ITEM 1. BUSINESS
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. NO SEPARATE FINANCIAL INFORMATION FOR UNITED STATIONERS SUPPLY CO. 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-K AND THEREFORE, UNLESS OTHERWISE INDICATED, THE RESPONSES SET FORTH HEREIN APPLY TO EACH OF UNITED STATIONERS INC. AND UNITED STATIONERS SUPPLY CO.
GENERAL
On March 30, 1995, pursuant to an Agreement and Plan of Merger, dated as of February 13, 1995 (the "Merger Agreement"), between Associated Holdings, Inc., a Delaware corporation ("Associated") and United Stationers Inc., a Delaware corporation ("United") and Associated's related Offer to Purchase dated February 21, 1995 (the "Offer"), Associated purchased 17,201,839 shares (NOT ADJUSTED FOR THE 100% STOCK DIVIDEND EFFECTIVE NOVEMBER 9, 1995) of Common Stock, $0.10 par value (the "Shares"), of United at a purchase price of $15.50 per share, or approximately $266.6 million, from United's stockholders (the "Acquisition"). On March 30, 1995, pursuant to the terms of the Merger Agreement, Associated was merged with and into United, with United surviving (the "Merger"), and immediately thereafter, Associated Stationers, Inc. ("ASI"), a Delaware corporation and wholly owned subsidiary of Associated was merged with and into United Stationers Supply Co. ("USSC"), an Illinois corporation and 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.
Except where the context clearly indicates otherwise, the term "Company" is used herein to refer to post-Merger United and the terms "Associated" and "United" are used hereinafter to refer to either the respective pre-Merger corporations or specific aspects of the post-Merger Company's business. 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.
The Company is the largest general line business products wholesaler in the United States, with 1995 pro forma net sales of $2.2 billion. The Company sells its products through a single national distribution network to more than 12,000 resellers, who in turn sell directly to end users. Substantially all these products are distributed overnight through a computer-based network of warehouse facilities and truck fleets radiating from 43 distribution points.
PRODUCTS
The Company markets a broad array of products, which include traditional office products; computers and related supplies, office furniture; and other products (including facilities management supplies). As part of the Company's business strategy to acquire incremental sales and increase market share through ancillary product offerings, the Company began to focus on niche product segments in 1991 and has expanded steadily upon this concept since then. The Company's product offerings, composed of more than 25,000 items, may be divided into four primary categories:
TRADITIONAL OFFICE PRODUCTS. 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. The Company's traditional office product offerings are quite deep, including, for example, more than 1,000 different stockkeeping units of ring binders and 800 types of file folders. Traditional office products constituted the majority of the Company's 1995 pro forma net sales.
COMPUTERS AND RELATED SUPPLIES. The Company sells computer supplies, peripherals and hardware with major brand names to computer resellers and office products dealers. Such office technology constituted approximately 27% of the Company's 1995 pro forma net sales.
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, with the Company currently offering nearly 3,000 furniture items from 70 different manufacturers. Office furniture constituted approximately 15% of the Company's 1995 pro forma net sales. The Company's "Pro-Image" program enables resellers with no previous expertise to provide high-end furniture and office design services to end-users. The Company offers national delivery and product "set-up" capabilities to office products dealers as well as to attract new furniture dealers.
OTHER PRODUCTS. The Company's newest product categories encompass the facilities management supplies market, which includes janitorial and sanitation supplies, specialty mailroom and warehouse items, kitchen and cafeteria items, first aid products and ergonomic products designed to enhance worker productivity, comfort and safety. Another one of the Company's niche markets is business presentation products, including audio visual equipment, flip charts and dry erase boards. Additionally, the Company offers its "Signature Image" program, which provides resellers with access into the advertising specialties market (such as imprinted and logo items).
CUSTOMERS
The Company sells principally to resellers of office products, consisting primarily of commercial dealers and contract stationers, retail dealers, superstores, mail order companies and mass merchandisers. In addition, the Company sells to office furniture dealers, computer resellers and janitorial and sanitary supply distributors. No single reseller accounted for more than 5% of the Company's pro forma net sales in 1995.
Commercial dealers and contract stationers are the most significant reseller channel for office products distribution and typically serve large businesses, institutions and government agencies. Through industry consolidation, the number of such dealers has decreased, with the remaining dealers getting larger. Net sales to these commercial dealers and contract stationers as a group are growing rapidly.
The number of retail dealers has been declining for some time as the result of individual retail dealers' inability to compete successfully with the growing number of superstores and, more recently, as a result of dealerships being acquired and brought under an umbrella of common ownership. However, many retail office products dealers have adapted to this highly competitive environment. Many retail dealers, commercial dealers and contract stationers have joined forces in marketing or buying groups in order to increase purchasing leverage. The Company believes it is the leading wholesale source for many of these groups, providing not only merchandise but also special programs that enable these dealers to take advantage of their combined strengths.
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 has also initiated 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.
MARKETING AND CUSTOMER SUPPORT
Substantially all of the Company's 25,000 products are sold through its comprehensive office products catalogs and flyers. These materials include general line catalogs, promotional pieces and specialty catalogs for the office products, office furniture, facilities management supplies and other specialty markets. The Company produces numerous catalogs for placement with dealers' end- user customers, including the
following annual catalogs: General Line Catalog; Office Furniture Catalog featuring furniture and accessories; Universal Catalog promoting the Company's private-brand merchandise; Computer Products Catalog offering hardware, supplies, accessories and furniture; Workplace Solutions Catalog featuring janitorial, maintenance, food service, warehouse and mailroom supplies; Business Communications Catalog, featuring products and supplies used for meetings and presentations; and separate Legal and Healthcare Catalogs offering office products used within such professions. In addition, the Company produces the following quarterly promotional catalogs: Action 2000 and Office Saver, each featuring over 1,000 high-volume commodity items, and Computer Concepts, featuring computer supplies, peripherals, accessories and furniture. The Company also produces separate 8-page quarterly flyers covering general office supplies, office furniture and Universal-TM-products. 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.
In addition to marketing its products and services through the use of its catalogs, the Company employs a sales force of approximately 160 salespersons. 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. The Company supplements the efforts of its sales force through telemarketing.
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 prompt distribution capabilities. In addition to emphasizing its broad product line, extensive inventory, computer integration 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 provides its resellers with a variety of dealer support and marketing services, including business management systems, promotional programs and pricing services. These services are designed to aid the reseller in differentiating itself from its competitors by addressing the steps in the end-user's procurement process.
To assist its resellers with pricing, the Company offers a matrix pricing software program. Traditionally, many resellers have priced products on a discount from the manufacturer's suggested retail price, but recently pricing has shifted toward a net pricing approach, whereby the reseller sells certain products at significant discounts, assuming that it can recapture the discounts through the sale of other higher margin products. The Company's matrix pricing program provides resellers with a resource to assist them in identifying the optimum pricing mix between high and low margin items and, as a result, enables resellers to manage their gross margins.
The Company offers to its resellers a variety of electronic order entry systems and business management and marketing programs which enhance the resellers' ability to manage their businesses profitably. For instance, the Company maintains EDI 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 seamlessly forward its customers' orders to the Company, resulting in the delivery of pre-sold products to the reseller or directly to its customers. The Company estimates that in 1995, approximately 90% of its orders were received electronically.
DISTRIBUTION
At the time of the Merger, certain of the Company's 47 regional distribution centers were redundant and, accordingly, management determined to close eight of such facilities. To date, seven redundant facilities have been closed and one remaining facility is expected to be closed in early Spring of 1996. As a result, the Company has a network of 40 regional distribution centers (including the new distribution center in Pittsburgh, Pennsylvania) located in 36 metropolitan areas in 25 states, most of which will carry the Company's full line of inventory. In addition, the Company has achieved cost savings from the more efficient
post-Merger operation of two distribution centers in each of four market areas, where the size of the Company's sales base requires multiple facilities.
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 250 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 augmented by its proprietary, computer-driven 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, which 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 balances.
Another service offered by the Company to resellers is its "wrap and label" program, which allows resellers the option to receive orders in accordance with the specifications of particular end-users. For example, when a reseller receives orders from a number of separate end-users, the Company groups and wraps the items separately by end-user so that the reseller need only deliver the package. The "wrap and label" program is 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.
PURCHASING AND MERCHANDISING
As the largest national office products wholesaler in the United States, the Company has substantial purchasing power and can realize significant economies of scale. The Company obtains products from over 450 manufacturers, for many of whom the Company believes that it is a significant customer. In 1995 on a pro forma basis, no supplier accounted for more than 11% of the Company's aggregate purchases. As a centralized corporate function, the Company's merchandising department interviews and selects 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, computers and related items. 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. See "Marketing and Customer Support" and "Distribution." 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 net pricing to resellers, breadth of product lines, availability of products, speed of delivery to resellers, order fill rates 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.
Consolidation has occurred in recent years throughout all levels of the office products industry. Consolidation of commercial dealers and contract stationers has resulted in an increased ability of those resellers to buy goods directly from manufacturers. In addition, over the last decade, office products
superstores (which largely buy directly from manufacturers) have entered virtually every major metropolitan market.
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), such as marketing and catalog programs, speed of delivery, and the ability to offer resellers on a "one-stop shop" basis a broad line of business products from multiple manufacturers with lower minimum order quantities. In addition, such heightened price awareness has led to margin pressure on commodity office products. In the event that such trend continues, the Company's profit margins could be adversely affected.
EMPLOYEES
At December 31, 1995, the Company employed approximately 4,800 persons.
The Company considers its relationships with its employees to be good. Approximately 900 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.
ITEM 2.
ITEM 2. PROPERTIES
The Company considers its properties to be suitable and adequate for their intended uses. 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 September 1993, approximately 47,000 square feet of office space located in Mt. Prospect, Illinois was leased by the Company. This lease expires in September of 1999 with an option to renew for two five-year terms.
REGIONAL DISTRIBUTION CENTERS. The Company presently operates 41 distribution centers (including one which opened in Pittsburgh, Pennsylvania during the first quarter of 1996) in 25 states. These centers represent total square footage of approximately 7.1 million square feet, of which approximately 4.3 million is owned and the balance is leased. One center is scheduled to close by early Spring of 1996.
LOCAL DISTRIBUTION POINTS. The Company also operates 25 local distribution points. Two are leased by the Company; the other local distribution points are operated through cross-docking arrangements with third party distribution companies.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the solicitation of proxies in the fourth quarter of 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QUARTERLY FINANCIAL DATA (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) (UNAUDITED)
THE COMPANY/ASSOCIATED
(1) Historical earnings per share amounts have been restated to reflect the share conversion resulting from the Merger and the 100% stock dividend, effective November 9, 1995. Earnings per share are net of preferred stock dividends.
(2) Reflects the results of Associated only.
(3) The extraordinary item reflects the write-off of financing costs and original issue discount relating to the retired debt which was being amortized over the life of the original debt.
(4) As a result of changes in the number of common and common equivalent shares during the year, the sum of four quarters' earnings per share will not equal earnings per share for the total year.
QUARTERLY STOCK PRICE DATA
The Common Stock is quoted through the Nasdaq National Market under the symbol "USTR." The following table sets forth on a per share basis, for the periods indicated, the high and low sale prices per share for the Common Stock as reported by the Nasdaq National Market. All stock price information has been restated to reflect the 100% stock dividend effective November 9, 1995.
High Low
First Quarter * * Second Quarter * * Third Quarter * * Fourth Quarter * *
First Quarter * * Second Quarter $ 9 5/16 $ 8 9/16 Third Quarter $15 1/2 $ 8 11/16 Fourth Quarter $27 3/4 $13 3/4
* Due to the significant changes in the Company's capital structure resulting from the Merger, stock price information for periods prior to the Merger has not been included as it is not comparable to the stock price information since the Merger.
On February 27, 1996, there were approximately 1,082 holders of record of Common Stock.
The Company does not currently intend to pay any cash dividends on the Common Stock. Furthermore, as a holding company, the ability of the Company to pay dividends in the future is dependent 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 5 to the Consolidated Financial Statements of the Company included elsewhere herein.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below and on the following pages is selected historical consolidated financial data for the Company and its predecessors. 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 and operating and other 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 balance sheet data at December 31, 1995 reflects the consolidated balances of the Company, including various Merger-related adjustments.
THE COMPANY / ASSOCIATED
The selected consolidated financial data of Associated's predecessor (the wholesale division of Boise Cascade Office Products Corporation "BCOP") set forth below for the fiscal year ended December 31, 1991 and for the one-month period ended January 31, 1992 (when Associated purchased the wholesale division of BCOP (the "Associated Transaction")) are derived from the unaudited financial statements of Associated's predecessor for such periods. Associated accounted for the Associated Transaction using the purchase method of accounting. There are material operational and accounting differences between Associated's predecessor and Associated resulting from the Associated Transaction. Accordingly, the historical financial data of Associated's predecessor may not be comparable in all material respects with data of Associated.
The selected consolidated financial data of Associated set forth below for the period from January 31, 1992 to December 31, 1992 and for the years ended December 31, 1993 and 1994 has been derived from the
Consolidated Financial Statements of Associated which have been audited by Arthur Andersen LLP, independent public accountants. The Selected Consolidated Financial Data of the Company for the fiscal year ended December 31, 1995 (which for Income Statement and 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) has 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 -- Historical Results of Operations of the Company/Associated," "Liquidity and Capital Resources of the Company/Associated" and the Consolidated Financial Statements of the Company included elsewhere in this Form 10-K.
(1) The capital structure and accounting basis of the assets and liabilities of Associated's predecessor differ from those of Associated and the Company. Accordingly, certain financial information for periods before January 31, 1992 is not comparable to that for periods after January 31, 1992 and therefore is not presented in this table.
(2) Associated's predecessor operated as a segment of a company which did not allocate income tax or interest expense to the predecessor. Accordingly, actual operating results for Associated's predecessor reflect only income from operations before interest expense and income taxes.
(3) Derived from the unaudited financial statements of Associated's predecessor as of and for the year ended December 31, 1991.
(4) Derived from the unaudited financial statements of Associated's predecessor for the one month ended January 31, 1992.
(5) Includes a restructuring charge of $9.8 million for the year ended December 31, 1995.
(6) 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 percentage of net sales.
(8) EBITDA margin for the year ended December 31, 1995 would have been 5.2% if adjusted to exclude the restructuring charge.
(9) Excludes amortization of deferred financing costs.
(10) Total debt and capital leases include current maturities.
UNITED
The selected consolidated financial data of United set forth below for the seven months ended March 30, 1995 (at which time United and Associated merged to create the Company) has been derived from the financial statements of United which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data at and for the seven-month period ended March 31, 1994 is unaudited and in the opinion of management reflects all adjustments considered necessary for a fair presentation of such data. The selected consolidated financial data of United for each of the fiscal years in the four-year period ended August 31, 1994 has been derived from the consolidated financial statements of United which have been audited by Arthur Andersen LLP, independent public accountants. 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 - Historical Results of Operations of United" and "Historical Liquidity and Capital Resources of United" and the Consolidated Financial Statements of United, together with the related notes thereto, included elsewhere herein.
(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 includes current maturities.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On March 30, 1995, Associated merged with and into United. Although the Company was the surviving corporation in the Merger, the transaction was treated as a reverse acquisition for accounting purposes, with Associated as the acquiring corporation. Therefore, the results of operations for the year ended December 31, 1995 reflects 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. As a result of the Merger, the results of operations of the Company for the year ended December 31, 1995 are not comparable to those of previous periods.
To facilitate a meaningful comparison, the following supplemental discussion and analysis is based on certain components of the combined historical results of operations without any pro forma adjustments for Associated and United for the years ended December 31, 1993 and 1994 and on the pro forma results of operations for the Company for the year ended December 31, 1995. The pro forma and combined historical results of operations do not purport to be indicative of the results that would have been obtained had such transactions been completed for the periods presented or that may be obtained in the future. The following information should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements of the Company and United, together with the related notes thereto, included elsewhere herein.
GENERAL INFORMATION
GROSS PROFIT MARGINS. Recently, a number of factors have adversely affected gross profit margins in the office products industry, including those of the Company. These factors reflect the increasingly competitive nature of the industry. Competitive pressures have increased due in part to the growth of large resellers such as national office products superstores that have heightened price awareness at the end-user level. The increasing price sensitivity of end-users has contributed to the decline in industrywide gross profit margins. These pressures are expected to continue in the future.
The Company's gross profit margins vary across product categories, so that material changes in its product mix can impact the Company's overall margin. For example, the gross profit margin on the Company's sales of commodity products, such as copier paper and laser printer toner-product categories that have grown over the past few years-tend to be lower than the gross profit margins on most other product categories. While the recent increases in sales of these types of products have adversely affected the Company's overall gross profit margin, they have contributed to higher operating income. The Company expects such sales to increase as a percentage of revenues in the future.
RESTRUCTURING CHARGE. In the first quarter of 1995, the Company recorded a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9 million). The restructuring charge includes severance costs totaling $1.8 million. The Company's consolidation plan specifies that 330 distribution, sales and corporate positions, 180 of which relate to pre-Merger Associated, will be eliminated substantially within the one-year period following the Merger. As of December 31, 1995, approximately 90 former Associated employees had been terminated, with the related termination costs of approximately $1.0 million charged against the reserve. The restructuring charge also includes distribution center closing costs totaling $6.7 million and stockkeeping unit reduction costs totaling $1.3 million. The consolidation plan calls for the closing of eight redundant distribution centers, six of which relate to pre-Merger Associated facilities, and the elimination of overlapping inventory items from the Company's catalogs substantially within the one-year period following the Merger. Estimated distribution center closing costs include (i) the net occupancy costs of leased facilities after they are vacated until expiration of leases and (ii) the losses on the sale of owned facilities and the facilities' furniture, fixtures and equipment. Estimated stockkeeping unit reduction costs include losses on the sale of inventory items which have been discontinued solely as a result of the Acquisition. As of December 31, 1995, $0.4 million relating to distribution center closing costs had been charged against the reserve. See Note 4 to the Consolidated Financial Statements of the Company included elsewhere herein.
EMPLOYEE STOCK OPTIONS. In September 1995, the Board of Directors approved, subject to stockholder approval, an amendment to the Company's employee stock option plan (the "Plan") that allows for the issuance of employee stock options to key management employees of the Company exercisable for up to approximately 2.2 million additional shares of Common Stock. The Plan was designed to build increased employee commitment through participation in the growth and performance of the Company. Subsequently, employee stock options exercisable for an aggregate of approximately 2.2 million shares of Common Stock were granted (subject to stockholder approval of the Plan amendment) to key management employees. Some of the employee stock options were granted at an exercise price below the then fair market value of the Common Stock. The exercise price of certain options is subject to increases on a quarterly basis beginning in 1996. The Company's stockholders will vote to approve such Plan amendment at the Company's annual meeting to be held in May 1996.
The employee stock options granted under the Plan do not vest to the employee until the occurrence of an event (a "Vesting Event") that causes the present non-public equity investors to have received at least a full return of their investment (at cost) in cash, fully tradable marketable securities or the equivalent. A Vesting Event will cause the Company to recognize compensation expense based upon the difference between the fair market value of the Common Stock and the exercise price of the employee stock options. Based upon a stock price of $22.75 and options outstanding as of January 31, 1996, the Company would recognize a nonrecurring noncash charge and related tax effect of $31.7 million in compensation expense ($19.0 million net of tax benefit of $12.7 million), if a Vesting Event were to occur. Each $1.00 change in the Common Stock price will result in an adjustment to such compensation expense of approximately $2.6 million ($1.6 million net of tax effect of $1.0 million).
CHANGE IN ACCOUNTING METHOD. Effective January 1, 1995, Associated changed its method of accounting for the cost of inventory from the FIFO method to the LIFO method. Associated made this change in contemplation of its acquisition of United (accounted for as a reverse acquisition) so that its method would conform to that of United. Associated believed that in an inflationary environment the LIFO method provides a better matching of current costs and current revenues, and that earnings reported under the LIFO method are more easily compared to that of other companies in the wholesale industry where the LIFO method is common. In 1995, this change resulted in the reduction of pre-tax income of the Company of approximately $8.8 million ($5.3 million net of tax benefit of $3.5 million). See Note 3 to the Consolidated Financial Statements of the Company included elsewhere herein.
PRO FORMA AND COMBINED RESULTS OF OPERATIONS
The following table of summary pro forma (see Note 4 to the Consolidated Financial Statements of the Company included elsewhere herein) and combined historical financial data is intended for informational purposes only and is not necessarily indicative of either financial position or results of operations in the future, or that would have occurred had the events described in the first paragraph under "Overview" occurred on January 1, 1995. The following information should be read in conjunction with, and is qualified in its entirety by, the historical Consolidated Financial Statements of the Company and its predecessors, including the related notes thereto, included elsewhere herein.
The following table also presents unaudited summary combined historical financial data for Associated and United for the years ended December 31, 1994 and 1993. This data has not been prepared in accordance with generally accepted accounting principles, which do not allow for the combination of financial data for entities that are not under common ownership. Nevertheless, management believes that this combined historical financial data, when read in conjunction with the separate historical financial statements of Associated and United prepared in accordance with generally accepted accounting principles and included elsewhere herein, may be helpful in understanding the past operations of the companies that were combined in the Merger. This combined historical financial data for 1994 and 1993 represents a combination of the historical financial data for Associated and United for the periods indicated without any pro forma adjustments, and is supplemental to the historical financial data of Associated and United included elsewhere herein.
COMPARISON OF PRO FORMA RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND COMBINED RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales were $2,201.9 million for 1995, a 10.6% increase over net sales of $1,990.4 million in 1994. The increase in net sales is primarily the result of changes in unit volume rather than changes in prices. Sales grew in all geographic regions. In addition, the sales growth is also attributable to increases in the sales of computer-related products through the Company's MicroUnited Division.
GROSS PROFIT. Gross profit as a percent of net sales decreased to 21.6% in 1995 from 22.0% in 1994. The lower gross profit margin reflects a shift in product mix and a larger LIFO charge due to Associated's change in its method of accounting for inventory from the FIFO method to the LIFO method. Also, gross profit was adversely affected by the higher sales of computer-related products and commodity items which typically carry lower gross profit margins.
OPERATING EXPENSES. Operating expenses as a percent of net sales decreased to 17.9% in 1995 from 19.0% in 1994. The decrease in operating expenses as a percent of net sales was primarily due to increased operating efficiencies, improved productivity and increased economies of scale as a result of the higher sales base.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales was 3.7% in 1995 compared to 3.0% in 1994 due to the aforementioned reasons.
COMPARISON OF COMBINED RESULTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1994 AND 1993.
NET SALES. Net sales were $1,990.4 million for 1994, a 3.4% increase over net sales of $1,925.4 million in 1993. The increase in net sales is primarily the result of changes in unit volume rather than changes in prices.
GROSS PROFIT. Gross profit as a percent of net sales decreased to 22.0% in 1994 from 23.4% in 1993. The lower gross profit margin primarily reflects higher levels of rebates and volume allowances earned by the Company's customers as a result of ongoing consolidations. In addition, gross profit margin was affected by a LIFO charge (an increase to "cost of goods sold") of $2.1 million in 1994 versus LIFO income (a decrease to "cost of goods sold") of $5.0 million in 1993, and a shift in product mix.
OPERATING EXPENSES. Operating expenses as a percent of net sales decreased to 19.0% in 1994 from 20.4% in 1993. The decrease is the result of streamlining the Company's work processes and reducing payroll and freight expense.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales was 3.0% in 1994 and 1993.
HISTORICAL RESULTS OF OPERATIONS OF THE COMPANY/ASSOCIATED
COMPARISON OF HISTORICAL FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994
NET SALES. Net sales were $1,751.5 million for 1995 compared to $470.2 million in 1994. The increase is primarily the result of the Merger. Sales in 1995 include only nine months of United's sales.
GROSS PROFIT. Gross profit as a percent of net sales decreased to 21.7% in 1995 from 24.0% in 1994. The lower gross profit margin reflects a shift in product mix, the Acquisition and the change in the method of accounting for inventory from the FIFO method to the LIFO method. See Note 3 to the Consolidated Financial Statements of the Company included elsewhere herein.
OPERATING EXPENSES. Operating expenses as a percent of net sales decreased to 18.5% in 1995 from 20.2% in 1994. The actual results for 1995 include the impact of a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9 million) in the first quarter of 1995. Operating expenses before the restructuring charge were 17.9% in 1995. The decrease in operating expenses as a percent of net sales before the restructuring charge was primarily due to increased operating efficiencies and improved productivity, partially offset by Merger-related compensation expense relating to an increase in the value of employee stock options of approximately $1.5 million ($0.9 million net of tax benefit of $0.6 million).
INCOME FROM OPERATIONS. Income from operations as a percent of net sales was 3.2% in 1995 (after the restructuring charge) compared to 3.8% in 1994. Before such restructuring charge, income from operations in 1995 was 3.8%.
INTEREST EXPENSE. Interest expense as a percent of net sales was 2.5% in 1995 compared to 1.6% in 1994. The increase reflects additional debt needed to consummate the Acquisition and higher interest rates in 1995.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income taxes and extraordinary item as a percent of net sales was 0.7% in 1995 compared to 2.2% in 1994.
INCOME BEFORE EXTRAORDINARY ITEM. Income before extraordinary item was $6.2 million in 1995 compared to $6.4 million in 1994. An extraordinary item, the loss on early retirement of debt related to the Merger of $2.4 million ($1.4 million net of tax benefit of $1.0 million), was recognized in the first quarter of 1995. Net income was $4.8 million in 1995 compared to $6.4 million in 1994. Excluding the extraordinary item, net income would have been $6.2 million.
FOURTH QUARTER RESULTS. Certain interim expense and inventory estimates are recorded throughout the year relating to shrinkage, inflation and product mix. The results of the year-end close and physical inventory reflected a favorable adjustment with respect to such estimates, resulting in approximately $0.9 million of additional net income, which is reflected in the fourth quarter of 1995.
COMPARISON OF HISTORICAL FISCAL YEARS ENDED DECEMBER 31, 1994 AND 1993
NET SALES. Net sales increased to $470.2 million in 1994 from $455.7 million in 1993, a 3.2% increase, primarily as a result of inclusion in 1994 of the full year of sales from Associated's new Baltimore distribution facility and increased unit sales volume to existing Associated customers as, in management's estimation, Associated's customers channeled more of their purchasing through Associated with the goal of reducing their internal inventory levels.
GROSS PROFIT. Gross profit increased to $112.9 million in 1994 from $105.5 million in 1993, a 7.0% increase, primarily due to increased unit volume as well as Associated's lower net cost of goods sold, as a percentage of sales, resulting from increased allowances granted to Associated by its suppliers. Management of
Associated believes that increased vendor allowances were due to competition among Associated's vendors that resulted in increased purchasing leverage. The increase in gross profit also resulted in part from Associated's increased forward-buying efforts, as management better identified and utilized product pricing opportunities available in the marketplace. Gross profit increases were partially offset by increased allowances extended by Associated to its customers in response to increased competition.
OPERATING EXPENSES. Operating expenses as a percent of net sales decreased to 20.2% in 1994 from 20.7% in 1993. The decrease in operating expenses as a percent of net sales was primarily due to productivity improvements and lower freight costs partially offset by lump-sum incentive awards earned in 1994 by employees and management based on Associated's level of profitability.
INCOME FROM OPERATIONS. Income from operations increased to $18.1 million in 1994 from $11.0 million in 1993, a 65.1% increase, and as a percentage of net sales was 3.8% in 1994, compared with 2.4% in 1993, for the reasons stated above.
INTEREST EXPENSE. Interest expense increased to $7.7 million in 1994 from $7.2 million in 1993, a 6.8% increase, as a result of an increase in the weighted average interest rate on outstanding debt in effect during the year from 7.75% in 1993 to 8.90% in 1994, which was offset in part by a reduction in average revolving debt balances to $39.6 million in 1994 from $46.9 million in 1993.
INCOME BEFORE INCOME TAXES. Income before income taxes increased to $10.4 million in 1994 from $3.7 million in 1993, a 177.7% increase, for the reasons stated above.
INCOME TAXES. Income taxes increased to $4.0 million in 1994 from $0.8 million in 1993, a $3.2 million increase. The effective tax rates for 1994 and 1993 were 38.4% and 20.9%, respectively. The increase in rate was due primarily to the effect of the change in the amount of tax valuation allowances.
NET INCOME. Net income increased to $6.4 million in 1994 from $3.0 million in 1993, an increase of $3.4 million, or 116.2%. Net income as a percentage of net sales increased to 1.4% in 1994 from 0.6% in 1993 for the reasons stated above.
HISTORICAL RESULTS OF OPERATIONS OF UNITED
COMPARISON OF THE SEVEN MONTHS ENDED MARCH 30, 1995 AND 1994
NET SALES. Net sales were $980.6 million in the seven months ended March 30, 1995, a 12.5% increase from net sales of $871.6 million in the comparable period in 1994. The primary reason for the increase is growth in unit volume.
GROSS PROFIT ON SALES. Gross profit as a percent of net sales was 21.1% for the seven months ended March 30, 1995, compared with 22.5% in the comparable period in 1994. This lower gross profit margin is primarily the result of a shift in the sale of computer related products that have lower gross profit margins and is consistent with the gross profit margins achieved in the latter half of United's fiscal year ended August 31, 1994.
OPERATING EXPENSES. Operating expenses as a percent of net sales increased to 20.6% in the seven-month period ended March 30, 1995 from 19.6% in the comparable period in 1994. The increase is primarily attributable to $27.8 million ($18.5 million net of tax benefit of $9.3 million) of non-recurring Merger-related costs consisting of severance payments under employment contracts; insurance benefits under employment contracts; legal, accounting and other professional services fees; the repurchase of stock options; and fees for letters of credit related to employment contracts and other costs. Operating expenses as a percent of net sales prior to the Merger-related costs were 17.7% for the seven-month period ended March 30, 1995. This decline from the comparable period in 1994 is a result of savings in employee-related payroll and freight expenses.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales was 0.5% in the seven-month period ended March 30, 1995, compared with 2.9% in the comparable period in 1994. The decrease was attributable to the Merger-related costs discussed under "Operating Expenses" above. Income from operations as a percent of net sales was 3.3% in the seven-month period ended March 30, 1995, excluding the Merger-related costs.
INTEREST EXPENSE. Interest expense was $7.6 million for the seven-month period ended March 30, 1995, compared with $6.1 million for the same period in 1994. The increase was due to higher interest expense from increased debt to meet working capital and other capital expenditure needs and higher interest rates on borrowings.
INCOME (LOSS) BEFORE INCOME TAXES. Income (loss) before income taxes as a percent of net sales was a loss of 0.3% in the seven-month period ended March 30, 1995, compared to income of 2.3% in the comparable period of 1994. The decrease in income before income taxes was attributable to the factors stated above.
INCOME TAXES. The effective tax rate for the seven-month period ended March 30, 1995 was (184.6%), compared with 41.5% for the seven-month period ended March 31, 1994. The increase is primarily due to non-deductible Merger-related costs and non-deductible amortization of goodwill.
NET INCOME (LOSS). Net income (loss) was a loss of $7.2 million for the seven-month period ended March 30, 1995, compared with income of $11.5 million for the same period in 1994. The loss was primarily due to $27.8 million ($18.5 million net of tax benefit of $9.3 million) of non-recurring Merger-related costs discussed under "Operating Expenses" above. Net income (loss) per share was a loss of $0.39 in the seven-month period ended March 30, 1995, compared with income of $0.62 for the same period in 1994.
COMPARISON OF THE FISCAL YEARS ENDED AUGUST 31, 1994 AND 1993
NET SALES. Net sales increased to $1,473.0 million in fiscal 1994 from $1,470.1 million in fiscal 1993, a 0.2% increase reflecting a slight increase in unit volume. Sales in the early part of fiscal 1994 were affected by a temporary drop in in-stock service levels and the discontinuing of nearly 12,000 items as a final step in the consolidation process of the SDC Acquisition in June 1992. Sales were also negatively impacted by the SDC Acquisition-related operational disruptions in the west and southwest regions. Sales grew in the fourth quarter by 3.4%, reversing the decline experienced in the prior two quarters.
GROSS PROFIT ON SALES. Gross profit on sales decreased to $322.9 million in fiscal 1994 from $344.5 million in fiscal 1993, a 6.3% decrease, due principally to a decrease in gross profit margin. Gross profit margin decreased to 21.9% in fiscal 1994 from 23.4% in fiscal 1993. The decline primarily reflects higher levels of rebates and volume allowances earned by the Company's customers as a result of ongoing consolidations. Gross profit margins over the last half of fiscal 1994 were relatively stable reflecting the slowing pace of dealer consolidations. In addition, gross profit margin was affected by a LIFO charge (an increase to "cost of sales" of $2.2 million in fiscal 1994 versus LIFO income (a decrease to "cost of sales") of $4.7 million in fiscal 1993, and a shift in the sale of products to items that have lower gross margins.
OPERATING EXPENSES. Operating expenses decreased to $286.6 million in fiscal 1994 from $298.4 million in fiscal 1993, a 4.0% decrease. Operating expenses as a percentage of net sales decreased to 19.4% in fiscal 1994 from 20.3% in fiscal 1993. The decrease is the result of streamlining United's work processes and reducing payroll and freight expense.
INCOME FROM OPERATIONS. Income from operations decreased to $36.3 million in fiscal 1994 from $46.1 million in fiscal 1993, a 21.3% decrease, and as a percentage of net sales was 2.5% in fiscal 1994, compared with 3.1% in fiscal 1993, for the reasons stated above.
INTEREST EXPENSE. Interest expense increased to $10.7 million in fiscal 1994 from $9.8 million in fiscal 1993, an 8.9% increase, primarily due to additional debt incurred to support working capital and other capital expenditures.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased to $26.0 million in fiscal 1994 from $36.9 million in fiscal 1993, a 29.4% decrease, for the reasons stated above.
INCOME TAXES. Income taxes decreased to $10.3 million in fiscal 1994 from $15.5 million in fiscal 1993, a $5.3 million decrease. The effective tax rates for 1994 and 1993 were 39.6% and 42.1%, respectively. The decrease is primarily due to the liquidation of a foreign subsidiary and a decrease in the effective state income tax rate, offset by an increase in the non-deductible losses in United's foreign operation and the non-deductible amortization of goodwill.
NET INCOME. Net income decreased to $15.7 million in 1994 from $21.4 million in 1993, a decrease of $5.7 million, or 26.3%. Net income as a percentage of net sales decreased to 1.1% in 1994 from 1.5% in 1993 for the reasons stated above.
FOURTH QUARTER RESULTS. Certain interim expense and inventory estimates are recognized throughout the fiscal year relating to shrinkage, inflation and product mix. The results of the year-end close and physical inventory reflected a favorable adjustment with respect to such estimates, resulting in approximately $0.5 million of additional net income, which is reflected in the fourth quarter of fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY/ASSOCIATED
In connection with the consummation of the Acquisition, Associated received an equity investment of $12.0 million and borrowed an aggregate of $416.5 million under the Credit Facilities (as defined below) and $130.0 million under a subordinated bridge facility (the "Subordinated Bridge Facility"). The proceeds of such investment and borrowings were used to (i) finance the purchase of shares of Common Stock pursuant to the Offer, (ii) refinance certain existing indebtedness of Associated (including all amounts outstanding under the Associated credit facilities in effect prior to the Merger) and indebtedness of the Company (including certain amounts outstanding under the United credit and overline facilities in effect prior to the Merger), (iii) repurchase United employee stock options and (iv) pay fees and expenses relating to the Acquisition.
The credit facilities under the Credit Agreement (the "Credit Facilities") consist of $200.0 million of term loan borrowings (the "Term Loan Facilities") and up to $325.0 million of revolving loan borrowings under the Revolving Credit Facility.
On May 3, 1995, USSC completed the issuance of $150.0 million of 12 3/4% Senior Subordinated Notes due 2005 (the "Notes"). The net proceeds of the Notes (after an underwriter discount of $4.5 million) were used to repay the $130.0 million Subordinated Bridge Facility (together with $1.6 million in accrued and unpaid interest thereon), to repay a portion of the Term Loan Facilities and accrued interest thereon (totaling approximately $6.5 million), to pay a dividend to the Company to repurchase the Series B preferred stock and to pay certain expenses.
The Term Loan Facilities consist of a $125.0 million Tranche A term loan facility (the "Tranche A Facility") and a $75.0 million Tranche B term loan facility (the "Tranche B Facility"). Amounts outstanding under the Tranche A Facility are required to be repaid in 20 consecutive installments, the first four of which (each in the aggregate principal amount of $3.63 million) are due on the last day of each of the first four calendar quarters which commenced with the quarter ended June 30, 1995. Subsequent quarterly payments under the Tranche A Facility are each in the aggregate principal amount of $6.05 million for each of the eight consecutive calendar quarters commencing with the quarter ending June 30, 1996 and $7.26 million for each of the eight consecutive calendar quarters commencing with the quarter ending June 30, 1998. Amounts outstanding under the Tranche B Facility are required to be repaid in 28 consecutive quarterly installments, the first twenty of which (in the aggregate principal amount of $0.24 million each) are due on the last day of each of the first twenty calendar quarters which commenced with the quarter ended June 30, 1995. The remaining eight installments in the aggregate principal amount of $8.47 million each will be due on the last day of each calendar quarter commencing with the quarter ending June 30, 2000. The final installments under the Tranche A Facility and the Tranche B Facility will be payable on March 31, 2000 and March 31, 2002, respectively.
The Revolving Credit Facility is limited to the lesser of $325.0 million or a borrowing base equal to: 80% of Eligible Receivables (as defined); plus 50% of Eligible Inventory (as defined) (provided that no more than 60% or during certain periods 65%, of the Borrowing Base may be attributable to Eligible Inventory); plus the aggregate amount of cover for Letter of Credit Liabilities (as defined). The Revolving Credit Facility provides that, for each fiscal year commencing January 1, 1996, the Company must repay revolving loans so that for a period of 30 consecutive days in each fiscal year the aggregate revolving loans do not exceed $200.0 million. The Revolving Credit Facility matures on March 31, 2000. The Revolving Credit Facility was amended as of December 21, 1995 to increase the amount available thereunder from $300.0 million to an aggregate of $325.0 million. As of December 31, 1995, $87.4 million remained available for borrowing under the Revolving Credit Facility.
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 the domestic direct and indirect subsidiaries of USSC, certain of the stock of all of the foreign direct and indirect subsidiaries of USSC and security interests in, and liens upon, all accounts
receivable, inventory, contract rights and other certain personal and certain real property of USSC and its domestic subsidiaries.
The Credit Agreement contains representations and warranties, affirmative and negative covenants and events of default customary for financings of this type. As of January 31, 1996, the Company was in compliance in all material respects with all covenants contained in the Credit Agreement.
The Credit Facilities permit capital expenditures for the Company of up to $12.0 million for its fiscal year ending December 31, 1996, plus $4.1 million of unused capital expenditures and approximately $3.0 million of unused excess cash flow (as defined) for the Company's fiscal year ended December 31, 1995. Capital expenditures will be financed from internally generated funds and available borrowings under the Credit Facilities. The Company expects gross capital expenditures to be approximately $10 to $12 million in 1996.
Management believes that the Company's cash on hand, anticipated funds generated from operations and available borrowings under the Credit Facilities, will be sufficient to meet the short-term (less than twelve 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.
On July 28, 1995, the Company repurchased the Series B preferred stock. Quarterly dividends currently accrue on the Company's two outstanding series of preferred stock at the rate of 10.0% for Series A preferred stock and 9.0% for Series C preferred stock per annum (or, when dividends are not paid in cash, 13.0% for Series A preferred stock and 10.0% for Series C preferred stock), and may be paid in the form of additional shares of the respective series of preferred stock (except, in the case of the Series C preferred stock, for dividends payable after January 31, 1999).
The Company is a holding company and, as a result, the Company's 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 indenture governing the Notes contain restrictions on the ability of USSC to transfer cash to the Company. Associated was a holding company and, as a result, Associated's primary source of funds was cash generated from operating activities of its operating subsidiary, ASI, and bank borrowings by ASI. The Associated credit agreement in effect prior to the Merger contained restrictions on the ability of ASI to transfer cash to Associated. The statements of cash flows for the Company for the periods indicated is summarized below:
Net cash provided by operating activities for 1995 was $26.3 million. The increase in 1995 was due to the Acquisition. Net cash provided by operating activities for 1994 increased to $14.1 million from a use of cash of $12.1 million in 1993. This increase in 1994 was principally due to an increase in accounts payable, a lesser increase in inventory levels and an increase in net income. Associated used $12.1 million of cash in operations in 1993 relating to an increase in inventory in 1993 due to a full year of Associated's operations, additional inventory to support the acquisition of Lynn-Edwards Corporation, a privately held office products wholesaler based in Sacramento, California, and an overall increase in sales volume.
Net cash used in investing activities in 1995 was $266.3 million, reflecting the Acquisition. Net cash used in investing activities in 1994 was $0.6 million, reflecting capital expenditures necessary to maintain existing assets. Net cash used in investing activities in 1993 was $3.3 million stemming mostly from capital expenditures in connection with the opening of the new Baltimore facility and those expenditures related to the acquisition of Lynn-Edwards Corporation.
Net cash provided by financing activities in 1995 was $249.8 million, reflecting the additional debt needed to consummate the Acquisition. Net cash used in financing activities in 1994 was $12.7 million, which was attributable to the pay down of debt. Net cash provided by financing activities in 1993 was $8.1 million due to $11.5 million of borrowings and an equipment loan partially offset by scheduled principal payments of $3.4 million.
Lock-up agreements prohibiting the sale or other transfer of Common Stock by certain large stockholders of the Company are scheduled to expire on March 31, 1996. As a result, 1,344,000 shares of Common Stock issuable upon the exercise of certain warrants to purchase Common Stock of the Company may be immediately thereafter sold pursuant to an effective registration statement under the Securities Act of 1933, as amended, and the Company has agreed to register an additional 809,204 shares of Common Stock (including shares of Common Stock issuable upon conversion of the Company's Nonvoting Common Stock) as soon as practicable. Holders of approximately 6,583,349 shares of Common Stock are parties to a registration rights agreement whereby the Company must register such shares under the Securities Act of 1933, as amended, at the request of 20% in interest of the holders. Therefore, a large number of shares of Common Stock may be made available for sale in the public market by such stockholders at various times beginning March 31, 1996. The sale of a large block of such shares, and the availability of additional large blocks for sale, could have an adverse effect on the prevailing market price of the Common Stock.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES OF UNITED
United was a holding company and, as a result, United's primary source of funds was cash generated from operating activities of its operating subsidiary, USSC, and bank borrowings by USSC. United's statement of cash flows for the periods indicated is summarized below:
OPERATING ACTIVITIES. The decrease in net cash used in operating activities from $55.8 million in the seven months ended March 31, 1994 to $47.5 million in the seven months ended March 30, 1995 was primarily due to increases in accounts payable and accrued liabilities partially offset by an increase to inventory. The decrease in net cash provided by operations from $36.0 million in fiscal 1993 to $8.1 million in fiscal 1994 was primarily attributable to a decrease in accounts payable and accrued liabilities as well as lower net income in 1994, partially offset by a decrease in accounts receivable and inventory.
INVESTING ACTIVITIES. The increase in net cash used in investing activities from $4.3 million in the seven months ended March 31, 1994 to $7.8 million in the seven months ended March 30, 1995 was primarily due to the acquisition of property, plant and equipment. Net cash used in investing activities declined from $30.0 million in fiscal 1993 to $10.5 million in fiscal 1994, as a result of a commensurate decline in capital expenditures. The $30.0 million of capital expenditures in fiscal 1993 includes the purchase of $16.0 million of computer and related hardware. Net capital expenditures in fiscal 1994 and 1993 were $10.5 million and $30.0 million, respectively.
FINANCING ACTIVITIES. The increase in net cash provided by financing activities from $62.5 million in the seven months ended March 31, 1994 to $62.9 million in the seven months ended March 30, 1995 was primarily due to increases in short-term debt partially offset by an increase in payments on long-term obligations. Net cash of $1.4 million was provided by financing activities in fiscal 1994 as compared to a net use of cash in financing activities in fiscal 1993 of $10.1 million.
INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor to operations. The Company's business is not generally governed by contracts that establish prices substantially in advance of the receipt of goods or services. As suppliers increase their prices for merchandise to the Company, the Company generally seeks to increase its prices to its customers. Significant deflation may, however, adversely affect the Company's profitability.
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 the months of January through March 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Set forth on the following pages are the financial statements of (i) the Company and (ii) pre-Merger United. 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 statements of income and cash flows for the year ended December 31, 1995 reflect the results 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 financial statements of the Company for the years ended December 31, 1994 and 1993 reflect the financial position, results of operations and cash flows of Associated only. The financial statements of pre-Merger United are included because United is considered a significant predecessor for accounting purposes.
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNITED STATIONERS INC.
We have audited the accompanying consolidated balance sheet of United Stationers Inc. and Subsidiary as of December 31, 1995 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule for 1995 listed in the index at Item 14(A). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit 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 audit provides 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 Subsidiary at December 31, 1995 and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for 1995, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, in 1995, the Company changed its method of valuing inventory from the first-in, first-out (FIFO) method to the last-in, first-out (LIFO) method.
/s/ERNST & YOUNG LLP
Chicago, Illinois January 29, 1996, except for Note 16, as to which the date is March 27, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF ASSOCIATED HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of ASSOCIATED HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARY as of December 31, 1994, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 1994 and 1993. 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 Associated Holdings, Inc. and subsidiary as of December 31, 1994, and the results of their operations and their cash flows for the years ended December 1994 and 1993, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
Chicago, Illinois January 23, 1995 (except with respect to the matters discussed in Note 1 as to which the date is February 13, 1995)
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except share data)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (dollars in thousands)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (dollars in thousands)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (dollars in thousands, except share data)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
UNITED STATIONERS INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND PURCHASE ACCOUNTING
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." As a result of share conversions in the Merger, immediately after the Merger, (i) the former holders of common stock and common stock equivalents of Associated owned shares of Common Stock and warrants or options to purchase shares of Common Stock constituting in the aggregate approximately 80% of the shares of Common Stock on a fully diluted basis, and (ii) holders of pre-Merger United common stock owned in the aggregate approximately 20% of the shares of Common Stock on a fully diluted basis. 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.
The financial information for the year ended December 31, 1995 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. Financial information prior to 1995 reflects that of Associated only. All common and common equivalent shares have been adjusted to reflect the 100% stock dividend effective November 9, 1995.
The 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 allocated to goodwill. The purchase price allocation to property, plant and equipment is amortized over the estimated useful lives ranging from 3 to 40 years. Goodwill is amortized over 40 years.
The total purchase price of United by Associated and its allocation to assets and liabilities acquired are as follows (dollars in thousands):
Purchase price: Price of United shares purchased by Associated . . . . . . . . $266,629 Fair value of United shares not acquired in the Offer. . . . . 21,618 Transaction costs. . . . . . . . . . . . . . . . . . . . . . . 6,309 -------- Total purchase price. . . . . . . . . . . . . . . . . . . $294,556 -------- --------
Allocation of purchase price: Current assets . . . . . . . . . . . . . . . . . . . . . . . . $542,993 Property, plant and equipment. . . . . . . . . . . . . . . . . 151,012 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,503 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 7,699 Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . (481,651) -------- Total purchase price. . . . . . . . . . . . . . . . . . . $294,556 -------- --------
Immediately following the Merger, the number of outstanding shares of Common Stock was 11,996,154 (or 13,947,440 on a fully diluted basis), of which (i) the former holders of Class A Common Stock, $0.01 par value, and Class B Common Stock, $0.01 par value, of Associated (collectively "Associated Common Stock") and warrants or options to purchase Associated Common Stock in the aggregate owned 9,206,666 shares constituting approximately 76.7% of the outstanding shares of Common Stock and outstanding warrants or options for 1,951,286 shares (collectively 80.0% on a fully diluted basis) and (ii) pre-Merger holders of shares of Common Stock (other than Associated-owned and
treasury shares) in the aggregate owned 2,789,488 shares of Common Stock constituting approximately 23.3% of the outstanding shares (or 20.0% on a fully diluted basis). As used in this paragraph, the term "Common Stock" includes shares of Nonvoting Common Stock, $0.01 par value, of the Company, which are immediately convertible into Voting Common Stock.
2. ORGANIZATION
The Company is a national general line business products wholesaler. The Company stocks and distributes more than 25,000 items, including traditional office supplies, office furniture and desk accessories; computer supplies, peripherals and hardware, and facilities management supplies. The Company markets its products primarily through catalogs with a total annual circulation of more than 7.5 million copies. The Company markets and distributes products to a broad range of approximately 12,000 resellers, consisting primarily of office products dealers (including commercial, contract and retail), computer resellers, office furniture dealers, office products superstores, mail order companies and mass merchandisers. The Company's distribution capability is supported by a nationwide network of 40 (post-consolidation including the new Pittsburgh distribution center) strategically located and fully integrated distribution centers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company. Investments in 20% to 50% owned companies are accounted for by the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform with current year presentations.
REVENUE RECOGNITION
Sales and provisions for estimated sales returns and allowances are recorded at the time of shipment.
CASH AND CASH EQUIVALENTS
Investments in low-risk instruments that have original maturities of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost which approximates market value.
INVENTORIES
Inventories constituting approximately 94% of total inventories at December 31, 1995 have been valued under the last-in, first-out (LIFO) method. Prior to 1995, all inventories were valued under the first-in, first-out (FIFO) method. Effective January 1, 1995, Associated changed its method of accounting for the cost of inventory from the FIFO method to the LIFO method. Associated made this change in contemplation of its acquisition of United (accounted for as a reverse acquisition) so that its method would conform to that of United. Associated believes that in an inflationary environment the LIFO method provides a better matching of current costs and current revenues and that earnings reported under the LIFO method are more easily compared to that of other companies in the wholesale industry where the LIFO method is common. This change resulted in a charge to pre-tax income of the Company of approximately $8.8 million ($5.3 million net of tax benefit of $3.5 million) or $0.37 per common and common equivalent share for the year ended December 31, 1995. The cumulative effect of this accounting change for years prior to 1995 is not determinable, nor are the pro forma effects of retroactive application of the LIFO method to prior years. 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 $8.8 million higher than reported at December 31, 1995.
PROPERTY, PLANT AND EQUIPMENT
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 ten years; the estimated useful life assigned to buildings does not exceed 40 years; leasehold improvements and assets under capital leases 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, 1995 and 1994 is $1,953,000 and $295,000, respectively.
SOFTWARE CAPITALIZATION
The Company capitalizes major internal and external systems development costs determined to have benefits for future periods. Amortization is recognized over the periods in which the benefits are realized, generally not to exceed three years. Systems development costs capitalized were $516,000, $780,000, and $767,000 in 1995, 1994 and 1993, respectively. Amortization expense was $2,298,000, $157,000 and $128,000 in 1995, 1994 and 1993, respectively.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on net income after preferred stock dividend requirements. Net income per common and common equivalent share on a primary and fully diluted basis are computed using the weighted average number of shares outstanding adjusted for the effect of stock options and warrants considered to be dilutive common stock equivalents.
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.
STOCK OPTIONS
The Company accounts for stock options in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
4. BUSINESS COMBINATION AND RESTRUCTURING CHARGE
The following summarized unaudited pro forma operating data for the years ended December 31, 1995 and 1994 is presented giving effect to the Acquisition as if it had been consummated at the beginning of the respective periods and, therefore, reflects the results of United and Associated on a consolidated basis. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the combination been in effect on the dates indicated, or which may result in the future. The pro forma results exclude one-time nonrecurring charges or credits directly attributable to the transaction (dollars in thousands, except share data):
Pro Forma Twelve Months -------------------------- Ended December 31, -------------------------- 1995 1994 ----------- ---------- Net sales $2,201,860 $1,990,363 Income before income taxes 22,737 4,237 Net income 13,063 2,581 Net income per primary and fully diluted common and common equivalent share $0.80 $0.07
The pro forma income statement adjustments consist of (i) increased depreciation expense resulting from the write-up of certain fixed assets to fair value, (ii) additional incremental goodwill amortization, (iii) additional incremental interest expense due to debt issued, net of debt retired, and (iv) reduction in preferred stock dividends due to the repurchase of the Series B preferred stock.
In the first quarter of 1995, the Company recorded a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9 million). The restructuring charge includes severance costs totaling $1.8 million. The consolidation plan specifies that 330 distribution, sales and corporate positions, 180 of which relate to pre-Merger Associated, will be eliminated substantially within a one-year period following the Merger. As of December 31, 1995, approximately 90 former Associated employees had been terminated, with related costs of approximately $1.0 million charged against the reserve. The restructuring charge also includes distribution center closing costs totaling $6.7 million and stockkeeping unit reduction costs totaling $1.3 million. The consolidation plan calls for the closing of eight redundant distribution centers, six of which relate to pre-Merger Associated facilities, and the elimination of overlapping inventory items from the Company's catalogs substantially within a one-year period following the Merger. Estimated distribution center closing costs include (i) the net occupancy costs of leased facilities after they are vacated until the expiration of the leases and (ii) the losses on the sale of owned facilities and the facilities' furniture, fixtures and equipment. Estimated stockkeeping unit reduction costs include losses on the sale of inventory items which have been discontinued solely as a result of the Acquisition and Merger. As of December 31, 1995, $0.4 million relating to distribution center closing costs have been charged against the reserve. The consolidation plan is scheduled to be substantially completed by March 31, 1996.
The historical results for 1995 include an extraordinary charge of approximately $2.4 million ($1.4 million net of tax benefit of $1.0 million) of financing costs and original issue discount relating to the debt retired. In addition, the historical results for 1995 include compensation expense relating to an increase in the value of employee stock options of approximately $1.5 million ($0.9 million net of tax benefit of $0.6 million) as a result of the Acquisition and Merger. The pro forma twelve months ended December 31, 1995 do not include the extraordinary write-off.
5. LONG-TERM DEBT
Long-term debt consists of the following amounts (dollars in thousands):
The prevailing prime interest rate at the end of 1995 and 1994 was 8.5%.
In connection with the Acquisition, Associated received an equity investment of $12.0 million and borrowed an aggregate of $416.5 million under the Credit Facilities and $130.0 million under the Subordinated Bridge Facility. The proceeds of these investments and borrowings were used to (i) finance the purchase of shares of United common stock pursuant to the Offer, (ii) refinance certain existing indebtedness of Associated (including all amounts outstanding under the existing old Associated credit facilities) and indebtedness of the Company (including certain amounts outstanding under United and USSC credit facilities), (iii) repurchase United employee stock options, and (iv) pay fees and expenses relating to the Acquisition.
The Credit Facilities as of December 31, 1995, consist of $200.0 million of term loan borrowings ("Term Loan Facilities") and up to $325.0 million of revolving loan borrowings ("Revolving Credit Facility"). The loans outstanding under the Term Loan Facilities and the Revolving Credit Facility bear interest, at the Company's option, equal to the prime rate plus 2.25% (if the Tranche B Facility) or 1.75% (if either the Tranche A Facility or the Revolving Credit Facility) or LIBOR plus 3.25% (if the Tranche B Facility) or 2.75% (if either the Tranche A or Revolving Credit Facility), based on one, two, three or six month periods.
On May 3, 1995, USSC completed the issuance of $150.0 million of 12 3/4% Senior Subordinated Notes due 2005 (the "Notes"). The net proceeds of the Notes (after discount and fees of approximately $7.9 million) were used to pay certain expenses to repay the $130.0 million Subordinated Bridge Facility (together with $1.6 million in accrued and unpaid interest thereon), to repay a portion of the Tranche A and Tranche B term loans and accrued interest (totaling approximately $6.5 million), to repurchase all outstanding shares of the Company's Series B preferred stock and to provide working capital.
The Revolving Credit Facility is limited to the lesser of $325.0 million or a borrowing base equal to 80% of Eligible Receivables (as defined in the Credit Agreement); plus 50% of Eligible Inventory (as defined in the Credit Agreement) (provided that no more than 60% or during certain periods 65%, of the Borrowing Base may be attributable to Eligible Inventory); plus the aggregate amount of cover for Letter of Credit Liabilities (as defined). The Revolving Credit Facility provides that, for each fiscal year commencing January 1, 1996, the Company must repay revolving loans so that for a period of 30 consecutive days in each fiscal year the aggregate revolving loans do not exceed $200.0 million. The Revolving Credit Facility matures on March 31, 2000.
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 of interest expense. At December 31, 1995, the Company had agreements which collar $200.0 million of the Company's borrowings under the Credit Facilities and expire in April 1998.
The agreement governing the Credit Facilities (the "Credit Agreement") contains representations and warranties, affirmative and negative covenants and events of default customary for financings of this type. Substantially all assets of the Company are pledged as collateral under the Credit Agreement and other long-term debt.
The right of the Company 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 Indenture and the Credit Agreement contain certain restrictive covenants, including covenants that restrict or prohibit USSC's ability to pay dividends and make other distributions to the Company.
Debt maturities for the years subsequent to December 31, 1995, are as follows (dollars in thousands):
------------------------------- Year Amount ------------------------------- 1996 $ 22,979 1997 27,630 1998 31,273 1999 34,172 2000 221,695 Later years 211,428 ------------------------------- $549,177 ------------------------------- -------------------------------
Outstanding letters of credit totaled $56.0 million at December 31, 1995. The letters of credit were issued to support various activities of the Company.
6. LEASES
The Company has entered into several non-cancelable long-term leases for property and equipment. Future minimum lease payments for non-cancelable leases in effect at December 31, 1995 having initial remaining terms of more than one year are as follows (dollars in thousands):
Operating Leases ------------------------------------- Capital Lease Sublease Net Lease Year Lease Payments Income Payments - ---- -------- ------------------------------------- 1996 $1,181 $13,950 $372 $13,578 1997 1,479 11,085 199 10,886 1998 487 9,245 146 9,099 1999 - 7,502 61 7,441 2000 - 5,462 - 5,462 Later years - 18,801 - 18,801 - -------------------------------------- ----------------------------------- Total minimum lease payments 3,147 $66,045 $778 $65,267 ----------------------------------- Less amount representing interest 334 ----------------------------------- - -------------------------------------- Present value of net minimum lease payments (including current portion of $907) $2,813 - -------------------------------------- - --------------------------------------
Rental expense for all operating leases was approximately $14.2 million, $3.0 million and $2.7 million in 1995, 1994 and 1993, respectively.
7. PENSION PLANS AND PROFIT SHARING PLANS
PENSION PLANS
In connection with the Merger and Acquisition, the Company assumed the pension plans of United. Associated did not have a pension plan. Former Associated employees will enter the pension plan on July 1, 1996. At that time, the Company will have 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' funded status at December 31, 1995 (dollars in thousands). This exhibit does not include the projected benefit obligation of $680,000 for the former Associated employees as of December 31, 1995.
- ------------------------------------------------------------- Actuarial Present Value of Benefits Obligation Vested benefits $ 18,776 Non-vested benefits 1,996 --------- Accumulated benefits obligation 20,772 Effect of projected future compensation levels 2,861 --------- Projected benefits obligation 23,633 Plan assets at fair value 26,713 --------- Plan assets in excess of projected benefits obligation 3,080 Unrecognized net gain due to past experience different from assumptions (507) --------- Prepaid pension asset recognized in Consolidated Balance Sheet $ 2,573 --------- ---------
The plans' assets consist of debt securities, equity securities and government securities. Net periodic pension cost for 1995 for pension and supplemental benefits plans includes the following components (dollars in thousands): - ------------------------------------------------------------- Service cost-benefits earned during the period $ 1,142 Interest cost on projected benefits obligation 1,157 Actual return on assets (2,711) Net amortization and deferral 1,382 --------- Net periodic pension cost $ 970 --------- ---------
The projected benefit obligation for 1995 was determined using an assumed discount rate of 7.25%. In 1995, the assumed rate of compensation increase ranged from 0.0% to 5.5%. The expected long-term rate of return on assets used in determining net periodic pension cost was 7.5%.
PROFIT SHARING PLANS
In connection with the Merger and Acquisition, the Company assumed the profit sharing plan of United; thus, the Company currently has two profit sharing plans which cover all salaried employees and certain hourly employees. The plans provide for annual contributions by the Company in an amount determined by the Board of Directors. The plans also permit employees to have contributions made as 401(k) salary deferrals on their behalf and to make after- tax voluntary contributions. The plans provide that the Company may match employee contributions as 401(k) salary deferrals. Company contributions for matching of employee contributions were approximately $0.6 million, $0.3 million and $0.4 million in 1995, 1994 and 1993, respectively.
8. POSTRETIREMENT BENEFITS
In connection with the Merger, the Company assumed the postretirement plan of United on March 30, 1995. Associated did not have 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, deductibles, co- payment provisions and other limitations.
The assumed health care average cost trend rate used in measuring the accumulated postretirement benefit obligation ("APBO") at December 31, 1995 was 11.0% and 3.0% in 1996 and beyond, respectively. Beginning in 1996, retirees will pay the difference between actual plan costs and the portion of costs paid by the Company which is limited to a cost trend rate of 3%. The assumed discount rate was 7.5%. A 1% increase in the health care cost trend rate would increase the APBO as of December 31, 1995 by approximately $396,000 and annual service cost and interest cost by approximately $46,000.
The cost of postretirement health care benefits for the year ended December 31, 1995 was as follows (dollars in thousands): - -------------------------------------------------------- Service cost $ 161 Interest on accumulated benefits obligation 109 -------- Net postretirement benefit cost $ 270 -------- --------
The following table sets forth the amounts recognized in the Company's Consolidated Balance Sheet as of December 31, 1995 (dollars in thousands):
- -------------------------------------------------------- Retirees $ (762) Other fully eligible plan participants (697) Other active plan participants (1,362) -------- Total APBO (2,821) Unrecognized net loss 76 -------- Accrued postretirement benefit obligation $ (2,745) -------- -------- 9. STOCK PLAN INCENTIVES
The Management Stock Option Plan (the "Plan"), as amended, is administered by the Board of Directors, although the Plan provides that the Board of Directors of the Company may designate an option committee to administer the Plan. Options outstanding under the Plan as of the Merger date became exercisable for a number of Shares equal to the number of such Shares that would have been received in respect of such option if it had been exercised immediately prior to March 30, 1995 (the "Effective Time").
In September 1995, the Company's Board of Directors approved an amendment to the Plan, subject to stockholder approval, which provided for the issuance of options to key management employees of the Company exercisable for up to 2.2 million additional shares of its Common Stock. Subsequently, approximately 2.2 million options were granted to management employees subject to stockholder approval. Some of the options were granted at an option price below market value and the option price of certain options is subject to increases on a quarterly basis beginning in 1996.
The stock options granted under the Plan do not vest to the employee until the occurrence of an event (a "Vesting Event") that causes the present non- public equity investors to have received at least a full return of their investment (at cost) in cash, fully tradable marketable securities or the equivalent. A Vesting Event will cause the Company to recognize compensation expense based upon the difference between the fair market value of the Common Stock and the exercise price of the stock options. If a Vesting Event were to occur, based upon a stock price of $22.75, the Company would recognize a
nonrecurring noncash charge and related tax effect of $31.7 million in compensation expense ($19.0 million net of tax benefit of $12.7 million). Each $1.00 change in the Common Stock price will result in an adjustment to such compensation expense of approximately $2.6 million ($1.6 million net of tax effect of $1.0 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 shares of Common Stock already owned by such optionee (including shares to be received upon exercise of the option) 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 (except in the case of incentive options).
The following table summarizes the transactions of the Plan for the last three years:
All share and per share data have been restated to reflect the 100% stock dividend effective November 9, 1995 and the conversion of Associated common stock as a result of the Merger.
On January 1, 1996, the Company granted, subject to stockholder approval, options exercisable for an aggregate of 240,000 shares of Common Stock at an exercise price of $12.50 per share (subject to quarterly increases) and 120,000 shares of Common Stock at a fixed exercise price of $5.12 per share. Further, the Company intends to grant options for an aggregate of 202,772 shares of Common Stock at an exercise price of $1.45 per share.
10. REDEEMABLE PREFERRED STOCK
At December 31, 1995, the Company had 1,500,000 authorized shares of $0.01 par value preferred stock, of which 15,000 shares were designated as Series A preferred stock, 15,000 shares were designated as Series B preferred stock, 15,000 shares were designated as Series C preferred stock, and 1,455,000 shares remained undesignated. At December 31, 1994, the Company had 245,000 authorized shares of preferred stock (nonvoting), consisting of 15,000 shares of $0.01 par value Class A preferred stock, 15,000 shares of $0.01 par value Class B preferred stock, 15,000 shares of $0.01 par value Class C preferred stock and 200,000 shares of $0.01 par value additional preferred stock. All preferred stock issued at the date of inception was valued at the amount of cash paid or assets received for the stock at $1,000 per share. On July 28, 1995, the Company repurchased all 6,892 shares of Series B preferred stock issued and outstanding for $7.0 million, including accrued and unpaid dividends thereon. All outstanding shares of preferred stock are senior in preference to the Common Stock of the Company.
Series A preferred stock must be redeemed by the Company on July 31, 1999. Dividends are cumulative at a rate of 10% per annum, payable quarterly on April 30, July 31, October 31 and January 31. In the event that the Company does not pay dividends in cash, the dividend rate increases to 13% per annum and is payable in stock. Series B and C preferred stock are junior in relation to the Series A preferred stock. During each of the years ended December 31, 1995, 1994 and 1993, 649 shares of Series A preferred stock were accrued but not issued. As of December 31, 1995 and 1994, 2,437 and 1,788 shares of Series A preferred stock have been accrued as dividends but not issued.
Series C preferred stock is redeemable in four equal quarterly installments on April 30, 2001, July 31, 2001, October 31, 2001, and January 31, 2002. Dividends for both Series B and C are cumulative at a rate of 9% per annum. Dividends are payable quarterly on April 30, July 31, October 31 and January 31. In the event that the Company does not pay dividends in cash, the dividend rate increases to 10% per annum and is payable in stock. During the year ended December 31, 1995, noncash dividends were declared and issued for both Series B and C preferred stock in the amounts of 332 and 763 shares, respectively. In addition, during 1995 a cash dividend of approximately $254,000 was paid to Series C preferred stockholders in connection with the repurchase of Series B preferred stock. During the year ended December 31, 1994, noncash dividends were declared and issued for both Series B and C preferred stock in the amount of 617 and 926 shares, respectively. During the year ended December 31, 1993, noncash dividends were declared and issued for both Series B and C preferred stock in the amount of 559 and 838 shares, respectively.
All series of preferred stock may be redeemed at the option of the issuer at any time. All series of preferred stock have a redemption and liquidation value of $1,000 per share plus the aggregate of accrued and unpaid dividends on such shares to date. Required redemption of preferred stock for the five years following the year ended December 31, 1995 is $7.4 million in 1999 for the Series A preferred stock.
11. REDEEMABLE WARRANTS
The Company had 1,430,468 and 1,311,091 warrants ("Lender Warrants") outstanding as of December 31, 1995 and 1994, respectively, which allow holders thereof to buy shares of Common Stock at an exercise price of $0.10 per share. Outstanding Lender Warrants as of December 31, 1995 were valued at $27.75 per warrant. During 1995, 117,954 warrants were exercised, 284,484 warrants were issued or accrued resulting from anti-dilution agreements and 47,153 were contributed back to the Company and terminated in connection with fees paid by the Company relating to the issuance of the Notes. Of the Lender Warrants outstanding as of December 31, 1994, 1,036,229 were valued at the date of inception at the negotiated amount of $0.97 per warrant while the remaining 274,862 warrants were valued at $1.58 per warrant. In addition, 129,725 additional Lender Warrants were accrued but not issued, as of December 31, 1994. These warrants were valued at $1.66 per warrant. The exercise period for Lender Warrants expires January 31, 2002.
The Lender Warrants contain certain put rights which allow the holders thereof to put the warrants to the Company commencing on February 10, 1996. The purchase price payable upon the exercise of the put rights is the greater of the then fair market value or equity value of the warrants, as defined, less the applicable exercise price of the warrants. Payment of the Lender Warrants can only occur after repayment of all debt outstanding under the Credit Agreement or with the consent of the lenders and/or agent under the Credit Agreement.
12. TRANSACTIONS WITH RELATED PARTIES
The Company has management advisory services agreements with three investor groups. These investor groups provide certain advisory services to the Company in connection with the Acquisition as defined below.
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 Credit Agreement related to certain Company performance criteria. At the Effective Time, the Company paid aggregate fees to Wingate Partners of $2.3 million for services rendered in connection with the Acquisition. Wingate Partners earned an aggregate of $603,000, $350,000 and $210,000 with respect to each of the fiscal years ended 1995, 1994 and 1993, respectively, for such oversight and monitoring services. Under the agreement, the Company is 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. The agreement expires on January 31, 2002, provided that the agreement continues in effect on a year to year basis thereafter unless terminated in writing by one of the parties at least 180 days before the expiration of the primary term or any subsequent yearly term.
Pursuant to an agreement, Cumberland Capital Corporation ("Cumberland") has 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 Credit Agreement related to certain Company performance criteria and (ii) previously issued shares of Associated Common Stock that converted in the Merger into 154,126 shares. Subject to certain exceptions, the issuance of such shares is subject to rescission if the agreement is terminated before January 31, 2002. At the Effective Time, the Company paid aggregate fees to Cumberland of $100,000 for services rendered in connection with the Acquisition. Pursuant to the agreement, Cumberland earned $129,000, $75,000 and $45,000 with respect to the fiscal years ended 1995, 1994 and 1993, respectively, for such oversight and monitoring services. The Company is also obligated to reimburse Cumberland for its out-of-pocket expenses and indemnify Cumberland and its affiliates from loss in connection with these services. The agreement expires on January 31, 2002, provided that the agreement continues in effect on a year to year basis thereafter unless terminated in writing by one of the parties at least 180 days before the expiration of the primary term for any subsequent yearly term.
Pursuant to an agreement, Good Capital Co., Inc. ("Good Capital") has 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 Credit Agreement related to certain Company performance criteria and (ii) previously issued shares of Associated Common Stock that converted in the Merger into 154,126 shares. Subject to certain exceptions, the issuance of such shares is subject to rescission if the agreement is terminated before January 31, 2002. At the Effective Time, the Company paid aggregate fees to Good Capital of $100,000 for services rendered in connection with the Acquisition. Pursuant to the agreement, Good Capital earned an aggregate $129,000, $75,000 and $45,000 in each of the fiscal years ended 1995, 1994 and 1993, respectively, for such oversight and monitoring services. The Company is also 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. The agreement expires on January 31, 2002, provided that the agreement continues in effect thereafter on a year to year basis unless terminated in writing by one of the parties at least 180 days before the expiration of the primary term or any subsequent yearly term.
13. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (dollars in thousands):
Year Ended December 31, ------------------------ 1995 1994 1993 ------ ------ ------ Currently payable - Federal $4,172 $3,090 $ 227 State 1,119 903 554 ------ ------ ------ Total currently payable 5,291 3,993 781
Deferred, net - Federal (142) 166 1,012 State (21) 24 148 Valuation allowance reduction - (190) (1,160) ------ ------ ------ Total deferred, net (163) - - ------ ------ ------ Provision for income taxes $5,128 $3,993 $ 781 ------ ------ ------ ------ ------ ------
The Company's effective income tax rates for the years ended December 31, 1995, 1994 and 1993 varied from the statutory Federal income tax rate as set forth in the following table (dollars in thousands):
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):
As a result of the Acquisition and Merger, the Company determined that the valuation allowance for deferred tax assets was no longer necessary and it has been eliminated.
In the Consolidated Balance Sheets, these deferred assets and deferred liabilities are classified as deferred tax assets or deferred income tax liabilities, based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the temporary difference.
14. 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 twelve months ended December 31, 1995, 1994 and 1993 (dollars in thousands):
1995 1994 1993 ------- ------ ------ Cash paid during the year for: Interest $36,120 $6,588 $6,119 Income taxes 8,171 2,118 630
The following are supplemental disclosures of noncash investing and financing activities for the twelve months ended December 31, 1995, 1994 and 1993 (dollars in thousands):
- On May 3, 1995, the Company issued stock valued at $2,406 in exchange for services related to the issuance of the Notes.
- On March 30, 1995, the Company issued stock valued at $2,162 in exchange for services related to financing the Acquisition.
- In 1994, Associated issued $9,000 of common stock to retire a $9,000 deferred obligation related to a transition services agreement.
- In 1994, Associated accrued $244 for warrants which had an exercise price less than the fair market value of the common stock.
- In 1994, Associated accrued $63 for common stock shares to be issued at less than fair market value.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as follows (dollars in thousands):
The fair value of the Notes is based on quoted market prices. The fair value of the interest rate collar, estimated as a $3.9 million payable, is based on quotes from counterparties.
16. CONTEMPLATED COMMON STOCK OFFERING
The Company has filed a preliminary registration statement with the Securities and Exchange Commission. The contemplated offering included both a primary component of 3.5 million shares and a secondary component of 3.5 million shares. Subsequently, the Board of Directors determined that the primary offering would be indefinitely postponed.
UNITED STATIONERS INC. AND SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
(1) Reflects the results of Associated only for the three months ended March 30, 1995 and the Company for the nine months ended December 31, 1995.
(2) Reflects the results of Associated only.
(3) Reflects the liability assumed as a result of the Merger.
(A) Accounts determined to be uncollectible and charged against reserves, net of collections on accounts previously written off.
(B) Credit memos issued for sales returns.
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNITED STATIONERS INC.
We have audited the accompanying consolidated balance sheet of United Stationers Inc. and Subsidiary as of March 30, 1995 and the related consolidated statements of operations, changes in stockholders' investment and cash flows for the seven months then ended. Our audit also included the financial statement schedule as of March 30, 1995 and for the seven months then ended listed in the index at Item 14(A). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit 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 audit provides 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 Subsidiary at March 30, 1995 and the consolidated results of their operations and their cash flows for the seven months then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Chicago, Illinois June 27, 1995
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNITED STATIONERS INC.
We have audited the accompanying consolidated balance sheets of UNITED STATIONERS INC. (a Delaware Corporation) AND SUBSIDIARIES as of August 31, 1994 and 1993, and the related consolidated statement of operations, changes in stockholders' investment and cash flows for fiscal years ended August 31, 1994, 1993 and 1992. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Stationers Inc. and Subsidiaries as of August 31, 1994 and 1993, and the results of its operations and its cash flows for the fiscal years ended August 31, 1994, 1993 and 1992, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois, October 6, 1994.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------- Aug. 31, MARCH 30, ----------------------- ASSETS 1995 1994 1993 - -------------------------------------------------------------------------------- CURRENT ASSETS:
Cash and cash equivalents $ 14,515 $ 6,920 $ 7,889
Accounts receivable, less reserves for doubtful accounts of $4,775 in 1995, $4,010 in 1994 and $3,964 in 1993 188,672 187,565 188,396
Inventories 306,741 225,794 229,760
Deferred income taxes and prepaid expenses 22,987 15,512 16,426
- -------------------------------------------------------------------------------- Total current assets 532,915 435,791 442,471 - --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 92,907 92,099 90,147
Fixtures and equipment 152,059 151,793 144,625
Leasehold improvements 85 36 46
- -------------------------------------------------------------------------------- Total property, plant and equipment 245,051 243,928 234,818
Less - Accumulated depreciation and amortization 118,219 114,364 97,182 - --------------------------------------------------------------------------------
Net property, plant and equipment 126,832 129,564 137,636 - --------------------------------------------------------------------------------
GOODWILL, NET 41,719 42,369 43,484 - --------------------------------------------------------------------------------
OTHER ASSETS 10,373 10,826 11,195 - --------------------------------------------------------------------------------
Total assets $711,839 $618,550 $634,786 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED STATIONERS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUBSEQUENT EVENT
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 "Tender Offer"). Immediately thereafter, Associated merged with and into United (the "Merger" and, collectively with the Tender Offer, the "Acquisition"), and Associated Stationers, Inc., a wholly-owned subsidiary of Associated ("ASI") merged with and into United Stationers Supply Co., a wholly-owned subsidiary of United ("USSC"), 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." As a result of share conversions in the Merger, immediately after the Merger, (i) the former holders of common stock and common stock equivalents of Associated owned shares of Common Stock and warrants or options to purchase shares of Common Stock constituting in the aggregate approximately 80% of the shares of Common Stock on a fully diluted basis, and (ii) holders of pre-Merger United common stock owned in the aggregate approximately 20% of the shares of Common Stock on a fully diluted basis. 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.
Immediately following the Merger, the number of outstanding Shares was 5,998,177 (or 6,973,720 on a fully diluted basis), of which (i) the former holders of Class A Common Stock, $0.01 par value, and Class B Common Stock, $0.01 par value, of Associated ("Associated Common Stock") and warrants or options to purchase Associated Common Stock in the aggregate owned 4,603,373 Shares constituting approximately 76.8% of the outstanding Shares and outstanding warrants or options for 975,603 Shares (collectively 80.0% on a fully diluted basis) and (ii) pre-Merger holders of Shares (other than Associated-owned Shares and treasury Shares) in the aggregate owned 1,394,744 Shares constituting approximately 23.2% of the outstanding Shares (or 20.0% on a fully diluted basis). As used in this paragraph, the term "Shares" includes shares of Nonvoting Common Stock, $0.01 par value, of the Company, which are immediately convertible into Shares for no additional consideration.
To finance the Offer, refinance existing debt of ASI, the Company and USSC, repurchase stock options and pay related fees and expenses, Associated, ASI, USSC and the Company entered into (i) new credit facilities ("New Credit Facilities") with a group of banks and financial institutions providing for term loan borrowings of $200.0 million and revolving loan borrowings of up to $300.0 million and (ii) a senior subordinated bridge loan facility in the aggregate principal amount of $130.0 million (the "Subordinated Bridge Facility"). In addition, simultaneously with the consummation of the Offer, Associated obtained $12.0 million from the sale of additional shares of Associated Common Stock, which proceeds were used to finance the purchase of a portion of the Shares pursuant to the Offer.
On May 3, 1995, USSC completed the issuance of $150.0 million of 12 3/4% Senior Subordinated Notes (the "Notes") due 2005. The net proceeds of the Notes (after discount and fees of approximately $5.5 million) were used to pay certain expenses, to repay the $130.0 million Subordinated Bridge Facility (together with $1.6 million in accrued and unpaid interest thereon), to repay a portion of the Tranche A and Tranche B term loans (totaling approximately $6.5 million) and provide working capital. The Company expects to repurchase the Series B Preferred Stock, together with accrued and unpaid dividends thereon (approximately $7.0 million).
The New Credit Facilities contain certain financial covenants covering the Company and its subsidiaries on a consolidated basis, including, without limitation, covenants relating to tangible net worth, capitalization, fixed charge coverage, capital expenditures and payment of dividends by the Company.
Effective for 1995, the Company changed its fiscal year from a year end of August 31 to December 31. The financial statements included herein represent the final financial statements of the Company through the date of the consummation of the Merger. Future financial statements of the Company will reflect Associated and its acquisition of the Company, and will be on the basis of a December 31 fiscal year end.
As part of the Merger, the Company incurred approximately $27.8 million of merger-related costs. The amount consisted 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United Stationers Inc. and its wholly owned subsidiaries ("the Company"). Investments in 20% to 50% owned companies are accounted for by the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform with current-year presentations.
REVENUE RECOGNITION
Sales and provisions for estimated sales returns and allowances are recorded at the time of shipment.
CASH AND CASH EQUIVALENTS
Investments in low-risk instruments which have an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost which approximates market value. The Company's cash equivalent policy conforms to the requirements of Financial Accounting Standard No. 95.
INVENTORIES
Inventories constituting approximately 82% of total inventories at March 30, 1995, August 31, 1994 and August 31, 1993 have been valued under the last-in, first-out (LIFO) method with the remainder of the inventory 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 $21,797,000, $18,854,000 and $16,679,000 higher than reported at March 30, 1995, August 31, 1994 and August 31, 1993, respectively.
In 1994, liquidations of certain LIFO inventories had the effect of increasing net earnings by $830,000 or $0.04 per share.
DEPRECIATION AND AMORTIZATION
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 and assets under capital leases are amortized over the lesser of their useful lives or the term of the applicable lease.
Goodwill reflecting the excess of cost over the value of net assets of businesses acquired is being amortized on a straight-line basis over 40 years. The cumulative amount of goodwill amortized at March 30, 1995, August 31, 1994 and August 31, 1993 is $2,965,000, $2,315,000 and $1,200,000, respectively.
SOFTWARE CAPITALIZATION
The Company capitalizes major internal and external systems development costs determined to have benefits for future periods. Amortization expense is recognized over the periods in which the benefits are realized, generally not to exceed three years. Systems development costs capitalized were $1,896,000,
$2,166,000, $1,955,000 and $4,202,000 in 1995, 1994, 1993 and 1992, respectively. Amortization expense was $1,795,000, $2,376,000, $2,946,000 and $3,384,000 in 1995, 1994, 1993 and 1992, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and debt instruments. The book value of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values.
Borrowings under the Company's Reducing Revolving Credit and Term Loan Agreement are considered to be at fair market value. The Company had approximately $62.4 million, $62.7 million and $66.1 million of long-term debt (excluding borrowings under the Company's Reducing Revolving Credit and Term Loan Agreement) outstanding as of March 30, 1995, August 31, 1994, and August 31, 1993, respectively. The approximate fair value was $61.3 million, $59.8 million and $68.0 million as of March 30, 1995, August 31, 1994 and August 31, 1993, respectively. The fair value is based on the current rates offered to the Company for debt of similar maturities. The fair values on the long-term debt financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange and exclude any liquidation or origination costs.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's foreign operations are translated at current exchange rates. Revenues and expenses are translated at average exchange rates for the year in accordance with Statement of Financial Accounting Standard No. 52. The amounts for all years presented were immaterial.
EARNINGS PER SHARE
Earnings per share and the effect on earnings per share of potentially dilutive stock options are computed by the treasury stock method. This computation takes into account the weighted average number of shares outstanding during each year, outstanding stock options and their exercise prices, and the market price of the stock throughout the year. The exercise of outstanding stock options would not result in a material dilution of earnings per share.
3. BUSINESS COMBINATION AND RESTRUCTURING CHARGE
On June 24, 1992, the Company acquired all of the outstanding capital stock of SDC Distributing Corp., parent of Stationers Distributing Company, Inc. ("SDC"). The results of operations of SDC have been included in the Company's consolidated financial statements since June 25, 1992.
The following summarized unaudited pro forma results of operations for the years ended August 31, 1992 and 1991 assume the acquisition occurred at the beginning of the respective periods. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the combination been in effect on the dates indicated, or which may result in the future.
1992 1991 - ------------------------------------------------------------------------------- (in thousands of dollars, except share data) (unaudited)
Net Sales.................. $1,445,900 $1,378,734 Net Income................. 20,444 14,070 Net Income per Share....... 1.10 0.76 - -------------------------------------------------------------------------------
In the fourth quarter of 1992, the Company recorded a $5.9 million pre-tax restructuring charge related to severance payments and closing of certain facilities associated with the acquisition.
4. LONG-TERM DEBT
Long-term debt consists of the following amounts (in thousands of dollars):
The prevailing prime interest rate at March 30, 1995, August 31, 1994 and August 31, 1993 was 9.0%, 7.8%, and 6.0%, respectively.
The Company has a $160.0 million Reducing Revolving Credit and Term Loan Agreement ("Credit Agreement") with a group of seven lenders (the "Lenders"). The Credit Agreement consists of a $130.0 million revolving credit facility ("Revolver") and a $30.0 million term loan ("Term Loan"). Proceeds are used to finance working capital requirements and capital expenditures of the Company.
The Revolver provides for revolving credit loans up to the amount of the commitment until August 31, 1997, at the Company's option. The initial $130.0 million commitment decreases to $83.6 million as of August 31, 1997 based on quarterly decreases which began in May 1994 as specified in the Credit Agreement. As of August 31, 1994, the Revolver commitment is $126.0 million. Under the terms of the Credit Agreement, the Company is required to pay a facility fee of 3/16 of 1% of the total available Revolver. The Term Loan (as amended) matures on September 30, 1995 (or earlier upon certain subsequent offerings by the Company of debt or equity). The Term Loan can be prepaid without penalty. Interest on both loans is payable at varying rates provided for in the Credit Agreement.
On February 28, 1995, the Company entered into a $30.0 million line of credit with a major bank. This credit facility was entered into to meet seasonal requirements after the Revolver and Term Loan was fully utilized, and bore interest at agreed upon market rates. The Company had $6.0 million outstanding under this agreement immediately prior to the Merger. This agreement was terminated in connection with the Merger.
The Credit Agreement contains certain financial covenants covering the Company and its subsidiary on a consolidated basis, including, without limitation, covenants relating to the consolidated current ratio, tangible net worth, capitalization, fixed charge coverage, capital expenditures and payment of dividends by the Company.
The net book value of assets subject to secured mortgages and industrial development bonds as of March 30, 1995, August 31, 1994 and August 31, 1993 was $28,128,000, $28,610,000 and $28,962,000, respectively.
Maturities of long-term debt (excluding amounts borrowed under the Credit Agreement), for the following periods as indicated, are as follows (in thousands of dollars):
- ------------------------------------------------------------------------------- YEAR (EXCEPT 1995) AMOUNT - ------------------------------------------------------------------------------- Nine Months Ending December 31, 1995.................................. $ 6,125 1996.................................................................. 8,167 1997.................................................................. 8,218 1998.................................................................. 8,824 1999.................................................................. 6,129 Later years........................................................... 24,971 - ------------------------------------------------------------------------------- $62,434 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
As part of the Merger, approximately $180 million of debt at March 30, 1995 was refinanced. The refinanced debt consisted of various mortgages, the Edison, New Jersey industrial development bonds, the private placement loan, and the Term Loan and Revolver.
5. PENSION PLANS AND POSTRETIREMENT BENEFITS
The Company has pension plans in effect for substantially all 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 Company also has a non-contributory, non-qualified plan ("Supplemental Benefit Plan") in effect for certain executives. The Company has not funded this plan.
Pension expense in 1995, 1994, 1993 and 1992 was approximately $1,707,000, $1,755,000, $1,269,000 and $866,000, respectively.
The following table sets forth the plans' funded status at March 30, 1995, August 31, 1994 and August 31, 1993 (in thousands of dollars):
(1) The Supplemental Benefit Plan was funded and paid out as a result of the merger.
The plans' assets consist of debt securities, equity securities and government securities. Net periodic pension cost for 1995, 1994, 1993 and 1992 for pension and supplemental benefits plans includes the following components (in thousands of dollars):
The projected benefit obligations for 1995, 1994, 1993 and 1992 were determined using an assumed discount rate of 7.5%, 7.5%, 7.25%, and 7.5%, respectively. In 1995, 1994, 1993, and 1992, the assumed rate of compensation increase ranged from 0% to 5.5%. The expected long-term rate of return on assets used in determining net periodic pension cost was 7.5%.
The Company provides an unfunded health care plan 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, deductibles, co- payment provisions and other limitations.
During the first quarter of 1994, the Company adopted Statement of Financial Accounting Standard No. 106 (SFAS 106), "Employer's Accounting for Postretirement Benefits Other Than Pensions." SFAS 106 requires companies to accrue the expected cost of postretirement health care and life insurance benefits throughout the employee's active service period. Previously, postretirement health care costs were recognized as claims were paid. The Company elected to amortize the unfunded Accumulated Postretirement Benefit Obligation (APBO) over 20 years.
The assumed health care average cost trend rate used in measuring the APBO at March 30, 1995 was 11.0% in 1995 and 3% in 1996 and beyond. Beginning in 1996, retirees will pay the difference between actual plan costs and the portion of cost paid by the Company which is limited to a cost trend rate of 3%. The assumed discount rate was 7.75%. A 1% increase in the care cost trend rate would increase the APBO as of March 30, 1995 by approximately $339,000 and the sum of the 1995 annual service cost and interest cost by approximately $35,000.
The cost of postretirement health care benefits for the seven months ended March 30, 1995 and the year ended August 31, 1994 are as follows (in thousands of dollars):
1995 1994 ---- ---- Service cost $109 $246 Interest on accumulated benefits obligation 106 146 Amortization of transition obligation 58 100 ---- ---- Net postretirement benefit cost $273 $492 ---- ---- ---- ----
The following table sets forth the amounts recognized in the Company's Balance Sheet at March 30, 1995 and August 31, 1994 (in thousands of dollars):
MARCH 30, AUG. 31, 1995 1994 ------- ------- Retirees $ (781) $ (601) Other active plan participants (1,758) (1,634) ------- ------- Total APBO $(2,539) $(2,235) Unrecognized transition obligation 1,838 1,897 Unrecognized net (gain) 63 (76) ------- ------- Accrued postretirement benefit obligation $ (638) $ (414) ------- ------- ------- -------
Prior to 1994, the cost of providing postretirement health care benefits, net of retiree contributions, was $46,777 in 1993 and $33,396 in 1992.
The Company has a qualified Profit Sharing Plan in which all salaried employees and certain hourly paid employees of the Company are eligible to participate upon completion of six consecutive months of employment. The Profit Sharing Plan provides for annual contributions by the Company in an amount determined by the Board of Directors. The Plan also permits employees to have contributions made as 401(k) salary deferrals on their behalf and to make after- tax voluntary contributions. The Plan provides that the Company may match employee contributions as 401(k) salary deferrals. Company contributions to the Plan for both profit sharing and matching of employee contributions were approximately $0.8 million in 1995, $0.5 million in 1994, $1.4 million in 1993 and $1.0 million in 1992.
6. STOCK INCENTIVE PLANS
As a result of the change in control of the Company, the Company paid out approximately $3.0 million to option holders representing the difference between the tender offer price of the stock ($15.50 per share) and the option exercise price. The amount was included in merger-related costs in 1995.
Under the Directors' Stock Option Plan, the Company granted options for 7,500 shares at a price of $13.75 per share in 1995, 7,500 shares at a price of $15.25 per share in 1994 and 7,500 shares at a price of $19.25 per share in 1993. The Directors' Option Plan provides for the granting of options covering up to 100,000 shares of the Company's common stock, subject to anti-dilution adjustments. Options are exercisable at any time after they are granted, but for not more than ten years after the option's grant. As of the period ended 1995, 1994, and 1993, 0, 41,000 and 45,500 options, respectively, were outstanding at a price range of $8.75 to $22.13 per share.
During fiscal 1995, options for a total of 100,000 shares at $10.50 were granted to certain officers. The grant was approved at the 1995 Annual Meeting held in January.
Under the Company's 1981 Stock Incentive Award Plan, options outstanding had an exercisable life of either five, six or ten years from the date of grant. The Company granted certain officers 15,000 and 16,700 shares of restricted stock in 1992 and 1991, respectively. There have been no restricted stock grants since 1992. The grants of restricted shares resulted in deferred compensation expense of $699,000 of which $16,000, $39,000, $132,000 and $185,000 was recognized in 1995, 1994, 1993 and 1992, respectively. The unrecognized portion of deferred compensation was $0, $16,000 and $55,000 as of March 30, 1995, August 31, 1994 and August 31, 1993, respectively. Under the terms of the grant, the stock does not vest to the employee until completion of three years of employment after the date of grant. The 1981 Stock Incentive Award Plan was terminated by the Company's Board of Directors on March 30, 1995.
In 1989, the Board of Directors terminated the 1985 Non-qualified Stock Option Plan so that no further stock options would be issued under this plan. The termination of the plan did not affect the options previously granted and outstanding. No option could have been exercised more than ten years after its grant.
The following table summarizes the transactions of the 1981 and 1985 Option Plans for 1995, 1994 and 1993.
(1) As a result in change in control of the Company, the Company paid out to option holders the difference between the tender offer price of the stock ($15.50 per share) and the option exercise price. The total amount was included in merger-related costs in 1995.
7. LEASES
The Company has entered into several non-cancelable long-term leases on property and equipment. Future minimum lease payments for non-cancelable leases in effect at March 30, 1995 having initial remaining terms of more than one year are as follows (in thousands of dollars):
Rental expense for all operating leases was approximately $7,731,000, $13,549,000, $14,917,000 and $11,546,000 in 1995, 1994, 1993 and 1992, respectively.
8. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," which was adopted in 1992.
The Company does not intend to provide Federal income taxes on the undistributed earnings for its foreign subsidiaries. The Company's policy is to leave the income in the country of origin until such time as all Federal income tax due upon its distribution will be fully offset by foreign tax credits. As of March 30, 1995, neither foreign subsidiary had undistributed earnings.
The Company provides for income taxes at statutory rates based on income reported for financial statement purposes. A summary of income tax expense is shown below (in thousands of dollars):
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 (in thousands of dollars):
In the consolidated balance sheets, these deferred assets and deferred liabilities are classified as deferred tax assets or deferred income tax liabilities, based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the temporary difference.
No valuation allowance was recorded in 1995 or 1994. A valuation allowance of $1,504,000 was recorded at August 31, 1993.
The table below records the differences between the statutory income tax rate and the Company's effective income tax rate:
UNITED STATIONERS INC. AND SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
* Reflects the transition period of September 1, 1994 through March 30, 1995
(A) Accounts determined to be uncollectible and charged against reserves, net of collections on accounts previously written off.
(B) Credit memos issued for sales returns, rebates and allowances.
ITEM 9.
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.
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 1, 1996:
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.
THOMAS W. STURGESS became President and Chief Executive Officer of the Company on May 31, 1995 and Chairman of the Board of the Company upon consummation of the Merger. Prior to the Merger, Mr. Sturgess served as Chairman of the Board and Chief Executive Officer of Associated since January 1992 and had been Chairman of the Board and Chief Executive Officer of ASI since December 1994. Since 1987, Mr. Sturgess has served as a general partner of various Wingate entities, including the indirect general partner of each of Wingate Partners and Wingate II. Mr. Sturgess has not actively participated in the management of Wingate Partners or the Wingate entities since December 31, 1995. Mr. Sturgess currently serves as a non-executive Chairman of the Board of Redman Industries, Inc., a manufactured housing producer ("Redman"), as well as RBPI Holding Corporation, a manufacturer and distributor of aluminum and vinyl windows. He is a director of Loomis Armored Inc., a provider of armored car and related services ("Loomis"), and Century Products Company, a manufacturer and distributor of baby seats and other juvenile products ("Century Products").
MICHAEL D. ROWSEY was elected to the Board of Directors upon consummation of the Merger and became Executive Vice President of the Company upon consummation of the Merger with primary responsibility for field operations. Prior to the Merger, Mr. Rowsey had been a director of Associated since 1992 and President and Chief Operating Officer of Associated since January 1992. From 1979 to January 1992, Mr. Rowsey served in various capacities with BCOP, most recently as the North Regional Manager.
DANIEL H. BUSHELL became Executive Vice President and Chief Financial Officer of the Company upon consummation of the Merger. 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. Prior thereto, he was Senior Vice President, Marketing of United since June 1992 and had previously been Senior Vice President, General Manager, MicroUnited since 1990 and Vice President, General Manager, MicroUnited since September 1989. He had held a staff position in the same capacity since February 1987.
ROBERT H. CORNELL became Vice President, Human Resources of the Company upon consummation of the Merger. Prior thereto, he was Vice President, Human Resources of United since February 1988, and since 1987 had been Vice President, Human Resources for USG Interiors Inc., a subsidiary of USG Corporation.
OTIS H. HALLEEN became Vice President, Secretary and General Counsel of the Company as of January 30, 1996. Since November 1, 1995 he has served as Vice President, Secretary and General Counsel at USSC. From 1986 through March 1995 he had been Vice President, Secretary and General Counsel of United.
JAMES A. PRIBEL became Treasurer of the Company upon consummation of the Merger. Prior thereto, he was Treasurer of United since 1992. Prior thereto he had been Assistant Treasurer of USSC since 1984 and had served in various positions since joining USSC in 1978.
TED S. RZESZUTO became Vice President and Controller of the Company upon consummation of the Merger. Prior thereto, he was Vice President and Controller of United since 1987 and Controller of United since 1985 and prior thereto had served in various accounting positions since joining USSC in 1975.
ALBERT SHAW became Vice President, Operations of the Company shortly after consummation of the Merger. Prior thereto, he was Vice President, Midwest Region of USSC since March 1994. He had been a Vice President of USSC since 1992 and prior to that had served in various management positions since joining USSC in 1974.
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.
GARY G. MILLER was elected to the Board of Directors upon consummation of the Merger and became Assistant Secretary of the Company on June 27, 1995. Mr. Miller served as Vice President and Secretary of the Company from consummation of the Merger until June 27, 1995. Prior thereto, Mr. Miller had been a director of Associated since 1992 and Vice President and Secretary of Associated since January 1992. Mr. Miller also currently serves as President of Cumberland, a private investment firm which is located in Fort Worth, Texas. In addition, from 1977 to December 1993, Mr. Miller served as Executive Vice President, Chief Financial Officer and a director of AFG Industries, Inc., and its parent company, Clarity Holdings Corp. He is Chairman of the Board of both CFData Corp., a nationwide
provider of check collection and check verification services, and Fore Star Golf, Inc., which was formed in 1993 to own and operate golf course facilities.
JAMES T. CALLIER, JR. was elected to the Board of Directors upon consummation of the Merger. Prior to the Merger, he had been a director of Associated since 1992. Mr. Callier is a general partner of Wingate Partners, and has served as President of Callier Consulting, Inc., an operating management firm, since 1985. Mr. Callier currently serves as Chairman of the Board of Century Products, as a director of Redman and Loomis and as an advisory director of Wingate II.
DANIEL J. GOOD was elected to the Board of Directors 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 for Shearson Lehman Bros. and President of A.G. Becker Paribas, Inc. Mr. Good serves as a director of Supercuts, Inc.
FREDERICK B. HEGI, JR. was elected to the Board of Directors upon consummation of the Merger. 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 Board of Loomis Holding Corporation, the parent corporation of Loomis, ITCO Holding Company, Inc., the parent corporation of ITCO Tire Company, Tahoka First Bancorp, Inc., a bank holding company, and Cedar Creek Bancshares, Inc., a bank holding company, and as a director of Century Products, Lone Star Technologies, Inc., a diversified company engaged in the manufacturing of steel pipe, Cattle Resources, Inc., a manufacturer of animal feeds and operator of commercial cattle feedlots and various funds managed by InterWest Partners.
JEFFREY K. HEWSON was elected to the Board of Directors in 1991. Mr. Hewson served as President and Chief Executive Officer of the Company from consummation of the Merger until May 31, 1995. Prior thereto, he was President and Chief Operating Officer of United since April 1991. He had been Executive Vice President of United since March 1990. Prior to that, he had been President of ACCO International's U.S. Division since 1989 and President of its Canadian Division since 1987. ACCO International is a manufacturer of traditional office products and a subsidiary of American Brands, Inc., which is a global consumer products holding company. Mr. Hewson currently serves as President and Chief Executive Officer of Beckley-Cardy, distributor of supplies, furniture and equipment to the educational market.
JAMES A. JOHNSON was elected to the Board of Directors 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 Century Products.
JOEL D. SPUNGIN has served as a member of the Board of Directors 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.
Messrs. Sturgess, Rowsey, Miller, Callier, Good, Hegi and Johnson were elected to the Board of Directors pursuant to a voting trust.
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 1996)--Messrs. Good, Johnson and Hewson; Class II (having terms expiring in 1997)--Messrs. Sturgess, Hegi and Rowsey; and Class III (having
terms expiring in 1998)--Messrs. G. Miller, Callier and Spungin.
ITEM 11.
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 8, 1996, to be filed within 120 days after the end of the Registrant's fiscal year.
ITEM 12.
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 8, 1996, to be filed within 120 days after the end of the Registrant's fiscal year.
ITEM 13.
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 8, 1996, to be filed within 120 days after the end of the Registrant's fiscal year.
ITEM 14.
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:
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
B) No reports on Form 8-K were filed by the Registrant during the last quarter.
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. 3332453 (filed December 6, 1989).
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.
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/Ted S. Rzeszuto -------------------------------------- Ted S. Rzeszuto Vice President and Controller (principal accounting officer) Dated: March 28, 1996
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: