<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended
December 31, 1995
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the
transition period from __________ to ____________
Commission file numbers: United Stationers Inc.: 0-10653
United Stationers Supply Co.: 33-59811
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
(Exact name of Registrant as specified in its charter)
UNITED STATIONERS INC.: DELAWARE UNITED STATIONERS INC.: 36-3141189
UNITED STATIONERS SUPPLY CO.: ILLINOIS UNITED STATIONERS SUPPLY CO.: 36-2431718
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2200 EAST GOLF ROAD
DES PLAINES, ILLINOIS 60016-1267
(847) 699-5000
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrants' Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
NONE N/A
------------------- ----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
United Stationers Inc.: Common Stock $0.10 par value
(Title of Class)
INDICATE BY CHECK MARK WHETHER EACH REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
UNITED STATIONERS INC.: YES ( X ) NO ( )
UNITED STATIONERS SUPPLY CO.: YES ( ) NO ( X )
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENT
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. ( X )
AGGREGATE MARKET VALUE OF THE VOTING STOCK (WHICH CONSISTS SOLELY OF SHARES OF
COMMON STOCK) HELD BY NON-AFFILIATES OF UNITED STATIONERS INC. AS OF FEBRUARY
27, 1996, BASED ON THE LAST SALE PRICE OF THE COMMON STOCK AS QUOTED BY THE
NASDAQ NATIONAL MARKET ON SUCH DATE: $65,173,766. UNITED STATIONERS SUPPLY CO.
HAS NO SHARES OF VOTING STOCK OUTSTANDING HELD BY NON-AFFILIATES.
ON FEBRUARY 27, 1996, UNITED STATIONERS INC. HAD OUTSTANDING 11,446,306 SHARES
OF COMMON STOCK, PAR VALUE $0.10 PER SHARE, AND 758,944 SHARES OF NONVOTING
COMMON STOCK, $0.01 PAR VALUE PER SHARE. ON FEBRUARY 27, 1996, UNITED
STATIONERS SUPPLY CO. HAD 880,000 SHARES OF COMMON STOCK, $1.00 PAR VALUE PER
SHARE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF FORM 10-K
- -----------------
Part III Portions of United Stationers Inc.'s definitive Proxy Statement
relating to the 1996 Annual Meeting of Stockholders of United
Stationers Inc., to be filed within 120 days of the fiscal year
end of United Stationers Inc.
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
CONTENTS AND CROSS REFERENCE SHEET
FURNISHED PURSUANT TO GENERAL INSTRUCTION G(4) OF FORM 10-K
FORM 10-K FORM 10-K FORM 10-K
PART NO. ITEM NO. DESCRIPTION PAGE NO.
- --------- --------- ----------- ----------
I 1 Business 1
Explanatory Note 1
General 1
Products 1-2
Customers 2
Marketing and Customer Support 2-3
Distribution 3-4
Purchasing and Merchandising 4
Competition 4-5
Employees 5
2 Properties 5
Executive Offices 5
Regional Distribution Centers 5
Local Distribution Points 5
3 Legal Proceedings 5
4 Submission of Matters to a Vote of
Security Holders 5
II 5 Market for Registrant's Common Equity
and Related Stockholder Matters 6
Quarterly Stock Price Data 7
6 Selected Consolidated Financial Data 7-10
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-20
8 Financial Statements and Supplementary
Data 20-60
9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 61
III 10 Directors and Executive Officers of
the Registrant 61-64
11 Executive Compensation 64
12 Security Ownership of Certain Beneficial
Owners and Management 64
13 Certain Relationships and Related
Transactions 64
IV 14 Exhibits, Financial Statements, Schedules
and Reports on Form 8-K 64-70
Signatures 71
<PAGE>
PART I
ITEM 1. BUSINESS
EXPLANATORY NOTE
THIS INTEGRATED FORM 10-K IS FILED PURSUANT TO THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, FOR EACH OF UNITED STATIONERS INC., A DELAWARE CORPORATION,
AND ITS WHOLLY-OWNED SUBSIDIARY, UNITED STATIONERS SUPPLY CO., AN ILLINOIS
CORPORATION (COLLECTIVELY, THE "COMPANY"). UNITED STATIONERS INC. IS A HOLDING
COMPANY WITH NO OPERATIONS SEPARATE FROM ITS OPERATING SUBSIDIARY, UNITED
STATIONERS SUPPLY CO. NO SEPARATE FINANCIAL INFORMATION FOR UNITED STATIONERS
SUPPLY CO. HAS BEEN PROVIDED HEREIN BECAUSE MANAGEMENT FOR THE COMPANY BELIEVES
SUCH INFORMATION WOULD NOT BE MEANINGFUL BECAUSE (I) UNITED STATIONERS SUPPLY
CO. IS THE ONLY DIRECT SUBSIDIARY OF UNITED STATIONERS INC., WHICH HAS NO
OPERATIONS OTHER THAN THOSE OF UNITED STATIONERS SUPPLY CO. AND (II) ALL ASSETS
AND LIABILITIES OF UNITED STATIONERS INC. ARE RECORDED ON THE BOOKS OF UNITED
STATIONERS SUPPLY CO. THERE IS NO MATERIAL DIFFERENCE BETWEEN UNITED STATIONERS
INC. AND UNITED STATIONERS SUPPLY CO. FOR THE DISCLOSURE REQUIRED BY THE
INSTRUCTIONS TO FORM 10-K AND THEREFORE, UNLESS OTHERWISE INDICATED, THE
RESPONSES SET FORTH HEREIN APPLY TO EACH OF UNITED STATIONERS INC. AND UNITED
STATIONERS SUPPLY CO.
GENERAL
On March 30, 1995, pursuant to an Agreement and Plan of Merger, dated as
of February 13, 1995 (the "Merger Agreement"), between Associated Holdings,
Inc., a Delaware corporation ("Associated") and United Stationers Inc., a
Delaware corporation ("United") and Associated's related Offer to Purchase
dated February 21, 1995 (the "Offer"), Associated purchased 17,201,839 shares
(NOT ADJUSTED FOR THE 100% STOCK DIVIDEND EFFECTIVE NOVEMBER 9, 1995) of
Common Stock, $0.10 par value (the "Shares"), of United at a purchase price
of $15.50 per share, or approximately $266.6 million, from United's
stockholders (the "Acquisition"). On March 30, 1995, pursuant to the terms of
the Merger Agreement, Associated was merged with and into United, with United
surviving (the "Merger"), and immediately thereafter, Associated Stationers,
Inc. ("ASI"), a Delaware corporation and wholly owned subsidiary of
Associated was merged with and into United Stationers Supply Co. ("USSC"), an
Illinois corporation and wholly owned subsidiary of United, with USSC
surviving. Although United was the surviving corporation in the Merger, the
transaction was treated as a reverse acquisition for accounting purposes with
Associated as the acquiring corporation.
Except where the context clearly indicates otherwise, the term "Company"
is used herein to refer to post-Merger United and the terms "Associated" and
"United" are used hereinafter to refer to either the respective pre-Merger
corporations or specific aspects of the post-Merger Company's business.
United is the parent company of its direct wholly owned subsidiary, USSC.
Except where the context clearly indicates otherwise including references to
the capital structure of United Stationers Inc., the term "Company"
hereinafter used includes United Stationers Inc. together with its subsidiary.
The Company is the largest general line business products wholesaler in
the United States, with 1995 pro forma net sales of $2.2 billion. The
Company sells its products through a single national distribution network to
more than 12,000 resellers, who in turn sell directly to end users.
Substantially all these products are distributed overnight through a
computer-based network of warehouse facilities and truck fleets radiating
from 43 distribution points.
PRODUCTS
The Company markets a broad array of products, which include traditional
office products; computers and related supplies, office furniture; and other
products (including facilities management supplies). As part of the Company's
business strategy to acquire incremental sales and increase market share
through ancillary product offerings, the Company began to focus on niche
product segments in 1991 and has expanded steadily upon this concept since
then. The Company's product offerings, composed of more than 25,000 items,
may be divided into four primary categories:
TRADITIONAL OFFICE PRODUCTS. The Company's core business continues to be
traditional office products, which includes both brand-name products and the
Company's private brand products. Traditional office
1
<PAGE>
products include writing instruments, paper products, organizers and
calendars and various office accessories. The Company's traditional office
product offerings are quite deep, including, for example, more than 1,000
different stockkeeping units of ring binders and 800 types of file folders.
Traditional office products constituted the majority of the Company's 1995
pro forma net sales.
COMPUTERS AND RELATED SUPPLIES. The Company sells computer supplies,
peripherals and hardware with major brand names to computer resellers and office
products dealers. Such office technology constituted approximately 27% of the
Company's 1995 pro forma net sales.
OFFICE FURNITURE. The Company's sale of office furniture such as leather
chairs, wooden and steel desks and computer furniture has enabled it to become
the nation's largest office furniture wholesaler, with the Company currently
offering nearly 3,000 furniture items from 70 different manufacturers. Office
furniture constituted approximately 15% of the Company's 1995 pro forma net
sales. The Company's "Pro-Image" program enables resellers with no previous
expertise to provide high-end furniture and office design services to end-users.
The Company offers national delivery and product "set-up" capabilities to
office products dealers as well as to attract new furniture dealers.
OTHER PRODUCTS. The Company's newest product categories encompass the
facilities management supplies market, which includes janitorial and sanitation
supplies, specialty mailroom and warehouse items, kitchen and cafeteria items,
first aid products and ergonomic products designed to enhance worker
productivity, comfort and safety. Another one of the Company's niche markets is
business presentation products, including audio visual equipment, flip charts
and dry erase boards. Additionally, the Company offers its "Signature Image"
program, which provides resellers with access into the advertising specialties
market (such as imprinted and logo items).
CUSTOMERS
The Company sells principally to resellers of office products, consisting
primarily of commercial dealers and contract stationers, retail dealers,
superstores, mail order companies and mass merchandisers. In addition, the
Company sells to office furniture dealers, computer resellers and janitorial and
sanitary supply distributors. No single reseller accounted for more than 5% of
the Company's pro forma net sales in 1995.
Commercial dealers and contract stationers are the most significant
reseller channel for office products distribution and typically serve large
businesses, institutions and government agencies. Through industry
consolidation, the number of such dealers has decreased, with the remaining
dealers getting larger. Net sales to these commercial dealers and contract
stationers as a group are growing rapidly.
The number of retail dealers has been declining for some time as the result
of individual retail dealers' inability to compete successfully with the growing
number of superstores and, more recently, as a result of dealerships being
acquired and brought under an umbrella of common ownership. However, many retail
office products dealers have adapted to this highly competitive environment.
Many retail dealers, commercial dealers and contract stationers have joined
forces in marketing or buying groups in order to increase purchasing leverage.
The Company believes it is the leading wholesale source for many of these
groups, providing not only merchandise but also special programs that enable
these dealers to take advantage of their combined strengths.
While the Company maintains and builds its business with commercial
dealers, contract stationers (including the contract stationer divisions of
national office product superstores) and retail dealers, it has also initiated
relationships with most major office products superstore chains. In addition,
the Company supplies inventory and other fulfillment services to the retail
operations of certain superstores, including their direct-to-business delivery
programs.
MARKETING AND CUSTOMER SUPPORT
Substantially all of the Company's 25,000 products are sold through its
comprehensive office products catalogs and flyers. These materials include
general line catalogs, promotional pieces and specialty catalogs for the office
products, office furniture, facilities management supplies and other specialty
markets. The Company produces numerous catalogs for placement with dealers' end-
user customers, including the
2
<PAGE>
following annual catalogs: General Line Catalog; Office Furniture Catalog
featuring furniture and accessories; Universal Catalog promoting the
Company's private-brand merchandise; Computer Products Catalog offering
hardware, supplies, accessories and furniture; Workplace Solutions Catalog
featuring janitorial, maintenance, food service, warehouse and mailroom
supplies; Business Communications Catalog, featuring products and supplies
used for meetings and presentations; and separate Legal and Healthcare
Catalogs offering office products used within such professions. In addition,
the Company produces the following quarterly promotional catalogs: Action
2000 and Office Saver, each featuring over 1,000 high-volume commodity items,
and Computer Concepts, featuring computer supplies, peripherals, accessories
and furniture. The Company also produces separate 8-page quarterly flyers
covering general office supplies, office furniture and Universal-TM-products.
Because commercial dealers, contract stationers and retail dealers typically
distribute only one wholesaler's catalogs in order to streamline and
concentrate order entry, the Company attempts to maximize the distribution of
its catalogs by offering advertising credits to resellers, which can be used
to offset the cost of catalogs.
In addition to marketing its products and services through the use of
its catalogs, the Company employs a sales force of approximately 160
salespersons. The sales force is responsible for sales and service to
resellers with which the Company has an existing relationship, as well as for
establishing new relationships with additional resellers. The Company
supplements the efforts of its sales force through telemarketing.
The Company concentrates its marketing efforts on providing value-added
services to resellers. The Company distributes products that are generally
available at similar prices from multiple sources, and most of its customers
purchase their products from more than one source. As a result, the Company
seeks to differentiate itself from its competitors through a broader product
offering, a higher degree of product availability, a variety of high quality
customer services and prompt distribution capabilities. In addition to
emphasizing its broad product line, extensive inventory, computer integration
and national distribution capabilities, the Company's marketing programs have
relied upon two additional major components. First, the Company produces an
extensive array of catalogs for commercial dealers, contract stationers and
retail dealers that are usually custom imprinted with each reseller's name
and sold to these resellers who, in turn, distribute the catalogs to their
customers. Second, the Company provides its resellers with a variety of
dealer support and marketing services, including business management systems,
promotional programs and pricing services. These services are designed to aid
the reseller in differentiating itself from its competitors by addressing the
steps in the end-user's procurement process.
To assist its resellers with pricing, the Company offers a matrix
pricing software program. Traditionally, many resellers have priced products
on a discount from the manufacturer's suggested retail price, but recently
pricing has shifted toward a net pricing approach, whereby the reseller sells
certain products at significant discounts, assuming that it can recapture the
discounts through the sale of other higher margin products. The Company's
matrix pricing program provides resellers with a resource to assist them in
identifying the optimum pricing mix between high and low margin items and, as
a result, enables resellers to manage their gross margins.
The Company offers to its resellers a variety of electronic order entry
systems and business management and marketing programs which enhance the
resellers' ability to manage their businesses profitably. For instance, the
Company maintains EDI systems that link the Company to selected resellers,
and interactive order systems that link the Company to selected resellers and
such resellers to the ultimate end-user. In addition, the Company's
electronic order entry systems allow the reseller to seamlessly forward its
customers' orders to the Company, resulting in the delivery of pre-sold
products to the reseller or directly to its customers. The Company estimates
that in 1995, approximately 90% of its orders were received electronically.
DISTRIBUTION
At the time of the Merger, certain of the Company's 47 regional
distribution centers were redundant and, accordingly, management determined to
close eight of such facilities. To date, seven redundant facilities have been
closed and one remaining facility is expected to be closed in early Spring
of 1996. As a result, the Company has a network of 40 regional distribution
centers (including the new distribution center in Pittsburgh, Pennsylvania)
located in 36 metropolitan areas in 25 states, most of which will carry the
Company's full line of inventory. In addition, the Company has achieved cost
savings from the more efficient
3
<PAGE>
post-Merger operation of two distribution centers in each of four market
areas, where the size of the Company's sales base requires multiple
facilities.
The Company supplements its regional distribution centers with 25 local
distribution points throughout the United States that serve as reshipment points
for orders filled at the regional distribution centers. The Company utilizes
more than 250 trucks, substantially all of which are contracted for by the
Company, to enable direct delivery from the regional distribution centers and
local distribution points to resellers.
The Company's distribution capabilities are augmented by its proprietary,
computer-driven system. If a reseller places an order for an item that is out of
stock at the Company location which usually serves the particular reseller, the
Company's system will automatically search for the item at alternative
distribution centers. If the item is available at an alternative location, the
system will automatically forward the order to that alternate location, which
will then coordinate shipping with the primary facility and, for the majority of
resellers, provide a single on-time delivery. The system effectively provides
the Company with added inventory support, which enables it to provide higher
service levels to the reseller, to reduce back orders and to minimize time spent
searching for merchandise substitutes, all of which contribute to the Company's
high order fill rate and efficient levels of inventory balances.
Another service offered by the Company to resellers is its "wrap and
label" program, which allows resellers the option to receive orders in
accordance with the specifications of particular end-users. For example, when a
reseller receives orders from a number of separate end-users, the Company groups
and wraps the items separately by end-user so that the reseller need only
deliver the package. The "wrap and label" program is attractive to resellers
because it eliminates the need to break down case shipments and to repackage the
orders before delivering them to the end-user.
PURCHASING AND MERCHANDISING
As the largest national office products wholesaler in the United States,
the Company has substantial purchasing power and can realize significant
economies of scale. The Company obtains products from over 450 manufacturers,
for many of whom the Company believes that it is a significant customer. In 1995
on a pro forma basis, no supplier accounted for more than 11% of the Company's
aggregate purchases. As a centralized corporate function, the Company's
merchandising department interviews and selects suppliers and products for
inclusion in the catalogs. Selection is based upon end-user acceptance and
demand for the product and the manufacturer's total service, price and product
quality offering.
COMPETITION
The Company competes with office products manufacturers and with other
national, regional and specialty wholesalers of office products, office
furniture, computers and related items. Competition between the Company and
manufacturers is based primarily upon net pricing, minimum order quantity and
product availability. Although manufacturers may provide lower prices to
resellers than the Company does, the Company's marketing and catalog programs,
combined with speed of delivery and its ability to offer resellers a broad line
of business products from multiple manufacturers on a "one-stop shop" basis
and with lower minimum order quantities, are important factors in enabling the
Company to compete effectively. See "Marketing and Customer Support" and
"Distribution." Manufacturers typically sell their products through a variety
of distribution channels, including wholesalers and resellers.
Competition between the Company and other wholesalers is based primarily on
net pricing to resellers, breadth of product lines, availability of products,
speed of delivery to resellers, order fill rates and the quality of its
marketing and other services. The Company believes it is competitive in each of
these areas. Most wholesale distributors of office products conduct operations
regionally and locally, sometimes with limited product lines such as writing
instruments or computer products. Only one other national wholesaler carries a
general line of office products.
Consolidation has occurred in recent years throughout all levels of the
office products industry. Consolidation of commercial dealers and contract
stationers has resulted in an increased ability of those resellers to buy goods
directly from manufacturers. In addition, over the last decade, office products
4
<PAGE>
superstores (which largely buy directly from manufacturers) have entered
virtually every major metropolitan market.
Increased competition in the office products industry, together with
increased advertising, has heightened price awareness among end-users. As a
result, purchasers of commodity type office products have become extremely price
sensitive, and therefore the Company has increased its efforts to market to
resellers the continuing advantages of its competitive strengths (as compared to
those of manufacturers and other wholesalers), such as marketing and catalog
programs, speed of delivery, and the ability to offer resellers on a "one-stop
shop" basis a broad line of business products from multiple manufacturers with
lower minimum order quantities. In addition, such heightened price awareness has
led to margin pressure on commodity office products. In the event that such
trend continues, the Company's profit margins could be adversely affected.
EMPLOYEES
At December 31, 1995, the Company employed approximately 4,800 persons.
The Company considers its relationships with its employees to be good.
Approximately 900 of the shipping, warehouse and maintenance employees at
certain of the Chicago, Detroit, Philadelphia, Baltimore, Los Angeles,
Minneapolis and New York City facilities are covered by collective bargaining
agreements. The agreements expire at various times during the next three years.
ITEM 2. PROPERTIES
The Company considers its properties to be suitable and adequate for their
intended uses. These properties consist of the following:
EXECUTIVE OFFICES. The Company's office facility in Des Plaines, Illinois
has approximately 135,800 square feet of office and storage space. In September
1993, approximately 47,000 square feet of office space located in Mt. Prospect,
Illinois was leased by the Company. This lease expires in September of 1999
with an option to renew for two five-year terms.
REGIONAL DISTRIBUTION CENTERS. The Company presently operates 41
distribution centers (including one which opened in Pittsburgh,
Pennsylvania during the first quarter of 1996) in 25 states. These centers
represent total square footage of approximately 7.1 million square feet, of
which approximately 4.3 million is owned and the balance is leased. One
center is scheduled to close by early Spring of 1996.
LOCAL DISTRIBUTION POINTS. The Company also operates 25 local distribution
points. Two are leased by the Company; the other local distribution points are
operated through cross-docking arrangements with third party distribution
companies.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary course
of its business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the
solicitation of proxies in the fourth quarter of 1995.
5
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
QUARTERLY FINANCIAL DATA (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
(UNAUDITED)
THE COMPANY/ASSOCIATED
<TABLE>
<CAPTION>
Income
Income (Loss)
(Loss) Per Share
Before Net Before Net Income
Year Ended Net Gross Extraordi- Income Extraordinary (Loss)
December 31, 1995 Sales Profit nary Item (Loss) Item (1) Per Share (1)
- ------------------ ----- ------- ----------- ------ -------- -------------
<S> <C> <C> <C> <C> <C>
First Quarter (2) $ 134,997 $ 31,429 ($4,233)(3) ($5,682) ($0.35) ($0.52)
Second Quarter 529,429 114,471 1,524 1,524 0.07 0.07
Third Quarter 537,624 116,624 4,173 4,173 0.27 0.27
Fourth Quarter 549,412 118,416 4,779 4,779 0.29 0.29
---------- -------- ------ ------
Totals (4) $1,751,462 $380,940 $6,243 $4,794 0.33 0.22
---------- -------- ------ ------
---------- -------- ------ ------
Year Ended
December 31, 1994 (2)
- ---------------------
First Quarter $122,040 27,878 $ 742 $ 742 0.03 0.03
Second Quarter 108,219 26,111 534 534 0.00 0.00
Third Quarter 119,123 29,412 2,703 2,703 0.26 0.26
Fourth Quarter 120,803 29,508 2,424 2,424 0.22 0.22
---------- -------- ------ ------
Totals $470,185 $112,909 $6,403 $6,403 0.51 0.51
---------- -------- ------ ------
---------- -------- ------ ------
</TABLE>
(1) Historical earnings per share amounts have been restated to reflect the
share conversion resulting from the Merger and the 100% stock dividend,
effective November 9, 1995. Earnings per share are net of preferred stock
dividends.
(2) Reflects the results of Associated only.
(3) The extraordinary item reflects the write-off of financing costs and
original issue discount relating to the retired debt which was being
amortized over the life of the original debt.
(4) As a result of changes in the number of common and common equivalent
shares during the year, the sum of four quarters' earnings per share will
not equal earnings per share for the total year.
6
<PAGE>
QUARTERLY STOCK PRICE DATA
The Common Stock is quoted through the Nasdaq National Market under the
symbol "USTR." The following table sets forth on a per share basis, for the
periods indicated, the high and low sale prices per share for the Common Stock
as reported by the Nasdaq National Market. All stock price information has been
restated to reflect the 100% stock dividend effective November 9, 1995.
High Low
1994
First Quarter * *
Second Quarter * *
Third Quarter * *
Fourth Quarter * *
1995
First Quarter * *
Second Quarter $ 9 5/16 $ 8 9/16
Third Quarter $15 1/2 $ 8 11/16
Fourth Quarter $27 3/4 $13 3/4
* Due to the significant changes in the Company's capital structure resulting
from the Merger, stock price information for periods prior to the Merger
has not been included as it is not comparable to the stock price
information since the Merger.
On February 27, 1996, there were approximately 1,082 holders of record of
Common Stock.
The Company does not currently intend to pay any cash dividends on the
Common Stock. Furthermore, as a holding company, the ability of the Company to
pay dividends in the future is dependent upon the receipt of dividends or other
payments from its operating subsidiary, USSC. The payment of dividends by USSC
is subject to certain restrictions imposed by the Company's debt agreements.
See Note 5 to the Consolidated Financial Statements of the Company included
elsewhere herein.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below and on the following pages is selected historical
consolidated financial data for the Company and its predecessors. Although
United was the surviving corporation in the Merger, the Acquisition was treated
as a reverse acquisition for accounting purposes, with Associated as the
acquiring corporation. Therefore, the income statement and operating and other
data for the year ended December 31, 1995 reflect the financial information of
Associated only for the three months ended March 30, 1995, and the results of
the Company for the nine months ended December 31, 1995. The balance sheet data
at December 31, 1995 reflects the consolidated balances of the Company,
including various Merger-related adjustments.
THE COMPANY / ASSOCIATED
The selected consolidated financial data of Associated's predecessor (the
wholesale division of Boise Cascade Office Products Corporation "BCOP") set
forth below for the fiscal year ended December 31, 1991 and for the one-month
period ended January 31, 1992 (when Associated purchased the wholesale division
of BCOP (the "Associated Transaction")) are derived from the unaudited financial
statements of Associated's predecessor for such periods. Associated accounted
for the Associated Transaction using the purchase method of accounting. There
are material operational and accounting differences between Associated's
predecessor and Associated resulting from the Associated Transaction.
Accordingly, the historical financial data of Associated's predecessor may not
be comparable in all material respects with data of Associated.
The selected consolidated financial data of Associated set forth below for
the period from January 31, 1992 to December 31, 1992 and for the years ended
December 31, 1993 and 1994 has been derived from the
7
<PAGE>
Consolidated Financial Statements of Associated which have been audited by
Arthur Andersen LLP, independent public accountants. The Selected
Consolidated Financial Data of the Company for the fiscal year ended December
31, 1995 (which for Income Statement and Operating and Other Data includes
Associated only for the three months ended March 30, 1995 and the results of
the Company for the nine months ended December 31, 1995) has been derived
from the Consolidated Financial Statements of the Company which have been
audited by Ernst & Young LLP, independent auditors. All Selected
Consolidated Financial Data set forth below should be read in conjunction
with, and is qualified in its entirety by, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Historical
Results of Operations of the Company/Associated," "Liquidity and Capital
Resources of the Company/Associated" and the Consolidated Financial
Statements of the Company included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
The Company Associated Predecessor(1)(2)
----------- ------------------------------------------- --------------------------
Year ended Year ended Year ended Jan 31 to Jan. 1 to Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Jan. 31, Dec. 31,
1995 1994 1993 1992 1992(4) 1991(3)
----------- ----------- ---------- --------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $1,751,462 $470,185 $455,731 $359,779 $39,016 $411,343
Cost of goods sold 1,370,522 357,276 350,251 276,546 29,874 308,090
---------- -------- -------- -------- ------- --------
Gross profit 380,940 112,909 105,480 83,233 9,142 103,253
Operating expenses(5) 323,383 94,788 94,502 72,880 7,723 88,374
---------- -------- -------- -------- ------- --------
Income from operations 57,557 18,121 10,978 10,353 $ 1,419 $ 14,879
Interest expense, net 46,186 7,725 7,235 5,626
---------- -------- -------- --------
Income before income taxes
and extraordinary item 11,371 10,396 3,743 4,727
Income taxes 5,128 3,993 781 1,777
---------- -------- -------- --------
Income before extraordinary
item 6,243 6,403 2,962 2,950
Extraordinary item - loss on
early retirement of debt, net
of tax benefit of $967 (1,449) - - - - - -
---------- -------- -------- --------
Net income $4,794 $6,403 $2,962 $2,950
---------- -------- -------- --------
---------- -------- -------- --------
Net income attributable to
common stockholders $2,796 $4,210 $ 915 $1,501
---------- -------- -------- --------
---------- -------- -------- --------
Net income per common and
common equivalent share
(primary and fully diluted)
Income before
extraordinary item $0.33 $0.51 $0.11 $0.19
Extraordinary item (0.11) - - - - - -
---------- -------- -------- --------
Net income $0.22 $0.51 $0.11 $0.19
---------- -------- -------- --------
---------- -------- -------- --------
Cash dividends declared per
common share - - - - - - - -
Operating and Other Data:
EBITDA (6) $81,241 $23,505 $16,481 $14,875 $1,661 $18,028
EBITDA margin (7) 4.6% (8) 5.0% 3.6% 4.1% 4.3% 4.4%
Depreciation and
amortization (9) $23,684 $5,384 $5,503 $4,522 $242 $3,149
Capital expenditures, net 8,017 554 3,273 4,289 (36) 273
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Predecessor
The -----------
Company Associated (1)(3)
------------- ---------------------------- --------
At December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................ $ 355,465 $ 56,454 $ 57,302 $ 46,396 $ 54,373
Total assets............................... 1,001,383 192,479 190,979 179,069 140,756
Total debt and capital leases (10)......... 551,990 64,623 86,350 78,297 --
Redeemable preferred stock................. 18,041 23,189 20,996 18,949 --
Redeemable warrants........................ 39,692 1,650 1,435 1,435 --
Total stockholders' or predecessor
division equity............................ 30,024 24,775 11,422 10,466 93,642
</TABLE>
(1) The capital structure and accounting basis of the assets and liabilities
of Associated's predecessor differ from those of Associated and the
Company. Accordingly, certain financial information for periods before
January 31, 1992 is not comparable to that for periods after January 31,
1992 and therefore is not presented in this table.
(2) Associated's predecessor operated as a segment of a company which did not
allocate income tax or interest expense to the predecessor. Accordingly,
actual operating results for Associated's predecessor reflect only income
from operations before interest expense and income taxes.
(3) Derived from the unaudited financial statements of Associated's predecessor
as of and for the year ended December 31, 1991.
(4) Derived from the unaudited financial statements of Associated's predecessor
for the one month ended January 31, 1992.
(5) Includes a restructuring charge of $9.8 million for the year ended December
31, 1995.
(6) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and extraordinary item and is presented because it is commonly
used by certain investors and analysts to analyze and compare companies on
the basis of operating performance and to determine a company's ability to
service and incur debt. EBITDA should not be considered in isolation from
or as a substitute for net income, cash flows from operating activities or
other consolidated income or cash flow statement data prepared in
accordance with generally accepted accounting principles or as a measure of
profitability or liquidity.
(7) EBITDA margin represents EBITDA as a percentage of net sales.
(8) EBITDA margin for the year ended December 31, 1995 would have been 5.2% if
adjusted to exclude the restructuring charge.
(9) Excludes amortization of deferred financing costs.
(10) Total debt and capital leases include current maturities.
9
<PAGE>
UNITED
The selected consolidated financial data of United set forth below for
the seven months ended March 30, 1995 (at which time United and Associated
merged to create the Company) has been derived from the financial statements
of United which have been audited by Ernst & Young LLP, independent auditors.
The selected consolidated financial data at and for the seven-month period
ended March 31, 1994 is unaudited and in the opinion of management reflects
all adjustments considered necessary for a fair presentation of such data.
The selected consolidated financial data of United for each of the fiscal
years in the four-year period ended August 31, 1994 has been derived from the
consolidated financial statements of United which have been audited by Arthur
Andersen LLP, independent public accountants. All selected consolidated
financial data set forth below should be read in conjunction with, and is
qualified in its entirety by, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Historical Results of
Operations of United" and "Historical Liquidity and Capital Resources of
United" and the Consolidated Financial Statements of United, together with
the related notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED AUGUST 31,
--------------------- -----------------------------------------------
MARCH 30, MARCH 31,
--------- ---------
1995 1994 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................ $980,575 $871,585 $1,473,024 $1,470,115 $1,094,275 $951,109
Cost of sales........................ 773,857 675,720 1,150,123 1,125,596 848,588 732,401
-------- -------- ---------- ---------- ---------- --------
Gross profit on sales............ 206,718 195,865 322,901 344,519 245,687 218,708
Operating expenses................... 174,021 170,420 286,607 298,405 219,285 195,694
Merger-related costs................. 27,780(1) -- -- -- -- --
-------- -------- ---------- ---------- ---------- --------
Income from operations........... 4,917 25,445 36,294 46,114 26,402 23,014
Interest expense, net................ 7,500 5,837 10,461 9,550 6,503 6,082
Other income (expense), net.......... 41 117 225 355 364 (14)
-------- -------- ---------- ---------- ---------- --------
Income (loss) before income
taxes.......................... (2,542) 19,725 26,058 36,919 20,263 16,918
Income taxes......................... 4,692 8,185 10,309 15,559 8,899 7,008
-------- -------- ---------- ---------- ---------- --------
Net income (loss)................ $ (7,234) $ 11,540 $ 15,749 $ 21,360 $ 11,364 $ 9,910
-------- -------- ---------- ---------- ---------- --------
-------- -------- ---------- ---------- ---------- --------
Net income (loss) per common
share.............................. $ (0.39) $ 0.62 $ 0.85 $ 1.15 $ 0.71 $ 0.64
Cash dividends declared per
share.............................. 0.30 0.30 0.40 0.40 0.40 0.40
OPERATING AND OTHER DATA:
EBITDA(2)............................ 17,553 37,665 57,755 67,712 46,645 41,912
EBITDA margin(3)..................... 1.8% 4.3% 3.9% 4.6% 4.3% 4.4%
Depreciation and amortization........ $ 12,595 $ 12,103 $ 21,236 $ 21,243 $ 19,879 $ 18,912
Net capital expenditures............. 7,764 4,287 10,499 29,958 8,291 15,765
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... 257,600 297,099 239,827 216,074 214,611 135,347
Total assets......................... 711,839 608,728 618,550 634,786 601,465 409,958
Total debt and capital leases(4)..... 233,406 227,626 155,803 150,251 150,728 73,123
Stockholders' investment............. 233,125 243,636 246,010 237,697 223,387 181,584
</TABLE>
(1) In connection with the Merger, United incurred approximately $27.8 million
of Merger-related costs, consisting of severance payments under employment
contracts ($9.6 million); insurance benefits under employment contracts
($7.4 million); legal, accounting and other professional services fees
($5.2 million); retirement of stock options ($3.0 million); and fees for
letters of credit related to employment contracts and other costs ($2.6
million).
(2) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and is presented because it is commonly used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance and to determine a company's ability to service and
incur debt. EBITDA should not be considered in isolation from or as a
substitute for net income, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability
or liquidity.
(3) EBITDA margin represents EBITDA as a percentage of net sales.
(4) Total debt and capital leases includes current maturities.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On March 30, 1995, Associated merged with and into United. Although the
Company was the surviving corporation in the Merger, the transaction was
treated as a reverse acquisition for accounting purposes, with Associated as
the acquiring corporation. Therefore, the results of operations for the year
ended December 31, 1995 reflects the financial information of Associated only
for the three months ended March 30, 1995 and the results of the Company for
the nine months ended December 31, 1995. As a result of the Merger, the
results of operations of the Company for the year ended December 31, 1995 are
not comparable to those of previous periods.
To facilitate a meaningful comparison, the following supplemental
discussion and analysis is based on certain components of the combined
historical results of operations without any pro forma adjustments for
Associated and United for the years ended December 31, 1993 and 1994 and on
the pro forma results of operations for the Company for the year ended
December 31, 1995. The pro forma and combined historical results of
operations do not purport to be indicative of the results that would have
been obtained had such transactions been completed for the periods presented
or that may be obtained in the future. The following information should be
read in conjunction with, and is qualified in its entirety by, the
Consolidated Financial Statements of the Company and United, together with
the related notes thereto, included elsewhere herein.
GENERAL INFORMATION
GROSS PROFIT MARGINS. Recently, a number of factors have adversely
affected gross profit margins in the office products industry, including
those of the Company. These factors reflect the increasingly competitive
nature of the industry. Competitive pressures have increased due in part to
the growth of large resellers such as national office products superstores
that have heightened price awareness at the end-user level. The increasing
price sensitivity of end-users has contributed to the decline in industrywide
gross profit margins. These pressures are expected to continue in the future.
The Company's gross profit margins vary across product categories, so
that material changes in its product mix can impact the Company's overall
margin. For example, the gross profit margin on the Company's sales of
commodity products, such as copier paper and laser printer toner-product
categories that have grown over the past few years-tend to be lower than the
gross profit margins on most other product categories. While the recent
increases in sales of these types of products have adversely affected the
Company's overall gross profit margin, they have contributed to higher
operating income. The Company expects such sales to increase as a percentage
of revenues in the future.
RESTRUCTURING CHARGE. In the first quarter of 1995, the Company
recorded a restructuring charge of $9.8 million ($5.9 million net of tax
benefit of $3.9 million). The restructuring charge includes severance costs
totaling $1.8 million. The Company's consolidation plan specifies that 330
distribution, sales and corporate positions, 180 of which relate to
pre-Merger Associated, will be eliminated substantially within the one-year
period following the Merger. As of December 31, 1995, approximately 90 former
Associated employees had been terminated, with the related termination costs
of approximately $1.0 million charged against the reserve. The restructuring
charge also includes distribution center closing costs totaling $6.7 million
and stockkeeping unit reduction costs totaling $1.3 million. The
consolidation plan calls for the closing of eight redundant distribution
centers, six of which relate to pre-Merger Associated facilities, and the
elimination of overlapping inventory items from the Company's catalogs
substantially within the one-year period following the Merger. Estimated
distribution center closing costs include (i) the net occupancy costs of
leased facilities after they are vacated until expiration of leases and (ii)
the losses on the sale of owned facilities and the facilities' furniture,
fixtures and equipment. Estimated stockkeeping unit reduction costs include
losses on the sale of inventory items which have been discontinued solely as
a result of the Acquisition. As of December 31, 1995, $0.4 million relating
to distribution center closing costs had been charged against the reserve.
See Note 4 to the Consolidated Financial Statements of the Company included
elsewhere herein.
11
<PAGE>
EMPLOYEE STOCK OPTIONS. In September 1995, the Board of Directors
approved, subject to stockholder approval, an amendment to the Company's
employee stock option plan (the "Plan") that allows for the issuance of
employee stock options to key management employees of the Company exercisable
for up to approximately 2.2 million additional shares of Common Stock. The
Plan was designed to build increased employee commitment through
participation in the growth and performance of the Company. Subsequently,
employee stock options exercisable for an aggregate of approximately 2.2
million shares of Common Stock were granted (subject to stockholder approval
of the Plan amendment) to key management employees. Some of the employee
stock options were granted at an exercise price below the then fair market
value of the Common Stock. The exercise price of certain options is subject
to increases on a quarterly basis beginning in 1996. The Company's
stockholders will vote to approve such Plan amendment at the Company's annual
meeting to be held in May 1996.
The employee stock options granted under the Plan do not vest to the
employee until the occurrence of an event (a "Vesting Event") that causes
the present non-public equity investors to have received at least a full
return of their investment (at cost) in cash, fully tradable marketable
securities or the equivalent. A Vesting Event will cause the Company to
recognize compensation expense based upon the difference between the fair
market value of the Common Stock and the exercise price of the employee stock
options. Based upon a stock price of $22.75 and options outstanding as of
January 31, 1996, the Company would recognize a nonrecurring noncash charge
and related tax effect of $31.7 million in compensation expense ($19.0
million net of tax benefit of $12.7 million), if a Vesting Event were to
occur. Each $1.00 change in the Common Stock price will result in an
adjustment to such compensation expense of approximately $2.6 million ($1.6
million net of tax effect of $1.0 million).
CHANGE IN ACCOUNTING METHOD. Effective January 1, 1995, Associated
changed its method of accounting for the cost of inventory from the FIFO
method to the LIFO method. Associated made this change in contemplation of
its acquisition of United (accounted for as a reverse acquisition) so that
its method would conform to that of United. Associated believed that in an
inflationary environment the LIFO method provides a better matching of
current costs and current revenues, and that earnings reported under the LIFO
method are more easily compared to that of other companies in the wholesale
industry where the LIFO method is common. In 1995, this change resulted in
the reduction of pre-tax income of the Company of approximately $8.8 million
($5.3 million net of tax benefit of $3.5 million). See Note 3 to the
Consolidated Financial Statements of the Company included elsewhere herein.
PRO FORMA AND COMBINED RESULTS OF OPERATIONS
The following table of summary pro forma (see Note 4 to the Consolidated
Financial Statements of the Company included elsewhere herein) and combined
historical financial data is intended for informational purposes only and is
not necessarily indicative of either financial position or results of
operations in the future, or that would have occurred had the events
described in the first paragraph under "Overview" occurred on January 1,
1995. The following information should be read in conjunction with, and is
qualified in its entirety by, the historical Consolidated Financial
Statements of the Company and its predecessors, including the related notes
thereto, included elsewhere herein.
12
<PAGE>
The following table also presents unaudited summary combined historical
financial data for Associated and United for the years ended December 31,
1994 and 1993. This data has not been prepared in accordance with generally
accepted accounting principles, which do not allow for the combination of
financial data for entities that are not under common ownership.
Nevertheless, management believes that this combined historical financial
data, when read in conjunction with the separate historical financial
statements of Associated and United prepared in accordance with generally
accepted accounting principles and included elsewhere herein, may be helpful
in understanding the past operations of the companies that were combined in
the Merger. This combined historical financial data for 1994 and 1993
represents a combination of the historical financial data for Associated and
United for the periods indicated without any pro forma adjustments, and is
supplemental to the historical financial data of Associated and United
included elsewhere herein.
<TABLE>
<CAPTION>
Pro Forma Combined
------------------ ----------------------------------------
Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993
------------------ ------------------ -------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $2,201,860 100.0% $1,990,363 100.0% $1,925,376 100.0%
Gross profit 475,839 21.6 438,759 22.0 450,645 23.4
Operating expenses 394,430 17.9 379,717 19.0 393,284 20.4
Income from operations 81,409 3.7 59,042 3.0 57,361 3.0
</TABLE>
COMPARISON OF PRO FORMA RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND
COMBINED RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales were $2,201.9 million for 1995, a 10.6% increase
over net sales of $1,990.4 million in 1994. The increase in net sales is
primarily the result of changes in unit volume rather than changes in prices.
Sales grew in all geographic regions. In addition, the sales growth is also
attributable to increases in the sales of computer-related products through
the Company's MicroUnited Division.
GROSS PROFIT. Gross profit as a percent of net sales decreased to
21.6% in 1995 from 22.0% in 1994. The lower gross profit margin reflects a
shift in product mix and a larger LIFO charge due to Associated's change in
its method of accounting for inventory from the FIFO method to the LIFO
method. Also, gross profit was adversely affected by the higher sales of
computer-related products and commodity items which typically carry lower
gross profit margins.
OPERATING EXPENSES. Operating expenses as a percent of net sales
decreased to 17.9% in 1995 from 19.0% in 1994. The decrease in operating
expenses as a percent of net sales was primarily due to increased operating
efficiencies, improved productivity and increased economies of scale as a
result of the higher sales base.
INCOME FROM OPERATIONS. Income from operations as a percent of net
sales was 3.7% in 1995 compared to 3.0% in 1994 due to the aforementioned
reasons.
COMPARISON OF COMBINED RESULTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1994 AND
1993.
NET SALES. Net sales were $1,990.4 million for 1994, a 3.4% increase
over net sales of $1,925.4 million in 1993. The increase in net sales is
primarily the result of changes in unit volume rather than changes in prices.
GROSS PROFIT. Gross profit as a percent of net sales decreased to
22.0% in 1994 from 23.4% in 1993. The lower gross profit margin primarily
reflects higher levels of rebates and volume allowances earned by the
Company's customers as a result of ongoing consolidations. In addition, gross
profit margin was affected by a LIFO charge (an increase to "cost of goods
sold") of $2.1 million in 1994 versus LIFO income (a decrease to "cost of
goods sold") of $5.0 million in 1993, and a shift in product mix.
OPERATING EXPENSES. Operating expenses as a percent of net sales
decreased to 19.0% in 1994 from 20.4% in 1993. The decrease is the result of
streamlining the Company's work processes and reducing payroll and freight
expense.
13
<PAGE>
INCOME FROM OPERATIONS. Income from operations as a percent of net
sales was 3.0% in 1994 and 1993.
HISTORICAL RESULTS OF OPERATIONS OF THE COMPANY/ASSOCIATED
COMPARISON OF HISTORICAL FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994
NET SALES. Net sales were $1,751.5 million for 1995 compared to $470.2
million in 1994. The increase is primarily the result of the Merger. Sales in
1995 include only nine months of United's sales.
GROSS PROFIT. Gross profit as a percent of net sales decreased to
21.7% in 1995 from 24.0% in 1994. The lower gross profit margin reflects a
shift in product mix, the Acquisition and the change in the method of
accounting for inventory from the FIFO method to the LIFO method. See Note 3
to the Consolidated Financial Statements of the Company included elsewhere
herein.
OPERATING EXPENSES. Operating expenses as a percent of net sales
decreased to 18.5% in 1995 from 20.2% in 1994. The actual results for 1995
include the impact of a restructuring charge of $9.8 million ($5.9 million
net of tax benefit of $3.9 million) in the first quarter of 1995. Operating
expenses before the restructuring charge were 17.9% in 1995. The decrease in
operating expenses as a percent of net sales before the restructuring charge
was primarily due to increased operating efficiencies and improved
productivity, partially offset by Merger-related compensation expense
relating to an increase in the value of employee stock options of
approximately $1.5 million ($0.9 million net of tax benefit of $0.6 million).
INCOME FROM OPERATIONS. Income from operations as a percent of net
sales was 3.2% in 1995 (after the restructuring charge) compared to 3.8% in
1994. Before such restructuring charge, income from operations in 1995 was
3.8%.
INTEREST EXPENSE. Interest expense as a percent of net sales was 2.5%
in 1995 compared to 1.6% in 1994. The increase reflects additional debt
needed to consummate the Acquisition and higher interest rates in 1995.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before
income taxes and extraordinary item as a percent of net sales was 0.7% in
1995 compared to 2.2% in 1994.
INCOME BEFORE EXTRAORDINARY ITEM. Income before extraordinary item was
$6.2 million in 1995 compared to $6.4 million in 1994. An extraordinary item,
the loss on early retirement of debt related to the Merger of $2.4 million
($1.4 million net of tax benefit of $1.0 million), was recognized in the
first quarter of 1995. Net income was $4.8 million in 1995 compared to $6.4
million in 1994. Excluding the extraordinary item, net income would have been
$6.2 million.
FOURTH QUARTER RESULTS. Certain interim expense and inventory
estimates are recorded throughout the year relating to shrinkage, inflation
and product mix. The results of the year-end close and physical inventory
reflected a favorable adjustment with respect to such estimates, resulting in
approximately $0.9 million of additional net income, which is reflected in
the fourth quarter of 1995.
COMPARISON OF HISTORICAL FISCAL YEARS ENDED DECEMBER 31, 1994 AND 1993
NET SALES. Net sales increased to $470.2 million in 1994 from $455.7
million in 1993, a 3.2% increase, primarily as a result of inclusion in 1994
of the full year of sales from Associated's new Baltimore distribution
facility and increased unit sales volume to existing Associated customers as,
in management's estimation, Associated's customers channeled more of their
purchasing through Associated with the goal of reducing their internal
inventory levels.
GROSS PROFIT. Gross profit increased to $112.9 million in 1994 from
$105.5 million in 1993, a 7.0% increase, primarily due to increased unit
volume as well as Associated's lower net cost of goods sold, as a percentage
of sales, resulting from increased allowances granted to Associated by its
suppliers. Management of
14
<PAGE>
Associated believes that increased vendor allowances were due to competition
among Associated's vendors that resulted in increased purchasing leverage.
The increase in gross profit also resulted in part from Associated's
increased forward-buying efforts, as management better identified and
utilized product pricing opportunities available in the marketplace. Gross
profit increases were partially offset by increased allowances extended by
Associated to its customers in response to increased competition.
OPERATING EXPENSES. Operating expenses as a percent of net sales
decreased to 20.2% in 1994 from 20.7% in 1993. The decrease in operating
expenses as a percent of net sales was primarily due to productivity
improvements and lower freight costs partially offset by lump-sum incentive
awards earned in 1994 by employees and management based on Associated's level
of profitability.
INCOME FROM OPERATIONS. Income from operations increased to $18.1
million in 1994 from $11.0 million in 1993, a 65.1% increase, and as a
percentage of net sales was 3.8% in 1994, compared with 2.4% in 1993, for the
reasons stated above.
INTEREST EXPENSE. Interest expense increased to $7.7 million in 1994
from $7.2 million in 1993, a 6.8% increase, as a result of an increase in the
weighted average interest rate on outstanding debt in effect during the year
from 7.75% in 1993 to 8.90% in 1994, which was offset in part by a reduction
in average revolving debt balances to $39.6 million in 1994 from $46.9
million in 1993.
INCOME BEFORE INCOME TAXES. Income before income taxes increased to
$10.4 million in 1994 from $3.7 million in 1993, a 177.7% increase, for the
reasons stated above.
INCOME TAXES. Income taxes increased to $4.0 million in 1994 from $0.8
million in 1993, a $3.2 million increase. The effective tax rates for 1994
and 1993 were 38.4% and 20.9%, respectively. The increase in rate was due
primarily to the effect of the change in the amount of tax valuation
allowances.
NET INCOME. Net income increased to $6.4 million in 1994 from $3.0
million in 1993, an increase of $3.4 million, or 116.2%. Net income as a
percentage of net sales increased to 1.4% in 1994 from 0.6% in 1993 for the
reasons stated above.
HISTORICAL RESULTS OF OPERATIONS OF UNITED
COMPARISON OF THE SEVEN MONTHS ENDED MARCH 30, 1995 AND 1994
NET SALES. Net sales were $980.6 million in the seven months ended
March 30, 1995, a 12.5% increase from net sales of $871.6 million in the
comparable period in 1994. The primary reason for the increase is growth in
unit volume.
GROSS PROFIT ON SALES. Gross profit as a percent of net sales was
21.1% for the seven months ended March 30, 1995, compared with 22.5% in the
comparable period in 1994. This lower gross profit margin is primarily the
result of a shift in the sale of computer related products that have lower
gross profit margins and is consistent with the gross profit margins achieved
in the latter half of United's fiscal year ended August 31, 1994.
OPERATING EXPENSES. Operating expenses as a percent of net sales
increased to 20.6% in the seven-month period ended March 30, 1995 from 19.6%
in the comparable period in 1994. The increase is primarily attributable to
$27.8 million ($18.5 million net of tax benefit of $9.3 million) of
non-recurring Merger-related costs consisting of severance payments under
employment contracts; insurance benefits under employment contracts; legal,
accounting and other professional services fees; the repurchase of stock
options; and fees for letters of credit related to employment contracts and
other costs. Operating expenses as a percent of net sales prior to the
Merger-related costs were 17.7% for the seven-month period ended March 30,
1995. This decline from the comparable period in 1994 is a result of savings
in employee-related payroll and freight expenses.
INCOME FROM OPERATIONS. Income from operations as a percent of net
sales was 0.5% in the seven-month period ended March 30, 1995, compared with
2.9% in the comparable period in 1994. The decrease was attributable to the
Merger-related costs discussed under "Operating Expenses" above. Income
from operations as a percent of net sales was 3.3% in the seven-month period
ended March 30, 1995, excluding the Merger-related costs.
15
<PAGE>
INTEREST EXPENSE. Interest expense was $7.6 million for the
seven-month period ended March 30, 1995, compared with $6.1 million for the
same period in 1994. The increase was due to higher interest expense from
increased debt to meet working capital and other capital expenditure needs
and higher interest rates on borrowings.
INCOME (LOSS) BEFORE INCOME TAXES. Income (loss) before income taxes as a
percent of net sales was a loss of 0.3% in the seven-month period ended March
30, 1995, compared to income of 2.3% in the comparable period of 1994. The
decrease in income before income taxes was attributable to the factors stated
above.
INCOME TAXES. The effective tax rate for the seven-month period ended
March 30, 1995 was (184.6%), compared with 41.5% for the seven-month period
ended March 31, 1994. The increase is primarily due to non-deductible
Merger-related costs and non-deductible amortization of goodwill.
NET INCOME (LOSS). Net income (loss) was a loss of $7.2 million for
the seven-month period ended March 30, 1995, compared with income of $11.5
million for the same period in 1994. The loss was primarily due to $27.8
million ($18.5 million net of tax benefit of $9.3 million) of non-recurring
Merger-related costs discussed under "Operating Expenses" above. Net income
(loss) per share was a loss of $0.39 in the seven-month period ended March
30, 1995, compared with income of $0.62 for the same period in 1994.
COMPARISON OF THE FISCAL YEARS ENDED AUGUST 31, 1994 AND 1993
NET SALES. Net sales increased to $1,473.0 million in fiscal 1994 from
$1,470.1 million in fiscal 1993, a 0.2% increase reflecting a slight increase
in unit volume. Sales in the early part of fiscal 1994 were affected by a
temporary drop in in-stock service levels and the discontinuing of nearly
12,000 items as a final step in the consolidation process of the SDC
Acquisition in June 1992. Sales were also negatively impacted by the SDC
Acquisition-related operational disruptions in the west and southwest
regions. Sales grew in the fourth quarter by 3.4%, reversing the decline
experienced in the prior two quarters.
GROSS PROFIT ON SALES. Gross profit on sales decreased to $322.9
million in fiscal 1994 from $344.5 million in fiscal 1993, a 6.3% decrease,
due principally to a decrease in gross profit margin. Gross profit margin
decreased to 21.9% in fiscal 1994 from 23.4% in fiscal 1993. The decline
primarily reflects higher levels of rebates and volume allowances earned by
the Company's customers as a result of ongoing consolidations. Gross profit
margins over the last half of fiscal 1994 were relatively stable reflecting
the slowing pace of dealer consolidations. In addition, gross profit margin
was affected by a LIFO charge (an increase to "cost of sales" of $2.2
million in fiscal 1994 versus LIFO income (a decrease to "cost of sales")
of $4.7 million in fiscal 1993, and a shift in the sale of products to items
that have lower gross margins.
OPERATING EXPENSES. Operating expenses decreased to $286.6 million in
fiscal 1994 from $298.4 million in fiscal 1993, a 4.0% decrease. Operating
expenses as a percentage of net sales decreased to 19.4% in fiscal 1994 from
20.3% in fiscal 1993. The decrease is the result of streamlining United's
work processes and reducing payroll and freight expense.
INCOME FROM OPERATIONS. Income from operations decreased to $36.3
million in fiscal 1994 from $46.1 million in fiscal 1993, a 21.3% decrease,
and as a percentage of net sales was 2.5% in fiscal 1994, compared with 3.1%
in fiscal 1993, for the reasons stated above.
INTEREST EXPENSE. Interest expense increased to $10.7 million in
fiscal 1994 from $9.8 million in fiscal 1993, an 8.9% increase, primarily due
to additional debt incurred to support working capital and other capital
expenditures.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased to
$26.0 million in fiscal 1994 from $36.9 million in fiscal 1993, a 29.4%
decrease, for the reasons stated above.
INCOME TAXES. Income taxes decreased to $10.3 million in fiscal 1994
from $15.5 million in fiscal 1993, a $5.3 million decrease. The effective tax
rates for 1994 and 1993 were 39.6% and 42.1%, respectively. The decrease is
primarily due to the liquidation of a foreign subsidiary and a decrease in
the effective state income tax rate, offset by an increase in the
non-deductible losses in United's foreign operation and the non-deductible
amortization of goodwill.
16
<PAGE>
NET INCOME. Net income decreased to $15.7 million in 1994 from $21.4
million in 1993, a decrease of $5.7 million, or 26.3%. Net income as a
percentage of net sales decreased to 1.1% in 1994 from 1.5% in 1993 for the
reasons stated above.
FOURTH QUARTER RESULTS. Certain interim expense and inventory
estimates are recognized throughout the fiscal year relating to shrinkage,
inflation and product mix. The results of the year-end close and physical
inventory reflected a favorable adjustment with respect to such estimates,
resulting in approximately $0.5 million of additional net income, which is
reflected in the fourth quarter of fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY/ASSOCIATED
In connection with the consummation of the Acquisition, Associated
received an equity investment of $12.0 million and borrowed an aggregate of
$416.5 million under the Credit Facilities (as defined below) and $130.0
million under a subordinated bridge facility (the "Subordinated Bridge
Facility"). The proceeds of such investment and borrowings were used to (i)
finance the purchase of shares of Common Stock pursuant to the Offer, (ii)
refinance certain existing indebtedness of Associated (including all amounts
outstanding under the Associated credit facilities in effect prior to the
Merger) and indebtedness of the Company (including certain amounts
outstanding under the United credit and overline facilities in effect prior
to the Merger), (iii) repurchase United employee stock options and (iv) pay
fees and expenses relating to the Acquisition.
The credit facilities under the Credit Agreement (the "Credit
Facilities") consist of $200.0 million of term loan borrowings (the "Term
Loan Facilities") and up to $325.0 million of revolving loan borrowings
under the Revolving Credit Facility.
On May 3, 1995, USSC completed the issuance of $150.0 million of 12 3/4%
Senior Subordinated Notes due 2005 (the "Notes"). The net proceeds of the
Notes (after an underwriter discount of $4.5 million) were used to repay the
$130.0 million Subordinated Bridge Facility (together with $1.6 million in
accrued and unpaid interest thereon), to repay a portion of the Term Loan
Facilities and accrued interest thereon (totaling approximately $6.5
million), to pay a dividend to the Company to repurchase the Series B
preferred stock and to pay certain expenses.
The Term Loan Facilities consist of a $125.0 million Tranche A term loan
facility (the "Tranche A Facility") and a $75.0 million Tranche B term loan
facility (the "Tranche B Facility"). Amounts outstanding under the Tranche
A Facility are required to be repaid in 20 consecutive installments, the
first four of which (each in the aggregate principal amount of $3.63 million)
are due on the last day of each of the first four calendar quarters which
commenced with the quarter ended June 30, 1995. Subsequent quarterly payments
under the Tranche A Facility are each in the aggregate principal amount of
$6.05 million for each of the eight consecutive calendar quarters commencing
with the quarter ending June 30, 1996 and $7.26 million for each of the eight
consecutive calendar quarters commencing with the quarter ending June 30,
1998. Amounts outstanding under the Tranche B Facility are required to be
repaid in 28 consecutive quarterly installments, the first twenty of which
(in the aggregate principal amount of $0.24 million each) are due on the last
day of each of the first twenty calendar quarters which commenced with the
quarter ended June 30, 1995. The remaining eight installments in the
aggregate principal amount of $8.47 million each will be due on the last day
of each calendar quarter commencing with the quarter ending June 30, 2000.
The final installments under the Tranche A Facility and the Tranche B
Facility will be payable on March 31, 2000 and March 31, 2002, respectively.
The Revolving Credit Facility is limited to the lesser of $325.0 million
or a borrowing base equal to: 80% of Eligible Receivables (as defined); plus
50% of Eligible Inventory (as defined) (provided that no more than 60% or
during certain periods 65%, of the Borrowing Base may be attributable to
Eligible Inventory); plus the aggregate amount of cover for Letter of Credit
Liabilities (as defined). The Revolving Credit Facility provides that, for
each fiscal year commencing January 1, 1996, the Company must repay revolving
loans so that for a period of 30 consecutive days in each fiscal year the
aggregate revolving loans do not exceed $200.0 million. The Revolving Credit
Facility matures on March 31, 2000. The Revolving Credit Facility was amended
as of December 21, 1995 to increase the amount available thereunder from
$300.0 million to an aggregate of $325.0 million. As of December 31, 1995,
$87.4 million remained available for borrowing under the Revolving Credit
Facility.
The Term Loan Facilities and the Revolving Credit Facility are secured
by first priority pledges of the stock of USSC, all of the stock of the
domestic direct and indirect subsidiaries of USSC, certain of the stock of
all of the foreign direct and indirect subsidiaries of USSC and security
interests in, and liens upon, all accounts
17
<PAGE>
receivable, inventory, contract rights and other certain personal and certain
real property of USSC and its domestic subsidiaries.
The Credit Agreement contains representations and warranties,
affirmative and negative covenants and events of default customary for
financings of this type. As of January 31, 1996, the Company was in
compliance in all material respects with all covenants contained in the
Credit Agreement.
The Credit Facilities permit capital expenditures for the Company of up
to $12.0 million for its fiscal year ending December 31, 1996, plus $4.1
million of unused capital expenditures and approximately $3.0 million of
unused excess cash flow (as defined) for the Company's fiscal year ended
December 31, 1995. Capital expenditures will be financed from internally
generated funds and available borrowings under the Credit Facilities. The
Company expects gross capital expenditures to be approximately $10 to $12
million in 1996.
Management believes that the Company's cash on hand, anticipated funds
generated from operations and available borrowings under the Credit
Facilities, will be sufficient to meet the short-term (less than twelve
months) and long-term operating and capital needs of the Company as well as
to service its debt in accordance with its terms. There is, however, no
assurance that this will be accomplished.
On July 28, 1995, the Company repurchased the Series B preferred stock.
Quarterly dividends currently accrue on the Company's two outstanding series
of preferred stock at the rate of 10.0% for Series A preferred stock and 9.0%
for Series C preferred stock per annum (or, when dividends are not paid in
cash, 13.0% for Series A preferred stock and 10.0% for Series C preferred
stock), and may be paid in the form of additional shares of the respective
series of preferred stock (except, in the case of the Series C preferred
stock, for dividends payable after January 31, 1999).
The Company is a holding company and, as a result, the Company's primary
source of funds is cash generated from operating activities of its operating
subsidiary, USSC, and bank borrowings by USSC. The Credit Agreement and the
indenture governing the Notes contain restrictions on the ability of USSC to
transfer cash to the Company. Associated was a holding company and, as a
result, Associated's primary source of funds was cash generated from
operating activities of its operating subsidiary, ASI, and bank borrowings by
ASI. The Associated credit agreement in effect prior to the Merger contained
restrictions on the ability of ASI to transfer cash to Associated. The
statements of cash flows for the Company for the periods indicated is
summarized below:
<TABLE>
<CAPTION>
The Company
------------------------------
Year Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Net cash provided by (used in) operating activities $ 26,329 $14,088 $(12,084)
Net cash used in investing activities (266,291) (554) (3,276)
Net cash provided by (used in) financing activities 249,773 (12,676) 8,095
</TABLE>
Net cash provided by operating activities for 1995 was $26.3 million.
The increase in 1995 was due to the Acquisition. Net cash provided by
operating activities for 1994 increased to $14.1 million from a use of cash
of $12.1 million in 1993. This increase in 1994 was principally due to an
increase in accounts payable, a lesser increase in inventory levels and an
increase in net income. Associated used $12.1 million of cash in operations
in 1993 relating to an increase in inventory in 1993 due to a full year of
Associated's operations, additional inventory to support the acquisition of
Lynn-Edwards Corporation, a privately held office products wholesaler based
in Sacramento, California, and an overall increase in sales volume.
Net cash used in investing activities in 1995 was $266.3 million,
reflecting the Acquisition. Net cash used in investing activities in 1994
was $0.6 million, reflecting capital expenditures necessary to maintain
existing assets. Net cash used in investing activities in 1993 was $3.3
million stemming mostly from capital expenditures in connection with the
opening of the new Baltimore facility and those expenditures related to the
acquisition of Lynn-Edwards Corporation.
Net cash provided by financing activities in 1995 was $249.8 million,
reflecting the additional debt needed to consummate the Acquisition. Net
cash used in financing activities in 1994 was $12.7 million, which was
attributable to the pay down of debt. Net cash provided by financing
activities in 1993 was $8.1 million due to $11.5 million of borrowings and an
equipment loan partially offset by scheduled principal payments of $3.4
million.
18
<PAGE>
Lock-up agreements prohibiting the sale or other transfer of Common
Stock by certain large stockholders of the Company are scheduled to expire on
March 31, 1996. As a result, 1,344,000 shares of Common Stock issuable upon
the exercise of certain warrants to purchase Common Stock of the Company may
be immediately thereafter sold pursuant to an effective registration
statement under the Securities Act of 1933, as amended, and the Company has
agreed to register an additional 809,204 shares of Common Stock (including
shares of Common Stock issuable upon conversion of the Company's Nonvoting
Common Stock) as soon as practicable. Holders of approximately 6,583,349
shares of Common Stock are parties to a registration rights agreement whereby
the Company must register such shares under the Securities Act of 1933, as
amended, at the request of 20% in interest of the holders. Therefore, a
large number of shares of Common Stock may be made available for sale in the
public market by such stockholders at various times beginning March 31, 1996.
The sale of a large block of such shares, and the availability of additional
large blocks for sale, could have an adverse effect on the prevailing market
price of the Common Stock.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES OF UNITED
United was a holding company and, as a result, United's primary source
of funds was cash generated from operating activities of its operating
subsidiary, USSC, and bank borrowings by USSC. United's statement of cash
flows for the periods indicated is summarized below:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
-------------------- YEAR ENDED AUGUST 31,
MARCH 30, MARCH 31, ---------------------
1995 1994 1994 1993
--------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Cash Provided by (Used in)
Operating Activities............... $(47,533) $(55,757) $ 8,108 $ 36,002
Net Cash Used in Investing
Activities......................... (7,764) (4,287) (10,499) (29,958)
Net Cash Provided by (Used in)
Financing Activities............... 62,912 62,514 1,422 (10,097)
</TABLE>
OPERATING ACTIVITIES. The decrease in net cash used in operating
activities from $55.8 million in the seven months ended March 31, 1994 to
$47.5 million in the seven months ended March 30, 1995 was primarily due to
increases in accounts payable and accrued liabilities partially offset by an
increase to inventory. The decrease in net cash provided by operations from
$36.0 million in fiscal 1993 to $8.1 million in fiscal 1994 was primarily
attributable to a decrease in accounts payable and accrued liabilities as
well as lower net income in 1994, partially offset by a decrease in accounts
receivable and inventory.
INVESTING ACTIVITIES. The increase in net cash used in investing
activities from $4.3 million in the seven months ended March 31, 1994 to $7.8
million in the seven months ended March 30, 1995 was primarily due to the
acquisition of property, plant and equipment. Net cash used in investing
activities declined from $30.0 million in fiscal 1993 to $10.5 million in
fiscal 1994, as a result of a commensurate decline in capital expenditures.
The $30.0 million of capital expenditures in fiscal 1993 includes the
purchase of $16.0 million of computer and related hardware. Net capital
expenditures in fiscal 1994 and 1993 were $10.5 million and $30.0 million,
respectively.
FINANCING ACTIVITIES. The increase in net cash provided by financing
activities from $62.5 million in the seven months ended March 31, 1994 to
$62.9 million in the seven months ended March 30, 1995 was primarily due to
increases in short-term debt partially offset by an increase in payments on
long-term obligations. Net cash of $1.4 million was provided by financing
activities in fiscal 1994 as compared to a net use of cash in financing
activities in fiscal 1993 of $10.1 million.
INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor
to operations. The Company's business is not generally governed by contracts
that establish prices substantially in advance of the receipt of goods or
services. As suppliers increase their prices for merchandise to the Company,
the Company generally seeks to increase its prices to its customers.
Significant deflation may, however, adversely affect the Company's
profitability.
19
<PAGE>
SEASONALITY
Although the Company's sales are generally relatively level throughout
the year, the Company's sales vary to the extent of seasonal differences in
the buying patterns of end-users who purchase office products. In particular,
the Company's sales are generally higher than average during the months of
January through March when many businesses begin operating under new annual
budgets.
The Company experiences seasonality in terms of its working capital
needs, with highest requirements in December through February reflecting a
build up in inventory prior to and during the peak sales period. The Company
believes that its current availability under the Revolving Credit Facility is
sufficient to satisfy such seasonal capital needs for the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Set forth on the following pages are the financial statements of (i) the
Company and (ii) pre-Merger United. Although United was the surviving
corporation in the Merger, the Acquisition was treated as a reverse
acquisition for accounting purposes, with Associated as the acquiring
corporation. Therefore, the statements of income and cash flows for the year
ended December 31, 1995 reflect the results of Associated only for the three
months ended March 30, 1995, and the results of the Company for the nine
months ended December 31, 1995. The financial statements of the Company for
the years ended December 31, 1994 and 1993 reflect the financial position,
results of operations and cash flows of Associated only. The financial
statements of pre-Merger United are included because United is considered a
significant predecessor for accounting purposes.
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF
DIRECTORS OF UNITED STATIONERS INC.
We have audited the accompanying consolidated balance sheet of United
Stationers Inc. and Subsidiary as of December 31, 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended. Our audit also included the financial
statement schedule for 1995 listed in the index at Item 14(A). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United
Stationers Inc. and Subsidiary at December 31, 1995 and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule for 1995, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, in 1995,
the Company changed its method of valuing inventory from the first-in, first-out
(FIFO) method to the last-in, first-out (LIFO) method.
/s/ERNST & YOUNG LLP
Chicago, Illinois
January 29, 1996,
except for Note 16, as to which the date is
March 27, 1996
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
ASSOCIATED HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of ASSOCIATED
HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARY as of December 31, 1994,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 1994 and 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Associated
Holdings, Inc. and subsidiary as of December 31, 1994, and the results of their
operations and their cash flows for the years ended December 1994 and 1993, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ARTHUR ANDERSEN LLP
Chicago, Illinois
January 23, 1995 (except with
respect to the matters discussed
in Note 1 as to which the date is
February 13, 1995)
22
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
NET SALES $ 1,751,462 $ 470,185 $ 455,731
COST OF GOODS SOLD 1,370,522 357,276 350,251
----------- ---------- ----------
Gross profit 380,940 112,909 105,480
OPERATING EXPENSES:
Warehousing, marketing and
administrative expenses 313,624 94,788 94,502
Restructuring charge 9,759 -- --
----------- ---------- ----------
Total operating expenses 323,383 94,788 94,502
----------- ---------- ----------
Income from operations 57,557 18,121 10,978
INTEREST EXPENSE, NET 46,186 7,725 7,235
----------- ---------- ----------
Income before income taxes
and extraordinary item 11,371 10,396 3,743
INCOME TAXES 5,128 3,993 781
----------- ---------- ----------
Income before extraordinary item 6,243 6,403 2,962
EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT
OF DEBT, NET OF TAX BENEFIT OF $967 (1,449) -- --
----------- ---------- ----------
NET INCOME 4,794 6,403 2,962
PREFERRED STOCK DIVIDENDS ISSUED
AND ACCRUED 1,998 2,193 2,047
----------- ---------- ----------
NET INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ 2,796 $ 4,210 $ 915
----------- ---------- ----------
----------- ---------- ----------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (PRIMARY AND FULLY DILUTED):
Income before extraordinary item $ 0.33 $ 0.51 $ 0.11
Extraordinary item (0.11) -- --
----------- ---------- ----------
Net income per common
and common equivalent share $ 0.22 $ 0.51 $ 0.11
----------- ---------- ----------
----------- ---------- ----------
AVERAGE NUMBER OF COMMON SHARES USED IN
PRIMARY CALCULATION 12,809,212 8,250,586 8,071,202
----------- ---------- ----------
----------- ---------- ----------
AVERAGE NUMBER OF COMMON SHARES USED IN
FULLY DILUTED CALCULATION 12,913,229 8,308,780 8,071,202
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
23
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,660 $ 1,849
Accounts receivable, less allowance for doubtful
accounts of $7,315 in 1995 and $3,496 in 1994 265,827 45,139
Inventories 381,618 88,197
Other 30,903 3,795
---------- --------
TOTAL CURRENT ASSETS 690,008 138,980
---------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 24,856 7,315
Buildings 105,136 27,976
Fixtures and equipment 96,467 18,470
Leasehold improvements 1,634 1,514
Assets under capital lease 3,002 3,002
---------- --------
Total property, plant and equipment 231,095 58,277
Less - accumulated depreciation and amortization 31,114 12,830
---------- --------
NET PROPERTY, PLANT AND EQUIPMENT 199,981 45,447
---------- --------
GOODWILL 77,786 4,948
---------- --------
OTHER 33,608 3,104
---------- --------
TOTAL ASSETS $1,001,383 $192,479
---------- --------
---------- --------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
24
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and
capital leases $ 23,886 $ 5,901
Accounts payable 194,567 54,351
Accrued expenses 107,622 20,473
Accrued income taxes 8,468 1,801
---------- --------
TOTAL CURRENT LIABILITIES 334,543 82,526
---------- --------
DEFERRED INCOME TAXES 34,380 --
---------- --------
LONG-TERM OBLIGATIONS
Long-term debt 526,198 55,467
Deferred obligations and other liabilities 18,505 4,872
---------- --------
TOTAL LONG-TERM OBLIGATIONS 544,703 60,339
---------- --------
REDEEMABLE PREFERRED STOCK
Preferred Stock Series A, $0.01 par value;
15,000 authorized; 5,000 issued and outstanding;
2,437 and 1,788, respectively, accrued 7,437 6,788
Preferred Stock Series B, $0.01 par value;
15,000 authorized; 6,560 issued and outstanding
in 1994 -- 6,560
Preferred Stock Series C, $0.01 par value;
15,000 authorized; 10,604 and 9,841,
respectively, issued and outstanding 10,604 9,841
---------- --------
TOTAL REDEEMABLE PREFERRED STOCK 18,041 23,189
---------- --------
REDEEMABLE WARRANTS 39,692 1,650
---------- --------
STOCKHOLDERS' EQUITY
Additional preferred stock, $0.01 par value;
1,455,000 and 200,000, respectively,
authorized; 0 issued and outstanding -- --
Common Stock (voting), $0.10 par value;
40,000,000 authorized; 11,446,306
issued and outstanding in 1995;
$0.01 par value; 954,911 issued
and outstanding; 5,435 accrued in 1994 1,145 10
Common Stock (nonvoting), $0.01
par value; 5,000,000 authorized; 758,994
issued and outstanding in 1995 8 --
Capital in excess of par value 28,871 18,139
Retained earnings -- 6,626
---------- --------
TOTAL STOCKHOLDERS' EQUITY 30,024 24,775
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,001,383 $192,479
---------- --------
---------- --------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
25
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Number
of Number of Capital Total
Redeemable Preferred Stock Redeemable Common Common Common Common in Stock
--------------------------- Warrants Shares Stock Shares Stock Excess Retained holders'
A B C Total Outstanding (Voting) (Voting) (Nonvoting) (Nonvoting) of Par Earnings Equity
------ ------ ------ ------- ----------- -------- -------- ----------- ----------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1992 $5,488 $5,384 $8,077 $18,949 $1,435 896,258 $ 9 -- -- $ 8,956 $ 1,501 $10,466
Net income -- -- -- -- -- -- -- -- -- -- 2,962 2,962
Stock dividends issued
or accrued on
preferred stock 650 559 838 2,047 -- -- -- -- -- -- (2,047) (2,047)
Other -- -- -- -- -- -- -- -- -- 41 -- 41
------ ------ ------ ------- ----------- -------- -------- ----------- ----------- ------- -------- -------
DECEMBER 31, 1993 6,138 5,943 8,915 20,996 1,435 896,258 9 -- -- 8,997 2,416 11,422
Net income -- -- -- -- -- -- -- -- -- -- 6,403 6,403
Stock dividends issued
or accrued on
preferred stock 650 617 926 2,193 -- -- -- -- -- -- (2,193) (2,193)
Other -- -- -- -- -- -- -- -- -- 51 -- 51
Issuance of common
shares -- -- -- -- -- 58,653 1 -- -- 8,999 -- 9,000
Common shares accrued -- -- -- -- -- 5,435 -- -- -- 63 -- 63
Warrants accrued -- -- -- -- 215 -- -- -- -- 29 -- 29
------ ------ ------ ------- ----------- -------- -------- ----------- ----------- ------- -------- -------
DECEMBER 31, 1994 $6,788 $6,560 $9,841 $23,189 $1,650 960,346 $10 -- -- $18,139 $ 6,626 $24,775
------ ------ ------ ------- ----------- -------- -------- ----------- ----------- ------- -------- -------
------ ------ ------ ------- ----------- -------- -------- ----------- ----------- ------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
26
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Number
of
Redeemable Preferred Stock Redeemable Common
-------------------------- Warrants Shares
A B C Total Outstanding (Voting)
--- --- --- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994 $6,788 $6,560 $ 9,841 $23,189 $ 1,650 960,346
Net income -- -- -- -- -- --
Stock dividends issued
or accrued
on Preferred Stock 649 332 763 1,744 -- --
Repurchase of Series B
Preferred Stock -- (6,892) -- (6,892) -- --
Cash dividends -- -- -- -- -- --
Accretion of warrants to
fair market value -- -- -- -- 37,275 --
Issuance of warrants
resulting from
option grant -- -- -- -- 2,900 --
Nonvoting common stock
issued for services
related to financing the
Acquisition issued in
exchange for common stock,
warrants and options -- -- -- -- (460) (109,159)
Increase in value of stock
option grants -- -- -- -- -- --
Common stock issued
Acquisition -- -- -- -- -- 4,831,873
Issuance of common
stock from exercise
of warrants -- -- -- -- (1,673) 58,977
100% stock dividend -- -- -- -- -- 5,683,463
Stock option exercises -- -- -- -- -- 20,806
Other -- -- -- -- -- --
------ ------ ------- ------- ------- ----------
DECEMBER 31, 1995 $7,437 $ -- $10,604 $18,041 $39,692 11,446,306
------ ------ ------- ------- ------- ----------
------ ------ ------- ------- ------- ----------
Number of Total
Common Common Common Capital in Stock-
Stock Shares Stock Excess Retained holders'
(Voting) (Nonvoting) (Nonvoting) of Par Earnings Equity
-------- ----------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994 $ 10 -- $-- $18,139 $6,626 $24,775
Net income -- -- -- -- 4,794 4,794
Stock dividends issued
or accrued
on Preferred Stock -- -- -- -- (1,744) (1,744)
Repurchase of Series B
Preferred Stock -- -- -- -- -- --
Cash dividends -- -- -- -- (254) (254)
Accretion of warrants to
fair market value -- -- -- (28,538) (8,737) (37,275)
Issuance of warrants
resulting from
option grant -- -- -- (2,900) -- (2,900)
Nonvoting common stock
issued for services
related to financing the
Acquisition issued in
exchange for common stock,
warrants and options (11) 139,474 1 2,749 -- 2,739
Increase in value of stock
option grants -- -- -- 2,407 -- 2,407
Common stock issued
Acquisition 563 215,614 3 35,223 -- 35,789
Issuance of common
stock from exercise
of warrants 6 -- -- 1,673 -- 1,679
100% stock dividend 575 403,906 4 -- (579) --
Stock option exercises 2 -- -- 28 -- 30
Other -- -- -- 90 (106) (16)
------ ------- --- ------- ----- --------
DECEMBER 31, 1995 $1,145 758,994 $ 8 $28,871 $ -- $30,024
------ ------- --- ------- ----- --------
------ ------- --- ------- ----- --------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
27
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,794 $ 6,403 $ 2,962
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 30,272 6,356 6,475
Deferred income tax provision 2,709 - -
Compensation expense on stock option grants 2,407 - -
Changes in operating assets and liabilities,
net of Acquisition:
Increase in accounts receivable (32,330) (128) (3,247)
(Increase) decrease in inventory 31,656 (5,579) (14,998)
Increase in other assets (107) (598) (3,990)
Increase (decrease) in accounts payable (5,104) 3,806 615
Increase (decrease) in accrued liabilities (3,474) 2,260 1,381
Increase (decrease) in other liabilities (4,795) 1,261 (1,282)
Other 301 307 -
---------- ------- ------
Net cash provided by (used in) operating activities 26,329 14,088 (12,084)
---------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of United -- net of cash acquired
of approximately $14,500 (258,438) - -
Capital expenditures, net (8,017) (554) (3,273)
Other 164 - (3)
--------- ------- ------
Net cash used in investing activities (266,291) (554) (3,276)
--------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayment) under revolver (3,608) (7,900) 9,500
Retirements and principal payments of debt (412,342) (4,827) (3,446)
Borrowings under financing agreements 686,854 - 2,000
Financing costs (25,290) - -
Issuance of common stock 12,006 - -
Retirement of Series B Preferred Stock (6,892) - -
Cash dividend (254) - -
Other (701) 51 41
--------- ------- ------
Net cash provided by (used in) financing activities 249,773 (12,676) 8,095
--------- ------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 9,811 858 (7,265)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,849 991 8,256
--------- ------- ------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,660 $ 1,849 $ 991
--------- -------- ------
--------- -------- ------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
28
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND PURCHASE ACCOUNTING
On March 30, 1995, Associated Holdings, Inc. ("Associated") purchased
92.5% of the then outstanding shares of the common stock, $0.10 par value
("Common Stock") of United Stationers Inc. ("United") for approximately
$266.6 million in the aggregate pursuant to a tender offer (the "Offer").
Immediately thereafter, Associated merged with and into United (the "Merger"
and, collectively with the Offer, the "Acquisition"), and Associated
Stationers, Inc. ("ASI"), a wholly owned subsidiary of Associated merged with
and into United Stationers Supply Co. ("USSC"), a wholly owned subsidiary of
United, with United and USSC continuing as the respective surviving
corporations. United, as the surviving corporation following the Merger, is
referred to herein as the "Company." As a result of share conversions in the
Merger, immediately after the Merger, (i) the former holders of common stock
and common stock equivalents of Associated owned shares of Common Stock and
warrants or options to purchase shares of Common Stock constituting in the
aggregate approximately 80% of the shares of Common Stock on a fully diluted
basis, and (ii) holders of pre-Merger United common stock owned in the
aggregate approximately 20% of the shares of Common Stock on a fully diluted
basis. Although United was the surviving corporation in the Merger, the
transaction was treated as a reverse acquisition for accounting purposes with
Associated as the acquiring corporation.
The financial information for the year ended December 31, 1995 includes
Associated only for the three months ended March 30, 1995 and the results of the
Company for the nine months ended December 31, 1995. Financial information
prior to 1995 reflects that of Associated only. All common and common
equivalent shares have been adjusted to reflect the 100% stock dividend
effective November 9, 1995.
The Acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the estimated fair values at
the date of acquisition with the excess of cost over fair value allocated to
goodwill. The purchase price allocation to property, plant and equipment is
amortized over the estimated useful lives ranging from 3 to 40 years. Goodwill
is amortized over 40 years.
The total purchase price of United by Associated and its allocation to
assets and liabilities acquired are as follows (dollars in thousands):
Purchase price:
Price of United shares purchased by Associated . . . . . . . . $266,629
Fair value of United shares not acquired in the Offer. . . . . 21,618
Transaction costs. . . . . . . . . . . . . . . . . . . . . . . 6,309
--------
Total purchase price. . . . . . . . . . . . . . . . . . . $294,556
--------
--------
Allocation of purchase price:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . $542,993
Property, plant and equipment. . . . . . . . . . . . . . . . . 151,012
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,503
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 7,699
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . (481,651)
--------
Total purchase price. . . . . . . . . . . . . . . . . . . $294,556
--------
--------
Immediately following the Merger, the number of outstanding shares of
Common Stock was 11,996,154 (or 13,947,440 on a fully diluted basis), of
which (i) the former holders of Class A Common Stock, $0.01 par value, and
Class B Common Stock, $0.01 par value, of Associated (collectively
"Associated Common Stock") and warrants or options to purchase Associated
Common Stock in the aggregate owned 9,206,666 shares constituting
approximately 76.7% of the outstanding shares of Common Stock and outstanding
warrants or options for 1,951,286 shares (collectively 80.0% on a fully
diluted basis) and (ii) pre-Merger holders of shares of Common Stock (other
than Associated-owned and
29
<PAGE>
treasury shares) in the aggregate owned 2,789,488 shares of Common Stock
constituting approximately 23.3% of the outstanding shares (or 20.0% on a
fully diluted basis). As used in this paragraph, the term "Common Stock"
includes shares of Nonvoting Common Stock, $0.01 par value, of the Company,
which are immediately convertible into Voting Common Stock.
2. ORGANIZATION
The Company is a national general line business products wholesaler. The
Company stocks and distributes more than 25,000 items, including traditional
office supplies, office furniture and desk accessories; computer supplies,
peripherals and hardware, and facilities management supplies. The Company
markets its products primarily through catalogs with a total annual circulation
of more than 7.5 million copies. The Company markets and distributes products
to a broad range of approximately 12,000 resellers, consisting primarily of
office products dealers (including commercial, contract and retail), computer
resellers, office furniture dealers, office products superstores, mail order
companies and mass merchandisers. The Company's distribution capability is
supported by a nationwide network of 40 (post-consolidation including the new
Pittsburgh distribution center) strategically located and fully integrated
distribution centers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company.
Investments in 20% to 50% owned companies are accounted for by the equity
method. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain prior year amounts have been reclassified to conform with current
year presentations.
REVENUE RECOGNITION
Sales and provisions for estimated sales returns and allowances are
recorded at the time of shipment.
CASH AND CASH EQUIVALENTS
Investments in low-risk instruments that have original maturities of three
months or less are considered to be cash equivalents. Cash equivalents are
stated at cost which approximates market value.
INVENTORIES
Inventories constituting approximately 94% of total inventories at December
31, 1995 have been valued under the last-in, first-out (LIFO) method. Prior to
1995, all inventories were valued under the first-in, first-out (FIFO) method.
Effective January 1, 1995, Associated changed its method of accounting for the
cost of inventory from the FIFO method to the LIFO method. Associated made this
change in contemplation of its acquisition of United (accounted for as a reverse
acquisition) so that its method would conform to that of United. Associated
believes that in an inflationary environment the LIFO method provides a better
matching of current costs and current revenues and that earnings reported under
the LIFO method are more easily compared to that of other companies in the
wholesale industry where the LIFO method is common. This change resulted in a
charge to pre-tax income of the Company of approximately $8.8 million ($5.3
million net of tax benefit of $3.5 million) or $0.37 per common and common
equivalent share for the year ended December 31, 1995. The cumulative effect of
this accounting change for years prior to 1995 is not determinable, nor are the
pro forma effects of retroactive application of the LIFO method to prior years.
Inventory valued under the FIFO and LIFO accounting methods are recorded at the
lower of cost or market. If the lower of FIFO cost or market method of
inventory accounting had been used by the Company for all inventories,
merchandise inventories would have been approximately $8.8 million higher than
reported at December 31, 1995.
30
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are determined by using the straight-line
method over the estimated useful lives of the assets.
The estimated useful life assigned to fixtures and equipment is from two to
ten years; the estimated useful life assigned to buildings does not exceed 40
years; leasehold improvements and assets under capital leases are amortized over
the lesser of their useful lives or the term of the applicable lease.
GOODWILL
Goodwill represents the excess cost over the value of net assets of
businesses acquired and is amortized on a straight-line basis over 40 years.
The Company continually evaluates whether events or circumstances have occurred
indicating that the remaining estimated useful life of goodwill may not be
appropriate. When factors indicate that goodwill should be evaluated for
possible impairment, the Company will use an estimate of undiscounted future
operating income compared to the carrying value of goodwill to determine if a
write-off is necessary. The cumulative amount of goodwill amortized at December
31, 1995 and 1994 is $1,953,000 and $295,000, respectively.
SOFTWARE CAPITALIZATION
The Company capitalizes major internal and external systems development
costs determined to have benefits for future periods. Amortization is
recognized over the periods in which the benefits are realized, generally not to
exceed three years. Systems development costs capitalized were $516,000,
$780,000, and $767,000 in 1995, 1994 and 1993, respectively. Amortization
expense was $2,298,000, $157,000 and $128,000 in 1995, 1994 and 1993,
respectively.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on net income
after preferred stock dividend requirements. Net income per common and common
equivalent share on a primary and fully diluted basis are computed using the
weighted average number of shares outstanding adjusted for the effect of stock
options and warrants considered to be dilutive common stock equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Actual results could differ from these
estimates.
STOCK OPTIONS
The Company accounts for stock options in accordance with APB Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
31
<PAGE>
4. BUSINESS COMBINATION AND RESTRUCTURING CHARGE
The following summarized unaudited pro forma operating data for the years
ended December 31, 1995 and 1994 is presented giving effect to the Acquisition
as if it had been consummated at the beginning of the respective periods and,
therefore, reflects the results of United and Associated on a consolidated
basis. These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that actually
would have resulted had the combination been in effect on the dates indicated,
or which may result in the future. The pro forma results exclude one-time
nonrecurring charges or credits directly attributable to the transaction
(dollars in thousands, except share data):
Pro Forma Twelve Months
--------------------------
Ended December 31,
--------------------------
1995 1994
----------- ----------
Net sales $2,201,860 $1,990,363
Income before income taxes 22,737 4,237
Net income 13,063 2,581
Net income per primary and
fully diluted common and
common equivalent share $0.80 $0.07
The pro forma income statement adjustments consist of (i) increased
depreciation expense resulting from the write-up of certain fixed assets to
fair value, (ii) additional incremental goodwill amortization, (iii)
additional incremental interest expense due to debt issued, net of debt
retired, and (iv) reduction in preferred stock dividends due to the
repurchase of the Series B preferred stock.
In the first quarter of 1995, the Company recorded a restructuring charge
of $9.8 million ($5.9 million net of tax benefit of $3.9 million). The
restructuring charge includes severance costs totaling $1.8 million. The
consolidation plan specifies that 330 distribution, sales and corporate
positions, 180 of which relate to pre-Merger Associated, will be eliminated
substantially within a one-year period following the Merger. As of December 31,
1995, approximately 90 former Associated employees had been terminated, with
related costs of approximately $1.0 million charged against the reserve. The
restructuring charge also includes distribution center closing costs totaling
$6.7 million and stockkeeping unit reduction costs totaling $1.3 million. The
consolidation plan calls for the closing of eight redundant distribution
centers, six of which relate to pre-Merger Associated facilities, and the
elimination of overlapping inventory items from the Company's catalogs
substantially within a one-year period following the Merger. Estimated
distribution center closing costs include (i) the net occupancy costs of leased
facilities after they are vacated until the expiration of the leases and (ii)
the losses on the sale of owned facilities and the facilities' furniture,
fixtures and equipment. Estimated stockkeeping unit reduction costs include
losses on the sale of inventory items which have been discontinued solely as a
result of the Acquisition and Merger. As of December 31, 1995, $0.4 million
relating to distribution center closing costs have been charged against the
reserve. The consolidation plan is scheduled to be substantially completed by
March 31, 1996.
The historical results for 1995 include an extraordinary charge of
approximately $2.4 million ($1.4 million net of tax benefit of $1.0 million) of
financing costs and original issue discount relating to the debt retired. In
addition, the historical results for 1995 include compensation expense relating
to an increase in the value of employee stock options of approximately $1.5
million ($0.9 million net of tax benefit of $0.6 million) as a result of the
Acquisition and Merger. The pro forma twelve months ended December 31, 1995 do
not include the extraordinary write-off.
32
<PAGE>
5. LONG-TERM DEBT
Long-term debt consists of the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------ -----
<S> <C> <C>
Revolver $ 185,000 $ 39,910
Term Loans
Tranche A, due in installments until March 31, 2000 110,053 -
Tranche B, due in installments until March 31, 2002 71,837 -
Tranche A, due in installments until December 1996 - 11,000
Tranche B, due in installments from January 1997
until December 1998 - 10,000
Original issue discount Tranche B due in 1997 - (443)
Senior Subordinated Notes 150,000 -
Mortgage at 9.4%, due in installments until 1999 2,174 -
Industrial development bonds, at market interest rates,
maturing at various dates through 2011 14,300 -
Industrial development bonds, at 66% to 79% of prime,
maturing at various dates through 2004 15,500 -
Other long-term debt 313 -
------- --------
549,177 60,467
Less - current maturities (22,979) (5,000)
------- --------
$ 526,198 $ 55,467
--------- ---------
--------- ---------
</TABLE>
The prevailing prime interest rate at the end of 1995 and 1994 was 8.5%.
In connection with the Acquisition, Associated received an equity
investment of $12.0 million and borrowed an aggregate of $416.5 million under
the Credit Facilities and $130.0 million under the Subordinated Bridge
Facility. The proceeds of these investments and borrowings were used to (i)
finance the purchase of shares of United common stock pursuant to the Offer,
(ii) refinance certain existing indebtedness of Associated (including all
amounts outstanding under the existing old Associated credit facilities) and
indebtedness of the Company (including certain amounts outstanding under
United and USSC credit facilities), (iii) repurchase United employee stock
options, and (iv) pay fees and expenses relating to the Acquisition.
The Credit Facilities as of December 31, 1995, consist of $200.0 million of
term loan borrowings ("Term Loan Facilities") and up to $325.0 million of
revolving loan borrowings ("Revolving Credit Facility"). The loans outstanding
under the Term Loan Facilities and the Revolving Credit Facility bear interest,
at the Company's option, equal to the prime rate plus 2.25% (if the Tranche B
Facility) or 1.75% (if either the Tranche A Facility or the Revolving Credit
Facility) or LIBOR plus 3.25% (if the Tranche B Facility) or 2.75% (if either
the Tranche A or Revolving Credit Facility), based on one, two, three or six
month periods.
On May 3, 1995, USSC completed the issuance of $150.0 million of 12 3/4%
Senior Subordinated Notes due 2005 (the "Notes"). The net proceeds of the Notes
(after discount and fees of approximately $7.9 million) were used to pay certain
expenses to repay the $130.0 million Subordinated Bridge Facility (together with
$1.6 million in accrued and unpaid interest thereon), to repay a portion of the
Tranche A and Tranche B term loans and accrued interest (totaling approximately
$6.5 million), to repurchase all outstanding shares of the Company's Series B
preferred stock and to provide working capital.
The Revolving Credit Facility is limited to the lesser of $325.0 million or
a borrowing base equal to 80% of Eligible Receivables (as defined in the Credit
Agreement); plus 50% of Eligible Inventory (as defined in the Credit Agreement)
(provided that no more than 60% or during certain periods 65%, of the Borrowing
Base may be attributable to Eligible Inventory); plus the aggregate amount of
cover for Letter of Credit Liabilities (as defined). The Revolving Credit
Facility provides that, for each fiscal year commencing January 1, 1996, the
Company must repay revolving loans so that for a period of 30 consecutive days
in each fiscal year the aggregate revolving loans do not exceed $200.0 million.
The Revolving Credit Facility matures on March 31, 2000.
33
<PAGE>
The Company is exposed to market risk for changes in interest rates. The
Company may enter into interest rate protection agreements, including collar
agreements, to reduce the impact of fluctuations in interest rates on a portion
of its variable rate debt. Such agreements, generally require the Company to
pay to or entitle the Company to receive from the other party the amount, if
any, by which the Company's interest payments fluctuate beyond the rates
specified in the agreements. The Company is subject to the credit risk that the
other party may fail to perform under such agreements. The Company's allocated
cost of such agreements is amortized to interest expense over the term of the
agreements, and the unamortized cost is included in other assets. Payments
received or made as a result of the agreements, if any, are recorded as an
addition or a reduction of interest expense. At December 31, 1995, the Company
had agreements which collar $200.0 million of the Company's borrowings under the
Credit Facilities and expire in April 1998.
The agreement governing the Credit Facilities (the "Credit Agreement")
contains representations and warranties, affirmative and negative covenants and
events of default customary for financings of this type. Substantially all
assets of the Company are pledged as collateral under the Credit Agreement and
other long-term debt.
The right of the Company to participate in any distribution of earnings or
assets of USSC is subject to the prior claims of the creditors of USSC. In
addition, the Indenture and the Credit Agreement contain certain restrictive
covenants, including covenants that restrict or prohibit USSC's ability to pay
dividends and make other distributions to the Company.
Debt maturities for the years subsequent to December 31, 1995, are as
follows (dollars in thousands):
-------------------------------
Year Amount
-------------------------------
1996 $ 22,979
1997 27,630
1998 31,273
1999 34,172
2000 221,695
Later years 211,428
-------------------------------
$549,177
-------------------------------
-------------------------------
Outstanding letters of credit totaled $56.0 million at December 31,
1995. The letters of credit were issued to support various activities of the
Company.
6. LEASES
The Company has entered into several non-cancelable long-term leases for
property and equipment. Future minimum lease payments for non-cancelable
leases in effect at December 31, 1995 having initial remaining terms of more
than one year are as follows (dollars in thousands):
Operating Leases
-------------------------------------
Capital Lease Sublease Net Lease
Year Lease Payments Income Payments
- ---- -------- -------------------------------------
1996 $1,181 $13,950 $372 $13,578
1997 1,479 11,085 199 10,886
1998 487 9,245 146 9,099
1999 - 7,502 61 7,441
2000 - 5,462 - 5,462
Later years - 18,801 - 18,801
- -------------------------------------- -----------------------------------
Total minimum lease payments 3,147 $66,045 $778 $65,267
-----------------------------------
Less amount representing interest 334 -----------------------------------
- --------------------------------------
Present value of net minimum
lease payments (including current
portion of $907) $2,813
- --------------------------------------
- --------------------------------------
Rental expense for all operating leases was approximately $14.2 million,
$3.0 million and $2.7 million in 1995, 1994 and 1993, respectively.
34
<PAGE>
7. PENSION PLANS AND PROFIT SHARING PLANS
PENSION PLANS
In connection with the Merger and Acquisition, the Company assumed the
pension plans of United. Associated did not have a pension plan. Former
Associated employees will enter the pension plan on July 1, 1996. At that time,
the Company will have pension plans covering substantially all of its employees.
Non-contributory plans covering non-union employees provide pension benefits
that are based on years of credited service and a percentage of annual
compensation. Non-contributory plans covering union members generally provide
benefits of stated amounts based on years of service. The Company funds the
plans in accordance with current tax laws.
The following table sets forth the plans' funded status at December 31,
1995 (dollars in thousands). This exhibit does not include the projected
benefit obligation of $680,000 for the former Associated employees as of
December 31, 1995.
1995
- -------------------------------------------------------------
Actuarial Present Value of Benefits Obligation
Vested benefits $ 18,776
Non-vested benefits 1,996
---------
Accumulated benefits obligation 20,772
Effect of projected future compensation levels 2,861
---------
Projected benefits obligation 23,633
Plan assets at fair value 26,713
---------
Plan assets in excess of projected benefits obligation 3,080
Unrecognized net gain due to past
experience different from assumptions (507)
---------
Prepaid pension asset recognized
in Consolidated Balance Sheet $ 2,573
---------
---------
The plans' assets consist of debt securities, equity securities and
government securities. Net periodic pension cost for 1995 for pension and
supplemental benefits plans includes the following components (dollars in
thousands):
1995
- -------------------------------------------------------------
Service cost-benefits earned during the period $ 1,142
Interest cost on projected benefits obligation 1,157
Actual return on assets (2,711)
Net amortization and deferral 1,382
---------
Net periodic pension cost $ 970
---------
---------
The projected benefit obligation for 1995 was determined using an assumed
discount rate of 7.25%. In 1995, the assumed rate of compensation increase
ranged from 0.0% to 5.5%. The expected long-term rate of return on assets used
in determining net periodic pension cost was 7.5%.
PROFIT SHARING PLANS
In connection with the Merger and Acquisition, the Company assumed the
profit sharing plan of United; thus, the Company currently has two profit
sharing plans which cover all salaried employees and certain hourly employees.
The plans provide for annual contributions by the Company in an amount
determined by the Board of Directors. The plans also permit employees to have
contributions made as 401(k) salary deferrals on their behalf and to make after-
tax voluntary contributions. The plans provide that the Company may match
employee contributions as 401(k) salary deferrals. Company contributions for
matching of employee contributions were approximately $0.6 million, $0.3 million
and $0.4 million in 1995, 1994 and 1993, respectively.
35
<PAGE>
8. POSTRETIREMENT BENEFITS
In connection with the Merger, the Company assumed the postretirement plan
of United on March 30, 1995. Associated did not have a postretirement plan.
The plan is unfunded and provides health care benefits to substantially all
retired non-union employees and their dependents. Eligibility requirements are
based on the individual's age (minimum age of 55), years of service and hire
date. The benefits are subject to retiree contributions, deductibles, co-
payment provisions and other limitations.
The assumed health care average cost trend rate used in measuring the
accumulated postretirement benefit obligation ("APBO") at December 31, 1995 was
11.0% and 3.0% in 1996 and beyond, respectively. Beginning in 1996, retirees
will pay the difference between actual plan costs and the portion of costs paid
by the Company which is limited to a cost trend rate of 3%. The assumed
discount rate was 7.5%. A 1% increase in the health care cost trend rate would
increase the APBO as of December 31, 1995 by approximately $396,000 and annual
service cost and interest cost by approximately $46,000.
The cost of postretirement health care benefits for the year ended December
31, 1995 was as follows (dollars in thousands):
1995
- --------------------------------------------------------
Service cost $ 161
Interest on accumulated benefits obligation 109
--------
Net postretirement benefit cost $ 270
--------
--------
The following table sets forth the amounts recognized in the Company's
Consolidated Balance Sheet as of December 31, 1995 (dollars in thousands):
1995
- --------------------------------------------------------
Retirees $ (762)
Other fully eligible plan participants (697)
Other active plan participants (1,362)
--------
Total APBO (2,821)
Unrecognized net loss 76
--------
Accrued postretirement benefit obligation $ (2,745)
--------
--------
9. STOCK PLAN INCENTIVES
The Management Stock Option Plan (the "Plan"), as amended, is administered
by the Board of Directors, although the Plan provides that the Board of
Directors of the Company may designate an option committee to administer the
Plan. Options outstanding under the Plan as of the Merger date became
exercisable for a number of Shares equal to the number of such Shares that would
have been received in respect of such option if it had been exercised
immediately prior to March 30, 1995 (the "Effective Time").
In September 1995, the Company's Board of Directors approved an amendment
to the Plan, subject to stockholder approval, which provided for the issuance of
options to key management employees of the Company exercisable for up to 2.2
million additional shares of its Common Stock. Subsequently, approximately 2.2
million options were granted to management employees subject to stockholder
approval. Some of the options were granted at an option price below market
value and the option price of certain options is subject to increases on a
quarterly basis beginning in 1996.
The stock options granted under the Plan do not vest to the employee until
the occurrence of an event (a "Vesting Event") that causes the present non-
public equity investors to have received at least a full return of their
investment (at cost) in cash, fully tradable marketable securities or the
equivalent. A Vesting Event will cause the Company to recognize compensation
expense based upon the difference between the fair market value of the Common
Stock and the exercise price of the stock options. If a Vesting Event were to
occur, based upon a stock price of $22.75, the Company would recognize a
36
<PAGE>
nonrecurring noncash charge and related tax effect of $31.7 million in
compensation expense ($19.0 million net of tax benefit of $12.7 million).
Each $1.00 change in the Common Stock price will result in an adjustment to
such compensation expense of approximately $2.6 million ($1.6 million net of
tax effect of $1.0 million).
An optionee under the Plan must pay the full option price upon exercise of
an option (i) in cash, (ii) with the consent of the Board of Directors of the
Company, by delivering shares of Common Stock already owned by such optionee
(including shares to be received upon exercise of the option) and having a fair
market value at least equal to the exercise price or (iii) in any combination of
the foregoing. The Company may require the optionee to satisfy federal tax
withholding obligations with respect to the exercise of options by (i)
additional withholding from the employee's salary, (ii) requiring the optionee
to pay in cash or (iii) reducing the number of shares of Common Stock to be
issued (except in the case of incentive options).
The following table summarizes the transactions of the Plan for the last
three years:
<TABLE>
<CAPTION>
STOCK INCENTIVE AWARD PLAN OPTION PRICE OPTION PRICE OPTION PRICE
(EXCLUDING RESTRICTED STOCK) 1995 RANGE 1994 RANGE 1993 RANGE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of the period 217,309 $1.45 367,160 $1.45 367,160 $1.45
Granted 1,840,000 $5.12-$12.50 28,694 $1.45 --
Exercised (20,804) $1.45 -- --
Canceled (20,158) $1.45 (178,545) $1.45 --
--------- -------- ------
Options outstanding at
end of the period 2,016,347 $1.45-$12.50 217,309 $1.45 367,160 $1.45
--------- -------- ------
--------- -------- ------
</TABLE>
All share and per share data have been restated to reflect the 100% stock
dividend effective November 9, 1995 and the conversion of Associated common
stock as a result of the Merger.
On January 1, 1996, the Company granted, subject to stockholder approval,
options exercisable for an aggregate of 240,000 shares of Common Stock at an
exercise price of $12.50 per share (subject to quarterly increases) and 120,000
shares of Common Stock at a fixed exercise price of $5.12 per share. Further,
the Company intends to grant options for an aggregate of 202,772 shares of
Common Stock at an exercise price of $1.45 per share.
10. REDEEMABLE PREFERRED STOCK
At December 31, 1995, the Company had 1,500,000 authorized shares of $0.01
par value preferred stock, of which 15,000 shares were designated as Series A
preferred stock, 15,000 shares were designated as Series B preferred stock,
15,000 shares were designated as Series C preferred stock, and 1,455,000 shares
remained undesignated. At December 31, 1994, the Company had 245,000 authorized
shares of preferred stock (nonvoting), consisting of 15,000 shares of $0.01 par
value Class A preferred stock, 15,000 shares of $0.01 par value Class B
preferred stock, 15,000 shares of $0.01 par value Class C preferred stock and
200,000 shares of $0.01 par value additional preferred stock. All preferred
stock issued at the date of inception was valued at the amount of cash paid or
assets received for the stock at $1,000 per share. On July 28, 1995, the
Company repurchased all 6,892 shares of Series B preferred stock issued and
outstanding for $7.0 million, including accrued and unpaid dividends thereon.
All outstanding shares of preferred stock are senior in preference to the Common
Stock of the Company.
Series A preferred stock must be redeemed by the Company on July 31, 1999.
Dividends are cumulative at a rate of 10% per annum, payable quarterly on April
30, July 31, October 31 and January 31. In the event that the Company does not
pay dividends in cash, the dividend rate increases to 13% per annum and is
payable in stock. Series B and C preferred stock are junior in relation to the
Series A preferred stock. During each of the years ended December 31, 1995,
1994 and 1993, 649 shares of Series A preferred stock were accrued but not
issued. As of December 31, 1995 and 1994, 2,437 and 1,788 shares of Series A
preferred stock have been accrued as dividends but not issued.
37
<PAGE>
Series C preferred stock is redeemable in four equal quarterly installments
on April 30, 2001, July 31, 2001, October 31, 2001, and January 31, 2002.
Dividends for both Series B and C are cumulative at a rate of 9% per annum.
Dividends are payable quarterly on April 30, July 31, October 31 and January 31.
In the event that the Company does not pay dividends in cash, the dividend rate
increases to 10% per annum and is payable in stock. During the year ended
December 31, 1995, noncash dividends were declared and issued for both Series B
and C preferred stock in the amounts of 332 and 763 shares, respectively. In
addition, during 1995 a cash dividend of approximately $254,000 was paid to
Series C preferred stockholders in connection with the repurchase of Series B
preferred stock. During the year ended December 31, 1994, noncash dividends
were declared and issued for both Series B and C preferred stock in the amount
of 617 and 926 shares, respectively. During the year ended December 31, 1993,
noncash dividends were declared and issued for both Series B and C preferred
stock in the amount of 559 and 838 shares, respectively.
All series of preferred stock may be redeemed at the option of the issuer
at any time. All series of preferred stock have a redemption and liquidation
value of $1,000 per share plus the aggregate of accrued and unpaid dividends on
such shares to date. Required redemption of preferred stock for the five
years following the year ended December 31, 1995 is $7.4 million in 1999 for the
Series A preferred stock.
11. REDEEMABLE WARRANTS
The Company had 1,430,468 and 1,311,091 warrants ("Lender Warrants")
outstanding as of December 31, 1995 and 1994, respectively, which allow holders
thereof to buy shares of Common Stock at an exercise price of $0.10 per share.
Outstanding Lender Warrants as of December 31, 1995 were valued at $27.75 per
warrant. During 1995, 117,954 warrants were exercised, 284,484 warrants were
issued or accrued resulting from anti-dilution agreements and 47,153 were
contributed back to the Company and terminated in connection with fees paid by
the Company relating to the issuance of the Notes. Of the Lender Warrants
outstanding as of December 31, 1994, 1,036,229 were valued at the date of
inception at the negotiated amount of $0.97 per warrant while the remaining
274,862 warrants were valued at $1.58 per warrant. In addition, 129,725
additional Lender Warrants were accrued but not issued, as of December 31, 1994.
These warrants were valued at $1.66 per warrant. The exercise period for Lender
Warrants expires January 31, 2002.
The Lender Warrants contain certain put rights which allow the holders
thereof to put the warrants to the Company commencing on February 10, 1996. The
purchase price payable upon the exercise of the put rights is the greater of the
then fair market value or equity value of the warrants, as defined, less the
applicable exercise price of the warrants. Payment of the Lender Warrants can
only occur after repayment of all debt outstanding under the Credit Agreement or
with the consent of the lenders and/or agent under the Credit Agreement.
12. TRANSACTIONS WITH RELATED PARTIES
The Company has management advisory services agreements with three investor
groups. These investor groups provide certain advisory services to the Company
in connection with the Acquisition as defined below.
Pursuant to an agreement, Wingate Partners, L.P. ("Wingate Partners") had
agreed to provide certain oversight and monitoring services to the Company in
exchange for an annual fee of up to $725,000, payment (but not accrual) of which
is subject to restrictions under the Credit Agreement related to certain Company
performance criteria. At the Effective Time, the Company paid aggregate fees to
Wingate Partners of $2.3 million for services rendered in connection with the
Acquisition. Wingate Partners earned an aggregate of $603,000, $350,000 and
$210,000 with respect to each of the fiscal years ended 1995, 1994 and 1993,
respectively, for such oversight and monitoring services. Under the agreement,
the Company is obligated to reimburse Wingate Partners for its out-of-pocket
expenses and indemnify Wingate Partners and its affiliates from loss in
connection with these services. The agreement expires on January 31, 2002,
provided that the agreement continues in effect on a year to year basis
thereafter unless terminated in writing by one of the parties at least 180 days
before the expiration of the primary term or any subsequent yearly term.
38
<PAGE>
Pursuant to an agreement, Cumberland Capital Corporation ("Cumberland") has
agreed to provide certain oversight and monitoring services to the Company in
exchange for (i) an annual fee of up to $137,500 payment (but not accrual) of
which is subject to restrictions under the Credit Agreement related to certain
Company performance criteria and (ii) previously issued shares of Associated
Common Stock that converted in the Merger into 154,126 shares. Subject to
certain exceptions, the issuance of such shares is subject to rescission if the
agreement is terminated before January 31, 2002. At the Effective Time, the
Company paid aggregate fees to Cumberland of $100,000 for services rendered in
connection with the Acquisition. Pursuant to the agreement, Cumberland earned
$129,000, $75,000 and $45,000 with respect to the fiscal years ended 1995, 1994
and 1993, respectively, for such oversight and monitoring services. The Company
is also obligated to reimburse Cumberland for its out-of-pocket expenses and
indemnify Cumberland and its affiliates from loss in connection with these
services. The agreement expires on January 31, 2002, provided that the
agreement continues in effect on a year to year basis thereafter unless
terminated in writing by one of the parties at least 180 days before the
expiration of the primary term for any subsequent yearly term.
Pursuant to an agreement, Good Capital Co., Inc. ("Good Capital") has
agreed to provide certain oversight and monitoring services to the Company in
exchange for (i) an annual fee of up to $137,500, payment (but not accrual) of
which is subject to restrictions under the Credit Agreement related to certain
Company performance criteria and (ii) previously issued shares of Associated
Common Stock that converted in the Merger into 154,126 shares. Subject to
certain exceptions, the issuance of such shares is subject to rescission if the
agreement is terminated before January 31, 2002. At the Effective Time, the
Company paid aggregate fees to Good Capital of $100,000 for services rendered in
connection with the Acquisition. Pursuant to the agreement, Good Capital earned
an aggregate $129,000, $75,000 and $45,000 in each of the fiscal years ended
1995, 1994 and 1993, respectively, for such oversight and monitoring services.
The Company is also obligated to reimburse Good Capital for its out-of-pocket
expenses and indemnify Good Capital and its affiliates from loss in connection
with these services. The agreement expires on January 31, 2002, provided that
the agreement continues in effect thereafter on a year to year basis unless
terminated in writing by one of the parties at least 180 days before the
expiration of the primary term or any subsequent yearly term.
13. INCOME TAXES
The provision for (benefit from) income taxes consists of the following
(dollars in thousands):
Year Ended December 31,
------------------------
1995 1994 1993
------ ------ ------
Currently payable -
Federal $4,172 $3,090 $ 227
State 1,119 903 554
------ ------ ------
Total currently payable 5,291 3,993 781
Deferred, net -
Federal (142) 166 1,012
State (21) 24 148
Valuation allowance reduction - (190) (1,160)
------ ------ ------
Total deferred, net (163) - -
------ ------ ------
Provision for income taxes $5,128 $3,993 $ 781
------ ------ ------
------ ------ ------
39
<PAGE>
The Company's effective income tax rates for the years ended December 31,
1995, 1994 and 1993 varied from the statutory Federal income tax rate as set
forth in the following table (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994 1993
------------------ ----------------- -----------------
% OF % OF % OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax provision based on the
federal statutory rate $3,980 35.0% $3,535 34.0% $1,273 34.0%
State and local income taxes -
net of federal income tax
benefit 705 6.2 607 5.8 492 13.2
Non-deductible and other 443 3.9 41 .4 176 4.7
Valuation allowance reduction -- -- (190) (1.8) (1,160) (31.0)
------ ------- ------ ------- ------ -------
Provision for income taxes $5,128 45.1% $3,993 38.4% $ 781 20.9%
------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ -------
</TABLE>
The deferred tax assets and liabilities result from timing differences in
the recognition of certain income and expense items for financial and tax
accounting purposes. The sources of these differences and the related tax
effects were as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1994
---------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Accrued expenses $20,351 $ -- $4,566 $ --
Allowance for doubtful accounts 10,645 -- 1,664 --
Inventory reserves and adjustments -- 14,756 1,264 --
Depreciation and amortization -- 42,300 -- 390
Reserve for restructuring charges
and other 13,970 331 1,869 --
--------- ----------- -------- ---------
44,966 57,387 9,363 390
Valuation allowance -- -- (8,973) --
--------- ----------- -------- ---------
Total $44,966 $57,387 $ 390 $ 390
--------- ----------- -------- ---------
--------- ----------- -------- ---------
</TABLE>
As a result of the Acquisition and Merger, the Company determined that the
valuation allowance for deferred tax assets was no longer necessary and it has
been eliminated.
In the Consolidated Balance Sheets, these deferred assets and deferred
liabilities are classified as deferred tax assets or deferred income tax
liabilities, based on the classification of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to
an asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference.
14. SUPPLEMENTAL CASH FLOW INFORMATION
In addition to the information provided in the Consolidated Statements of
Cash Flows, the following are supplemental disclosures of cash flow information
for the twelve months ended December 31, 1995, 1994 and 1993 (dollars in
thousands):
1995 1994 1993
------- ------ ------
Cash paid during the year for:
Interest $36,120 $6,588 $6,119
Income taxes 8,171 2,118 630
40
<PAGE>
The following are supplemental disclosures of noncash investing and
financing activities for the twelve months ended December 31, 1995, 1994 and
1993 (dollars in thousands):
- On May 3, 1995, the Company issued stock valued at $2,406 in exchange
for services related to the issuance of the Notes.
- On March 30, 1995, the Company issued stock valued at $2,162 in
exchange for services related to financing the Acquisition.
- In 1994, Associated issued $9,000 of common stock to retire a $9,000
deferred obligation related to a transition services agreement.
- In 1994, Associated accrued $244 for warrants which had an exercise
price less than the fair market value of the common stock.
- In 1994, Associated accrued $63 for common stock shares to be issued
at less than fair market value.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents $11,660 $ 11,660 $ 1,849 $ 1,849
Current maturities of long-term
obligations 23,886 23,886 5,901 5,901
Long-term debt:
Notes 150,000 163,875 -- --
All other 376,198 376,198 55,467 55,467
</TABLE>
The fair value of the Notes is based on quoted market prices. The fair
value of the interest rate collar, estimated as a $3.9 million payable, is based
on quotes from counterparties.
16. CONTEMPLATED COMMON STOCK OFFERING
The Company has filed a preliminary registration statement with the
Securities and Exchange Commission. The contemplated offering included both
a primary component of 3.5 million shares and a secondary component of 3.5
million shares. Subsequently, the Board of Directors determined that the
primary offering would be indefinitely postponed.
41
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
OF PERIOD EXPENSES OTHER(3) DEDUCTIONS OF PERIOD
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
YEAR ENDED:
December 31, 1995(1) $3,496 $ 5,169 $ 4,776 $ 6,126(A) $7,315
December 31, 1994(2) 3,544 1,528 1,576(A) 3,496
December 31, 1993(2) 3,360 2,152 1,968(A) 3,544
Sales Returns:
YEAR ENDED:
December 31, 1995(1) $ 540 $60,598 $12,051 $64,216(B) $8,973
December 31, 1994(2) 514 42,792 42,766(B) 540
December 31, 1993(2) 660 39,598 39,744(B) 514
</TABLE>
(1) Reflects the results of Associated only for the three months ended March
30, 1995 and the Company for the nine months ended December 31, 1995.
(2) Reflects the results of Associated only.
(3) Reflects the liability assumed as a result of the Merger.
(A) Accounts determined to be uncollectible and charged against reserves, net
of collections on accounts previously written off.
(B) Credit memos issued for sales returns.
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF
DIRECTORS OF UNITED STATIONERS INC.
We have audited the accompanying consolidated balance sheet of United
Stationers Inc. and Subsidiary as of March 30, 1995 and the related consolidated
statements of operations, changes in stockholders' investment and cash flows for
the seven months then ended. Our audit also included the financial statement
schedule as of March 30, 1995 and for the seven months then ended listed in the
index at Item 14(A). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United
Stationers Inc. and Subsidiary at March 30, 1995 and the consolidated results of
their operations and their cash flows for the seven months then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
June 27, 1995
43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF
DIRECTORS OF UNITED STATIONERS INC.
We have audited the accompanying consolidated balance sheets of UNITED
STATIONERS INC. (a Delaware Corporation) AND SUBSIDIARIES as of August 31, 1994
and 1993, and the related consolidated statement of operations, changes in
stockholders' investment and cash flows for fiscal years ended August 31, 1994,
1993 and 1992. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Stationers Inc. and Subsidiaries as of August 31, 1994 and 1993, and the results
of its operations and its cash flows for the fiscal years ended August 31, 1994,
1993 and 1992, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Chicago, Illinois,
October 6, 1994.
44
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
SEVEN MONTHS ENDED FOR THE YEAR ENDED AUG. 31,
-------------------- --------------------------------------
(UNAUDITED)
MARCH 30, March 31,
1995 1994 1994 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $980,575 $871,585 $1,473,024 $1,470,115 $1,094,275
COST OF SALES 773,857 675,720 1,150,123 1,125,596 848,588
- ---------------------------------------------------------------------------------------------
Gross profit on sales 206,718 195,865 322,901 344,519 245,687
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSE
Warehousing, marketing and
administrative expenses 174,021 170,420 286,607 298,405 213,372
Merger-related costs 27,780 -- -- -- --
Restructuring charge -- -- -- -- 5,913
- ---------------------------------------------------------------------------------------------
Total operating expenses 201,801 170,420 286,607 298,405 219,285
- ---------------------------------------------------------------------------------------------
Income from operations 4,917 25,445 36,294 46,114 26,402
- ---------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (7,640) (6,095) (10,722) (9,849) (6,980)
Interest income 140 258 261 299 477
Other, net 41 117 225 355 364
- ---------------------------------------------------------------------------------------------
Total other income (expense) (7,459) (5,720) (10,236) (9,195) (6,139)
- ---------------------------------------------------------------------------------------------
Income (Loss) before income taxes (2,542) 19,725 26,058 36,919 20,263
INCOME TAXES 4,692 8,185 10,309 15,559 8,899
- ---------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (7,234) $11,540 $ 15,749 $21,360 $ 11,364
- ---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 18,593,614 18,585,451 18,587,282 18,559,600 16,088,450
- ---------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON
SHARE $(0.39) $0.62 $0.85 $1.15 $0.71
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
45
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Aug. 31,
MARCH 30, -----------------------
ASSETS 1995 1994 1993
- --------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 14,515 $ 6,920 $ 7,889
Accounts receivable, less reserves for
doubtful accounts of $4,775 in 1995,
$4,010 in 1994 and $3,964 in 1993 188,672 187,565 188,396
Inventories 306,741 225,794 229,760
Deferred income taxes and prepaid expenses 22,987 15,512 16,426
- --------------------------------------------------------------------------------
Total current assets 532,915 435,791 442,471
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 92,907 92,099 90,147
Fixtures and equipment 152,059 151,793 144,625
Leasehold improvements 85 36 46
- --------------------------------------------------------------------------------
Total property, plant and equipment 245,051 243,928 234,818
Less - Accumulated depreciation
and amortization 118,219 114,364 97,182
- --------------------------------------------------------------------------------
Net property, plant and equipment 126,832 129,564 137,636
- --------------------------------------------------------------------------------
GOODWILL, NET 41,719 42,369 43,484
- --------------------------------------------------------------------------------
OTHER ASSETS 10,373 10,826 11,195
- --------------------------------------------------------------------------------
Total assets $711,839 $618,550 $634,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
46
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Aug. 31,
MARCH 30, --------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term obligations $ 43,501 $ 6,338 $ 3,448
Accounts payable 146,222 121,793 150,374
Accrued expenses 77,219 65,055 69,175
Accrued income taxes 8,373 2,778 3,400
- --------------------------------------------------------------------------------
Total current liabilities 275,315 195,964 226,397
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES 13,494 17,427 14,484
- --------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS:
Long-term debt 173,933 149,465 146,735
Other liabilities 15,972 9,684 9,473
- --------------------------------------------------------------------------------
Total long-term obligations 189,905 159,149 156,208
- --------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT:
Preferred stock, no par value, authorized
1,500,000 shares, no shares issued
or outstanding -- -- --
Common stock, $0.10 par value, authorized
40,000,000 shares, issued 18,610,929
shares in 1995, 18,592,054 shares in
1994 and 18,586,627 shares in 1993 1,861 1,859 1,859
Capital in excess of par value 91,912 91,729 91,687
Retained earnings 139,495 152,448 144,292
Less -- 14,347 shares, 1,828 shares and 9,993
shares of common stock in treasury at cost
in 1995, 1994 and 1993, respectively (143) (26) (141)
- --------------------------------------------------------------------------------
Total stockholders' investment 233,125 246,010 237,697
- --------------------------------------------------------------------------------
Total liabilities and stockholders' investment $711,839 $618,550 $634,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
47
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Number of Capital in Total
Common Common Excess of Retained Treasury Stockholders'
Shares Stock Par Value Earnings Stock Investment
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1991 15,535,013 $1,554 $54,557 $125,704 $(231) $181,584
Net Income -- -- -- 11,364 -- 11,364
Issuance of common shares 3,016,169 301 36,643 -- -- 36,944
Cash dividends - $0.40 per
share on common stock -- -- -- (6,535) -- (6,535)
Disposition of treasury stock -- -- -- -- 30 30
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1992 18,551,182 $1,855 $91,200 $130,533 $(201) $223,387
Net Income -- -- -- 21,360 -- 21,360
Issuance of common shares 35,445 4 487 -- -- 491
Cash dividends - $0.40 per
share on common stock -- -- -- (7,601) -- (7,601)
Disposition of treasury stock -- -- -- -- 60 60
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1993 18,586,627 $1,859 $91,687 $144,292 $(141) $237,697
Net Income -- -- -- 15,749 -- 15,749
Issuance of common shares 5,427 -- 42 -- -- 42
Cash dividends - $0.40 per
share on common stock -- -- -- (7,593) -- (7,593)
Disposition of treasury stock -- -- -- -- 115 115
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1994 18,592,054 $1,859 $91,729 $152,448 $ (26) $246,010
Net Loss -- -- -- (7,234) -- (7,234)
Issuance of common shares 18,875 2 183 -- -- 185
Cash dividends - $0.30 per
share on common stock -- -- -- (5,719) -- (5,719)
Acquisition of treasury stock -- -- -- -- (117) (117)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 30, 1995 18,610,929 $1,861 $91,912 $139,495 $(143) $233,125
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
48
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
-----------------------
(UNAUDITED) FISCAL YEAR ENDED AUG. 31,
MARCH 30, MARCH 31, --------------------------------
FOR THE PERIOD ENDED 1995 1994 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <S> <S> <S> <S> <S>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ (7,234) $ 11,540 $ 15,749 $ 21,360 $ 11,364
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES, NET OF SDC PURCHASE IN 1992 -
Loss on sale of fixed assets 200 494 579 476 55
Depreciation and amortization 12,595 12,103 21,236 21,243 19,879
(Decrease)/increase in deferred taxes (3,933) 1,298 2,943 2,261 (8,240)
Increase/(decrease) in accounts payable 24,429 (64,918) (28,581) 15,259 7,195
Increase/(decrease) in accrued liabilities 17,260 (14,407) (7,522) 3,655 (2,896)
(Increase)/decrease in accounts receivable (1,107) 8,062 831 (20,016) (12,681)
(Increase)/decrease in inventories (80,947) (7,818) 3,966 (7,353) (15,776)
(Increase)/decrease in prepaid expenses (7,475) (752) 914 1,392 3,940
Increase in Other Assets (1,341) (1,359) (2,007) (2,275) (5,378)
- ------------------------------------------------------------------------------------------------------------------------------
Total Adjustments (40,319) (67,297) (7,641) 14,642 (13,902)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (47,553) (55,757) 8,108 36,002 (2,538)
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (7,799) (4,487) (10,719) (30,008) (8,342)
Proceeds from disposition of property, plant & equipment 35 200 220 50 51
Payment for purchase of SDC, net of cash acquired of $2,480 - - - - - - - - (37,338)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (7,764) (4,287) (10,499) (29,958) (45,629)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in short-term debt 5,660 33 (2,855) (481) 1,636
Payments on long-term obligations (4,541) (1,269) (1,533) (4,537) (4,213)
Additions to long-term obligations 67,444 69,348 13,246 1,971 57,460
Issuance of common shares 185 25 42 491 164
Payment of dividends (5,719) (5,738) (7,593) (7,601) (6,535)
(Acquisition)/disposition of treasury stock (117) 115 115 60 30
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 62,912 62,514 1,422 (10,097) 48,542
- ------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 7,595 2,470 (969) (4,053) 375
Cash and Cash Equivalents at the beginning of the year 6,920 7,889 7,889 11,942 11,567
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 14,515 $10,359 $ 6,920 $ 7,889 $ 11,942
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 6,851 $ 5,943 $ 10,199 $ 8,972 $ 6,722
Income taxes 9,257 6,054 6,229 18,395 14,489
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair Value of Assets Acquired - - - - - - - - 175,359
Cash Paid - - - - - - - - (39,818)
Common Stock Issued - - - - - - - - (36,780)
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities Assumed/Incurred - - - - - - - - 98,761
- ------------------------------------------------------------------------------------------------------------------------------
Investment in Business Venture - - - - - - 742 - -
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
49
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUBSEQUENT EVENT
On March 30, 1995, Associated Holdings, Inc. ("Associated") purchased
92.5% of the then outstanding shares of the common stock, $0.10 par value
("Common Stock") of United Stationers Inc. ("United") for approximately
$266.6 million in the aggregate pursuant to a tender offer (the "Tender
Offer"). Immediately thereafter, Associated merged with and into United (the
"Merger" and, collectively with the Tender Offer, the "Acquisition"), and
Associated Stationers, Inc., a wholly-owned subsidiary of Associated ("ASI")
merged with and into United Stationers Supply Co., a wholly-owned subsidiary
of United ("USSC"), with United and USSC continuing as the respective
surviving corporations. United, as the surviving corporation following the
Merger, is referred to herein as the "Company." As a result of share
conversions in the Merger, immediately after the Merger, (i) the former
holders of common stock and common stock equivalents of Associated owned
shares of Common Stock and warrants or options to purchase shares of Common
Stock constituting in the aggregate approximately 80% of the shares of Common
Stock on a fully diluted basis, and (ii) holders of pre-Merger United common
stock owned in the aggregate approximately 20% of the shares of Common Stock
on a fully diluted basis. Although United was the surviving corporation in
the Merger, the transaction was treated as a reverse acquisition for
accounting purposes with Associated as the acquiring corporation.
Immediately following the Merger, the number of outstanding Shares
was 5,998,177 (or 6,973,720 on a fully diluted basis), of which (i) the
former holders of Class A Common Stock, $0.01 par value, and Class B Common
Stock, $0.01 par value, of Associated ("Associated Common Stock") and
warrants or options to purchase Associated Common Stock in the aggregate
owned 4,603,373 Shares constituting approximately 76.8% of the outstanding
Shares and outstanding warrants or options for 975,603 Shares (collectively
80.0% on a fully diluted basis) and (ii) pre-Merger holders of Shares (other
than Associated-owned Shares and treasury Shares) in the aggregate owned
1,394,744 Shares constituting approximately 23.2% of the outstanding Shares
(or 20.0% on a fully diluted basis). As used in this paragraph, the term
"Shares" includes shares of Nonvoting Common Stock, $0.01 par value, of the
Company, which are immediately convertible into Shares for no additional
consideration.
To finance the Offer, refinance existing debt of ASI, the Company and
USSC, repurchase stock options and pay related fees and expenses, Associated,
ASI, USSC and the Company entered into (i) new credit facilities ("New Credit
Facilities") with a group of banks and financial institutions providing for
term loan borrowings of $200.0 million and revolving loan borrowings of up to
$300.0 million and (ii) a senior subordinated bridge loan facility in the
aggregate principal amount of $130.0 million (the "Subordinated Bridge
Facility"). In addition, simultaneously with the consummation of the Offer,
Associated obtained $12.0 million from the sale of additional shares of
Associated Common Stock, which proceeds were used to finance the purchase of
a portion of the Shares pursuant to the Offer.
On May 3, 1995, USSC completed the issuance of $150.0 million of 12 3/4%
Senior Subordinated Notes (the "Notes") due 2005. The net proceeds of the
Notes (after discount and fees of approximately $5.5 million) were used to
pay certain expenses, to repay the $130.0 million Subordinated Bridge
Facility (together with $1.6 million in accrued and unpaid interest thereon),
to repay a portion of the Tranche A and Tranche B term loans (totaling
approximately $6.5 million) and provide working capital. The Company expects
to repurchase the Series B Preferred Stock, together with accrued and unpaid
dividends thereon (approximately $7.0 million).
The New Credit Facilities contain certain financial covenants covering
the Company and its subsidiaries on a consolidated basis, including, without
limitation, covenants relating to tangible net worth, capitalization, fixed
charge coverage, capital expenditures and payment of dividends by the Company.
Effective for 1995, the Company changed its fiscal year from a year end
of August 31 to December 31. The financial statements included herein
represent the final financial statements of the Company through the date of
the consummation of the Merger. Future financial statements of the Company
will reflect Associated and its acquisition of the Company, and will be on
the basis of a December 31 fiscal year end.
50
<PAGE>
As part of the Merger, the Company incurred approximately $27.8 million
of merger-related costs. The amount consisted of severance payments under
employment contracts ($9.6 million); insurance benefits under employment
contracts($7.4 million); legal, accounting and other professional services
fees ($5.2 million); retirement of stock options ($3.0 million); and fees for
letters of credit related to employment contracts and other costs ($2.6
million).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United
Stationers Inc. and its wholly owned subsidiaries ("the Company").
Investments in 20% to 50% owned companies are accounted for by the equity
method. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior-year amounts have been
reclassified to conform with current-year presentations.
REVENUE RECOGNITION
Sales and provisions for estimated sales returns and allowances are
recorded at the time of shipment.
CASH AND CASH EQUIVALENTS
Investments in low-risk instruments which have an original maturity of
three months or less are considered to be cash equivalents. Cash equivalents
are stated at cost which approximates market value. The Company's cash
equivalent policy conforms to the requirements of Financial Accounting
Standard No. 95.
INVENTORIES
Inventories constituting approximately 82% of total inventories at March
30, 1995, August 31, 1994 and August 31, 1993 have been valued under the
last-in, first-out (LIFO) method with the remainder of the inventory valued
under the first-in, first-out (FIFO) method. Inventory valued under the FIFO
and LIFO accounting methods are recorded at the lower of cost or market. If
the lower of FIFO cost or market method of inventory accounting had been used
by the Company for all inventories, merchandise inventories would have been
approximately $21,797,000, $18,854,000 and $16,679,000 higher than reported
at March 30, 1995, August 31, 1994 and August 31, 1993, respectively.
In 1994, liquidations of certain LIFO inventories had the effect of
increasing net earnings by $830,000 or $0.04 per share.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are determined by using the straight-line
method over the estimated useful lives of the assets.
The estimated useful life assigned to fixtures and equipment is from two
to 10 years; the estimated useful life assigned to buildings does not exceed
40 years; leasehold improvements and assets under capital leases are
amortized over the lesser of their useful lives or the term of the applicable
lease.
Goodwill reflecting the excess of cost over the value of net assets of
businesses acquired is being amortized on a straight-line basis over 40
years. The cumulative amount of goodwill amortized at March 30, 1995, August
31, 1994 and August 31, 1993 is $2,965,000, $2,315,000 and $1,200,000,
respectively.
SOFTWARE CAPITALIZATION
The Company capitalizes major internal and external systems development
costs determined to have benefits for future periods. Amortization expense is
recognized over the periods in which the benefits are realized, generally not
to exceed three years. Systems development costs capitalized were $1,896,000,
51
<PAGE>
$2,166,000, $1,955,000 and $4,202,000 in 1995, 1994, 1993 and 1992,
respectively. Amortization expense was $1,795,000, $2,376,000, $2,946,000
and $3,384,000 in 1995, 1994, 1993 and 1992, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and debt instruments. The
book value of cash and cash equivalents, trade receivables and trade payables
are considered to be representative of their respective fair values.
Borrowings under the Company's Reducing Revolving Credit and Term Loan
Agreement are considered to be at fair market value. The Company had
approximately $62.4 million, $62.7 million and $66.1 million of long-term
debt (excluding borrowings under the Company's Reducing Revolving Credit and
Term Loan Agreement) outstanding as of March 30, 1995, August 31, 1994, and
August 31, 1993, respectively. The approximate fair value was $61.3 million,
$59.8 million and $68.0 million as of March 30, 1995, August 31, 1994 and
August 31, 1993, respectively. The fair value is based on the current rates
offered to the Company for debt of similar maturities. The fair values on
the long-term debt financial instruments are not necessarily indicative of
the amounts that would be realized in a current market exchange and exclude
any liquidation or origination costs.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's foreign operations are
translated at current exchange rates. Revenues and expenses are translated
at average exchange rates for the year in accordance with Statement of
Financial Accounting Standard No. 52. The amounts for all years presented
were immaterial.
EARNINGS PER SHARE
Earnings per share and the effect on earnings per share of potentially
dilutive stock options are computed by the treasury stock method. This
computation takes into account the weighted average number of shares
outstanding during each year, outstanding stock options and their exercise
prices, and the market price of the stock throughout the year. The exercise
of outstanding stock options would not result in a material dilution of
earnings per share.
3. BUSINESS COMBINATION AND RESTRUCTURING CHARGE
On June 24, 1992, the Company acquired all of the outstanding capital
stock of SDC Distributing Corp., parent of Stationers Distributing Company,
Inc. ("SDC"). The results of operations of SDC have been included in the
Company's consolidated financial statements since June 25, 1992.
The following summarized unaudited pro forma results of operations for
the years ended August 31, 1992 and 1991 assume the acquisition occurred at
the beginning of the respective periods. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
the results of operations that actually would have resulted had the
combination been in effect on the dates indicated, or which may result in the
future.
1992 1991
- -------------------------------------------------------------------------------
(in thousands of dollars, except share data) (unaudited)
Net Sales.................. $1,445,900 $1,378,734
Net Income................. 20,444 14,070
Net Income per Share....... 1.10 0.76
- -------------------------------------------------------------------------------
In the fourth quarter of 1992, the Company recorded a $5.9 million pre-tax
restructuring charge related to severance payments and closing of certain
facilities associated with the acquisition.
52
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following amounts (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 30 AUGUST 31,
-------- --------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgages, 9.0% to 12.5%, due in installments until 2002, secured by the
Regional Distribution Centers in Livonia, Michigan; Pennsauken,
New Jersey; Dallas, Texas; Woburn, Massachusetts; and The City of
Industry, California $ 12,908 $ 13,182 $ 13,615
Industrial development bonds, interest at 69% of prime, maturing in 2015,
secured by land, buildings and certain equipment located in
Edison, New Jersey 8,000 8,000 8,000
Industrial development bonds, at market interest rates, maturing at
various dates through 2011 14,300 14,300 14,300
Industrial development bonds, at 66% to 79% of prime, maturing at
various dates through 2005 15,500 15,500 15,500
Unsecured loan, at 9.65%, maturing at various dates through 1998 11,450 11,450 14,300
Other long-term debt 276 303 356
Term Loan 30,000 30,000 30,000
Revolver 125,000 63,000 54,000
- --------------------------------------------------------------------------------------------------------------
$217,434 $155,735 $150,071
- --------------------------------------------------------------------------------------------------------------
Less -- current maturities 43,501 6,270 3,336
- --------------------------------------------------------------------------------------------------------------
$173,933 $149,465 $146,735
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The prevailing prime interest rate at March 30, 1995, August 31, 1994
and August 31, 1993 was 9.0%, 7.8%, and 6.0%, respectively.
The Company has a $160.0 million Reducing Revolving Credit and Term Loan
Agreement ("Credit Agreement") with a group of seven lenders (the "Lenders").
The Credit Agreement consists of a $130.0 million revolving credit facility
("Revolver") and a $30.0 million term loan ("Term Loan"). Proceeds are used
to finance working capital requirements and capital expenditures of the
Company.
The Revolver provides for revolving credit loans up to the amount of the
commitment until August 31, 1997, at the Company's option. The initial
$130.0 million commitment decreases to $83.6 million as of August 31, 1997
based on quarterly decreases which began in May 1994 as specified in the
Credit Agreement. As of August 31, 1994, the Revolver commitment is $126.0
million. Under the terms of the Credit Agreement, the Company is required to
pay a facility fee of 3/16 of 1% of the total available Revolver. The Term
Loan (as amended) matures on September 30, 1995 (or earlier upon certain
subsequent offerings by the Company of debt or equity). The Term Loan can be
prepaid without penalty. Interest on both loans is payable at varying rates
provided for in the Credit Agreement.
On February 28, 1995, the Company entered into a $30.0 million line of
credit with a major bank. This credit facility was entered into to meet
seasonal requirements after the Revolver and Term Loan was fully utilized,
and bore interest at agreed upon market rates. The Company had $6.0 million
outstanding under this agreement immediately prior to the Merger. This
agreement was terminated in connection with the Merger.
The Credit Agreement contains certain financial covenants covering the
Company and its subsidiary on a consolidated basis, including, without
limitation, covenants relating to the consolidated current ratio, tangible
net worth, capitalization, fixed charge coverage, capital expenditures and
payment of dividends by the Company.
The net book value of assets subject to secured mortgages and industrial
development bonds as of March 30, 1995, August 31, 1994 and August 31, 1993
was $28,128,000, $28,610,000 and $28,962,000, respectively.
53
<PAGE>
Maturities of long-term debt (excluding amounts borrowed under the
Credit Agreement), for the following periods as indicated, are as follows (in
thousands of dollars):
- -------------------------------------------------------------------------------
YEAR (EXCEPT 1995) AMOUNT
- -------------------------------------------------------------------------------
Nine Months Ending December 31, 1995.................................. $ 6,125
1996.................................................................. 8,167
1997.................................................................. 8,218
1998.................................................................. 8,824
1999.................................................................. 6,129
Later years........................................................... 24,971
- -------------------------------------------------------------------------------
$62,434
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
As part of the Merger, approximately $180 million of debt at March 30,
1995 was refinanced. The refinanced debt consisted of various mortgages, the
Edison, New Jersey industrial development bonds, the private placement loan,
and the Term Loan and Revolver.
5. PENSION PLANS AND POSTRETIREMENT BENEFITS
The Company has pension plans in effect for substantially all employees.
Non-contributory plans covering non-union employees provide pension benefits
that are based on years of credited service and a percentage of annual
compensation. Non-contributory plans covering union members generally
provide benefits of stated amounts based on years of service. The Company
funds the plans in accordance with current tax laws.
The Company also has a non-contributory, non-qualified plan
("Supplemental Benefit Plan") in effect for certain executives. The Company
has not funded this plan.
Pension expense in 1995, 1994, 1993 and 1992 was approximately
$1,707,000, $1,755,000, $1,269,000 and $866,000, respectively.
The following table sets forth the plans' funded status at March 30,
1995, August 31, 1994 and August 31, 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
SUPPLEMENTAL
PENSION PLANS BENEFIT PLANS
-------------------------- ------------------------
1995 1994 1993 1995(1) 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Actuarial Present Value of Benefits Obligation
Vested benefits $16,446 $15,215 $15,063 $0 $ 549 $ 442
Non-vested benefits 1,682 1,887 1,702 0 16 4
- ----------------------------------------------------------------------------------------------------------
Accumulated benefits obligation $18,128 $17,102 $16,765 $0 $ 565 $ 446
Effect of projected future compensation levels 2,511 2,982 2,356 0 328 119
- ----------------------------------------------------------------------------------------------------------
Projected benefits obligation $20,639 $20,084 $19,121 $0 $ 893 $ 565
Plan assets at fair value 22,683 21,000 20,875 0 -- --
- ----------------------------------------------------------------------------------------------------------
Projected benefits obligation less than
(in excess of) plan assets $ 2,044 $ 916 $ 1,754 $0 $(893) $(565)
Unrecognized net gain due to past
experience different from assumptions (914) 266 (279) 0 189 (9)
Unrecognized prior service cost 1,101 1,347 1,270 0 131 160
Unrecognized net obligation (asset) at
September 1, 1985 to be amortized over
3 to 12 years in 1995 and 1994
4 to 13 years in 1993 (412) (467) (561) 0 90 120
- ----------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension liability recognized
in Consolidated Balance Sheets $ 1,819 $2,062 $ 2,184 $0 $(483) $(294)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Supplemental Benefit Plan was funded and paid out as a result of the
merger.
54
<PAGE>
The plans' assets consist of debt securities, equity securities and
government securities. Net periodic pension cost for 1995, 1994, 1993 and 1992
for pension and supplemental benefits plans includes the following components
(in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost - benefits earned during the period $1,084 $1,863 $1,293 $1,055
Interest cost on projected benefits obligation 909 1,436 1,209 952
Actual return on assets (780) 263 (3,235) (983)
Net amortization and deferral 494 (1,807) 2,002 (158)
- --------------------------------------------------------------------------------
Net periodic pension cost $1,707 $1,755 $1,269 $ 866
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The projected benefit obligations for 1995, 1994, 1993 and 1992 were
determined using an assumed discount rate of 7.5%, 7.5%, 7.25%, and 7.5%,
respectively. In 1995, 1994, 1993, and 1992, the assumed rate of compensation
increase ranged from 0% to 5.5%. The expected long-term rate of return on
assets used in determining net periodic pension cost was 7.5%.
The Company provides an unfunded health care plan to substantially all
retired non-union employees and their dependents. Eligibility requirements are
based on the individual's age (minimum age of 55), years of service and hire
date. The benefits are subject to retiree contributions, deductibles, co-
payment provisions and other limitations.
During the first quarter of 1994, the Company adopted Statement of
Financial Accounting Standard No. 106 (SFAS 106), "Employer's Accounting for
Postretirement Benefits Other Than Pensions." SFAS 106 requires companies to
accrue the expected cost of postretirement health care and life insurance
benefits throughout the employee's active service period. Previously,
postretirement health care costs were recognized as claims were paid. The
Company elected to amortize the unfunded Accumulated Postretirement Benefit
Obligation (APBO) over 20 years.
The assumed health care average cost trend rate used in measuring the APBO
at March 30, 1995 was 11.0% in 1995 and 3% in 1996 and beyond. Beginning in
1996, retirees will pay the difference between actual plan costs and the portion
of cost paid by the Company which is limited to a cost trend rate of 3%. The
assumed discount rate was 7.75%. A 1% increase in the care cost trend rate
would increase the APBO as of March 30, 1995 by approximately $339,000 and the
sum of the 1995 annual service cost and interest cost by approximately $35,000.
The cost of postretirement health care benefits for the seven months ended
March 30, 1995 and the year ended August 31, 1994 are as follows (in thousands
of dollars):
1995 1994
---- ----
Service cost $109 $246
Interest on accumulated benefits obligation 106 146
Amortization of transition obligation 58 100
---- ----
Net postretirement benefit cost $273 $492
---- ----
---- ----
55
<PAGE>
The following table sets forth the amounts recognized in the Company's
Balance Sheet at March 30, 1995 and August 31, 1994 (in thousands of dollars):
MARCH 30, AUG. 31,
1995 1994
------- -------
Retirees $ (781) $ (601)
Other active plan participants (1,758) (1,634)
------- -------
Total APBO $(2,539) $(2,235)
Unrecognized transition obligation 1,838 1,897
Unrecognized net (gain) 63 (76)
------- -------
Accrued postretirement benefit obligation $ (638) $ (414)
------- -------
------- -------
Prior to 1994, the cost of providing postretirement health care benefits,
net of retiree contributions, was $46,777 in 1993 and $33,396 in 1992.
The Company has a qualified Profit Sharing Plan in which all salaried
employees and certain hourly paid employees of the Company are eligible to
participate upon completion of six consecutive months of employment. The Profit
Sharing Plan provides for annual contributions by the Company in an amount
determined by the Board of Directors. The Plan also permits employees to have
contributions made as 401(k) salary deferrals on their behalf and to make after-
tax voluntary contributions. The Plan provides that the Company may match
employee contributions as 401(k) salary deferrals. Company contributions to the
Plan for both profit sharing and matching of employee contributions were
approximately $0.8 million in 1995, $0.5 million in 1994, $1.4 million in 1993
and $1.0 million in 1992.
6. STOCK INCENTIVE PLANS
As a result of the change in control of the Company, the Company paid out
approximately $3.0 million to option holders representing the difference between
the tender offer price of the stock ($15.50 per share) and the option exercise
price. The amount was included in merger-related costs in 1995.
Under the Directors' Stock Option Plan, the Company granted options for
7,500 shares at a price of $13.75 per share in 1995, 7,500 shares at a price of
$15.25 per share in 1994 and 7,500 shares at a price of $19.25 per share in
1993. The Directors' Option Plan provides for the granting of options covering
up to 100,000 shares of the Company's common stock, subject to anti-dilution
adjustments. Options are exercisable at any time after they are granted, but
for not more than ten years after the option's grant. As of the period ended
1995, 1994, and 1993, 0, 41,000 and 45,500 options, respectively, were
outstanding at a price range of $8.75 to $22.13 per share.
During fiscal 1995, options for a total of 100,000 shares at $10.50 were
granted to certain officers. The grant was approved at the 1995 Annual Meeting
held in January.
Under the Company's 1981 Stock Incentive Award Plan, options outstanding
had an exercisable life of either five, six or ten years from the date of grant.
The Company granted certain officers 15,000 and 16,700 shares of restricted
stock in 1992 and 1991, respectively. There have been no restricted stock
grants since 1992. The grants of restricted shares resulted in deferred
compensation expense of $699,000 of which $16,000, $39,000, $132,000 and
$185,000 was recognized in 1995, 1994, 1993 and 1992, respectively. The
unrecognized portion of deferred compensation was $0, $16,000 and $55,000 as of
March 30, 1995, August 31, 1994 and August 31, 1993, respectively. Under the
terms of the grant, the stock does not vest to the employee until completion of
three years of employment after the date of grant. The 1981 Stock Incentive
Award Plan was terminated by the Company's Board of Directors on March 30, 1995.
In 1989, the Board of Directors terminated the 1985 Non-qualified Stock
Option Plan so that no further stock options would be issued under this plan.
The termination of the plan did not affect the options previously granted and
outstanding. No option could have been exercised more than ten years after its
grant.
56
<PAGE>
The following table summarizes the transactions of the 1981 and 1985
Option Plans for 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1981 Stock Incentive Award Plan Option Price Option Price Option Price
(excluding restricted stock) 1995 Range 1994 Range 1993 Range
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of the period 1,135,060 $8.64-$19.39 891,350 $8.64-$19.39 995,520 $8.64-$19.39
Granted 100,000 $10.50 401,050 $10.00-$16.25 18,000 $13.75-$14.00
Exercised (22,860) $8.64-$9.29 (3,520) $ 8.64-$13.75 (37,040) $8.64-$17.48
Canceled(1) (1,212,200) $8.64-$19.39 (153,820) $ 8.64-$19.39 (85,130) $8.64-$19.39
---------- -------- --------
Options outstanding at end
of the period - - 1,135,060 891,350
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
1985 Non-qualified Stock Option Price Option Price Option Price
Option Plan 1995 Range 1994 Range 1993 Range
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at
beginning of the period 109,500 $14.78-$18.09 109,500 $14.78-$18.09 143,000 $14.78-$18.09
Granted - - - - - - - - - - - -
Exercised - - - - - - - - (5,000) $18.09
Canceled(1) (109,500) $14.78-$18.09 - - - - (28,500) $14.78-$18.09
---------- -------- --------
Options outstanding at end
of the period - - 109,500 109,500
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As a result in change in control of the Company, the Company paid out to
option holders the difference between the tender offer price of the stock
($15.50 per share) and the option exercise price. The total amount was
included in merger-related costs in 1995.
7. LEASES
The Company has entered into several non-cancelable long-term leases on
property and equipment. Future minimum lease payments for non-cancelable
leases in effect at March 30, 1995 having initial remaining terms of more than
one year are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Operating Leases
--------------------------------
Lease Sublease Net Lease
Year (except 1995) Payments Income Payments
- --------------------------------------------------------------------
<S> <C> <C> <C>
Nine months ending Dec. 31, 1995 $ 9,165 $ 617 $ 8,548
1996 9,894 269 9,625
1997 7,712 199 7,513
1998 5,811 146 5,665
1999 4,275 61 4,214
Later years 14,263 - - 14,263
- --------------------------------------------------------------------
Total minimum lease payments $51,120 $1,292 $49,828
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Rental expense for all operating leases was approximately $7,731,000,
$13,549,000, $14,917,000 and $11,546,000 in 1995, 1994, 1993 and 1992,
respectively.
57
<PAGE>
8. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes," which was
adopted in 1992.
The Company does not intend to provide Federal income taxes on the
undistributed earnings for its foreign subsidiaries. The Company's policy is
to leave the income in the country of origin until such time as all Federal
income tax due upon its distribution will be fully offset by foreign tax
credits. As of March 30, 1995, neither foreign subsidiary had undistributed
earnings.
The Company provides for income taxes at statutory rates based on income
reported for financial statement purposes. A summary of income tax expense is
shown below (in thousands of dollars):
<TABLE>
- --------------------------------------------------------------------
1995 1994 1993 1992
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Taxes currently payable
Federal $ 14,122 $ 7,059 $ 7,972 $ 8,565
Other tax credits - - (5) (10) (37)
State 2,584 1,591 2,274 2,501
Prepaid and deferred taxes (12,014) 1,664 5,323 (2,130)
- --------------------------------------------------------------------
$ 4,692 $10,309 $15,559 $ 8,899
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
The deferred tax assets and liabilities result from timing differences
in the recognition of certain income and expense items for financial and tax
accounting purposes. The sources of these differences and the related tax
effects were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
March 30, 1995 August 31, 1994 Aug. 31, 1993
-------------- --------------- -------------
Assets Liabilities Assets Liabilities Assets Liabilities
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserves for returns, rebates and allowances $18,869 $ - - $14,593 $ - - $14,250 $ - -
Reserves for direct acquisition costs 1,477 - - 1,700 - - 3,887 - -
Reserves for restructuring charges 10 - - 332 - - 1,720 - -
Merger-related costs 6,737 - - - - - - - - - -
Reserves for worker's compensation insurance 3,814 - - 3,905 - - 3,818 - -
Accelerated depreciation - - 17,716 - - 17,360 - - 15,252
Software capitalization - - 1,465 - - 1,595 - - 1,913
Inventory reserves and related
purchase accounting differences - - 6,142 - - 7,143 - - 7,738
All other 4,554 2,629 4,843 2,472 3,613 1,836
- -------------------------------------------------------------------------------------------------------------------
Total $35,461 $27,952 $25,373 $28,570 $27,288 $26,739
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
In the consolidated balance sheets, these deferred assets and deferred
liabilities are classified as deferred tax assets or deferred income tax
liabilities, based on the classification of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to
an asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal
date of the temporary difference.
58
<PAGE>
No valuation allowance was recorded in 1995 or 1994. A valuation
allowance of $1,504,000 was recorded at August 31, 1993.
The table below records the differences between the statutory income
tax rate and the Company's effective income tax rate:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1995 1994 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory Federal income tax 35.0% 35.0% 34.7% 34.0%
State income taxes, net of the Federal
income tax benefit (4.9) 4.8 6.1 6.6
Losses from foreign subsidiaries - - 1.9 1.3 3.3
Liquidation of a foreign subsidiary - - (3.9) - - - -
Non-deductible goodwill amortization (9.0) 1.5 .9 - -
Non-deductible merger-related expenses (208.3) - - - - - -
Other, net 2.6 .3 (.9) - -
------ ---- ---- ----
Effective income tax rate (184.6)% 39.6% 42.1% 43.9%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
59
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
Period ended:
March 30, 1995* $ 4,010 $ 2,510 $ 1,745 (A) $ 4,775
August 31, 1994 3,964 5,750 5,704 (A) 4,010
August 31, 1993 4,335 7,316 7,687 (A) 3,964
Sales Returns, Rebates and Allowances
Period ended:
March 30, 1995* $31,293 $43,523 $48,371 (B) $26,445
August 31, 1994 25,552 67,970 62,229 (B) 31,293
August 31, 1993 23,794 52,593 50,835 (B) 25,552
</TABLE>
* Reflects the transition period of September 1, 1994 through March 30, 1995
(A) Accounts determined to be uncollectible and charged against reserves, net
of collections on accounts previously written off.
(B) Credit memos issued for sales returns, rebates and allowances.
60
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant had no disagreements on accounting and financial
disclosure of the type referred to in Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information with respect to those
individuals who are currently serving as members of the Board of Directors or
as executive officers of the Company on February 1, 1996:
<TABLE>
Name Age Position
- --------------------------------------------------------------------------------
<S> <C> <C>
Thomas W. Sturgess...... 45 Director, Chairman of the Board, President
and Chief Executive Officer
Michael D. Rowsey....... 43 Director and Executive Vice President
Daniel H. Bushell....... 44 Executive Vice President, Chief Financial Officer and
Assistant Secretary
Steven R. Schwarz....... 42 Executive Vice President
Robert H. Cornell....... 56 Vice President, Human Resources
Otis H. Halleen......... 61 Vice President, Secretary and General Counsel
James A. Pribel......... 42 Treasurer
Ted S. Rzeszuto......... 43 Vice President and Controller and Assistant Secretary
Albert Shaw............. 46 Vice President, Operations
Ergin Uskup............. 58 Vice President, Management Information Systems
and Chief Information Officer
Gary G. Miller.......... 45 Director and Assistant Secretary
James T. Callier, Jr. .. 60 Director
Daniel J. Good.......... 55 Director
Frederick B. Hegi, Jr. . 52 Director
Jeffrey K. Hewson....... 52 Director
James A. Johnson........ 41 Director
Joel D. Spungin......... 58 Director
</TABLE>
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company. There is no family relationship between any
directors or executive officers of the Company. Officers of the Company are
elected by the Board of Directors and hold office until their respective
successors are duly elected and qualified.
THOMAS W. STURGESS became President and Chief Executive Officer of the
Company on May 31, 1995 and Chairman of the Board of the Company upon
consummation of the Merger. Prior to the Merger, Mr. Sturgess served as
Chairman of the Board and Chief Executive Officer of Associated since January
1992 and had been Chairman of the Board and Chief Executive Officer of ASI
since December 1994. Since 1987, Mr. Sturgess has served as a general partner
of various Wingate entities, including the indirect general partner of each of
Wingate Partners and Wingate II. Mr. Sturgess has not actively participated in
the management of Wingate Partners or the Wingate entities since December 31,
1995. Mr. Sturgess currently serves as a non-executive Chairman of the Board of
Redman Industries, Inc., a manufactured housing producer ("Redman"), as well
as RBPI Holding Corporation, a manufacturer and distributor of aluminum and
vinyl windows. He is a director of Loomis Armored Inc., a provider of armored
car and related services ("Loomis"), and Century Products Company, a
manufacturer and distributor of baby seats and other juvenile products
("Century Products").
61
<PAGE>
MICHAEL D. ROWSEY was elected to the Board of Directors upon consummation
of the Merger and became Executive Vice President of the Company upon
consummation of the Merger with primary responsibility for field operations.
Prior to the Merger, Mr. Rowsey had been a director of Associated since 1992
and President and Chief Operating Officer of Associated since January 1992.
From 1979 to January 1992, Mr. Rowsey served in various capacities with BCOP,
most recently as the North Regional Manager.
DANIEL H. BUSHELL became Executive Vice President and Chief Financial
Officer of the Company upon consummation of the Merger. Mr. Bushell has served
as Assistant Secretary of the Company since January 1996, and served as
Secretary of the Company from June 1995 through such date. Mr. Bushell also
served as Assistant Secretary of the Company from the consummation of the
Merger until June 1995. Prior thereto, Mr. Bushell had been Chief
Administrative and Chief Financial Officer of Associated and ASI since January
1992. From 1978 to January 1992, Mr. Bushell served in various capacities with
ACE Hardware Corporation, most recently as Vice President of Finance.
STEVEN R. SCHWARZ became Executive Vice President of the Company upon
consummation of the Merger with primary responsibility for marketing and
merchandising. Prior thereto, he was Senior Vice President, Marketing of United
since June 1992 and had previously been Senior Vice President, General Manager,
MicroUnited since 1990 and Vice President, General Manager, MicroUnited since
September 1989. He had held a staff position in the same capacity since
February 1987.
ROBERT H. CORNELL became Vice President, Human Resources of the Company
upon consummation of the Merger. Prior thereto, he was Vice President, Human
Resources of United since February 1988, and since 1987 had been Vice
President, Human Resources for USG Interiors Inc., a subsidiary of USG
Corporation.
OTIS H. HALLEEN became Vice President, Secretary and General Counsel of
the Company as of January 30, 1996. Since November 1, 1995 he has served as
Vice President, Secretary and General Counsel at USSC. From 1986 through March
1995 he had been Vice President, Secretary and General Counsel of United.
JAMES A. PRIBEL became Treasurer of the Company upon consummation of the
Merger. Prior thereto, he was Treasurer of United since 1992. Prior thereto he
had been Assistant Treasurer of USSC since 1984 and had served in various
positions since joining USSC in 1978.
TED S. RZESZUTO became Vice President and Controller of the Company upon
consummation of the Merger. Prior thereto, he was Vice President and Controller
of United since 1987 and Controller of United since 1985 and prior thereto had
served in various accounting positions since joining USSC in 1975.
ALBERT SHAW became Vice President, Operations of the Company shortly after
consummation of the Merger. Prior thereto, he was Vice President, Midwest
Region of USSC since March 1994. He had been a Vice President of USSC since
1992 and prior to that had served in various management positions since joining
USSC in 1974.
ERGIN USKUP became Vice President, Management Information Systems and
Chief Information Officer of the Company upon consummation of the Merger. Prior
thereto, he was Vice President, Management Information Systems and Chief
Information Officer of United since February 1994, and since 1987 had been Vice
President, Corporate Information Services for Baxter International Inc., a
global manufacturer and distributor of health care products.
GARY G. MILLER was elected to the Board of Directors upon consummation of
the Merger and became Assistant Secretary of the Company on June 27, 1995. Mr.
Miller served as Vice President and Secretary of the Company from consummation
of the Merger until June 27, 1995. Prior thereto, Mr. Miller had been a
director of Associated since 1992 and Vice President and Secretary of
Associated since January 1992. Mr. Miller also currently serves as President of
Cumberland, a private investment firm which is located in Fort Worth, Texas. In
addition, from 1977 to December 1993, Mr. Miller served as Executive Vice
President, Chief Financial Officer and a director of AFG Industries, Inc., and
its parent company, Clarity Holdings Corp. He is Chairman of the Board of both
CFData Corp., a nationwide
62
<PAGE>
provider of check collection and check verification services, and Fore Star
Golf, Inc., which was formed in 1993 to own and operate golf course facilities.
JAMES T. CALLIER, JR. was elected to the Board of Directors upon
consummation of the Merger. Prior to the Merger, he had been a director of
Associated since 1992. Mr. Callier is a general partner of Wingate Partners,
and has served as President of Callier Consulting, Inc., an operating
management firm, since 1985. Mr. Callier currently serves as Chairman of the
Board of Century Products, as a director of Redman and Loomis and as an
advisory director of Wingate II.
DANIEL J. GOOD was elected to the Board of Directors upon consummation of
the Merger. Prior to the Merger, he had been a director of Associated since
1992. Mr. Good is Chairman of Good Capital Co., Inc. ("Good Capital"), an
investment firm in Lake Forest, Illinois. Until June 1995, Mr. Good was Vice
Chairman of Golden Cat Corp., the largest producer of cat litter in the United
States, and prior thereto he was Managing Director of Merchant Banking for
Shearson Lehman Bros. and President of A.G. Becker Paribas, Inc. Mr. Good
serves as a director of Supercuts, Inc.
FREDERICK B. HEGI, JR. was elected to the Board of Directors upon
consummation of the Merger. Prior to the Merger, he had been a director of
Associated since 1992. Mr. Hegi is a general partner of various Wingate
entities, including the indirect general partner of each of Wingate Partners
and Wingate II. Since May 1982, Mr. Hegi has served as President of Valley View
Capital Corporation, a private investment firm. Mr. Hegi also currently serves
as Chairman of the Board of Loomis Holding Corporation, the parent corporation
of Loomis, ITCO Holding Company, Inc., the parent corporation of ITCO Tire
Company, Tahoka First Bancorp, Inc., a bank holding company, and Cedar Creek
Bancshares, Inc., a bank holding company, and as a director of Century
Products, Lone Star Technologies, Inc., a diversified company engaged in the
manufacturing of steel pipe, Cattle Resources, Inc., a manufacturer of animal
feeds and operator of commercial cattle feedlots and various funds managed by
InterWest Partners.
JEFFREY K. HEWSON was elected to the Board of Directors in 1991. Mr.
Hewson served as President and Chief Executive Officer of the Company from
consummation of the Merger until May 31, 1995. Prior thereto, he was President
and Chief Operating Officer of United since April 1991. He had been Executive
Vice President of United since March 1990. Prior to that, he had been President
of ACCO International's U.S. Division since 1989 and President of its Canadian
Division since 1987. ACCO International is a manufacturer of traditional office
products and a subsidiary of American Brands, Inc., which is a global consumer
products holding company. Mr. Hewson currently serves as President and Chief
Executive Officer of Beckley-Cardy, distributor of supplies, furniture and
equipment to the educational market.
JAMES A. JOHNSON was elected to the Board of Directors upon consummation
of the Merger. Prior to the Merger, he had been a director of Associated since
1992. Mr. Johnson is a general partner of various Wingate entities, including
the indirect general partner of Wingate II. From 1980 until he joined Wingate
Partners in 1990, Mr. Johnson served as a Principal of Booz-Allen & Hamilton,
an international management consulting firm. Mr. Johnson currently serves as a
director of Century Products.
JOEL D. SPUNGIN has served as a member of the Board of Directors since
1972 and prior to the consummation of the Merger was Chairman of the Board of
Directors and Chief Executive Officer of United since August 1988. From October
1989 until April 1991, he was also President of United. Prior to that, since
March 1987, Mr. Spungin was Vice Chairman of the Board and Chief Executive
Officer of United. Previously, since August 1981, Mr. Spungin was President and
Chief Operating Officer of United. He also serves as a general partner of DMS
Enterprises, L.P., a management advisory and investment partnership, and as a
director of AAR Corp.
Messrs. Sturgess, Rowsey, Miller, Callier, Good, Hegi and Johnson were
elected to the Board of Directors pursuant to a voting trust.
The Charter provides that the Board of Directors shall be divided into
three classes, each class as nearly equal in number as possible, and each term
consisting of three years. The directors currently in each class are as
follows: Class I (having terms expiring in 1996)--Messrs. Good, Johnson and
Hewson; Class II (having terms expiring in 1997)--Messrs. Sturgess, Hegi and
Rowsey; and Class III (having
63
<PAGE>
terms expiring in 1998)--Messrs. G. Miller, Callier and Spungin.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference, pursuant to General Instruction G(3) to
Form 10-K, from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on May 8, 1996, to be filed within
120 days after the end of the Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference, pursuant to General Instruction G(3) to
Form 10-K, from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on May 8, 1996, to be filed within
120 days after the end of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference, pursuant to General Instruction G(3) to
Form 10-K, from the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on May 8, 1996, to be filed within
120 days after the end of the Registrant's fiscal year.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) The following financial statements, schedules and exhibits are filed as
part of this report:
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
(1) Financial Statements of the Company
Report of Independent Auditors 21
Report of Independent Public Accountants 22
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 23
Consolidated Balance Sheets as of December 31, 1995 and 1994 24-25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 26-27
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 28
Notes to Consolidated Financial Statements 29-41
Financial Statement Schedule
II. Valuation and Qualifying Accounts.................................. 42
All other financial statements and schedules not listed
have been omitted because they are not applicable, not
required or because the required information is
included in the consolidated financial statements or
notes thereto.
(2) Financial Statements of United
Report of Independent Auditors.......................................... 43
Report of Independent Public Accountants................................ 44
Consolidated Statements of Operations for the seven months ended
March 30, 1995 and March 31, 1994 (unaudited), and for the years
ended August 31, 1994, August 31, 1993, and August 31, 1992........... 45
Consolidated Balance Sheets as of March 30, 1995, August 31, 1994,
and August 31, 1993................................................... 46-47
64
<PAGE>
Consolidated Statements of Changes in Stockholders' Investment for
the seven months ended March 30, 1995, and for the years ended
August 31, 1994, August 31, 1993 and August 31, 1992 48
Consolidated Statements of Cash Flows for the for the seven months
ended March 30, 1995 and March 31, 1994 (unaudited), and for the
years ended August 31, 1994, August 31, 1993, and August 31, 1992.... 49
Notes to Consolidated Financial Statements.............................. 50-59
Financial Statement Schedule
II. Valuation and Qualifying Accounts.................................. 60
All other financial statements and schedules not listed
have been omitted because they are not applicable, not
required or because the required information is
included in the consolidated financial statements or
notes thereto.
</TABLE>
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.1 Charter (Exhibit 3(a) to the Company's Annual Report on Form 10-K
dated November 19, 1987)(3).
4.2 Certificate of Ownership and Merger merging Associated into United(2).
4.3 Restated Bylaws(1).
9.1 Voting Trust Agreement, dated as of January 31, 1992, among the
Company, the stockholders party thereto and Messrs. Sturgess, Hegi,
Miller, Good and Johnson, as voting trustees(1).
9.2 First Amendment to Voting Trust Agreement, dated as of March 30, 1995,
among the Company, the stockholders party thereto and Messrs.
Sturgess, Hegi, Miller, Good and Johnson, as voting trustees(1).
10.1 Credit Agreement, dated as of March 30, 1995, among USSC, the Company,
certain Lenders named therein and Chase Bank, as Agent and Lender
(Exhibit 4.A.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995)(3).
10.2 Waiver and Amendment No. 1, dated as of April 13, 1995, among USSC,
the Company, each of the lenders party thereto and Chase Bank(1).
10.3 Waiver and Amendment No. 2, dated as of December 21, 1995, among the
Company, United, each of the lenders party thereto and Chase Bank(4).
10.4 Assumption Agreement, dated as of March 30, 1995, among USSC, the
Company and Chase Bank, as agent (included in Exhibit 10.1, Exhibit
F).
10.5 Form of Revolving Credit Note, issuable under the Credit Agreement
(included in Exhibit 10.1, Exhibit A-1).
10.6 Form of Tranche A Term Loan Note, issuable under the Credit Agreement
(included in Exhibit 10.1, Exhibit A-2).
10.7 Form of Tranche B Term Loan Note, issuable under the Credit Agreement
(included in Exhibit 10.1, Exhibit A-3).
10.8 Security Agreement, dated as of March 30, 1995, between USSC and Chase
Bank, as agent (included in Exhibit 10.1, Exhibit C).
10.9 Form of Indenture of Mortgage, Assignment of Rents, Security Agreement
and Fixture Filing, dated as of March 30, 1995, by USSC in favor of
Chase Bank (included in Exhibit 10.1, Exhibit E).
10.10 Registration Rights Agreement, dated as of April 26, 1995, among the
Company, USSC and the Initial Purchaser(1).
10.11 Purchase Agreement, dated April 26, 1995, among the Company, USSC, and
the Initial Purchaser(1).
10.12 Registration Rights Agreement, dated as of January 31, 1992, between
the Company and CMIHI (included in Exhibit 10.15, Annex 2).
10.13 Amendment No. 1 to Registration Rights Agreement, dated as of March
30, 1995, among the Company, CMIHI and certain other holders of Lender
Warrants(1).
10.14 Amended and Restated Registration Rights Agreement, dated as of March
30, 1995, among the Company, Wingate Partners, Cumberland, Good
Capital Co., Inc. and certain other Company stockholders(1).
65
<PAGE>
10.15 Warrant Agreement, dated as of January 31, 1992, among the Company,
USSC and CMIHI(1).
10.16 Amendment No. 1 to Warrant Agreement, dated as of October 27, 1992,
among the Company, USSC, CMIHI and the other parties thereto(1).
10.17 Letter Agreement dated as of February 10, 1995, amending certain
provisions of the Warrant Agreement, among the Company, USSC, CMIHI
and the other parties thereto(4).
10.18 Amendment No. 2 to Warrant Agreement, dated as of March 30, 1995,
among the Company, USSC, CMIHI and the other parties thereto(1).
10.19 Amendment No. 3 to Warrant Agreement, dated as of July 28, 1995, among
the Company, USSC, CMIHI and the other parties thereto(4).
10.20 Exhibit intentionally left blank.
10.21 Warrant Agreement, dated as of January 31, 1992, between the Company
and Boise Cascade Corporation(1).
10.22 Amendment No. 1 to Warrant Agreement, dated as of March 30, 1995,
between the Company and Boise Cascade Corporation(1).
10.23 Indenture, dated as of May 3, 1995, among USSC, the Company and The
Bank of New York(1).
10.24 First Supplemental Indenture, dated as of July 28, 1995, among USSC,
the Company, and the Bank of New York(1).
10.25 Investment Banking Fee and Management Agreements, dated as of January
31, 1992, among the Company, USSC and each of Wingate Partners,
Cumberland and Good Capital Co., Inc.(1).
10.26 Amendment No. 1 to Investment Banking Fee and Management Agreements,
dated as of March 30, 1995, among USSC, the Company and each of
Wingate Partners, Cumberland and Good Capital Co., Inc.(1).
10.27 1992 Management Stock Option Plan, dated as of January 31, 1992(1).
10.28 Amendment No. 1 to 1992 Management Stock Option Plan, dated as of
March 30, 1995(1).
10.29 Amendment No. 2 to 1992 Management Stock Option Plan, dated as of
September 27, 1995(4).
10.30 Letter agreements, dated January 31, 1992, between the Company (as
successor-in-interest to Associated) and each of Michael D. Rowsey,
Robert W. Eberspacher, Lawrence E. Miller, Daniel J. Schleppe, Duane
J. Ratay and Daniel H. Bushell regarding grants of stock options(1).
10.31 Amendment to Stock Option Grants, dated as of March 30, 1995, between
the Company and each of Michael D. Rowsey, Robert W. Eberspacher,
Lawrence E. Miller, Daniel J. Schleppe, Duane J. Ratay and Daniel H.
Bushell(1).
10.32 Forms of Stock Option Agreements, dated October 2, 1995, granting
options to certain management employees, subject to stockholder
approval of Amendment No. 2 to Stock Option Plan(4).
10.33 Forms of Amendments to Stock Option Grants, dated September 29, 1995,
between the Company and each of Michael D. Rowsey, Robert W.
Eberspacher, Lawrence E. Miller, Daniel J. Schleppe and Daniel H.
Bushell(4).
10.34 Stock Option Agreements, dated as of January 1, 1996, between the
Company and Thomas W. Sturgess, granting options subject to
stockholder approval of Amendment No. 2 to Stock Option Plan(4).
10.35 Executive Stock Purchase Agreements, dated as of January 31, 1992,
among the Company, Wingate Partners, ASI Partners, L.P. and each of
Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller and
Daniel J. Schleppe(1).
10.36 First Amendments to Executive Stock Purchase Agreements, dated as of
March 30, 1995, among the Company, Wingate Partners, ASI Partners,
L.P. and each of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E.
Miller and Daniel J. Schleppe(1).
10.37 Executive Bonus Plan (Exhibit 10(a)(i)(F) to the Company's Report on
Form 10-K dated November 17, 1988)(3).
10.38 Amendment to Executive Bonus Plan adopted February 13, 1995(2).
10.39 Supplemental Benefits Plan as amended and restated as of July 13, 1988
(Exhibit 10(a)(H)(1) to the Company's Report on Form 10-K dated
November 17, 1988)(3).
10.40 Management Incentive Plan (Exhibit 10(a)(i)(L) to the Company's Report
on Form 10-K dated November 17, 1988)(3).
66
<PAGE>
10.41 Amendment to Management Incentive Plan (Exhibit 10(a)(i)(C)(1) to the
Company's Report on Form 10-K dated November 23, 1994(3).
10.42 Amendment to Management Incentive Plan adopted February 13, 1995(2).
10.43 Management Incentive Plan for period 4/1/95 through 12/31.95(4).
10.44 Management Incentive Plan for 1996(4).
10.45 Profit Sharing PluSavings Plan (Exhibit 10(a)(i)(F)(2)(f) to the
Company's Report on Form 10-K dated November 20, 1989(3).
10.46 United Stationers Supply Co. Pension Plan as amended (See the
Company's Reports on Form 10-K for the fiscal years ended August 31,
1985, 1986, 1987 and 1989(3).
10.47 Amendment to Pension Plan adopted February 10, 1995(2).
10.48 One Time Merger Integration Bonus Plan(4).
10.49 Employment Agreements, dated as of January 31, 1992, among the
Company, USSC and each of Michael D. Rowsey, Robert W. Eberspacher,
Lawrence E. Miller, Daniel J. Shleppe, Duane J. Ratay and Daniel H.
Bushell(1).
10.50 Amended and Restated Employment and Consulting Agreement dated April
15, 1993 among the Company, USSC and Joel D. Spungin (Exhibit 10(b) to
the Company's Report on Form 10-K dated November 22, 1993(3).
10.51 Amendment dated February 13, 1995 to the Amended and Restated
Employment and Consulting Agreement among the Company, USSC and Joel
D. Spungin(2).
10.52 Form of Employment and Consulting Agreement among the Company, USSC
and certain officers (Exhibit 10(j) to the Company's Report on Form
10-K dated November 19, 1987(3).
10.53 Amendment dated February 13, 1995 to Employment and Consulting
Agreement among the Company, USSC and Jerold A. Hecktman(2).
10.54 Amendment dated February 13, 1995 to Employment and Consulting
Agreement among the Company, USSC and Ted S. Rzeszuto(2).
10.55 Amendment dated February 13, 1995 to Employment and Consulting
Agreement among the Company, USSC and Otis H. Halleen(2).
10.56 Amendment dated February 13, 1995 to Employment and Consulting
Agreement among the Company, USSC and Robert H. Cornell(2).
10.57 Amendment dated February 13, 1995 to Employment and Consulting
Agreement among the Company, USSC and Steven R. Schwarz(2).
10.58 Employment and Consulting Agreement dated March 1, 1990 between the
Company, USSC and Jeffrey K. Hewson (Exhibit 10(1) to the Company's
Report on Form 10-K dated November 20, 1990)(3).
10.59 Amendment dated April 10, 1991 of Employment and Consulting Agreement
between the Company, USSC and Jeffrey K. Hewson (Exhibit 10(1)(I) to
the Company's Report on Form 10-K dated November 25, 1991)(3).
10.60 Amendment dated September 1, 1994 of Hewson Employment and Consulting
Agreement (Exhibit 10(e)(ii) to the Company's Report on Form 10-K
dated November 23, 1994)(3).
10.61 Amendment to Employment and Consulting Agreement dated February 13,
1995 between the Company, USSC and Jeffrey K. Hewson(2).
10.62 Amendment dated May 25, 1995 to Employment and Consulting Agreement
between the Company, USSC and Jeffrey K. Hewson(4).
10.63 Severance Agreement between the Company, USSC and James A. Pribel
dated February 13, 1995(2).
10.64 Letter Agreement dated February 13, 1995 between the Company and Ergin
Uskup(2).
10.65 Amendment dated August 30, 1995 to Employment and Consulting Agreement
between the Company, USSC and Steven R. Schwarz(4).
10.66 Amendment dated August 30, 1995 to Employment and Consulting Agreement
between the Company, USSC and Ted S. Rzeszuto(4).
10.67 Employment Agreements dated October 1, 1995 between USSC and each of
Daniel H. Bushell, Michael D. Rowsey, Steven R. Schwarz, Robert H.
Cornell, Ted S. Rzeszuto, and Al Shaw(4).
10.68 Employment Agreement dated November 1, 1995 between USSC and Otis H.
Halleen(4).
10.69 Employment Agreement dated as of January 1, 1996 between the Company,
USSC and Thomas W. Sturgess(4).
67
<PAGE>
10.70 Deferred Compensation Plan. (Exhibit 10(f) to the Company's Annual
Report on Form 10-K dated October 6, 1994)(3).
10.71 Consulting Agreement dated October 1,1995 between the Company and
Jeffrey K. Hewson(4).
10.72 Letter Agreement dated November 29, 1995 granting shares of restricted
stock to Joel D. Spungin(4).
10.73 Option Agreement dated November 29, 1995 between the Company and
Jeffrey K. Hewson(4).
10.74 Lease Agreement dated as of March 4, 1988 between Crow-Alameda Limited
Partnership and Stationers Distributing Company, Inc., as amended(1).
10.75 Industrial Real Estate Lease, dated as of May 17, 1993, among Majestic
Realty Co. and Patrician Associates, Inc., as landlord, and United
Stationers Supply Co., as tenant(1).
10.76 Standard Industrial Lease, dated as of March 15, 1991, between Shelley
B. and Barbara Detrik and Lynn Edwards Corp.(1).
10.77 Lease Agreement, dated as of January 12, 1993, as amended, among
Stationers Antelope Joint Venture, AVP Trust, Adon V. Panattoni and
Yolanda M. Panattoni, as landlord, and United Stationers Supply Co.,
as tenant(1).
10.78 Lease dated as of February 1, 1993, between CMD Florida Four Limited
Partnership and United Stationers Supply Co., as amended(1).
10.79 Standard Industrial Lease, dated March 2, 1992, between Carol Point
Builders I and Associated Stationers, Inc.(1).
10.80 Lease, dated March 22, 1973, between National Boulevard Bank of
Chicago, a trustee under Trust Agreement dated March 15, 1973 and
known as Trust No. 4722, and United Supply Co., as amended(1).
10.81 Lease Agreement, dated July 20, 1993, between OTR, acting as the duly
authorized nominee of the Board of the State Teachers Retirement
System of Ohio, and United Stationers Supply Co., as amended(1).
10.82 Lease Agreement, dated as of December 20, 1988, between Corporate
Property Associates 8, L.P., and Stationers Distributing Company,
Inc., as amended(1).
10.83 Industrial Lease, dated as of February 22, 1988, between Northtown
Devco and Stationers Distributing Company, as amended(1).
10.84 Lease, dated as of April 17, 1989, between Isaac Heller and United
Stationers Supply Co., as amended(1).
10.85 Lease Agreement, dated as of May 10, 1984, between Westbelt Business
Park Joint Venture and Boise Cascade Corporation, as amended(1).
10.86 Lease, dated as of January 19, 1981, between Propco, Inc. and Crown
Zellerbach Corporation, as amended(1).
10.87 Lease Agreement, dated as of August 17, 1981, between Gulf United
Corporation and Crown Zellerbach Corporation, as amended(1).
10.88 Lease Agreement, dated as of March 31, 1978, among Gillich O.
Traughber and J. T. Cruin, Joint Venturers, and Boise Cascade
Corporation, as amended(1).
10.89 Lease Agreement, dated November 7, 1988, between Dalware II Associates
and Stationers Distributing Company, Inc., as amended(1).
10.90 Lease Agreement, dated November 7, 1988, between Central East Dallas
Development Limited Partnership and Stationers Distributing Company,
Inc., as amended(1).
10.91 Lease Agreement, dated as of March 17, 1989, between Special Asset
Management Company of Texas, Inc., and Stationers Distributing
Company, Inc., as amended(1).
10.92 Sublease, dated January 9, 1992, between Shadrall Associates and
Stationers Distributing Company, Inc.(1).
10.93 Industrial Lease, dated as of June 12, 1989, between Stationers
Distributing Company, Inc. and Dual Asset Fund V, as amended(1).
10.94 Lease Agreement, dated as of July, 1994, between Bettilyon Mortgage
Loan Company and United Stationers Supply Co.(1).
10.95 Agreement of Lease, dated as of January 5, 1994, between the Estate of
James Campbell, deceased, and United Stationers Supply Co.(1).
10.96 Lease Agreement dated January 5, 1996 between Robinson Properties,
L.P. and USSC(4).
10.97 Real Estate Agreement dated January 9, 1996 between USSC as seller and
Seid Street, Ltd. as purchaser.*
68
<PAGE>
10.98 Real Estate Agreement dated October 19, 1995 between USSC as seller
and Boise Cascade Office Products Corporation as purchaser(4).
10.99 Agreement for Data Processing Services, dated January 31, 1992,
between USSC (as successor-in-interest to ASI) and Affiliated Computer
Services, Inc.(1).
10.100 Amended and Restated First Amendment to Agreement for Data Processing
Services, dated as of August 29, 1995, between USSC and Affiliated
Computer Services, Inc.(1).
10.101 Form of Director's Agreement to Cash Out and Cancel Stock Options
dated February 13, 1995 (Exhibit 10.53 to the Company's Report on Form
10-K dated June 27, 1995)(3).
10.102 Form of Employee's Agreement to Cash Out and Cancel Stock Options
dated February 13, 1995 (Exhibit 10.54 to the Company's Report on Form
10-K dated June 27, 1995)(3).
10.103 US Employee Benefits Trust Agreement dated March 21, 1995 between the
Company and American National Bank and Trust Company of Chicago as
Trustee(2).
10.104 USI Bonus Benefits Trust Agreement dated March 21, 1995 between the
Company and American National Bank and Trust Company of Chicago as
Trustee(2).
10.105 Certificate of Insurance covering directors' and officers' liability
insurance effective November 1, 1994 through November 1, 1995 (Exhibit
10.57 to the Company's Report on Form 10-K dated June 27, 1995)(3).
10.106 Certificate of Insurance covering directors' and officers' liability
insurance effective March 30, 1995 through March 30, 1996 (Exhibit
10.81 to the Company's Form S-3 (No. 33-62739), as amended)(3).
10.107 Amendment to Medical Plan Document for the Company(2).
10.108 The Company Severance Plan, adopted February 10, 1995(2).
10.109 Securities Purchase Agreement, dated as of July 28, 1995, among the
Company, Boise Cascade, Wingate Partners, Wingate II, Wingate
Affiliates, Wingate Affiliates II, ASI Partners III, L.P., the Julie
Good Mora Grantor Trust and the Laura Good Stathos Grantor Trust(2).
10.110 Amendment dated February 23, 1996 to Option Agreements between the
Company and Thomas W. Sturgess (amending Exhibit 10.34).*
10.111 Amendment No. 3 to United Stationers Inc. Management Equity Plan,
dated as of September 27, 1995.*
10.112 Amendment No. 2 dated March 5, 1996 to Stock Option Agreements between
the Company and Thomas W. Sturgess.*
10.113 Amendment to Employment Agreement dated March 5, 1996 between the
Company, USSC and Thomas W. Sturgess.*
21 Subsidiaries of the Company.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.*
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.*
23.3 Consent of Arthur Andersen LLP, Independent Public Accountants.*
24.1 Powers of Attorney of directors and executive officers of the
Registrant. (Included on Page II-8 of Registration Statement on Form
S-2)(4).
27 Financial Data Schedule (EDGAR filing only)(4).
* Filed herewith.
(1) Incorporated by reference to the Company's Form S-1 (No. 33-59811), as
amended, initially filed with the Commission on June 12, 1995.
(2) Incorporated by reference to the Company's Schedule 14D-9 dated
February 21, 1995.
(3) Incorporated by reference to other prior filings of the Company as
indicated.
(4) Incorporated by reference to the Company's Form S-2 (No. 333-01089) as
filed with the Commission on February 20, 1996.
</TABLE>
B) No reports on Form 8-K were filed by the Registrant during the last
quarter.
For the purpose of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statement on Form S-8
No. 3332453 (filed December 6, 1989).
69
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNITED STATIONERS INC.
BY: /s/Ted S. Rzeszuto
--------------------------------------
Ted S. Rzeszuto
Vice President and Controller
(principal accounting officer)
Dated: March 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/Thomas W. Sturgess Chairman of the Board of Directors, March 28, 1996
- ------------------------------ President and Chief Executive Officer
Thomas W. Sturgess
/s/Michael D. Rowsey Executive Vice President March 28, 1996
- ------------------------------ and a Director
Michael D. Rowsey
/s/Daniel H. Bushell Executive Vice President, March 28, 1996
- ------------------------------ Chief Financial Officer and
Daniel H. Bushell Assistant Secretary
/s/Ted S. Rzeszuto Vice President and Controller March 28, 1996
- ------------------------------
Ted S. Rzeszuto
/s/James T. Callier, Jr. Director March 28, 1996
- ------------------------------
James T. Callier, Jr.
/s/Daniel J. Good Director March 28, 1996
- ------------------------------
Daniel J. Good
/s/Frederick B. Hegi, Jr. Director March 28, 1996
- ------------------------------
Frederick B. Hegi, Jr.
/s/Jeffrey K. Hewson Director March 28, 1996
- ------------------------------
Jeffrey K. Hewson
/s/James A. Johnson Director March 28, 1996
- ------------------------------
James A. Johnson
/s/Gary G. Miller Director March 28, 1996
- ------------------------------
Gary G. Miller
/s/Joel D. Spungin Director March 28, 1996
- ------------------------------
Joel D. Spungin
</TABLE>
71
<PAGE>
Exhibit 10.97
REAL ESTATE AGREEMENT
THIS AGREEMENT is made this 9th day of January, 1996, by and between
UNITED STATIONERS SUPPLY CO., an Illinois corporation ("Seller") and SEID
STREET, LTD., an Ohio limited liability Company ("Purchaser").
The parties agree as follows:
1. PREMISES. Seller shall sell to Purchaser and Purchaser shall purchase
from Seller, at the price and on the terms and conditions set forth herein, fee
simple marketable title (subject to Permitted Exceptions hereinafter defined) in
and to certain improved real property, consisting of approximately 24 acres,
more or less, together with improvements thereon or attached thereto, including,
but not limited to, a certain warehouse/office building of approximately Two
Hundred Thirty-Three Thousand (233,000) square feet, and all easements, rights
and privileges appurtenant thereto, including all right, title and interest of
Seller in and to any land lying in the bed of any street, road or avenue opened
or proposed in front of or adjoining the premises, and all riparian rights, said
premises being commonly known as 9450 Allen Drive, Valley View, Cuyahoga County,
Ohio, as described in Exhibit A attached hereto and by this reference made a
part hereof ("Premises").
<PAGE>
2. PURCHASE PRICE. Purchaser shall pay Seller the sum of Five Million
Nine Hundred Sixty-Eight Thousand Dollars ($5,968,000.00) for the Premises
("Purchase Price"). The Purchase Price shall be paid to Seller as follows:
(a) Concurrently with the execution of this Agreement, Purchaser shall
deposit into escrow with Continental Title Agency Corp. ("Escrow Agent") the sum
of Fifty Thousand Dollars ($50,000.00) on account of the Purchase Price (the
"Earnest Money"). The Earnest Money will be deposited into an interest-bearing
account for the benefit of Purchaser.
(b) Upon satisfaction of the conditions specified in Section 3(a) and (b)
below, Purchaser shall deposit with the Escrow Agent the additional sum of Fifty
Thousand Dollars ($50,000.00) on account of the Purchase Price (the "Additional
Earnest Money"). The Additional Earnest Money will be added to the
interest-bearing account described in Section 2(a) above.
(c) Purchaser shall pay the balance of the Purchase Price, plus or minus
applicable adjustments and prorations, at Closing in cash, cashier's check or
wire transfer, as the parties shall agree.
3. CONDITIONS PRECEDENT TO CLOSING. Purchaser's obligations hereunder
are subject to the satisfaction of the following conditions:
(a) Within forty-five (45) days after the date of this Agreement,
Purchaser shall have the right to conduct such
2
<PAGE>
engineering, environmental, and feasibility studies, including soil tests,
borings, drainage tests and similar tests on the Premises as Purchaser deems
necessary to determine the suitability of the Premises for Purchaser's proposed
use, and Purchaser shall have determined, in its reasonable discretion, that the
Premises are suitable for Purchaser's proposed use. Such studies shall be
conducted by Purchaser at its sole cost and expense. Seller agrees to allow
Purchaser reasonable access to the Premises to conduct such studies. In the
event Purchaser is not satisfied, then Purchaser may terminate this Agreement by
giving written notice thereof to the Seller and to the Escrow Agent, in which
event all funds and documents deposited by the parties with the Escrow Agent or
each other shall be returned forthwith to the party who so deposited the same
and the parties shall thereupon be released from any further obligations
hereunder each to the other. The parties acknowledge, however, that in the
event Purchaser is satisfied and/or this condition precedent is waived, nothing
contained herein shall be construed as prohibiting Purchaser from reasonable
access to the Premises or from conducting additional studies, review and tests
after the expiration of the aforesaid 45-day period provided such access shall
not interfere with Seller's normal operations in the conduct of its business.
Purchaser shall save, defend, indemnify, and hold Seller harmless from and
against all claims, lawsuits, judgments, losses, liabilities, or expenses of any
kind
3
<PAGE>
or nature which may be incurred by Seller as the result of Purchaser's
examination, tests, or studies on the Premises (excluding the discovery of any
preexisting condition on the Premises). The obligations of Purchaser imposed by
the preceding sentence shall survive any termination of this Agreement and shall
survive Closing;
(b) Within seventy-five (75) days of the date of this Agreement, Purchaser
shall have received a commitment for a first mortgage loan on the Premises in
the amount of not less than Five Million Two Hundred Thousand Dollars
($5,200,000.00) or such lesser amount as Purchaser shall accept, with an
interest rate and on terms reasonably acceptable to Purchaser. If Purchaser
makes a good faith effort but is unable to obtain a commitment for the mortgage
loan contemplated herein, or reasonably believes that it cannot comply with the
terms and conditions of such commitment, Purchaser will so notify Seller in
writing within the time specified, indicating the interest rate and terms which
would be acceptable to Purchaser. If Seller is not so notified within said
seventy-five (75) days, Purchaser shall for all purposes be deemed to have
secured such commitment or to have agreed to purchase the Premises without
financing or based upon any mortgage commitment actually obtained. If Seller
is so notified, Seller may, at Seller's option, within thirty (30) days after
said notice, elect to provide purchase money financing or to secure a mortgage
4
<PAGE>
commitment on behalf of Purchaser upon the same terms and conditions previously
indicated by Purchaser as being acceptable. In such case, Purchaser agrees to
furnish Seller all requested credit and financial information and to sign
commercially reasonable papers relating to application for such mortgage
commitment. If Seller is unable or unwilling to secure such commitment or to
accept purchase money financing, this Agreement shall be of no further force and
effect, and the Earnest Money shall be returned to Purchaser.
(c) The conditions of the title to the Premises and survey matters shall
have been approved by Purchaser in accordance with the procedure set forth in
Sections 11 and 12.
(d) Prior to Closing, Purchaser shall have received an executed original
of Seller's certification of nonforeign status made pursuant to Section 1445 of
the Internal Revenue Code and in a form substantially similar to Exhibit B
attached hereto and incorporated by this reference;
(e) Prior to Closing and after satisfaction of the conditions set forth in
Sections 3(a) and (b) above, Seller agrees that the Purchaser shall have the
right to file, at Purchaser's sole cost and expense, any and all plans required
in order to obtain a building permit, zoning or rezoning, subdivision or lot
split, or any other approval or permit from any and all governmental authorities
having jurisdiction over the Premises.
5
<PAGE>
Seller agrees that, upon Purchaser's request, Seller shall join in the execution
of any application or plat required in order to obtain such permit or approval,
and that Seller otherwise shall cooperate with Purchaser with respect to any
permit or approval process. Without limiting the foregoing, Seller also agrees
that it will not institute any legal proceedings against Purchaser and/or any
governmental authority in opposition to any building permit, zoning or rezoning,
subdivision, lot split or other approval or permit sought by Purchaser with
respect to the Premises.
(f) Purchaser shall have the periods specified in Sections 3(a) and (b) in
which to determine whether the conditions set forth therein are satisfied and,
in the case of the condition of title and survey matters, the periods set forth
in Sections 11 and 12. If any of such conditions are not satisfied, in the
reasonable judgment of Purchaser, Purchaser may terminate this Agreement upon
written notice to Seller within the applicable time, (subject to the right of
Seller, if it elects, to seek to obtain or provide financing in accordance with
Section (3)(b)). Absent such written notice to Seller, Purchaser shall be
deemed to have waived all unsatisfied conditions and shall proceed to close this
transaction.
4. RISK OF CONDEMNATION AND LOSS
(a) if any governmental entity or any other entity with the power of
condemnation gives Seller notice that it intends to
6
<PAGE>
commence condemnation of or commences condemnation for all or any portion of or
interest in the Premises or improvements thereto, Seller shall immediately
notify Purchaser of such event. In such event, Purchaser may, at its option
within ten (10) days of receipt of such notice from Seller, terminate this
Agreement and neither party shall have any further rights or obligations under
this Agreement, except as provided in Section 22. Should Purchaser elect not to
exercise the foregoing option to terminate this Agreement, Seller shall appoint
Purchaser as its agent to conduct all negotiations with the condemning party
and, at Closing, shall assign to Purchaser all of its rights against the
condemning party or proceeds received from the condemning party. In such case,
the sale provided for herein shall be closed without reduction in or adjustment
to the Purchase Price.
(b) All risk of loss or damage to the Premises from fire or other casualty
shall remain with the Seller to the date of transfer of title. If, prior to
Closing, the Premises or any portion thereof, is totally or partially damaged by
any casualty, Seller shall promptly so notify Purchaser, and Purchaser shall, to
the extent that the cost of repair of the damage equals or exceeds Fifty
Thousand Dollars ($50,000.00), have the right, for a period of ten (10) days
after receipt of such notice, to terminate the Agreement by written notice to
Seller. If the Agreement is terminated pursuant to this Section 4(b), neither
party hereto
7
<PAGE>
shall be liable to the other hereunder, except for Purchaser's obligations under
Section 3(a) (if still appropriate in light of the scope of damage) and this
Agreement shall be null and void. If Purchaser shall not terminate this
Agreement or if there shall be damage to the Premises not in excess of Fifty
Thousand Dollars ($50,000.00), the parties shall proceed to Closing, in which
event Purchaser shall be entitled to a credit against the Purchase Price in an
amount equal to the cost of restoring the Premises to a condition substantially
equivalent to that which existed immediately prior to the occurrence of the
casualty (as calculated by a reputable contractor or engineer retained by
Purchaser and reasonably acceptable to Seller). Notwithstanding the above, the
Closing Date shall be postponed (by no more than sixty (60) days) if Purchaser's
mortgagee so requires in order to insure that the provisions of this Section
shall be complied with by the parties.
(c) Seller covenants and agrees to maintain insurance coverage on the
Premises in an amount of not less than the Purchase Price through the Closing
Date, and to cooperate with Purchaser in the event of the occurrence of any
casualty described in Section 4(b).
5. TAXES AND ASSESSMENTS: CLOSING COSTS.
(a) Real estate taxes, general and special ("Taxes") (and personal
property taxes, utilities, and other similar items, if any) shall be prorated
between the parties as of the date of
8
<PAGE>
Closing, such that credits and charges for the Closing Date and all days
preceding the Closing Date shall be allocated to Seller, and credits and charges
for all days after the Closing Date shall be allocated to Purchaser. The
Purchase Price shall be adjusted at the Closing to reflect the prorations.
(b) If the actual amount of Taxes is not known on the Closing Date, Taxes
shall be prorated on the basis of the last available certified duplicates and
rates, with Seller and Purchaser re-prorating Taxes upon issuance of the actual
tax bills. All special assessments, reassessed assessments, and/or respread
Taxes upon the Premises shall be paid out of Seller's funds at Closing.
(c) If any errors or omissions are made regarding adjustments and
prorations as aforesaid, the parties shall make the appropriate corrections
promptly upon the discovery thereof. If any estimations are made at the Closing
regarding adjustments or prorations, the parties shall make the appropriate
correction promptly when accurate information becomes available. Any corrected
adjustment or proration shall be paid in cash to the party entitled thereto.
(d) Seller shall not assign any policies of liability or property damage
insurance covering the Premises. No insurance premiums shall be prorated.
Purchaser shall pay for recording fees and for one-half of any
9
<PAGE>
Closing fees, including escrow fees. Transfer taxes and assessments, deed
stamps and one-half of any Closing fees, including escrow fees, shall be paid by
Seller. Each party shall pay its own attorneys' fees and all expenses incurred
by it other than expenses specifically enumerated in this Section 5.
6. DEED. Subject to Purchaser's review and acceptance of Title Evidence
defined in Section 11 hereinafter, Seller shall convey the Premises to Purchaser
by general warranty deed (the "Deed") conveying good and marketable,
indefeasible fee simple title to the Premises subject only to the following
(collectively the "Permitted Exceptions"):
a. Building and zoning laws, ordinances, state and federal
regulations;
b. Current real estate taxes and special assessments;
c. Rights-of-way, easements, restrictions, reservations and
mineral rights of record (which are approved by Purchaser
pursuant to Section 11 hereof);
d. Acts done or suffered or judgments against Purchaser or any
person claiming by, through or under Purchaser.
Such deed shall contain a legal description of the Premises which is based
upon and consistent with the survey of the Premises provided for in Section 12.
In addition to the obligations required to be performed hereunder by Seller
at the Closing, Seller agrees to perform such other acts, and/or to execute and
deliver to Purchaser such
10
<PAGE>
further instruments, documents and other materials, as are reasonably requested
by Purchaser at or subsequent to Closing in order to effectuate the consummation
of the transaction contemplated herein and to vest title to the Premises in
Purchaser, including, without limitation, the assignment of all rights of Seller
in and to any easements for the benefit of the Premises; provided, however, that
the foregoing instruments and other materials, if any, shall not enlarge the
scope of Seller's liabilities hereunder.
7. POSSESSION. Purchaser shall be entitled to possession of the Premises
at Closing. The Premises shall be delivered in substantially the same condition
of repair and working order as at the date of signing this Agreement, free of
debris and in broom-clean condition. If the Premises are not so delivered to
Purchaser, Seller agrees to reimburse Purchaser for the cost of making such
repairs and cleaning as necessary to achieve such condition of the Premises.
Prior to Closing, Seller shall have removed from the Premises all personal
property stored or in use thereon which belongs to Seller or others that is not
to be conveyed to Purchaser under the terms of this Agreement (the "Excluded
Personalty). If Seller fails to remove such Excluded Personalty prior to
Closing, Purchaser may remove and dispose of such
11
<PAGE>
Excluded Property as it sees fit, and it may recover its costs of doing so from
the Seller.
Purchaser represents that it has investigated the Premises and/or will have
further investigated the Premises pursuant to Section 3(a) above to Purchaser's
satisfaction. Except as otherwise provided in this Agreement, Purchaser agrees
that the Premises are being sold in its present condition "AS IS".
8. CLOSING. The term "Closing" as used in this Agreement means the
payment by Purchaser to Seller of the Purchase Price and the delivery by Seller
to Purchaser of the Deed. Unless otherwise agreed by the parties, Closing shall
take place on July 1, 1996, at 10:00 a.m. Cleveland time. This transaction shall
be closed through an escrow that is to be held by Continental Title Agency Corp.
(also sometimes referred to herein as the "Title Company"), in accordance with
the general provisions of the usual form of escrow agreement then in use by such
Title Company for transactions similar to this with such special provisions
inserted as may be required to conform with this Agreement. Each party shall
execute and deliver on a timely basis afl escrow instructions, deeds, funds, and
other documents reasonably necessary to accomplish Closing. In addition to, and
not in limitation of, the foregoing:
a. On or before the Closing Date, Seller shall execute items (i),
(ii), (iii) and (iv) below and
12
<PAGE>
deliver or cause to be delivered to the Title Company all of the items listed
below:
(i) The Deed;
(ii) Any instruments then required pursuant to Section 6;
(iii) Title Affidavits, if any, required by the Title Company;
(iv) Seller's affidavit of non-foreign status, as contemplated by
Section 1445 of the Internal Revenue Code of 1986, as
amended; and
b. On or before the Closing date, Purchaser shall deliver or cause
to be delivered to Title Company all of the items listed below:
(i) The balance of the Purchase Price, subject to the prorations
as hereinafter provided.
c. The transactions provided for in this Agreement shall be completed
by the Title Company on the Closing Date by doing the following:
(i) by delivering the Deed to Purchaser by filing the Deed for
record in Deed Records of Cuyahoga County, Ohio (which shall
be deemed delivery to Purchaser);
(ii) by causing the issuance of the Title Policy, subject only to
the Permitted Exceptions, and forwarding the Title Policy to
Purchaser with a copy to Seller;
(iii) by prorating taxes and assessments, in accordance with
Section 5 with respect to the Premises, and paying and
charging Purchaser and Seller for those costs and expenses
to be paid by Seller and Purchaser pursuant to Section 11;
13
<PAGE>
(iv) by delivering to Purchaser the FIRPTA Affidavit executed by
Seller; and
(v) by preparing and forwarding to both Purchaser and Seller two
(2) signed copies of the Title Company's Settlement
Statement setting forth all receipts and disbursements
provided for herein.
Purchaser shall, concurrent with Title Company's performance of the
foregoing items, deliver to Seller (or cause to deliver, by instruction to its
first mortgagee), in cash or by wire transfer, the Purchase Price less the full
amount of Seller's closing costs under Section 5), the payoff of all mortgages,
liens or other encumbrances which can be satisfied with the payment of money,
and prorations and credits to which Purchaser is entitled.
d. In the event the Title Company is unable to simultaneously perform
all instructions set forth in Section 8(c)(i) through (v) on the Closing Date,
the Title Company shall so notify Seller and Purchaser, and shall retain all
documents deposited with the Title Company until receipt by the Title Company of
written instructions executed by Seller and Purchaser or by a Court of competent
jurisdiction.
e. If either Purchaser or Seller (i) disapproves any condition
referred to in this Agreement within the applicable time period and in the
manner set forth in the Agreement, or (ii) is otherwise allowed to terminate
this Agreement and cancel the
14
<PAGE>
Escrow, without thereby committing an act of default under this Agreement or the
Escrow and does so, all obligations of the parties under this Agreement shall,
except as otherwise set forth, terminate and neither party shall have any
further obligation to the other under this Agreement. In such event, Escrow
Agent shall return all funds (after deducting its charges, if its charges are to
be borne by the party depositing such funds) and documents then in Escrow to the
party depositing same, and each party shall promptly return all documents in the
possession of such party to the other party. If Escrow fails to close due to a
breach of this Agreement by Seller, Seller agrees to promptly direct Escrow
Agent to return the Escrow Deposit to Purchaser.
f. In the event Escrow fails to close because of failure of
Purchaser to comply with its obligations hereunder, the Escrow cancellation
charges shall be paid by Purchaser. In the event Escrow fails to close because
of failure of Seller to comply with its obligations hereunder, such costs shall
be paid by Seller. In the event Escrow shall fail to close for any other
reason, such costs shall be divided equally between the parties.
g. Section 1445 of the Internal Revenue Code provides that the
transferee of a United States real property interest must deduct and withhold a
tax equal to ten percent (10%) of the amount realized by the transferor on the
disposition, if the
15
<PAGE>
transferor is a foreign person. Seller is not a foreign person, and the
"FIRPTA" certification will be provided to Purchaser as provided for in Section
3(c) hereinabove.
9. BROKERS. Purchaser warrants to Seller that, other than The Galbreath
Company ("Galbreath"), no person or other entity of any sort is entitled to any
commissions or other fees, broker's fee, finder's fee, or other payment by
reason of the action of Purchaser in connection with this transaction, Seller
warrants to Purchaser that, other than Grubb & Ellis ("Grubb"), no person or
other entity of any sort is entitled to any commission, broker's fee, finder's
fee, or any other payment by reason of the action of Seller in connection with
this transaction. Upon and in the event of Closing, Seller shall pay a
commission to Grubb in the total amount of One Hundred Thirty-Two Thousand
Dollars ($132,000.00). Purchaser shall be responsible for any and all
commission to be paid to Galbreath upon and in the event of Closing. Each party
shall hold harmless, indemnify, and defend the other from and against all claims
by parties other than The Galbreath Company and Grubb & Ellis for commissions or
other fees which arise from or are based upon the actions of the indemnifying
party and which constitute a violation of the indemnifying party's warranty
contained in this Section 9.
16
<PAGE>
10. DEFAULT. If Purchaser fails to close this transaction when and as
required hereby, Seller may terminate this Agreement, in which case Seller shall
be entitled to all remedies as Seller may have at law or in equity. If Seller
fails to close this transaction in accordance with its terms, Purchaser may
terminate this Agreement. The foregoing remedy shall be in addition to any
other remedy Purchaser may have at law or in equity, including but not limited
to the right of specific performance.
11. TITLE COMMITMENT; DEFECTS.
a. The Seller shall cause the Title Company to issue and deliver its
commitment (the "Commitment") for issuance of an ALTA owner's policy (Form B -
revised 10-17-70) of title insurance covering the Premises in the full amount of
the Purchase Price, which Commitment shall show marketable fee simple title to
the Premises to be good in Seller. The Commitment shall show the results of a
special tax search of the Premises. Copies of the Commitment, together with
copies of each document affecting title to the Premises, shall be delivered to
Purchaser not later than twenty (20) days after the date of this Agreement. The
cost and expense of the Commitment shall be borne by the Seller.
b. The Commitment and the Survey (as hereinafter defined in Section
12) are referred to as the "Title Evidence". Purchaser shall notify Seller of
Purchaser's disapproval of any
17
<PAGE>
matter contained in the Title Evidence within ten (10) days after Purchaser's
receipt of all of the Title Evidence and copies of the documents referred to in
the Title Evidence as exceptions or exclusions from coverage. If the Title
Evidence is not satisfactory to Purchaser (Collectively, "Defects"), those
Defects shall, as a condition to Purchaser's obligations under this Agreement,
be cured or removed from the Title Evidence within thirty (30) days after notice
to Seller of the item of Title Evidence disclosing the Defects, or at Closing if
the Defects consist of mortgages, other security instruments or monetary liens
that Seller intends to discharge and cancel at the Closing out of the Purchase
Price. If Seller elects not to cure and remove all Defects, this Agreement may
be terminated, at Purchaser's election, by written notice given to Seller within
five (5) days after expiration of the period allowed for cure or Purchaser may,
at Purchaser's sole election, proceed to close this transaction notwithstanding
any Defects. Upon termination, the parties will be release from further
liability hereunder, except for Purchaser's obligations, if any, under Section
3.
c. Notwithstanding any provision of this Section 11 to the contrary,
Seller shall have the obligation, on or prior to the Closing Date, to secure
releases, discharges, or satisfactions, or otherwise cure at no cost to
Purchaser, any Defect which is a lien for the payment of money only (except real
18
<PAGE>
estate taxes and assessments which shall be prorated in accordance with Section
5), including, without limitation, all mortgages, any lien or encumbrance which
may be released or discharged by the payment of a definite sum of money or any
exception to title which arose after the date of this Agreement as the result of
the act or violation of Seller or anyone claiming by, from, through or under
Seller.
d. It shall be a condition precedent to Purchaser's obligation to
consummate the transaction contemplated hereby that the Title Company can and
will, upon filing the instruments of conveyance of record, issue its ALTA
owner's fee policy (Form B revised 10-17-70) of title insurance (the "Title
Policy") in the full amount of the Purchase Price, at standard rates, insuring
Purchaser as the owner in fee simple of the Premises subject only to the
Permitted Exceptions, and without the exception for certain of the standard
printed exceptions (encroachments, overlaps, boundary line disputes, or any
other matters which would be disclosed by an accurate survey or inspection of
the Premises, easements or claims of easements not shown by the public records,
or any lien or right to a lien for services, labor, or materials furnished to
the Premises, imposed by law, and not shown by the public records), unless and
except to the extent that any such matters included in the so-called standard
printed exceptions have been approved or waived by Purchaser.
19
<PAGE>
The Title Policy shall also affirmatively insure: (i) Purchaser's right to use
any appurtenant easements in accordance with their terms and conditions; (ii)
contiguity of the parcels described in Exhibit "A" (if more than one parcel);
(iii) that the Premises has the benefit of full and free ingress and egress,
both pedestrian and vehicular, to and from a public highway, either directly or
by a perpetual easement; and (iv) that the Premises is zoned for its intended
purpose of an office, warehousing and distribution facility. Seller agrees to
execute and deliver to the Title Company such affidavits and instruments as may
be reasonably required to permit the Title Company to issue Purchaser's Title
Evidence in the form required by this subsection and to provide a copy of such
affidavits and instruments to Purchaser. The parties hereto agree that the
Seller shall bear all of the cost of the Title Policy.
e. Notwithstanding the foregoing, in no event shall the Closing take
place later than September 1, 1996, unless a later date shall be mutually agreed
upon by Seller and Purchaser.
12. SURVEY. Within sixty (60) days after the date of this Agreement,
Seller shall cause a registered surveyor or professional engineer to prepare a
survey (the "Survey") in form sufficient to enable the Title Company to delete
from the Title Policy the so-called standard exception for matters disclosed by
an accurate survey. If Purchaser so requests, a perimeter legal
20
<PAGE>
description of the Premises as prepared by such surveyor or engineer shall be
used to describe the Premises in the Deed. The cost and expense of such survey
shall be borne by the Seller.
The Survey shall include:
(a) a full metes and bounds legal description of the Premises;
(b) identification of all perimeter lines with distance, angles and
monuments either set or found at each corner;
(c) a statement of the total acreage contained in the Premises and
specifically identifying the portion of the Premises and the
acreage thereof in any public highway, right-of-way or dedicated
street;
(d) identification of all streets adjacent to the Premises, and
further identification of all right-of-way lines, including for
both their respective distance from the nearest intersection
streets;
(e) identification of all curb cuts, driveways and fences;
(f) the location of all structures and improvements on the Premises;
(g) identification of all utility lines servicing the Premises
(including sewer, gas, electric and telephone), together with the
recording information of all easements over private property
through which such lines pass between the Premises and a properly
dedicated and accepted street;
(h) identification of all easements and rights-of-way either of
record or visible on the ground which either benefit or burden
the Premises, indicating for each recording information as to the
volume and page of recording and date of recording, or stating
that the easement is unrecorded;
(i) identification of all front, rear and side building set-back
lines;
21
<PAGE>
(j) identification of all encroachments of the Premises onto
adjoining land and all encroachments onto the Premises by
improvements on adjoining land, or a positive statement that no
encroachment exists;
(k) the point of beginning of the legal description and the true
point of beginning of the Premises and all calls of the legal
description between them; and
(l) a statement that no portion of the Premises is located within a
flood plain or flood way area as designated by the U.S.
Department of Interior, or indicating which portions are located
within such flood plain or flood way.
In the event the Survey discloses any encroachments, overlaps, boundary line
disputes or any other matter affecting title to the Premises or which violates
any law, rule, or regulation, such matter(s) shall be considered to be a
Defect(s) and the relative rights and obligations of the parties with respect
thereto shall be governed by the provisions of Section 11(b) hereof.
13. ENVIRONMENTAL MATTERS.
a. Purchaser shall cause a reputable environmental evaluation and/or
consulting firm (the "Consultant") selected by Purchaser to conduct an
environmental inspection and audit of the Premises (the "Audit"). The cost and
expense of such Audit shall be borne by Purchaser. Purchaser and Seller shall
cooperate to insure that the Audit is performed as soon as practicable and is
completed no later than thirty-five (35) days from execution of this Agreement,
and shall assist the Consultant in designing the
22
<PAGE>
parameters of the Audit which shall include without limitation a view of the
Premises, inquiry into present and past uses of the Premises, review of records
of the United States Environmental Protection Agency, the Ohio Environmental
Protection Agency, or other governmental entity having jurisdiction relating to
environmental matters, field observations, determination of the integrity of any
above-ground and underground storage or process tanks, and such additional
investigation and testing as Purchaser and the Consultant shall agree are
appropriate to determine if the Premises has been contaminated by, or contains
any pollutant, industrial or other waste, or toxic or hazardous waste, substance
or material, including but not limited to those defined, registered or listed as
such pursuant to the Ohio Revised Code, Comprehensive Environmental Response
Compensation and Liability Act or the Toxic Substances Control Act and any lead
paint, asbestos or asbestos-containing material ("environmental condition"). In
addition to providing any information reasonably requested by the Consultant,
Seller shall cooperate with Purchaser and the Consultant throughout the course
of the Audit and shall cooperate in any other way reasonably requested by
Purchaser or the Consultant. Promptly upon completion of the Audit, the
Consultant shall deliver a copy of the Audit to Purchaser. The report shall
certify that an appropriate inquiry was made into the previous ownership and
uses of the Premises
23
<PAGE>
consistent with good commercial and customary practices, in an effort to
minimize possible liability of Purchaser for an environmental condition.
b. Purchaser shall have until 5:00 p.m. on the forty-fifth (45th) day
from execution of this Agreement to accept or reject said Audit. If Purchaser
rejects said Audit, Purchaser shall have the right to terminate this Agreement
by giving Seller notice of such termination on or before 5:00 p.m. on such date.
Thereafter, neither of the parties hereto shall be liable to the other hereunder
and this Agreement shall be null and void except for Purchaser's obligations, if
any, under Section 3(a). If Purchaser fails to terminate this Agreement within
such forty-five (45) days or fails to complete or have the Audit completed
within forty-five (45) days after the date hereof, then Purchaser shall be
deemed to have accepted the environmental status of the Premises and this
transaction shall proceed to Close in accordance with the terms and conditions
contained herein.
c. If required by Purchaser or its mortgagee, such Audit shall be
updated (the "Update") by the Consultant at or prior to the Closing. If an
adverse change has occurred between the date of the Audit and the completion of
the Update, Purchaser shall have the rights afforded to it pursuant to Section
13(b) hereinabove.
24
<PAGE>
14. ENVIRONMENTAL REPRESENTATIONS. As an inducement to Purchaser to
purchase the Premises, Seller hereby represents to Purchaser that, to the best
of Seller's knowledge:
(a) Seller has not caused and will not cause, and there never has
occurred during the time Seller has occupied the Premises, the release of any
"hazardous substance" on the Premises as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended;
(b) Seller has not caused any lead paint, asbestos or asbestos-
containing material to be placed on or under the Premises;
(c) There are no underground storage tanks on or under the Premises;
(d) The Premises are not subject to any federal, state, or local
"Superfund" lien, proceeding claim, liability or action, or the threat or
likelihood thereof, for the cleanup, removal, or remediation of any such
"hazardous substance" from the Premises;
(e) Seller has at all times complied with all applicable federal,
state, and local environmental laws and regulations applicable to the Premises
and the operations conducted thereon.
25
<PAGE>
15. ADDITIONAL SELLER'S WARRANTIES AND REPRESENTATIONS.
a. Seller hereby represents and warrants to Purchaser that, on the
date hereof:
(i) Seller is a Illinois corporation, duly organized and validly
existing under the laws of the State of Illinois.
(ii) Seller has full power and authority to enter into this
Agreement and to perform its obligations hereunder, and this
Agreement constitutes the legal, valid and binding
obligation of Seller, enforceable against Seller in
accordance with its terms. The Board of Directors of Seller
has approved this Agreement and the transactions
contemplated herein.
(iii) To the best of Seller's knowledge, there are no outstanding
written or oral leases covering or in any way affecting the
Premises that will survive the Closing, and no person or
entity has any right to acquire the Premises (whether by
option to purchase, contract, or otherwise).
(iv) Neither the execution of this Agreement nor the consummation
of the transaction contemplated hereby will constitute a
violation of or be in conflict with or constitute a default
under any term or provision of any agreement or instrument
to which Seller is a party or by which the Premises or any
part thereof is bound.
(v) To the best of Seller's knowledge, there are no service or
maintenance contracts or other agreements of any type
whatsoever affecting the Premises, which cannot be
terminated by Purchaser on thirty (30) days notice.
(vi) Seller has received no notices nor to Seller's best
knowledge are there any legal or administrative proceedings
or other legal or governmental actions with respect to the
Premises which have been commenced or threatened.
26
<PAGE>
(vii) Seller has not requested, given its consent for or otherwise
received notice of any pending zoning variance or change
with respect to the Premises.
(viii) The Premises are free from mechanics' liens or the
possibility of the rightful filing thereof.
(ix) Any information with respect to the Property that Seller has
delivered to Purchaser is true and complete in all material
respects.
b. Seller shall notify Purchaser of facts of which it hereafter may
receive notice which would cause any of the warranties and representations
contained in this Agreement to be untrue on the Closing Date. All of the
foregoing representations and warranties shall survive the Closing and shall not
be merged into the Deed.
16. PURCHASER'S WARRANTIES AND REPRESENTATIONS.
a. Purchaser hereby represents and warrants to Seller that, on the
date hereof:
(i) Purchaser is an Ohio limited liability company organized and
duly formed under the laws of the State of Ohio.
(ii) Purchaser has full power and authority to enter into this
Agreement and to perform its obligations hereunder, and this
Agreement constitutes the legal, valid and binding
obligation of Purchaser, enforceable against Purchaser in
accordance with its terms.
(iii) Neither the execution of this Agreement nor the consummation
of the transaction
27
<PAGE>
contemplated hereby will constitute a violation of or be in
conflict with or constitute a default under any term or
provision of any agreement or instrument to which Purchaser
is a party or by which the Premises or any part thereof are
bound.
17. ASSIGNMENT. Neither this Agreement nor any rights arising under it
may be assigned or mortgaged by either party without the prior written consent
of the other party, and any attempt to transfer this Agreement or any rights or
interests arising hereunder, by operation of law or otherwise, without such
consent shall be void and of no force or effect,
18. MODIFICATION WAIVERS. No part of this Agreement may be amended or
modified without the express written consent of both parties. Neither party
shall be held to have waived any of its rights hereunder except by delivery of a
written instrument expressing a clear and specific intent to waive such right.
19. NOTICES. Any notice or demand required or permitted to be given
under the terms of this Agreement shall be deemed to be effective and to have
been duly given or made if given by any of the following methods:
(a) On first attempted delivery, if deposited in the United States
mail, in a sealed envelope, postage prepaid, by registered or certified mail,
return receipt requested, or hand delivered, respectively addressed as follows:
28
<PAGE>
To Purchaser:
Seid Street, Ltd.
320 Wood Ridge
Aurora, Ohio 44202
Attn: Roger Seid, Member
Telephone number: (216) 562-7343
with copy to:
Kenneth B. Liffman, Esq.
McCarthy, Lebit, Crystal
& Haiman Co., L.P.A.
1800 Midland Building
101 Prospect Avenue, West
Cleveland, Ohio 44ll5
Telephone Number: (216) 696-1422
Telecopy Number: (216) 696-1210
To Seller:
United Stationers Supply Co.
2200 East Golf Road
Des Plaines, IL 60016-1267
Attention: Exec. Vice President and CFO
Telecopy number (708)* 699-4716
Telephone number (708)* 699-5000, Ext. 2135
with copy to:
Otis H. Halleen General Counsel
2200 East Golf Road
Des Plaines, IL 60016-1267
Telecopy number (708)* 699-3193
Telephone number (708)* 699-5000, Ext. 2309
*EFFECTIVE JANUARY 20, 1996, AREA CODE WILL BE (847)
(b) Sent to the above address via an established national overnight
delivery service (such as Federal Express), charges prepaid, or
29
<PAGE>
(c) Sent via any electronic communications method, provided the
sender obtains written confirmation of receipt of the communication by the
electronic communication equipment at the office of the addressee listed above,
provided, if this method is used, the party shall immediately follow such notice
with a second notice in the method set forth in (a) or (b) above.
20. ENFORCEMENT AND ATTORNEYS' FEES. In the event suit or other action is
instituted to enforce or interpret any of the terms or obligations under this
Agreement, the prevailing party shall be entitled to recover its costs and
reasonable attorneys' fees from the other party as determined by the court.
21. INTEGRATION. This Agreement contains the entire agreement of the
parties concerning the subject hereof, including all oral understandings or
agreements, and there are no collateral understandings or agreements or
representations or warranties not expressly included herein.
22. SURVIVAL. All representations and warranties made herein shall be
true and correct as of Closing and shall survive Closing. All obligations of
either party to hold harmless, indemnify, or defend the other party shall
survive Closing.
23. TIME. Time is of the essence of this Agreement.
24. TAX REPORTING. The parties hereby designate the Escrow Agent to serve
as "Real Estate Broker", as defined in Section 6045
30
<PAGE>
of the Internal Revenue Code as amended, for the purpose of making such reports
and filing such returns as shall be required thereunder from time to time.
25. TITLE COMPANY. It is hereby agreed that Continental Title Agency
Corp., 605 Bond Court Building, Cleveland, Ohio 44ll4, shall act as Title
Company and Escrow Agent in regard to this transaction, and this Agreement shall
constitute instructions to said Title Company both as to Title Company and
Escrow Agent subject to the terms and conditions of its regular and usual
printed form of acceptance, insofar as such terms and conditions are applicable
to and are consistent with this Agreement. In the event of any inconsistency
between such acceptance and this Agreement, this Agreement shall control. In
addition, the Title Company agrees to assume full responsibility for compliance
with subsection (e) of Section 6045 of the Internal Revenue Code of 1986
("I.R.C."), by filing a return in accordance with subsection (a) of Section 6045
I.R.C., and a statement under subsection (b) of Section 6045 I.R.C., with
respect to this transaction. After receipt of a copy of this Agreement and
acceptance of these terms by the Title Company, the Title Company shall
acknowledge its acceptance of these terms and its agreement with this Section 24
by delivering to the Seller and the Purchaser, forthwith, a signed and dated
copy of the document attached hereto and referred to as "Acknowledgment of Title
Company".
31
<PAGE>
26. FURTHER ASSURANCES. Provided it does not enlarge the liabilities of
the parties hereunder, the Seller and Purchaser both agree that each one, at any
time and from time to time upon request of the other, will do, execute,
acknowledge and deliver or cause to be done, executed, acknowledged and
delivered all such further acts, deeds, assignments, transfers, conveyances, and
assurances as may be required for the conveyance of the Premises by the Seller,
its successors and assigns to the Purchaser, its successors and assigns.
27. SECTION HEADINGS. All section headings and other titles and captions
herein are for convenience only, do not form any substantive part of this
Agreement, and shall not restrict or enlarge any substantive provisions hereof
or thereof.
28. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of Ohio.
29. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of the parties hereto and their respective successors,
personal representatives and assigns; provided, however, that nothing contained
herein shall be construed as waiving the restriction against assignment set
forth in Section 16 hereinabove.
32
<PAGE>
IN WITNESS WHEREOF, the parties have executed multiple counterparts of this
Agreement, each of which shall be deemed an original thereof, as of the date
first above written.
SELLER: PURCHASER:
UNITED STATIONERS SUPPLY CO. SEID STREET, LTD., an Ohio
Limited Liability Company
By: /S/ Daniel H. Bushell
---------------------
Daniel H. Bushell By: /S/ Roger Seid
Executive Vice President --------------
and CFO Roger Seid, Member
ACKNOWLEDGMENT
OF
TITLE COMPANY
The undersigned hereby acknowledges receipt of that certain Agreement
between United Stationers Supply Co. and Seid Street, Ltd. and agrees to be
bound by the terms of said Agreement as they pertain to the responsibilities and
obligations of the Title Company set forth in said Agreement.
CONTINENTAL TITLE AGENCY CORP.
Dated: January 9, 1996 By
------------------ ---------------------------
33
<PAGE>
EXHIBIT 10.110
UNITED STATIONERS INC.
MANAGEMENT EQUITY PLAN
AMENDMENT TO STOCK OPTION AGREEMENT
February 23, 1996
Mr. Thomas W. Sturgess
c/o Wingate Partners
750 North St. Paul/ Suite #1200
Dallas, Texas 75201
Dear Tom:
This will confirm the following amendments to each of the stock option
agreements made effective as of January 1, 1996 (the "Agreements") between you
and United Stationers Inc., a Delaware corporation (the "Company"). The
Agreements are hereby amended by adding, at the end of Paragraph (3) Vesting,
of each Agreement the following provision:
"Notwithstanding the foregoing provisions of this Paragraph (3), these
options shall not vest and shall terminate effective May 8, 1996
unless the Company (with its consolidated subsidiaries) realizes a net
profit, in accordance with generally accepted accounting principles,
for the period February 1, 1996 through May 7, 1996. For purposes of
calculating the net profit there shall be excluded (1) any
compensation expenses incurred as the result of option grants under
the Management Equity Plan, (2) fees and expenses incurred in
connection with the consummation of a public offering (primary and/or
secondary) of shares of stock of the Company, (3) redemption premiums
paid in connection with the redemption of any of the outstanding
Notes, (4) write-offs of deferred financing costs relating to such
redemption, and (5) fees payable to lenders to permit the application
of the Company's net proceeds from the Offering . The good faith
determination of and certification by the Compensation Committee that
a net profit for the described period has been realized shall be
conclusive."
As so amended, the Agreement remains in full force and effect.
To indicate your acceptance of the foregoing, please sign and return one copy of
this letter immediately.
Very truly yours,
UNITED STATIONERS INC.
By: /S/ Gary G. Miller
--------------------------------------
Gary G. Miller, Director and Member of
Compensation Committee
Accepted as of the date written above:
/S/ Thomas W. Sturgess
- ----------------------
Thomas W. Sturgess
<PAGE>
EXHIBIT 10.111
AMENDMENT NO. 3 TO
UNITED STATIONERS INC.
MANAGEMENT EQUITY PLAN
This Amendment No. 3 to the United Stationers Inc. Management Equity Plan
(the "Plan") is effective as of September 27, 1995. Unless otherwise defined
herein, capitalized terms used herein shall have the meanings given them in the
Plan.
WHEREAS, Associated Holdings, Inc. adopted the Plan as of January 31, 1992;
WHEREAS, upon the merger of Associated Holdings, Inc. with United
Stationers Inc. on March 30, 1995, the Plan was amended by Amendment No. 1; and
on September 27, 1995 was further amended by Amendment No. 2, subject to
stockholder approval of the amendment;
WHEREAS, the Company desires to further amend the Plan, to meet the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended;
THEREFORE, the Plan is amended as follows:
1. Section 6 of the Plan is amended by adding thereto the following as
subsection 6(i):
"(i) LIMIT ON INDIVIDUAL GRANTS. In any calendar year, the
maximum number of shares for which options may be granted under the
Plan to any one optionee is 400,000 shares of common stock(subject
to adjustment in accordance with Section 7 of the Plan)."
2. Except as amended hereby, the Plan shall remain in full force and effect.
All references to the "Plan" shall refer to the Plan as amended by this
amendment.
3. The amendment made hereby shall be subject to approval by the stockholders
of the Company no later than the next annual meeting of stockholders.
<PAGE>
EXHIBIT 10.112
UNITED STATIONERS INC.
MANAGEMENT EQUITY PLAN
AMENDMENT NO. 2 TO STOCK OPTION AGREEMENT
March 5, 1996
Mr. Thomas W. Sturgess
c/o Wingate Partners
750 North St. Paul/ Suite #1200
Dallas, Texas 75201
Dear Tom:
This will confirm the following amendment to that certain stock option
agreement made effective as of January 1, 1996, as previously amended on
February 23, 1996 between you and United Stationers Inc., a Delaware
corporation (the "Company")granting options for 240,000 shares of Common
Stock at an initial exercise price of $12.50 per share (the "Agreement").
The Agreement is hereby amended by adding, at the end of Paragraph (3)
VESTING of the Agreement, the following:
"Provided that the net profit requirements set forth above for the
specified period have been achieved, this option may also be exercised as
to some or all of the options immediately in the event of the termination
of your employment (i) for Good Reason (as defined in your employment
agreement), (ii) by expiration of your term of employment, (iii) by the
Company other than for Cause, (iv) due to a Change in Control, or
(v) due to your death or permanent disability.
As so amended, the Agreement remains in full force and effect.
To indicate your acceptance of the foregoing, please sign and return one copy
of this letter immediately.
Very truly yours,
UNITED STATIONERS INC.
By: /s/ Gary Miller
---------------
Gary G. Miller, Member
Compensation Committee
Accepted as of the date written above:
/s/ Thomas W. Sturgess
- --------------------------------------------------------
Thomas W. Sturgess
<PAGE>
EXHIBIT 10.113
AMENDMENT TO
EMPLOYMENT AGREEMENT
This amendment, dated as of March 5, 1996, amends the Employment Agreement
effective as of January 1, 1996, between United Stationers Supply Co., United
Stationers Inc. (collectively, the "Company") and Thomas W. Sturgess
("Sturgess").
WHEREAS, the parties entered into an Employment Agreement effective as of
January 1, 1996 (the "Agreement"), and
WHEREAS, the parties desire to amend the Agreement to more accurately
reflect the intention of the parties at the time the Agreement was signed;
THEREFORE, the parties agree that the Agreement be, and it is hereby
amended as follows:
1. The last paragraph of Section 8 of the Agreement is amended by
deleting therefrom the following: "(x) the occurrence of certain transactions as
provided under the MEP plan, and (y)".
2. Section 9 of the Agreement is amended by deleting therefrom the
following: "(x) the occurrence of certain transactions as provided under the MEP
plan, and (y)".
3. Except as so amended, the Agreement remains in full force and effect.
Dated: as of March 5, 1996
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
By: /s/ Gary G. Miller
--------------------------------------
Gary G. Miller, Director and
Member, Compensation Committee
By: /s/ James T. Callier, Jr.
--------------------------------------
James T. Callier, Jr., Director and
Member, Compensation Committee
/s/ Thomas W. Sturgess
--------------------------------------
Thomas W. Sturgess
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
Under Which Percentage
Name of Subsidiary Organized of Ownership
- ------------------ --------- ------------
United Stationers Supply Co. Illinois 100%
Subsidiaries of United Stationers Supply Co.:
- ---------------------------------------------
United Stationers Hong Kong Limited Hong Kong 100%
United Worldwide Limited Hong Kong 100%
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-62739) of United Stationers Inc. and in the related Prospectus of our
reports dated June 27, 1995 and January 29, 1996 (except for Note 16, as to
which the date is March 27, 1996) with respect to the consolidated financial
statements and schedules of United Stationers Inc. and Subsidiary for the seven
month transition period ended March 30, 1995 and the year ended December 31,
1995, respectively, included in the Annual Report (Form 10-K) for the year ended
December 31, 1995.
/s/Ernst & Young LLP
Chicago, Illinois
March 28, 1996
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statement (Form S-3 No. 33-62739) of United
Stationers Inc. and in the related Prospectus of our report dated January 23,
1995 (except with respect to the matters discussed in Note 1 as to which the
date is February 13, 1995) on the consolidated financial statements and schedule
of Associated Holdings, Inc. as of December 31, 1994 and for the years ended
December 31, 1994 and 1993 and to all references to our Firm included in the
Annual Report (Form 10-K) of United Stationers Inc. for the year ended December
31, 1995.
/s/Arthur Andersen LLP
Chicago, Illinois
March 28, 1996
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statement (Form S-3 No. 33-62739) of United
Stationers Inc. and in the related Prospectus of our report dated October 6,
1994 on the consolidated financial statements and schedule of United Stationers
Inc. as of August 31, 1994 and 1993 and for the years ended August 31, 1994,
1993 and 1992 and to all references to our Firm included in the Annual Report
(Form 10-K) of United Stationers Inc. for the year ended December 31, 1995.
/s/Arthur Andersen LLP
Chicago, Illinois
March 28, 1996
