ITEM 1. BUSINESS
The Company
Univar Corporation (Univar, the Registrant, or the Corporation) was incorporated in October, 1995. As of February 29, 1996, Univar changed its state of incorporation from Delaware to Washington by means of a migratory merger. The Delaware predecessor of the Corporation was incorporated in September, 1966 to become the successor corporation in the merger of Van Waters & Rogers Inc. and United Pacific Corporation, both long established companies then doing business in the western United States and western Canada. For the fiscal year ended February 29, 1996, Univar Corporation and its three wholly owned subsidiaries were involved in the distribution of industrial, agricultural and pest control chemicals and related products and services. In the United States, the Corporation conducts its operations through Van Waters & Rogers Inc.; in Canada, through Van Waters & Rogers Ltd.; and through Univar Europe N.V. (Univar Europe) in the United Kingdom, Scandinavia, Switzerland, and northern Italy.
Distribution is the process by which manufacturers, both large and small, move their products in the most economical way to many end users. As a distributor of industrial, pest control, and agricultural chemicals and related products, the Corporation's role is to purchase chemicals from manufacturers in truck, railcar, or tankcar quantities and sell them in smaller quantities to various customers. Univar adds value to its products through superior service, selection, blending and packaging, delivery reliability, and provides customers assistance with environmental and regulatory compliance.
The Corporation provides a hazardous waste management service in the U.S. called ChemCare(R). ChemCare is a service providing its customers with logistics management, temporary waste storage, and access to various treatment and disposal technologies. ChemCare allows the Corporation to maximize existing equipment, facilities and chemical handling knowledge to assist customers in responsibly collecting and disposing of their chemical waste streams. It is, in essence, a reverse distribution process, developed in response to customer demand for help in coping with increasingly complex environmental regulations at the federal, state, and local levels.
The Corporation does not, under ChemCare or any other program, actually dispose of chemical waste streams. Rather, it contracts with Environmental Protection Agency (EPA) permitted hazardous waste disposal sites to do so, through incineration, recycling, or other means.
The Corporation is developing additional ancillary services in the U.S., including contract chemical management services, and third party logistics. The Corporation provides contract management services through its VIMS(TM) services. (Van Waters & Rogers Integrated Management Services). VIMS takes full advantage of the Corporation's UVX2000(R) networked computer system combined with expertise in sourcing, procuring, warehousing, and transporting to reduce customers' costs of acquiring and managing products and materials. With its Third Party Logistics business, the Corporation is making existing warehousing capacities available to customers, along with services such as packaging and terminaling of bulk liquids, for manufactured products.
Financial Information About Industry Segments
The Corporation operates in only one market segment, chemical distribution, through its wholly owned subsidiaries, Van Waters & Rogers Inc. in the United States, Van Waters & Rogers Ltd. in Canada, and Univar Europe N.V. in Europe. The ancillary services described above are not material in relation to the Corporation's chemical distribution business.
Operations in Canada and Europe for each of the last three years are reported in the Univar Corporation financial statements on page 36 of this filing, under the caption of Note 11. Such Industry Segment Information is incorporated herein by reference.
ITEM 1. BUSINESS (Continued)
Raw Materials
Numerous sources of supply generally exist for nearly all raw materials essential to the business.
Patents, Trademarks and Tradenames
Univar and its subsidiaries own certain trademarks, servicemarks, and tradenames which are subject to renewal at various dates beginning in 1997 through 2010. These marks and names are important in the Corporation's current operations but not indispensable.
Seasonal Business
Approximately 27% of annual sales occur in the first quarter of the year, followed by approximately 26% in the second quarter, 24% in the third quarter and 23% in the fourth quarter. While quarterly sales volumes do not vary significantly, the mix of business during the year is subject to seasonal variation. The Corporation markets pest control and agricultural products, which together represented 13%, 12%, and 11% of sales, respectively, in fiscal 1996, 1995, and 1994. While sales of these products occur throughout the year, approximately 69% of these annual sales occur during the first two quarters of the fiscal year. Complimentary seasonal fluctuations of certain industrial chemical sales, such as aircraft de-icing fluid, offset lower sales volumes of agricultural and pest control products in the third and fourth quarters of the fiscal year. This seasonal change in product mix results in expected fluctuation of gross margin percentage from quarter to quarter during the year.
Principal Customers
No portion of the continuing operations of the Corporation is dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on the Corporation.
Competitive Conditions
In the distribution of chemicals and related products, Van Waters & Rogers Inc., Van Waters & Rogers Ltd., and Univar Europe N.V. compete with local, regional, and national distributors, as well as with manufacturers who sell directly to end users. Although Univar is one of the largest industrial chemical distributors in North America and has expanded its operations to western Europe, the Corporation faces significant competition from distributors who have a larger market share within local and regional markets as well as from other national distributors.
The Corporation competes on a variety of factors such as price, product quality, customer service, selection of available products, reliability, technical support, and delivery.
Research and Development
As a distributor, Univar and its subsidiaries do not engage in research activities relating to the development of new products or the improvement of existing products.
Environmental Matters
See "The Environment" section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 17 of this filing.
ITEM 1. BUSINESS (Continued)
Employees
As of February 29, 1996, Univar and its subsidiaries had 3,237 full-time employees, of which 579 employees are members of various labor unions. At year end, the Corporation was in negotiations with three labor unions in connection with renewal of labor contracts. The Corporation generally enjoys good relations with its employees.
Backlog
The Corporation records revenues as orders are shipped. Due to the nature of the Corporation's business, no record of the backlog of orders is maintained.
EXECUTIVE OFFICERS OF THE REGISTRANT
(1) Family Relationships: James H. Wiborg and N. Stewart Rogers, directors of the Registrant, are brothers-in-law.
No arrangement or understanding exists between any officer and any other person pursuant to which he or she was elected as an officer.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation operates from 147 facilities; 99 in the United States, 18 in Canada, and 30 in Europe, with a total of approximately 4,962,000 square feet of office and warehouse space, (3,596,000 in the U.S., 826,000 in Canada, and 540,000 in Europe) of which 3,552,000 square feet is owned (82 facilities) and the remainder leased.
Listed below are the principal plants and physical properties of the Corporation and its subsidiaries used in the wholesale distribution of industrial, agricultural, and pest control chemicals. The Corporation believes its facilities are in good condition and adequate for its current operations.
VAN WATERS & ROGERS INC. Principal Facilities
ITEM 2. PROPERTIES (CONTINUED)
Other Van Waters & Rogers Inc. properties (owned or leased), which consist mainly of industrial warehouses and related office space:
ITEM 2. PROPERTIES (CONTINUED)
VAN WATERS & ROGERS LTD. Principal Facilities
Other Van Waters & Rogers Ltd. properties in Canada (owned or leased) which consist mainly of industrial warehouses and related office space:
Brandon, Manitoba Coaldale, Alberta Dartmouth, Nova Scotia Fort St. John, British Columbia Kelowna, British Columbia Red Deer, Alberta Regina, Saskatchewan Saskatoon, Saskatchewan
ITEM 2. PROPERTIES (CONTINUED)
UNIVAR EUROPE N.V. Principal Facilities
Other Univar Europe properties (owned or leased) which consist mainly of industrial warehouses and related office space:
Bergen, Norway Christchurch, United Kingdom Croydon, United Kingdom Empoli, Italy Exeter, United Kingdom Fredrikstad, Norway Gateshead, United Kingdom Glasgow, United Kingdom Helsinki (Kerava), Finland Manchester, United Kingdom Norrkiping (Fleminggatan), Sweden Scunthorpe, United Kingdom Tamworth, United Kingdom Venizia Mestre, Italy Ware, United Kingdom
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of its business, the Corporation is involved in numerous contractual, product liability, and public liability cases and claims. The liabilities for injuries to persons or property are frequently covered by liability insurance, and the deductible and self-insured portions of these liabilities, where applicable, have been accrued in the financial statements set forth at Item 8 below. See also "The Environment" section of Management's Discussion and Analysis in Item 7 of this filing.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Univar Corporation common stock is listed for trading on the New York Stock Exchange under the trading symbol UVX. The high and low sales prices for the Corporation's common stock for each quarter during the last two years as reported on the New York Stock Exchange follows:
Security Holders
As of February 29, 1996, the Corporation estimated there were approximately 6,800 beneficial shareholders.
Dividends
Quarterly cash dividends of $0.075 per share have been declared during each of the last eight quarters.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
For the Fiscal Years Ended February 29/28 (Thousands of dollars, except share data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS HIGHLIGHTS
Fiscal 1996 was a year distinguished by excellent performances by the Corporation's European and Canadian operations, but which were overshadowed by less than satisfactory operating results in the United States. At the beginning of the year in the United States, implementation activities relating to a major reengineering program were underway, which impacted core business processes as well as the network of warehouses and distribution centers. During the third and fourth quarters, following appointment of a new Chief Executive Officer and President of the Corporation and its U.S. subsidiary, the Corporation dropped certain of its reengineering initiatives as operations in the United States were not achieving many of the benefits anticipated from these activities. The Corporation revised its plans for dealing with operations in the United States, placing emphasis on a "back to basics" approach to sales and marketing coupled with decentralization of the organization structure.
For fiscal 1996, the Corporation had net income of $5.9 million compared with last year's loss of $16.3 million. Excluding a substantial one-time charge and other costs relating to the U.S. reengineering program, as well as a settlement gain recognized in the fourth quarter last year, comparable net income for fiscal 1995 would have totaled $3.9 million.
FISCAL 1996 COMPARED WITH FISCAL 1995
Sales for 1996 totaled $2.0 billion, an increase of 6.5% compared to 1995. Sales growth of less than 1% in the United States was hampered by the disruption caused by implementation of reengineering initiatives, and later, by strategic changes in the United States organizational structure.
Foreign markets served by the Corporation posted strong sales growth for the year. When measured in local currencies, sales were up 19% in Europe and 12% in Canada. During the year, the combination of European currencies in the markets served by Univar increased almost 7% against the U.S. dollar, while the Canadian dollar increased by less than 1%. The impact of favorable currency exchange rates accounted for approximately 21% of total sales growth for the Corporation.
The Corporation's sales were affected by inflation rates estimated at 2.2% and 4.6%, for 1996 and 1995, respectively.
Gross margin dollars for the current year increased by $7.2 million compared with the prior year. Gross margin percentage for 1996 was 13.8%, down from 14.3% for 1995. Margin percentage decreased in the United States and in Europe, and remained constant in Canada. In the United States, decreased margin percentage is attributable to a combination of increased transportation costs, decreased margins on certain products, and a change in the mix of products sold. The decrease in gross margin percentage in Europe reflects higher sales volumes of lower margin products, such as bulk and commodity chemicals.
Consolidated operating expenses, as a percentage of sales, including reengineering costs, were 12.5% for 1996 compared with 15.0% for 1995. In the United States, operating expenses, as a percentage of sales, exclusive of reengineering charges, dropped to 13.1% for 1996, down from 13.3% for 1995. The reduction is due primarily to reduced labor costs. Canadian operating expenses dropped to 8.0% of sales for 1996 compared with 8.4% of sales for 1995. European operating expenses decreased to 12.9% of sales compared with 14.0% in the prior year. Reductions in operating expenses, as a percentage of sales, in both Canada and Europe, are due primarily to continuing increased sales volumes.
During the third and fourth quarters of fiscal 1996, the Corporation revised certain of its reengineering estimates. The revisions stem from mid-course corrections in the Corporation's strategic direction, following appointment of a new Chief Executive Officer and President of the Corporation and its U.S. subsidiary. Estimate revisions include changes in the number and location of planned facility closures, equipment to be abandoned or liquidated, revised severance accruals, relocation costs, and other costs related to
decentralization of the Corporation's organizational structure. Costs arising in connection with estimate revisions were offset, in part, by reversal of a portion of reengineering accurals established in 1995.
At the beginning of the year, accruals pertaining to reengineering charges totaled $20.4 million. For the year, cash expenditures and non-cash accrual reductions totaled $4.9 million and $7.6 million, respectively. At year-end 1996, the remaining accruals pertaining to the revised estimates totaled $7.9 million.
Interest expense increased to $15.2 million, up from $12.0 million last year. Interest expense last year is net of a non recurring $0.8 million settlement achieved in fiscal 1995, as discussed below. The overall average interest rate was 8.1% for 1996 compared with 7.4% for 1995.
The Corporation has entered into certain interest rate swap agreements to manage its exposure to interest rate fluctuations. At February 29, 1996, the aggregate notional amount of these agreements totaled $50 million, with a weighted average remaining life of approximately 5 years. These agreements effectively convert a portion of the Corporation's floating rate debt to fixed rate debt with rates ranging from 6.77% to 7.25%. (See Note 3 to the financial statements.)
The Corporation provided for income taxes at an effective rate of 51.7% or $6.3 million, for fiscal 1996. In fiscal 1995, the Corporation recorded an income tax benefit of $8.0 million, at an effective rate of 34.0%. The change in the effective rate is due in part to a change in the mix of foreign and domestic income. The portion of taxable income subject to higher Canadian tax rates increased. Additionally, results for the prior year included settlement gains which were not subject to foreign taxes.
FISCAL 1995 COMPARED WITH FISCAL 1994
Sales for 1995 totaling $1.9 billion were up 6.1% compared to 1994, but were not reflective of the real growth experienced in each of the Corporation's continuing markets. In the United States, sales increased by 1.7%, despite the impact of legislation that resulted in a decline in the sales of chlorinated fluorocarbons and chlorinated solvents. These chemicals accounted for 2.1% of total sales during 1995, down from 3.5% in 1994. Excluding these products, sales in the United States grew by 5.1%
Foreign markets served by the Corporation posted strong sales growth for the year. When measured in local currencies, sales were up over 8% in Europe and more than 28% in Canada. However, due to changes in currency exchange rates, Canadian sales expressed in U.S. dollars did not reflect this real growth. The Canadian dollar dropped approximately 6% against the U.S. dollar. On the other hand, the combination of European currencies in the markets served by Univar increased approximately 2% against the U.S. dollar.
The Corporation's sales were affected by inflation rates estimated at 4.6% and 0.9%, for 1995 and 1994, respectively.
Gross margin dollars for fiscal 1995 increased by $4.1 million compared with fiscal 1994. Gross margin percentage for 1995 was 14.3%, down from 15.0% for 1994. Sales of lower margin agricultural chemicals increased to 5.3% of total sales, up from 4.1% in the prior year. The Corporation's business mix changed slightly compared with the fiscal 1994. Through-warehouse and direct sales accounted for approximately 78.0% and 20.4%, respectively, of total sales for fiscal 1995. Other sales, consisting primarily of ChemCare(R) services accounted for the remaining 1.6% of sales. In fiscal 1994, through-warehouse and direct sales accounted for approximately 76.9% and 21.3%, respectively, of total sales. Other sales accounted for the remaining 1.8% of sales. Along with the change in mix, margin percentages on both through-warehouse and direct sales decreased compared with fiscal 1994. Margin percentage on ChemCare services increased slightly compared with fiscal 1994.
Consolidated operating expenses, as a percentage of sales, including reengineering costs, were 15.0% for 1995 compared with 13.7% for 1994. In the United States, operating expenses, as a percentage of sales, exclusive of reengineering charges, remained constant at 13.3% for 1995 and 1994. Canadian operating expenses dropped to 8.4% of sales for 1995 compared with 9.8% of sales for 1994. European operating
expenses decreased to 14.0% of sales compared with 14.6% in fiscal 1994. Reductions in operating expenses, as a percentage of sales, in both Canada and Europe were due primarily to continuing increased sales volumes.
Beginning in the second quarter of fiscal 1994, the Corporation began work on a strategic business transformation of its U.S. operating company. As a result of this effort, at the end of the second quarter of fiscal 1995, the Corporation announced its plans to reorganize the U.S. operating company, redesign its distribution network, develop a national procurement and materials management strategy, increase sales force efficiency, improve gross margins, and reduce the amount of capital required to conduct ongoing operations. In support of this effort, during fiscal 1995 the Corporation recorded pretax reengineering charges of $37.4 million.
At February 28, 1995, the remaining accruals pertaining to the reengineering charges totaled $20.4 million. For the year, cash expenditures and non-cash accrual reductions totaled $14.6 million and $2.4 million, respectively.
Interest expense, which is net of $0.8 million pertaining to a settlement achieved as discussed below, decreased to $12.0 million for 1995 compared with $12.9 million for 1994. The overall average interest rate was 7.4% for 1995 compared with 7.7% for 1994.
The Corporation recorded an income tax benefit of $8.0 million in fiscal 1995, compared with income tax expense of $4.4 million in fiscal 1994. The Corporation's effective income tax rate was 34.0 % in fiscal 1995 compared with 43.0% for 1994. The change in the effective rate for fiscal 1995 was due to a change in the mix of domestic and foreign income coupled with higher Canadian tax rates compared with U.S. rates, and to settlement gains which were not subject to foreign taxes.
FISCAL 1995 SETTLEMENT ACHIEVED
In fiscal 1992, Univar Europe executed a foreign currency denominated note (U.S. dollar equivalent of $6.8 million) in connection with certain business acquisitions. The note was contingently payable in June 1995, or could be deferred until December 1998 if the seller did not achieve certain minimum net worth requirements by December 1994. In accordance with contract provisions, the seller agreed to provide indemnification to Univar Europe for certain environmental and other undisclosed contingencies that may have existed as of the acquisition date. Univar Europe had the right to offset these liabilities against the note's principal balance. Univar Europe had also agreed to pay additional consideration, in the minimum amount of $1.8 million, which was non-interest bearing and payable in 1995.
Shortly after the acquisition, the Corporation began negotiations with the seller to settle certain disputes regarding acquisition asset values and other claims. When the seller subsequently entered bankruptcy, the seller's largest secured creditor, a Swedish bank, was appointed the receiver in bankruptcy for the seller's assets, liabilities and contingent obligations. In addition to the original claims and disputes with the seller, certain disputes also arose with the receiver, due to its handling of the seller's bankruptcy proceedings and the attachment of certain of Univar Europe's assets.
The Corporation and the receiver reached a settlement of all claims, counterclaims and disputes on October 31,1994. As part of the settlement agreement, the note plus accrued interest and the additional consideration discussed above were satisfied. A settlement gain totaling $3.0 million, net of related costs, was recorded as a recovery of representations and warranties pertaining to environmental costs ($0.9 million), interest ($0.8 million) and damages caused by the receiver's actions as part of the bankruptcy proceedings ($1.3 million). Univar Europe is consolidated using its financial year-end, December 31. Accordingly, recognition of the settlement gain was included in the Corporation's fourth quarter of fiscal 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued FASB Statement No. 123, "Accounting for Stock-Based Compensation." The Company plans to continue to measure compensation cost of employee
stock option plans using the intrinsic value method prescribed by APB Opinion No. 25, and starting in fiscal 1997, to make pro forma disclosures of net income and earnings per share as if the fair value method prescribed by FASB No. 123 had been applied.
In the fourth quarter of fiscal 1996, the Corporation adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. This Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Adoption of FASB No. 121 had no impact on the Corporation's results of operations or financial position.
In the first quarter of fiscal 1995, the Corporation adopted FASB Statement No. 112, "Employers' Accounting for Postemployment Benefits." Postemployment benefits are all types of benefits, other than retirement benefits, provided to former or inactive employees, their beneficiaries and covered dependents. These benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability related benefits (including workers' compensation), job training and counseling, and continuation of benefits such as health care benefits and life insurance coverage. Under this statement, the cost of postemployment benefits is recognized on an accrual basis. The adoption of this statement did not materially increased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations totaled $19.1 million for the current year, compared with $15.9 million for fiscal 1995, and $35.4 million for fiscal 1994. The reduction in operating cash flows for fiscal 1996 and 1995 compared with fiscal 1994 was due primarily to costs of the U.S. reengineering efforts. Cash provided by operations was used in part to finance the Corporation's capital expenditures and pay dividends.
The Corporation has domestic and foreign short-term credit lines totaling $105.9 million, of which $56.4 million was available at fiscal year-end 1996. The Corporation and its domestic and Canadian subsidiaries are parties to a medium-term revolving credit agreement with a group of banks which provide up to $195 million in available borrowings, of which $80 million was available at February 29, 1996.
During the year, the foreign subsidiaries of the Corporation entered into a multi-currency revolving credit agreement with a group of banks. Under the terms of the agreement, which is guaranteed by the Corporation, the borrowers may borrow up to the U.S. dollar equivalent of $90 million, of which $76.9 was available at February 29, 1996.
Total short, medium, and long-term borrowings at fiscal year-end 1996 were $188.7 million, compared with $162.3 million at the end of fiscal 1995. (See Notes 2 and 3 to the financial statements.) The ratio of interest bearing debt to equity, which the Corporation has targeted at 1:1 historically, was 1.05:1 at the end of the current year, up from 0.92:1 at the end of the prior year.
The Corporation believes its internally generated cash, together with its access to available worldwide bank lines, will be adequate to cover anticipated liquidity requirements.
Working capital, excluding cash and cash equivalents and short-term borrowings, totaled $112.3 million at the end of fiscal 1996, compared with $97.4 million at the end of fiscal 1995. At fiscal year-end 1996, the ratio of current assets to current liabilities was 1.19:1 compared to 1.23:1 at fiscal year-end 1995. The increase in working capital resulted in part from an acquisition in the United Kingdom and in part from growth in sales in both Canada and Europe.
EXERCISE OF DOW PUT AGREEMENT
On June 24, 1991, the Corporation and The Dow Chemical Company ("Dow") entered into an Agreement of Purchase and Sale of Stock (the "Dow Purchase Agreement"). In accordance with the Dow Purchase
Agreement, Univar sold 1,900,000 shares of its common stock to Dow at a price of $15.84 per share. In addition, Univar reserved the right to put to Dow between approximately 2,500,000 and 2,900,000 additional shares of common stock at a price that escalated over time, but which reached a maximum price of $18.74 per share. The number of additional shares that could be sold depended on whether Pakhoed Investeringen B.V. ("Pakhoed") exercised its right to acquire shares from Univar at the same price as they were sold to Dow in order for Pakhoed to maintain its percentage share ownership in Univar. Pakhoed elected not to exercise its right to acquire additional shares. Therefore, based on the manner in which the calculation of the number of additional shares to be sold was made, the actual maximum number of shares that Univar could put to Dow was 2,509,371. In lieu of the unilateral right of Univar to put these shares of common stock to Dow, on May 13, 1994, Univar and Dow executed an Amended and Restated Agreement of Purchase and Sale of Stock (the "Amended Agreement").
Under the terms of the Amended Agreement, Dow purchased from Univar 2,000,000 shares of common stock at a price of $18.74 per share (a total purchase price of $37,480,000). Dow now holds 3,900,000 shares of common stock representing 17.89% of the issued and outstanding shares of Univar. In addition, Dow and Univar have agreed that, at any time within the period ending May 12, 1997, Univar can put to Dow, or Dow can call, up to 101,874 shares of Series A Convertible Preferred Stock. The price per share will be $93.70. Each share of Series A Convertible Preferred Stock is convertible, by either Dow or Univar, into five shares of common stock. In the event of a call or put, either all or half the 101,874 shares must be called by Dow or put by Univar. With respect to the conversion of the Series A Convertible Preferred Stock into Univar common stock, Univar has agreed that it will not convert the preferred shares if, following the conversion, Dow would own in excess of 19.9% of the issued and outstanding common stock of the Corporation. Dow has agreed that it will pay to Univar $350,000 per year for each of the three years ending May 12, 1995, 1996, and 1997, in the event Univar does not elect to put the Series A Convertible Preferred Stock to Dow, or in the event Dow does not call the Series A Convertible Preferred Stock.
DIVIDENDS AND RETURN ON EQUITY
Cash dividends declared and paid during the year totaled $0.30 per share, unchanged from the two prior years. Return on beginning equity for the past three years has varied, with a 3.3% return for fiscal 1996 and 1994, and a 10.3% negative return for fiscal 1995.
BUSINESS ACQUISITIONS
At the end of fiscal 1996, the Corporation acquired a company located in the United Kingdom with annual revenues of approximately $70 million. The acquisition included equity shares with a total value of $16.0 million. Funding for the acquisition was provided from credit line borrowings. The newly acquired operations were consolidated with the Corporation's existing operations in the United Kingdom.
At the time of the organization of Univar Europe in 1991, Univar and its then 31% shareholder, Pakhoed, entered into a Shareholder Agreement resulting in the formation of Univar Europe, which was incorporated in the Netherlands in 1990. At the time Univar Europe was capitalized, it was 51% owned by the Corporation and 49% owned by Pakhoed. On September 1, 1994 the Corporation acquired the minority shareholder's 49% interest in Univar Europe, in accordance with the terms of the Shareholder Agreement. The acquisition included equity shares and subordinated debt with a total value of $25.8 million. Funding for this aggregate purchase price was provided through the sale of 2 million shares of the Corporation's common stock to The Dow Chemical Company as described above.
During fiscal 1995, the Corporation completed an acquisition in Europe. The acquired company had annual revenues of approximately $6.5 million. The aggregate purchase price was $3.2 million, consisting of fixed assets, inventories, and customer lists.
See Note 11 to the financial statements for sales and other operations data by geographic area.
CAPITAL EXPENDITURES
Capital expenditures for fiscal 1996 totaled $22.5 million. Capital expenditures include normal additions, upgrades, and expansions of offices, plants, delivery equipment, and similar items. Capital expenditures during fiscal 1995 and 1994 totaled $23.0 million and $14.0 million, respectively. Capital expenditures for fiscal 1997 are projected to be approximately $40 million, which includes plans for two new warehouse facilities.
THE ENVIRONMENT
The Corporation is subject to a variety of environmental laws and regulations and faces exposure from actual or potential claims and legal proceedings involving environmental matters. The Corporation or related entities have been contacted by various governmental agencies regarding potential liability for a share of the cost of clean up of independent waste disposal or recycling sites with alleged or confirmed contaminated soil and/or groundwater to which the Corporation or related entities may have taken waste products. With regard to many of these sites, the Corporation has denied liability because of an absence of any connection between the Corporation or related entities and the waste disposal or recycling site. The Corporation believes there are twenty-eight sites in which the Corporation may be liable for a share of the cost of clean up. With the exception of one site, at those sites which show some alleged evidence of an association between the Corporation or related entities and the waste disposal or recycling site, the Corporation is considered a de minimis, or small quantity, "potentially responsible party." The Corporation estimates the probable liability for the remediation of independent waste disposal sites totals $1.7 million, which is included in the Corporation's environmental accrual. Possible costs for these sites could range up to $3.0 million.
Forty-three owned, previously owned, or leased sites of the Corporation are currently undergoing remediation efforts or are in the process of active review of the need for potential remedial efforts. Some of these efforts are being conducted pursuant to governmental proceedings or investigations, while others are being conducted voluntarily by the Corporation, with appropriate state or federal agency oversight and approval. The following table shows additions to and expenditures charged against the Corporation's environmental accruals during the past three fiscal years:
Annual cash expenditures for remedial, monitoring and investigatory activities have averaged approximately $4.4 million during the past three years. In addition, annual cash expenditures for environmental capital expenditures have averaged $1.0 million. While the Corporation does not anticipate a material increase in the projected annual level of its environmental related expenditures, there is the possibility that such increases may occur in the future. The precision of the Corporation's environmental estimates is affected by several uncertainties such as the developments at sites that result from investigatory studies; the extent of required cleanup; the complexity of applicable government laws and regulations and their interpretations; the varying costs and effectiveness of alternative cleanup technologies and methods; the uncertainty concerning recovery of such costs from third-parties which may be jointly liable; and the questionable level of the Corporation's involvement at various sites at which the Corporation is allegedly associated. The Corporation periodically reviews the status of all significant existing or potential environmental issues and adjusts its accruals as new remediation requirements are defined, as information relevant to reasonable estimates to be made becomes available, and to reflect new and changing facts. The accruals do not reflect any possible future insurance recoveries.
Although the Corporation believes adequate accruals have been provided for environmental contingencies, it is possible, due to the uncertainties previously noted, that additional accruals could be required in the future that could have a material effect on the results of operations in a particular quarter or annual period. However,
the ultimate resolution of these contingencies, to the extent not previously provided for, is not expected to have a material adverse effect on the Corporation's financial position.
STOCK PRICE
During the fiscal year ended February 29, 1996, the price of Univar common shares ranged between a high of $16.25 on September 20, 1995, and a low of $9.88 per share on December 19, 1995. The range, on a fiscal quarter by quarter basis is presented in Part II, Item 5.
The closing price on the New York Stock Exchange at February 29, 1996 was $10.63 per share, down from $12.63 per share a year earlier and down from $11.25 at the end of 1994. The S&P 500 Index for the same dates was 640.43, 487.39 and 467.14, respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended February 29/28 (Thousands of dollars, except per share amounts)
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended February 29/28 (Thousands of dollars)
The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation and all of its majority-owned domestic and foreign subsidiaries, after elimination of significant intercompany accounts and transactions.
The Corporation's 100% owned subsidiary, Univar Europe N.V. (Univar Europe), is consolidated using its financial year-end, December 31.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results are likely to differ from those estimates and it is possible the difference may be significant.
REVENUE RECOGNITION
The Corporation records revenues as orders are shipped.
INVENTORIES
Inventories consist primarily of finished goods. The methods of valuation of inventories at the balance sheet dates were as follows:
If the inventories valued on the last-in, first-out (LIFO) method had been valued at average costs, they would have been $34.4 million and $32.0 million higher than reported at year-end 1996 and 1995, respectively.
During fiscal 1995, the Corporation experienced decreases in certain LIFO inventories that were carried at lower costs prevailing in prior years. The effect of these decreases was to increase earnings before income taxes by approximately $1.4 million in fiscal year 1995.
PROPERTY, PLANT, & EQUIPMENT
Expenditures for property, plant, and equipment and for renewals and betterments that extend the originally estimated economic lives of assets are capitalized at the related cost. Expenditures for maintenance, repairs, and other renewals are charged to expense. Gain or loss is recognized for dispositions. For financial reporting purposes, depreciation has been provided using the straight-line method over the estimated useful lives of the related assets which range from three to forty years. For income tax purposes, depreciation on certain assets is computed using accelerated methods. Interest cost of approximately $0.4 million for fiscal year 1995 was capitalized to the cost of new assets.
Costs incurred in developing or purchasing management information systems are capitalized and included in property, plant, and equipment. These costs are depreciated over their estimated useful lives from the date the systems become operational.
INTANGIBLE ASSETS
Intangible assets, which consist of goodwill and covenants not to compete, are amortized using the straight-line method over their estimated useful lives, typically not more than twenty and ten years, respectively.
ENVIRONMENT
Accruals for contamination removal costs are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accruals for such environmental liabilities are included in the balance sheet caption "Other Liabilities and Deferred Credits." Accruals for insurance or other third-party recoveries for environmental costs are recorded when it is probable that recoveries on the claim will be realized.
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Costs related to investigation of potential environmental matters are expensed as incurred.
SELF-INSURANCE RESERVES
The Corporation retains certain exposures in its insurance plan under various deductible or self-insured programs. Reserves for claims made are recorded at estimated costs as current liabilities. Reserves for estimated claims incurred but not yet reported are recorded as other long-term liabilities.
INCOME TAXES
Taxes on income are calculated using the asset and liability method which results in recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using enacted rates. The principal differences between financial and tax reporting arise from depreciation, self-insurance, reengineering, restructuring and other accruals and reserves, pension accruals, alternative minimum tax credits, foreign tax credits, and net operating loss carryforwards. Accumulated undistributed earnings after taxes for the Canadian subsidiary amounted to approximately $74 million at February 29, 1996. The European subsidiaries have accumulated undistributed earnings of approximately $9 million at February 29, 1996. No provision for foreign withholding or United States federal income taxes is necessary, as it is management's intention that dividends will be paid only under circumstances which will not generate additional net tax cost.
MINORITY INTEREST
The Corporation acquired the minority shareholder's 49% interest in Univar Europe during fiscal 1995, as described in Note 8.
FAIR VALUE
The carrying value of financial instruments approximates fair value, unless otherwise disclosed. Fair values have been estimated using available market prices for similar issues and maturities.
TRANSLATION OF FOREIGN CURRENCY
Local currencies have been used as the functional currency throughout the world. The balance sheet accounts of foreign subsidiaries are translated using the exchange rates in effect at their respective years-end. Results of operations are translated using the average exchange rates prevailing throughout the periods. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as the cumulative translation adjustment in shareholders' equity. Realized gains and losses from foreign currency transactions are included in net income for the period.
DERIVATIVES
The Corporation has limited involvement with derivative financial instruments and does not use them for trading purposes. Derivatives are used to manage well-defined interest rate and foreign exchange risks. Interest rate swaps are entered into with major banks in which the Corporation pays a floating rate and receives a fixed rate with interest payments being calculated on a notional amount, as described in Note 3. Amounts received or paid by the Corporation at the settlement dates under the swap agreements are included in interest expense. Forward foreign exchange contracts are used to hedge fluctuations in prices on inventory purchases caused by changes in exchange rates and as hedges for foreign denominated accounts receivable and payable. Foreign exchange contracts have gains and losses recognized at the settlement date. The use of derivatives does not have a significant effect on the Corporation's results of operations or its financial position.
EARNINGS PER SHARE
Net income (loss) per common share is based on the weighted average number of shares outstanding during each year (21,700,672 for 1996, 21,345,622 for 1995, and 19,703,273 for 1994 ). There is no material dilution due to outstanding stock options.
STATEMENTS OF CASH FLOWS
The Corporation considers cash on hand, certificates of deposit, and short-term marketable securities with maturities of less than 90 days, as cash and equivalents for purposes of the statements of cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued FASB Statement No. 123, "Accounting for Stock-Based Compensation." The Company plans to continue to measure compensation cost of employee stock option
plans using the intrinsic value method prescribed by APB Opinion No. 25, and starting in fiscal 1997, to make pro forma disclosures of net income and earnings per share as if the fair value method prescribed by FASB No. 123 had been applied.
During the fourth quarter of fiscal 1996, the Corporation adopted FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. This Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Adoption of FASB No. 121 had no impact on the Corporation's results of operations or financial position.
NOTE 2 - NOTES PAYABLE
As of February 29, 1996, the Corporation has domestic and foreign short-term lines of credit totaling $105.9 million, with loans against these bank lines of $49.5 million. The approximate average aggregate short-term borrowing and weighted average short-term interest rates were $57.6 million and 6.6% in 1996, and $50.6 million and 5.8% in 1995. The maximum amount of short-term borrowing during the year was $71.0 million in 1996 and $75.4 million in 1995.
NOTE 3 - LONG-TERM DEBT AND REVOLVING CREDIT
Long-term debt consists of the following at February 29/28:
Maturities of long-term debt for the fiscal years ending 1998-2001 are as follows:
The Corporation and its domestic subsidiary are parties to a revolving credit agreement with a group of banks. Under the terms of the agreement, the borrowers may borrow up to $195 million at the prime rate, certificate of deposit rate plus 7/8%, or LIBOR (London Interbank Offering Rate) plus 7/8%, at the Corporation's option. The interest rates in effect were 6.59% and 7.04% as of year-end 1996 and 1995, respectively. The credit commitment extends for three years, with annual one year renewals, thereafter. In addition, the agreement requires fees of 1/4% on unused commitments.
During the year, the foreign subsidiaries of the Corporation entered into a multi-currency revolving credit agreement with a group of banks. Under the terms of the agreement, which is guaranteed by the Corporation and its U.S. subsidiary, the borrowers may borrow up to the U.S. dollar equivalent of $90 million at the U.S. prime rate or the Canadian B/A rate plus 5/8%, for Canadian dollar loans, or LIBOR plus 5/8% for loans in all other authorized currencies, at the borrower's option. The weighted average interest rate in effect as of year-end 1996 was 5.4%. The credit commitment extends for three years, with annual one year renewals. In addition, the agreement requires fees of 1/4% per annum on the total commitment amount.
The long-term debt instruments include provisions specifying current ratio, interest bearing debt to equity ratios, and a minimum equity level, among other restrictions. Under the most restrictive of the financial covenants, the Corporation's current ratio, as defined, may not fall below 1.20:1; the ratio of total interest bearing debt, as defined, to equity may not exceed 1.40:1; and the Corporation's shareholders' equity may not be less than $156.4 million. At year end, the Corporation was in compliance with all loan covenants.
The Corporation has entered into certain interest rate swap agreements to manage its exposure to interest rate fluctuations. At February 29, 1996, the aggregate notional amount of these agreements totaled $50 million, with a weighted average remaining life of approximately 5 years. These agreements effectively convert a portion of the Corporation's floating rate debt to fixed rate debt with rates ranging from 6.77% to 7.25% The estimated aggregate fair value of the contracts, as measured by the amount the Corporation would have paid if the agreements were terminated at the balance sheet date, was approximately $1.9 million. The Corporation is exposed to, but does not anticipate, credit loss in the event of counterparty nonperformance.
NOTE 4 - LEASES
Rental expense was $25.2 million, $24.1 million, and $23.2 million, for 1996, 1995, and 1994, respectively. The Corporation and its subsidiaries occupy certain leased premises and lease certain other equipment. Leases that qualify as capital leases have been capitalized. The amount of such capitalized leases included in property, plant, and equipment and the related accumulated amortization was $6.7 million and $2.4 million in 1996, and $5.2 million and $2.3 million in 1995. Lease amortization is included in depreciation expense.
Future minimum lease payments as of year-end under capital leases and non-cancelable operating leases, having initial lease terms of more than one year, are as follows:
The present value of the capital lease payments is presented in the 1996 balance sheet as long-term debt.
NOTE 5 - REENGINEERING CHARGES
In the second quarter of fiscal 1994, the Corporation began work on a strategic business transformation of its U.S. operating company. As a result of this effort, at the end of the second quarter of fiscal 1995, the Corporation announced its plans to reorganize the U.S. operating company, redesign its distribution network, develop a national procurement and materials management strategy, increase sales force efficiency, improve gross margins, and reduce the amount of capital required to conduct ongoing operations. In support of this effort, during fiscal 1995 the Corporation recorded pretax reengineering charges of $37.4 million, which included severance and other
employee benefits, facility closure costs, consultant fees, project travel costs and write-down to fair value of certain facilities.
At year end 1995, the remaining accruals relating to reengineering charges totaled $20.4 million. For that year, cash expenditures and non-cash accrual reductions totaled $14.6 million and $2.4 million, respectively.
During the third and fourth quarters of fiscal 1996, the Corporation revised certain of its reengineering estimates. The revisions stem from mid-course corrections in the Corporation's strategic direction, following appointment of a new Chief Executive Officer and President of the Corporation and its U.S. subsidiary. Estimate revisions include changes in the number and location of planned facility closures, equipment to be abandoned or liquidated, revised severance accruals, relocation costs, and other costs related to decentralization of the company's organizational structure. Costs arising in connection with estimate revisions were offset, in part, by reversal of a portion of reengineering accruals established in 1995.
At year end 1996, the remaining accruals pertaining to the revised estimates totaled $7.9 million. For the year, cash expenditures and non-cash accrual reductions totaled $4.9 million and $7.6 million, respectively.
NOTE 6 - TAXES ON INCOME
The components of income (loss) before income taxes and minority interest were as follows:
The provision for (benefit of) taxes on income (loss) consisted of the following components:
Deferred tax balances consisted of the following temporary differences at February 29/28:
The accompanying financial statements reflect effective tax (benefit) rates of 51.7% in 1996, (34.0%) in 1995, and 43.0% in 1994. An analysis of the differences between these rates and the Federal statutory rate is set forth below:
The Corporation's federal income tax returns are closed for all years up to 1988. The Corporation has U.S. federal tax net operating loss carry-overs totaling $11.2 million, which expire in 2011. In addition, the Corporation has alternative minimum tax credit carry-overs totaling $6.5 million, which have no carry-over limitation period. Research and experimentation credit carry-overs total $0.5 million and expire through 2007. Charitable contribution carry-overs total $1.8 million and expire through the year 2001.
NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS
PENSION BENEFITS
The Corporation and its subsidiaries have defined benefit pension plans covering substantially all employees in the U.S., Canada, and the United Kingdom, excluding those employees covered by unions that operate plans independent of the Corporation or its subsidiaries. The Corporation's funding policy is to contribute annually amounts that provide for benefits attributed to service to date and benefits expected to be earned during the plan year, based on the projected final average compensation and where pension laws or economics either require or encourage funding.
The U.S. funded plan is the largest plan. Its benefits are based on length of service and the employee's highest five-year average compensation. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations was 5% and 6%, respectively for 1996 and 1995. The expected long-term rate of return on plan assets was 10% for both 1996 and 1995. The weighted average discount rate used was 7.8% and 8.8%, for 1996 and 1995, respectively. The market value of assets, consisting primarily of cash equivalents and equity securities is as reported by the trustee bank serving the pension plan.
Employees of non-U.S. subsidiaries generally receive pension benefits from corporate sponsored plans or from statutory plans administered by governmental agencies in their countries. Corporate sponsored foreign plans have applied the provisions of Statement of Financial Accounting Standards No. 87 using assumptions that are similar to those utilized for the U.S. plans.
The status of the Corporation's funded defined benefit plans is as follows:
The status of the Corporation's unfunded defined benefit plans is as follows:
Net periodic pension expense for all defined benefit plans sponsored by the Corporation and its subsidiaries includes the following components:
Certain employees are covered under union-sponsored, collectively bargained, defined benefit plans. Expenses for these plans were $0.9 million in 1996 and 1995 and $0.8 million in 1994, as determined in accordance with negotiated labor contracts.
Provisions of the Multi-Employer Pension Amendments Act of 1980 require participating employers to assume a proportionate share of a multi-employer plan's unfunded, vested benefits in the event of withdrawal from or termination of such plan. Information concerning the Corporation's share of unfunded, vested benefits is not available from plan administrators. Provisions of the Act may have the effect of increasing the level of contributions in future years.
OTHER POST RETIREMENT BENEFITS
In addition to providing pension benefits, in the United States, the Corporation provides certain health care benefits to its retired employees. The plan provides health care benefits including hospital, physicians', dentists', and eye care services and major medical expense benefits. The plan provides benefits supplemental to Medicare after retirees are eligible for these benefits. The cost of the benefits provided are shared by the Corporation and the retiree, with the Corporation portion increasing as the retiree has increased years of credited service. The Corporation has the ability to change these benefits at any time.
The retiree health care cost provision was $1.5 million and $1.9 million for fiscal 1996 and 1995, respectively. The components of the expense were as follows:
Benefit costs were calculated based on assumed cost growth for retiree health care costs of a 14.0% annual rate for 1997, decreasing to a 6.0% annual growth rate over a nine year period. The health care cost trend rate assumed has a significant effect on the amount reported. To illustrate, increasing the assumed medical cost trend rate by 1 percentage point would increase the accumulated postretirement benefit obligation at February 29, 1996 by $2.1 million and the net periodic postretirement benefit cost for the year by $0.2 million. The accumulated retiree health care obligation at fiscal year end 1996 and 1995 was determined using a weighted average discount rate of 8.2% and 9.2%, respectively.
The accumulated retiree health care obligation at February 29/28 consisted of the following components:
NOTE 8 - BUSINESS ACQUISITIONS
At the end of fiscal 1996, the Corporation acquired a company located in the United Kingdom with annual sales revenues of approximately $70 million. The acquisition included equity shares with a total value of $16.0 million. Funding for the acquisition was provided from credit line borrowings. The newly acquired operations were consolidated with the Corporation's existing operations in the United Kingdom.
At the time of the organization of Univar Europe in 1991, Univar and its then 31% shareholder, Pakhoed Investeringen B.V. (Pakhoed), entered into a Shareholder Agreement resulting in the formation of Univar Europe, which was incorporated in the Netherlands in 1990. At the time Univar Europe was capitalized, it was 51% owned by the Corporation and 49% owned by Pakhoed. On September 1, 1994 the Corporation acquired the minority shareholder's 49% interest in Univar Europe, in accordance with the terms of the Shareholder Agreement. The acquisition included equity shares and subordinated debt with a total value of $25.8 million. Funding for this aggregate purchase price was provided through the sale of 2 million shares of the Corporation's common stock to The Dow Chemical Company (Dow) as described in Note 9.
During fiscal 1995, the Corporation completed an acquisition in Europe. The acquired company had annual revenues of approximately $6.5 million. The aggregate purchase price was $3.2 million, consisting of fixed assets, inventories and customer lists.
NOTE 9 - COMMON STOCK TRANSACTIONS
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
The Corporation's long-term incentive stock plans (the Plans) provide for the granting of non-qualified stock options, incentive stock options, and restricted stock awards, to non-employee directors, officers, and key employees. For incentive stock options, the option price may not be less than the fair market value of the common stock at the date of grant. Non-qualified stock options may be granted at less than the fair market value of the common stock. Options may be exercisable as determined by the committee of the Board of Directors that administers the Plans.
Under the 1993 Non-Employee Director Stock Option Plan, options become exercisable six months after grant or upon termination of service to the Board, whichever is earlier, and expire three months to five years after termination of service to the Board, depending on the circumstances of retirement.
Under the 1992 Long-Term Incentive Plan (LTIP), options become exercisable at the earlier of ten years after date of grant, or beginning 3 years after the date of grant, based on the Corporation's performance compared with performance of a selected peer group. Options typically expire 10 years and 3 months after the date of grant. Certain recipients of grants under the 1992 LTIP are also entitled to receive, subject to achievement of specified Corporation performance compared with the selected peer group, cash incentives equivalent to the tax adjusted exercise price of the options,.
Under the 1986 and 1995 Long-Term Incentive Stock Plans, options become exercisable at the rate of 20% per year beginning two years after the date of grant, and expire ten years after the date of grant.
Restricted Stock Awards (RSA's) may be granted or sold to officers and key employees. RSA's may not be sold or otherwise disposed of during the established restriction periods, presently up to six years. At the end of fiscal 1995, RSA's totaling 142,293 shares were held for the benefit of certain executive and other officers in connection with an incentive compensation arrangement. Vesting of these RSA's and payment of the related dividends were subject to performance criteria which were not achieved.
Unamortized deferred stock compensation expense related to RSA's granted of approximately $4,000 and $74,000, is classified as such in the shareholders' equity section of the Corporation's balance sheet for 1996 and 1995, respectively.
The Compensation Committee of the Board of Directors may, at its discretion, determine the number of shares, the purchase price, applicable vesting periods, and any other terms of each option or award. Options and awards include provisions for acceleration of such applicable vesting periods in the event of certain transactions that may result in a change of control of the Corporation.
The following table summarizes activity in the Plans:
PUT AGREEMENT WITH THE DOW CHEMICAL COMPANY
On June 24, 1991, the Corporation and The Dow Chemical Company ("Dow") entered into an Agreement of Purchase and Sale of Stock (the "Dow Purchase Agreement"). In accordance with the Dow Purchase Agreement, Univar sold 1,900,000 shares of its common stock to Dow at a price of $15.84 per share. In addition, Univar reserved the right to put to Dow between approximately 2,500,000 and 2,900,000 additional shares of common stock at a price that escalated over time, but which reached a maximum price of $18.74 per share. The number of additional shares that could be sold depended on whether Pakhoed Investeringen B.V. (Pakhoed) exercised its right to acquire shares from Univar at the same price as they were sold to Dow in order for Pakhoed to maintain its percentage share ownership in Univar. Pakhoed elected not to exercise its right to acquire additional shares. Therefore, based on the manner in which the calculation of the number of additional shares to be sold was made, the actual maximum number of shares that Univar could put to Dow was 2,509,371. In lieu of the unilateral right of Univar to put 2,509,371 shares of common stock to Dow, on May 13, 1994, Univar and Dow executed an Amended and Restated Agreement of Purchase and Sale of Stock (the "Amended Agreement").
Under the terms of the Amended Agreement, Dow purchased from Univar 2,000,000 shares of common stock at a price of $18.74 per share (a total purchase price of $37,480,000). Dow now holds 3,900,000 shares of common stock representing 17.89% of the issued and outstanding shares of Univar. In addition, Dow and Univar have agreed that, at any time within the period ending May 12, 1997, Univar can put to Dow, or Dow can call, up to 101,874 shares of Series A Convertible Preferred Stock. The price per share will be $93.70. Each share of Series A Convertible Preferred Stock is convertible into five shares of common stock by either Dow or Univar. In the event of a call or put, either all or half the 101,874 shares must be called by Dow or put by Univar. With respect to the conversion of the Series A Convertible Preferred Stock into Univar common stock, Univar has agreed that it will not convert the preferred shares if, following the conversion, Dow would own in excess of 19.9% of the issued and outstanding common stock of the Corporation. Dow has agreed that it will pay to Univar $350,000 per year for each of the three years ending May 12, 1995, 1996, and 1997, in the event Univar does not elect to put the Series A Convertible Preferred Stock to Dow, or in the event Dow does not call the Series A Convertible Preferred Stock.
NOTE 10 - LITIGATION AND CONTINGENCIES
Because of the nature of its business, the Corporation is involved in numerous contractual, product liability, and public liability cases and claims. The liabilities for injuries to persons or property are frequently covered by liability insurance, and the deductible and self-insured portions of these liabilities, where applicable, have been accrued in these financial statements.
The Corporation is subject to a variety of environmental laws and regulations and faces exposure from actual or potential claims and legal proceedings involving environmental matters. The Corporation or related entities have been contacted by various governmental agencies regarding potential liability for a share of the cost of clean up of independent waste disposal or recycling sites with alleged or confirmed contaminated soil and/or groundwater to which the Corporation or related entities may have taken waste products. With regard to many of these sites, the Corporation has denied liability because of an absence of any connection between the Corporation or related entities and the waste disposal or recycling site. The Corporation believes there are twenty-eight in which the Corporation may be liable for a share of the cost of clean up. With the exception of one site, those sites which show some alleged evidence of an association between the Corporation or related entities and the waste disposal or recycling site, the Corporation is considered a de minimis, or small quantity, "potentially responsible party." The Corporation estimates the probable liability for the remediation of independent waste disposal sites totals $1.7 million, which is included in the Corporation's environmental accrual. Possible costs for these sites could range up to $3.0 million.
Forty-three owned, previously owned, or leased sites of the Corporation are currently undergoing remediation efforts or are in the process of active review of the need for potential remedial efforts. Some of these efforts are being conducted pursuant to governmental proceedings or investigations, while others are being conducted voluntarily by the Corporation, with appropriate state or federal agency oversight and approval. The following table shows additions to and expenditures charged against the Corporation's environmental accruals during the past three fiscal years:
Annual cash expenditures for remedial, monitoring, and investigatory activities have averaged approximately $4.4 million during the past three years. In addition, annual cash expenditures for environmental capital expenditures have averaged $1.0 million. While the Corporation does not anticipate a material increase in the projected annual level of its environmental related expenditures, there is the possibility that such increases may occur in the future. The precision of the Corporation's environmental estimates is affected by several uncertainties such as the developments at sites resulting from investigatory studies; the extent of required cleanup; the complexity of applicable government laws and regulations and their interpretations; the varying costs and effectiveness of alternative cleanup technologies and methods; the uncertainty concerning recovery of such costs from third-parties which may be jointly liable; and the questionable level of the Corporation's involvement at various sites at which the Corporation is allegedly associated. The Corporation periodically reviews the status of all significant existing or potential environmental issues and adjusts its accruals as new remediation requirements are defined, as information relevant to reasonable estimates to be made becomes available, and to reflect new and changing facts. The accruals do not reflect any possible future insurance recoveries.
Although the Corporation believes adequate accruals have been provided for environmental contingencies, it is possible, due to the uncertainties previously noted, that additional accruals could be required in the future that could have a material effect on the results of operations in a particular quarter or annual period. However, the ultimate resolution of these contingencies, to the extent not previously provided for, is not expected to have a material adverse effect on the Corporation's financial position.
At year end 1996, the Corporation had letters of credit outstanding totaling approximately $8.1 million, which guaranteed various insurance and financing activities. Substantially all of these are automatically renewable each year.
NOTE 11 - GEOGRAPHIC INFORMATION
Univar operates in only one industry segment (chemical distribution) in the United States, Canada, and Europe.
(1) The income (loss) from operations includes reengineering charges totaling $37.4 million and $4.5 million, respectively, in fiscal 1995 and 1994.
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The net loss in the second quarter of 1995 includes recognition of net-of-tax reengineering charges totaling $20.6 million. These charges represent the costs to reorganize the U.S. operating company, eliminate up to 2 layers of management, redesign its distribution network, develop a national procurement and materials management strategy, increase sales force efficiency, improve gross margins, and reduce the amount of capital required to conduct ongoing operations. Costs accrued included severance, other employee benefits, facility closure costs, the non-cash write-down to fair value of certain facilities, and consultant fees and expenses.
Significant items increasing income for the fourth quarter of 1995 include settlement gains, net of related costs and deferrals totaling $2.7 million, reduction of reserves and accruals totaling $1.4 million, costing adjustments totaling $0.8 million, and reduction of the LIFO reserve by $0.8 million.
Significant items increasing income for the fourth quarter of 1994 include costing adjustments totaling $1.4 million, reductions in self-insurance reserves for general liability totaling $0.9 million, and reductions in self-insured health reserves by $1.0 million. The significant item which decreased fourth quarter 1994 net income was the cost of the Corporation's re-engineering effort of ($1.8 million).
The total of the amounts shown as quarterly earnings per share may differ from the amount shown on the Consolidated Statement of Operations because the annual computation is made separately and is based upon average numbers of shares and equivalent shares outstanding for the entire year.
NOTE 13 - SETTLEMENT ACHIEVED
In fiscal 1992, Univar Europe executed a foreign currency denominated note (U.S. dollar equivalent of $6.8 million) in connection with certain business acquisitions. The note was contingently payable in June 1995, or could be deferred until December 1998 if the seller did not achieve certain minimum net worth requirements by December 1994. In accordance with contract provisions, the seller agreed to provide indemnification to Univar Europe for certain environmental and other undisclosed contingencies that may have existed as of the acquisition date. Univar Europe had the right to offset these liabilities against the note's principal balance. Univar Europe had also agreed to pay additional consideration, in the minimum amount of $1.8 million, which was non-interest bearing and payable in 1995.
Shortly after the acquisition, the Corporation began negotiations with the seller to settle certain disputes regarding acquisition asset values and other claims. When the seller subsequently entered bankruptcy, the seller's largest secured creditor, a Swedish bank, was appointed the receiver in bankruptcy for the seller's assets, liabilities, and contingent obligations. In addition to the original claims and disputes with the seller, certain disputes also arose
with the receiver, due to its handling of the seller's bankruptcy proceedings and the attachment of certain of Univar Europe's assets.
The Corporation and the receiver reached a settlement of all claims, counterclaims and disputes on October 31,1994. As part of the settlement agreement, the note plus accrued interest and the additional consideration discussed above were satisfied. A settlement gain totaling $3.0 million, net of related costs, was recorded as a recovery of representations and warranties pertaining to environmental costs ($0.9 million), interest ($0.8 million) and damages caused by the receiver's actions as part of the bankruptcy proceedings ($1.3 million). Univar Europe is consolidated using its financial year-end, December 31. Accordingly, recognition of the settlement gain is included in the Corporation's fourth quarter of fiscal 1995.
MANAGEMENT RESPONSIBILITY FOR FINANCIAL DATA
The management of Univar Corporation has prepared and is responsible for the integrity and fairness of the financial statements and other financial information presented in this annual report. The statements have been prepared in accordance with generally accepted accounting principles and, to the extent appropriate, include amounts based on management's judgment and/or estimates. In order to discharge its responsibilities for these financial statements and information, management maintains accounting systems and related internal controls. These controls are designed to provide reasonable assurance that transactions are properly authorized and recorded, that assets are safeguarded, and that financial records are reliably maintained. While management continually monitors the effectiveness of and compliance with its control systems, the concept of reasonable assurance, however, incorporates an acknowledgment that the cost of a control system must be related to the benefits derived.
The Corporation's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all the Corporation's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Furthermore, management believes that all representations made to Arthur Andersen LLP during its audit were valid and appropriate.
Management has reviewed the recommendations of Arthur Andersen LLP, and has responded in what we believe to be appropriate and cost-effective ways.
The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with management and with the independent auditors to review the quality of financial reporting, the operation and development of the internal control systems, and the work of independent auditors.
The independent auditors regularly meet with the Audit Committee without the presence of any other parties.
/s/ Paul H. Hough /s/ Gary E. Pruitt - -------------------------------------- ------------------------------ PAUL H. HOUGH GARY E. PRUITT President and Chief Executive Officer Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)
ARTHUR ANDERSEN LLP 801 Second Avenue, Suite 800 Seattle, WA 98104 (206) 623-8023
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Univar Corporation:
We have audited the accompanying consolidated balance sheets of Univar Corporation (a Washington corporation) and subsidiaries as of February 29, 1996 and February 28, 1995, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended February 29, 1996. These financial statements are the responsibility of the Corporation'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 financial position of Univar Corporation and subsidiaries as of February 29, 1996 and February 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 29, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP Seattle, Washington, April 24, 1996
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Identification of Directors, Identification of Executive Officers, Business Experience and Family Relationships
The information required of directors of the Corporation by this item is incorporated by reference to the Corporation's definitive Proxy Statement which the Corporation will have filed with the Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year.
The information required of executive officers of the Corporation by this item is included in Part I of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Cash Compensation, Bonuses and Deferred Compensation, Compensation Pursuant to Plans, Pension Table, and Stock Option Plans
The information required by this item is incorporated by reference to the Corporation's definitive Proxy Statement which the Corporation will have filed with the Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners, Security Ownership of Management, and Changes in Control
The information required by this Item is incorporated by reference to the Corporation's definitive Proxy Statement which the Corporation will have filed with the Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Related Transactions, Certain Business Relationships and Indebtedness of Management
The information required by this Item is incorporated by reference to the Corporation's definitive Proxy Statement which the Corporation will have filed with the Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements INDEX
Consolidated Statements of Operations Page 19 Consolidated Statements of Cash Flows Page 20 Consolidated Balance Sheets Page 21-22 Consolidated Statements of Shareholders' Equity Page 23 Notes to Consolidated Financial Statements Page 24-38
(2) Financial Statement Schedules
(a) Selected Quarterly Data (see page 37)
(b) The following financial schedule is submitted herewith. All other financial schedules are either not applicable or are fully disclosed in the applicable section of the Corporation's financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Schedule II Valuation and Qualifying Accounts
(c) Report of Independent Public Accountants, Arthur Andersen LLP, dated April 24,1996.
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed, or required to be filed, during the fourth quarter of the year.
(c) Exhibits
The required exhibits are included at the end of the Form 10-K Annual Report and are described in the Exhibit Index immediately preceding the first exhibit.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS UNIVAR CORPORATION AND SUBSIDIARIES FOR THE YEARS ENDED FEBRUARY 28, 1995, 1994, AND 1993 (THOUSANDS OF DOLLARS)
(1) Uncollectible accounts written off, net of recoveries.
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.
UNIVAR CORPORATION
Date: May 17, 1996 /s/ Paul H. Hough ------------------------- -------------------------------------------- Paul H. Hough President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Date: May 17, 1996 /s/ Gary E. Pruitt ------------------------- -------------------------------------------- Gary E. Pruitt, Chief Financial Officer (Principal Financial and Accounting Officer)
DIRECTORS
James W. Bernard Sjoerd D. Eikelboom Richard E. Engebrecht Paul H. Hough Roger L. Kesseler Curtis P. Lindley N. Stewart Rogers John G. Scriven Andrew V. Smith Roy E. Wansik Nicolaas J. Westdijk James H. Wiborg
By:/s/ William A. Butler - ------------------------------------ William A. Butler, Attorney-in-Fact Power of Attorney dated May 2, 1996
ARTHUR ANDERSEN LLP 801 Second Avenue, Suite 800 Seattle, WA 98104 (206) 623-8023
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Univar Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Univar Corporation and subsidiaries included in this Form 10-K, and have issued our report thereon dated April 24, 1996. Our audit was made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule included in this Form 10-K is presented for the purposes of complying with the Securities and Exchange Commission rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated 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 consolidated financial statements taken as a whole.
Arthur Andersen LLP Seattle, Washington, April 24, 1996
EXHIBIT INDEX