ITEM 1. BUSINESS
General
From its founding in 1929 until November 15, 1983, the business of National Sanitary Supply Company (the "Company") was privately owned. In September 1983 the Company was incorporated in Delaware as a wholly-owned subsidiary of Chemed Corporation (a diversified public corporation with interests in residential and commercial plumbing and drain cleaning services, home repair service contracts, janitorial supply products distribution, medical and dental disposable product supply distribution for private practices, and home healthcare services). As used herein, "Company" refers to National Sanitary Supply Company, its wholly-owned subsidiaries and its predecessors; and "Chemed" refers to Chemed Corporation.
In June 1986 the Company sold in a public offering 1,000,000 shares of its common stock, par value $1 per share (the "Common Stock"). As of December 31, 1996 Chemed owned 83 percent of the outstanding shares of Common Stock, or 5,144,551 of the 6,162,019 shares outstanding.
In September 1988 the Company acquired by merger Century Papers, Inc., which is now a wholly-owned subsidiary ("National Southwest"). Effective December 31, 1996 Cardinal Papers, Inc., a subsidiary of National Southwest, was merged into its parent corporation.
On June 17, 1992 the Company formed National Sanitary Supply Development, Inc. ("NSSD"), a Delaware corporation, to aid its expansion program in the Midwest.
The Company conducts its business in one segment.
Description of Business
The Company is the nation's largest specialized distributor of sanitary maintenance supplies. The Company's products are sold primarily through over 750 sales personnel employed by the Company to a wide variety of commercial, institutional, and industrial customers. In 1996, the Company serviced approximately 125,000 customers located principally in Arizona, California, Colorado, Indiana, Louisiana, Michigan, Mississippi, Missouri, Nevada, New Mexico, Ohio, Oklahoma, Oregon, Tennessee, Texas, Utah and Washington. Federal, state and local governmental agencies accounted for approximately 8 percent of the Company's total sales for 1996. These sales are attributable to over 1,200 different agencies whose purchasing decisions generally are made separately. Other than sales to the aforementioned entities, no one customer accounts for more than 4 percent of net sales.
Other information called for by this item is included within Notes 1 and 2 of the Notes to Consolidated Financial Statements appearing on pages 14 and 15 of the 1996 Annual Report to Stockholders and is incorporated herein by reference.
Products and Supplies
The Company's product line consists primarily of a wide variety of sanitary maintenance supplies used by commercial, institutional, and industrial facilities. In addition, the Company also distributes, primarily through National Southwest, food service disposable products, packaging materials, and business paper for use in institutional and industrial establishments. Except for the various chemical products that are manufactured by and for the Company, the products sold by the Company are purchased from outside suppliers.
Approximately 26 percent of the Company's total sales in 1996 were of chemical and equipment products, including specialty and general purpose cleaners, floor finishes, hand soaps, deodorants, disinfectants, floor machines, vacuums and carpet extractors. A portion of these products is marketed under the "National Sanitary Supply Co." proprietary label, a federally registered trademark. Most of the proprietary-label chemical products are manufactured by the Company.
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Approximately 17 percent of the Company's total 1996 sales were of a wide variety of general maintenance products needed in the housekeeping function such as mops, buckets, brooms, brushes, trash can liners, floor mats and pads.
Approximately 33 percent of the Company's total 1996 sales were of paper products, such as towels and tissues used in public restrooms.
The remaining 24 percent of the Company's total 1996 sales included food service products such as paper napkins, plates and cups; packaging and business paper products such as tapes, boxes, computer paper, copier paper and stationery; and special order and non-stock items.
The Company purchases products from many different manufacturers. In certain product lines, such as paper products, a significant portion of purchases is made from one supplier. Although the Company has no long-term supply contracts, it expects to continue relationships with its existing suppliers. Because there are numerous sources of similar products, management does not believe that the loss of any one supplier would have a material adverse effect on the business.
Distribution System
The Company maintains over 70 distribution center and sales branch locations throughout the western, southwestern and midwestern United States. From the distribution centers, generally consisting of both a sales office and warehouse facility, products are distributed directly to National's customers, principally by a fleet of Company-owned vehicles or vehicles leased from Chemed. In addition to these distribution facilities, the Company maintains sales branch offices that carry a relatively small inventory of products, which are delivered directly to customers on an emergency basis.
Manufacturing
The Company markets a line of chemical cleaning, sanitation, and maintenance compounds under the "National Sanitary Supply Co." proprietary label. Most of these products are manufactured by the Company in its facility in Los Angeles, with some being manufactured for the Company under contract.
The Company's manufacturing operations are not labor intensive. The Company operates two shifts at its manufacturing facility and could increase its overall production substantially without incurring significant capital expenditures.
The chemicals used in the Company's manufacturing processes are purchased from a number of suppliers. The Company does not believe that the loss of any one chemical supplier would have a material adverse effect on its business and believes that alternative sources could be found in a relatively short period of time.
Employees
As of December 31, 1996, the Company employed 1,710 persons, of whom 755 were field sales personnel; 320 were clerical personnel; and the remainder were production personnel, warehousing and shipping personnel, and headquarters management and administrative personnel. The Company generally considers its relationship with its employees as good. 8% of its employees are represented by labor unions.
Competition
The market for sanitary maintenance and paper supplies is highly competitive. Competition is, however, highly fragmented. In the United States, over 7,000 firms compete in the sanitary maintenance supply distribution business on a local or regional basis. Competition also exists indirectly from wholesale price clubs, manufacturers selling directly to customers, and foodservice distributors.
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The principal competitive factors in this market are the level of service provided; range of products offered; speed, efficiency and reliability of delivery; and price.
Environmental Matters
The Company's operations are subject to various federal, state, and local laws and regulations regarding the environmental aspects of the manufacture and distribution of chemical components. The Company, to the best of its knowledge, is currently in compliance in all material respects with the environmental laws and regulations affecting its operations. Capital expenditures for the purpose of environmental protection during 1997 and 1998 are not expected to be material in amount.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates three different types of facilities: branch sales offices, regional distribution centers, and a combination distribution center and manufacturing facility. Branch sales offices provide office facilities for sales representatives whose territories are located in outlying areas as well as storage facilities for maintaining a small inventory of products for emergency shipments. Regional distribution centers generally consist of not only a sales office but also a warehouse facility that delivers products to customers in a wide geographic area including those markets covered by the related sales branch offices. The third type of facility performs the same function as a regional distribution center with the added responsibility of manufacturing and delivering products to regional distribution centers. The following table provides a summary of the major facilities operated by the Company as of December 31, 1996:
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(a) Represents forty-four (44) separate branch sales offices located throughout the western, midwestern, and southwestern United States.
The owned property is held in fee and is not subject to any major encumbrance. Leased properties are occupied under rental agreements having terms ranging up to ten years and with month-to-month tenancies. Certain of the leases provide for payment by the Company of insurance, property taxes, and building operating expenses and for options to purchase and options to renew. The Company does not believe that failure to obtain the renewal of any lease would have a material adverse effect on its business.
Management considers all of the facilities to be in good operating condition and to be generally adequate for the Company's present and anticipated needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
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ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
(1) Mr. E. L. Hutton is Chairman of the Company and Chairman and Chief Executive Officer of Chemed. He has held the latter two positions since November 1993. Previously, from April 1970 to November 1993, he held the positions of President and Chief Executive Officer of Chemed. He is the father of Mr. Thomas C. Hutton, a Vice President of Chemed and a director of the Company.
(2) Mr. McNamara is a Vice Chairman of the Company and President of Chemed. From August 1986 to August 1994 he was General Counsel and Assistant Secretary of the Company. He served as Executive Vice President, General Counsel and Secretary of Chemed from November 1993 to August 1994, serving as Chemed's Vice Chairman from May 1992 to November 1993.
(3) Mr. Voet is President and Chief Executive Officer of the Company and is also an Executive Vice President of Chemed. He was Vice Chairman and Chief Executive Officer of the Company from November 1986 to January 1992. He served as Chemed's Vice Chairman from 1988 until November 1993.
(4) Mr. Garber is a Vice Chairman of the Company. He was President and Chief Operating Officer of the Company from April 1986 to January 1992.
(5) Mr. Jackson is an Executive Vice President of the Company and is Executive Vice President and General Manager of National Southwest. He has held these positions since November and October 1994, respectively. He was Director of Sales for Scott Paper Co.'s Southwest Division from January 1990 to October 1994.
(6) Mr. Vuylsteke is an Executive Vice President of the Company and General Manager of its National West division and has held these positions since January 1992 and July 1991, respectively. He was Vice President and General Manager of the Company's Northwest division from February 1989 to July 1991.
(7) Mr. Sander is Senior Vice President, Treasurer and Chief Financial Officer of the Company, and has held these positions since August 1996 and May 1988, respectively. From August 1988 to August 1996 he was a Vice President of the Company.
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Each executive officer holds office until the annual election at the next annual organizational meeting of the Board of Directors of the Company, which is scheduled to be held on May 19, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
MARKET AND PRICE RANGE OF COMMON STOCK, DIVIDENDS
The Company's Common Stock (par value $1 per share) trades on the NASDAQ National Market tier of its Stock Market under the symbol NSSX. The range of the high and low trade prices for the Company's Common Stock and dividends paid per share for each quarter of 1995 and 1996 are set forth below:
Future dividends are necessarily dependent upon the Company's earnings and financial condition, and other factors not presently determinable.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
*Includes only stockholders of record; does not include those whose shares are held in nominee name or within clearinghouse positions of brokers, banks and other institutions. The Company believes its stockholders number more than 500.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item for the five years ended December 31, 1996, appearing on page 1 of the 1996 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
The information called for by this Item is set forth on pages 20 through 21 of the 1996 Annual Report to Stockholders and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item set forth on pages 10 through 19 of the 1996 Annual Report to Stockholders, and the Unaudited Quarterly Data appearing on page 13 of the 1996 Annual Report to Stockholders, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The directors of the Company are:
The information required under this Item with respect to directors is set forth under "Election of Directors" in the Company's 1997 Proxy Statement which is incorporated herein by reference, with the exception of Mr. Cunningham. Mr. Cunningham, age 52, is a Senior Chemical Advisor to Schroder Wertheim, Inc., New York, New York, an investment banking, asset management and securities firm. He has held this position since March 1992. From October 1990 to March 1992 he was a Managing Director of Furman Selz Incorporated, New York, New York, an institutional investment firm. He is a director of Chemed.
The information required under this Item with respect to executive officers is set forth under Part I hereof. The information required under this item set forth under "Section 16(a) Beneficial Ownership Reporting Compliance", in the Company's 1997 Proxy Statement, is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this Item is set forth under "Executive Compensation" in the Company's 1997 Proxy Statement which is incorporated herein by reference.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required under this Item is set forth under "Security Ownership of Certain Beneficial Owners and Management" in the Company's 1997 Proxy Statement which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this Item is set forth under "Certain Arrangements and Transactions" in the Company's 1997 Proxy Statement which is incorporated herein by reference.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
EXHIBITS
3.1. Certificate of Incorporation of Chemed Supply, Inc., dated September 19, 1983.*
3.2. Certificate of Merger of La-Ru Truck Rental Company, Inc. into Chemed Supply, Inc., dated November 15, 1983.*
3.3. Certificate of Amendment of the Certificate of Incorporation, as amended, of National Sanitary Supply Company, dated July 13, 1987.*
3.4. Amended and Restated By-Laws of the Company as of November 3, 1993.*
10.1. 1986 Stock Incentive Plan of the Company, as amended through August 4, 1993.*,***
10.2. Executive Salary Protection Plan of the Company.*,***
10.3. Form of Executive Salary Protection Agreement.*,***
10.4. Amended Tax Procedures and Services Agreement as of January 1, 1993 between the Company and Chemed Corporation.*
10.5. Employment Agreement, dated November 6, 1995, between Thomas M. Lane and the Company.*,***
10.6. 1988 Stock Incentive Plan adopted May 19, 1988, as amended through August 4, 1993.*,***
10.7. $1,600,000 Promissory Note issued by Century Papers, Inc. to Chemed Corporation on November 10, 1988.*
10.8. $9,400,000 Promissory Note issued by the Company to Chemed Corporation on November 10, 1988.*
10.9. $8,000,000 Promissory Note issued by the Company to Chemed on January 1, 1993.*
10.10. Benefit Equalization Plan, as amended November 6, 1991.*,***
10.11. Employment Contracts with Executives.*,***
10.12. Amendment No. 4 to Employment Contracts with Executives.***
10.13. Assignment of $1,600,000 Promissory Note from Century Papers, Inc. to the Company of May 1, 1992.*
10.14. Employees Thrift and Profit Sharing Plan.*,***
10.15. Trust Agreement of Employees Thrift and Profit Sharing Plan.*,***
10.16. Employment Agreement, dated May 20, 1996, between W. Dwight Jackson and Century Papers, Inc.***
10.17. 1995 Stock Incentive Plan of the Company. *,***
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10.18. Split Dollar Life Insurance Agreements.*, ***
11.1. Computation of earnings per share.
13.1. 1996 Annual Report to Stockholders
21.1. Subsidiaries of the Company.
23.1. Consent of Independent Accountants.
24.1. Powers of Attorney.
27.1. Financial Data Schedule.+
* This exhibit is being filed by means of incorporation by reference (see Index to Exhibits on page E-1). Each other exhibit is being filed with this report.
*** Management contract or Executive Compensation Plan or Arrangement.
+ Not filed herewith.
FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements and Financial Statement Schedules on page S-1.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1996.
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SIGNATURES
Pursuant to the requirement 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.
NATIONAL SANITARY SUPPLY COMPANY
March 28, 1997 By: /s/ PAUL C. VOET ------------------------ Paul C. Voet President and Chief Executive Officer
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.
* Naomi C. Dallob, General Counsel and Secretary of the Company, by signing her name hereto signs this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission.
March 28, 1997 /s/ NAOMI C. DALLOB - -------------- -------------------------- Date Naomi C. Dallob (Attorney-in-Fact and a Director)
INDEX TO EXHIBITS
E-2
E-3
E-4