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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the year ended December 31, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) 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
Incorporation or Organization) Identification No.)
2200 EAST GOLF ROAD
DES PLAINES, ILLINOIS 60016-1267
(847) 699-5000
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrants' Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
United Stationers Inc.: Common Stock $0.10 par value
(Title of Class)
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 FOR 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 ( )
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENT
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. ( X )
AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES OF UNITED
STATIONERS INC. AS OF MARCH 15, 1999, WAS $475,899,354, BASED ON THE LAST SALE
PRICE OF THE COMMON STOCK AS QUOTED BY THE NASDAQ NATIONAL MARKET SYSTEM ON SUCH
DATE. UNITED STATIONERS SUPPLY CO. HAS NO SHARES OF COMMON STOCK OUTSTANDING
HELD BY NON-AFFILIATES.
ON MARCH 15, 1999, UNITED STATIONERS INC. HAD OUTSTANDING 37,200,832 SHARES
OF COMMON STOCK, PAR VALUE $0.10 PER SHARE. ON MARCH 15, 1999, UNITED
STATIONERS SUPPLY CO. HAD 880,000 SHARES OF COMMON STOCK, $1.00 PAR VALUE PER
SHARE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF FORM 10-K
Part III Portions of United Stationers Inc.'s definitive Proxy Statement
relating to the 1999 Annual Meeting of Stockholders of United
Stationers Inc., to be filed within 120 days of the year end of
United Stationers Inc.
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UNITED STATIONERS INC. AND SUBSIDIARIES
UNITED STATIONERS SUPPLY CO.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
CONTENTS AND CROSS REFERENCE SHEET
FURNISHED PURSUANT TO GENERAL INSTRUCTION G(4) OF FORM 10-K
FORM 10-K FORM 10-K FORM 10-K
PART NO. ITEM NO. DESCRIPTION PAGE NO.
- ---------- --------- ----------- --------
I Explanatory Note 1
1 Business 1
General 1
Products 2
Customers 2
Marketing and Customer Support 2-3
Distribution 3-4
Purchasing and Merchandising 4
Competition 4
Employees 4
2 Properties 4-5
3 Legal Proceedings 6
4 Submission of Matters to a Vote of Security Holders 6
II 5 Market for Registrant's Common Equity
and Related Stockholder Matters 6-7
Quarterly Stock Price Data 7
6 Selected Consolidated Financial Data 7-11
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-20
7A Quantitative and Qualitative Disclosure About Market Risk 21
8 Financial Statements and Supplementary Data 21-45
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 46
III 10 Directors and Executive Officers of the Registrant 46-48
11 Executive Compensation 48
12 Security Ownership of Certain Beneficial
Owners and Management 48
13 Certain Relationships and Related Transactions 48
IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 49-52
Signatures 53
PART I
EXPLANATORY NOTE
THIS INTEGRATED FORM 10-K IS FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, FOR EACH OF UNITED STATIONERS INC., A DELAWARE CORPORATION,
AND ITS WHOLLY OWNED SUBSIDIARY, UNITED STATIONERS SUPPLY CO., 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 DISCLOSURES REQUIRED BY THE INSTRUCTIONS TO FORM 10-K AND
THEREFORE, UNLESS OTHERWISE INDICATED, THE RESPONSES SET FORTH HEREIN APPLY TO
EACH OF UNITED STATIONERS INC. AND UNITED STATIONERS SUPPLY CO.
ITEM 1. BUSINESS
GENERAL
On March 30, 1995, Associated Holdings, Inc., ("Associated"), was merged with
and into United Stationers Inc., ("United"), with United surviving (the
"Merger"). Immediately thereafter, Associated Stationers, Inc. ("ASI"), the
wholly owned subsidiary of Associated, was merged with and into United
Stationers Supply Co. ("USSC"), the wholly owned subsidiary of United, with USSC
surviving. Although United was the surviving corporation in the Merger, the
transaction was treated as a reverse acquisition for accounting purposes with
Associated as the acquiring corporation.
United is the parent company of its direct wholly owned subsidiary, USSC. Except
where the context clearly indicates otherwise, including references to the
capital structure of United Stationers Inc., the term "Company" hereinafter used
includes United Stationers Inc. together with its subsidiary.
On October 31, 1996, USSC acquired all of the capital stock of Lagasse Bros.,
Inc. ("Lagasse"), a wholesaler of janitorial and sanitary supplies. Lagasse
operates as a subsidiary of USSC.
On April 3, 1998, USSC acquired all of the capital stock of Azerty Incorporated,
Azerty de Mexico, S.A. de C.V., Positive ID Wholesale Inc., and AP Support
Services Incorporated (the "Azerty Acquisition"), which together conducted
substantially all of United States and Mexican operations of the Office Products
Division of Abitibi-Consolidated Inc. (collectively, the "Azerty Business"). The
Azerty Business is primarily a specialty wholesaler of computer consumables,
peripherals and accessories in the United States and Mexico.
The Company is the largest general line business products wholesaler in the
United States with 1998 net sales of $3.1 billion. The Company sells its
products through national distribution networks to more than 20,000 resellers,
who in turn sell directly to end users. These products are distributed through a
computer-based network of warehouse facilities and truck fleets radiating from
40 distribution centers, 19 Lagasse distribution centers and six Azerty
distribution centers.
1
PRODUCTS
The Company's product offerings, comprised of more than 35,000 stockkeeping
units (SKUs), may be divided into five primary categories:
TRADITIONAL OFFICE PRODUCTS. The Company's core business continues to be
traditional office products, which include both brand-name products and the
Company's private brand products. Traditional office products include writing
instruments, paper products, organizers, calendars and general office
accessories.
COMPUTER CONSUMABLES. The Company offers computer supplies, and peripherals to
value-added computer resellers and office products dealers. In April 1998, the
Company acquired the Azerty Business a wholesaler of computer consumables within
the United States and Mexico.
OFFICE FURNITURE. The Company's sale of office furniture such as leather
chairs, wooden and steel desks and computer furniture has enabled it to become
the nation's largest office furniture wholesaler. The Company currently offers
nearly 4,000 furniture items from 50 different manufacturers.
FACILITIES SUPPLIES. The major products in this category are janitorial and
sanitation supplies, safety and security items, and shipping and mailing
supplies. In October 1996, the Company acquired Lagasse, the largest pure
wholesaler of janitorial and sanitation supplies in North America. The Company
currently distributes these products to sanitary supply dealers through 19
Lagasse distribution centers.
BUSINESS MACHINES AND AUDIO-VISUAL PRODUCTS. This product category includes
business machines - from calculators to telephones - as well as audio-visual
equipment and supplies.
CUSTOMERS
The Company sells to more than 20,000 resellers of office products, including
office product dealers, office furniture dealers, office products superstores,
mass merchandisers, computer products resellers, mail order companies and
sanitary supply distributors. Of its 20,000 customers, no single reseller
accounted for more than 6% of the Company's net sales in 1998.
Commercial dealers and contract stationers are the most significant reseller
channel for office products distribution and typically serve medium to large
businesses, institutions and government agencies. Through industry
consolidation, the number of such dealers has decreased, with the remaining
dealers growing larger. As a result, net sales to these commercial dealers and
contract stationers as a group have grown rapidly. Many dealers, have joined
marketing or buying groups in order to increase their purchasing leverage. The
Company believes it is the leading wholesale source for most of these groups,
providing not only merchandise but also special programs that enable these
dealers to benefit from their combined purchasing power and marketing efforts.
While the Company maintains and builds its business with commercial dealers,
contract stationers (including the contract stationer divisions of national
office product superstores) and retail dealers, it also has relationships with
most major office products superstore chains. In addition, the Company supplies
inventory and other fulfillment services to the retail operations of certain
superstores, including their direct-to-business delivery programs and to
non-stocking resellers.
MARKETING AND CUSTOMER SUPPORT
The Company concentrates its marketing efforts on providing value-added services
to resellers. The Company distributes products that are generally available at
similar prices from multiple sources, and most of its customers purchase their
products from more than one source. As a result, the Company seeks to
differentiate itself from its competitors through a broader product offering, a
higher degree of product availability, a variety of high quality customer
services and overnight distribution capabilities. In addition to emphasizing its
broad product line, extensive inventory, integrated systems and national
distribution capabilities, the Company's marketing programs have relied upon two
additional major components. First, the Company produces an extensive array of
catalogs for commercial dealers, contract stationers and retail dealers that are
usually custom imprinted with each reseller's name and sold to these resellers
who, in turn, distribute the catalogs to their customers. Second, the Company
2
provides its resellers with a variety of dealer support and marketing services,
including electronic commerce options, promotional programs and pricing
services. These services are designed to aid the reseller in differentiating
itself from its competitors by addressing the needs of the end-user's
procurement process.
Substantially all of the Company's 35,000 SKUs are sold through its
comprehensive general line catalog, promotional pieces and specialty catalogs
for the office products, computer supplies, office furniture, facilities
management supplies and other specialty markets. The Company produces the
following annual catalogs: General Line Catalog; Office Furniture Catalog
featuring furniture and accessories; Universal Catalog promoting the Company's
private-brand merchandise; Computer Supplies and Accessories Catalog offering
information technology supplies, accessories and furniture; Computer Products
Catalog promoting specialized information technology products; Facility Supplies
Catalog featuring food service, warehouse, mailroom supplies and products and
supplies used for meetings and presentations; and the Lagasse Catalog offering
janitorial and sanitation supplies. In addition, the Company produces the
following quarterly promotional catalogs: Action 2000, featuring over 1,000
high-volume commodity items, and Computer Concepts, featuring computer supplies,
peripherals, accessories and furniture. The Company also produces separate
quarterly flyers covering general office supplies, office furniture and
Universal-TM- products. The majority of the expenses related to the production
of such catalogs is borne by the Company's suppliers. Because commercial
dealers, contract stationers and retail dealers typically distribute only one
wholesaler's catalogs in order to streamline and concentrate order entry, the
Company attempts to maximize the distribution of its catalogs by offering
advertising credits to resellers, which can be used to offset the cost of
catalogs. Also, the Company offers an electronic catalog available through an
Internet-based ordering systems which are linked to its web-based catalog
(www.unitedstationers.com).
The Company also offers to its resellers a variety of electronic order entry
systems and business management and marketing programs. For instance, the
Company maintains electronic data interchange systems that link the Company to
selected resellers and interactive order systems that link the Company to
selected resellers and such resellers to the ultimate end user. In addition, the
Company's electronic order entry systems allow the reseller to forward its
customers' orders directly to the Company, resulting in the delivery of pre-sold
products to the reseller or directly to the reseller's customer. The Company
estimates that in 1998, it received approximately 80% of its orders
electronically.
In addition to marketing its products and services through the use of its
catalogs, the Company employs a sales force of approximately 140 field
salespersons and a telemarketing staff of 180 people. The sales force is
responsible for sales and service to resellers with which the Company has an
existing relationship, as well as for establishing new relationships with
additional resellers.
DISTRIBUTION
The Company has a network of 40 business products regional distribution centers
located in 36 metropolitan areas in 25 states in the United States, most of
which carry the Company's full line of inventory. The Company also maintains 19
Lagasse distribution centers that carry a full line of janitorial and sanitation
supplies and six Azerty distribution centers that carry information technology
supplies. The Company supplements its regional distribution centers with 25
local distribution points throughout the United States that serve as reshipment
points for orders filled at the regional distribution centers. The Company
utilizes more than 400 trucks, substantially all of which are contracted for by
the Company, to enable direct delivery from the regional distribution centers
and local distribution points to resellers.
The Company's distribution capabilities are aided by its proprietary,
computer-driven inventory locator system. If a reseller places an order for an
item that is out of stock at the Company location which usually serves the
particular reseller, the Company's system will automatically search for the item
at alternative distribution centers. If the item is available at an alternative
location, the system will automatically forward the order to that alternate
location, which will then coordinate shipping with the primary facility and, for
the majority of resellers, provide a single on-time delivery. The system
effectively provides the Company with added inventory support that enables it to
provide higher service levels to the reseller, to reduce back orders and to
minimize time spent searching for merchandise substitutes, all of which
contribute to the Company's high order fill rate and efficient levels of
inventory.
Another service offered by the Company to resellers is its "wrap and label"
program, that offers resellers the option to receive individually packaged
orders customized to meet the needs of specific end users. For example, when a
reseller receives orders from several individual end users, the Company can
group and wrap the items separately identifying the specific end user so that
the reseller need only deliver the package. The "wrap and label" program is
3
attractive to resellers because it eliminates the need to break down case
shipments and to repackage the orders before delivering them to the end user.
The Company also can ship orders directly to end users on behalf of resellers.
PURCHASING AND MERCHANDISING
As the largest business products wholesaler in North America, the Company
qualifies for substantial volume allowances and can realize significant
economies of scale. The Company obtains products from over 500 manufacturers,
for many of whom the Company believes it is a significant customer. In 1998, no
supplier accounted for more than 17% of the Company's aggregate purchases. As a
centralized function, the Company's merchandising departments interview and
select suppliers and products for inclusion in the catalogs. Selection is based
upon end-user acceptance and demand for the product and the manufacturer's total
service, price and product quality offering.
COMPETITION
The Company competes with office products manufacturers and with other national,
regional and specialty wholesalers of office products, office furniture,
computer supplies and related items, and facility management supplies.
Competition between the Company and manufacturers is based primarily upon net
pricing, minimum order quantity and product availability. Although manufacturers
may provide lower prices to resellers than the Company does, the Company's
marketing and catalog programs, combined with speed of delivery and its ability
to offer resellers a broad line of business products from multiple manufacturers
on a "one-stop shop" basis and with lower minimum order quantities, are
important factors in enabling the Company to compete effectively. Manufacturers
typically sell their products through a variety of distribution channels,
including wholesalers and resellers.
Competition between the Company and other wholesalers is based primarily on
breadth of product lines, availability of products, speed of delivery to
resellers, order fill rates, net pricing to resellers and the quality of its
marketing and other services. The Company believes it is competitive in each of
these areas. Most wholesale distributors of office products conduct operations
regionally and locally, sometimes with limited product lines such as writing
instruments or computer products. Only one other national wholesaler carries a
general line of office products.
Increased competition in the office products industry, together with increased
advertising, has heightened price awareness among end users. As a result,
purchasers of commodity-type office products have become extremely price
sensitive, and therefore, the Company has increased its efforts to market to
resellers the continuing advantages of its competitive strengths (as compared to
those of manufacturers and other wholesalers).
EMPLOYEES
As of December 31, 1998, the Company employed approximately 6,100 persons.
The Company considers its relations with employees to be good. Approximately
1,000 of the shipping, warehouse and maintenance employees at certain of the
Chicago, Detroit, Philadelphia, Baltimore, Los Angeles, Minneapolis and New York
City facilities are covered by collective bargaining agreements. The agreements
expire at various times during the next three years. The Company has not
experienced any work stoppages during the past five years.
ITEM 2. PROPERTIES
The Company considers its properties to be suitable and adequate for their
intended uses. The Company continually evaluates its properties to ensure that
they provide for peak efficiency to maximize customer satisfaction and economies
of scale. These properties consist of the following:
EXECUTIVE OFFICES. The Company's office facility in Des Plaines, Illinois has
approximately 135,800 square feet of office and storage space. In addition,
the Company leases approximately 50,000 square feet of office space located
in Mt. Prospect, Illinois, approximately 28,000 square feet of office space
in Orchard Park, New York (not including approximately 20,000 square feet of
warehouse space), and approximately 22,000 square feet of office space in
Harahan, Louisiana (not including approximately 61,000 square feet of
warehouse space).
4
DISTRIBUTION CENTERS. The Company presently has more than 9.0 million square
feet of warehouse space in 40 business products distribution centers, 19
janitorial and sanitary supply distribution centers and 6 information technology
distribution centers. The Company also operates 25 local distribution points.
The following table sets forth information regarding the Company's principal
leased and owned distribution centers:
Approx. Square Feet
-------------------------
State/Country City Metropolitan Area Served Owned Leased
- ------------------ -------------------------- --------------------------- --------- -----------
Arizona Tempe Phoenix ----- 153,800
California City of Industry (1) /
Santa Fe Los Angeles 344,500 205,400
Springs
Sacramento / Union City / Sacramento / San
Visalia Francisco / Oakland ----- 475,600
Colorado Denver / Aurora Denver 104,200 180,900
Florida Miami / Dania /
Ft. Lauderdale Miami ----- 202,100
Jacksonville Jacksonville 150,000 -----
Tampa Tampa 128,000 30,000
Georgia Atlanta / Norcross Atlanta 372,000 54,400
Illinois Carol Stream / Forest
Park / Glendale Heights Chicago 222,300 305,500
Greenville St. Louis 210,000 -----
Indiana Fort Wayne Fort Wayne ----- 75,000
Indianapolis Indianapolis 128,000 41,600
Louisiana Harahan (1) New Orleans ----- 165,900
Maryland Harmans Baltimore / Wash., D.C. 324,000 123,100
Massachusetts Woburn / Sharon Boston 309,000 115,700
Mexico Mexico City Mexico City ----- 4,000
Monterrey Monterrey ----- 1,300
Michigan Livonia / Van Buren Detroit 229,700 86,500
Minnesota Eagan / Brooklyn Park Minneapolis / St. Paul 338,000 -----
Missouri Kansas City Kansas City ----- 95,200
New Jersey Edison New York 257,600 289,700
Pennsauken Philadelphia 231,000 25,300
New York Coxsackie Albany 257,600 -----
Orchard Park New York ----- 48,000
North Carolina Charlotte Charlotte 104,000 92,000
Ohio Cincinnati Cincinnati 108,800 -----
Columbus Columbus ----- 171,700
Twinsburg / Valley View Cleveland 206,100 165,000
Oklahoma Tulsa Tulsa 52,600 22,500
Oregon Portland Portland ----- 106,500
Pennsylvania Pittsburgh / Chambersburg Pittsburgh / Baltimore ----- 197,200
Tennessee Memphis Memphis ----- 78,300
Nashville Nashville ----- 191,300
Texas Dallas (1) Dallas / Fort Worth 223,200 231,900
Houston Houston ----- 269,000
Lubbock Lubbock ----- 58,800
San Antonio San Antonio ----- 94,900
Utah Salt Lake City Salt Lake City ----- 167,600
Washington Tukwila / Kent Seattle ----- 181,500
Wisconsin Milwaukee Milwaukee 67,300 -----
(1) A portion of such property is subleased to a third party.
5
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary course of
its business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the Company's stockholders was held on November 5, 1998 for
the purpose of considering approval of an amendment to the Company's Certificate
of Incorporation to increase the number of shares of Common Stock, par value
$0.10 per share, from 40,000,000 shares to 100,000,000 shares and the number of
shares of undesignated Preferred Stock, par value $0.01 per share, from
1,500,000 shares to 15,000,000 shares.
The tabulation of the votes was as follows:
For Against Abstain Not Voted
---------- --------- ------- ---------
20,995,840 8,550,958 16,676 7,245,024
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
Income (Loss)
Income (Loss) Per Share
Before Net Before Net Income
Net Gross Extraordinary Income Extraordinary (Loss)
Sales Profit Item (Loss) Item (1) (2) Per Share (1) (2)
---------- ---------- ------------ ---------- --------------- -----------------
YEAR ENDED DECEMBER 31, 1998
First Quarter $ 712,517 $ 123,062 $ 15,091 $ 15,091 $ 0.44 $ 0.44
Second Quarter (3) 751,966 125,890 7,229 1,322 0.21 0.04
Third Quarter 795,407 136,275 19,879 19,879 0.52 0.52
Fourth Quarter 799,276 144,011 21,726 21,726 0.58 0.58
---------- ---------- ---------- ----------
Totals (3) $3,059,166 $ 529,238 $ 63,925 $ 58,018 1.76 1.60
---------- ---------- ---------- ----------
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YEAR ENDED DECEMBER 31, 1997
First Quarter $ 635,021 $ 108,742 $ 10,009 $ 10,009 $ 0.33 $ 0.33
Second Quarter 610,041 104,734 9,870 9,870 0.32 0.32
Third Quarter 650,912 114,442 11,867 11,867 0.37 0.37
Fourth Quarter (4) 662,161 118,013 (23,558) (29,442) (0.76)(5) (0.95)(5)
---------- ---------- ---------- ----------
Totals (4) $2,558,135 $ 445,931 $ 8,188 $ 2,304 0.22 0.03
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) As a result of changes in the number of common and common equivalent shares
during the year, the sum of quarterly earnings per share will not equal
earnings per share for the total year.
(2) Earnings per share reflect a two-for-one stock split in the form of a 100%
Common Stock dividend paid September 28, 1998.
6
(3) The second quarter and the year ended December 31, 1998, reflect a
non-recurring charge of $13.9 million ($8.3 million net of tax benefit of
$5.6 million) related to the write off of a contract for computer services
from a vendor (see Note 1 to the Consolidated Financial Statements included
elsewhere herein) and an extraordinary loss of $9.9 million ($5.9 million
net of tax benefit of $4.0 million) related to the early retirement of debt
(see Notes 1 and 7 to the Consolidated Financial Statements included
elsewhere herein).
(4) The fourth quarter and year ended December 31, 1997, reflect a
non-recurring non-cash charge of $59.4 million ($35.5 million net of tax
benefit of $23.9 million), (see Notes 1 and 11 to the Consolidated
Financial Statements included elsewhere herein) and a cash charge of
$5.3 million ($3.2 million net of tax benefit of $2.1 million) related
to the vesting of stock options and the termination of certain
management advisory service agreements (see Notes 1 and 13 to the
Consolidated Financial Statements included elsewhere herein). In
addition, during the fourth quarter of 1997, the Company recorded an
extraordinary loss of $9.8 million ($5.9 million net of tax benefit of
$3.9 million) related to the early retirement of debt (see Note 1 to the
Consolidated Financial Statements included elsewhere herein).
(5) Net loss per common share during the fourth quarter of 1997 is calculated
using only the weighted average number of common shares outstanding.
QUARTERLY STOCK PRICE DATA
The Company's Common Stock is quoted through the Nasdaq National Market
System under the symbol "USTR." The following table sets forth on a per share
basis, for the periods indicated, the high and low closing sale prices per
share for the Common Stock as reported by the Nasdaq National Market System.
All stock price information reflects a two-for-one stock split in the form of
a 100% Common Stock dividend paid September 28, 1998.
High Low
------ ------
1997
--------------
First Quarter $10.88 $ 9.38
Second Quarter 13.75 9.50
Third Quarter 19.13 11.94
Fourth Quarter 24.32 18.63
High Low
------ ------
1998
--------------
First Quarter $32.66 $21.94
Second Quarter 32.38 26.56
Third Quarter 36.00 23.88
Fourth Quarter 30.19 22.50
On March 15, 1999, there were approximately 970 holders of record of Common
Stock.
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid cash dividends and does not anticipate
declaring cash dividends on its Common Stock in the foreseeable future.
Furthermore, as a holding company, the ability of United to pay cash
dividends in the future depends upon the receipt of dividends or other
payments from its operating subsidiary, USSC. The payment of dividends by
USSC is subject to certain restrictions imposed by the Company's debt
agreements. See Note 7 to the Consolidated Financial Statements of the
Company included elsewhere herein.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is the selected historical consolidated financial data for the
Company. Although United was the surviving corporation in the Merger, the
Acquisition was treated as a reverse acquisition for accounting purposes, with
Associated as the acquiring corporation. Therefore, the income statement,
operating, and other
7
data for the year ended December 31, 1995, reflect the financial information
of Associated only for the three months ended March 30, 1995, and the results
of the Company for the nine months ended December 31, 1995.
THE COMPANY/ASSOCIATED
The selected consolidated financial data for the year ended December 31, 1994
was derived from the Consolidated Financial Statements of Associated. The
selected consolidated financial data of the Company for the years ended December
31, 1998, 1997, 1996 and 1995 (which for Income Statement, Operating, and Other
Data includes Associated only for the three months ended March 30, 1995, and the
results of the Company for the nine months ended December 31, 1995) have been
derived from the Consolidated Financial Statements of the Company, which have
been audited by Ernst & Young LLP, independent auditors. All selected
consolidated financial data set forth below should be read in conjunction with,
and is qualified in its entirety by, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere in this Form 10-K.
The Company
----------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- --------
(dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Net sales $ 3,059,166 $2,558,135 $2,298,170 $1,751,462 $470,185
Cost of goods sold 2,529,928 2,112,204 1,907,209 1,446,949 382,299
----------- ---------- ---------- ---------- --------
Gross profit 529,238 445,931 390,961 304,513 87,886
Operating expenses:
Warehousing, marketing and
administrative expenses 359,875 311,002 277,957 246,956(1) 69,765
Non-recurring charges 13,852(2) 64,698(3) - - - - - -
----------- ---------- ---------- ---------- --------
Total operating expenses 373,727 375,700 277,957 246,956(1) 69,765
----------- ---------- ---------- ---------- --------
Income from operations 155,511 70,231 113,004 57,557 18,121
Interest expense, net 36,301 53,511 57,456 46,186 7,725
Other expense 8,221(4) - - - - - - - -
----------- ---------- ---------- ---------- --------
Income before income taxes
and extraordinary item 110,989 16,720 55,548 11,371 10,396
Income taxes 47,064 8,532 23,555 5,128 3,993
----------- ---------- ---------- ---------- --------
Income before extraordinary
item 63,925 8,188 31,993 6,243 6,403
Extraordinary item - loss on
early retirement of debt, net of
tax benefit of $3,970 in 1998,
$3,956 in 1997, and $967 in 1995 (5,907) (5,884) - - (1,449) - -
----------- ---------- ---------- ---------- --------
Net income $ 58,018 $ 2,304 $ 31,993 $ 4,794 $ 6,403
----------- ---------- ---------- ---------- --------
----------- ---------- ---------- ---------- --------
Net income attributable to
common stockholders $ 58,018 $ 776 $ 30,249 $ 2,796 $ 4,210
----------- ---------- ---------- ---------- --------
----------- ---------- ---------- ---------- --------
Net income per common
share - assuming dilution (5)
Income before extraordinary item $ 1.76 $ 0.22 $ 1.01 $ 0.17 $ 0.26
Extraordinary item (0.16) (0.19) - - (0.06) - -
----------- ---------- ---------- ---------- --------
Net income $ 1.60 $ 0.03 $ 1.01 $ 0.11 $ 0.26
----------- ---------- ---------- ---------- --------
----------- ---------- ---------- ---------- --------
Cash dividends declared per
common share $ - - $ - - $ - - $ - - $ - -
OPERATING AND OTHER DATA:
EBITDA (6) 182,449 96,272 139,046 81,241 23,505
EBITDA margin (7) 6.0%(8) 3.8%(9) 6.1% 4.6%(10) 5.0%
Depreciation and
amortization (11) $ 26,938 $ 26,041 $ 26,042 $ 23,684 $ 5,384
Capital expenditures 24,616 12,991 (2,886)(12) 8,017 554
8
The Company
----------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------
1998(13) 1997 (14) 1996 1995 (15) 1994
----------- ------------ ---------- ------------- ----------
(dollars in thousands, except per share data)
OPERATING RESULTS BEFORE CHARGES:
Income from operations $ 169,363 $ 134,929 $ 113,004 $ 67,316 $ 18,121
Net income attributable to
common stockholders 72,212 45,364 30,249 10,081 4,210
Net income per common
share - assuming dilution (5) 2.00 1.47 1.01 0.40 0.26
EBITDA 196,301 160,970 139,046 91,000 23,505
EBITDA margin 6.4% 6.3% 6.1% 5.2% 5.0%
As of December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
BALANCE SHEET DATA:
Working capital $ 357,024(16) $ 451,449 $ 404,973 $ 355,465 $ 56,454
Total assets 1,166,991(16) 1,148,021 1,109,867 1,001,383 192,479
Total debt and capital lease (17) 315,384 537,135 600,002 551,990 64,623
Redeemable preferred stock - - - - 19,785 18,041 23,189
Redeemable warrants - - - - 23,812 39,692 1,650
Total stockholders' equity 370,563 223,308 75,820 30,024 24,775
(1) Includes a restructuring charge of $9.8 million ($5.9 million net of tax
benefit of $3.9 million) for the year ended December 31, 1995.
(2) In the second quarter of 1998, the Company recognized a non-recurring
charge of $13.9 million ($8.3 million net of tax benefit of $5.6 million)
related to the write off of the remaining payments and prepaid expense
under a contract for computer services from a vendor. See Note 1 to the
Consolidated Financial Statements included elsewhere herein.
(3) In the fourth quarter of 1997, the Company recognized a non-recurring
non-cash charge of $59.4 million ($35.5 million net of tax benefit of $23.9
million), (see Notes 1 and 11 to the Consolidated Financial Statements
included elsewhere herein) and a non-recurring cash charge of $5.3 million
($3.2 million net of tax benefit of $2.1 million) related to the vesting of
stock options and the termination of certain management advisory service
agreements (see Notes 1 and 13 to the Consolidated Financial Statements
included elsewhere herein).
(4) Represents the loss on the sale of certain trade accounts receivable
through an asset-backed securitization program and the loss on the sale of
certain capital assets. See Note 5 to the Consolidation Financial
Statements included elsewhere herein.
(5) Earnings per share reflect a two-for-one stock split in the form of a 100%
Common Stock paid September 28, 1998.
(6) EBITDA excluding non-recurring charges would have been $196.3 million and
$161.0 million for 1998 and 1997, respectively. EBITDA is defined as
earnings before interest, taxes, depreciation and amortization and
extraordinary item and is presented because it is commonly used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance and to determine a company's ability to service and
incur debt. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability
or liquidity.
(7) EBITDA margin represents EBITDA as a percent of net sales.
9
(8) EBITDA margin would have been 6.4% excluding the non-recurring charge.
(9) EBITDA margin would have been 6.3% excluding the non-recurring charges.
(10) EBITDA margin would have been 5.2% excluding the restructuring charge.
(11) Excludes amortization related to deferred financing costs, which is a
component of interest expense.
(12) Includes $11.1 million of proceeds from the sale of property, plant and
equipment.
(13) In the second quarter of 1998, the Company recognized a non-recurring
charge of $13.9 million ($8.3 million net of tax benefit of $5.6 million)
related to the write off of the remaining payments and prepaid expense
under a contract for computer services from a vendor (see Note 1 to the
Consolidated Financial Statements included elsewhere herein). In addition,
during the second quarter of 1998 the Company recorded an extraordinary
loss of $9.9 million ($5.9 million net of tax benefit of $4.0 million)
related to the early retirement of debt (see Notes 1 and 7 to the
Consolidated Financial Statements included elsewhere herein).
(14) In the fourth quarter of 1997, the Company recognized a non-recurring
non-cash charge of $59.4 million ($35.5 million net of tax benefit of $23.9
million), (see Notes 1 and 11 to the Consolidated Financial Statements
included elsewhere herein) and a non-recurring cash charge of $5.3 million
($3.2 million net of tax benefit of $2.1 million) related to the vesting of
stock options and the termination of certain management advisory service
agreements (see Notes 1 and 13 to the Consolidated Financial Statements
included elsewhere herein). In addition, during the fourth quarter of 1997
the Company recorded an extraordinary loss of $9.8 million ($5.9 million
net of tax benefit of $3.9 million) related to early retirement of debt
(see Note 1 to the Consolidated Financial Statements included elsewhere
herein).
(15) During 1995, the Company recorded a restructuring charge of $9.8 million
($5.9 million net of tax benefit of $3.9 million) and an extraordinary loss
of $2.4 million ($1.4 million net of tax benefit of $1.0 million) related
to early retirement of debt.
(16) Excludes $160.0 million of certain trade accounts receivable sold through
an asset-backed securitization program. See Note 5 to the Consolidated
Financial Statements included elsewhere herein.
(17) Total debt and capital lease include current maturities.
UNITED
The selected consolidated financial data of United (a predecessor of the
Company) set forth below for the seven months ended March 30, 1995 (at which
time United and Associated merged to create the Company) have been derived from
the Consolidated Financial Statements of United which have been audited by Ernst
& Young LLP, independent auditors. The selected financial data at and for the
seven-month period ended March 31, 1994 are unaudited and in the opinion of
management reflect all adjustments considered necessary for a fair presentation
of such data. The selected consolidated financial data of United for the fiscal
year ended August 31, 1994 have been derived from the audited Consolidated
Financial Statements of United.
10
UNITED
-------------------------------------------------------------
SEVEN MONTHS ENDED TWELVE MONTHS ENDED
------------------------------------ ----------------------
MARCH 30, MARCH 31, AUGUST 31,
1995 1994 1994
------------- --------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data:
Net sales $ 980,575 $ 871,585 $1,473,024
Cost of sales 814,780 717,546 1,220,245
---------- ---------- ----------
Gross profit on sales 165,795 154,039 252,779
Operating expenses 133,098 128,594 216,485
Merger-related costs 27,780(1) - - - -
---------- ---------- ----------
Income from operations 4,917 25,445 36,294
Interest expense, net 7,500 5,837 10,461
Other income, net 41 117 225
---------- ---------- ----------
Income (loss) before income taxes (2,542) 19,725 26,058
Income taxes 4,692 8,185 10,309
---------- ---------- ----------
Net income (loss) $ (7,234) $ 11,540 $ 15,749
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common
share - assuming dilution $ (0.39) $ 0.62 $ 0.85
Cash dividends declared per share 0.30 0.30 0.40
Operating and Other Data:
EBITDA(2) 17,553 37,665 57,755
EBITDA margin(3) 1.8% 4.3% 3.9%
Depreciation and amortization $ 12,595 $ 12,103 $ 21,236
Net capital expenditures 7,764 4,287 10,499
Balance Sheet Data (at period end):
Working capital 257,600 297,099 239,827
Total assets 711,839 608,728 618,550
Total debt and capital leases(4) 233,406 227,626 155,803
Stockholders' investment 233,125 243,636 246,010
(1) In connection with the Merger, United incurred approximately $27.8 million
of Merger-related costs, consisting of severance payments under employment
contracts ($9.6 million); insurance benefits under employment contracts
($7.4 million); legal, accounting and other professional services fees
($5.2 million); retirement of stock options ($3.0 million); and fees for
letters of credit related to employment contracts and other costs ($2.6
million).
(2) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and is presented because it is commonly used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance and to determine a company's ability to service and
incur debt. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability
or liquidity.
(3) EBITDA margin represents EBITDA as a percentage of net sales.
(4) Total debt and capital leases include current maturities.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-K.
Information contained or incorporated by reference in this Form 10-K 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-K are
forward-looking statements. The following matters and certain other factors
noted throughout this Form 10-K constitute cautionary statements identifying
important factors with respect to any such forward-looking statements,
including certain risks and uncertainties, that 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 integration of acquisitions,
changes in end-users' traditional demands for business products, reliance by
the Company on certain key suppliers, the effects on the Company of
fluctuations in manufacturers' pricing, potential service interruptions,
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 filings by the Company with the Securities and
Exchange Commission, including the Company's Registration Statement filed on
June 9, 1998. All forward-looking statements contained in this Form 10-K
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.
OVERVIEW
On March 30, 1995, Associated Holdings, Inc. ("Associated") purchased 92.5% of
the then outstanding shares of the common stock, $0.10 par value ("Common
Stock") of United Stationers Inc. ("United") for approximately $266.6 million in
the aggregate pursuant to a tender offer (the "Offer"). Immediately thereafter,
Associated merged with and into United (the "Merger" and, collectively with the
Offer, the "Acquisition"), and Associated Stationers, Inc. ("ASI"), a wholly
owned subsidiary of Associated merged with and into United Stationers Supply Co.
("USSC"), a wholly owned subsidiary of United, with United and USSC continuing
as the respective surviving corporations. Although United was the surviving
corporation in the Merger, the transaction was treated as a reverse acquisition
for accounting purposes, with Associated as the acquiring corporation.
COMMON STOCK DIVIDEND. All share and per share data reflect a two-for-one stock
split in the form of a 100% Common Stock dividend paid September 28, 1998.
JUNE 1998 EQUITY OFFERING. In June 1998, United completed an offering of 4.0
million shares of Common Stock (the "June 1998 Equity Offering"), consisting of
3.0 million primary shares sold by United, and 1.0 million secondary shares sold
by certain selling stockholders. The shares were priced at $27.00 per share,
before underwriting discounts and commissions of $1.15 per share. The aggregate
proceeds to United of approximately $77.6 million (before deducting expenses)
were delivered to USSC and used to repay a portion of indebtedness under the
Tranche A Term Loan Facility, which caused a permanent reduction of the amount
borrowable thereunder.
United did not receive any of the proceeds from the sale of the 1.0 million
shares of Common Stock offered by the selling stockholders, other than an
aggregate of approximately $6.4 million paid by the selling stockholders upon
exercise of employee stock options in connection with the June 1998 Equity
Offering, which were delivered to USSC and applied to the repayment of
indebtedness under the New Credit Facilities.
12
Subsequent to the closing of the June 1998 Equity Offering, the underwriters for
the offering exercised an overallotment option to purchase an additional 0.4
million shares from United. The net proceeds to United of approximately $10.3
million from the sale were delivered to USSC and used to repay an additional
portion of the indebtedness outstanding under the Tranche A Term Loan Facility.
In the second quarter of 1998, the Company recognized the following charges:
a non-recurring charge of $13.9 million ($8.3 million net of tax benefit of
$5.6 million) to write off the remaining payments and related prepaid expense
under a contract for computer services from a vendor (see Note 1 to the
Consolidated Financial Statements included elsewhere herein) and an
extraordinary loss of $9.9 million ($5.9 million net of tax benefit of $4.0
million) related to the early retirement of debt (see Notes 1 and 7 to the
Consolidated Financial Statements included elsewhere herein), (collectively
"1998 Charges").
Net income attributable to common stockholders for the year ended December 31,
1998, before the 1998 Charges, was $72.2 million, up 59.0%, compared with $45.4
million, before the 1997 Charges (as defined). In 1998 diluted earnings per
share, before the 1998 Charges, were $2.00 on 36.2 million weighted average
shares outstanding, up 36.1%, compared with $1.47, before the 1997 Charges (as
defined), on 30.8 million weighted average shares outstanding for the prior
year.
AZERTY BUSINESS ACQUISITION. On April 3, 1998, the Company acquired all of
the capital stock of Azerty Incorporated, Azerty de Mexico, S.A. de C.V.,
Positive ID Wholesale Inc., and AP Support Services Incorporated
(collectively the "Azerty Business"), which comprised substantially all of
the United States and Mexican operations of the Office Products Division of
Abitibi-Consolidated Inc. The aggregate purchase price paid by the Company
for the Azerty Business was approximately $115.7 million (including fees and
expenses). The acquisition was financed primarily through senior debt. The
Azerty Business acquisition has been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition, with the excess of cost over fair value of
approximately $73.7 million allocated to goodwill. The financial information
for the year ended December 31, 1998, includes nine months of the Azerty
Business. The pro forma effects of this acquisition are not material.
OCTOBER 1997 EQUITY OFFERING. On October 9, 1997, the Company completed a 4.0
million share primary offering of Common Stock and a 6.8 million share secondary
offering of Common Stock (the "October 1997 Equity Offering"). The shares were
priced at $19.00 per share, before underwriting discounts and commissions of
$0.95 per share. The aggregate net proceeds to the Company from this equity
offering of $72.2 million (before deducting expenses) and proceeds of $0.1
million resulting from the conversion of approximately 2.2 million warrants into
Common Stock were used to (i) redeem $50.0 million of the Company's 12.75%
Senior Subordinated Notes and pay the redemption premium thereon of $6.4
million, (ii) pay fees related to the October 1997 Equity Offering, and (iii)
reduce by $15.5 million the indebtedness under the Term Loan Facilities. The
repayment of indebtedness resulted in an extraordinary loss of $9.8 million
($5.9 million net of tax benefit of $3.9 million) and caused a permanent
reduction of the amount borrowable under the Term Loan Facilities.
As a result of the October 1997 Equity Offering, the Company recognized the
following charges in the fourth quarter of 1997: (i) a pre-tax non-recurring
non-cash charge of $59.4 million ($35.5 million net of tax benefit of $23.9
million), (see Notes 1 and 11 to the Consolidated Financial Statements included
elsewhere herein) and a non-recurring cash charge of $5.3 million ($3.2 million
net of tax benefit of $2.1 million) related to the vesting of stock options and
the termination of certain management advisory service agreements (see Notes 1
and 13 to the Consolidated Financial Statements included elsewhere herein), and
(ii) an extraordinary loss of $9.8 million ($5.9 million net of tax benefit of
$3.9 million) related to the early retirement of debt (see Note 1 to the
Consolidated Financial Statements included elsewhere herein), (collectively
"1997 Charges").
Net income attributable to common stockholders for the year ended December 31,
1997, before the 1997 Charges, was $45.4 million, up 50.3%, compared with $30.2
million in 1996. Diluted earnings per share, before the 1997 Charges, for 1997
were $1.47 on 30.8 million weighted average shares outstanding, up 45.3%,
compared with $1.01 on 29.8 million weighted average shares outstanding for the
prior year.
13
LAGASSE BROS., INC. ACQUISITION. On October 31, 1996, the Company acquired all
of the capital stock of Lagasse Bros., Inc. ("Lagasse") for approximately $51.9
million. The acquisition was financed primarily through senior debt. The Lagasse
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the estimated fair values at the date of
acquisition, with the excess of cost over fair value of approximately $39.0
million allocated to goodwill. The financial information for the year ended
December 31, 1996, includes the results of Lagasse for November and December
only. The pro forma effects of this acquisition are not material.
GENERAL INFORMATION
EMPLOYEE STOCK OPTIONS. The Management Equity Plan (the "Plan") is administered
by the Board of Directors, although the Plan allows the Board of Directors of
the Company to designate an option committee to administer the Plan. The Plan
provides for the issuance of shares of Common Stock through the exercise of
options, to key officers and management employees of the Company, either as
incentive stock options or as non-qualified stock options.
In October 1997, the Company's stockholders approved an amendment to the Plan
that provided for the issuance of approximately 3.0 million additional options
to key management employees and directors of the Company. During 1998 and 1997,
options of approximately 1.0 million and 0.5 million, respectively, were granted
to management employees and directors with option exercise prices equal to fair
market value.
In September 1995, the Company's Board of Directors approved an amendment to the
Plan which provided for the issuance of options in connection with the Merger
("Merger Incentive Options") to key management employees of the Company
exercisable for up to 4.4 million additional shares of its Common Stock.
Subsequently, approximately 4.4 million options were granted during 1995 and
1996 to management employees. Some of the options were granted at an option
exercise price below market value and the option exercise price of certain
options increased by $0.31 on a quarterly basis effective April 1, 1996.
These Merger Incentive Options, which were performance-based, were granted to
provide incentives to management with respect to the successful development
of ASI and the integration of ASI with the Company. All Merger Incentive
Options were vested and became exercisable with the completion of the October
1997 Equity Offering. All Common Stock issued from the exercise of Merger
Incentive Options was subject to a six-month holding period that expired on
April 10, 1998. In the fourth quarter of 1997, the Company was required to
recognize compensation expense based upon the difference between the fair
market value of the Common Stock and the exercise prices. Based on the
closing stock price on October 10, 1997 of $19.56, and options outstanding as
of October 10, 1997, the Company recognized a non-recurring non-cash charge
of $59.4 million ($35.5 million net of tax benefit of $23.9 million).
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 19.6%, on equivalent workdays, to $3.1 billion
for 1998, compared with $2.6 billion for 1997. The Company experienced sales
strength in all geographic regions and across all product categories.
Specifically, the janitorial and sanitation products and computer consumables
product categories experienced sales growth rates of 26% and 7%, respectively,
during 1998.
Net sales for 1998 include nine months of incremental sales resulting from the
April 1998 Azerty Acquisition. After adjusting for the acquisition, the Company
achieved an organic net sales growth rate of 8.4%, on equivalent workdays.
The Company's organic net sales growth rate through February 1999 was up
slightly over 1%. Strategic planning initiatives, which capitalize on the
Company's core competencies, position the Company to achieve its long-term
goal of top-line organic growth of 6% to 9%.
14
GROSS MARGIN. Gross margin declined to 17.3% in 1998, compared with 17.4% in
1997. This decrease is primarily the result of the blending in of the
lower-margin computer consumables Azerty Business, which was substantially
offset by the continuing shift away from lower-margin hardware items and a
higher level of vendor allowances.
OPERATING EXPENSES. Operating expenses as a percent of net sales, before a
non-recurring charge, declined to 11.8% in 1998, compared with 12.2%, before
non-recurring charges, in 1997. This reduction represents the impact of
combining the lower operating expense ratio from the Azerty Business with the
Company's traditional operating expense ratio. The non-recurring charge,
recorded in the second quarter of 1998, of $13.9 million ($8.3 million net of
tax benefit of $5.6 million) was related to the write off of a contract for
computer services from a vendor (see Note 1 to the Consolidated Financial
Statements included elsewhere herein). Non-recurring charges recorded in the
fourth quarter of 1997 were $59.4 million (non-cash), (see Notes 1 and 11 to the
Consolidated Financial Statements included elsewhere herein) and $5.3 million
(cash) related to the vesting of stock options and the termination of certain
management advisory service agreements (see Notes 1 and 13 to the Consolidated
Financial Statements included elsewhere herein). Operating expenses, as a
percent of net sales, including the aforementioned charges, were 12.2% in
1998, compared with 14.7% in 1997.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales, before
non-recurring charges in 1998 and 1997, increased to 5.5% in 1998 from 5.2% in
1997. Including the non-recurring charge, income from operations as a percent of
net sales was 5.1% in 1998, compared with 2.7% in 1997.
INTEREST EXPENSE. Interest expense as a percent of net sales was 1.2% in 1998,
compared with 2.1% in 1997. This reduction reflects the continued leveraging of
fixed interest costs against higher sales and the repayment of indebtedness with
the proceeds received from the June 1998 Equity Offering, the Receivables
Securitization Program (as defined), and the October 1997 Equity Offering. These
transactions were partially offset by the acquisition of the Azerty Business in
April of 1998 for a purchase price of approximately $115.7 million and the
timely placement of $100.0 million of Senior Subordinated Notes at 8.375%
in April of 1998.
OTHER EXPENSE. Other expense as a percent of net sales was 0.3% in 1998. This
expense primarily represents the costs associated with the sale of certain trade
accounts receivable through the Receivables
Securitization Program (as defined). These costs vary on a monthly basis and are
generally related to certain interest rates.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income taxes
and extraordinary item as a percent of net sales, excluding the impact of the
non-recurring charges in 1998 and 1997, increased to 4.0% in 1998 from 3.1%
in 1997. Including the non-recurring charge, income before income taxes and
extraordinary item as a percent of net sales was 3.6% in 1998, compared with
0.6% in 1997.
NET INCOME. Net income in 1998 and 1997 include an extraordinary item, loss on
the early retirement of debt of $9.9 million ($5.9 million net of tax benefit of
$4.0 million) and $9.8 million ($5.9 million net of tax benefit of $3.9
million), respectively (see Note 1 to the Consolidated Financial Statements
included elsewhere herein). Net income as a percent of net sales, excluding the
impact of the non-recurring charge and the extraordinary item, increased to 2.4%
compared with 1.8% in 1997. Including the impact of the non-recurring charge and
the extraordinary item, net income as a percent of net sales was 1.9% in 1998,
compared with 0.1% in 1997.
In the second quarter of 1998, the Company recognized the following charges:
a non-recurring charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million) related to the write-off of a contract for computer services from a
vendor (see Note 1 to the Consolidated Financial Statements included elsewhere
herein) and an extraordinary loss of $9.9 million ($5.9 million net of tax
benefit of $4.0 million) related to the early retirement of debt (see Notes 1
and 7 to the Consolidated Financial Statements included elsewhere
herein), (collectively "1998 Charges").
FOURTH QUARTER RESULTS. Certain expense and cost of sale estimates are recorded
throughout the year, including inventory shrinkage and obsolescence, required
LIFO reserve, manufacturers' allowances, advertising costs and various expense
items. During the fourth quarter of 1998, the Company recorded a favorable net
income adjustment of approximately $2.3 million related to the refinement of
estimates recorded in the prior three quarters.
15
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased 11.8%, on equivalent workdays, to $2.6 billion
for 1997, compared with $2.3 billion for 1996. This increase represents strength
in all geographic regions. Also, the Company's janitorial and sanitation
products, office furniture and traditional office supplies experienced strong
growth throughout the year.
Net sales for 1997 include 10 months of incremental sales related to the
October 1996 acquisition of Lagasse Bros., Inc. Excluding the Lagasse
acquisition, sales growth for 1997 was 8.8%.
GROSS MARGIN. Gross margin increased to 17.4% in 1997 from 17.0% in 1996. This
increase reflects higher vendor rebates obtained by meeting higher purchase
volume hurdles. In addition, the Company continued to see a shift in product mix
toward higher margin items. Lower margin computer hardware declined as a percent
of total sales.
OPERATING EXPENSES. Operating expenses as a percent of net sales, before
non-recurring charges, remained nearly flat at 12.2% in 1997, compared with
12.1% in 1996. Non-recurring charges recorded in the fourth quarter of 1997
were $59.4 million (non-cash), (see Notes 1 and 11 to the Consolidated
Financial Statements included elsewhere herein) and $5.3 million (cash)
related to the vesting of stock options and the termination of certain
management advisory service agreements (see Notes 1 and 13 to the
Consolidated Financial Statements included elsewhere herein). During 1997,
the Company accelerated certain discretionary expenditures that represent
investments in the future, specifically, preparation for the Year 2000
computer system issues and investments related to strategic planning. In
addition, the Company continues to improve warehouse and systems efficiencies
to produce high levels of customer and consumer satisfaction. Operating
expenses as a percent of net sales, including the aforementioned
non-recurring charges, was 14.7% in 1997.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales, before
non-recurring charges, increased to 5.2% from 4.9% in 1996. Including
non-recurring charges, income from operations as a percent of net sales was 2.7%
in 1997.
INTEREST EXPENSE. Interest expense as a percent of net sales was 2.1% compared
with 2.5% in 1996. This reduction reflects the continued leveraging of fixed
interest costs against higher sales.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income taxes
and extraordinary item as a percent of net sales, excluding the impact of
non-recurring charges, increased to 3.1% from 2.4% in 1996. Including
non-recurring charges, income before income taxes and extraordinary item as a
percent of net sales was 0.6% in 1997.
NET INCOME. Net income in 1997 includes an extraordinary item, loss on the early
retirement of debt of $9.8 million ($5.9 million net of tax benefit of $3.9
million) or 0.2% of net sales (see Note 1 to the Consolidated Financial
Statements included elsewhere herein). Net income as a percent of net sales,
excluding the impact of non-recurring charges and early retirement of debt,
increased to 1.8% in 1997 from 1.4% in 1996. Including non-recurring charges and
extraordinary item, net income as a percent of net sales was 0.1% in 1997.
In the fourth quarter of 1997, the Company recognized the following charges: (i)
pre-tax non-recurring charges of $59.4 million (non-cash), (see Note 11 to the
Consolidated Financial Statements included elsewhere herein) and $5.3 million
(cash) related to the vesting of stock options and the termination of certain
management advisory service agreements (see Note 13 to the Consolidated
Financial Statements included elsewhere herein), and (ii) an extraordinary loss
of $9.8 million ($5.9 million net of tax benefit of $3.9 million) related to the
early retirement of debt (see Note 1 to the Consolidated Financial Statements
included elsewhere herein).
FOURTH QUARTER RESULTS. Certain expense and cost of sale estimates are recorded
throughout the year, including inventory shrinkage, required LIFO reserve,
manufacturers' allowances, advertising costs and various expense items. During
the fourth quarter of 1997, the Company recorded a favorable net income
adjustment of approximately $2.9 million related to the refinement of estimates
recorded in the prior three quarters.
16
LIQUIDITY AND CAPITAL RESOURCES
CREDIT AGREEMENT
At December 31, 1998, the available credit under the Second Amended and Restated
Credit Agreement (the "Credit Agreement") included $59.4 million of term loan
borrowings (the "Term Loan Facilities"), and up to $250.0 million of revolving
loan borrowings (the "Revolving Credit Facility").
The Term Loan Facilities consisted initially of a $150.0 million Tranche A
term loan facility ("Tranche A Facility") and a $100.0 million Tranche B term
loan facility ("Tranche B Facility"). The Company repaid a substantial
portion of the Tranche A Facility with proceeds from the June 1998 Equity
Offering. Amounts outstanding under the Tranche A Facility are to be repaid
in 21 quarterly installments ranging from $1.0 million at March 31, 1999 to
$3.7 million at March 31, 2004. All amounts outstanding under the Tranche B
Facility have been repaid as of April 15, 1998, with net proceeds from the
sale of $100.0 million of 8.375% Senior Subordinated Notes (as defined) and
from a portion of the proceeds generated from the sale of certain receivables
under the Receivables Securitization Program (as defined).
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 and $24.0 million was outstanding
at December 31, 1998.
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, certain of 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 set range, with the rate based on
the ratio of total debt to earnings before interest, taxes, depreciation, and
amortization ("EBITDA"). The Tranche A Facility and Revolving Credit Facility
bear interest at prime to prime plus 0.75%, or, at the Company's option, the
London Interbank Offering Rate ("LIBOR") plus 1.00% to 2.00%.
The Credit Agreement contains representations and warranties, affirmative and
negative covenants and events of default customary for financings of this type.
At December 31, 1998, the Company was in compliance with all covenants contained
in the Credit Agreement.
The Company is exposed to market risk for changes in interest rates. The Company
may enter into interest rate protection agreements, including collar agreements,
to reduce the impact of fluctuations in interest rates on a portion of its
variable rate debt. These agreements generally require the Company to pay to or
entitle the Company to receive from the other party the amount, if any, by which
the Company's interest payments fluctuate beyond the rates specified in the
agreements. The Company is subject to the credit risk that the other party may
fail to perform under such agreements. The Company's allocated cost of such
agreements is amortized to interest expense over the term of the agreements, and
the unamortized cost is included in other assets. Payments received or made as a
result of the agreements, if any, are recorded as an addition or a reduction to
interest expense. At December 31, 1998, the Company had interest rate collar
agreements expiring October 1999 on $200.0 million of borrowings at LIBOR rates
between 5.2% and 8.0%. For the years ended December 31, 1998, 1997, and 1996,
the Company recorded $0.2 million, $0.6 million, and $0.9 million, respectively,
to interest expense resulting from LIBOR rate fluctuations below the floor rate
specified in the collar agreements.
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.
17
Management believes that the Company's cash on hand, anticipated funds generated
from operations and available borrowings under the Credit Agreement, will be
sufficient to meet the short-term (less 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.
12.75% SENIOR SUBORDINATED NOTES
The 12.75% Senior Subordinated Notes ("12.75% Notes") originally were issued
on May 3, 1995, pursuant to the 12.75% Notes Indenture. As of December 31,
1998, the aggregate outstanding principal amount of the 12.75% Notes was
$100.0 million. The 12.75% Notes are unsecured senior subordinated
obligations of USSC, and payment of the 12.75% Notes is fully and
unconditionally guaranteed by the Company and USSC's domestic "restricted"
subsidiaries on a senior subordinated basis. The 12.75% Notes mature on May
1, 2005, and bear interest at the rate of 12.75% per annum, payable
semi-annually on May 1 and November 1 of each year.
8.375% SENIOR SUBORDINATED NOTES
The 8.375% Senior Subordinated Notes ("8.375% Notes") were issued on April
15, 1998, pursuant to the 8.375% Notes Indenture. As of December 31, 1998,
the aggregate outstanding principal amount of the 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.
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its credit facilities,
the Company entered into a $163.0 million Receivables Securitization Program
pursuant to which the Company sells its eligible receivables (except for certain
excluded receivables, which initially includes all receivables from the Azerty
Business and Lagasse) to the Receivables Company, a wholly owned offshore,
bankruptcy-remote special purpose limited liability company, which in turn
ultimately transfers the eligible receivables 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 receivables includes
not only those eligible receivables that existed on the closing date of
the Receivables Securitization Program, but also eligible receivables created
thereafter. The Company received approximately $160.0 million in proceeds from
the initial sale of certain eligible receivables on April 3, 1998. These
proceeds were used to repay a portion of the Tranche B Facility and certain
other 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.
The Chase Manhattan Bank acts as funding agent and, with other commercial
banks rated at least A-1/P-1, provides standby liquidity funding to support
the purchase of the receivables by the Receivables Company under a 364-day
liquidity facility. The proceeds from the Receivables Securitization Program
were used to reduce borrowings under the Company's Revolving Credit Facility.
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 December 31, 1998,
exclude approximately $160.0 million of accounts receivable sold to the
Receivables Company.
18
CASH FLOW INFORMATION
The statements of cash flows for the Company for the periods indicated is
summarized below:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
(dollars in thousands)
Net cash provided by operating activities $ 290,866 $ 41,768 $ 1,609
Net cash used in investing activities (140,356) (12,991) (49,871)
Net cash (used in) provided by financing activities (143,839) (27,029) 47,221
Net cash provided by operating activities for 1998 increased to $290.9
million from $41.8 million in 1997. This increase was due to the sale of
certain accounts receivable totaling $160.0 million, higher net income
(before non-recurring charges), an increase in accounts payable of $22.7
million, an increase in deferred taxes of $20.5 million, and a $35.5 million
decrease in inventory partially offset by a $18.2 million increase in other
assets. Net cash provided by operating activities for 1997 increased to $41.8
million from $1.6 million in 1996. This change was due to slower inventory
growth of $23.0 million, higher net income (before non-recurring charges),
and an increase in accrued liabilities of $35.2 million, partially offset by
a $21.4 million decline in deferred tax expense and a $38.0 million decline
in accounts payable.
Net cash used in investing activities during 1998 was $140.4 million compared
with $13.0 million in 1997. The increase was due to the acquisition of Azerty,
Inc. on April 3, 1998, and an increase in capital expenditures of $11.7 million.
Net cash used in investing activities during 1997 was $13.0 million compared
with $49.9 million in 1996. The decrease was due to the acquisition of Lagasse
Bros., Inc. on October 31, 1996, offset by the collection of $11.1 million in
1996 from the successful sale of closed facilities and related equipment.
Net cash used in financing activities during 1998 was $143.8 million compared
with $27.0 million in 1997. This increase was the result of the financing
required to purchase the Azerty Business, the additional payment of $8.4 million
for employee withholding tax related to stock option exercises, and changes to
working capital requirements partially offset by the net proceeds from the
timely placement of $100.0 million 8.375% Notes, and the incremental proceeds of
$27.8 million from the issuance of Common Stock. Net cash used in financing
activities in 1997 was $27.0 million compared with net cash provided of $47.2
million in 1996. The decrease was due to a $50.0 million partial redemption of
the Company's 12.75% Notes, a reduction of indebtedness under the Term Loan
Facilities of $15.5 million, redemption of Series A and C Preferred Stock of
$21.2 million and a $8.5 million payment related to employee income tax
withholding for stock option exercises offset by proceeds of $72.2 million
(before deducting expenses) related to the issuance of 4.0 million shares of
Common Stock, and additional borrowings under the revolver of $49.0 million
during 1997, compared with additional borrowings of $22.0 million in 1996.
SEASONALITY
Although the Company's sales are generally relatively level throughout the year,
the Company's sales vary to the extent of seasonal differences in the buying
patterns of end-users who purchase office products. In particular, the Company's
sales are generally higher than average during January when many businesses
begin operating under new annual budgets.
The Company experiences seasonality in terms of its working capital needs, with
highest requirements in December through February reflecting a build up in
inventory prior to and during the peak sales period. The Company believes that
its current availability under the Revolving Credit Facility is sufficient to
satisfy such seasonal capital needs for the foreseeable future.
19
INFLATION/DEFLATION AND CHANGING PRICES
The Company maintains substantial inventories to accommodate the prompt
service and delivery requirements of its customers. Accordingly, the Company
purchases its products on a regular basis in an effort to maintain its
inventory at levels that it believes to be sufficient to satisfy the
anticipated needs of its customers based upon historic buying practices and
market conditions. Although the Company historically has been able to pass
through manufacturers' price increases to its customers on a timely basis,
competitive conditions will influence how much of future price increases can
be passed on to the Company's customers. Conversely, when manufacturers'
prices decline, lower sales prices could result in lower margins as the
Company sells existing inventory. Changes in the prices paid by the Company
for its products therefore could have a material adverse effect on the
Company's net sales, gross margins and net income.
YEAR 2000 MODIFICATIONS
The Company relies on both information technology ("IT") and non-IT computer
systems in its operations. The mission-critical IT systems include the Company's
operating and accounting systems, such as IT software applications that allow
the Company to maintain inventory and customer information and to communicate
with its suppliers and customers. The non-IT systems are primarily
telecommunications systems and the embedded microprocessors that control
warehouse and other building systems, such as inventory control devices,
security systems, lighting, fire and safety systems, and heating, ventilating
and air conditioning systems.
In 1996, the Company began to address the year 2000 problem (that is, the fact
that some systems may fail or produce inaccurate results using dates in or
around the year 2000). The Company formed a year 2000 task force under its Chief
Information Officer to coordinate and implement measures designed to prevent
disruption in its business operations related to the year 2000 problem. The
Company believes that it completed the remediation of its mission-critical IT
applications software in December 1998 and is scheduled to complete an
end-to-end test of its IT systems by September 1999. The Company is assessing
the effect of the year 2000 problem on its non-IT systems and intends to replace
non-IT systems as necessary to become year 2000 ready by December 1999.
The Company also is working with its customers and suppliers to determine
whether the year 2000 problem will have an adverse effect on the Company's
relationships with them. Beginning with the Company`s catalog for
1999, the Company's product suppliers have assured the Company that their
products will be year 2000 ready. However, the Company does not control its
suppliers and relies on a variety of utilities, telecommunications companies and
other suppliers in order to continue its business.
The Company is analyzing its business to identify its most reasonably likely
worst case scenario and is developing contingency plans to address the risks
created by the year 2000 problem. These plans include procuring alternative
suppliers, when available, when the Company is able to conclude that an existing
supplier will not be year 2000 ready. The Company is scheduled to complete these
contingency plans by July 1999.
The Company's year 2000 remediation utilizes both internal and external
resources. During 1998 and 1997 the Company incurred approximately $1.5 million
and $1.4 million, respectively, related to this issue and expects to incur an
additional $1.0 million to $1.5 million of such expenses over the next year.
Funding for year 2000 expenses will be generated from on-going operations and
available borrowings under the Credit Agreement.
There can be no assurance that year 2000 remediation by the Company or third
parties will be properly and timely completed and failure to do so could have a
material adverse effect on the Company's financial condition. The Company cannot
predict the actual effects to it of the year 2000 issue, which depends on
numerous uncertainties such as: (i) whether major third parties address this
issue properly and timely and (ii) whether broad-based or systemic economic
failures may occur. The Company currently is unaware of any events, trends, or
condition regarding this issue that may have a material effect on the Company's
results of operations, liquidity, and financial position. If the year 2000 issue
is not resolved by January 1, 2000, the Company's results of operations or
financial condition could be materially adversely affected.
20
ITEM 7A. 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 is
principally limited to the Company's outstanding long-term debt at December 31,
1998, of $315.4 million and $160.0 million of receivables sold under the
Receivables Securitization Program, whose discount rate varies with market
interest rates ("Receivables Exposure"). Approximately 43% of the outstanding
debt and Receivables Exposure is 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 $1.4 million annualized increase or decrease in interest expense,
loss on the sale of certain accounts receivable and cash flows. The Company has
entered into interest rate collar agreements, under which the interest rates on
$200.0 million of floating rate debt can vary between LIBOR rates of 5.2% and
8.0% (see Note 7 to the Consolidated Financial Statements included elsewhere
herein.) 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, but is
considering such a program, and may enter into such transactions when it
believes there is a clear financial advantage to do so.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Set forth on the following pages are the Consolidated Statements of Income,
Changes in Stockholders' Equity and Cash Flows of the Company for the years
ended December 31, 1998, 1997 and 1996, and the Consolidated Balance Sheets of
the Company as of December 31, 1998 and 1997.
21
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF
DIRECTORS OF UNITED STATIONERS INC.
We have audited the accompanying consolidated balance sheets of United
Stationers Inc. and Subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements 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 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Stationers
Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
January 26, 1999,
except for Note 18, as to which the date is
March 17, 1999
22
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
NET SALES $ 3,059,166 $ 2,558,135 $ 2,298,170
COST OF GOODS SOLD 2,529,928 2,112,204 1,907,209
----------- ----------- -----------
Gross profit 529,238 445,931 390,961
OPERATING EXPENSES:
Warehousing, marketing and
administrative expenses 359,875 311,002 277,957
Non-recurring charges 13,852 64,698 - -
----------- ----------- -----------
Total operating expenses 373,727 375,700 277,957
----------- ----------- -----------
Income from operations 155,511 70,231 113,004
INTEREST EXPENSE 36,301 53,511 57,456
OTHER EXPENSE 8,221 - - - -
----------- ----------- -----------
Income before income taxes and extraordinary item 110,989 16,720 55,548
INCOME TAXES 47,064 8,532 23,555
----------- ----------- -----------
Income before extraordinary item 63,925 8,188 31,993
EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT
OF DEBT (net of tax benefit of $3,970 in 1998 and
$3,956 in 1997) (5,907) (5,884) - -
----------- ----------- -----------
NET INCOME 58,018 2,304 31,993
PREFERRED STOCK DIVIDENDS ISSUED AND ACCRUED - - 1,528 1,744
----------- ----------- -----------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 58,018 $ 776 $ 30,249
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER COMMON SHARE:
Income before extraordinary item $ 1.84 $ 0.26 $ 1.24
Extraordinary item (0.17) (0.23) - -
----------- ----------- -----------
Net income per common share $ 1.67 $ 0.03 $ 1.24
----------- ----------- -----------
----------- ----------- -----------
Average number of common shares (in thousands) 34,680 26,128 24,410
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER COMMON SHARE - ASSUMING DILUTION:
Income before extraordinary item $ 1.76 $ 0.22 $ 1.01
Extraordinary item (0.16) (0.19) - -
----------- ----------- -----------
Net income per common share $ 1.60 $ 0.03 $ 1.01
----------- ----------- -----------
----------- ----------- -----------
Average number of common shares (in thousands) 36,171 30,760 29,846
----------- ----------- -----------
----------- ----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
AS OF DECEMBER 31,
---------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,038 $ 12,367
Accounts receivable, less allowance for doubtful
accounts of $9,775 in 1998 and $7,071 in 1997 203,467 311,920
Inventories 554,940 511,555
Other 21,293 14,845
----------- -----------
TOTAL CURRENT ASSETS 798,738 850,687
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 21,857 21,857
Buildings 95,944 101,322
Fixtures and equipment 148,658 113,037
Leasehold improvements 1,508 1,026
----------- -----------
Total property, plant and equipment 267,967 237,242
Less - accumulated depreciation and amortization 98,907 72,699
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT 169,060 164,543
GOODWILL 181,009 111,852
OTHER 18,184 20,939
----------- -----------
TOTAL ASSETS $ 1,166,991 $ 1,148,021
----------- -----------
----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
AS OF DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 301,952 $ 236,475
Accrued expenses 111,741 107,935
Accrued income taxes 20,312 10,561
Current maturities of long-term debt 7,709 44,267
----------- -----------
TOTAL CURRENT LIABILITIES 441,714 399,238
DEFERRED INCOME TAXES 26,223 19,383
LONG-TERM DEBT 307,675 492,868
OTHER LONG-TERM LIABILITIES 20,816 13,224
STOCKHOLDERS' EQUITY
Common Stock (voting), $0.10 par value; 100,000,000 and 40,000,000,
respectively, authorized; 36,912,173 and 31,810,546, respectively,
issued and outstanding 3,691 3,181
Capital in excess of par value 303,330 213,260
Retained earnings 64,853 7,085
Accumulated translation adjustment (1,311) (218)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 370,563 223,308
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,166,991 $ 1,148,021
----------- -----------
----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Redeemable Preferred Stock
--------------------------------------------
Redeemable
A C Total Warrants
-------- --------- --------- ------------
DECEMBER 31, 1995 $7,437 $10,604 $18,041 $39,692
Net Income - - - - - - - -
Unrealized translation adjustment - - - - - - - -
Comprehensive income - - - - - - - -
Preferred stock dividends 649 1,095 1,744 - -
Reduction of warrants to fair market value - - - - - - (15,880)
Decrease in value of stock option grants - - - - - - - -
------ ------- ------- -------
DECEMBER 31, 1996 8,086 11,699 19,785 23,812
Net income - - - - - - - -
Unrealized translation adjustment - - - - - - - -
Comprehensive income - - - - - - - -
Stock dividends issued 489 898 1,387 - -
Redemption of Series A and
Series C preferred stock (8,575) (12,597) (21,172) - -
Accretion of lender warrants
to fair market value - - - - - - 23,254
Increase in value of stock option grants - - - - - - - -
Compensation associated with stock options - - - - - - - -
Conversions of redeemable
warrants into common stock - - - - - - (47,066)
Issuance of common stock,
net of offering expenses - - - - - - - -
Stock options exercised - - - - - - - -
Conversion of nonvoting common
stock into common stock - - - - - - - -
Cancellation of common stock - - - - - - - -
Other - - - - - - - -
------ ------- ------- -------
DECEMBER 31, 1997 $ - - $ - - $ - - $ - -
------ ------- ------- -------
------ ------- ------- -------
Number of Number of
Common Common Common Common
Shares Stock Shares Stock
(Voting) (Voting) (Nonvoting) (Nonvoting)
------------ ------------ --------------- --------------
DECEMBER 31, 1995 11,446,306 $1,145 758,994 $ 8
Net Income - - - - - - - -
Unrealized translation adjustment - - - - - - - -
Comprehensive income - - - - - - - -
Preferred stock dividends - - - - - - - -
Reduction of warrants to fair market value - - - - - - - -
Decrease in value of stock option grants - - - - - - - -
DECEMBER 31, 1996 11,446,306 1,145 758,994 8
---------- ------ -------- ------
Net income - - - - - - - -
Unrealized translation adjustment - - - - - - - -
Comprehensive income - - - - - - - -
Stock dividends issued - - - - - - - -
Redemption of Series A and
Series C preferred stock - - - - - - - -
Accretion of lender warrants
to fair market value - - - - - - - -
Increase in value of stock option grants - - - - - - - -
Compensation associated with stock options - - - - - - 59,398
Conversions of redeemable
warrants into common stock 1,408,398 141 - - - -
Issuance of common stock,
net of offering expenses 2,000,000 200 - - - -
Stock options exercised 299,889 30 - - - -
Conversion of nonvoting common
stock into common stock 758,994 76 (758,994) (8)
Cancellation of common stock (8,314) (1) - - - -
Other - - - - - - - -
---------- ------ -------- ------
DECEMBER 31, 1997 15,905,273 $1,591 - - $ - -
---------- ------ -------- ------
---------- ------ -------- ------
Total
Capital in Other Stock-
Excess Comprehen- Retained holders'
of Par sive Income Earnings Equity
------------ ------------- ---------- ----------
DECEMBER 31, 1995 $ 28,857 $ 14 $ - - $ 30,024
Net Income - - - - 31,993 31,993
Unrealized translation adjustment - - 6 - - 6
------ ------- --------
Comprehensive income - - 6 31,993 31,999
Preferred stock dividends - - - - (1,744) (1,744)
Reduction of warrants to fair market value 15,880 - - - - 15,880
Decrease in value of stock option grants (339) - - - - (339)
-------- ------ ------- --------
DECEMBER 31, 1996 44,398 20 30,249 75,820
Net income - - - - 2,304 2,304
Unrealized translation adjustment - - (238) - - (238)
------ ------- --------
Comprehensive income - - (238) 2,304 2,066
Stock dividends issued - - - - (1,528) (1,528)
Redemption of Series A and
Series C preferred stock - - - - - - - -
Accretion of lender warrants
to fair market value (915) - - (22,339) (23,254)
Increase in value of stock option grants 380 - - - - 380
Compensation associated with stock options 59,398 - - - - 59,398
Conversions of redeemable
warrants into common stock 47,074 - - - - 47,215
Issuance of common stock,
net of offering expenses 71,254 - - - - 71,454
Stock options exercised (8,270) - - - - (8,240)
Conversion of nonvoting common
stock into common stock (68) - - - - - -
Cancellation of common stock 1 - - - - - -
Other 8 - - (11) (3)
-------- ------ ------- --------
DECEMBER 31, 1997 $213,260 $ (218) $ 8,675 $223,308
-------- ------ ------- --------
-------- ------ ------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Number of
Redeemable Preferred Stock Common Common
-------------------------- Redeemable Shares Stock
A C Total Warrants (Voting) (Voting)
------- ------- ------- ---------- ---------- --------
DECEMBER 31, 1997 $ - - $ - - $ - - $ - - 15,905,273 $1,591
Net income - - - - - - - - - - - -
Unrealized translation adjustment - - - - - - - - - - - -
Comprehensive income - - - - - - - - - - - -
Stock options exercised - - - - - - - - 904,409 90
Issuance of common stock,
net of offering expenses - - - - - - - - 1,700,000 170
100% stock dividend - - - - - - - - 18,402,491 1,840
Other - - - - - - - - - - - -
------- ------- ------- ---------- ---------- --------
DECEMBER 31, 1998 $ - - $ - - $ - - $ - - 36,912,173 $3,691
------- ------- ------- ---------- ---------- --------
------- ------- ------- ---------- ---------- --------
Number of Total
Common Common Capital in Other Stock-
Shares Stock Excess Comprehen- Retained holders'
(Nonvoting) (Nonvoting) of Par sive Income Earnings Equity
------------- ------------- ------------ ------------- ------- -----------
DECEMBER 31, 1997 - - $ - - $213,260 $ (218) $ 8,675 $223,308
Net income - - - - - - - - 58,018 58,018
Unrealized translation adjustment - - - - - - (1,093) - - (1,093)
-------- ------- --------
Comprehensive income - - - - - - (1,093) 58,018 56,925
Stock options exercised - - - - 3,095 - - - - 3,185
Issuance of common stock,
net of offering expenses - - - - 86,979 - - - - 87,149
100% stock dividend - - - - - - - - (1,840) - -
Other - - - - (4) - - - - (4)
-------- ------- ---------- -------- ------- --------
DECEMBER 31, 1998 - - $ - - $303,330 $ (1,311) $64,853 $370,563
-------- ------- ---------- -------- ------- --------
-------- ------- ---------- -------- ------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,018 $ 2,304 $ 31,993
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 22,406 21,963 22,766
Amortization 4,532 4,078 3,276
Amortization of capitalized financing costs 2,062 4,323 5,333
Extraordinary item - early retirement of debt 9,877 9,840 - -
Deferred income taxes 4,380 (16,091) 5,299
Compensation expense on stock option grants - - 60,041 (339)
Other 2,044 51 1,584
Changes in operating assets and liabilities, net of
acquisition in 1998 and 1996:
Decrease (increase) in accounts receivable 159,593 (20,519) (15,379)
Increase in inventory (12,777) (48,316) (71,282)
(Increase) decrease in other assets (8,246) 9,985 1,814
Increase (decrease) in accounts payable 21,090 (1,649) 36,352
Increase (decrease) in accrued liabilities 20,543 18,036 (17,185)
Increase (decrease) in other liabilities 7,344 (2,278) (2,623)
--------- --------- ---------
Net cash provided by operating activities 290,866 41,768 1,609
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions:
Azerty, Inc. (115,740) - - - -
Lagasse Bros., Inc. - - - - (51,896)
Capital expenditures (24,709) (13,036) (8,190)
Proceeds from disposition of property, plant & equipment 93 45 11,076
Other - - - - (861)
--------- --------- ---------
Net cash used in investing activities (140,356) (12,991) (49,871)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under revolver (22,000) 49,000 22,000
Retirements and principal payments of debt (549,852) (117,776) (30,861)
Borrowings under financing agreements 350,000 - - 57,933
Financing costs (4,526) - - (1,851)
Issuance of common stock 99,442 71,606 - -
Payment of employee withholding tax related to stock
option exercises (16,903) (8,546) - -
Redemption of Series A and Series C Preferred Stock - - (21,172) - -
Cash dividend - - (141) - -
--------- --------- ---------
Net cash (used in) provided by financing activities (143,839) (27,029) 47,221
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,671 1,748 (1,041)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,367 10,619 11,660
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,038 $ 12,367 $ 10,619
--------- --------- ---------
--------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On March 30, 1995, Associated Holdings, Inc. ("Associated") purchased 92.5% of
the then outstanding shares of the common stock, $0.10 par value ("Common
Stock") of United Stationers Inc. ("United") for approximately $266.6 million in
the aggregate pursuant to a tender offer (the "Offer"). Immediately thereafter,
Associated merged with and into United (the "Merger" and, collectively with the
Offer, the "Acquisition"), and Associated Stationers, Inc. ("ASI"), a wholly
owned subsidiary of Associated merged with and into United Stationers Supply Co.
("USSC"), a wholly owned subsidiary of United, with United and USSC continuing
as the respective surviving corporations. United, as the surviving corporation
following the Merger, is referred to herein as the "Company." Although United
was the surviving corporation in the Merger, the transaction was treated as a
reverse acquisition for accounting purposes with Associated as the acquiring
corporation.
COMMON STOCK DIVIDEND
All share and per share data reflect a two-for-one stock split in the form of a
100% Common Stock dividend paid September 28, 1998.
JUNE 1998 EQUITY OFFERING
In June 1998, United completed an offering of 4.0 million shares of Common
Stock (the "June 1998 Equity Offering"), consisting of 3.0 million primary
shares sold by United, and 1.0 million secondary shares sold by certain
selling stockholders. The shares were priced at $27.00 per share, before
underwriting discounts and commissions of $1.15 per share. The aggregate
proceeds to United of approximately $77.6 million (before deducting expenses)
were delivered to USSC and used to repay a portion of indebtedness under the
Tranche A Term Loan Facility which caused a permanent reduction of the amount
borrowable thereunder.
United did not receive any of the proceeds from the sale of the 1.0 million
shares of Common Stock offered by the selling stockholders, other than an
aggregate of approximately $6.4 million paid by the selling stockholders upon
exercise of employee stock options in connection with the June 1998 Equity
Offering, which were delivered to USSC and applied to the repayment of
indebtedness under the New Credit Facilities.
Subsequent to the closing of the June 1998 Equity Offering, the underwriters for
the offering exercised an overallotment option to purchase an additional 0.4
million shares from United. The net proceeds to United of approximately $10.3
million from the sale were delivered to USSC and used to repay an additional
portion of the indebtedness outstanding under the Tranche A Term Loan Facility.
In the second quarter of 1998, the Company recognized the following charges in
the second quarter of 1998: (i) a non-recurring charge of $13.9 million ($8.3
million net of tax benefit of $5.6 million) to write-off the remaining payments
and related prepaid expense under a contract for computer services from a vendor
and an extraordinary loss of $9.9 million ($5.9 million net of tax benefit of
$4.0 million) related to the early retirement of debt (collectively "1998
Charges").
Net income attributable to common stockholders for the year ended December 31,
1998, before the 1998 Charges, was $72.2 million, up 59.0%, compared with $45.4
million, before the 1997 Charges (as defined). In 1998, diluted earnings per
share, before the 1998 Charges, were $2.00 on 36.2 million weighted average
shares outstanding, up 36.1%, compared with $1.47, before the 1997 Charges (as
defined), on 30.8 million weighted average shares outstanding for the prior
year.
AZERTY BUSINESS ACQUISITION
On April 3, 1998, the Company acquired all of the capital stock of Azerty
Incorporated, Azerty de Mexico, S.A. de C.V., Positive ID Wholesale Inc., and
AP Support Services Incorporated (collectively the "Azerty Business"), which
comprised substantially all of the United States and Mexican operations of
the Office Products Division of Abitibi-Consolidated Inc. The aggregate
purchase price paid by the Company for the Azerty Business was approximately
$115.7 million (including fees and expenses). The acquisition was financed
primarily through senior debt. The Azerty Business acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to
29
the assets purchased and the liabilities assumed based upon the estimated
fair values at the date of acquisition with the excess of cost over fair
value of approximately $73.7 million allocated to goodwill. The financial
information for the year ended December 31, 1998, includes nine months of the
Azerty Business. The pro forma effects of this acquisition are not material.
OCTOBER 1997 EQUITY OFFERING
On October 9, 1997, the Company completed a 4.0 million share primary
offering of Common Stock and a 6.8 million share secondary offering of Common
Stock (the "October 1997 Equity Offering"). The shares were priced at $19.00
per share, before underwriting discounts and commissions of $0.95 per share.
The aggregate net proceeds to the Company from this equity offering of $72.2
million (before deducting expenses) and proceeds of $0.1 million resulting
from the conversion of approximately 2.2 million warrants into Common Stock
were used to (i) redeem $50.0 million of the Company's 12.75% Senior
Subordinated Notes and pay the redemption premium thereon of $6.4 million,
(ii) pay fees related to the October 1997 Equity Offering, and (iii) reduce
by $15.5 million the indebtedness under the Term Loan Facilities. The
repayment of indebtedness resulted in an extraordinary loss of $9.8 million
($5.9 million net of tax benefit of $3.9 million) and caused a permanent
reduction of the amount borrowable under the Term Loan Facilities.
As a result of the October 1997 Equity Offering, the Company recognized the
following charges in the fourth quarter of 1997: (i) a pre-tax non-recurring
non-cash charge of $59.4 million ($35.5 million net of tax benefit of $23.9
million) and a non-recurring cash charge of $5.3 million ($3.2 million net of
tax benefit of $2.1 million) related to the vesting of stock options and the
termination of certain management advisory service agreements (see Note 13),
and (ii) an extraordinary loss of $9.8 million ($5.9 million net of tax
benefit of $3.9 million) related to the early retirement of debt (see Note
1), (collectively "1997 Charges").
Net income attributable to common stockholders for the year ended December 31,
1997, before the 1997 Charges, was $45.4 million, up 50.3%, compared with $30.2
million in 1996. Diluted earnings per share, before the 1997 Charges, for 1997
was $1.47 on 30.8 million weighted average shares outstanding, up 45.3%,
compared with $1.01 on 29.8 million weighted average shares outstanding for the
prior year.
LAGASSE BROS., INC. ACQUISITION
On October 31, 1996, the Company acquired all of the capital stock of Lagasse
Bros., Inc. ("Lagasse") for approximately $51.9 million. The acquisition was
financed primarily through senior debt. The Lagasse acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the estimated fair values at the date of acquisition with the
excess of cost over fair value of approximately $39.0 million allocated to
goodwill. The financial information for the year ended December 31, 1996
includes the results of Lagasse for November and December only. The pro forma
effects of this acquisition are not material.
2. OPERATIONS
The Company operates in a single reportable segment as a national wholesale
distributor of business products. The Company offers approximately 35,000
items from more than 500 manufacturers. This includes a broad spectrum of
office products, computer supplies, office furniture 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, buying groups, office furniture dealers,
superstores and mass merchandisers, mail order houses, computer products
resellers, sanitary supply distributors and warehouse clubs. The Company has
a distribution network of 40 business products regional distribution centers.
In addition, the Company has 19 Lagasse Distribution Centers, specifically
serving janitorial and sanitary supply distributors and six Azerty distribution
centers that carry information technology supplies. Through its integrated
computer system, the Company provides a high level of customer service and
overnight delivery.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
30
REVENUE RECOGNITION
Revenue is recognized when a product is shipped and title is transferred to the
customer in the period the sale is reported.
CASH AND CASH EQUIVALENTS
Investments in low-risk instruments that may be liquidated within three months
from the purchase date are considered cash equivalents. Cash equivalents are
stated at cost which approximates market value.
INVENTORIES
Inventories constituting approximately 80% and 91% of total inventories at
December 31, 1998 and 1997, respectively, have been valued under the last-in,
first-out ("LIFO") method. The decline in the percentage of inventory on LIFO
resulted from the acquisition of the Azerty Business, whose inventory is valued
under the first-in, first-out ("FIFO") method. Inventory valued under the FIFO
and LIFO accounting methods are recorded at the lower of cost or market. If the
lower of FIFO cost or market method of inventory accounting had been used by the
Company for all inventories, merchandise inventories would have been
approximately $4.2 million and $4.3 million higher than reported at December 31,
1998 and 1997, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are determined by using the straight-line method over the estimated
useful lives of the assets.
The estimated useful life assigned to fixtures and equipment is from two to 10
years; the estimated useful life assigned to buildings does not exceed 40 years;
leasehold improvements are amortized over the lesser of their useful lives or
the term of the applicable lease.
GOODWILL
Goodwill represents the excess cost over the value of net assets of businesses
acquired and is amortized on a straight-line basis over 40 years. The Company
continually evaluates whether events or circumstances have occurred indicating
that the remaining estimated useful life of goodwill may not be appropriate.
When factors indicate that goodwill should be evaluated for possible impairment,
the Company will use an estimate of undiscounted future operating income
compared to the carrying value of goodwill to determine if a write off is
necessary. The cumulative amount of goodwill amortized at December 31, 1998 and
1997 is $11.8 million and $7.6 million, respectively.
SOFTWARE CAPITALIZATION
The Company capitalizes internal and external software development costs
determined to have benefits in future periods. Amortization is recognized over
the periods in which the benefits are realized, generally not to exceed three
years.
INCOME TAXES
Income taxes are accounted for using the liability method under which deferred
income taxes are recognized for the estimated tax consequences for temporary
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. Provision has not been made for deferred U.S. income
taxes on the undistributed earnings of the Company's foreign subsidiaries
because these earnings are intended to be permanently invested.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the local
currency.
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 Consolidated Financial Statements and
accompanying notes. Actual results could differ from these estimates.
31
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and for Hedging Activities". SFAS No. 133 requires all derivatives
to be recorded on the balance sheet at fair value and establishes "special
accounting" for the following three different types of hedges: hedges of changes
in the fair value of assets, liabilities or firm commitments; hedges of the
variable cash flows of forecasted transactions; and hedges of foreign currency
exposures of net investments in foreign operations. Though the accounting
treatment and criteria for each of the three types of hedges are unique, they
all result in recognizing offsetting changes in value or cash flows of both the
hedge and the hedged item in earnings in the same period. Changes in the fair
value of derivatives that do not meet the criteria of one of these three
categories of hedges are included in earnings in the period of the change. SFAS
No. 133 will be effective for and adopted by the Company in the third quarter of
the year ending December 31, 1999. The Company anticipates that SFAS No. 133
will not have a material impact on its consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits," which was adopted by the Company at
December 31, 1998. SFAS No. 132 revises and improves disclosure requirements of
FASB Statements No. 87, Employers' Accounting for Pensions, No. 88 Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. SFAS No. 132 does not change the recognition or
measurement of pension and other postretirement benefit plans, but standardizes
disclosure requirements for pensions and other postretirement benefits,
eliminates unnecessary disclosures and requires certain additional information.
In accordance with SFAS No. 132, the Company adjusted the reporting and display
of its pension plans and postretirement benefits.
In June of 1997, the FASB issued SFAS No. 130, "Comprehensive Income," which was
adopted by the Company in the first quarter of 1998. SFAS No. 130 requires
companies to report a new, additional measure of income on the income statement,
statement of stockholders' equity, or create a new financial statement that
shows the new measure of income. Comprehensive income will include foreign
currency translation gains and losses that have been previously excluded from
net income and recorded instead to stockholders' equity. In accordance with SFAS
No. 130, the Company expanded its reporting and display of comprehensive income
and its components in the Consolidated Statements of Changes in Stockholders'
Equity.
In 1998, the Company adopted SFAS No. 129 "Disclosure of Information about
Capital Structure." SFAS No. 129 requires companies to disclose certain
information about their capital structure. SFAS No. 129 did not have a material
impact on the Company's consolidated financial statement disclosures.
During 1996, the Company adopted the supplemental disclosure requirement of SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages but
does not require adoption of a fair value method of accounting for stock
options. For those entities that do not elect to adopt the fair value method,
the new standard requires supplemental disclosure regarding the pro forma
effects of that method. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value based method of accounting
prescribed by the Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," and related Interpretations.
Adoption of SFAS No. 123 will have no impact on the financial position or
results of operations of the Company.
4. SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which was adopted by the Company in 1998.
SFAS No. 131 requires companies to report financial and descriptive information
about its reportable operating segments, including segment profit or loss,
certain specific revenue and expense items, and segment assets, as well as
information about the revenues derived from the Company's products and services,
the countries in which the Company earns revenues and holds assets, and major
customers. This statement also requires companies that have a single reportable
segment to disclose information about products and services, information about
geographic areas, and information about major customers. This statement requires
the use of the management approach to determine the information to be reported.
The management approach is based on the way management organizes the enterprise
to assess performance and make operating decisions regarding the allocation of
resources. It is management's opinion that, at this time, the Company has
several operating segments, however only one reportable segment.
32
The following discussion sets forth the required disclosure regarding single
segment information:
The Company operates as a single reportable segment as the largest general
line business products wholesaler in the United States, operations outside
the United States were immaterial, with 1998 net sales of $3.1 billion. The
Company sells its products through national distribution networks to more
than 20,000 resellers, who in turn sell directly to end-users. These products
are distributed through a computer-based network of warehouse facilities and
truck fleets radiating from 40 regional business products distribution
centers, 19 Lagasse distribution centers and six Azerty distribution centers.
The Company's product offerings, comprised of more than 35,000 stockkeeping
units (SKUs), may be divided into five primary categories: (i) The Company's
core business continues to be traditional office products, which include both
brand-name products and the Company's private brand products. Traditional office
products include writing instruments, paper products, organizers and calendars
and various office accessories; (ii) The Company offers computer supplies, and
peripherals to computer resellers and office products dealers; (iii) The
Company's sale of office furniture such as leather chairs, wooden and steel
desks and computer furniture has enabled it to become the nation's largest
office furniture wholesaler. The Company currently offers nearly 4,000 furniture
items from 50 different manufacturers; (iv) A fourth category of products is
facility supplies, including janitorial and sanitation supplies, safety and
security items, and shipping and mailing supplies. In October 1996, the Company
acquired Lagasse, the largest pure wholesaler of janitorial and sanitation
supplies in North America. The Company distributes these products through 19
Lagasse distribution centers to sanitary supply dealers; and (v) The Company
also distributes business machines and audio-visual equipment and supplies.
The Company sells to more than 20,000 resellers of office products, including
office product dealers, office furniture dealers, office products superstores,
mass merchandisers, computer products resellers, mail order companies and
sanitary supply distributors. Of its 20,000 customers, no single reseller
accounted for more than 6% of the Company's net sales in 1998.
The following table sets forth net sales by product category for the years ended
December 31, 1998 and 1997 (dollars in thousands):
Years Ended
December 31,
--------------------------
1998 1997
----------- -----------
Traditional office products $1,183 $1,248
Computer supplies and peripherals 878 504
Office furniture 425 379
Facility supplies 202 74
Business machines and audio-visual
equipment and supplies 334 315
Other 37 38
-------- --------
Total net sales $3,059 $2,558
-------- --------
-------- --------
Comparable information for the year ended December 31, 1996 is not available.
5. OTHER EXPENSE
The following table sets forth the components of other expense (dollars in
thousands):
Years Ended December 31,
----------------------------------
1998 1997 1996
--------- ---------- ----------
Loss on the sale of accounts receivable, net of
servicing revenue $ 7,477 $ - - $ - -
Other 744 - - - -
------- -------- --------
Total $ 8,221 $ - - $ - -
------- -------- --------
------- -------- --------
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its credit facilities,
the Company entered into a $163.0 million Receivables Securitization Program
pursuant to which the Company sells its eligible receivables (except for certain
excluded receivables, which initially includes all receivables from the Azerty
Business and Lagasse) to the Receivables
33
Company, a wholly owned offshore, bankruptcy-remote special purpose limited
liability company, which in turn ultimately transfers the eligible receivables
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 receivables includes not only those eligible receivables that
existed on the closing date of the Receivables Securitization Program, but also
eligible receivables created thereafter. The Company received approximately
$160.0 million in proceeds from the initial sale of certain eligible receivables
on April 3, 1998. These proceeds were used to repay a portion of the Tranche B
Facility (as defined) and certain other indebtedness under the Credit Agreement
(as defined). 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 under the caption Other Expense.
The Chase Manhattan Bank acts as funding agent and, with other commercial
banks rated at least A-1/P-1, provides standby liquidity funding to support
the purchase of the receivables by the Receivables Company under a 364-day
liquidity facility. The proceeds from the Receivables Securitization Program
were used to reduce borrowings under the Company's Revolving Credit Facility.
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 December 31, 1998
exclude approximately $160.0 million of accounts receivable sold to the
Receivables Company.
6. EARNINGS PER SHARE
Net income per common share is based on net income after preferred stock
dividend requirements. Basic earnings per share is calculated on the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated on the weighted average number of common and common equivalent shares
outstanding during the period. Stock options and warrants are considered to be
common equivalent shares.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Years Ended December 31,
--------------------------------------------------------------
1998 1997
Before Before
1998 Charges(1) 1997 Charges(2) 1996
---------- ------------ ---------- ------------ ----------
Numerator:
Income before extraordinary item $ 63,925 $ 72,212 $ 8,188 $ 46,892 $ 31,993
Preferred stock dividends - - - - 1,528 1,528 1,744
-------- -------- -------- -------- --------
Numerator for basic and diluted earnings
per share - income attributable to common
stockholders before extraordinary item $ 63,925 $ 72,212 $ 6,660 $ 45,364 $ 30,249
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Denominator:
Denominator for basic earnings per
share - weighted average shares 34,680 34,680 26,128 26,128 24,410
Effect of dilutive securities:
Employee stock options 1,491 1,491 2,516 2,516 2,630
Warrants - - - - 2,116 2,116 2,806
-------- -------- -------- -------- --------
Dilutive potential common shares 1,491 1,491 4,632 4,632 5,436
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 36,171 36,171 30,760 30,760 29,846
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic earnings per share $ 1.84 $ 2.08 $ 0.26 $ 1.74 $ 1.24
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted earnings per share $ 1.76 $ 2.00 $ 0.22 $ 1.47 $ 1.01
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
34
(1) In the second quarter of 1998, the Company wrote off the remaining term
of a contract for computer services from a vendor. As a result the
Company recorded a non-recurring charge of $13.9 million ($8.3 million
net of tax benefit of $5.6 million) to write off the remaining payments
and related prepaid expense under this contract (see Note 1). In
addition, during the second quarter of 1998 the Company recorded an
extraordinary loss of $9.9 million ($5.9 million net of tax benefit of
$4.0 million) related to the early retirement of debt (see Notes 1 and
7).
(2) In the fourth quarter of 1997, the Company recognized the following
charges: (i) pre-tax non-recurring charges of $59.4 million ($35.5
million net of tax benefit of $23.9 million), (non-cash), (see Notes 1
and 11) and $5.3 million ($3.2 million net of tax benefit of $2.1
million), (cash) related to the vesting of stock options and the
termination of certain management advisory service agreements (see
Notes 1 and 13), and (ii) an extraordinary loss of $9.8 million ($5.9
million net of tax benefit of $3.9 million) related to the early
retirement of debt (see Note 1).
7. LONG-TERM DEBT
Long-term debt consists of the following amounts (dollars in thousands):
1998 1997
----------- -----------
Revolver $ 24,000 $ 256,000
Term Loans
Tranche A, due in installments until March 31, 2004 59,448 - -
Tranche A, due in installments until September 30, 2001 - - 97,524
Tranche B, due in installments until September 30, 2003 - - 51,275
8.375% Senior Subordinated Notes, due April 15, 2008 100,000 - -
12.75% Senior Subordinated Notes, due May 1, 2005 100,000 100,000
Mortgage at 9.4%, due September 1, 1999 1,832 1,957
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 304 579
--------- ---------
Subtotal 315,384 537,135
Less - current maturities (7,709) (44,267)
--------- ---------
Total $ 307,675 $ 492,868
--------- ---------
--------- ---------
The prevailing prime interest rate at the end of 1998 and 1997 was 7.75% and
8.50%, respectively.
At December 31, 1998, the available credit under the Second Amended and Restated
Credit Agreement (the "Credit Agreement") included $59.4 million of term loan
borrowings (the "Term Loan Facilities"), and up to $250.0 million of revolving
loan borrowings (the "Revolving Credit Facility").
The Term Loan Facilities consisted initially of $150.0 million Tranche A term
loan facility ("Tranche A Facility") and a $100.0 million Tranche B term loan
facility ("Tranche B Facility"). The Company repaid a substantial portion of the
Tranche A Facility with proceeds from the June 1998 Equity Offering. As a
result, the Company recognized an extraordinary loss on the early retirement of
debt of $9.9 million ($5.9 million net of tax benefit of $4.0 million). Amounts
outstanding under the Tranche A Facility are to be repaid in 21 quarterly
installments ranging from $1.0 million at March 31, 1999 to $3.7 million at
March 31, 2004. All amounts outstanding under the Tranche B Facility have been
repaid as of April 15, 1998 with net proceeds from the sale of $100.0 million of
8.375% Senior Subordinated Notes and from a portion of the proceeds generated
from the sale of certain receivables under the Receivables Securitization
Program (see Note 5).
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 and $24.0 million was outstanding at December 31,
1998.
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, certain of 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.
35
The loans outstanding under the Term Loan Facilities and the Revolving Credit
Facility bear interest as determined within a set range with the rate based on
the ratio of total debt to earnings before interest, taxes, depreciation, and
amortization ("EBITDA"). The Tranche A Facility and Revolving Credit Facility
bear interest at prime to prime plus 0.75%, or, at the Company's option, the
London Interbank Offering Rate ("LIBOR") plus 1.00% to 2.00%.
The Credit Agreement contains representations and warranties, affirmative and
negative covenants and events of default customary for financing of this type.
At December 31, 1998, the Company was in compliance with all covenants contained
in the Credit Agreement.
The Company is exposed to market risk for changes in interest rates. The Company
may enter into interest rate protection agreements, including collar agreements,
to reduce the impact of fluctuations in interest rates on a portion of its
variable rate debt. Such agreements generally require the Company to pay to or
entitle the Company to receive from the other party the amount, if any, by which
the Company's interest payments fluctuate beyond the rates specified in the
agreements. The Company is subject to the credit risk that the other party may
fail to perform under such agreements. The Company's allocated cost of such
agreements is amortized to interest expense over the term of the agreements, and
the unamortized cost is included in other assets. Payments received or made as a
result of the agreements, if any, are recorded as an addition or a reduction to
interest expense. At December 31, 1998, the Company had interest rate collar
agreements expiring October 1999 on $200.0 million of borrowings at LIBOR rates
between 5.2% and 8.0%. For the years ended December 31, 1998, 1997, and 1996,
the Company recorded $0.2 million, $0.6 million, and $0.9 million, respectively,
to interest expense resulting from LIBOR rate fluctuations below the floor rate
specified in the collar agreements.
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.
Debt maturities for the years subsequent to December 31, 1998 are as follows
(dollars in thousands):
Year Amount
- ---- ------
1999 $ 7,709
2000 11,807
2001 14,337
2002 23,880
2003 18,401
Later years 239,250
---------
Total $ 315,384
---------
---------
At December 31, 1998 and 1997, the Company had available letters of credit of
$53.4 million and $52.9 million, respectively, of which $49.4 million and $49.8
million, respectively, were outstanding.
12.75% SENIOR SUBORDINATED NOTES
The 12.75% Senior Subordinated Notes ("12.75% Notes") were originally issued
on May 3, 1995, pursuant to the 12.75% Notes Indenture. As of December 31,
1998, the aggregate outstanding principal amount of the 12.75% Notes was
$100.00 million. The 12.75% Notes are unsecured senior subordinated
obligations of USSC, and payment of the 12.75% Notes is fully and
unconditionally guaranteed by the Company and USSC's domestic "restricted"
subsidiaries on a senior subordinated basis. The 12.75% Notes mature on May
1, 2005, and bear interest at the rate of 12.75% per annum, payable
semi-annually on May 1 and November 1 of each year.
36
In addition, the 12.75% Notes are redeemable at the option of USSC at any time
on or after May 1, 2000, in whole or in part, at the following redemption prices
(expressed as percentages of principal amount):
Redemption
Year Beginning May 1, Price
-------------------- ------------
2000..................................................... 106.375%
2001..................................................... 104.781%
2002..................................................... 103.188%
2003..................................................... 101.594%
and thereafter at 100.0% of the principal amount, in each case together with
accrued and unpaid interest, if any, to the redemption date.
Upon the occurrence of a change of control (which term includes the acquisition
by any person or group of more than 50% of the voting power of the outstanding
common stock of either the Company or USSC or certain significant changes in the
composition of the Board of Directors of either the Company or USSC), USSC shall
be obligated to offer to redeem all or a portion of each holder's 12.75% Notes
at 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of such redemption. Such obligation, if it arose,
could have a material adverse effect on the Company.
The 12.75% Notes Indenture governing the 12.75% Notes contains certain
covenants, including limitations on the incurrence of indebtedness, the making
of restricted payments, transactions with affiliates, the existence of liens,
disposition of proceeds of asset sales, the making of guarantees by restricted
subsidiaries, transfer and issuances of stock of subsidiaries, the imposition of
certain payment restrictions on restricted subsidiaries and certain mergers and
sales of assets.
8.375% SENIOR SUBORDINATED NOTES
The 8.375% Senior Subordinated Notes ("8.375% Notes") were issued on April
15, 1998, pursuant to the 8.375% Notes Indenture. As of December 31, 1998,
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.
The 8.375% Notes Indenture provides that, prior to April 15, 2001, USSC may
redeem, at its option, up to 35% of the aggregate principal amount of the 8.375%
Notes within 180 days following one or more Public Equity Offerings (as defined
in the 8.375% Notes Indenture) with the net proceeds of such offerings at a
redemption price equal to 108.375% of the principal amount thereof, together
with accrued and unpaid interest and Additional Amounts (as defined in the
8.375% Notes Indenture), if any, to the date of redemption; provided that
immediately after giving effect to each such redemption, at least 65% of the
aggregate principal amount of the 8.375% Notes remain outstanding after giving
effect to such redemption.
In addition, the 8.375% Notes are redeemable at the option of USSC at any time
on or after April 15, 2003, in whole or in part, at the following redemption
prices (expressed as percentages of principal amount):
Redemption
Year Beginning May 1, Price
-------------------- ------------
2003...................................................... 104.188%
2004...................................................... 102.792%
2005...................................................... 101.396%
and thereafter at 100.0% of the principal amount, in each case together with
accrued and unpaid interest, if any, to the redemption date.
Upon the occurrence of a change of control (which term includes the acquisition
by any person or group of more than 50% of the voting power of the outstanding
common stock of either the Company or USSC or certain significant changes in the
composition of the Board of Directors of either the Company or USSC), USSC shall
be obligated to offer to redeem all or a portion of each holder's 8.375% Notes
at 101% of the principal amount thereof, together with accrued
37
and unpaid interest, if any, to the date of such redemption. Such obligation, if
it arose, could have a material adverse effect on the Company.
The 8.375% Notes Indenture governing the 8.375% Notes contains certain
covenants, including limitations on the incurrence of indebtedness, the making
of restricted payments, transactions with affiliates, the existence of liens,
disposition of proceeds of asset sales, the making of guarantees by restricted
subsidiaries, transfer and issuances of stock of subsidiaries, the imposition of
certain payment restrictions on restricted subsidiaries and certain mergers and
sales of assets. In addition, the 8.375% Notes Indenture provides for the
issuance thereunder of up to $100.0 million aggregate principal amount of
additional 8.375% Notes having substantially identical terms and conditions to
the 8.375% Notes, subject to compliance with the covenants contained in the
8.375% Notes Indenture, including compliance with the restrictions contained in
the 8.375% Notes Indenture relating to incurrence of indebtedness.
8. LEASES
The Company has entered into several non-cancelable long-term leases for certain
property and equipment. Future minimum rental payments under operating leases in
effect at December 31, 1998 having initial or remaining non-cancelable lease
terms in excess of one year are as follows (dollars in thousands):
Operating
Year Leases (1)
- ------------- ------------
1999 $ 25,982
2000 22,769
2001 18,963
2002 13,176
2003 8,448
Later years 27,129
--------
Total minimum lease payments $116,467
--------
--------
(1) Operating leases are net of immaterial sublease income.
Rental expense for all operating leases was approximately $22.8 million, $20.5
million, and $18.8 million in 1998, 1997, and 1996, respectively.
9. PENSION PLANS AND DEFINED CONTRIBUTION PLAN
PENSION PLANS
As of December 31, 1998, the Company has pension plans covering substantially
all of its employees. Non-contributory plans covering non-union employees
provide pension benefits that are based on years of credited service and a
percentage of annual compensation. Non-contributory plans covering union members
generally provide benefits of stated amounts based on years of service. The
Company funds the plans in accordance with current tax laws.
The following table sets forth the plans' change in Projected Benefit Obligation
for the years ended December 31, 1998 and 1997 (dollars in thousands):
1998 1997
---------- ----------
Benefit obligation at beginning of year $ 28,773 $ 23,556
Service cost 2,734 2,333
Interest cost 2,113 1,833
Amendments 346 245
Actuarial loss 4,043 1,527
Benefits paid (887) (721)
-------- --------
Benefit obligation at end of year $ 37,122 $ 28,773
-------- --------
-------- --------
38
The plans' assets consist of corporate and government debt securities and equity
securities. The following table sets forth the change in the plans' assets for
the years ended December 31, 1998 and 1997 (dollars in thousands):
1998 1997
---------- ----------
Fair value of assets at beginning of year $ 33,562 $ 28,372
Actual return on plan assets 5,207 5,496
Company contributions 3,092 415
Benefits paid (887) (721)
-------- --------
Fair value of plan assets at end of year $ 40,974 $ 33,562
-------- --------
-------- --------
The following table sets forth the plans' funded status at December 31, 1998 and
1997 (dollars in thousands):
1998 1997
---------- ----------
Funded status of the plan $ 3,852 $ 4,789
Unrecognized prior service cost 1,135 888
Unrecognized net actuarial gain (4,391) (6,020)
-------- --------
Prepaid pension asset (liability) recognized
in the Consolidated Balance Sheets $ 596 $ (343)
-------- --------
-------- --------
Net periodic pension cost for 1998, 1997 and 1996 for pension and supplemental
benefit plans includes the following components (dollars in thousands):
1998 1997 1996
------- ------- -------
Service cost - benefit earned during the period $ 2,734 $ 2,333 $ 1,884
Interest cost on projected benefit obligation 2,113 1,833 1,652
Expected return on plan assets (2,648) (2,135) (2,006)
Amortization of prior service cost 99 77 33
Amortization of actuarial loss (243) (63) - -
------- ------- -------
Net periodic pension cost $ 2,055 $ 2,045 $ 1,563
------- ------- -------
------- ------- -------
The assumptions used in accounting for the Company's defined benefit plans are
set forth below:
1998 1997 1996
---------- ---------- -----------
Assumed discount rate 6.75% 7.25% 7.50%
Rates of compensation increase 5.50% 5.50% 5.50%
Expected long-term rate of return on plan assets 7.50% 7.50% 7.50%
DEFINED CONTRIBUTION
The Company has a defined contribution plan in which all salaried employees and
certain hourly paid employees are eligible to participate following the
completion of six consecutive months of employment. The plan permits employees
to have contributions made as 401(k) salary deferrals on their behalf, or as
voluntary after-tax contributions, and provides for Company contributions, or
contributions matching employees salary deferral contributions, at the
discretion of the Board of Directors. In addition, the Board of Directors
approved a special contribution of approximately $1.0 million in 1998 and 1997
to the United Stationers 401(k) Savings Plan on behalf of certain non-highly
compensated employees who are eligible for participation in the plan. Company
contributions for matching of employees' contributions were approximately $1.4
million, $1.0 million and $0.9 million in 1998, 1997 and 1996, respectively.
10. POSTRETIREMENT BENEFITS
The Company maintains a postretirement plan. The plan is unfunded and provides
health care benefits to substantially all retired non-union employees and their
dependents. Eligibility requirements are based on the individual's age (minimum
age of 55), years of service and hire date. The benefits are subject to retiree
contributions, deductible, co-payment provision and other limitations. Retirees
pay one-half of the projected plan costs. The following tables set forth the
plan's change in Accrued Postretirement Benefit Obligation ("APBO"), plan assets
and funded status for the years ended December 31, 1998 and 1997 (dollars in
thousands):
39
1998 1997
--------- ---------
Benefit obligation at beginning of year $ 3,045 $ 2,583
Service cost 479 268
Interest cost 209 190
Plan participants' contributions 89 82
Actuarial loss 163 127
Benefits paid (237) (205)
--------- ---------
Benefit obligation at end of year $ 3,748 $ 3,045
--------- ---------
--------- ---------
Fair value of assets at beginning of year $ - - $ - -
Company contributions 148 123
Plan participants' contributions 89 82
Benefits paid (237) (205)
--------- ---------
Fair value of plan assets at end of year $ - - $ - -
--------- ---------
--------- ---------
Funded status of the plan $ (3,748) $ (3,045)
Unrecognized net actuarial gain (148) (415)
--------- ---------
Accrued postretirement benefit obligation
in the Consolidated Balance Sheets $ (3,896) $ (3,460)
--------- ---------
--------- ---------
The cost of postretirement health care benefits for the years ended December 31,
1998, 1997 and 1996 were as follows (dollars in thousands):
1998 1997 1996
-------- -------- --------
Service cost $ 479 $ 268 $ 239
Interest cost 209 190 204
Amortization of actuarial loss (15) (15) - -
-------- -------- --------
Net periodic postretirement benefit cost $ 673 $ 443 $ 443
-------- -------- --------
-------- -------- --------
The assumptions used in accounting for the Company's postretirement plan for the
three years presented are set forth below:
1998 1997 1996
----------- ----------- ------------
Assumed average health care cost trend 3.0% 3.0% 3.0%
Assumed discount rate 6.75% 7.25% 7.50%
Because the Company's annual medical cost increases for current and future
retirees and their dependents are capped at 3% per year, which is the assumed
health care trend rate used in calculating the APBO, an increase in the
medical trend rate above 3% has no effect on the APBO. A 1% change in the
assumed health care cost trend rate would have the following effects (dollars
in thousands):
1% Increase 1% Decrease
----------- -------------
Effect on the APBO as of December 31, 1998 $487 $(412)
Effect on total of service cost and
interest cost components in 1998 118 (100)
11. STOCK OPTION PLAN
The Management Equity Plan (the "Plan") is administered by the Board of
Directors, although the Plan allows the Board of Directors of the Company to
designate an option committee to administer the Plan. The Plan provides for the
issuance of shares of Common Stock through the exercise of options, to key
officers and management employees of the Company, either as incentive stock
options or as non-qualified stock options.
In October 1997, the Company's stockholders approved an amendment to the Plan
which provided for the issuance of approximately 3.0 million additional options
to key management employees and directors of the Company. During 1998 and 1997,
options of approximately 1.0 million and 0.5 million, respectively, were granted
to management employees and directors with option exercise prices equal to fair
market value.
40
In September 1995, the Company's Board of Directors approved an amendment to the
Plan which provided for the issuance of options in connection with the Merger
("Merger Incentive Options") to key management employees of the Company
exercisable for up to 4.4 million additional shares of its Common Stock.
Subsequently, approximately 4.4 million options were granted during 1995 and
1996 to management employees. Some of the options were granted at an option
exercise price below market value and the option exercise price of certain
options increased by $0.31 on a quarterly basis effective April 1, 1996.
These Merger Incentive Options, which were performance-based, were granted in
order to provide incentives to management with respect to the successful
development of ASI and the integration of ASI with the Company. All Merger
Incentive Options were vested and became exercisable with the completion of the
October 1997 Equity Offering and all time varying exercise prices became fixed.
All Common Stock issued from the exercise of Merger Incentive Options was
subject to a six-month holding period that expired on April 10, 1998. In the
fourth quarter of 1997, the Company was required to recognize compensation
expense based upon the difference between the fair market value of the Common
Stock and the exercise prices. Based on the closing stock price on October 10,
1997 of $19.56 and options outstanding as of October 10, 1997, the Company
recognized a non-recurring non-cash charge of $59.4 million ($35.5 million net
of tax benefit of $23.9 million).
An optionee under the Plan must pay the full option price upon exercise of an
option (i) in cash; (ii) with the consent of the Board of Directors of the
Company, by delivering mature shares of Common Stock already owned by such
optionee and having a fair market value at least equal to the exercise price; or
(iii) in any combination of the foregoing. The Company may require the optionee
to satisfy federal tax withholding obligations with respect to the exercise of
options by (i) additional withholding from the employee's salary, (ii) requiring
the optionee to pay in cash, or (iii) reducing the number of shares of Common
Stock to be issued to meet only the minimum statutory withholding requirement
(except in the case of incentive stock options).
The following table summarizes the transactions of the Plan for the last three
years:
Management Equity Plan Weighted Average Weighted Average Weighted Average
(excluding restricted stock) 1998 Exercise Prices 1997 Exercise Prices 1996 Exercise Prices
- ---------------------------- ---------- ----------------- ---------- ----------------- ---------- -----------------
Options outstanding at
beginning of the period 3,597,794 $ 6.89 4,995,536 $ 5.81 4,061,992 $ 5.37
Granted 965,150 24.13 538,000 11.44 1,301,544 3.98
Exercised (2,303,666) 5.72 (1,693,742) 7.71 - - - -
Canceled (46,700) 22.89 (242,000) 7.38 (368,000) 3.82
----------- --------- ----------
Options outstanding at
end of the period 2,212,578 15.28 3,597,794 6.89 4,995,536 5.81
----------- --------- ----------
----------- --------- ----------
Number of options
exercisable 862,128 7.64 3,067,794 6.09 - - - -
----------- --------- ----------
----------- --------- ----------
The following table summarizes information concerning outstanding options of the
Plan at December 31, 1998:
Remaining
Exercise Number Contractual Number
Prices Outstanding Life (years) Exercisable
---------- ----------- ------------ -----------
$ 0.73 72,000 3.09 72,000
2.56 62,500 3.74 62,500
8.44 627,628 3.74 627,628
10.81 500,000 8.00 100,000
22.13 30,000 8.87 - -
23.38 779,450 9.07 - -
24.13 62,000 9.09 - -
27.06 5,000 9.13 - -
30.56 8,000 9.36 - -
31.63 30,000 9.20 - -
33.06 30,000 9.61 - -
33.56 6,000 9.50 - -
--------- -------
Total 2,212,578 862,128
--------- -------
--------- -------
41
During 1996, the Company adopted the supplemental disclosure requirements of
SFAS No. 123. Accordingly, the Company is required to disclose pro forma net
income and earnings per share as if the fair value-based accounting method in
SFAS No. 123 had been used to account for stock-based compensation cost. The
Company's Merger Incentive Options granted under the Plan were considered "all
or nothing" awards because the options did not vest to the employee until the
occurrence of a Vesting Event. The fair value of "all or nothing" awards were
measured at the grant date; however, amortization of compensation expense began
when it was probable that the awards were vested. The October 1997 Equity
Offering constituted a Vesting Event; as a result, all Merger Incentive Options
vested and became exercisable by the optionees.
Options granted under the Plan during 1998 and 1997 did not require compensation
cost to be recognized in the income statement; however, they are subject to the
supplemental disclosure requirements of SFAS No. 123. Net income and earnings
per share, before charges (see 1 and 2 below), for 1998 and 1997 represent the
Company's results excluding one-time charges and the pro forma adjustments
required by SFAS No. 123. Had compensation cost been determined on the basis of
SFAS No. 123 for options granted during 1998, 1997 and 1996, net income and
earnings per share would have been adjusted as follows (in thousands, except per
share data):
1998 1997 1996
----------- ----------- -----------
Net income attributable to common stockholders:
As reported $ 58,018 $ 776 $ 30,249
Before charges 72,212(1) 45,364(2) 30,249
Pro forma 55,758 18,396 30,249
Net income per common share - basic:
As reported $ 1.67 $ 0.03 $ 1.24
Before charges 2.08(1) 1.74(2) 1.24
Pro forma 1.61 0.70 1.24
Weighted average shares outstanding 34,680 26,128 24,410
Net income per common share - diluted:
As reported $ 1.60 $ 0.03 $ 1.01
Before charges 2.00(1) 1.47(2) 1.01
Pro forma 1.54 0.60 1.01
Weighted average shares outstanding
and assumed conversions 36,171 30,760 29,846
(1) The year ended December 31, 1998 reflects a write off of the remaining
term of a contract for computer services from a vendor. As a result, the
Company recorded a non-recurring charge of $13.9 million ($8.3 million
net of tax benefit of $5.6 million) to write off the remaining payments
and related prepaid expense under this contract (see Note 1). In
addition, during 1998 the Company recorded an extraordinary loss of $9.9
million ($5.9 million net of tax benefit of $4.0 million) related to the
early retirement of debt (see Notes 1 and 7).
(2) The year ended December 31, 1997 reflects non-recurring charges of
$59.4 million ($35.5 million net of tax benefit of $23.9 million),
(non-cash), (see Note 1) and $5.3 million ($3.2 million net of tax
benefit of $2.1 million), (cash) related to the vesting of stock
options and the termination of certain management advisory service
agreements (see Note 13). In addition, during 1997 the Company
recorded an extraordinary loss of $9.8 million ($5.9 million net of
tax benefit of $3.9 million) related to early retirement of debt (see
Note 1).
The Company uses a binomial option pricing model to estimate the fair value of
options at the date of grant. The weighted average assumptions used to value
options and the weighted average fair value of options granted during 1998, 1997
and 1996 were as follows:
1998 1997 1996
------------- ---------------- -----------------
Fair value of options granted $14.58 $ 6.85 $ 8.84
Exercise price $24.13 $11.44 $ 4.30
Expected stock price volatility 59.0% 64.7% 80.7%
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.5% 6.4% 5.2%
Expected life of options 6 years 5 years 2 years
42
12. PREFERRED STOCK
The authorized capital shares of the Company include 15,000,000 shares of
preferred stock. The rights and preferences of preferred stock are established
by the Company's Board of Directors upon issuance. At December 31, 1998, the
Company had zero shares of preferred stock outstanding, all 15,000,000 shares
are specified as undesignated preferred stock. On September 2, 1997, pursuant to
a plan to provide for an equity offering, the Company completed the redemption
of all Series A and Series C preferred stock issued and outstanding for $8.6
million and $12.7 million, respectively, including accrued and unpaid dividends
thereon.
13. TRANSACTIONS WITH RELATED PARTIES
Prior to the fourth quarter of 1997, the Company had management advisory service
agreements with three investor groups. These investor groups provided certain
advisory services to the Company.
Pursuant to an agreement, Wingate Partners, L.P. ("Wingate Partners") had agreed
to provide certain oversight and monitoring services to the Company in exchange
for an annual fee of up to $725,000, payment (but not accrual) of which is
subject to restrictions under the former credit agreement related to certain
Company performance criteria. Wingate Partners earned an aggregate of $513,540
and $725,000 with respect to each of the years ended 1997 and 1996,
respectively, for such oversight and monitoring services. Under the agreement,
the Company was obligated to reimburse Wingate Partners for its out-of-pocket
expenses and indemnify Wingate Partners and its affiliates from loss in
connection with these services.
Pursuant to an agreement, Cumberland Capital Corporation ("Cumberland") had
agreed to provide certain oversight and monitoring services to the Company in
exchange for (i) an annual fee of up to $137,500, payment (but not accrual) of
which is subject to restrictions under the former credit agreement related to
certain Company performance criteria. Pursuant to the agreement, Cumberland
earned an aggregate of $97,400 and $137,000 with respect to the years ended 1997
and 1996, respectively, for such oversight and monitoring services. The Company
also was obligated to reimburse Cumberland for its out-of-pocket expenses and
indemnify Cumberland and its affiliates from loss in connection with these
services.
Pursuant to an agreement, Good Capital Co., Inc. ("Good Capital") had an
agreement to provide certain oversight and monitoring services to the Company in
exchange for (i) an annual fee of up to $137,500, payment (but not accrual) of
which is subject to restrictions under the former credit agreement related to
certain Company performance criteria. Pursuant to the agreement, Good Capital
earned an aggregate of $97,400 and $137,500 with respect to the years ended 1997
and 1996, respectively, for such oversight and monitoring services. The Company
also was obligated to reimburse Good Capital for its out-of-pocket expenses and
indemnify Good Capital and its affiliates from loss in connection with these
services.
In the fourth quarter of 1997, the Company terminated the management advisory
service agreements for one-time payments of approximately $2.4 million, $400,000
and $400,000 to Wingate Partners, Cumberland and Good Capital, respectively. As
indicated in Note 1, these one-time payments were included as non-recurring
charges on the Consolidated Statements of Income.
14. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (dollars
in thousands):
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
---------- ---------- ----------
Currently payable -
Federal $ 34,281 $ 19,812 $ 14,724
State 8,403 4,811 3,532
---------- ---------- ----------
Total currently payable 42,684 24,623 18,256
Deferred, net -
Federal 3,508 (12,889) 4,614
State 872 (3,202) 685
---------- ---------- ----------
Total deferred, net 4,380 (16,091) 5,299
---------- ---------- ----------
Provision for income taxes $ 47,064 $ 8,532 $ 23,555
---------- ---------- ----------
---------- ---------- ----------
43
The Company's effective income tax rates for the years ended December 31, 1998,
1997 and 1996 varied from the statutory Federal income tax rate as set forth in
the following table (dollars in thousands):
Years Ended December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- --------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Tax provision based on the
federal statutory rate $38,846 35.0% $ 5,852 35.0% $19,442 35.0%
State and local income taxes -
net of federal income tax
benefit 5,993 5.4 1,053 6.3 3,000 5.4
Non-deductible and other 2,225 2.0 1,627 9.7 1,113 2.0
------- ---- ------- ---- ------- ----
Provision for income taxes $47,064 42.4% $ 8,532 51.0% $23,555 42.4%
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
The deferred tax assets and liabilities result from timing differences in the
recognition of certain income and expense items for financial and tax accounting
purposes. The sources of these differences and the related tax effects were as
follows (dollars in thousands):
December 31,
-----------------------------------------------
1998 1997
---------------------- ----------------------
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Accrued expenses $24,254 $ - - $18,280 $ - -
Allowance for doubtful accounts 6,754 - - 8,632 - -
Inventory reserves and adjustments - - 17,201 - - 16,852
Depreciation and amortization - - 38,315 - - 41,588
Reserve for stock option compensation 3,902 - - 16,792 - -
Other 6,672 - - 5,720 - -
------- ------- ------- -------
Total $41,582 $55,516 $49,424 $58,440
------- ------- ------- -------
------- ------- ------- -------
In the Consolidated Balance Sheets, these deferred assets and liabilities are
classified on a net basis as current and non-current based on the classification
of the related asset or liability or the expected reversal date of the temporary
difference.
15. SUPPLEMENTAL CASH FLOW INFORMATION
In addition to the information provided in the Consolidated Statements of Cash
Flows, the following are supplemental disclosures of cash flow information for
the years ended December 31, 1998, 1997 and 1996 (dollars in thousands):
1998 1997 1996
---------- --------- ----------
Cash paid during the year for:
Interest $42,592 $49,279 $52,871
Income taxes 26,439 13,663 17,482
44
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is as follows
(dollars in thousands):
December 31, 1998 December 31, 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and cash equivalents $ 19,038 $ 19,038 $ 12,367 $ 12,367
Current maturities of long-term
obligations and capital lease 7,709 7,709 44,267 44,267
Long-term debt and capital lease:
12.75% Subordinated Notes 100,000 111,500 100,000 114,750
8.375% Subordinated Notes 100,000 99,750 - - - -
All other 107,675 107,675 392,868 392,868
Interest rate collar - - 463 - - 387
The fair value of the Notes and interest rate collar are based on quoted market
prices and quotes from counterparties, respectively.
17. SUMMARIZED FINANCIAL DATA FOR GUARANTOR SUBSIDIARIES
Azerty Incorporated, Positive ID Wholesale, and AP Support Services
(collectively, the "Azerty Guarantor") and Lagasse guarantee the 12.75%
Notes and the 8.375% Notes issued by USSC. The Azerty Guarantor and Azerty
de Mexico, S.A. de C.V. (collectively, the "Azerty Business") were acquired
on April 3, 1998.
Set forth below is summarized combined financial data for the Azerty Business
(subsequent to its acquisition by USSC) and Lagasse. Summarized combined
financial data as of December 31, 1998 reflect both Lagasse and the Azerty
Business. The summarized combined income statement data for the year ended
December 31, 1998 reflect the operations of Lagasse for the 12 months and
the Azerty Business, subsequent to its acquisition by USSC, for the nine months
ended December 31, 1998. Summarized financial data as of December 31, 1997, for
the 12 months ended December 31, 1997 and for the two months ended December
31, 1996 reflect Lagasse only.
As of December 31,
------------------------------
1998 1997
------------- -------------
Balance Sheet Data:
Current assets $ 175,745 $ 29,731
Total assets 293,914 68,766
Current liabilities 90,498 13,564
Total liabilities 90,560 18,490
Year Ended
December 31, Two Months Ended
------------------------------ December 31,
1998 1997 1996
------------- ------------- -------------------
Income Statement Data:
Net sales $ 423,297 $ 97,275 $ 12,668
Gross margin 47,756 18,014 1,790
Operating income 17,254 7,976 173
Net income (loss) 9,799 4,190 (21)
18. SUBSEQUENT EVENT
The Company announced on March 11, 1999, that its Board of Directors authorized
a share repurchase program of up to $50.0 million of the Company's Common
Stock, contingent upon approval by the Company's senior lenders. On March 17,
1999, the Company received approval from its senior lenders for the share
repurchase program. Purchases will be made from time to time in the open
market or in privately negotiated transactions.
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant had no disagreements on accounting and financial disclosure of
the type referred to in Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information with respect to those individuals who are
currently serving as members of the Board of Directors or as executive officers
of the Company on February 15, 1999:
Name Age Position
- -------------------------------------------------------------------------------------------------------
Frederick B. Hegi, Jr...... 55 Chairman of the Board of Directors
Randall W. Larrimore....... 51 Director, President and Chief Executive Officer
Daniel J. Good............. 58 Director
James A. Johnson........... 44 Director
Benson P. Shapiro.......... 57 Director
Joel D. Spungin............ 61 Director
Max D. Hopper.............. 64 Director
Roy W. Haley............... 52 Director
Daniel H. Bushell.......... 47 Executive Vice President, Chief Development Officer and
Chief Financial Officer
Steven R. Schwarz.......... 45 Executive Vice President and President, United Supply Division
Kathleen S. Dvorak......... 42 Vice President, Investor Relations and Assistant Secretary
Tom Helton................. 51 Vice President, Human Resources
Susan Maloney Meyer........ 55 Vice President, General Counsel and Secretary
James A. Pribel............ 45 Treasurer
Ergin Uskup................ 60 Vice President, Management Information Systems
and Chief Information Officer
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company. There is no family relationship between any
directors or executive officers of the Company. Officers of the Company are
elected by the Board of Directors and hold office until their respective
successors are duly elected and qualified.
FREDERICK B. HEGI, JR. was elected to the Board of Directors of United upon
consummation of the Merger and served as Chairman, Interim President and Chief
Executive Officer upon the resignation of Thomas W. Sturgess in November 1996
and until Randall Larrimore became President and Chief Executive Officer in May
1997. Prior to the Merger, he had been a director of Associated since 1992. Mr.
Hegi is a general partner of various Wingate entities, including the indirect
general partner of each of Wingate Partners and Wingate II. Since May 1982, Mr.
Hegi has served as President of Valley View Capital Corporation, a private
investment firm. Mr. Hegi also currently serves as Chairman of the Executive
Committee of the Board of Loomis, Fargo & Co., an armored car service company;
Chairman of Tahoka First Bancorp, Inc., a bank holding company; and Chairman of
Cedar Creek Bancshares, Inc., a bank holding company. Additionally, he is a
director of Texas Capital Bancshares, Inc., a bank holding company, and Lone
Star Technologies, Inc. (NYSE), a diversified company engaged in the manufacture
of tubular products.
RANDALL W. LARRIMORE was elected to the Board of Directors of United and the
Company and became President and Chief Executive Officer of the Company on May
23, 1997. From February 1988 to May 1997, Mr. Larrimore had been President and
Chief Executive Officer of MasterBrand Industries, Inc., a manufacturer of
leading brands including Master Lock padlocks and Moen faucets, and a subsidiary
of Fortune Brands (formerly American Brands). Prior to that time, Mr. Larrimore
was President and Chief Executive Officer of Twentieth Century Companies, a
manufacturer of plumbing repair parts and a division of Beatrice Foods. Prior,
thereto he was Vice President of Marketing for Beatrice Home Specialties, the
operating parent of Twentieth Century. Fortune Brands acquired Twentieth Century
Companies and other Beatrice Divisions and subsidiaries in 1988. Before joining
Beatrice in 1983, Mr. Larrimore was with Richardson-Vicks, McKinsey & Company
and then with PepsiCo International. Mr. Larrimore serves as a director of Olin
Corporation, a diversified manufacturer of chemicals, metals, micro-electronic
materials and sporting ammunition. He also serves as a director of Evanston
Northwestern Healthcare and S.I.F.E., Students in Free Enterprise.
46
DANIEL J. GOOD was elected to the Board of Directors of United upon
consummation of the Merger. Prior to the Merger, he had been a director of
Associated since 1992. Mr. Good is Chairman of Good Capital Co., Inc. ("Good
Capital"), an investment firm in Lake Forest, Illinois. Until June 1995, Mr.
Good was Vice Chairman of Golden Cat Corp., the largest producer of cat
litter in the United States, and prior thereto he was Managing Director of
Merchant Banking of Shearson Lehman Bros. and President of A.G. Becker
Paribas, Inc. Mr. Good serves as an advisory director of AON Risk Services,
Inc., COM2001 and as Chairman of the Advisory Board of Brown Simpson
Asset Management LLC.
MAX D. HOPPER has served as a Director of the company since August 1998. In
1995, he founded Max D. Hopper Associates, Inc., a consulting firm specializing
in creating benefits from the strategic use of advanced information systems. He
is the retired chairman of the SABRE Technology Group and served as Senior Vice
President for American Airlines, both units of AMR Corporation. Mr. Hopper
currently serves on the board of directors of Gartner Group, Inc., Metrocall,
Inc., USDATA Corporation, Inc., Payless Cashways, Inc., VTEL Corporation,
Worldtalk Corporation and Exodus Communications, Inc.
ROY W. HALEY was elected to the Board of Directors of United in March 1998. Mr.
Haley currently serves as Chairman and Chief Executive Officer of WESCO
International Inc. ("WESCO"). Prior to joining WESCO in 1994, he served as
President and Chief Operating Officer of American General Corporation, one of
the nation's largest consumer financial services organizations. Mr. Haley also
serves as a director for Cambrex, Corp. (NYSE), Development Dimensions, Inc.,
and The National Association of Electrical Distribution Education Foundation.
JAMES A. JOHNSON was elected to the Board of Directors of United upon
consummation of the Merger. Prior to the Merger, he had been a director of
Associated since 1992. Mr. Johnson is a general partner of various Wingate
entities, including the indirect general partner of Wingate II. From 1980 until
he joined Wingate Partners in 1990, Mr. Johnson served as a Principal of
Booz-Allen & Hamilton, an international management consulting firm. Mr. Johnson
currently serves as a director of Pro Parts Xpress, a wholesale distributor of
automotive parts.
BENSON P. SHAPIRO was elected to the Board of Directors of United in November
1997. Professor Shapiro has served on the faculty of Harvard University for 27
years and until July 1997 was THE MALCOLM P. MCNAIR PROFESSOR OF MARKETING at
the Harvard Business School. He continues to teach a variety of Harvard's
executive programs and spends much of his time on consulting, public speaking,
and writing. He serves on Indus River Networks, Inc. and several advisory boards
for private companies.
JOEL D. SPUNGIN has served as a member of the Board of Directors of United since
1972 and prior to the consummation of the Merger was Chairman of the Board of
Directors and Chief Executive Officer of United since August 1988. From October
1989 until April 1991, he was also President of United. Prior to that, since
March 1987, Mr. Spungin was Vice Chairman of the Board and Chief Executive
Officer of United. Previously, since August 1981, Mr. Spungin was President and
Chief Operating Officer of United. He also serves as a general partner of DMS
Enterprises, L.P., a management advisory and investment partnership, and as a
director of AAR Corp., an aviation and aerospace company, and Home Products
International, Inc., a manufacturer of home improvement products.
DANIEL H. BUSHELL became Executive Vice President and Chief Financial Officer of
the Company upon consummation of the Merger. In January 1999, Mr. Bushell was
also named Chief Development Officer and has responsibility for exploring market
options and acquisitions, including international opportunities. Mr. Bushell has
served as Assistant Secretary of the Company since January 1996, and served as
Secretary of the Company from June 1995 through such date. Mr. Bushell also
served as Assistant Secretary of the Company from the consummation of the Merger
until June 1995. Prior thereto, Mr. Bushell had been Chief Administrative and
Chief Financial Officer of Associated and ASI since January 1992. From 1978 to
January 1992, Mr. Bushell served in various capacities with ACE Hardware
Corporation, most recently as Vice President of Finance.
STEVEN R. SCHWARZ became Executive Vice President of the Company upon
consummation of the Merger with primary responsibility for marketing and
merchandising. In January 1999, Mr. Schwarz was also named to the position of
President, United Supply Division which is the Company's core office supply
business. Prior thereto, he was Senior Vice President, Marketing of United
since June 1992 and had previously been Senior Vice President, General
Manager, Micro United since 1990 and Vice President, General Manager, Micro
United since September 1989. He had held a staff position in the same
capacity since February 1987.
KATHLEEN S. DVORAK became Vice President, Investor Relations in July 1997. Ms.
Dvorak began her career at United in 1982 and has held various positions with
increasing responsibility within the investor relations function. Most recently,
she was Director of Investor Relations of the Company.
47
TOM HELTON became Vice President of Human Resources in February 1998. Prior to
joining United, Mr. Helton spent 11 years, from 1986 to 1997, at Whirlpool
Corporation where he held a variety of management and executive positions within
the human resource function. Most recently, he was Vice President of Human
Resources for Whirlpool Asia. From 1980 to 1986, Mr. Helton was with Kaiser
Aluminum and Chemical working in personnel and labor relations.
SUSAN MALONEY MEYER became Vice President, General Counsel and Secretary of the
Company in July 1998. Prior thereto, since 1991 Ms. Meyer was at General
Instrument Corporation, a broadband technology company, most recently serving as
Vice President, Secretary and Deputy General Counsel. From 1986 through 1991,
Ms. Meyer served as senior counsel for Beatrice Companies, Inc., a large
conglomerate in a wide variety of businesses.
JAMES A. PRIBEL became Treasurer of the Company upon consummation of the Merger.
Prior thereto he was Treasurer of United since 1992. Mr. Pribel previously had
been Assistant Treasurer of USSC since 1984 and had served in various positions
since joining USSC in 1978.
ERGIN USKUP became Vice President, Management Information Systems and Chief
Information Officer of the Company upon consummation of the Merger. Prior
thereto, he was Vice President, Management Information Systems and Chief
Information Officer of United since February 1994, and since 1987 had been Vice
President, Corporate Information Services for Baxter International Inc., a
global manufacturer and distributor of health care products.
The Charter provides that the Board of Directors shall be divided into three
classes, each class as nearly equal in number as possible, and each term
consisting of three years. The directors currently in each class are as follows:
Class I (having terms expiring in 1999)--Messrs. Good, Hopper, Johnson and
Spungin; Class II (having terms expiring in 2000)--Messrs. Hegi and Larrimore
and Class III (having terms expiring in 2001)--Messrs.
Haley and Shapiro.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference, pursuant to General Instruction G(3) to Form
10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 12, 1999, to be filed within 120 days
after the end of the Registrant's year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference, pursuant to General Instruction G(3) to Form
10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 12, 1999, to be filed within 120 days
after the end of the Registrant's year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference, pursuant to General Instruction G(3) to Form
10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 12, 1999, to be filed within 120 days
after the end of the Registrant's year.
48
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) The following financial statements, schedules and exhibits are filed as part
of this report:
PAGE NO.
--------
(1) Financial Statements of the Company
Report of Independent Auditors....................................... 22
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.................................. 23
Consolidated Balance Sheets as of December 31, 1998 and 1997......... 24-25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996.............. 26-27
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.................................. 28
Notes to Consolidated Financial Statements........................... 29-45
(2) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Certificate of Ownership and Merger merging Associated Stationers,
Inc. into the Company(2).
2.2 Stock Purchase Agreement among USSC and Lagasse Bros., Inc and the
shareholders of Lagasse Bros., Inc. (Exhibit 99.1 to the Company's
Report on Form 8-K filed November 5, 1996)(3).
2.3 Stock Purchase Agreement, dated as of February 10, 1998, among the
Company, United, Abitibi-Consolidated Inc., Abitibi-Consolidated
Sales Corporation. Azerty Incorporated, Azerty de Mexico,S.A. de
C.V., AP Support Services Incorporated and Positive I.D. Wholesale
Inc. (Exhibit 2.1 to the Company's Report on Form 8-K filed April 20,
1998)(3).
3.1 Second Restated Certificate of Incorporation dated as of November 5,
1998.*
3.2 Amended and Restated Bylaws dated as of March 24, 1999.*
3.3 Restated Articles of Incorporation of USSC(6).
3.4 Restated Bylaws of USSC(7).
4.1 Second Supplemental Indenture, dated as of April 3, 1998, among the
Company, Lagasse Bros., Inc., Azerty Incorporated, Positive ID
Wholesale Inc., AP Support Services Incorporated, as guarantors, and
The Bank of New York, as trustee (Exhibit 4.1 to the Company's Report
on Form 8-K filed April 20, 1998)(3).
4.2 Indenture, dated as of April 15, 1998, among the Company, USSC as
issuer, Logasse Bros., Inc., Azerty Incorporated, Positive ID
Wholesale Inc., AP Support Services Incorporated, as guarantors, and
The Bank of New York, as trustee (Exhibit 4.1 to the Company's Report
on Form 8-K filed April 20, 1998)(3).
4.3 Indenture, dated as of May 3, 1995, among the Company, as guarantor,
USSC, as issuer, and The Bank of New York, as trustee(1).
4.4 First Supplemental Indenture, dated as of July 28, 1995, among the
Company, USSC and The Bank of New York(1).
4.5 Amendment No. 1 to Second Amended and Restated Credit Agreement
dated December 30, 1998.*
4.6 Amendment No. 2 to Second Amended and Restated Credit Agreement
dated March 17, 1999.*
10.1 Registration Rights Agreement, dated as of January 31, 1992, between the
Company and CMIH (included in Exhibit 10.4, Annex 2).
10.2 Amendment No. 1 to Registration Rights Agreement, dated as of March 30,
1995, among the Company, CMIHI and certain other holders of Lender
Warrants(1).
10.3 Amended and Restated Registration Rights Agreement, dated as of March
30, 1995, among the Company, Wingate Partners L.P., Cumberland Capital
Corporation, Good Capital Co., Inc. and certain other Company
stockholders(1).
10.4 Warrant Agreement, dated as of January 31, 1992, among the Company, USSC
and CMIH(1).
10.5 Amendment No. 1 to Warrant Agreement, dated as of October 27, 1992,
among the Company, USSC, CMIH and the other parties thereto(1).
10.6 Investment Banking Fee and Management Agreements, dated as of January
31, 1992, among the Company, USSC and each of Wingate Partners, L.P.,
Cumberland Capital Corporation and Good Capital Co., Inc.(1)
10.7 Amendment No. 1 to Investment Banking Fee and Management Agreements,
dated as of March 30, 1995, among the Company, USSC and each of
Wingate Partners, L.P., Cumberland Capital Corporation and Good
Capital Co., Inc.(1).
10.8 Termination Agreements, dated as of October 31, 1997, terminating the
Investment Banking Fee and Management Agreements, among the Company,
USSC and each of Wingate Partners, L.P., Cumberland Capital
Corporation, and Good Capital Co., Inc.(1)
10.9 Amendment No. 4 to Warrant Agreement, effective as of July 7, 1997,
among the Company, USSC, CMIH and the other parties thereto(5).
10.10 Warrant Agreement, dated as of January 31, 1992, between the Company and
Boise Cascade Corporation(1).
10.11 Amendment No. 1 to Warrant Agreement, dated as of March 30, 1995,
between the Company and Boise Cascade Corporation(1).
10.12 Indenture, dated as of May 3, 1995, among USSC, the Company and The Bank
of New York(1).
10.13 First Supplemental Indenture, dated as of July 28, 1995, among USSC, the
Company, and The Bank of New York(1).
10.14 Investment Banking Fee and Management Agreements, dated as of January
31, 1992, among the Company, USSC and each of Wingate Partners,
Cumberland and Good Capital Co., Inc.(1).
10.15 Amendment No. 1 to Investment Banking Fee and Management Agreements,
dated as of March 30, 1995, among USSC, the Company and each of Wingate
Partners, Cumberland and Good Capital Co., Inc.(1).
49
10.16 Termination Agreements, dated as of October 31, 1997, terminating the
Investment Banking Fee and Management Agreements among the Company,
USSC and each of Wingate Partners L.P., Cumberland Capital
Corporation and Good Capital Co., Inc.(8).
10.17 Amendment No. 4 to Management Equity Plan, dated as of August 19,
1997(5).**
10.18 United Stationers Inc. Management Equity Plan, as amended through August
19, 1997(5).**
10.19 Letter Agreements, dated as of January 31, 1992, between the Company (as
successor-in-interest to Associated) and each of Michael D. Rowsey,
Robert W. Eberspacher, Lawrence E. Miller, Daniel J. Schleppe, Duane J.
Ratay and Daniel H. Bushell regarding grants of stock options(1).
10.20 Amendment to Stock Option Grants, dated as of March 30, 1995, between
the Company and each of Michael D. Rowsey, Robert W. Eberspacher,
Lawrence E. Miller, Daniel J. Schleppe, Duane J. Ratay and Daniel H.
Bushell(1).
10.21 Forms of Stock Option Agreements dated October 2, 1995, granting options
to certain management employees(4).**
10.22 Forms of Amendments to Stock Option Grants, dated September 29, 1995,
between the Company and each of Michael D. Rowsey, Robert W.
Eberspacher, Lawrence E. Miller, Daniel J. Schleppe and Daniel H.
Bushell(4).**
10.23 Stock Option Agreements dated as of January 1, 1996, between the Company
and Thomas W. Sturgess, granting options(4).**
10.24 Executive Stock Purchase Agreements, dated as of January 31, 1992,
among the Company, Wingate Partners L.P., ASI Partners, L.P. and each
of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller and
Daniel J. Schleppe(1).
10.25 First Amendments to Executive Stock Purchase Agreements, dated as of
March 30, 1995, among the Company, Wingate Partners L.P., ASI
Partners, L.P. and each of Michael D. Rowsey, Robert W. Eberspacher,
Lawrence E. Miller and Daniel J. Schleppe(1).
10.26 Management Incentive Plan for 1996(4).**
10.27 Management Incentive Plan for 1997 (Exhibit 10.39 to Company's Report on
Form 10-K dated March 26, 1997)(3).**
10.28 1997 Special Bonus Plan (Exhibit 10.40 to the Company's Report on Form
10-K dated March 26, 1997)(3).**
10.29 United Stationers 401(k) Savings Plan, restated as of March 1, 1996
(Exhibit 10.45.1 to the Company's Report on Form 10-K dated March 26,
1997)(3).**
10.30 United Stationers Supply Co. Pension Plan as amended (See the Company's
Reports on Form 10-K for the fiscal years ended August 31, 1985, 1986,
1987 and 1989)(3).**
10.31 Amendment to Pension Plan adopted February 10, 1995(2).**
10.32 One Time Merger Integration Bonus Plan(4).**
10.33 Amended and Restated Employment and Consulting Agreement dated April 15,
1993 among the Company, USSC and Joel D. Spungin (Exhibit 10(b) to the
Company's Report on Form 10-K dated November 22, 1993)(3).**
10.34 Amendment dated February 13, 1995 to the Amended and Restated Employment
and Consulting Agreement among the Company, USSC and Joel D.
Spungin(2).**
10.35 Severance Agreement between the Company, USSC and James A. Pribel dated
February 13, 1995(2).**
10.36 Letter Agreement dated February 13, 1995 between the Company and Ergin
Uskup(2).
10.37 Employment Agreements dated October 1, 1995 between USSC and each of
Daniel H. Bushell, Michael D. Rowsey, Steven R. Schwarz, Robert H.
Cornell, Ted S. Rzeszuto and Al Shaw(4).**
10.38 Employment Agreement dated November 1, 1995 between USSC and Otis H.
Halleen(4).**
10.39 Employment Agreement dated as of January 1, 1996 between the Company,
USSC and Thomas W. Sturgess(4).**
10.40 Deferred Compensation Plan. (Exhibit 10(f) to the Company's Annual
Report on Form 10-K dated October 6, 1994)(3).**
10.41 Letter Agreement dated November 29, 1995 granting shares of restricted
stock to Joel D. Spungin(4).**
10.42 Lease Agreement, dated as of March 4, 1988, between Crow-Alameda Limited
Partnership and Stationers Distributing Company, Inc., as amended(1).
10.43 Industrial Real Estate Lease, dated as of May 17, 1993, among Majestic
Realty Co. and Patrician Associates, Inc., as landlord, and United
Stationers Supply Co., as tenant(1).
10.44 Standard Industrial Lease, dated as of March 15, 1991, between Shelley
B. & Barbara Detrik and Lynn Edwards Corp.(1).
10.45 Lease Agreement, dated as of January 12, 1993, as amended, among
Stationers Antelope Joint Venture, AVP Trust, Adon V. Panattoni and
Yolanda M. Panattoni, as landlord, and United Stationers Supply Co., as
tenant(1).
10.46 Lease, dated as of February 1, 1993, between CMD Florida Four Limited
Partnership and United Stationers Supply Co., as amended(1).
10.47 Standard Industrial Lease, dated March 2, 1992, between Carol Point
Builders I and Associated Stationers, Inc.(1).
50
10.48 First Amendment to Industrial Lease dated January 23, 1997 between
ERI-CP, Inc. (successor to Carol Point Builders I) and United Stationers
Supply Co. (successor to Associated Stationers, Inc.)(5).
10.49 Lease, dated March 22, 1973, between National Boulevard Bank of Chicago,
as trustee under Trust Agreement dated March 15, 1973 and known as Trust
No. 4722, and USSC, as amended(1).
10.50 Lease Agreement, dated July 20, 1993, between OTR, acting as the duly
authorized nominee of the Board of the State Teachers Retirement System
of Ohio, and United Stationers Supply Co., as amended(1).
10.51 Lease Agreement, dated as of December 20, 1988, between Corporate
Property Associates 8, L.P., and Stationers Distributing Company, Inc.,
as amended(1).
10.52 Industrial Lease, dated as of February 22, 1988, between Northtown Devco
and Stationers Distributing Company, as amended(1).
10.53 Lease, dated as of April 17,1989, between Isaac Heller and USSC, as
amended(1).
10.54 Lease Agreement, dated as of May 10, 1984, between Westbelt Business
Park Joint Venture and Boise Cascade Corporation, as amended(1).
10.55 Fourth Amendment to Lease between Keystone-Ohio Property Holding Corp.
(as successor to Westbelt Business Park) and USSC (as successor to
Associated Stationers, Inc.) dated December 3, 1996(5).
10.56 Lease effective March 1, 1997 between Davis Partnership and USSCO*.
10.57 Lease Agreement, dated as of August 17, 1981, between Gulf United
Corporation and Crown Zellerbach Corporation, as amended(1).
10.58 Lease Agreement, dated as of March 31, 1978, among Gillich O. Traughber
and J.T. Cruin, Joint Venturers, and Boise Cascade Corporation, as
amended(1).
10.59 Lease Agreement, dated November 7, 1988, between Delware II Associates
and Stationers Distributing Company, Inc., as amended(1).
10.60 Lease Agreement, dated November 7, 1988, between Central East Dallas
Development Limited Partnership and Stationers Distributing Company,
Inc., as amended(1).
10.61 Lease Agreement, dated as of March 17, 1989, between Special Asset
Management Company of Texas, Inc., and Stationers Distributing Company,
Inc., as amended(1).
10.62 Sublease, dated January 9, 1992, between Shadrall Associates and
Stationers Distributing Company, Inc.(1).
10.63 Industrial Lease, dated as of June 12, 1989, between Stationers
Distributing Company, Inc. and Dual Asset Fund V, as amended(1).
10.64 Lease Agreement, dated as of July 1994, between Bettilyon Mortgage Loan
Company and USSC(1).
10.65 Agreement of Lease, dated as of January 5, 1994, between the Estate of
James Campbell, deceased, and USSC(1).
10.66 Amendment No. 2 to Agreement of Lease dated February 1, 1997 between the
Estate of James Campbell, deceased, and USSC(8).
10.67 Lease Agreement dated January 5, 1996, between Robinson Properties, L.P.
and USSC(4).
10.68 Agreement for Data Processing Services, dated January 31, 1992, between
USSC (as successor-in-interest to ASI) and Affiliated Computer Services,
Inc.(1).
10.69 Amended and Restated First Amendment to Agreement for Data Processing
Services, dated as of August 29, 1995, between USSC and Affiliated
Computer Services, Inc.(1).
10.70 Stock Purchase Agreement between United Stationers Supply Co. and
Lagasse Bros., Inc. ("Lagasse") and Kevin C. Lagasse, Cynthia Lagasse,
David C. Lagasse, Linette Lagasse Abadie, Clinton G. Lagasse, Raymond J.
Lagasse and Rickey Lagasse, being all of the shareholders of Lagasse
(Exhibit 99.1 to Registrant's Report on Form 8-K filed November 5,
1996)(3).
10.71 Amended and Restated Credit Agreement dated October 31, 1996 (amending
and restating the Credit Agreement dated as of March 30, 1995)(Exhibit
99.2 to Registrant's Report on Form 8-K filed November 5, 1996)(3).
10.72 USI Employee Benefits Trust Agreement dated March 21, 1995 between the
Company and American National Bank and Trust Company of Chicago as
Trustee(2).
10.73 Certificate of Insurance covering directors' and officers' liability
insurance effective March 30, 1996 through April 1, 1997(8).
10.74 Certificate of Insurance covering directors' and officers' liability
insurance effective April 1, 1997 through April 1, 1998(5).
10.75 Amendment to Medical Plan Document for the Company(2).**
10.76 The Company Severance Plan, adopted February 10, 1995(2).**
10.77 Securities Purchase Agreement, dated as of July 28, 1995, among the
Company, Boise Cascade, Wingate Partners, Wingate II, Wingate
Affiliates, Wingate Affiliates II, ASI Partners III, L.P., the Julie
Good Mora Grantor Trust and the Laura Good Stathos Grantor Trust(2).
10.78 Amendment dated February 23, 1996 to Option Agreements between the
Company and Thomas W. Sturgess (Exhibit 10.110 to the Company's Report
on Form 10-K dated March 28, 1996)(3).**
10.79 Amendment No. 3 to United Stationers Inc. Management Equity Plan, dated
as of September 27, 1995 (Exhibit 10.111 to the Company's Report on Form
10-K dated March 28, 1996(3).**
51
10.80 Amendment No. 2 dated March 5, 1996 to Stock Option Agreements between
the Company and Thomas W. Sturgess (Exhibit 10.112 to the Company's
Report on Form 10-K dated March 28, 1996)(3).**
10.81 Amendment to Employment Agreement dated March 5, 1996 between the
Company, USSC and Thomas W. Sturgess (Exhibit 10.113 to the Company's
Form 10-K dated March 28, 1996)(3).**
10.82 Employment Agreement dated as of May 23, 1997 between the Company, USSC
and Randall W. Larrimore(5).**
10.83 Employment Agreements dated as of June 1, 1997 between USSC and each of
Daniel H. Bushell, Michael D. Rowsey and Steven R. Schwarz(5).**
10.84 Lease dated as of October 20, 1997 between Ozburn-Hessey Storage Co. and
USSC(8).
10.85 United Stationers Inc. Non-employee Directors' Deferred Stock
Compensation Plan(8).**
10.86 Amendments to Stock Option Grants, dated as of June 1, 1997, between
United and each of Daniel H. Bushell, Michael D. Rowsey and Steven R.
Schwarz(5).**
10.87 Second Amended and Restated Credit Agreement, dated April 3, 1998,
among United, the Company, the lenders parties thereto, Chase Securities
Inc., as arranger, and the Chase Manhattan Bank, as agent (Exhibit 10.1
to the Company's Report on Form 8-K filed April 20, 1998)(3).
10.88 Second Amended and Restated Security Agreement, dated April 3, 1998,
between the Company and the Chase Manhattan Bank, as administrative
agent (Exhibit 10.2 to the Company's Report on Form 8-K filed
April 20, 1998)(3).
10.89 Subsidiary Guarantee and Security Agreement, dated April 3, 1998,
among Lagasse Bros., Inc., Azerty Incorporated, Positive ID Wholesale
Inc., AP Support Services Incorporated and the Chase Manhattan Bank,
as administrative agent (Exhibit 10.3 to the Company's Report on Form
8-K filed April 20, 1998)(3).
10.90 Pooling Agreement, dated April 3, 1998, among USS Receivables
Company, Ltd., the Company, as servicer, and The Chase Manhattan Bank,
as trustee (Exhibit 10.4 to the Company's Report on Form 8-K filed
April 20, 1998)(3).
10.91 Receivables Sale Agreement, dated as of April 3, 1998, among the
Company, as seller, USS Receivables Company, Ltd., and the Company,
as servicer (Exhibit 10.6 to the Company's Report on Form 8-K filed
April 20, 1998(3).
10.92 Servicing Agreement, dated as of April 3, 1998, among USS Receivables
Company, Ltd., the Company, as servicer, and the Chase Manhattan
Bank, as trustee (Exhibit 10.7 to the Company's Report on Form 8-K
filed April 20, 1998(3).
10.93 Certificate of Insurance covering directors' and officers' liablity
insurance effective April 1, 1998 through April 1, 2000(9).
10.94 Lease Agreement, dated as of October 12, 1998, between Corum Carol
Stream Associates, LLC and USSC.*
10.95 Management Incentive Plan for 1998.(*)(**)
10.96 Restated Management Equity Plan as of November 5, 1998.(*)(**)
10.97 Severance Agreement between the Company, USSC and Michael Rowsey and
Cynthia Rowsey, dated as of January 1, 1999.*
10.98 Warrant Purchase Agreement between the Company and ASI Partners III,
L.P. dated December, 1998.(*)(**)
21 Subsidiaries of the issuer.*
23.1 Consent of Ernst & Young LLP, independent auditors.*
27.1 Financial Data Schedule for United Stationers Inc. (EDGAR filing only)*.
27.2 Financial Data Schedule for United Stationers Supply Co. (EDGAR filing
only)*.
- --------------------------------------------------------------------------------
* Filed herewith.
** Compensatory Plan Arrangement.
(1) Incorporated by reference to USSC's Form S-1 (No. 33-59811), as amended,
initially filed with the Commission on June 12, 1995.
(2) Incorporated by reference to the Company's Schedule 14D-9 dated February
21, 1995.
(3) Incorporated by reference to other prior filings of the Company as
indicated.
(4) Incorporated by reference to the Company's Form S-2 (No. 333-01089) as
filed with the Commission on February 20, 1996.
(5) Incorporated by reference to the Company's Form S-2 (No. 333-34937) as
filed with the Commission on October 3, 1997.
(6) Adopted March 24, 1999.
(7) Incorporated by reference to United's Form S-1 (No. 33-59811), as
amended, initially filed with the Commission on June 12, 1995.
(8) Incorporated by reference to United's Form 10-K initially filed with
the Commission on March 12, 1998.
(9) Incorporated by reference to United's Form S-4 initially filed with
the Commission on June 12, 1998.
B) Reports on Form 8-K filed by the Registrant were as follows:
The Company filed a report on Form 8-K on December 31, 1998, reporting
under Item 5 the resignation of Michael D. Rowsey from Executive Vice
President and the Board of Directors of the Company.
For the purpose of complying with the amendments to the rules governing Form S-8
(effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statement on Form S-8 No. 333-37665
(filed October 10, 1997).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BY: /s/ Daniel H. Bushell
------------------------------------
Daniel H. Bushell
Executive Vice President,
Chief Development Officer and
Chief Financial Officer
(principal accounting officer)
Dated: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Frederick B. Hegi, Jr. Chairman of the Board of Directors March 29, 1999
- ----------------------------
Frederick B. Hegi, Jr.
/s/ Randall W. Larrimore President, Chief Executive Officer
- ---------------------------- and Director March 29, 1999
Randall W. Larrimore
/s/ Daniel J. Good Director March 29, 1999
- ----------------------------
Daniel J. Good
/s/ Roy W. Haley Director March 29, 1999
- ----------------------------
Roy W. Haley
/s/ Max D. Hopper Director March 29, 1999
- ----------------------------
Max D. Hopper
/s/ James A. Johnson Director March 29, 1999
- ----------------------------
James A. Johnson
/s/ Benson P. Shapiro Director March 29, 1999
- ----------------------------
Benson P. Shapiro
/s/ Joel D. Spungin Director March 29, 1999
- ----------------------------
Joel D. Spungin
53