable with respect to 25% of such Options on each of the first four 3 anniversaries of October 1, 1999, provided that Executive is employed by the Company on such vesting date, and further provided that it shall be recommended that such Options shall fully vest upon a Change in Control, as defined in Section 10 hereof, and that the next tranche vest upon a termination event described in Section 7(a)(i), (ii), (iii) or (iv). (c) Long Term Compensation/SERP Benefits. USI's subsidiary Lighting Corporation of America currently maintains a Long Term Incentive Plan ("LTIP") and a Supplemental Executive Retirement Plan ("SERP"). Upon the Spinoff the Executive's account balance in the LTIP and SERP shall be transferred to similar arrangements with the Company. The Company shall have no obligation to put additional amounts in or provide additional accruals under an LTIP or SERP type plan and may continue them or discontinue them in the judgment of its Compensation Committee or Board, but the Executive shall at all times be fully vested in his transferred account balance benefit accruals thereunder and earnings (if any) thereon. For each fiscal year or portion thereof during the Employment Term, after the Spinoff Date, Executive shall be eligible to participate in any long-term incentive compensation plans or supplemental executive retirement plans made available to vice presidents of the Company. (d) Other Compensation. The Company may, upon recommendation of the Compensation Committee, award to the Executive such other bonuses and compensation as it deems appropriate and reasonable. 5. Employee Benefits and Vacation. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites generally maintained by the Company from time to time for the benefit of vice presidents of the Company in each case in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive) and, except as otherwise determined by the Compensation Committee, the Executive's employment with USI (including its subsidiaries while subsidiaries) or any of its predecessors prior to the Commencement Date (as reflected in USI's books and records) shall be recognized for all purposes under any Company sponsored pension, retirement, savings, welfare and other employee benefit plans or arrangements established within the six (6) month period following the Commencement Date. 4 (b) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than four (4) weeks paid vacation per calendar year. The Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6. Business Expenses. The Company shall reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. Termination. (a) The employment of Executive under this Agreement shall terminate upon the earliest to occur of any of the following events: (i) the death of the Executive; (ii) the termination of the Executive's employment by the Company due to the Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of the Executive's employment by the Company without Cause; (v) the termination of employment by the Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by the Executive with or without Good Reason during the thirty (30) day period commencing one (1) year after a Change in Control (such thirty (30) day period being referred to herein as the "Change in Control Protection Period"), provided that the Executive shall have a right to terminate employment pursuant to this Section 7(a)(vi) and receive the amounts under Section 8(c)(A)(i) and (ii) unless simultaneous with the Change in Control, the Company or the person or entity triggering the Change in 5 Control delivers to the Executive an irrevocable direct pay letter of credit with regard to the amounts under Section 8(c)(A)(i) and (ii) and satisfying the requirements of Section 7(g) hereof; (vii) the termination of the Executive's employment by the Company for Cause pursuant to Section 7(e); (viii) the retirement of the Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits; (b) Disability. If by reason of the same or related physical or mental illness or incapacity, the Executive is unable to carry out his material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period, the Company may terminate Executive's employment for Disability upon thirty (30) days written notice by a Notice of Disability Termination, at any time thereafter during such twelve month period while Executive is unable to carry out his duties as a result of the same or related physical or mental illness or incapacity. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. (c) Termination for Good Reason. A Termination for Good Reason means a termination by Executive by written notice given within ninety (90) days after the occurrence of the Good Reason event, unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof). For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances: (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence); (ii) removal of, or the nonreelection of, the Executive from the officer positions, if any, with the Company specified herein without election to a materially comparable or higher position; (iii) (A) a relocation of the Company's executive office in New Jersey to a location more than both thirty-five (35) miles from Iselin, New Jersey and thirty-five (35) miles from the Executive's residence at the time of relocation or (B) relocation of the Executive's office to a location more than thirty-five (35) miles from the Company's executive offices in New 6 Jersey; (iv) after a Change of Control, a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate immediately prior to the Change of Control (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus as Executive participated in prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any provision of this Agreement, including without limitation Section 12 hereof; (vi) a failure of any successor to assume in a writing delivered to Executive upon the assignee becoming such, the obligations of the Company hereunder; or (vii) a failure of the Company to grant stock options within ninety (90) days after the Commencement Date in an aggregate amount of exercise price (which shall be fair market value at the time of grant) multiplied by number of options of at least $660,000 and, as to other provisions materially in the aggregate no less favorable to the Executive than the recommendations required by Section 4(b) hereof. (d) Notice of Termination for Good Reason. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than ten (10) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given, provided that in the case of the events set forth in Section 7(c)(ii) or (iii) the date may be two (2) days after the giving of such notice. (e) Cause. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business, assets or employees; (ii) the refusal of Executive to follow the proper written direction of the Board or a more senior officer of the Company, provided that the foregoing refusal shall not be "Cause" 7 if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board or the more senior officer (whichever is applicable); (iii) substantial and continuing willful refusal by the Executive to attempt to perform the duties required of him hereunder (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board or a more senior officer of the Company which specifically identifies the manner in which it is believed that the Executive has substantially and continually refused to attempt to perform his duties hereunder; (iv) the Executive being convicted of a felony (other than a felony involving a motor vehicle); (v) the breach by Executive of any material fiduciary duty owed by Executive to the Company; or (vi) Executive's dishonesty, misappropriation or fraud with regard to the Company (other than good faith expense account disputes). (f) Notice of Termination for Cause. A Notice of Termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. The date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a Termination by the Company without Cause. (g) The irrevocable direct pay letter of credit required to be delivered pursuant to Section 7(a)(vi) hereof shall be in amount equal to the amount the Executive would be entitled to under Section 8(c)(A)(i) and (ii) hereof if he were terminated without Cause upon the Change in Control and have an expiration date of no less than two (2) years after the Change in Control. The Executive shall be entitled to draw on the letter of credit upon presentation to the issuing bank of a demand for payment signed by the Executive that states that (i) (A) a Good Reason event has occurred and the Executive would be entitled to payment under Section 8(c) of this Agreement if he elected to terminate employment for Good Reason or (B) one (1) year and not more than one (1) year and thirty (30) days has expired since the Change in Control or (C) the Executive is entitled to payment under Section 8(c) of this Agreement and (ii) assuming the event set forth in (i) entitled him to payment under Section 8(c) of this Agreement, the amount the Company would be indebted to him at the time of presentation under Section 8(c)(A)(i) and (ii) if he then was eligible to receive payments under Section 8(c). There shall be no other requirements (including no requirement that the Executive first makes demand upon the Company or that 8 the Executive actually terminates employment) with regard to payment of the letter of credit. To the extent the letter of credit is not adequate to cover the amount owed to the Executive by the Company under this Agreement, is not submitted by the Executive or is not paid by the issuing bank, the Company shall remain liable to the Executive for the remainder owed the Executive pursuant to the terms of this Agreement. To the extent any amount is paid under the letter of credit it shall be a credit against any amounts the Company then or thereafter would owe to the Executive under Section 8(c) of this Agreement. The letter of credit shall be issued by a national money center bank with a rating of at least A by Standard & Poors Ratings Services. The Company shall bear the cost of the letter of credit. 8. Consequences of Termination of Employment. (a) Death. If Executive's employment is terminated during the Employment Term on or after the Spinoff Date by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including and without limitation, any bonus if declared or earned but not yet paid for a completed fiscal year, any amount of Base Salary earned but unpaid, any accrued vacation pay payable pursuant to the Company's policies, and any unreimbursed business expenses payable pursuant to Section 6 (collectively "Accrued Amounts") which amounts shall be promptly paid in a lump sum to Executive's estate; (ii) the product of (x) the target annual bonus for the fiscal year of the Executive's death, multiplied by (y) a fraction, the numerator of which is the number of days of the current fiscal year during which the Executive was employed by the Company, and the denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives; (iii) subject to Sections 9 and 11, any other amounts or benefits owing to the Executive under the then applicable employee benefit plans, long term incentive plans or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (iv) payment on a monthly basis of three (3) months of Base Salary, which shall be paid to Executive's spouse, or if he is not married to the Executive's estate or if she shall predecease him, then to the Executive's children (or their guardian if one is appointed) in equal shares; and (v) payment of the spouse's and dependent's COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than three (3) years. (b) Disability. If, Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death (other than life insurance benefits), provided that the payment of Base Salary shall be reduced by the 9 projected amount he would receive under any long-term disability policy or program maintained by the Company during the three (3) month period during which Base Salary is being paid. (c) Termination by Executive for Good Reason or for any Reason During the Change in Control Protection Period or Termination by the Company without Cause or Nonextension of the Term by the Company. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) if a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) Executive's employment with the Company is terminated by the Company without Cause or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1(a) hereof, Executive shall be entitled to receive the Accrued Amounts and shall, subject to Sections 9(b) and 11(h) hereof, be entitled to receive, (A) (i) two (2) times Base Salary, to be paid, if such termination is after a Change in Control, in one lump sum within ten (10) days after compliance with Section 9(b) hereof, or otherwise to be paid one (1) times Base Salary in a lump sum and one (1) times Base Salary in twelve (12) equal monthly installments commencing one (1) month after the aforementioned lump sum is paid and (ii) if such termination is after a Change in Control, two (2) times the highest annual bonus paid or, if declared or earned but not yet paid for a completed fiscal year, payable to Executive for any of the previous two (2) completed fiscal years by the Company or USI; (B) any Accrued Amounts at the date of termination; (C) any other amounts or benefits owing to Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (D) if such termination is after a Change in Control, two (2) years of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (E) if such termination is after a Change in Control, two (2) years of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); and (F) payment by the Company of the premiums for the Executive and his dependents' health coverage for two (2) years under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (F) above may at the discretion of the Company be 10 made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his dependents, or by covering Executive and his dependents under substitute arrangements. (d) Termination with Cause or Voluntary Resignation without Good Reason or Retirement. If, Executive's employment hereunder is terminated (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, the Executive shall be entitled to receive only his Base Salary through the date of termination and any unreimbursed business expenses payable pursuant to Section 6 and, if the Executive has retired pursuant to the Company's retirement programs, any bonus that has been declared or earned but not yet paid for a completed fiscal year. All other benefits (including, without limitation, options and the vesting thereof) due Executive following such termination of employment shall be determined in accordance with the Company's plans and programs. 9. (a) No Mitigation; Set-Off. In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Sections 8 and 9 are in the nature of severance payments and are not in the nature of a penalty. Such amounts are inclusive, and in lieu of any, amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. (b) Executive agrees that, as a condition to receiving the payments and benefits provided under Section 8(c) hereunder he will execute, deliver and not revoke (within the time period permitted by applicable law) a release of all claims of any kind whatsoever against the Company, its affiliates, officers, directors, employees, agents and shareholders in the then standard form being used by the Company for senior executives (but without release of right of indemnification hereunder, equity grants, or benefit plans that by their terms are intended to survive termination of his employment). 10. Change in Control. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the 11 Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the Commencement Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets other than (x) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (y) pursuant to a spinoff type transaction, directly or indirectly, of such assets to the stockholders of the Company. In no event shall the Spinoff in and of itself constitute a Change in Control for purposes of this Agreement; provided, however, that the provisions of this Section 10 shall be operative immediately after consummation of the Spinoff. 11. Confidential Information and Non-Solicitation of the Company. (a) (i) Executive acknowledges that as a result of his employment by the Company, Executive will obtain secret and confidential information as to the Company and its affiliates and the Company and its affiliates will suffer substantial damage, which would be difficult to ascertain, if Executive should 12 use such confidential information and that because of the nature of the information that will be known to Executive it is necessary for the Company and its affiliates to be protected by the Confidentiality restrictions set forth herein. (ii) Executive acknowledges that the retention of nonclerical employees employed by the Company and its affiliates in which the Company and its affiliates have invested training and depends on for the operation of their businesses is important to the businesses of the Company and its affiliates, that Executive will obtain unique information as to such employees as an executive of the Company and will develop a unique relationship with such persons as a result of being an executive of the Company and, therefore, it is necessary for the Company and its affiliates to be protected from Executive's Solicitation of such employees as set forth below. (iii) Executive acknowledges that the provisions of this Agreement are reasonable and necessary for the protection of the businesses of the Company and its affiliates and that part of the compensation paid under this Agreement and the agreement to pay severance in certain instances is in consideration for the agreements in this Section 11. (b) Solicitation shall mean: recruiting, soliciting or inducing, of any nonclerical employee or employees of the Company or its affiliates to terminate their employment with, or otherwise cease their relationship with, the Company or its affiliates or hiring or assisting another person or entity to hire any nonclerical employee of the Company or its affiliates or any person who within six (6) months before had been a nonclerical employee of the Company or its affiliates and were recruited or solicited for such employment or other retention while an employee of the Company, provided, however, that solicitation shall not include any of the foregoing activities engaged in with the prior written approval of the Chief Executive Officer of the Company. (c) If any restriction set forth with regard to Solicitation is found by any court of competent jurisdiction, or an arbitrator, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. If any provision of this Section 11 shall be declared to be invalid or unenforceable, in whole or in part, as a result of the foregoing, as a result of public policy or for any other reason, such invalidity shall not affect the remaining provisions of this Section which shall remain in full force and effect. 13 (d) During and after the Employment Term, Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates all secret or confidential information, knowledge or data relating to the Company and its affiliates, and their respective businesses, including any confidential information as to customers of the Company and its affiliates, (i) obtained by Executive during his employment by the Company and its affiliates and (ii) not otherwise public knowledge or known within the applicable industry. Executive shall not, without prior written consent of the Company, unless compelled pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In the event Executive is compelled by order of a court or other governmental or legal body to communicate or divulge any such information, knowledge or data to anyone other than the foregoing, he shall promptly notify the Company of any such order and he shall cooperate fully with the Company in protecting such information to the extent possible under applicable law. (e) Upon termination of his employment with the Company and its affiliates, or at any time as the Company may request, Executive will promptly deliver to the Company, as requested, all documents (whether prepared by the Company, an affiliate, Executive or a third party) relating to the Company, an affiliate or any of their businesses or property which he may possess or have under his direction or control other than documents provided to Executive in his capacity as a participant in any employee benefit plan, policy or program of the Company or any agreement by and between Executive and the Company with regard to Executive's employment or severance. (f) Furthermore, in the event of any termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non-extension of the Employment Term, Executive for two (2) years thereafter will not engage in Solicitation. (g) In the event of a breach or potential breach of this Section 11, Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agree that the Company and its affiliates shall be entitled to injunctive relief (in addition to its other remedies at law) to have the provisions of this Section 11 enforced. It is hereby acknowledged that the provisions of this Section 11 are for the benefit of the Company and all of the 14 affiliates of the Company before and after the Spinoff Date and each such entity may enforce the provisions of this Section 11 and only the applicable entity can waive the rights hereunder with respect to its confidential information and employees. (h) Furthermore, in the event of breach of this Section 11 by Executive, while he is receiving amounts under Section 8(c) hereof, Executive shall not be entitled to receive any future amounts pursuant to Section 8(c) hereof. 12. Indemnification. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, employee or officer of the Company and/or any affiliate of the Company, or is or was serving at the request of any of such companies as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law (or, if other than the Company, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed by the applicable company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by the Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. 15 (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 12 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the applicable company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company agrees to obtain Officer and Director liability insurance policies covering Executive and shall maintain at all times during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than the greater of: (i) the amount of coverage maintained by the Company for the Chairman and Chief Executive Officer of the Company or (ii) $10 million. The Company shall maintain for a six (6) year period commencing on the date the Executive ceased to be an employee of the Company, Officer and Director liability insurance coverage for events occurring during the period the Executive was an employee or director of the Company in the same aggregate amount and under the same terms as are maintained for its active officers and directors. The phrase "in the same aggregate amount and under the same terms" shall include the same level of self-insurance by the Company as shall be maintained for active officers and directors. 16 (i) This Section 12 shall not create or expand any rights to indemnification in favor of Executive with respect to service with USI, the Company or their affiliates prior to the date hereof. 13. Special Tax Provision. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a change in ownership of the Company or a direct or indirect parent thereof after the Spinoff covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income or payroll tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 13 is that (a) the Executive, after paying his Federal, state and local income tax and any payroll taxes on Executive, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 13 and (b) that Executive should never be "out-of-pocket" with respect to any tax or other amount subject to this Section 13, whether payable to any taxing authority or repayable to the Company, and this Section 13 shall be interpreted accordingly. (b) Except as otherwise provided in Section 13(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, 17 (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and the Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state, local income and/or payroll taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income and payroll tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. (d)(i)(A) In the event that prior to the time the Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax 18 Reimbursement Payment was made, the Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by the Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by the Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, the Executive shall file at the request of the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion (less any tax the Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event the Executive receives a refund pursuant to (B) above and repays such amount to the Company, the Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. (D) The Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if the Executive's claim for refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. 19 (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 13, subject to subpart (i)(D) above, the Executive shall permit the Company to control issues related to this Section 13 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany him and the Executive and his representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 13 (other than by mutual agreement) or, if not required, agreed to by the Company and the Executive, the Executive shall cooperate fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of the Executive. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant and any payment made after such fifth (5th) day shall bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant, to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay the Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by the Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. 20 (g) The Company and the Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 13 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 13(d)(i)(D) hereof. 14. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to principles of conflict of laws. (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company or its subsidiaries and Executive with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) Assignment. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only to an acquirer of all or substantially all of the assets of the Company, provided such acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to the Executive and otherwise complies with the provisions hereof with regard to such assumption. This Agreement may be assigned by USI to the Company and upon assumption of the Agreement by the Company, USI shall be released from any further obligations or liabilities hereunder. 21 (e) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. (f) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman and Chief Executive Officer of the Company or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (h) Survivorship. The respective rights and obligations of the parties hereunder, including without limitation Section 12 hereof, shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (i) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. (k) Executive's Representation. The Executive represents and warrants to the Company that there is no legal impediment to him performing his obligations under this Agreement and neither entering into this Agreement nor performing his contemplated service hereunder will violate any agreement to which he is a party or any other legal restriction. 22 (l) Relocation of Executive. Executive shall be relocated in accordance with the terms of the Prescolite Relocation Policy. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. U.S. INDUSTRIES, INC. By: -------------------------------- Name: Title: ----------------------------------- Gary K. Meuchel 23 EX-10 8 EXHIBIT 10.5(F) Exhibit 10.5(f) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of July 1, 1999, by and between, U.S. Industries, Inc., a Delaware corporation, with its principal United States office at 101 Wood Avenue South, Iselin, New Jersey 08830 ("USI"), and Peter F. Reilly, residing at 11 Blackwell Avenue, Morristown, New Jersey 07960 ("Executive"). W I T N E S S E T H: WHEREAS, Executive is currently employed as Treasurer of USI; WHEREAS, USI intends to transfer all or a part of the assets constituting USI's diversified segment (the "Diversified Segment") and other assets of USI (such assets collectively "USI Diversified") to a newly constituted wholly owned subsidiary of USI (the "Company") and to spinoff the Company to the shareholders of USI (a spinoff with John Raos as Chairman and Chief Executive Officer of the Company is referred to herein as the "Spinoff"); WHEREAS, effective on the consummation of the Spinoff (the "Commencement Date"), the Company desires to employ the Executive as Vice President, Chief Financial Officer and Treasurer of the Company and the Executive is willing to serve in such capacities; WHEREAS, USI and the Executive desire to enter into this agreement (the "Agreement") as to the terms of his employment by the Company, under which the Executive's employment shall commence on the Commencement Date and which Agreement will be assigned by USI to the Company upon or prior to consummation of the spinoff, and to embody the terms of Executive's prospective employment by the Company subsequent to the Spinoff. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement shall be for a two-year term (the "Employment Term") commencing on the Commencement Date and ending two (2) years thereafter; provided that if the Executive is not physically or mentally capable of performing the duties set forth in Section 2 herein on the Commencement Date (as reasonably determined by the Company in its sole discretion) this Agreement shall be null and void ab initio. Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive two (2) year periods unless the Company or the Executive gives written notice to the other at least ninety (90) days prior to the expiration of the then current Employment Term of the termination of Executive's employment hereunder at the end of such current Employment Term. Notwithstanding the foregoing, this Agreement shall be null and void if the Spinoff is not consummated by June 30, 2000; provided, however, that this date will be extended to September 30, 2000 if prior to June 30, 2000 USI receives a private letter ruling from the Internal Revenue Service providing that the stock dividends that will occur pursuant to the Spinoff will be a tax-free distribution and providing such other relief and approvals as requested in the ruling. 2. Positions. (a) Executive shall serve as Vice President, Chief Financial Officer and Treasurer of the Company. If requested by the Board of Directors of the Company (the "Board") or the Chairman and so elected by the stockholders of the Company, Executive shall also serve on the Board without additional compensation. Executive shall also serve, if requested by the Board, the Chairman or the President, as an executive officer and director of subsidiaries and a director of associated companies of the Company and shall comply with the policy of the Compensation Committee of the Company's Board (the "Compensation Committee") with regard to retention or forfeiture of the director's fees. (b) Executive shall report to any more senior officer of the Company as designated by the Chairman or the President and, shall have such duties and authority, consistent with his then position as shall be assigned to him from time to time by the Board, the Chairman, the President or such other more senior officer(s) of the Company. (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder; provided, however, that Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial and legal affairs and to serve on corporate, civic, or charitable boards or committees. Notwithstanding the foregoing, the Executive shall only serve on 2 corporate boards of directors if approved in advance by the Board and shall not serve on any corporate board of directors if such service would be inconsistent with his fiduciary responsibilities to the Company, as determined by the Board. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $200,000. Base salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary shall be subject to annual review by the Board or the Compensation Committee (commencing on the first day of the Company's 2001 fiscal year) during the Employment Term and may be increased, but not decreased, from time to time by the Board or the Compensation Committee, except that, prior to a Change in Control, as defined in Section 10 hereof, it may be decreased proportionately in connection with an across the board decrease applying to all senior executives of the Company. The base salary as determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. Incentive Compensation. (a) Bonus. For each fiscal year or portion thereof during the Employment Term, Executive shall, subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), be eligible to participate in an incentive pay plan of the Company that provides an annualized cash target bonus opportunity equal to at least 65% of Base Salary. (b) Equity. (i) Options. Pursuant to a stock option plan satisfying the requirements of Code Section 162(m), the Company shall, after the Commencement Date, recommend to the Compensation Committee that Executive be granted, three separate grants of nonqualified stock options (the "Options") to purchase the number of shares of Common Stock of the Company ("Common Stock") determined for each grant by dividing $366,666.66 by the fair market value of the Common Stock on the date of grant as determined under the applicable stock option plan (the "Fair Market Value"). It shall be recommended that the first grant of options be made within the fifteen (15) day period following the date "regular way trading" of the Common Stock commences, excluding the period of "when issued trading" ("Regular Way Trading"), the second grant of options be made after the fifteenth (15th) day and before the thirtieth (30th) day following the commencement of Regular Way Trading, and the third grant of options be made after the thirtieth (30th) day and before the forty-fifth (45th) day following the commencement of Regular Way Trading. The Company shall recommend that the Options shall have an exercise price equal to the Fair Market Value. It shall be recommended that the stock option grants shall provide that the Options shall become exercisable with respect to 25% of such Options on each of the first four 3 anniversaries of October 1, 1999, provided that Executive is employed by the Company on such vesting date, and further provided that it shall be recommended that such Options shall fully vest upon a Change in Control, as defined in Section 10 hereof, and that the next tranche vest upon a termination event described in Section 7(a)(i), (ii), (iii) or (iv). (ii) Restricted Stock. After the Commencement Date, the Company shall recommend to the Compensation Committee that, on or prior to the ninetieth (90th) business day after the Commencement Date, Executive be granted the number of restricted shares (the "Restricted Stock") of Common Stock (the "Company Restricted Stock") that Donaldson, Lufkin & Jenrette ("DLJ") determines is required to provide the Executive with a Company Restricted Stock award with an aggregate value that is equivalent to the aggregate value of the restricted shares of USI common stock which were forfeited upon Executive ceasing employment with USI (the "Forfeited USI Shares"). For purposes of determining the number of shares of Company Restricted Stock to be granted pursuant to this Section 4(b)(ii) the value of the Forfeited USI Shares shall be based on the closing price of USI common stock reported on the New York Stock Exchange on the day before the Dividend Record Date applicable to holders of USI common stock in connection with the Spinoff and the value of the Common Stock shall be based on the fair market value of the Common Stock as determined by DLJ in a report issued to the Board of Directors of USI in connection with the final approval of the Spinoff. The Company Restricted Stock award shall be subject to such terms and conditions as specified by the Compensation Committee on the date of grant, provided that the Company shall recommend that the Company Restricted Stock vest over a period not to exceed five (5) years. (c) Long Term Compensation/SERP Benefits. USI currently maintains the Long Term Incentive Plan ("LTIP") and the Supplemental Executive Retirement Plan (the "SERP"). Upon the Spinoff the Executive's account balance in the LTIP and benefit accruals under the SERP shall be transferred to similar arrangements with the Company. The Company shall have no obligation to put additional amounts in or provide additional accruals under an LTIP or SERP type plan and may continue them or discontinue them in the judgment of its Compensation Committee or Board, but the Executive shall at all times be fully vested in his transferred account balance benefit accruals thereunder and earnings (if any) thereon. For each fiscal year or portion thereof during the Employment Term, after the Spinoff Date, Executive shall be eligible to participate in any long-term incentive compensation plans or supplemental executive retirement plans made available to senior executives of the Company serving as vice presidents. 4 (d) Other Compensation. The Company may, upon recommendation of the Compensation Committee, award to the Executive such other bonuses and compensation as it deems appropriate and reasonable. 5. Employee Benefits and Vacation. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements and fringe benefits and perquisites generally maintained by the Company from time to time for the benefit of senior executives of the Company serving as vice presidents in each case in accordance with their respective terms as in effect from time to time (other than any special arrangement entered into by contract with an executive) and, except as otherwise determined by the Compensation Committee, the Executive's employment with USI or any of its predecessors prior to the Commencement Date (as reflected in USI's books and records) shall be recognized for all purposes under any Company sponsored pension, retirement, savings, welfare and other employee benefit plans or arrangements established within the six (6) month period following the Commencement Date. (b) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than four (4) weeks paid vacation per calendar year. The Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6. Business Expenses. The Company shall reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. Termination. (a) The employment of Executive under this Agreement shall terminate upon the earliest to occur of any of the following events: (i) the death of the Executive; (ii) the termination of the Executive's employment by the Company due to the Executive's Disability pursuant to Section 7(b) hereof; 5 (iii) the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of the Executive's employment by the Company without Cause; (v) the termination of employment by the Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by the Executive with or without Good Reason during the thirty (30) day period commencing one (1) year after a Change in Control (such thirty (30) day period being referred to herein as the "Change in Control Protection Period"), provided that the Executive shall have a right to terminate employment pursuant to this Section 7(a)(vi) and receive the amounts under Section 8(c)(A)(i) and (ii) unless simultaneous with the Change in Control, the Company or the person or entity triggering the Change in Control delivers to the Executive an irrevocable direct pay letter of credit with regard to the amounts under Section 8(c)(A)(i) and (ii) and satisfying the requirements of Section 7(g) hereof; (vii) the termination of the Executive's employment by the Company for Cause pursuant to Section 7(e); (viii) the retirement of the Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits; (b) Disability. If by reason of the same or related physical or mental illness or incapacity, the Executive is unable to carry out his material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period, the Company may terminate Executive's employment for Disability upon thirty (30) days written notice by a Notice of Disability Termination, at any time thereafter during such twelve month period while Executive is unable to carry out his duties as a result of the same or related physical or mental illness or incapacity. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. 6 (c) Termination for Good Reason. A Termination for Good Reason means a termination by Executive by written notice given within ninety (90) days after the occurrence of the Good Reason event, unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof). For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances: (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence); (ii) removal of, or the nonreelection of, the Executive from the officer positions, if any, with the Company specified herein without election to a materially comparable or higher position (provided, however, removal from the position of Treasurer shall not be a violation of this subsection (ii) or (i) above); (iii) a relocation of the Company's executive office in New Jersey to a location more than both thirty-five (35) miles from Iselin, New Jersey and thirty-five (35) miles from the Executive's residence at the time of relocation or relocation of the Executive's office to a location more than thirty-five (35) miles from the Company's executive office in New Jersey; (iv) after a Change of Control, a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate immediately prior to the Change of Control (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus as Executive participated in prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any provision of this Agreement, including without limitation Section 12 hereof; (vi) a failure of any successor to assume in a writing delivered to Executive upon the assignee becoming such, the obligations of the Company hereunder; or (vii) a failure of the Company to grant stock options within ninety (90) days after the Commencement Date in an aggregate amount of exercise price (which shall be fair market value at the time of grant) multiplied by number of options of at least $1,100,000 and, as to other provisions materially in the aggregate no less favorable to the Executive than the recommendations required by Section 4(b) hereof. 7 (d) Notice of Termination for Good Reason. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than ten (10) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given, provided that in the case of the events set forth in Section 7(c)(ii) or (iii) the date may be two (2) days after the giving of such notice. (e) Cause. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business, assets or employees; (ii) the refusal of Executive to follow the proper written direction of the Board or a more senior officer of the Company, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board or the more senior officer (whichever is applicable); (iii) substantial and continuing willful refusal by the Executive to attempt to perform the duties required of him hereunder (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board or a more senior officer of the Company which specifically identifies the manner in which it is believed that the Executive has substantially and continually refused to attempt to perform his duties hereunder; (iv) the Executive being convicted of a felony (other than a felony involving a motor vehicle); (v) the breach by Executive of any material fiduciary duty owed by Executive to the Company; or (vi) Executive's dishonesty, misappropriation or fraud with regard to the Company (other than good faith expense account disputes). (f) Notice of Termination for Cause. A Notice of Termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. The date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court not to have been based on 8 the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a Termination by the Company without Cause. (g) The irrevocable direct pay letter of credit required to be delivered pursuant to Section 7(a)(vi) hereof shall be in amount equal to the amount the Executive would be entitled to under Section 8(c)(A)(i) and (ii) hereof if he were terminated without Cause upon the Change in Control and have an expiration date of no less than two (2) years after the Change in Control. The Executive shall be entitled to draw on the letter of credit upon presentation to the issuing bank of a demand for payment signed by the Executive that states that (i) (A) a Good Reason event has occurred and the Executive would be entitled to payment under Section 8(c) of this Agreement if he elected to terminate employment for Good Reason or (B) one (1) year and not more than one (1) year and thirty (30) days has expired since the Change in Control or (C) the Executive is entitled to payment under Section 8(c) of this Agreement and (ii) assuming the event set forth in (i) entitled him to payment under Section 8(c) of this Agreement, the amount the Company would be indebted to him at the time of presentation under Section 8(c)(A)(i) and (ii) if he then was eligible to receive payments under Section 8(c). There shall be no other requirements (including no requirement that the Executive first makes demand upon the Company or that the Executive actually terminates employment) with regard to payment of the letter of credit. To the extent the letter of credit is not adequate to cover the amount owed to the Executive by the Company under this Agreement, is not submitted by the Executive or is not paid by the issuing bank, the Company shall remain liable to the Executive for the remainder owed the Executive pursuant to the terms of this Agreement. To the extent any amount is paid under the letter of credit it shall be a credit against any amounts the Company then or thereafter would owe to the Executive under Section 8(c) of this Agreement. The letter of credit shall be issued by a national money center bank with a rating of at least A by Standard & Poor's Ratings Services. The Company shall bear the cost of the letter of credit. 8. Consequences of Termination of Employment. (a) Death. If, Executive's employment is terminated during the Employment Term on or after the Commencement Date by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including and without limitation, any bonus if declared or earned but not yet paid for a completed fiscal year, any amount of Base Salary earned but unpaid, any accrued vacation pay payable pursuant to the Company's policies, and any unreimbursed business expenses payable pursuant to Section 6 (collectively "Accrued Amounts") which amounts 9 shall be promptly paid in a lump sum to Executive's estate; (ii) the product of (x) the target annual bonus for the fiscal year of the Executive's death, multiplied by (y) a fraction, the numerator of which is the number of days of the current fiscal year during which the Executive was employed by the Company, and the denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives; (iii) subject to Sections 9 and 11, any other amounts or benefits owing to the Executive under the then applicable employee benefit plans, long term incentive plans or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (iv) payment on a monthly basis of three (3) months of Base Salary, which shall be paid to Executive's spouse, or if he is not married to the Executive's estate or if she shall predecease him, then to the Executive's children (or their guardian if one is appointed) in equal shares; and (v) payment of the spouse's and dependent's COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than three (3) years. (b) Disability. If, Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death (other than life insurance benefits), provided that the payment of Base Salary shall be reduced by the projected amount he would receive under any long-term disability policy or program maintained by the Company during the three (3) month period during which Base Salary is being paid. (c) Termination by Executive for Good Reason or for any Reason During the Change in Control Protection Period or Termination by the Company without Cause or Nonextension of the Term by the Company. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) if a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) Executive's employment with the Company is terminated by the Company without Cause or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1(a) hereof, Executive shall be entitled to receive the Accrued Amounts and shall, subject to Sections 9(b) and 11(h) hereof, be entitled to receive, (A)(i) two (2) times Base Salary, to be paid, if such termination is after a Change in Control, in one lump sum within ten (10) days after compliance with Section 9(b) hereof, or otherwise to be paid one (1) times Base Salary in a lump sum and one (1) times Base Salary in twelve (12) equal monthly installments commencing one (1) month after the aforementioned lump sum is paid and (ii) if such 10 termination is after a Change in Control, two (2) times the highest annual bonus paid or, if declared or earned but not yet paid for a completed fiscal year, payable to Executive for any of the previous two (2) completed fiscal years by the Company or USI; (B) any Accrued Amounts at the date of termination; (C) any other amounts or benefits owing to Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company which shall be paid in accordance with such plans and programs; (D) if such termination is after a Change in Control, two (2) years of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (E) if such termination is after a Change in Control, two (2) years of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); and (F) payment by the Company of the premiums for the Executive and his dependents' health coverage for two (2) years under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (F) above may at the discretion of the Company be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his dependents, or by covering Executive and his dependents under substitute arrangements. (d) Termination with Cause or Voluntary Resignation without Good Reason or Retirement. If, Executive's employment hereunder is terminated (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, the Executive shall be entitled to receive only his Base Salary through the date of termination and any unreimbursed business expenses payable pursuant to Section 6 and, if the Executive has retired pursuant to the Company's retirement programs, any bonus that has been declared or earned but not yet paid for a completed fiscal year. All other benefits (including, without limitation, options and the vesting thereof) due Executive following such termination of employment shall be determined in accordance with the Company's plans and programs. 9. (a) No Mitigation; Set-Off. In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under 11 this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Sections 8 and 9 are in the nature of severance payments and are not in the nature of a penalty. Such amounts are inclusive, and in lieu of any, amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. (b) Executive agrees that, as a condition to receiving the payments and benefits provided under Section 8(c) hereunder he will execute, deliver and not revoke (within the time period permitted by applicable law) a release of all claims of any kind whatsoever against the Company, its affiliates, officers, directors, employees, agents and shareholders in the then standard form being used by the Company for senior executives (but without release of right of indemnification hereunder, equity grants, or benefit plans that by their terms are intended to survive termination of his employment). 10. Change in Control. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the Commencement Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation 12 effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the sale or disposition by the Company of all or substantially all of the Company's assets other than (x) the sale or disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or (y) pursuant to a spinoff type transaction, directly or indirectly, of such assets to the stockholders of the Company. In no event shall the Spinoff in and of itself constitute a Change in Control for purposes of this Agreement; provided, however, that the provisions of this Section 10 shall be operative immediately after consummation of the Spinoff. 11. Confidential Information and Non-Solicitation of the Company. (a) (i) Executive acknowledges that as a result of his employment by the Company, Executive will obtain secret and confidential information as to the Company and its affiliates and the Company and its affiliates will suffer substantial damage, which would be difficult to ascertain, if Executive should use such confidential information other than in the performance of his duties hereunder and that because of the nature of the information that will be known to Executive it is necessary for the Company and its affiliates to be protected by the Confidentiality restrictions set forth herein. (ii) Executive acknowledges that the retention of nonclerical employees employed by the Company and its affiliates in which the Company and its affiliates have invested training and depends on for the operation of their businesses is important to the businesses of the Company and its affiliates, that Executive will obtain unique information as to such employees as an executive of the Company and will develop a unique relationship with such persons as a result of being an executive of the Company and, therefore, it is necessary for the Company and its affiliates to be protected from Executive's Solicitation of such employees as set forth below. (iii) Executive acknowledges that the provisions of this Agreement are reasonable and necessary for the protection of the businesses of the Company and its affiliates and that part of the compensation paid under this Agreement and the agreement to pay severance in certain instances is in consideration for the agreements in this Section 11. 13 (b) Solicitation shall mean: recruiting, soliciting or inducing, of any nonclerical employee or employees of the Company or its affiliates to terminate their employment with, or otherwise cease their relationship with, the Company or its affiliates or hiring or assisting another person or entity to hire any nonclerical employee of the Company or its affiliates or any person who within six (6) months before had been a nonclerical employee of the Company or its affiliates and were recruited or solicited for such employment or other retention while an employee of the Company, provided, however, that solicitation shall not include any of the foregoing activities engaged in with the prior written approval of the Chief Executive Officer of the Company. (c) If any restriction set forth with regard to Solicitation is found by any court of competent jurisdiction, or an arbitrator, to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or geographic area as to which it may be enforceable. If any provision of this Section 11 shall be declared to be invalid or unenforceable, in whole or in part, as a result of the foregoing, as a result of public policy or for any other reason, such invalidity shall not affect the remaining provisions of this Section which shall remain in full force and effect. (d) During and after the Employment Term, Executive shall hold in a fiduciary capacity for the benefit of the Company and its affiliates all secret or confidential information, knowledge or data relating to the Company and its affiliates, and their respective businesses, including any confidential information as to customers of the Company and its affiliates, (i) obtained by Executive during his employment by the Company and its affiliates and (ii) not otherwise public knowledge or known within the applicable industry. Executive shall not, without prior written consent of the Company, unless compelled pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In the event Executive is compelled by order of a court or other governmental or legal body to communicate or divulge any such information, knowledge or data to anyone other than the foregoing, he shall promptly notify the Company of any such order and he shall cooperate fully with the Company in protecting such information to the extent possible under applicable law. The Company shall reimburse the Executive for his reasonable expenses, if any, incurred in connection with such cooperation. 14 (e) Upon termination of his employment with the Company and its affiliates, or at any time as the Company may request, Executive will promptly deliver to the Company, as requested, all documents (whether prepared by the Company, an affiliate, Executive or a third party) relating to the Company, an affiliate or any of their businesses or property which he may possess or have under his direction or control other than documents provided to Executive in his capacity as a participant in any employee benefit plan, policy or program of the Company or any agreement by and between Executive and the Company with regard to Executive's employment or severance. (f) Furthermore, in the event of any termination of Executive's employment for any reason whatsoever, whether by the Company or by Executive and whether or not for Cause, Good Reason or non-extension of the Employment Term, Executive for two (2) years thereafter will not engage in Solicitation. (g) In the event of a breach or potential breach of this Section 11, Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agree that the Company and its affiliates shall be entitled to injunctive relief (in addition to its other remedies at law) to have the provisions of this Section 11 enforced. It is hereby acknowledged that the provisions of this Section 11 are for the benefit of the Company and all of the affiliates of the Company before and after the Spinoff Date and each such entity may enforce the provisions of this Section 11 and only the applicable entity can waive the rights hereunder with respect to its confidential information and employees. (h) Furthermore, in the event of breach of this Section 11 by Executive, while he is receiving amounts under Section 8(c) hereof, Executive shall not be entitled to receive any future amounts pursuant to Section 8(c) hereof. 12. Indemnification. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, employee or officer of the Company and/or any affiliate of the Company, or is or was serving at the request of any of such companies as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as 15 a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law (or, if other than the Company, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed by the applicable company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by the Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner 16 which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 12 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the applicable company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company agrees to obtain Officer and Director liability insurance policies covering Executive and shall maintain at all times during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than the greater of: (i) the amount of coverage maintained by the Company for the Chairman and Chief Executive Officer of the Company or (ii) $10 million. The Company shall maintain for a six (6) year period commencing on the date the Executive ceased to be an employee of the Company, Officer and Director liability insurance coverage for events occurring during the period the Executive was an employee or director of the Company in the same aggregate amount and under the same terms as are maintained for its active officers and directors. The phrase "in the same aggregate amount and under the same terms" shall include the same level of self-insurance by the Company as shall be maintained for active officers and directors. (i) This Section 12 shall not create or expand any rights to indemnification in favor of Executive with respect to service with USI, the Company or their affiliates prior to the date hereof. 13. Special Tax Provision. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a change in ownership of the Company or a direct or indirect parent thereof after the Spinoff covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such 17 excise tax (such excise tax, together with such interest and penalties, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income or payroll tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 13 is that (a) the Executive, after paying his Federal, state and local income tax and any payroll taxes on Executive, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 13 and (b) that Executive should never be "out-of-pocket" with respect to any tax or other amount subject to this Section 13, whether payable to any taxing authority or repayable to the Company, and this Section 13 shall be interpreted accordingly. (b) Except as otherwise provided in Section 13(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and the Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" 18 allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state, local income and/or payroll taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income and payroll tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. (d)(i)(A) In the event that prior to the time the Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, the Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by the Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by the Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 19 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, the Executive shall file at the request of the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion (less any tax the Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event the Executive receives a refund pursuant to (B) above and repays such amount to the Company, the Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. (D) The Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if the Executive's claim for refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 13, subject to subpart (i)(D) above, the Executive shall permit the Company to control issues related to this Section 13 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany him and the Executive and his representative shall cooperate with the Company and its representative. 20 (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 13 (other than by mutual agreement) or, if not required, agreed to by the Company and the Executive, the Executive shall cooperate fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of the Executive. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant and any payment made after such fifth (5th) day shall bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant, to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay the Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by the Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. (g) The Company and the Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 13 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 13(d)(i)(D) hereof. 14. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to principles of conflict of laws. (b) Entire Agreement/Amendments. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement 21 Date and supersedes any prior agreements between the Company and the Executive with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be. (d) Assignment. This Agreement shall not be assignable by the Executive. This Agreement shall be assignable by the Company only to an acquirer of all or substantially all of the assets of the Company, provided such acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to the Executive and otherwise complies with the provisions hereof with regard to such assumption. This Agreement may be assigned by USI to the Company and upon assumption of the Agreement by the Company, USI shall be released from any further obligations or liabilities hereunder. (e) Successors; Binding Agreement; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. (f) Communications. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Senior Vice President, General Counsel and Secretary of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. 22 (g) Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (h) Survivorship. The respective rights and obligations of the parties hereunder, including without limitation Section 12 hereof, shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (i) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. (k) Executive's Representation. The Executive represents and warrants to the Company that there is no legal impediment to him performing his obligations under this Agreement and neither entering into this Agreement nor performing his contemplated service hereunder will violate any agreement to which he is a party or any other legal restriction. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. U.S. INDUSTRIES, INC. By: ----------------------------- Name: Title: ----------------------------------- Peter F. Reilly 23 -----END PRIVACY-ENHANCED MESSAGE-----