UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file numbers: United Stationers Inc.: 0-10653
United Stationers Supply Co.: 33-59811
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
(Exact name of registrant as specified in its charter)
United Stationers Inc.: Delaware United Stationers Inc.: 36-3141189
United Stationers Supply Co.: Illinois United Stationers Supply Co.: 36-2431718
- --------------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 East Golf Road, Des Plaines, Illinois 60016-1267
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 699-5000
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
United Stationers Inc.: Yes ( X ) No ( )
United Stationers Supply Co.: Yes ( X ) No ( )
On May 12, 1999, United Stationers Inc. had outstanding 33,990,155 shares of
Common Stock, par value $0.10 per share. On May 12, 1999, United Stationers
Supply Co. had 880,000 shares of Common Stock, $1.00 par value per share,
outstanding; United Stationers Inc. owns 100% of these shares.
UNITED STATIONERS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
IMPORTANT EXPLANATORY NOTE 1
Independent Accountants' Review Report 2
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998. 3
Condensed Consolidated Statements of Income
for the Three Months ended March 31, 1999 and 1998. 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations. 11
PART II - OTHER INFORMATION 17
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SIGNATURE 18
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INDEX TO EXHIBITS 19
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UNITED STATIONERS INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPORTANT EXPLANATORY NOTE
THIS INTEGRATED FORM 10-Q IS FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, FOR EACH OF UNITED STATIONERS INC. ("UNITED"), A DELAWARE
CORPORATION, AND ITS WHOLLY OWNED SUBSIDIARY, UNITED STATIONERS SUPPLY CO.
("USSC"), AN ILLINOIS CORPORATION (COLLECTIVELY, THE "COMPANY"). UNITED
STATIONERS INC. IS A HOLDING COMPANY WITH NO OPERATIONS SEPARATE FROM ITS
OPERATING SUBSIDIARY, UNITED STATIONERS SUPPLY CO. AND ITS SUBSIDIARIES. NO
SEPARATE FINANCIAL INFORMATION FOR UNITED STATIONERS SUPPLY CO. AND ITS
SUBSIDIARIES HAS BEEN PROVIDED HEREIN BECAUSE MANAGEMENT FOR THE COMPANY
BELIEVES SUCH INFORMATION WOULD NOT BE MEANINGFUL BECAUSE (i) UNITED STATIONERS
SUPPLY CO. IS THE ONLY DIRECT SUBSIDIARY OF UNITED STATIONERS INC., WHICH HAS NO
OPERATIONS OTHER THAN THOSE OF UNITED STATIONERS SUPPLY CO. AND (ii) ALL ASSETS
AND LIABILITIES OF UNITED STATIONERS INC. ARE RECORDED ON THE BOOKS OF UNITED
STATIONERS SUPPLY CO. THERE IS NO MATERIAL DIFFERENCE BETWEEN UNITED STATIONERS
INC. AND UNITED STATIONERS SUPPLY CO. FOR THE DISCLOSURE REQUIRED BY THE
INSTRUCTIONS TO FORM 10-Q AND THEREFORE, UNLESS OTHERWISE INDICATED, THE
RESPONSES SET FORTH HEREIN APPLY TO EACH OF UNITED STATIONERS INC. AND UNITED
STATIONERS SUPPLY CO.
-1-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
United Stationers Inc.
We have reviewed the accompanying condensed consolidated balance sheet of United
Stationers Inc. and Subsidiaries as of March 31, 1999, and the related condensed
consolidated statements of income and cash flows for the three month periods
ended March 31, 1999 and 1998. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Stationers Inc. as of
December 31, 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 26, 1999, except for Note 18, as to
which the date is March 17, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1998,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/Ernst & Young LLP
Chicago, Illinois
April 23, 1999
-2-
UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited) (Audited)
March 31, December 31,
1999 1998
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 23,449 $ 19,038
Accounts receivable, net 215,549 203,467
Inventories 516,746 554,940
Other current assets 25,225 21,293
----------- -----------
Total current assets 780,969 798,738
Property, plant and equipment, net 168,986 169,060
Goodwill, net 180,412 181,009
Other 18,502 18,184
----------- -----------
Total assets $ 1,148,869 $ 1,166,991
----------- -----------
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 267,976 $ 301,952
Accrued liabilities 138,708 132,053
Current maturities of long-term debt 8,183 7,709
----------- -----------
Total current liabilities 414,867 441,714
Deferred income taxes 26,344 26,223
Long-term obligations 351,882 328,491
----------- -----------
Total liabilities 793,093 796,428
Stockholders' equity:
Common stock, $0.10 par value; 100,000,000
shares authorized; 37,201,669 and 36,912,173,
respectively, issued 3,720 3,691
Additional paid-in capital 304,247 303,330
Treasury stock, at cost - 2,215,000 shares (34,656) --
Retained earnings 83,541 64,853
Accumulated translation adjustment (1,076) (1,311)
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Total stockholders' equity 355,776 370,563
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Total liabilities and stockholders' equity $ 1,148,869 $ 1,166,991
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See notes to condensed consolidated financial statements.
-3-
UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------------
1999 1998
------------ ------------
Net sales $ 824,261 $ 712,517
Cost of goods sold 690,393 589,455
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Gross profit 133,868 123,062
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Operating expenses:
Warehousing, marketing and
administrative expenses 91,982 85,037
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Income from operations 41,886 38,025
Interest expense 7,467 11,826
Other expense 2,199 --
------------ ------------
Income before income taxes 32,220 26,199
Income taxes 13,532 11,108
------------ ------------
Net income $ 18,688 $ 15,091
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Net income per common share $ 0.51 $ 0.47
------------ ------------
------------ ------------
Average number of common shares outstanding 36,840 31,990
Net income per common share - assuming dilution $ 0.50 $ 0.44
------------ ------------
------------ ------------
Average number of common shares outstanding -
assuming dilution 37,409 34,196
See notes to condensed consolidated financial statements.
-4-
UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------------
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net income $ 18,688 $ 15,091
Depreciation and amortization 6,804 7,433
Amortization of capitalized financing costs 358 930
Changes in operating assets and liabilities (6,464) 44,046
----------- -----------
Net cash provided by operating activities 19,386 67,500
Cash Flows From Investing Activities:
Capital expenditures (8,702) (3,984)
Proceeds from disposition of property, plant
and equipment 3,200 9
----------- -----------
Net cash used in investing activities (5,502) (3,975)
Cash Flows From Financing Activities:
Principal payments on debt (1,119) (29,934)
Net borrowing (repayments) under revolver 26,000 (32,000)
Issuance of common shares 2,447 243
Payment of employee withholding tax related to
stock option exercises (2,381) (2,571)
Repurchase of common stock (34,656) --
Other 236 (126)
----------- -----------
Net cash used in financing activities (9,473) (64,388)
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Net change in cash and cash equivalents 4,411 (863)
Cash and cash equivalents, beginning of period 19,038 12,367
----------- -----------
Cash and cash equivalents, end of period $ 23,449 $ 11,504
----------- -----------
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Other Cash Flow Information:
Income taxes paid $ 1,196 $ 742
Interest paid 3,842 10,424
See notes to condensed consolidated financial statements.
-5-
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited,
except for the Consolidated Balance Sheet as of December 31, 1998. These
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Accordingly, the reader of this
Form 10-Q should refer to the Company's Form 10-K for the year ended December
31, 1998 for further information. In the opinion of the Company's management,
the condensed consolidated financial statements for the unaudited interim
periods presented include all adjustments necessary to fairly present the
results of such interim periods and the financial position as of the end of said
periods. Certain interim expense and inventory estimates are recognized
throughout the year relating to marginal income tax rates, shrinkage, price
changes and product mix. Any refinements to these estimates based on actual
experience are recorded when known.
2. OPERATIONS
The Company operates in a single 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 computer products resellers,
office furniture dealers, mass merchandisers, sanitary supply distributors,
warehouse clubs, mail order houses and office products superstores. The Company
has a distribution network of 40 business products distribution centers, 19
janitorial and sanitation distribution centers and six computer consumables,
peripherals and accessories distribution centers. In addition to its broad
product offering, the Company provides value-added marketing and logistics
services to both manufacturers and resellers.
3. REPURCHASE OF COMMON STOCK
In the first quarter of 1999, the Company's Board of Directors authorized the
repurchase of up to $50.0 million in common stock. During the first quarter of
1999, the Company repurchased 2,215,000 shares of common stock at a cost of
approximately $34.7 million. As of March 31, 1999, the Company had authorization
remaining to repurchase up to $15.3 million in common stock out of the $50.0
million approved by the Board of Directors in the first quarter of 1999.
4. COMPREHENSIVE INCOME
Total comprehensive income was $18,923,000 and $14,968,000 for the three month
periods ended March 31, 1999 and 1998, respectively.
-6-
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the quarter. Diluted EPS reflects the potential dilution that could occur
if dilutive securities were exercised into common stock. Stock options are
considered dilutive securities.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended
March 31,
---------------------------------
1999 1998
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NUMERATOR:
Net income $ 18,688 $ 15,091
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DENOMINATOR:
Denominator for basic earnings per share -
Weighted average shares 36,840 31,990
Effect of dilutive securities:
Employee stock options 569 2,206
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Denominator for diluted earnings per share -
Adjusted weighted average shares
and assumed conversions 37,409 34,196
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Earnings per common share:
Net income per share - Basic $ 0.51 $ 0.47
Net income per share - Diluted $ 0.50 $ 0.44
-7-
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. 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.
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 distribution centers, 19 janitorial
and sanitation distribution centers and six computer consumables,
peripherals and accessories 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 includes
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
Bros. Inc., the largest pure wholesaler of janitorial and sanitation supplies
in North America. The Company distributes these products through 19
janitorial and sanitation 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 during the first quarter
of 1999.
-8-
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth net sales by product category for the three month
periods ended March 31, 1999 and 1998 (dollars in millions):
Three Month Period Ended
March 31,
----------------------------------
1999 1998
-------------- ---------------
Traditional office products $ 284 $ 307
Computer supplies and peripherals 298 179
Office furniture 106 109
Facility supplies 57 47
Business machines and audio-visual
equipment 79 71
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Total net sales $ 824 $ 713
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7. SUMMARIZED FINANCIAL DATA FOR GUARANTOR SUBSIDIARIES
Azerty Incorporated, Positive ID Wholesale, and AP Support Services
(collectively, the "Azerty Guarantor") and Lagasse Bros., Inc. ("Lagasse")
guarantee the 8.375% Senior Subordinated Notes due 2008 (the "Notes") issued
by United Stationers Supply Co. ("USSC"). The Azerty Guarantor Subsidiaries
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 March 31, 1999 and December 31, 1998 reflect both Lagasse
and the Azerty Business. The summarized combined income statement data for the
three months ended March 31, 1999 reflects the operations of Lagasse and the
Azerty Business. Summarized financial data for the three months ended March 31,
1998 reflect Lagasse only.
As of As of
March 31, December 31,
1999 1998
-------------- --------------
Balance Sheet Data:
Current assets $ 218,455 $ 175,745
Total assets 335,999 293,914
Current liabilities 96,403 90,498
Total liabilities 96,765 90,560
Three Months Ended
March 31,
-------------------------------------
1999 1998
---------------- -----------------
Income Statement Data:
Net sales $ 175,710 $ 35,080
Gross margin 18,084 6,373
Operating income 6,729 2,460
Net income 3,741 1,373
-9-
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. RECENT ACCOUNTING PRONOUNCEMENT
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. The
Company will adopt SFAS No. 133 on January 1, 2000. The Company anticipates that
SFAS No. 133 will not have a material impact on its consolidated financial
statements.
-10-
ITEM 2. 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-Q.
Information contained or incorporated by reference in this Form 10-Q may contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"anticipate," "believe," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. All statements other than
statements of historical fact included in this Form 10-Q, including those
regarding the Company's financial position, business strategy, projected costs
and plans and objectives of management for future operations are forward-looking
statements. The following matters and certain other factors noted throughout
this Form 10-Q 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-Q and/or any subsequent written or oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by such cautionary statements. The Company
undertakes no obligation to release the results of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
First Quarter Ended March 31, 1999 compared with the
First Quarter Ended March 31, 1998
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NET SALES. Net sales were $824.3 million in the first quarter of 1999, a 15.7%
increase over net sales of $712.5 million in the first quarter of 1998. The
increase reflects the impact of the Azerty acquisition which closed on April 3,
1998. Organic sales in the first quarter of 1999 increased by 1.5%.
During the first quarter of 1999, the Company experienced slowing sales growth
due to the discontinuance of laptop and desktop computers and office products at
Azerty, decisions by certain customers to use an alternate wholesaler and a
change in inventory management strategy by certain customers. Considering the
strategic initiatives currently underway, the Company expects to build sales
momentum as it progresses through the year.
GROSS MARGIN. Gross margin declined to 16.3% in the first quarter of 1999
compared with 17.2% in 1998. This decrease is primarily the result of the
blending of the lower-margin computer consumables business (Azerty) into the
Company's overall margin mix.
OPERATING EXPENSES. Operating expenses as a percent of net sales declined to
11.2% in 1999 compared with 11.9% in 1998. This reduction represents the impact
of Azerty's lower operating expense ratio. The Company believes there are
significant opportunities to further reduce its operating expense ratio,
primarily through best practices and ongoing productivity improvements.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales
decreased to 5.1% in 1999 compared with 5.3% in 1998.
-11-
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE. Interest expense as a percent of net sales was 0.9% compared
with 1.7% in 1998. 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, and the Receivables
Securitization Program (as defined). These transactions were partially offset by
the acquisition of Azerty, in April of 1998, for a purchase price of
approximately $115.7 million and the placement of $100.0 million of Senior
Subordinated Notes at 8.375% (as defined) in April of 1998.
OTHER EXPENSE. Other expense as a percent of net sales was 0.3% in 1999. This
expense 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. Income before income taxes as a percent of net sales
increased to 3.9% from 3.6% in 1998.
NET INCOME. Net income as a percent of net sales increased to 2.3% compared with
2.1% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
CREDIT AGREEMENT
At March 31, 1999, the available credit under the Second Amended and Restated
Credit Agreement (the "Credit Agreement") included $58.4 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 20 quarterly
installments ranging from $1.6 million at June 30, 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 $50.0 million was outstanding at March 31, 1999.
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%.
-12-
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Credit Agreement contains representations and warranties, affirmative and
negative covenants and events of default customary for financings of this type.
At March 31, 1999, 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 March 31, 1999, 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 three months ended March 31, 1999 and 1998, the
Company recorded $0.1 million and $0.2 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.
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 March 31, 1999,
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 March 31, 1999, 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
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.
-13-
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Receivables Securitization Program
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 March 31, 1999, exclude approximately $160.0 million
of accounts receivable sold to the Receivables Company.
The statements of cash flows for the Company for the periods indicated are
summarized below:
For the Three Months
Ended March 31,
------------------------------
1999 1998
------- --------
(dollars in thousands)
Net cash provided by operating activities $19,386 $ 67,500
Net cash used in investing activities (5,502) (3,975)
Net cash used in financing activities (9,473) (64,388)
Net cash provided by operating activities during the first three months of 1999
decreased to $19.4 million from $67.5 million in the comparable prior-year
period. This decrease was primarily the result of a decrease in accounts payable
and an increase in accounts receivable partially offset by a decrease in
inventory.
Net cash used in investing activities during the first three months of 1999 was
$5.5 million compared with $4.0 million used in the first three months of 1998.
The increase in cash used was primarily due to an increase in capital
expenditures partially offset by higher proceeds from the sale of property,
plant, and equipment.
Net cash used in financing activities during the first three months of 1999 was
$9.5 million compared with $64.4 million for the first three months of 1998.
This decrease was due primarily to increased borrowings under the revolver and
lower debt principal payments (due to the elimination of the excess cash flow
payment required by the credit agreement in 1998) partially offset by the
repurchase of common stock.
-14-
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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
relationship 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. For the three months
ended March 31, 1999, the Company incurred $0.5 million and expects to incur an
additional $1.0 million to $1.5 million of year 2000 remediation expenses during
the balance of the year. Funding for year 2000 expenses will be generated from
ongoing 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
conditions regarding this issue that may have a material effect on the Company's
results of operations, liquidity, or 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.
-15-
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 March 31,
1999, of $340.3 million and $160.0 million of receivables sold under the
Receivables Securitization Program, whose discount rate varies with market
interest rates ("Receivables Exposure"). Approximately 40% 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 $1.5 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%. 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.
-16-
UNITED STATIONERS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable
ITEM 2 CHANGES IN SECURITIES
Not applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number
-------
2 Not applicable
11 Not applicable
15.1 Letter regarding unaudited interim
financial information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27.1 Financial Data Schedule - United Stationers Inc.
27.2 Financial Data Schedule - United Stationers Supply Co.
99 Not applicable
(b) The Company filed a report on Form 8-K on March 23, 1999
reporting under Item 5 that the Company's Board of
Directors and senior lenders approved the adoption of a
stock repurchase program.
-17-
UNITED STATIONERS INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
----------------------------
(Registrant)
Date: May 12, 1999 /s/ Daniel H. Bushell
------------------- -------------------------------
Daniel H. Bushell
Executive Vice President and
Chief Financial Officer
-18-
UNITED STATIONERS INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
(a) Exhibit
Number
-------
2 Not applicable
11 Not applicable
15.1 Letter regarding unaudited interim
financial information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27.1 Financial Data Schedule - United Stationers Inc.
27.2 Financial Data Schedule - United Stationers Supply Co.
99 Not applicable
-19-