UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file numbers: United Stationers Inc.: 0-10653
United Stationers Supply Co.: 33-59811
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
(Exact name of registrant as specified in its charter)
United Stationers Inc.: Delaware United Stationers Inc.: 36-3141189
United Stationers Supply Co.: Illinois United Stationers Supply Co.: 36-2431718
- -------------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 East Golf Road, Des Plaines, Illinois 60016-1267
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 699-5000
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
United Stationers Inc.: Yes (X) No ( )
United Stationers Supply Co.: Yes (X) No ( )
On May 11, 2001, United Stationers Inc. had outstanding 33,325,571 shares of
Common Stock, par value $0.10 per share. On May 11, 2001, United Stationers
Supply Co. had 880,000 shares of Common Stock, $1.00 par value per share,
outstanding; United Stationers Inc. owns 100% of these shares.
UNITED STATIONERS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PAGE
PART I -- FINANCIAL INFORMATION
IMPORTANT EXPLANATORY NOTE 1
Independent Accountants' Review Report 2
Condensed Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income
for the Three Months ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II -- OTHER INFORMATION 24
SIGNATURE 25
INDEX TO EXHIBITS 26
UNITED STATIONERS INC. AND SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPORTANT EXPLANATORY NOTE
THIS INTEGRATED FORM 10-Q IS FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, FOR EACH OF UNITED STATIONERS INC. ("UNITED"), A DELAWARE
CORPORATION, AND ITS WHOLLY OWNED SUBSIDIARY, UNITED STATIONERS SUPPLY CO.
("USSC"), AN ILLINOIS CORPORATION (COLLECTIVELY, THE "COMPANY"). UNITED
STATIONERS INC. IS A HOLDING COMPANY WITH NO OPERATIONS SEPARATE FROM ITS
OPERATING SUBSIDIARY, UNITED STATIONERS SUPPLY CO. AND ITS SUBSIDIARIES. NO
SEPARATE FINANCIAL INFORMATION FOR UNITED STATIONERS SUPPLY CO. AND ITS
SUBSIDIARIES HAS BEEN PROVIDED HEREIN BECAUSE MANAGEMENT FOR THE COMPANY
BELIEVES SUCH INFORMATION WOULD NOT BE MEANINGFUL BECAUSE (i) UNITED STATIONERS
SUPPLY CO. IS THE ONLY DIRECT SUBSIDIARY OF UNITED STATIONERS INC., WHICH HAS NO
OPERATIONS OTHER THAN THOSE OF UNITED STATIONERS SUPPLY CO. AND (ii) ALL ASSETS
AND LIABILITIES OF UNITED STATIONERS INC. ARE RECORDED ON THE BOOKS OF UNITED
STATIONERS SUPPLY CO. THERE IS NO MATERIAL DIFFERENCE BETWEEN UNITED STATIONERS
INC. AND UNITED STATIONERS SUPPLY CO. FOR THE DISCLOSURE REQUIRED BY THE
INSTRUCTIONS TO FORM 10-Q AND THEREFORE, UNLESS OTHERWISE INDICATED, THE
RESPONSES SET FORTH HEREIN APPLY TO EACH OF UNITED STATIONERS INC. AND UNITED
STATIONERS SUPPLY CO.
- 1 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
United Stationers Inc.
We have reviewed the accompanying condensed consolidated balance sheet of United
Stationers Inc. and Subsidiaries as of March 31, 2001, and the related condensed
consolidated statements of income for the three month periods ended March 31,
2001 and 2000, and the condensed consolidated statements of cash flows for the
three month periods ended March 31, 2001 and 2000. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of United
Stationers Inc. as of December 31, 2000, and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for the year then
ended (not presented herein) and in our report dated January 26, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/Ernst & Young LLP
Chicago, Illinois
April 23, 2001
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UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited) (Audited)
As of March 31, As of December 31,
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 31,225 $ 19,784
Accounts receivable, net 303,591 329,934
Inventories 635,129 688,926
Other current assets 23,264 15,843
---------- ----------
Total current assets 993,209 1,054,487
Property, plant and equipment, net 195,906 189,787
Goodwill, net 195,156 181,923
Other 22,205 20,830
---------- ----------
Total assets $1,406,476 $1,447,027
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 363,762 $ 392,789
Accrued liabilities 129,390 125,969
Current maturities of long-term debt 42,287 40,273
---------- ----------
Total current liabilities 535,439 559,031
Deferred income taxes 23,141 22,703
Long-term obligations 353,425 386,854
---------- ----------
Total liabilities 912,005 968,588
Stockholders' equity:
Common stock, $0.10 par value, authorized 100,000,000 shares,
issued 37,213,207 shares in 2001 and 2000 3,721 3,721
Additional paid-in capital 302,975 302,837
Treasury stock, at cost -- 3,918,558 shares in 2001 and
3,170,699 shares in 2000 (70,689) (66,832)
Retained earnings 262,042 240,429
Accumulated translation adjustment (3,578) (1,716)
---------- ----------
Total stockholders' equity 494,471 478,439
---------- ----------
Total liabilities and stockholders' equity $1,406,476 $1,447,027
========== ==========
See notes to condensed consolidated financial statements.
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UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2001 2000
---------- ----------
Net sales $1,059,842 $ 994,883
Cost of goods sold 893,719 836,753
---------- ----------
Gross profit 166,123 158,130
Operating expenses:
Warehousing, marketing and administrative expenses 119,742 107,726
---------- ----------
Income from operations 46,381 50,404
Interest expense 8,055 7,414
Other expense 2,484 2,646
---------- ----------
Income before income taxes 35,842 40,344
Income taxes 14,229 16,420
---------- ----------
Net income $ 21,613 $ 23,924
---------- ----------
Net income per common share:
Net income per share $ 0.65 $ 0.70
========== ==========
Average number of common shares outstanding (in thousands) 33,331 34,019
Net income per common share-assuming dilution:
Net income per share $ 0.64 $ 0.69
========== ==========
Average number of common shares outstanding (in thousands) 33,600 34,751
See notes to condensed consolidated financial statements.
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UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2001 2000
-------- --------
Cash Flows From Operating Activities:
Net income $ 21,613 $ 23,924
Depreciation and amortization 8,834 7,598
Amortization of capitalized financing costs 420 492
Changes in operating assets and liabilities 61,334 14,100
-------- --------
Net cash provided by operating activities 92,201 46,114
Cash Flows From Investing Activities:
Capital expenditures (11,392) (7,163)
Acquisition of Peerless Paper Mills, Inc. (32,442) --
Other 8 --
-------- --------
Net cash used in investing activities (43,826) (7,163)
Cash Flows From Financing Activities:
Retirements and principal payments on debt (8,900) (1,705)
Net repayments under revolver (23,000) (28,000)
Issuance of common stock -- 648
Issuance of treasury stock 403 --
Payment of employee withholding tax related to
stock option exercises (16) (419)
Acquisition of treasury stock, at cost (4,124) --
Other (1,297) 361
-------- --------
Net cash used in financing activities (36,934) (29,115)
-------- --------
Net change in cash and cash equivalents 11,441 9,836
Cash and cash equivalents, beginning of period 19,784 18,993
-------- --------
Cash and cash equivalents, end of period $ 31,225 $ 28,829
======== ========
Other Cash Flow Information:
Income taxes paid $ 1,260 $ 2,101
Interest paid 6,414 2,695
Discount on the sale of accounts receivable 2,434 2,540
See notes to condensed consolidated financial statements.
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UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited,
except for the Consolidated Balance Sheet as of December 31, 2000. These
financial statements have been prepared in accordance with the rules and
regulations of the United States Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. Accordingly, the reader of this Form 10-Q should refer to the
Company's Form 10-K for the year ended December 31, 2000 for further
information. In the opinion of the Company's management, the condensed
consolidated financial statements for the unaudited interim periods presented
include all adjustments necessary to fairly present the results of such interim
periods and the financial position as of the end of said periods. Certain
interim expense and inventory estimates are recognized throughout the year
relating to income tax rates, shrinkage, price changes and product mix. Any
refinements to these estimates based on actual experience are recorded when
known.
RECLASSIFICATION
Certain amounts from prior periods have been reclassified to conform to the 2001
presentation. During the fourth quarter of 2000, the Company reclassified
freight revenue from "Cost of Goods Sold" and "Operating Expense" to "Net Sales"
in compliance with FASB Emerging Issues Task Force ("EITF") Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10, requires
that shipping and handling fees billed to a customer in a sale transaction
represent revenues earned for the goods provided and should be classified as
revenue. The following table sets forth the impact of the reclassification for
the first quarter ended March 31, 2000 presented in the Consolidated Statements
of Income:
% to
For the Three Months Ended March 31, 2000 Net Sales
- ------------------------------------ ---- ---------
Before Freight Revenue Reclassification:
Net sales $979,358 100.0%
========
Gross margin $157,792 16.1%
Operating expenses 107,388 11.0%
--------
Income from operations $ 50,404 5.1%
========
After Freight Revenue Reclassification:
Net sales $994,883 100.0%
========
Gross margin $158,130 15.9%
Operating expenses 107,726 10.8%
--------
Income from operations $ 50,404 5.1%
========
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UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. OPERATIONS
The Company operates in a single segment as the nation's largest wholesale
distributor of business products in North America. The Company offers
approximately 40,000 items from more than 500 manufacturers. This includes a
broad spectrum of office products, computer supplies, office furniture, business
machines, audio-visual products and facilities management supplies. The Company
primarily serves commercial and contract office products dealers. Its customers
include more than 20,000 resellers -- such as office products dealers,
mega-dealers, office furniture dealers, office products superstores and mass
merchandisers, mail order companies, computer products resellers, sanitary
supply distributors and e-commerce dealers. For the three months ended March 31,
2001, no single customer accounted for more than 9% of the Company's net sales.
For the three months ended March 31, 2001, U.S. Office Products Co. was the
Company's largest customer accounting for approximately 8% of the Company's net
sales. Through its integrated mainframe systems, the Company provides a high
level of customer service and overnight delivery utilizing a distribution
network of 73 distribution centers within the United States, three distribution
centers that serve the Canadian marketplace, and a state-of-the-art distribution
and service center in Memphis, Tennessee dedicated to serving clients of THE
ORDER PEOPLE ("TOP"). In addition, TOP has leased distribution centers in
Harrisburg, Pennsylvania and in Reno, Nevada.
During 2000, the Company established THE ORDER PEOPLE ("TOP") to operate as its
third-party fulfillment provider for product categories beyond office products.
TOP offers a full set of services specifically designed to support a wide
variety of third-party service needs. By combining the Company's
state-of-the-art distribution network with a multi-channel Customer Relationship
Management (CRM) capability, clients have the ability to custom design their
order fulfillment experience and then monitor and measure consumer satisfaction.
The Company has extensive experience and the ability to pick, pack, ship and
track products with a wide range of physical attributes. TOP enables the Company
to leverage these core competencies in a broader context for third-party
logistics and fulfillment.
Acquisition of Peerless Paper Mills, Inc.
On January 5, 2001, the Company's subsidiary Lagasse, Inc. ("Lagasse") acquired
all of the capital stock of Peerless Paper Mills, Inc. ("Peerless"). Peerless is
a wholesale distributor of janitorial/sanitation, paper, and food service
products. A Certificate of Dissolution was filed with the Commonwealth of
Pennsylvania to dissolve Peerless as of January 5, 2001. Upon its dissolution,
Peerless was merged into Lagasse. The purchase price of approximately $32.4
million was financed through the Company's Senior Credit Facility. This
acquisition will enable the Company to expand the Lagasse product line, enhance
scale and infrastructure, and add experienced management to the Lagasse
operation. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed, based upon the estimated fair values at
the date of acquisition. The excess of cost over fair value of approximately
$15.2 million was allocated to goodwill. The pro forma effects of the
acquisition were not material.
- 7 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquisition of CallCenter Services, Inc.
On July 1, 2000, the Company acquired all of the capital stock of CallCenter
Services, Inc. from Corporate Express, a Buhrmann Company. The purchase price of
approximately $10.7 million was financed through the Company's Senior Credit
Facility. CallCenter Services is a customer relationship management outsourcing
service company. It has two inbound call centers, in Wilkes-Barre, Pennsylvania
and Salisbury, Maryland, with a total of up to 1,000 seats. This acquisition
complements the third-party fulfillment business of TOP. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets purchased and the liabilities
assumed, based upon the estimated fair values at the date of acquisition. The
excess of cost over fair value of approximately $3.1 million was allocated to
goodwill. The pro forma effects of the acquisition were not material.
Acquisition of Azerty Canada
On July 5, 2000, the Company completed the acquisition of the net assets of
Azerty Canada from MCSi, Inc. The purchase price of approximately $33.6 million
(U.S. dollars) was financed through the Company's Senior Credit Facility. Azerty
Canada is a specialty wholesale distributor of computer consumables, peripherals
and accessories. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed, based upon the estimated fair values at
the date of acquisition. The excess of cost over fair value of approximately
$11.8 million was allocated to goodwill. The pro forma effects of the
acquisition were not material.
3. STOCK REPURCHASE PROGRAM
On October 23, 2000, the Company's Board of Directors authorized a repurchase of
up to $50.0 million of its common stock. On an opportunistic basis, purchases
will be made from time-to-time in the open market or in privately negotiated
transactions. As of March 31, 2001, under this authorization, the Company has
purchased 1,024,600 shares of common stock at a cost of approximately $26.6
million.
4. COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income (dollars
in thousands):
For the Three Months Ended
March 31,
--------------------------
2001 2000
------- ------
Net income $21,613 23,924
Unrealized currency translation adjustment (1,862) 361
------- ------
Comprehensive income $19,751 $24,285
======= =======
- 8 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that could occur if dilutive securities were
exercised into common stock. Stock options are considered dilutive securities.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
For the Three Months Ended
March 31,
--------------------------
2001 2000
------- -------
NUMERATOR:
Net income $21,613 $23,924
======= =======
DENOMINATOR (in thousands):
Denominator for basic earnings per share --
Weighted average shares 33,331 34,019
Effect of dilutive securities:
Employee stock options 269 732
------- -------
Denominator for diluted earnings per share --
Adjusted weighted average shares
and assumed conversions 33,600 34,751
======= =======
Earnings per common share:
Basic -- Net income per share $ 0.65 $ 0.70
======= =======
Diluted -- Net income per share $ 0.64 $0 .69
======= =======
- 9 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. LONG-TERM DEBT
Long-term debt consisted of the following amounts (dollars in thousands):
As of As of
March 31, December 31,
2001 2000
--------- ---------
Revolver $ 75,000 $ 98,000
Tranche A term loan, due in installments until March 31, 2004 41,718 44,325
Tranche A-1 term loan, due in installments until September 30, 2005 131,250 137,500
8.375% Senior Subordinated Notes, due April 15, 2008 100,000 100,000
Industrial development bonds, at market interest rates,
maturing at various dates through 2011 14,300 14,300
Industrial development bonds, at 66% to 78% of prime,
maturing at various dates through 2004 15,500 15,500
Other long-term debt 599 242
--------- ---------
Subtotal 378,367 409,867
Less -- current maturities (42,287) (40,273)
--------- ---------
Total $ 336,080 $ 369,594
========= =========
The prevailing prime interest rate at March 31, 2001 and December 31, 2000 was
8.0% and 9.5%, respectively.
On June 30, 2000, the Company entered into the Third Amended and Restated
Revolving Credit and Term Loan Agreement (the "Credit Agreement"). The Credit
Agreement, among other things, provides for an additional $150.0 million, five
year term loan facility (the "Tranche A-1 Facility").
As of March 31, 2001, the available credit under the Credit Agreement included
$173.0 million of term loan borrowings (the "Term Loan Facilities") and up to
$250.0 million of revolving loan borrowings (the "Revolving Credit Facility").
As of March 31, 2001, the Term Loan Facilities consist of a $41.7 million
Tranche A term loan facility (the "Tranche A Facility") and a $131.3 million
Tranche A-1 Facility. Amounts outstanding under the Tranche A Facility are to be
repaid in 12 quarterly installments ranging from $3.1 million at June 30, 2001
to $3.7 million at March 31, 2004. Amounts outstanding under the Tranche A-1
Facility are to be repaid in 17 quarterly installments ranging from $6.3 million
at June 30, 2001 to $7.8 million at June 30, 2005.
The Revolving Credit Facility is limited to $250.0 million, less the aggregate
amount of letter of credit liabilities, and contains a provision for swingline
loans in an aggregate amount up to $25.0 million. The Revolving Credit Facility
matures on March 31, 2004. The Company had $75.0 million outstanding under the
Revolving Credit Facility at March 31, 2001.
- 10 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Term Loan Facilities and the Revolving Credit Facility are secured by first
priority pledges of the stock of USSC, all of the stock of domestic direct and
indirect subsidiaries of USSC, the stock of Lagasse and Azerty Incorporated
("Azerty") and certain of the foreign and direct and indirect subsidiaries of
USSC (excluding USS Receivables Company, Ltd.) and security interests and liens
upon all accounts receivable, inventory, contract rights and certain real
property of USSC and its domestic subsidiaries other than accounts receivables
sold in connection with the Receivables Securitization Program.
The loans outstanding under the Term Loan Facilities and the Revolving Credit
Facility bear interest as determined within a pricing matrix. The interest rate
is based on the ratio of total debt to earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), excluding the EBITDA of TOP. The
Tranche A Facility and Revolving Credit Facility bear interest at the prime rate
plus 0% to 1.00%, or, at the Company's option, the London Interbank Offered
Rate ("LIBOR") plus 1.25% to 2.25%. The Tranche A-1 Facility bears interest
at the prime rate plus 0.25% to 1.25%, or, at the Company's option, LIBOR
plus 1.50% to 2.50%.
The Credit Agreement contains representations and warranties, affirmative and
negative covenants, and events of default customary for financing of this type.
At March 31, 2001, the Company was in compliance with all covenants contained in
the Credit Agreement.
The right of United to participate in any distribution of earnings or assets of
USSC is subject to the prior claims of the creditors of USSC. In addition, the
Credit Agreement contains certain restrictive covenants, including covenants
that restrict or prohibit USSC's ability to pay cash dividends and make other
distributions to United.
Management believes that the Company's cash on hand, anticipated funds generated
from operations and borrowings available under the Credit Agreement, will be
sufficient to meet the short-term (fewer than 12 months) and long-term operating
and capital needs of the Company, as well as to service its debt in accordance
with its terms. There is, however, no assurance that this will be accomplished.
United is a holding company and, as a result, its primary source of funds is
cash generated from operating activities of its operating subsidiary, USSC, and
bank borrowings by USSC. The Credit Agreement and the indentures governing the
Notes contain restrictions on the ability of USSC to transfer cash to United.
8.375% Senior Subordinated Notes:
The 8.375% Senior Subordinated Notes (the "8.375% Notes") were issued on April
15, 1998, pursuant to the 8.375% Notes Indenture. As of March 31, 2001, the
aggregate outstanding principal amount of 8.375% Notes was $100.0 million. The
8.375% Notes are unsecured senior subordinated obligations of USSC, and payment
of the 8.375% Notes is fully and unconditionally guaranteed by the Company and
USSC's domestic "restricted" subsidiaries that incur indebtedness (as defined in
the 8.375% Notes Indenture) on a senior subordinated basis. The 8.375% Notes
mature on April 15, 2008, and bear interest at the rate of 8.375% per annum,
payable semi-annually on April 15 and October 15 of each year.
- 11 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.75% Senior Subordinated Notes
The 12.75% Senior Subordinated Notes ("12.75% Notes") were originally issued on
May 3, 1995, under the 12.75% Notes Indenture. On May 2, 2000, the Company
redeemed the remaining $100.0 million of its 12.75% Senior Subordinated Notes
(the "12.75% Notes"). The 12.75% Notes were redeemed at the redemption price of
106.375% of the principal amount plus accrued interest. As a result, the Company
recognized an extraordinary loss on the early retirement of debt of
approximately $10.7 million ($6.5 million net of tax benefit of $4.2 million).
This charge included the write-off of approximately $4.3 million ($2.6 million
net of tax benefit of $1.7 million) of capitalized costs. The redemption was
funded through the Company's Revolving Credit Facility.
7. ACCOUNTS RECEIVABLE
In connection with the Company's $163.0 million Receivables Securitization
Program the Company sells, on a revolving basis, its eligible accounts
receivable (except for certain excluded accounts receivable, which initially
includes all accounts receivable from Azerty and Lagasse) to the USS Receivables
Company, a wholly owned offshore, bankruptcy-remote special purpose limited
liability company. This company in turn ultimately transfers the eligible
accounts receivable to a third-party, multi-seller asset-backed commercial paper
program, existing solely for the purpose of issuing commercial paper rated
A-1/P-1 or higher. The sale of trade accounts receivable includes not only those
eligible receivables that existed on the closing date of the Receivables
Securitization Program, but also eligible accounts receivable created
thereafter. Affiliates of PNC Bank and Chase Manhattan Bank act as funding
agents. The funding agents, together with other commercial banks rated at least
A-1/P-1, provide standby liquidity funding to support the purchase of the
accounts receivable by the Receivables Company under 364-day liquidity
facilities.
The Receivables Securitization Program is accounted for as a sale in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Accounts receivable sold under these arrangements are excluded
from accounts receivable in the Condensed Consolidated Balance Sheet. As of
March 31, 2001 and 2000, the Company had sold $152.0 million and $160.0 million,
respectively, of accounts receivable through the Receivables Securitization
Program. The annual interest rate on the certificates issued under the
Receivables Securitization Program during the three months ended March 31, 2001
and 2000 ranged between 5.5% and 6.5% and 5.9% and 6.1%, respectively. The
Company's retained interest in the receivables in the master trust as of March
31, 2001 and 2000, was approximately $98.7 million and $101.0 million,
respectively. This retained interest, which is included in the accounts
receivable balance reflected in the Condensed Consolidated Balance Sheets, is
recorded at fair value. Due to a short average collection cycle for such
accounts receivable of approximately thirty-five days and the Company's
collection history, the fair value of the Company's retained interest
approximates book value. Losses recognized on the sale of accounts receivable
totaled approximately $2.5 million and $2.6 million for the three months ended
March 31, 2001 and 2000, respectively. These costs vary on a monthly basis and
generally are related to certain short-term interest rates. These costs are
included in the Condensed Consolidated Statements of Income under the caption
Other Expense. For the three months ended March 31, 2001 and 2000, as a result
of the short average collection cycle referenced above, proceeds from the
collection under this revolving agreement were approximately $730.8 million and
$780.7 million, respectively. The Company has retained the responsibility for
servicing accounts receivable transferred to the master trust. No servicing
asset or liability has been recorded because the fees the Company receives for
servicing the receivables approximate the related costs. Accounts receivable
sold to the master trust that were written off during the three months ended
March 31, 2001 or 2000 were immaterial.
- 12 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Statement
No. 140 replaces the earlier Statement No. 125 in its entirety. While the new
statement revises certain accounting guidance for transfers of financial assets,
most of the provisions of Statement No. 125 have been carried over without
reconsideration. Statement No. 140 is effective for transfers and servicing of
financial assets occurring after March 31, 2001, but requires certain
disclosures relating to securitizations for fiscal years ending after December
15, 2000. The accounting provisions of Statement No. 140 will not impact the
Company's Consolidated Financial Statements.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" issued by the Financial Accounting Standards
Board. SFAS No. 133, as amended by SFAS Nos. 137 and 138, establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
on the balance sheet. The statement also requires changes in the fair value of
the derivative instruments to be recorded in either net earnings or other
comprehensive income depending on their intended use. The adoption of SFAS Nos.
133 and 138 did not have a material impact on the Company's Consolidated
Financial Statements.
9. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following table presents condensed consolidating financial information for
the guarantors of the 8.375% Notes issued by USSC. Payment of the 8.375% Notes
is fully and unconditionally guaranteed by the Company and USSC's domestic
"restricted" subsidiaries (as defined in the 8.375% Notes Indenture). The
following condensed consolidating financial information has been prepared using
the equity method of accounting in accordance with the requirements for
presentation of this information.
- 13 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statements of Income
(dollars in thousands)
United
United Stationers Subsidiary
Stationers Inc. Supply Co. Subsidiary Non-
(Parent) (Issuer) Guarantors Guarantors Eliminations Consolidated
---------- ---------- ---------- ---------- ------------ ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2001:
Net sales $ -- $ 785,529 $ 278,814 $ 7,142 $ (11,643) $1,059,842
Cost of goods sold -- 645,717 251,454 -- (3,452) 893,719
---------- ---------- ---------- ---------- ---------- ----------
Gross profit -- 139,812 27,360 7,142 (8,191) 166,123
Warehouse, marketing and
administrative expenses -- 96,782 23,404 806 (1,250) 119,742
Other expense -- 6,928 -- -- (4,444) 2,484
Interest expense (2,194) 7,146 1,115 4,485 (2,497) 8,055
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 2,194 28,956 2,841 1,851 -- 35,842
Income taxes 871 11,495 1,128 735 -- 14,229
Equity from subsidiaries 20,290 1,116 -- -- (21,406) --
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 21,613 $ 18,577 $ 1,713 $ 1,116 $ (21,406) $ 21,613
========== ========== ========== ========== ========== ==========
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
Net sales $ -- $ 755,768 $ 239,735 $ 7,727 $ (8,347) 994,883
Cost of goods sold -- 619,557 217,313 (117) -- 836,753
---------- ---------- ---------- ---------- ---------- ----------
Gross profit -- 136,211 22,422 7,844 (8,347) 158,130
Warehouse, marketing and
administrative expenses -- 93,338 14,214 906 (732) 107,726
Other expense -- 7,614 -- -- (4,968) 2,646
Interest expense (1,983) 6,053 1,193 4,798 (2,647) 7,414
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 1,983 29,206 7,015 2,140 -- 40,344
Income taxes 807 11,894 2,855 864 -- 16,420
Equity from subsidiaries 22,748 1,276 -- -- (24,024) --
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 23,924 $ 18,588 $ 4,160 $ 1,276 $ (24,024) $ 23,924
========== ========== ========== ========== ========== ==========
- 14 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheets
(dollars in thousands)
United
United Stationers Subsidiary
Stationers Inc. Supply Co. Subsidiary Non-
(Parent) (Issuer) Guarantors Guarantors Eliminations Consolidated
---------- ---------- ---------- ---------- ------------ ------------
AS OF MARCH 31, 2001
ASSETS
Cash and cash equivalents $ 424 $ 17,611 $ 11,669 $ 1,521 $ -- $ 31,225
Accounts receivable, net -- 97,495 146,819 240,572 (181,295) 303,591
Inventories -- 471,467 163,662 -- -- 635,129
Other current assets -- 15,826 7,435 3 -- 23,264
Property, plant and equipment -- 161,146 34,754 6 -- 195,906
Goodwill, net -- 73,615 121,541 -- -- 195,156
Intercompany notes receivable 104,511 166,896 -- -- (271,407) --
Investment in subsidiaries 551,909 206,093 -- -- (758,002) --
Other noncurrent assets 3 27,447 3,280 -- (8,525) 22,205
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 656,847 $ 1,237,596 $ 489,160 $ 242,102 $(1,219,229) $ 1,406,476
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ -- $ 245,498 $ 118,264 $ -- $ -- $ 363,762
Accrued liabilities 3,970 96,285 28,832 2,002 (1,699) 129,390
Current maturities of long-term debt -- 42,202 85 -- -- 42,287
Deferred income taxes -- 22,216 925 -- -- 23,141
Long-term obligations -- 361,074 -- 152,000 (159,649) 353,425
Intercompany notes payable -- 104,511 107,757 59,139 (271,407) --
Stockholders' equity 652,877 365,810 233,297 28,961 (786,474) 494,471
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $ 656,847 $ 1,237,596 $ 489,160 $ 242,102 $(1,219,229) $ 1,406,476
=========== =========== =========== =========== =========== ===========
AF OF DECEMBER 31, 2000
ASSETS
Cash and cash equivalents $ 424 $ 13,202 $ 4,201 $ 1,957 $ -- $ 19,784
Accounts receivable, net -- 145,696 124,451 241,572 (181,785) 329,934
Inventories -- 524,120 164,806 -- -- 688,926
Other current assets -- 10,599 5,239 5 -- 15,843
Property, plant and equipment -- 179,370 10,412 5 -- 189,787
Goodwill, net -- 77,914 104,009 -- -- 181,923
Intercompany notes receivable 102,317 106,764 -- -- (209,081) --
Investment in subsidiaries 530,802 197,198 -- -- (728,000) --
Other noncurrent assets 2 21,157 -- -- (329) 20,830
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 633,545 $ 1,276,020 $ 413,118 $ 243,539 $(1,119,195) $ 1,447,027
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ -- $ 273,697 $ 119,092 $ -- $ -- $ 392,789
Accrued liabilities 3,102 95,001 27,563 5,575 (5,272) 125,969
Current maturities of long-term debt -- 40,193 80 -- -- 40,273
Deferred income taxes -- 22,301 402 -- -- 22,703
Long-term obligations -- 393,178 (6,324) 150,000 (150,000) 386,854
Intercompany notes payable -- 102,317 47,098 59,666 (209,081) --
Stockholders' equity 630,443 349,333 225,207 28,298 (754,842) 478,439
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $ 633,545 $ 1,276,020 $ 413,118 $ 243,539 $(1,119,195) $ 1,447,027
=========== =========== =========== =========== =========== ===========
- 15 -
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statements of Cash Flows
(dollars in thousands)
United United
Stationers Stationers Subsidiary
Inc. Supply Co. Subsidiary Non-
(Parent) (Issuer) Guarantors Guarantors Eliminations Consolidated
---------- ---------- ---------- ---------- ------------ ------------
For the Three Months Ended March 31, 2001:
Net cash flows (used in) provided by operating
activities $ (403) $ 44,435 $(14,248) $ (1,909) $ 64,326 $ 92,201
Cash flows from investing activities:
Acquisitions -- -- (32,442) -- -- (32,442)
Capital expenditures -- (4,891) (6,501) -- -- (11,392)
Investment in subsidiaries 4,124 -- -- -- (4,124) --
Other -- 8 -- -- -- 8
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) investing activities 4,124 (4,883) (38,943) -- (4,124) (43,826)
Cash flows from financing activities:
Net repayments under revolver -- (23,000) -- -- -- (23,000)
Retirements and principal payments of debt -- (8,900) -- 2,000 (2,000) (8,900)
Issuance of treasury stock 403 -- -- -- -- 403
Acquisition of treasury stock, at cost (4,124) -- -- -- -- (4,124)
Intercompany dividend -- (4,124) -- -- 4,124 --
Intercompany notes payable -- 2,194 60,659 (527) (62,326) --
Payment of employee withholding tax related to
Stock option exercises -- (16) -- -- -- (16)
Other -- (1,297) -- -- -- (1,297)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (3,721) (35,143) 60,659 1,473 (60,202) (36,934)
Net change in cash and cash equivalents -- 4,409 7,468 (436) -- 11,441
Cash and cash equivalents, beginning of year 424 13,202 4,201 1,957 -- 19,784
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end of year $ 424 $ 17,611 $ 11,669 $ 1,521 $ -- $ 31,225
======== ======== ======== ======== ======== ========
For the Three Months Ended March 31, 2000:
Net cash flows (used in) provided by operating $ (648) $ 36,512 $ 23,934 $(14,836) $ 1,152 $ 46,114
activities
Cash flows from investing activities:
Capital expenditures -- (2,961) (4,202) -- -- (7,163)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities -- (2,961) (4,202) -- -- (7,163)
Cash flows from financing activities:
Net repayments under revolver -- (28,000) -- -- -- (28,000)
Retirements and principal payments of debt -- (1,705) -- -- -- (1,705)
Issuance of common stock 648 -- -- -- -- 648
Intercompany notes payable -- 1,983 (15,657) 14,826 (1,152) --
Payment of employee withholding tax related to
stock option exercises -- (419) -- -- -- (419)
Other -- 361 -- -- -- 361
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 648 (27,780) (15,657) 14,826 (1,152) (29,115)
Net change in cash and cash equivalents -- 5,771 4,075 (10) -- 9,836
Cash and cash equivalents, beginning of year 424 13,889 2,506 2,174 -- 18,993
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end of year $ 424 $ 19,660 $ 6,581 $ 2,164 $ -- $ 28,829
======== ======== ======== ======== ======== ========
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and related notes appearing elsewhere in this
Form 10-Q.
Information contained or incorporated by reference in this Form 10-Q may contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"anticipate," "believe," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. All statements other than
statements of historical fact included in this Form 10-Q, including those
regarding the Company's financial position, business strategy, projected costs
and plans and objectives of management for future operations are forward-looking
statements. Certain risks and uncertainties could cause actual results to differ
materially from those in such forward-looking statements. Such risks and
uncertainties include, but are not limited to, the highly-competitive
environment in which the Company operates, the market potential for third-party
service providers, the Company's ability to adjust THE ORDER PEOPLE'S cost
structure to the timing of revenue generation, the integration of acquisitions,
changes in end-users' traditional demands for business products, the Company's
reliance on certain key suppliers, the effects of fluctuations in manufacturers'
pricing, potential service interruptions, customer credit risk, dependence on
key personnel, and general economic conditions. A description of these factors,
as well as other factors, which could affect the Company's business, is set
forth in certain filings by the Company with the Securities and Exchange
Commission. All forward-looking statements contained in this Form 10-Q and/or
any subsequent written or oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by such cautionary statements. The Company undertakes no
obligation to release the results of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
For the three months ended March 31, 2001, no single customer accounted for
more than 9% of the Company's net sales. For the three months ended March 31,
2001, U.S. Office Products Co. ("USOP") was the Company's largest customer
accounting for approximately 8% of the Company's net sales. On March 5, 2001,
USOP filed for Chapter 11 bankruptcy protection to facilitate its sale of
business to UPS and Corporate Express, Inc. The Company was identified as a
"critical vendor" by order of the United States Bankruptcy Court for the
District of Delaware in the Chapter 11 proceeding captioned, IN RE: US OFFICE
PRODUCTS COMPANY, ET AL., (Case No. 01-646 (PJW)). USOP has paid its entire
pre-petition accounts receivable balance. The Company continues to ship
product to USOP based on terms similar to the terms afforded USOP prior to
their filing. USOP's purchases from the Company continue at typical levels
with essentially no change in account receivable days outstanding and no
increase in credit exposure. On May 14, 2001, the sale fo USOP to Corporate
Express, Inc. was completed.
During 2000, the Company established THE ORDER PEOPLE ("TOP") to operate as its
third-party fulfillment provider for product categories beyond office products.
TOP offers a full set of services specifically designed to support a wide
variety of third-party service needs. By combining the Company's
state-of-the-art distribution network with a multi-channel Customer Relationship
Management (CRM) capability, clients have the ability to custom design their
order fulfillment experience and then monitor and measure consumer satisfaction.
The Company has extensive experience and the ability to pick, pack, ship and
track products with a wide range of physical attributes. TOP enables the Company
to leverage these core competencies in a broader context for third-party
logistics and fulfillment.
Acquisition of Peerless Paper Mills, Inc.
On January 5, 2001, the Company's subsidiary Lagasse, Inc. ("Lagasse") acquired
all of the capital stock of Peerless Paper Mills, Inc. ("Peerless"). Peerless is
a wholesale distributor of janitorial/sanitation, paper, and food service
products. A Certificate of Dissolution was filed with the Commonwealth of
Pennsylvania to dissolve Peerless as of January 5, 2001. Upon its dissolution,
Peerless was merged into Lagasse. The purchase price of approximately $32.4
million was financed through the Company's Senior Credit Facility. This
acquisition will enable the Company to expand the Lagasse product line, enhance
scale and infrastructure, and add experienced management to the Lagasse
operation. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed, based upon the estimated fair values at
the date of acquisition. The excess of cost over fair value of approximately
$15.2 million was allocated to goodwill. The pro forma effects of the
acquisition were not material.
- 17 -
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Acquisition of CallCenter Services, Inc.
On July 1, 2000, the Company acquired all of the capital stock of CallCenter
Services, Inc. from Corporate Express, a Buhrmann Company. The purchase price of
approximately $10.7 million was financed through the Company's Senior Credit
Facility. CallCenter Services is a customer relationship management outsourcing
service company. It has two inbound call centers, in Wilkes-Barre, Pennsylvania
and Salisbury, Maryland, with a total of up to 1,000 seats. This acquisition
will complement and significantly enhance the third-party fulfillment business
of TOP. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed, based upon the estimated fair values at
the date of acquisition. The excess of cost over fair value of approximately
$3.1 million was allocated to goodwill. The pro forma effects of the acquisition
were not material.
Acquisition of Azerty Canada
On July 5, 2000, the Company completed the acquisition of the net assets of
Azerty Canada from MCSi, Inc. The purchase price of approximately $33.6 million
(U.S. dollars) was financed through the Company's Senior Credit Facility. Azerty
Canada is a specialty wholesale distributor of computer consumables, peripherals
and accessories. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed, based upon the estimated fair values at
the date of acquisition. The excess of cost over fair value of approximately
$11.8 million was allocated to goodwill. The pro forma effects of the
acquisition were not material.
First Quarter Ended March 31, 2001 compared with the
First Quarter Ended March 30, 2000
- ----------------------------------------------------
NET SALES. Net sales for the first quarter of 2001 totaled $1.1 billion, up
6.5%, compared with $994.9 million in the first quarter of 2000. After adjusting
for one fewer workday, sales rose 8.2% in the first quarter of 2001, compared
with the same period last year. The Company achieved low single-digit growth
within its core business, while acquisitions drove the growth rate into the high
single-digits.
The Company's sales of office furniture were flat, compared with the prior year
quarter. These results are indicative of slowing consumer demand and general
economic conditions. While the current economic environment present challenges,
the Company sees an opportunity for sales growth as dealers shift their
inventory investment to wholesalers and in a weak economy consumers tend to
shift their demand toward the mid-priced furniture line offered by the
Company.
The janitorial and sanitation product category continued to achieve relatively
strong growth rates. These products are primarily distributed through the
Lagasse operating unit, which achieved a growth rate percentage in the
upper-teens, excluding the acquisition of Peerless. This increase is based on
continued market expansion in a fragmented industry. The growth within customer
channels is concentrated mainly in national, mail order, and independent dealer
accounts. Including the acquisition of Peerless, the janitorial and sanitation
supply category increased by over 50%.
Traditional office products experienced a growth rate percentage in the low
single-digits versus the prior year quarter. Uncertainty surrounding the economy
slowed consumption of office products within the commercial sector, particularly
in small-to-midsize companies.
- 18 -
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales in the computer supplies category grew at a percentage rate in the low
single-digits over the prior-year quarter. The acquisition of Azerty Canada in
July 2000 contributed substantially to the sales growth within this category.
GROSS MARGIN. Gross margin dollars for the quarter were $166.1 million, up $8.0
million or 5.1% from last year. The gross margin rate was 15.7% in the first
quarter of 2001, compared with 15.9% in the same period last year. The margin
dollar increase was primarily due to the sales increase. However, the margin
rate decline was primarily due to spending at TOP. The margin rate, excluding
TOP, was comparable to the prior year at 15.9%.
OPERATING EXPENSES. Operating expenses increased 11.2% to $119.7 million,
compared with $107.7 million last year. Operating expenses as a percentage of
net sales were 11.3% in the first quarter of 2001 and 10.8% in 2000. Operating
expenses in 2001 include $5.9 million invested in TOP. Excluding TOP,
operating expenses increased 6.1% to $113.8 million, or 10.8% of net sales.
The Company will continue to work toward taking cost out of the business by
utilizing best practices across all facilities, employing more advanced
technology, and continuing to leverage its infrastructure.
INCOME FROM OPERATIONS. Income from operations as a percentage of net sales
declined to 4.4% compared with 5.1% last year. Income from operations, excluding
the investments in TOP, increased $2.4 million to $53.2 million, or 5.1% of net
sales.
INTEREST EXPENSE. Interest expense as a percentage of net sales was unchanged
compared with the prior year at 0.8%. The first quarter of 2001 includes
interest expense savings related to the redemption of the 12.75% Notes and
slightly lower interest rates on variable rate debt offset by increased
borrowing requirements.
OTHER EXPENSE. Other expense as a percentage of net sales was 0.2% in the first
quarter of 2001, compared with 0.3% in the same period last year. This expense
represents the costs associated with the sale of certain trade accounts
receivable through the Receivables Securitization Program (as defined). Costs
related to the Receivables Securitization Program vary on a monthly basis and
are generally related to certain short-term interest rates.
INCOME BEFORE TAXES. Income before taxes as a percent of net sales was 3.4% in
the first quarter of 2001, compared with 4.1% last year.
INCOME TAXES. Income tax expense as a percent of net sales was 1.3% in the first
quarter of 2001, compared with 1.7% last year.
NET INCOME. Net income totaled $21.6 million, or 2.0% of net sales, compared
with $23.9 million, or 2.4% of net sales. Diluted earnings per share declined
7.2% to $0.64 from $0.69 last year. However, excluding the operating loss
of $6.8 million related to TOP, diluted earnings per share increased 11.6% to
$0.77.
- 19 -
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Credit Agreement
On June 30, 2000, the Company entered into the Third Amended and Restated
Revolving Credit and Term Loan Agreement (the "Credit Agreement"). The Credit
Agreement, among other things, provides for an additional $150.0 million,
five-year term loan facility (the "Tranche A-1 Facility").
As of March 31, 2001, the available credit under the Credit Agreement included
$173.0 million of term loan borrowings (the "Term Loan Facilities") and up to
$250.0 million of revolving loan borrowings (the "Revolving Credit Facility").
In addition, the Company has $100.0 million of 8.375% Senior Subordinated Notes
due 2008 and $29.8 million of industrial development bonds.
As of March 31, 2001, the Term Loan Facilities consisted of a $41.7 million
Tranche A term loan facility (the "Tranche A Facility") and a $131.3 million
Tranche A-1 Facility. Amounts outstanding under the Tranche A Facility are to be
repaid in 12 quarterly installments ranging from $3.1 million at June 30, 2001
to $3.7 million at March 31, 2004. Amounts outstanding under the Tranche A-1
Facility are to be repaid in 17 quarterly installments ranging from $6.3 million
at June 30, 2001 to $7.8 million at June 30, 2005.
The Revolving Credit Facility is limited to $250.0 million, less the aggregate
amount of letter of credit liabilities, and contains a provision for swingline
loans in an aggregate amount up to $25.0 million. The Revolving Credit Facility
matures on March 31, 2004. The Company had $75.0 million outstanding under the
Revolving Credit Facility at March 31, 2001.
The Term Loan Facilities and the Revolving Credit Facility are secured by first
priority pledges of the stock of USSC, all of the stock of domestic direct and
indirect subsidiaries of USSC, the stock of Lagasse and Azerty and certain of
the foreign and direct and indirect subsidiaries of USSC (excluding USS
Receivables Company, Ltd.) and security interests and liens upon all accounts
receivable, inventory, contract rights and certain real property of USSC and its
domestic subsidiaries other than accounts receivables sold in connection with
the Receivables Securitization Program.
The loans outstanding under the Term Loan Facilities and the Revolving Credit
Facility bear interest as determined within a pricing matrix. The interest rate
is based on the ratio of total debt to earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), excluding the EBITDA of TOP. The
Tranche A Facility and Revolving Credit Facility bear interest at the prime rate
plus 0% to 1.00%, or, at the Company's option, the London Interbank Offered
Rate ("LIBOR") plus 1.25% to 2.25%. The Tranche A-1 Facility bears interest
at the prime rate plus 0.25% to 1.25%, or, at the Company's option, LIBOR
plus 1.50% to 2.50%.
The Credit Agreement contains representations and warranties, affirmative and
negative covenants, and events of default customary for financings of this type.
At March 31, 2001, the Company was in compliance with all covenants contained in
the Credit Agreement.
- 20 -
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The right of United to participate in any distribution of earnings or assets of
USSC is subject to the prior claims of the creditors of USSC. In addition, the
Credit Agreement contains certain restrictive covenants, including covenants
that restrict or prohibit USSC's ability to pay cash dividends and make other
distributions to United.
Management believes that the Company's cash on hand, anticipated funds generated
from operations and borrowings available under the Credit Agreement, will be
sufficient to meet the short-term (fewer than 12 months) and long-term operating
and capital needs of the Company, as well as to service its debt in accordance
with its terms. There is, however, no assurance that this will be accomplished.
United is a holding company and, as a result, its primary source of funds is
cash generated from operating activities of its operating subsidiary, USSC, and
bank borrowings by USSC. The Credit Agreement and the indentures governing the
Notes contain restrictions on the ability of USSC to transfer cash to United.
8.375% Senior Subordinated Notes:
The 8.375% Senior Subordinated Notes (the "8.375% Notes") were issued on April
15, 1998, pursuant to the 8.375% Notes Indenture. As of March 31, 2001, the
aggregate outstanding principal amount of 8.375% Notes was $100.0 million. The
8.375% Notes are unsecured senior subordinated obligations of USSC, and payment
of the 8.375% Notes is fully and unconditionally guaranteed by the Company and
USSC's domestic "restricted" subsidiaries that incur indebtedness (as defined in
the 8.375% Notes Indenture) on a senior subordinated basis. The 8.375% Notes
mature on April 15, 2008, and bear interest at the rate of 8.375% per annum,
payable semi-annually on April 15 and October 15 of each year.
12.75% Senior Subordinated Notes
On May 2, 2000, the Company redeemed the remaining $100.0 million of its 12.75%
Senior Subordinated Notes (the "12.75% Notes"). The 12.75% Notes were redeemed
at the redemption price of 106.375% of the principal amount plus accrued
interest. As a result, the Company recorded an after-tax extraordinary charge of
approximately $6.5 million in the second quarter of 2000. This charge includes
approximately $2.6 million (after-tax) related to the write-off of capitalized
costs. The redemption was funded through the Company's Revolving Credit
Facility. The Company's annual interest expense saving were projected to be
approximately $4.0 million.
- 21 -
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Receivables Securitization Program
In connection with the Company's $163.0 million Receivables Securitization
Program the Company sells, on revolving basis, its eligible accounts receivable
(except for certain excluded accounts receivable, which initially includes all
accounts receivable from the Azerty and Lagasse) to the USS Receivables Company,
a wholly owned offshore, bankruptcy-remote special purpose limited liability
company. This company in turn ultimately transfers the eligible accounts
receivable to a third-party, multi-seller asset-backed commercial paper program,
existing solely for the purpose of issuing commercial paper rated A-1/P-1 or
higher. The sale of trade accounts receivable includes not only those eligible
accounts receivable that existed on the closing date of the Receivables
Securitization Program, but also eligible accounts receivable created
thereafter. The Company received approximately $160.0 million in proceeds from
the initial sale of certain eligible accounts receivable on April 3, 1998. These
proceeds were used to repay a portion of indebtedness under the Credit
Agreement. Costs related to this facility vary on a monthly basis and generally
are related to certain interest rates. These costs are included in the
Consolidated Statements of Income, included elsewhere herein, under the caption
Other Expense.
Affiliates of PNC Bank and The Chase Manhattan Bank act as funding agents. The
funding agents, together with other commercial banks rated at least A-1/P-1,
provide standby liquidity funding to support the purchase of the accounts
receivable by the Receivables Company under 364-day liquidity facilities. The
Receivables Company retains an interest in the eligible receivables transferred
to the third party. As a result of the Receivables Securitization Program, the
balance sheet assets of the Company as of March 31, 2001 and December 31, 2000
exclude $152.0 million and $150.0 million, respectively, of accounts receivable
sold to the Receivables Company.
Cash Flow
The statements of cash flows for the Company for the periods indicated are
summarized below:
For the Three Months
Ended March 31,
-----------------------
2001 2000
-------- --------
(dollars in thousands)
Net cash provided by operating activities $ 92,201 $ 46,114
Net cash used in investing activities (43,826) (7,163)
Net cash used in financing activities (36,934) (29,115)
Net cash provided by operating activities for the three months ended March 31,
2001 increased to $92.2 million from $46.1 million in the comparable prior year
period. This increase was primarily due to a $40.3 million decrease in
inventory, a $37.0 million decrease in accounts receivable, and a $1.2 million
increase in depreciation expense partially offset by a $24.2 million decline in
accounts payable, a $7.7 million increase in prepaid expenses, and a $2.3
million decline in net income.
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UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used in investing activities for the three months ended March 31, 2001
was $43.8 million compared with $7.2 million used in the comparable prior
period. This increase is primarily due to the acquisition of Peerless Paper
Mills, Inc. for $32.4 million and $4.2 million of incremental net capital
expenditures during 2001.
Net cash used in financing activities for the three months ended March 31, 2001
was $36.9 million compared with $29.1 million in the comparable prior period.
This increase was primarily due to incremental scheduled debt principal payments
of $7.2 million and $4.1 million used to repurchase common stock. These
transactions were partially offset by net repayments of $23.0 million under the
Revolving Credit Facility in the current year compared with $28.0 million last
year.
Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to market risk associated principally with changes in
interest rates and foreign currency exchange rates. Interest rate exposure at
March 31, 2001 is principally limited to the Company's outstanding long-term
debt of $378.4 million and $152.0 million of receivables sold under the
Receivables Securitization Program, whose discount rate varies with market
interest rates ("Receivables Exposure"). Approximately 19% of the outstanding
debt and Receivables Exposure are priced at interest rates that are fixed. The
remaining debt and Receivables Exposure is priced at interest rates that float
with the market. A 50 basis point movement in interest rates would result in an
approximate $2.2 million annualized increase or decrease in interest expense and
loss on the sale of certain accounts receivable.
The Company will from time to time enter into interest rate swaps or collars on
its debt. The Company does not use derivative financial or commodity instruments
for trading purposes. Typically, the use of such derivative instruments is
limited to interest rate swaps or collars on the Company's outstanding long-term
debt. The Company's exposure related to such derivative instruments is, in the
aggregate, not material to the Company's financial position, results of
operations and cash flows.
The Company's foreign currency exchange rate risk is limited principally to the
Mexican Peso, Canadian Dollar, Italian Lira, as well as product purchases from
Asian countries currently paid in U.S. dollars. Many of the products which the
Company sells in Mexico and Canada are purchased in U.S. dollars while the sale
is invoiced in the local currency. The Company's foreign currency exchange rate
risk is not material to the Company's financial position, results of operations
and cash flows. The Company has not previously hedged these transactions and may
enter into such transactions when it believes there is a financial advantage to
doing so.
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UNITED STATIONERS INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable
ITEM 2 CHANGES IN SECURITIES
Not applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number
2 Not applicable
11 Not applicable
15.1 Letter regarding unaudited interim financial
information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
99 Not applicable
(b) The Company filed the following reports on Form 8-K:
- The Company reported under Item 5 on March 30,
2001, the election of Steven M. Cappaert to the
position of Senior Vice President and
Controller. Cappaert will be responsible for
financial reporting, budgeting and forecasting,
sales and margin control and financial analysis.
- The Company reported under Item 5 on April 25,
2001, earnings per share of $0.64 for its first
quarter ended March 31, 2001, compared with
$0.69 in the first quarter of 2000. Net income
for the latest three months was $21.6 million,
down from $23.9 million in the comparable
prior-year quarter.
- 24 -
UNITED STATIONERS INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
----------------------------------------
(Registrant)
Date: May 11, 2001 /s/ Eileen A. Kamerick
----------------------------------------
Eileen A. Kamerick
Executive Vice President and Chief
Financial Officer
- 25 -
UNITED STATIONERS INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
(a) Exhibit
Number
-------
2 Not applicable
11 Not applicable
15.1 Letter regarding unaudited interim financial
information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
99 Not applicable
- 26 -