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Filed pursuant to Rule 424(b)(3)
File No. 333-56717
PROSPECTUS
OFFER TO EXCHANGE ALL OUTSTANDING
8 3/8% SENIOR SUBORDINATED NOTES DUE 2008
FOR
8 3/8% SENIOR SUBORDINATED NOTES DUE 2008
OF
UNITED STATIONERS SUPPLY CO.
United Stationers Supply Co., an Illinois corporation (the "Company"), the
operating subsidiary of United Stationers Inc. ("United"), and the Guarantors
(as hereinafter defined) hereby offer, upon the terms and subject to the
conditions set forth in this Prospectus and the letter of transmittal
accompanying this Prospectus (the "Letter of Transmittal," which together
constitute the "Exchange Offer"), to exchange $1,000 principal amount of 8 3/8%
Senior Subordinated Notes due 2008 (the "New Notes") issued by the Company for
each $1,000 principal amount of 8 3/8% Senior Subordinated Notes due 2008 (the
"Old Notes") issued by the Company (the "Original Offering"), of which an
aggregate principal amount of $100.0 million is outstanding. The form and terms
of the New Notes are identical to the form and terms of the Old Notes except
that the New Notes have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and will not bear any legends restricting their
transfer. The New Notes will evidence the same debt as the Old Notes and will be
issued pursuant to, and entitled to the benefits of, the Indenture (as defined)
governing the Old Notes. The Exchange Offer is being made in order to satisfy
certain contractual obligations of the Company. See "The Exchange Offer" and
"Description of the New Notes." The New Notes and the Old Notes are sometimes
collectively referred to herein as the "Notes".
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SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES.
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Interest on the New Notes is payable semi-annually on April 15 and October 15 of
each year, commencing on October 15, 1998. The New Notes will mature on April
15, 2008. Except as described below, the Company may not redeem the New Notes
prior to April 15, 2003. On and after such date, the Company may redeem the New
Notes, in whole or in part, at any time at the redemption prices set forth
herein, together with accrued and unpaid interest and Additional Amounts (as
defined), if any, to the date of redemption. In addition, at any time and from
time to time prior to April 15, 2001, the Company may, subject to certain
requirements, redeem up to 35% of the aggregate principal amount of the New
Notes with the net cash proceeds received from one or more Public Equity
Offerings (as defined), at a redemption price equal to 108.375% of the principal
amount to be redeemed, together with accrued and unpaid interest and Additional
Amounts, if any, to the date of redemption, provided that at least 65% of the
aggregate principal amount of New Notes remains outstanding immediately after
each such redemption. The New Notes will not be subject to any sinking fund
requirement. Upon the occurrence of a Change of Control (as defined), the
Company will be required to make an offer to repurchase the New Notes at a price
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest and Additional Amounts, if any, to the date of repurchase. See
"Description of the New Notes."
The New Notes will be unsecured and will be subordinated to all existing and
future Senior Indebtedness (as defined) of the Company. The New Notes will rank
PARI PASSU in right of payment with all existing and future senior subordinated
Indebtedness (as defined) of the Company and will rank senior in right of
payment to all Subordinated Indebtedness (as defined) of the Company. The New
Notes will be guaranteed, on an unsecured senior subordinated basis, by United
and all of the Company's direct and indirect domestic subsidiaries on the Issue
Date (as defined) and by each direct and indirect domestic subsidiary of the
Company which incurs any Indebtedness (excluding any Securitization Subsidiary
(as defined) that has entered into or established a Permitted Receivables
Securitization Program (as defined) and any Unrestricted Subsidiaries (as
defined )) created or acquired thereafter. The Indenture under which the New
Notes will be issued (the "Indenture") permits the Company to incur additional
indebtedness, including Senior Indebtedness, subject to certain limitations. See
"Description of the New Notes." As of March 31, 1998, after giving pro forma
effect to the Azerty Acquisition (as defined), the Senior Credit Facilities
Refinancing (as defined), the Original Offering (including the application of
net proceeds therefrom), and the June Equity Offering (as defined) (including
the application of net proceeds therefrom), the aggregate principal amount of
the Company's Senior Indebtedness would have been approximately $162.7 million
(excluding unused commitments), and the Company would have had no senior
subordinated Indebtedness outstanding other than the Notes and the 12 3/4% Notes
(as defined). In addition, the Company would have had $78.4 million in
Subordinated Indebtedness, consisting of intercompany indebtedness payable to
United. See "Description of the New Notes--General" and "--Subordination," and
"Description of Certain Indebtedness--12 3/4% Notes."
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THE COMPANY AND THE GUARANTORS WILL ACCEPT FOR EXCHANGE ANY AND ALL OLD NOTES
VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON
SEPTEMBER 2, 1998, UNLESS EXTENDED (AS SO EXTENDED, SUCH TIME AND DATE BEING THE
"EXPIRATION DATE"). TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO
THE EXPIRATION DATE. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY
CONDITIONS. SEE "THE EXCHANGE OFFER."
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes pursuant to the Exchange Offer, where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed, for a period of 90 days after the Expiration Date, to make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
No public market existed for the Old Notes before the Exchange Offer. The
Company currently does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system, and no active public market for the New Notes is currently anticipated.
The Company will pay all the expenses incident to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange pursuant to the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 5, 1998.
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AVAILABLE INFORMATION
The Company and United are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information may
be inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60611, and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates by writing to
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549.
This Prospectus does not contain all the information set forth in the
Registration Statement filed with the Commission on Form S-4 with respect to the
New Notes (the "Registration Statement") and the exhibits and schedules thereto,
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document set forth all material
elements of such documents, but are not necessarily complete. With respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is hereby made to such exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. Copies of the Registration
Statement and the exhibits thereto are on file with the Commission and may be
examined without charge at the public reference facilities of the Commission
described above. Copies of such materials can also be obtained at prescribed
rates by writing to the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The reports, proxy
statements and other information may also be obtained from the web site that the
Commission maintains at http://www.sec.gov.
The Company is required by the Indenture to furnish the holders of the Notes
with copies of the annual reports and of the information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act, as long as any
Notes are outstanding.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY AND
UNITED, INCLUDING STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "UNAUDITED
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL
OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE
BY MANAGEMENT OF THE COMPANY WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE
INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH
ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES
OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION; (2)
INCREASED COSTS; (3) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (4)
INCREASES IN THE COMPANY'S COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF
ADDITIONAL DEBT OR EQUITY CAPITAL; AND (5) CHANGES IN GENERAL ECONOMIC
CONDITIONS IN THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE.
MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS
MANAGEMENT. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY
FUTURE EVENTS OR CIRCUMSTANCES. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH
COULD AFFECT THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD-LOOKING
STATEMENTS, SEE "RISK FACTORS."
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. AS USED IN THIS
PROSPECTUS, UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES,
REFERENCES HEREIN TO THE "COMPANY" OR "UNITED STATIONERS" INCLUDE (I) UNITED
STATIONERS SUPPLY CO., THE OPERATING SUBSIDIARY OF UNITED, AND ITS DIRECT AND
INDIRECT SUBSIDIARIES, AND (II) THE BUSINESS CONDUCTED BY UNITED, THE COMPANY,
ASSOCIATED HOLDINGS, INC. ("ASSOCIATED") AND ASSOCIATED STATIONERS, INC.
("ASI"), THE OPERATING SUBSIDIARY OF ASSOCIATED, PRIOR TO THE MERGERS OF
ASSOCIATED WITH UNITED AND ASI WITH THE COMPANY ON MARCH 30, 1995 (COLLECTIVELY,
THE "MERGER"). EXCEPT AS OTHERWISE INDICATED, (I) THE PRO FORMA FINANCIAL
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 GIVES EFFECT TO THE JUNE EQUITY
OFFERING (AS DEFINED) (INCLUDING THE APPLICATION OF THE NET PROCEEDS THEREFROM),
THE ORIGINAL OFFERING (INCLUDING THE APPLICATION OF THE NET PROCEEDS THEREFROM),
THE AZERTY ACQUISITION (AS DEFINED) AND THE SENIOR CREDIT FACILITIES REFINANCING
(AS DEFINED) AS IF EACH SUCH TRANSACTION HAD OCCURRED ON JANUARY 1, 1997, AND
(II) THE SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 1997 GIVES EFFECT TO THE OCTOBER EQUITY OFFERING (AS DEFINED)
(INCLUDING THE APPLICATION OF THE NET PROCEEDS THEREFROM), THE PREFERRED STOCK
REDEMPTION (AS DEFINED), THE JUNE EQUITY OFFERING (INCLUDING THE APPLICATION OF
THE NET PROCEEDS THEREFROM), THE ORIGINAL OFFERING (INCLUDING THE APPLICATION OF
THE NET PROCEEDS THEREFROM), THE AZERTY ACQUISITION, THE SENIOR CREDIT
FACILITIES REFINANCING, THE MANAGEMENT AGREEMENTS TERMINATION (AS DEFINED) AND
THE COMPUTER SERVICES CONTRACT WRITE-OFF (AS DEFINED), AS IF EACH SUCH
TRANSACTION HAD OCCURRED ON JANUARY 1, 1997. IN ADDITION, THE FINANCIAL
INFORMATION INCLUDED HEREIN PRESENTS UNITED, THE COMPANY AND ITS SUBSIDIARIES ON
A CONSOLIDATED BASIS. UNITED IS A HOLDING COMPANY WITH NO OPERATIONS SEPARATE
FROM THE COMPANY AND ITS SUBSIDIARIES. NO SEPARATE FINANCIAL INFORMATION FOR THE
COMPANY HAS BEEN PROVIDED HEREIN BECAUSE MANAGEMENT OF THE COMPANY BELIEVES SUCH
INFORMATION WOULD NOT BE MEANINGFUL BECAUSE (I) THE COMPANY IS THE ONLY DIRECT
SUBSIDIARY OF UNITED, WHICH HAS NO OPERATIONS OTHER THAN THOSE OF THE COMPANY
AND ITS SUBSIDIARIES, AND (II) ALL ASSETS AND LIABILITIES OF UNITED ARE RECORDED
ON THE BOOKS OF THE COMPANY.
THE COMPANY
OVERVIEW
United Stationers is the largest broad line wholesale distributor of
business products in North America, with annual sales of more than twice its
next largest competitor. The Company offers more than 35,000 stockkeeping units
("SKUs"), including traditional office products, office furniture, information
technology products, facilities management supplies and janitorial and
sanitation supplies. The Company's customer base is comprised of more than
20,000 resellers, including office products dealers, office furniture dealers,
office products superstores, mass merchandisers, computer products resellers,
mail order companies and sanitary supply distributors. United Stationers serves
its customers through an integrated nationwide network of 40 business products
distribution centers and 19 janitorial and sanitation distribution centers. In
addition to its broad product offering, the Company provides value-added
marketing and logistics services to both manufacturers and resellers. For the
year ended December 31, 1997, the Company's net sales and EBITDA were $2.6
billion and $96.3 million (after non-recurring charges of $64.7 million),
respectively, and the Company's supplemental pro forma net sales and EBITDA
would have been $2.9 billion and $177.5 million, respectively.
The Company estimates that the U.S. business products industry generated
sales of more than $120 billion in manufacturers' shipments in 1996 (based on
independent industry sources). In recent years, this industry has experienced
significant consolidation at all levels of the supply chain, including
manufacturers, wholesalers and resellers. During this period, the Company has
strengthened its competitive position by: (i) leveraging its significant scale;
(ii) emphasizing cost-effective operations and systems; (iii) stocking the
broadest range of business products in the industry; and (iv) providing a high
level of customer service, including quick and accurate order fulfillment and
consistent on-time and
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accurate order delivery. Throughout this consolidation, the Company has
successfully maintained relationships with a diverse customer base, with no
single reseller accounting for more than 6% of the Company's net sales in 1997.
As competition within the business products industry has increased,
resellers have focused on broadening their product offerings on a cost-effective
basis as well as providing high in-stock order fill rates on same day and
overnight delivery to end users. A primary goal of the Company is to be the
reseller's "partner of choice" by assisting its customers in achieving these
objectives and enabling them to increase their own profitability and return on
assets. United Stationers offers one-stop shopping to its customers by providing
a comprehensive inventory of products from more than 550 manufacturers. As the
Company's product line is much larger and broader than that which resellers can
economically stock themselves, resellers can rely on the Company to offer safety
stock (inventory back-up on high volume items) and to stock certain
slower-moving, generally higher margin products. As a result of volume
purchasing, the Company often qualifies for better pricing and terms than are
available to resellers. In addition, the Company can offer significantly lower
minimum order quantities than are available to resellers directly from
manufacturers.
United Stationers also provides a broad range of value-added services to
resellers. The Company produces catalogs (available in paper form, on CD-ROM and
through seamless links to the Company's web site) for its resellers to customize
and use as consumer marketing tools. For the 1998 catalog season, the Company
circulated more than 10 million broad line and specialized catalogs. The
Company's order entry systems allow resellers to place orders electronically
with the Company, thereby increasing a reseller's efficiency. Further, the
Company is able to deliver pre-sold products directly to the reseller's
customers or to the reseller for delivery to the end user without further
packaging. Through its state-of-the-art information systems and integrated
nationwide network of distribution centers, the Company has been able to achieve
a high order fill rate, which is an important benefit to resellers in providing
timely deliveries to end users. All of these services are provided in such a
manner that the end user has no knowledge of the Company's role in the supply
chain, as all catalogs and packaging are customized with the name of the
reseller, allowing the reseller to maintain and foster end-user relationships.
By utilizing the Company's services and products, resellers have begun to
realize the economic value of reducing the number of SKUs they carry and are
increasingly relying upon the Company for direct order fulfillment. The Company
believes that this trend of "de-stocking" by resellers will continue.
United Stationers is an integral part of the supply chain for resellers.
Additionally, manufacturers value the Company as both a cost-effective
distribution channel and as a sales outlet that provides broad geographic
exposure for their products. United Stationers also facilitates the introduction
of new products by manufacturers through the use of the Company's widely
distributed marketing materials. By serving as a distribution channel for
manufacturers, the Company assumes credit risk and cost-effectively breaks down
bulk shipments into individual orders for overnight delivery, allowing
manufacturers to realize efficiencies in order administration, warehousing and
freight costs. Manufacturers also rely on the Company to reach smaller resellers
who are not large enough to purchase directly due to their small order sizes and
the related high delivery costs.
COMPETITIVE STRENGTHS
During the last several years, the Company has strengthened its competitive
position in the business products industry through the following:
SIGNIFICANT SCALE. As the largest broad line business products wholesaler
in North America, the Company qualifies for substantial volume allowances and
can realize significant economies of scale. In addition, the Company's size and
nationwide service and distribution capabilities enable it to: (i) service the
demands of large national, regional, local and individual reseller accounts by
offering products from
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over 500 manufacturers; (ii) seek cost-effective sourcing of products both in
North America and internationally; and (iii) mitigate the effect of local or
regional economic downturns.
COST EFFECTIVE OPERATIONS. The Company seeks cost reductions at both the
corporate and operating levels in order to improve its efficiency. Examples of
such cost reduction efforts include: (i) reduced merchandise procurement and
handling costs through higher manufacturers' incentives and better terms; (ii)
continued efforts to increase inventory efficiency without lowering order fill
rates; (iii) reduced payroll and benefits costs through improved labor
allocation and higher productivity; (iv) reduced freight costs through ongoing
refinements to delivery systems; (v) increased sourcing of certain products from
lower cost sources; (vi) streamlined work practices and procedures; and (vii)
increased leveraging of fixed costs over an increasing sales base.
BROAD PRODUCT SELECTION. Stocking over 35,000 SKUs, the Company offers the
broadest selection of business products in the industry, providing resellers
with one-stop shopping for their business products needs. The Company's size
allows it to maintain a broad product selection, thereby enabling its customers
to hold less inventory while still providing end users with a high level of
service.
HIGH LEVEL OF CUSTOMER SERVICE. The Company believes that a key component
of its success has been its focus on customer service and support. Customer
service includes: ease of ordering, rapid access to information, high order fill
rates, on-time accurate shipments and value-added management and marketing
assistance. The Company's integrated computer information system serves an
important role in providing a high level of customer service, as it allows the
Company to provide resellers with the ability to manage electronically critical
business functions, including order entry, purchasing, pricing, accounts
receivable, accounts payable and inventory control. This integrated computer
system also is designed, in part, to enable the Company to monitor five key
measures of customer satisfaction: order fill rate, order accuracy, inventory
accuracy, on-time delivery and accessibility of the Company's personnel to
customers. The Company also supports resellers' marketing efforts by designing
informative, user-friendly catalogs and other marketing materials.
The Company continues to introduce additional services, such as its "wrap
and label" program that offers resellers the option to receive prepackaged
orders customized (and labeled with the reseller's name) to meet the
specifications of particular end users. The Company can also drop ship orders
directly to end users on behalf of resellers. These services allow resellers to
lower their inventory investment and minimize handling costs.
BUSINESS STRATEGY
United Stationers' strategy is to create value in the supply chain for both
resellers and manufacturers. By reducing the overall cost of distribution, the
Company believes its role as a wholesaler will continue to expand and that it
can achieve above industry-average growth rates by:
CAPTURING A GREATER SHARE OF EXISTING CUSTOMERS' PURCHASES. The Company
believes that it has the opportunity to capture a portion of the sales of
business products currently sold directly by manufacturers to resellers without
wholesaler involvement (currently only approximately 20% of manufacturers'
shipments of business products move through wholesalers). The Company believes
that as resellers intensify their focus on asset management, return on
investment and inventory efficiency, they will continue de-stocking and
increasingly rely on United Stationers' products and services to meet end-user
requirements for a high order fill rate for a broad product assortment available
on an overnight basis.
EXPANDING ITS CUSTOMER BASE. The Company plans to continue to expand its
customer base by: (i) maintaining and building its business with commercial
dealers and contract stationers; (ii) developing additional programs for
marketing and buying groups; (iii) continuing to focus on complementary markets,
including specialty dealers; and (iv) expanding geographically, both within the
United States and, potentially, internationally.
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OFFERING A BROADER LINE OF PRODUCTS AND SERVICES. The Company's product
line expansion plans include developing its newer product categories, such as
office furniture, information technology products and peripherals, facilities
management supplies and janitorial and sanitation supplies and potentially
offering new products or services. The Company also plans to continue to expand
its line of private brand products.
CAPITALIZING ON CROSS-SELLING OPPORTUNITIES. The Company believes that its
various products and services are complementary and that there are significant
opportunities to cross-sell to existing customers. By implementing this
strategy, management believes the Company can enhance sales as resellers
purchase a broader selection of products offered by the Company, thereby
reducing end-user procurement costs and enhancing reseller profitability.
INCREASING TECHNOLOGICAL CAPABILITIES AND UTILIZING ELECTRONIC
COMMERCE. The Company intends to continue to invest in information systems
enhancements and customer interfaces that management believes will allow it to
capture a growing percentage of its customers' business. In addition, as the
Internet becomes increasingly important as a marketing channel, the Company is
positioned to participate in this trend with direct, on-line access by its
resellers to its 25,000 SKU general line catalog.
MAKING STRATEGIC ACQUISITIONS. The Company believes it can enhance its
growth by continuing to make strategic acquisitions, such as the acquisition of
Lagasse Bros., Inc. ("Lagasse") in 1996, which substantially increased the
Company's position in the janitorial and sanitation supplies product category.
In addition, the Company believes that the Azerty Acquisition (as defined) will
expand its product offerings and make the Company one of the largest
distributors of computer consumable supplies in the United States. The Company
intends to continue, from time to time, to pursue acquisitions that expand its
customer base, increase its geographic reach and/or broaden its product
offering.
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RECENT TRANSACTIONS
JUNE EQUITY OFFERING
In June 1998, United completed an offering of 2,005,507 shares of Common
Stock (the "June Equity Offering"), consisting of 1,500,000 primary shares sold
by United, and 505,507 secondary shares sold by certain selling stockholders.
The aggregate net proceeds to United of approximately $77.1 million were
delivered to USSC and used to repay a portion of indebtedness under the Tranche
A Term Loan Facility (as defined) which caused a permanent reduction of the
amount borrowable thereunder.
United did not receive any of the proceeds from the sale of the 505,507
shares of Common Stock offered by the selling stockholders, other than an
aggregate of approximately $6.4 million paid by the selling stockholders upon
exercise of employee stock options in connection with the June Equity Offering,
which were delivered to USSC and applied to the repayment of indebtedness under
the New Credit Facilities (as defined).
Subsequent to the closing of the June Equity Offering, the underwriters for
such offering exercised an overallotment option to purchase an additional
200,000 shares from United (the "Additional Shares"). The net proceeds to United
of approximately $10.3 million from the sale of such Additional Shares were
delivered to USSC and used to repay an additional portion of the indebtedness
outstanding under the Tranche A Term Loan Facility. The pro forma financial
information contained in this Prospectus that gives effect to the June Equity
Offering does not include the sale of the Additional Shares and the application
of net proceeds therefrom.
AZERTY ACQUISITION
On April 3, 1998, the Company completed the acquisition of all of the
capital stock of Azerty Incorporated, Azerty de Mexico, S.A. de C.V., Positive
ID Wholesale Inc., and AP Support Services Incorporated (the "Azerty
Acquisition"), which together conducted substantially all of the United States
and Mexican operations of the Office Products Division of Abitibi-Consolidated
Inc. (collectively, the "Azerty Business"). The aggregate purchase price paid by
the Company for the Azerty Acquisition was approximately $115.2 million
(including fees and expenses), subject to adjustment based upon the final net
tangible assets of the Azerty Business as of the closing of the acquisition. The
Azerty Business is primarily a specialty wholesaler of computer consumables,
peripherals and accessories in the United States and Mexico. It is currently
anticipated that the Company's existing Micro United division will be integrated
with the Azerty Business. For the fiscal year ended December 31, 1997, the
Azerty Business had combined net sales and EBITDA of $355.4 million and $12.6
million, respectively. See "Recent Transactions--Azerty Acquisition."
The purchase price for the Azerty Acquisition was funded from borrowings
under the Company's New Credit Facilities (as defined). See "--Senior Credit
Facilities Refinancing--The New Credit Facilities."
SENIOR CREDIT FACILITIES REFINANCING
THE NEW CREDIT FACILITIES
On April 3, 1998, in order to fund the purchase price of the Azerty
Acquisition, refinance borrowings under the Company's existing senior secured
credit facilities (the "Existing Credit Facilities"), and pay related fees and
expenses in connection therewith, the Company amended and restated its existing
credit agreement (as amended and restated, the "New Credit Agreement") governing
its senior secured credit facilities (the "New Credit Facilities"). The New
Credit Facilities consisted initially of a $250.0 million six year revolving
credit facility (the "Revolving Credit Facility"), a $150.0 million six year
tranche A term loan facility (the "Tranche A Term Loan Facility"), and a $100.0
million six and three-quarter year tranche B term loan facility (the "Tranche B
Term Loan Facility"). The net proceeds of the Original
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Offering were used to repay a substantial portion of indebtedness outstanding
under the Tranche B Term Loan Facility and the remainder of such facility was
repaid with proceeds from the sale of certain receivables. As a result of the
early retirement of the Existing Credit Facilities, approximately $9.5 million
($5.7 million net of tax benefit of $3.8 million) of unamortized financing fees
will be expensed as a non-cash extraordinary charge during the second quarter of
1998. See "Use of Proceeds," "Recent Transactions--New Credit Facilities" and
"Description of Certain Indebtedness--New Credit Facilities." A portion of the
Tranche A Term Loan Facility was repaid from the net proceeds of the June Equity
Offering.
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its Existing Credit
Facilities, the Company entered into a $163.0 million 364-day liquidity facility
(the "Receivables Securitization Program"), pursuant to which the Company sells
all of its U.S. dollar trade receivables (the "Eligible Receivables") (except
for certain excluded receivables) to a wholly-owned offshore, special purpose
limited liability company intended to be bankruptcy-remote (the "Receivables
Company"). The Receivables Company then transfers the Eligible Receivables to a
third-party, multi-seller (the "Third Party Seller") asset-backed commercial
paper program. The Third-Party Seller's purchases of the Eligible Receivables
are supported by a facility between the Third-Party Seller and banks with
ratings of A-1/P-1 or higher. The Company received approximately $160.0 million
in proceeds from the initial sale of Eligible Receivables on April 3, 1998. The
proceeds to the Company from the Receivables Securitization Program were used to
reduce borrowings under the Revolving Credit Facility and repay a portion of the
Tranche B Term Loan Facility. The Unaudited Consolidated Pro Forma Financial
Statements included in this Prospectus reflect $150.0 million in proceeds from
the sale of Eligible Receivables under the Receivables Securitization Program,
as this amount was deemed to more fairly represent the average amount of
receivables that would have been sold in 1997. Management of United believes
that the Unaudited Consolidated Pro Forma Financial Statements included herein
represent a fair presentation of how the historical financial statements of
United might have been affected if the transaction described therein had been
consummated at the beginning of the periods presented. See "Unaudited
Consolidated Pro Forma Financial Statements." See "Recent
Transactions--Receivables Securitization Program."
The refinancing of the Company's Existing Credit Facility pursuant to the
New Credit Facilities and the Receivables Securitization Program is collectively
referred to in this Prospectus as the "Senior Credit Facilities Refinancing."
COMPUTER SERVICES CONTRACT WRITE-OFF
During the second quarter of 1998, the Company wrote off (the "Computer
Services Contract Write-Off") the remaining term of a contract for the provision
of computer services (as amended, the "Computer Services Contract"), which is
scheduled to expire in July 2002. Management had recently determined that the
Computer Services Contract had no future value to the Company. As a result of
the Computer Services Contract Write-Off, the Company recorded a $13.9 million
non-recurring pre-tax charge ($8.3 million net of tax benefit of $5.6 million)
to write-off the remaining payments and related prepaid expense under the
Computer Services Contract. The Company anticipates that the savings from this
write-off will be approximately $3.2 million annually. See "Recent
Transactions--Computer Services Contract Write-Off" and "Unaudited Consolidated
Pro Forma Financial Statements."
OCTOBER EQUITY OFFERING
On October 10, 1997, United completed an offering of 2.0 million primary
shares of its common stock, $0.10 par value ("Common Stock"), and a 3.4 million
share secondary offering of Common Stock by certain selling stockholders
(collectively, the "October Equity Offering"). The shares of Common Stock sold
in the October Equity Offering were priced at $38.00 per share, before
underwriting discounts and commissions of $1.90 per share. The aggregate net
proceeds to United of $72.2 million (before
6
<PAGE>
deducting expenses) and proceeds of $0.1 million resulting from the exercise of
1,119,038 warrants to purchase Common Stock sold in the October Equity Offering
were contributed to USSC and used to (i) repurchase $50.0 million principal
amount of USSC's existing 12 3/4% Senior Subordinated Notes due 2005 (the
"12 3/4% Notes") and pay the redemption premium thereof of approximately $6.4
million, (ii) pay fees related to the October Equity Offering, and (iii) reduce
indebtedness under its existing senior secured term loan facilities by $15.5
million. The repayment of indebtedness from the proceeds of the October Equity
Offering resulted in an extraordinary loss of $9.8 million ($5.9 million net of
tax benefit of $3.9 million).
------------------------
The principal executive offices of the Company are located at 2200 East Golf
Road, Des Plaines, Illinois 60016-1267 and its telephone number at such location
is (847) 699-5000.
7
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer applies to $100.0 million aggregate principal amount of
the Old Notes. The form and terms of the New Notes are the same as the form and
terms of the Old Notes except that (i) interest on the New Notes shall accrue
from the date of issuance of the Old Notes, and (ii) the New Notes are being
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer. The New Notes will evidence the same debt as the Old
Notes and will be entitled to the benefits of the Indenture pursuant to which
the Old Notes were issued. The Old Notes and the New Notes are sometimes
referred to collectively herein as the "Notes." See "Description of the New
Notes."
<TABLE>
<S> <C>
The Exchange Offer................ $1,000 principal amount of New Notes in exchange for
each $1,000 principal amount of Old Notes. As of the
date hereof, Old Notes representing $100.0 million
aggregate principal amount are outstanding. The terms of
the New Notes and the Old Notes are substantially
identical in all material respects, except that the New
Notes will be freely transferable by the holders thereof
except as otherwise provided herein. See "Description of
the New Notes."
Based on an interpretation by the Commission's staff set
forth in no-action letters issued to third parties
unrelated to the Company and the Guarantors, the Company
and the Guarantors believe that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, sold and otherwise
transferred by any registered person receiving the New
Notes, whether or not that person is the registered
holder (other than any such holder or such other person
that is an "affiliate" of the Company or the Guarantors
within the meaning of Rule 405 under the Securities Act
or a broker dealer who purchases such New Notes directly
from the Company to resell pursuant to Rule 144A or any
other available exception under the Securities Act or a
person participating in the distribution of the New
Notes), without compliance with the registration and
prospectus delivery provisions of the Securities Act,
provided that (i) the New Notes are acquired in the
ordinary course of business of that holder or such other
person, (ii) neither the holder nor such other person is
engaging in or intends to engage in a distribution of
the New Notes, and (iii) neither the holder nor such
other person has an arrangement or understanding with
any person to participate in the distribution of the New
Notes. See "The Exchange Offer-- Purpose and Effect."
Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where those Old Notes
were acquired by the broker-dealer as a result of its
market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in
connection with any resale of these New Notes. See "Plan
of Distribution."
Registration Rights Agreement..... The Old Notes were sold by the Company on April 15,
1998, in a private placement in reliance on Section 4(2)
of the Securities Act and immediately resold by the
initial purchasers thereof in reliance on Rule 144A
under the Securities Act. In connection
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
with the sale, the Company and the Guarantors entered
into an Exchange and Registration Rights Agreement with
the initial purchasers of the Old Notes (the
"Registration Rights Agreement") requiring the Company
and the Guarantors to make the Exchange Offer. See "The
Exchange Offer--Purpose and Effect."
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York
City time, September 2, 1998, or such later date and
time to which it is extended by the Company and the
Guarantors.
Withdrawal........................ The tender of the Old Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. Any Old
Notes not accepted for exchange for any reason will be
returned without expense to the tendering holder thereof
as promptly as practicable after the expiration or
termination of the Exchange Offer.
Interest on the New Notes and Old
Notes........................... Interest on each New Note will accrue from the date of
issuance of the Old Note for which the New Note is
exchanged or from the date of the last periodic payment
of interest on such Old Note, whichever is later. No
additional interest will be paid on Old Notes tendered
and accept for exchange.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the
Company. See "The Exchange Offer--Certain Conditions to
Exchange Offer."
Procedures for Tendering Old
Notes........................... Each holder of the Old Notes wishing to accept the
Exchange Offer must complete, sign and date the Letter
of Transmittal, or a copy thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver the Letter of Transmittal, or the
copy, together with the Old Notes and any other required
documentation, to the Exchange Agent (as defined) at the
address set forth herein. Persons holding the Old Notes
through the Depository Trust Company ("DTC") and wishing
to accept the Exchange Offer must do so pursuant to the
DTC's Automated Tender Offer Program, by which each
tendering participant will agree to be bound by the
Letter of Transmittal. By executing or agreeing to be
bound by the Letter of Transmittal, each holder will
represent to the Company and the Guarantors that, among
other things, (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course
of business of the person receiving such New Notes,
whether or not such person is the registered holder of
the Old Notes, (ii) neither the holder nor any such
other person is engaging in or intends to engage in a
distribution of such New Notes, (iii) neither the holder
nor any such other person has an arrangement or
understanding with any person to participate in the
distribution of such New Notes, and (iv) neither the
holder nor any such other person is an
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
"affiliate," as defined under Rule 405 promulgated under
the Securities Act, of the Company or the Guarantors.
Pursuant to the Registration Rights Agreement, the
Company and the Guarantors are required to file a
"shelf" registration statement for a continuous offering
pursuant to Rule 415 under the Securities Act in respect
of the Old Notes if (i) because of any change in law or
applicable interpretations thereof by the staff of the
Commission, the Company determines that it is not
permitted to effect the Exchange Offer as contemplated
hereby, (ii) validly tendered Old Notes are not
exchanged for New Notes within 200 business days after
the issue date of the Old Notes (the "Issue Date"),
(iii) any Initial Purchaser so requests with respect to
Old Notes not eligible to be exchanged for New Notes in
the Exchange Offer and held by it following the
consummation of the Exchange Offer, (iv) any applicable
law or interpretations do not permit any holder to
participate in the Exchange Offer, or (v) any holder
that participates in the Exchange Offer does not receive
freely transferable New Notes in exchange for tendered
Old Notes (the obligation to comply with a prospectus
delivery requirement being understood not to constitute
a restriction on transferability). See "The Exchange
Offer--Procedures for Tendering."
Acceptance of Old Notes and
Delivery of New Notes........... The Company will accept for exchange any and all Old
Notes which are properly tendered (and not withdrawn) in
the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Exchange Agent.................... The Bank of New York is serving as Exchange Agent (the
"Exchange Agent") in connection with the Exchange Offer.
Federal Income Tax
Considerations.................. The exchange of Old Notes for New Notes pursuant to the
Exchange Offer should not be a taxable event for federal
income tax purposes. See "Certain Federal Income Tax
Considerations."
Effect of Not Tendering........... Old Notes that are not tendered or that are tendered but
not accepted will, following the completion of the
Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof. The Company will
have no further obligation to provide for the
registration under the Securities Act of such Old Notes
(except as described in "The Exchange Offer").
</TABLE>
10
<PAGE>
THE NEW NOTES
<TABLE>
<S> <C>
Issuer............................ United Stationers Supply Co.
Securities Offered................ $100.0 million aggregate principal amount of 8 3/8%
Senior Subordinated Notes due 2008.
Maturity.......................... April 15, 2008.
Interest Payment Dates............ April 15 and October 15 of each year, commencing on
October 15, 1998.
Sinking Fund...................... None.
Optional Redemption............... Except as described below, the Company may not redeem
the New Notes prior to April 15, 2003. On or after such
date, the Company may redeem the New Notes, in whole or
in part, at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time and
from time to time prior to April 15, 2001, the Company
may redeem, subject to certain requirements, up to 35%
of the aggregate principal amount of the New Notes with
the net proceeds from one or more Public Equity
Offerings, at a redemption price equal to 108.375% of
the principal amount to be redeemed, together with
accrued and unpaid interest and Additional Amounts, if
any, to the date of redemption, provided that at least
65% of the aggregate principal amount of the New Notes
remains outstanding immediately after each such
redemption. See "Description of the New Notes--Optional
Redemption."
Change of Control................. Upon a Change of Control, the Company will be required
to make an offer to repurchase the New Notes at a price
equal to 101% of principal amount thereof, together with
accrued and unpaid interest and Additional Amounts, if
any, to the date of repurchase. See "Description of the
New Notes--Certain Covenants--Purchase of Notes upon a
Change of Control."
Guarantees........................ The New Notes will be guaranteed (the "Guarantees"),
jointly and severally on a senior subordinated basis, by
United and all of the Company's direct and indirect
domestic Subsidiaries (as defined) on the Issue Date,
and by each direct and indirect domestic Subsidiary of
the Company which incurs any Indebtedness (excluding any
Securitization Subsidiary that has entered into or
established a Permitted Receivables Securitization
Program and any Unrestricted Subsidiaries) created or
acquired thereafter (collectively, the "Guarantors").
The Receivables Company will not guarantee the New
Notes, as it is a foreign subsidiary. The Guarantees
will be general unsecured senior subordinated
obligations of the Guarantors. The Guarantors are also
guaranteeing all obligations of the Company under the
New Credit Facilities, and each of such Guarantors has
granted a security interest in all or substantially all
its assets to secure its guarantee obligations under the
New Credit Facilities. The obligations of each Guarantor
under its Guarantee will be subordinated in right of
payment to the prior
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
payment in full of all Guarantor Senior Indebtedness (as
defined) of such Guarantor to substantially the same
extent as the New Notes are subordinated to all existing
and future Senior Indebtedness of the Company. See
"Description of the New Notes--Guarantees."
Ranking........................... The New Notes will be unsecured and will be subordinated
in right of payment to all existing and future Senior
Indebtedness of the Company. The New Notes will rank
PARI PASSU in right of payment with the 12 3/4% Notes
and any future senior subordinated Indebtedness of the
Company, and will rank senior to all Subordinated
Indebtedness of the Company. As of March 31, 1998, after
giving pro forma effect to the Senior Credit Facilities
Refinancing, the Azerty Acquisition, the Original
Offering (including the application of net proceeds
thereof), and the June Equity Offering (including the
application of net proceeds therefrom), the aggregate
principal amount of the Company's outstanding Senior
Indebtedness would have been approximately $162.7
million (excluding unused commitments), the Company
would have had no senior subordinated Indebtedness
outstanding other than the $100.0 million in principal
amount of 12 3/4% Notes and the New Notes, and the
Company would have had $78.4 million in Subordinated
Indebtedness consisting of intercompany indebtedness
payable to United. See "Description of the New
Notes--General" and "--Subordination."
Restrictive Covenants............. The Indenture will limit, among other things, (i) the
incurrence of additional Indebtedness by the Company and
its Restricted Subsidiaries, (ii) the payment of
dividends on, and redemption of, capital stock of the
Company and its Restricted Subsidiaries and the
redemption of certain subordinated obligations of the
Company and its Restricted Subsidiaries, (iii)
investments, (iv) sales of assets and Restricted
Subsidiary stock, (v) transactions with affiliates, and
(vi) consolidations, mergers and transfers of all or
substantially all of the Company's assets. The Indenture
will also prohibit certain restrictions on distributions
from Restricted Subsidiaries. However, all of these
limitations and prohibitions are subject to a number of
important qualifications and exceptions. See
"Description of the New Notes--Certain Covenants."
Use of Proceeds................... There will be no cash proceeds to the Company from the
Exchange Offer. The Company used the proceeds from the
Original Offering (i) to repay a substantial portion of
indebtedness of the Company outstanding under the
Tranche B Term Loan Facility, and (ii) to pay related
fees and expenses of the Original Offering.
</TABLE>
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" beginning on page 17 for risks involved
with an investment in the New Notes.
12
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA DATA
On March 30, 1995, Associated purchased 92.5% of the then-outstanding shares
of pre-Merger United common stock pursuant to a tender offer (the "Tender
Offer"). Immediately thereafter, Associated merged with and into United, and
ASI, a wholly owned subsidiary of Associated, merged with and into USSC, a
wholly owned subsidiary of United. Although United was the surviving corporation
in the Merger, the transaction was treated as a reverse acquisition for
accounting purposes, with Associated deemed the acquiring corporation.
Therefore, the historical income statement 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 post-Merger United for
the nine months ended December 31, 1995.
Set forth below are (i) summary historical financial data, (ii) summary 1995
supplemental pro forma data, (iii) summary pro forma data reflecting the Senior
Credit Facilities Refinancing, the Azerty Acquisition, the Original Offering
(and the application of the net proceeds to the Company therefrom), and the June
Equity Offering (and the application of the net proceeds to United therefrom),
(iv) summary 1997 supplemental pro forma data reflecting the October Equity
Offering (and the application of the net proceeds to the Company therefrom), the
termination of certain management advisory service agreements effected in
October 1997 (see note 13 to the Consolidated Financial Statements of United
included elsewhere herein) (the "Management Agreements Termination"), the
redemption of all of United's outstanding shares of Series A Preferred Stock,
$0.01 par value ("Series A Preferred Stock"), and Series C Preferred Stock,
$0.01 par value ("Series C Preferred Stock" and, collectively with the Series A
Preferred Stock, the "Preferred Stock"), for approximately $21.3 million, which
was effected in September 1997 (the "Preferred Stock Redemption" and,
collectively with the October Equity Offering and the Management Agreements
Termination, the "1997 Financing Transactions"), the cost savings associated
with, the Computer Services Contract Write-Off, the Senior Credit Facilities
Refinancing, the Azerty Acquisition, the Original Offering (and the application
of the net proceeds to the Company therefrom) and the June Equity Offering (and
the application of the net proceeds to United therefrom) and (v) summary
supplemental pro forma data for the three months ended March 31, 1998 reflecting
the cost savings associated with the Computer Services Contract Write-Off,
Senior Credit Facilities Refinancing, the Azerty Acquisition, the Original
Offering (and the application of the net proceeds to the Company therefrom) and
the June Equity Offering (and the application of the net proceeds to United
therefrom). The summary 1995 supplemental pro forma data, the pro forma data and
the supplemental pro forma data are intended for informational purposes only and
are not necessarily indicative of either financial position or results of
operations in the future, or those that would have occurred had the events
described below occurred on the indicated dates as described elsewhere herein.
The following information should be read in conjunction with, and is qualified
in its entirety by, "Selected Consolidated Financial Data," "Unaudited
Consolidated Pro Forma Financial Statements," and related notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of United, together with
the related notes thereto, included herein.
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
PRO FORMA
1995 YEAR ENDED YEAR ENDED
----------------------------- DECEMBER 31, DECEMBER 31,
UNITED SUPPLEMENTAL --------------------------- ----------------
HISTORICAL PRO FORMA(1) 1996 1997 1997(2)
-------------- ------------ ---------- --------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................... $ 1,751,462 $2,201,860 $2,298,170 $ 2,558,135 $2,913,558
Cost of goods sold.......................... 1,446,949 1,820,590 1,907,209 2,112,204 2,435,364
-------------- ------------ ---------- --------------- ----------------
Gross profit................................ 304,513 381,270 390,961 445,931 478,194
Operating expenses:
Warehousing, marketing and administrative
expenses................................ 237,197 299,861(5) 277,957 311,002 333,601
Restructuring charge(6)................... 9,759 -- -- -- --
Non-recurring charges(7).................. -- -- -- 64,698 64,698
-------------- ------------ ---------- --------------- ----------------
Total operating expenses.................... 246,956 299,861 277,957 375,700 398,299
-------------- ------------ ---------- --------------- ----------------
Income from operations...................... 57,557 $ 81,409 113,004 70,231 79,895
------------
------------
Interest expense............................ 46,186 57,456 53,511 41,656
Other expense............................... -- -- -- 9,251(8)
-------------- ---------- --------------- ----------------
Income before income taxes and extraordinary
item...................................... 11,371 55,548 16,720 28,988
Income taxes................................ 5,128 23,555 8,532 14,161
-------------- ---------- --------------- ----------------
Income before extraordinary item............ 6,243 31,993 8,188 14,827
Extraordinary item.......................... (1,449)(9) -- (5,884)(10) (5,884)(10)
-------------- ---------- --------------- ----------------
Net income.................................. 4,794 31,993 2,304 8,943
Preferred stock dividends issued and
accrued................................... 1,998 1,744 1,528 1,528
-------------- ---------- --------------- ----------------
Net income attributable to common
stockholders.............................. $ 2,796 $ 30,249 $ 776 $ 7,415
-------------- ---------- --------------- ----------------
-------------- ---------- --------------- ----------------
Net income per common share--
assuming dilution:
Income before extraordinary item.......... $ 0.33 $ 2.03 $ 0.43 $ 0.79
Extraordinary item........................ (0.11) -- (0.38) (0.35)
-------------- ---------- --------------- ----------------
Net income................................ $ 0.22 $ 2.03 $ 0.05 $ 0.44
-------------- ---------- --------------- ----------------
-------------- ---------- --------------- ----------------
Weighted average shares and assumed
conversions (in thousands).............. 12,809 14,923 15,380 16,950
-------------- ---------- --------------- ----------------
-------------- ---------- --------------- ----------------
<CAPTION>
PRO FORMA SUPPLEMENTAL
SUPPLEMENTAL THREE PRO FORMA
PRO FORMA MONTHS THREE MONTHS
YEAR ENDED THREE MONTHS ENDED ENDED MARCH ENDED MARCH
DECEMBER 31, MARCH 31, 31, 31,
-------------- ------------------ ----------- -------------
1997(3) 1997 1998 1998(2) 1998(4)
-------------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................... $2,913,558 $635,021 $712,517 $812,240 $812,240
Cost of goods sold.......................... 2,435,364 526,279 589,455 680,505 680,505
-------------- -------- -------- ----------- -------------
Gross profit................................ 478,194 108,742 123,062 131,735 131,735
Operating expenses:
Warehousing, marketing and administrative
expenses................................ 329,653 76,704 85,037 91,312 90,510
Restructuring charge(6)................... -- -- -- -- --
Non-recurring charges(7).................. -- -- -- -- --
-------------- -------- -------- ----------- -------------
Total operating expenses.................... 329,653 76,704 85,037 91,312 90,510
-------------- -------- -------- ----------- -------------
Income from operations...................... 148,541 32,038 38,025 40,423 41,225
Interest expense............................ 36,560 14,661 11,826 9,134 9,134
Other expense............................... 9,251(8) -- -- 2,313(8) 2,313(8)
-------------- -------- -------- ----------- -------------
Income before income taxes and extraordinary
item...................................... 102,730 17,377 26,199 28,976 29,778
Income taxes................................ 43,805 7,368 11,108 12,403 12,725
-------------- -------- -------- ----------- -------------
Income before extraordinary item............ 58,925 10,009 15,091 16,573 17,053
Extraordinary item.......................... -- -- -- -- --
-------------- -------- -------- ----------- -------------
Net income.................................. 58,925 10,009 15,091 16,573 17,053
Preferred stock dividends issued and
accrued................................... -- 455 -- -- --
-------------- -------- -------- ----------- -------------
Net income attributable to common
stockholders.............................. $ 58,925 $ 9,554 $ 15,091 $ 16,573 $ 17,053
-------------- -------- -------- ----------- -------------
-------------- -------- -------- ----------- -------------
Net income per common share--
assuming dilution:
Income before extraordinary item.......... $ 3.19 $ 0.65 $ 0.88 $ 0.89 $ 0.91
Extraordinary item........................ -- -- -- -- --
-------------- -------- -------- ----------- -------------
Net income................................ $ 3.19 $ 0.65 $ 0.88 $ 0.89 $ 0.91
-------------- -------- -------- ----------- -------------
-------------- -------- -------- ----------- -------------
Weighted average shares and assumed
conversions (in thousands).............. 18,500 14,608 17,098 18,646 18,646
-------------- -------- -------- ----------- -------------
-------------- -------- -------- ----------- -------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------- SUPPLEMENTAL THREE
PRO FORMA PRO FORMA MONTHS
1995 YEAR ENDED YEAR ENDED YEAR ENDED ENDED
-------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
UNITED SUPPLEMENTAL ---------------------- -------------- -------------- ---------
HISTORICAL PRO FORMA(1) 1996 1997 1997(2) 1997(3) 1997
---------- -------------- ---------- ---------- -------------- -------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(11)........................ $ 81,241 $ 111,880 $ 139,046 $ 96,272 $ 108,903 $ 177,549 $ 38,573
Adjusted EBITDA(12)............... 91,000 111,880 139,046 160,970 173,601 177,549 38,573
EBITDA margin(13)................. 4.6% 5.1% 6.1% 3.8% 3.7% 6.1% 6.1%
Adjusted EBITDA margin............ 5.2% 5.1% 6.1% 6.3% 6.0% 6.1% 6.1%
Depreciation and amortization..... $ 23,684 $ 26,042 $ 26,041 $ 29,008 $ 29,008 6,535
Capital expenditures, net......... 8,017 (2,886) 12,991 13,733 13,733 1,612
Ratio of net debt to EBITDA....... 6.6x 4.2x 5.5x -- -- 3.5x
Ratio of net debt to Adjusted
EBITDA.......................... 5.9x 4.2x 3.3x -- -- 3.5x
Ratio of EBITDA to interest
expense......................... 1.8x 2.4x 1.8x 2.6x 4.9x 2.6x
Ratio of Adjusted EBITDA to
interest expense................ 2.0x 2.4x 3.0x 4.2x 4.9x 2.6x
OTHER DATA BEFORE CHARGES(14):
Income from operations............ $ 67,316 $ 113,004 $ 134,929 $ 144,593 $ 148,541 $ 32,038
Net income attributable to common
stockholders.................... 10,081 30,249 45,364 51,988 58,925 9,554
Net income per common share
assuming dilution............... 0.79 2.03 2.95 3.07 3.19 0.65
<CAPTION>
PRO FORMA SUPPLEMENTAL
THREE PRO FORMA
MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 31,
----------- --------------
1998 1998(2) 1998(4)
--------- ----------- --------------
<S> <C> <C> <C>
OTHER DATA:
EBITDA(11)........................ $ 45,458 $ 48,634 $ 49,436
Adjusted EBITDA(12)............... 45,458 48,634 49,436
EBITDA margin(13)................. 6.4% 6.0% 6.1%
Adjusted EBITDA margin............ 6.4% 6.0% 6.1%
Depreciation and amortization..... 7,433 8,211 8,211
Capital expenditures, net......... 3,975 4,252 4,252
Ratio of net debt to EBITDA....... 2.6x 1.8x 1.8x
Ratio of net debt to Adjusted
EBITDA.......................... 2.6x 1.8x 1.8x
Ratio of EBITDA to interest
expense......................... 3.8x 5.3x 5.4x
Ratio of Adjusted EBITDA to
interest expense................ 3.8x 5.3x 5.4x
OTHER DATA BEFORE CHARGES(14):
Income from operations............ $ 38,025 $ 40,423 $ 41,225
Net income attributable to common
stockholders.................... 15,091 16,573 17,053
Net income per common share
assuming dilution............... 0.88 0.89 0.91
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
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HISTORICAL PRO FORMA(2)
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(DOLLARS IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 11,504 $ 11,504
Working capital..................................................................... 431,324 327,374
Total assets........................................................................ 1,087,692 1,093,357
Total debt(15)...................................................................... 475,201 362,669
Total stockholders' equity.......................................................... 236,629 309,834
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(1) Supplemental pro forma data for the year ended December 31, 1995 are based
on the audited consolidated financial statements of United for the fiscal
year ended December 31, 1995 (which includes the results of operations of
Associated for twelve months but excludes pre-Merger United for the three
months ended March 30, 1995) and the unaudited consolidated financial
statements of pre-Merger United for the three-month period ended March 30,
1995 giving effect to (i) increased depreciation expense of $1.3 million
resulting from the write-up of certain fixed assets to fair value, (ii)
additional incremental goodwill amortization, (iii) elimination of
nonrecurring compensation expense of $1.5 million relating to certain
employee stock options recognized as a result of the Merger and (iv) the
elimination of $37.6 million in costs described in (4) below. This
information is presented to facilitate a better understanding of the
combined operations prior to the Merger.
(2) See "Unaudited Consolidated Pro Forma Financial Statements" for a
discussion of the adjustments used in preparation of this data which
reflects the Senior Credit Facilities Refinancing, the Azerty Acquisition,
the Original Offering and the June Equity Offering.
(3) See the "Unaudited Consolidated Supplemental Pro Forma Income Statement"
for a discussion of the adjustments used in preparation of this data which
reflects the 1997 Financing Transactions, the Senior Credit Facilities
Refinancing, the Azerty Acquisition, the Original Offering and the June
Equity Offering.
(4) See "Unaudited Consolidated Pro Forma Financial Statements" for a
discussion of the adjustments used in preparation of this data which
reflects the Senior Credit Facilities Refinancing, the Azerty Acquisition,
the Original Offering, the June 1998 Equity Offering and the Computer
Services Contract Write-Off.
(5) Supplemental pro forma operating expenses for the year ended December 31,
1995 exclude the following items: (i) a restructuring charge of $9.8
million related to the Merger which was recorded by United during the year
ended December 31, 1995; and (ii) Merger-related costs of $27.8 million
recorded by pre-Merger United during the three months ended March 30, 1995.
(6) Restructuring charge is related to United's consolidation plan in
connection with the Merger.
(7) United recognized a non-recurring non-cash charge of $59.4 million ($35.5
million net of tax benefit of $23.9 million) and a non-recurring cash
charge of $5.3 million ($3.2 million net of tax benefit of $2.1 million)
related to the vesting of certain stock options (the "Merger Incentive
Options") and the Management Agreements Termination, respectively.
(8) Costs related to the sale of certain accounts receivable.
(9) Loss on early retirement of debt of $2.4 million ($1.4 million net of tax
benefit of $1.0 million).
(10) Loss on early retirement of debt of $9.8 million ($5.9 million net of tax
benefit of $3.9 million).
(11) "EBITDA" refers to earnings before interest, income taxes, depreciation
and amortization, and costs associated with the sale of certain accounts
receivable. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to incur and service debt and is also one
of the financial measures by which certain covenants under the Company's
New Credit Agreement are calculated. However, EBITDA should not be
considered in isolation or as a substitute for net income or cash flow
data prepared in accordance with generally accepted accounting principles
or as a measure of a company's profitability or liquidity. Also, the
EBITDA definition used herein may not be comparable to similarly titled
measures reported by other companies.
(12) "Adjusted EBITDA" is defined as in note 11 above except for the add back
of restructuring and non-recurring charges discussed in notes 6 and 7
above and the extraordinary items discussed in notes 9 and 10 above.
(13) EBITDA margin represents EBITDA as a percentage of net sales.
(14) Charges refers to the restructuring and non-recurring charges discussed in
notes 6 and 7 above and the extraordinary items discussed in notes 9 and
10 above.
(15) Includes current maturities.
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RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS IN CONNECTION WITH
AN INVESTMENT IN THE NEW NOTES IN ADDITION TO THE OTHER INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE EXCHANGE ACT, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "ANTICIPATE," "BELIEVE,"
"ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS
INCLUDED IN THIS PROSPECTUS, INCLUDING THOSE REGARDING THE COMPANY'S FINANCIAL
POSITION, BUSINESS STRATEGY, PROJECTED COSTS, AND PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS ARE FORWARD-LOOKING STATEMENTS. THE FOLLOWING
MATTERS AND CERTAIN OTHER FACTORS NOTED THROUGHOUT THIS PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-
LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS
AND ANY SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO
THE COMPANY OR PERSONS ACTING ON BEHALF OF THE COMPANY ARE EXPRESSLY QUALIFIED
IN THEIR ENTIRETY BY SUCH CAUTIONARY STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will register
Old Notes under the Securities Act. See "The Exchange Offer--Purpose and
Effect." Based on interpretations by the staff of the SEC, as set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold or otherwise transferred by holders thereof (other than any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders, other than broker-dealers, have no arrangement or understanding with
any person to participate in the distribution of such New Notes. However, the
SEC has not considered the Exchange Offer in the context of a no-action letter
and there can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Each Holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of such New Notes and has
no arrangement or understanding to participate in a distribution of New Notes.
If any Holder is an affiliate of the Company or the Guarantors or is engaged in
or intends to engage in or has any arrangement or understanding with respect to
the distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such Holder (i) may not rely on the applicable interpretations of the staff of
the SEC and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes pursuant to the Exchange Offer must acknowledge that such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities and that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus,
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as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." In addition, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with. The Company and the Guarantors have agreed, pursuant to
the Registration Rights Agreement, subject to certain limitations specified
therein, to register or qualify the New Notes for offer or sale under the
securities laws of such jurisdiction as any holder reasonably requests in
writing. Unless a holder so requests, the Company does not currently intend to
register or qualify the sale of the New Notes in any such jurisdictions. See
"The Exchange Offer."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company has significant debt and debt service obligations. As of March
31, 1998, after giving effect to the Senior Credit Facilities Refinancing, the
Azerty Acquisition, the Original Offering (including application of the net
proceeds therefrom) and the June Equity Offering (including the application of
net proceeds therefrom), the Company would have had outstanding long-term
indebtedness (including current maturities) of approximately $362.7 million
(excluding unused commitments) and total stockholders' equity of $309.8 million.
See "Capitalization."
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
potential acquisition opportunities, general corporate purposes or other
purposes may be impaired; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness; (iii) the Company may be more vulnerable to economic
downturns, may be limited in its ability to withstand competitive pressures and
may have reduced flexibility in responding to changing business and economic
conditions; and (iv) fluctuations in market interest rates will affect the cost
of the Company's borrowings to the extent not covered by interest rate hedge
agreements because interest under the New Credit Facilities is payable at
variable rates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Liquidity and Capital Resources" and "Description of
Certain Indebtedness."
The Company's ability to service its indebtedness will be dependent on its
future performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the Company's
control. The Company believes that, based upon current levels of operations, it
should be able to meet its debt service obligations when due. If, however, the
Company were unable to service its indebtedness, it would be forced to pursue
one or more alternative strategies such as selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital. There can be
no assurance that any of these strategies could be effected on satisfactory
terms, if at all, or that asset sales, restructuring or refinancing would be
permitted under the Indenture, the New Credit Agreement or the indenture
governing the Company's 12 3/4% Notes (as amended and supplemented from time to
time, the "12 3/4% Notes Indenture"). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
SUBORDINATION
The indebtedness evidenced by the New Notes and the Guarantees (including
principal, premium, if any, and interest) will be subordinated in right of
payment to present and future Senior Indebtedness of the Company and Senior
Guarantor Indebtedness of each Guarantor. In the event of the dissolution or
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liquidation of United or the Company, or in the case of certain events of
default with respect to the New Notes or such Senior Indebtedness or Senior
Guarantor Indebtedness, certain creditors of the Company holding Senior
Indebtedness or of any Guarantor holding Senior Guarantor Indebtedness will be
entitled to be paid in full before any payment is made to holders of the Notes
or the Guarantees. Senior Indebtedness and Senior Guarantor Indebtedness would
currently include, among other things, the debt incurred under the New Credit
Facilities and, in the case of Senior Indebtedness, the Company's current and
future obligations under capitalized leases. The New Notes and the Guarantees
will be general unsecured obligations of the Company and the Guarantors,
respectively, and will also be subordinated in right of payment to all existing
and future secured Indebtedness of the Company and the Guarantors, respectively,
as well as to any future and existing Indebtedness of the Company's foreign
subsidiaries (none of which will be Guarantors under the Indenture). After
giving pro forma effect to the Senior Credit Facilities Refinancing, the Azerty
Acquisition, the Original Offering (including application of the net proceeds
therefrom), and the June Equity Offering (including the application of the net
proceeds therefrom), as if such transactions had occurred on March 31, 1998,
there would have been approximately $162.7 million of Senior Indebtedness of the
Company and approximately $162.7 million of Senior Guarantor Indebtedness of the
Guarantors outstanding on such date, substantially all of which represents
Indebtedness or guarantees of Indebtedness under the New Credit Facilities which
would have been secured by substantially all of the assets of the Company and
the Guarantors, respectively; in addition, after taking into account
approximately $36.5 million of outstanding letters of credit, there would have
been approximately $63.5 million available to be drawn by the Company as secured
Senior Indebtedness under the Revolving Credit Facility, which amount would have
been secured Senior Guarantor Indebtedness of the Guarantors. See "Unaudited
Consolidated Pro Forma Financial Statements." The Indenture does not prohibit or
limit the designation of Indebtedness otherwise permitted to be incurred as
Senior Indebtedness or Senior Guarantor Indebtedness. See "Description of the
New Notes--Subordination."
LIMITED PRACTICAL VALUE OF GUARANTEE BY UNITED
United will unconditionally guarantee, on a senior subordinated basis, all
payments of principal, premium, if any, interest and Additional Amounts, if any,
on the New Notes. However, since at present United's only significant asset is
the capital stock of the Company (and such asset will be pledged to the lenders
under the New Credit Facilities), if the Company should be unable to meet its
payment obligations with respect to the New Notes, it is unlikely that United
would be able to do so.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture, the New Credit Agreement, and the 12 3/4% Notes Indenture
contain or will contain numerous restrictive covenants that limit the discretion
of management with respect to certain business matters. These covenants place
significant restrictions on, among other things, the ability of the Company to
incur additional indebtedness, to create liens or other encumbrances, to pay
dividends or make other payments in respect of its capital stock or Subordinated
Indebtedness, to engage in transactions with affiliates, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
assets and merge or consolidate with another entity. The New Credit Agreement
also contains a number of financial covenants that require the Company to meet
certain financial ratios and tests. A failure to comply with the obligations in
the Indenture, the New Credit Agreement or the 12 3/4% Notes Indenture could
result in an event of default under the Indenture, the New Credit Agreement or
the 12 3/4% Notes Indenture, which, if not cured or waived, could permit
acceleration of the indebtedness thereunder and acceleration of indebtedness
under other instruments that may contain cross-acceleration or cross-default
provisions, any of which could have a material adverse effect on the financial
condition of the Company. The New Credit Agreement restricts the prepayment,
purchase, redemption, defeasance or other payment of any of the principal of the
Notes or the 12 3/4% Notes so long as any loans
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remain outstanding under the New Credit Agreement. See "Description of the New
Notes--Certain Covenants" and "Description of Certain Indebtedness."
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with business products manufacturers and other national, regional and
specialty wholesalers of business products, office furniture, computer products,
janitorial and sanitation supplies and related items. Some of these competitors
are larger than the Company and have greater financial and other resources
available to them than does the Company, and there can be no assurance that the
Company can continue to compete successfully with such competitors. Increased
competition in the business products industry, together with increased
advertising, has heightened price awareness among end users. Such heightened
price awareness has led to margin pressure on business products. In the event
that such a trend continues, the Company's profit margins could be adversely
affected. Further, the Company could be adversely affected by the loss of a
major customer. See "Business--Competition."
CONSOLIDATION
Consolidation continues throughout all levels of the business products
industry. Consolidation of commercial dealers and contract stationers has
resulted in (i) an increased ability of those resellers to buy goods directly
from manufacturers on their own or through their participation in buying groups,
(ii) the ability of larger resellers who grow primarily through acquisitions to
qualify for larger volume rebates than the acquired companies would have
qualified for on a stand-alone basis, and (iii) fewer independent resellers to
purchase from wholesalers. In addition, over the last decade, office products
superstores (which largely buy directly from manufacturers) have entered
virtually every major metropolitan market. Continuing consolidation could
adversely affect the Company's financial results. See "Business--The Business
Products Industry."
INTEGRATION OF ACQUISITIONS
As a result of the Azerty Acquisition and the Company's strategy of pursuing
strategic acquisitions, the Company's management will be required to manage
substantially larger operations than has historically been the case. With the
Azerty Acquisition, the Company's future operations in the computer supplies and
related products area and earnings from such operations will be largely
dependent upon the Company's ability to integrate the operations of the
Company's existing Micro United division within the Azerty Business. The Company
must, among other things, integrate management and employee personnel and
combine certain administrative, sales and information technology procedures. The
integration of the Azerty Business involves numerous risks, including the
potential loss of key employees and customers. There can be no assurance that
the Company will successfully integrate the Micro United business and the Azerty
Business, and a failure to do so could have a material adverse effect on the
Company's results of operations and financial condition. Additionally, the need
to focus management's attention on the integration of the Azerty Business may
limit the ability of the Company to successfully pursue acquisitions or other
opportunities related to its business for a period of time.
CHANGING END-USER DEMANDS AND SEASONALITY
The Company's sales and profitability are largely dependent on its ability
to continually enhance its product offerings in order to meet changing end-user
demands. End-users traditional demands for business products have changed over
the last several years as a result of, among other things, the widespread use of
computers and other technological advances (resulting in the reduction in use of
traditional office supplies), efforts by various businesses to establish
"paperless" work environments, increased recycling efforts and a trend toward
non-traditional offices (such as home offices). The Company's ability to
continually monitor and react to such trends and changes in end-user demands
will
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be necessary to avoid adverse effects on its sales and profitability. In
addition, the Company's financial results could be adversely affected if and to
the extent that end-user demand for a broad product selection or the need for
overnight delivery were to diminish substantially or end-user demand for a
higher proportion of low margin products were to increase substantially.
Although the Company's sales are 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 month of January when many
businesses begin operating under new annual budgets. Any impact upon sales
during this peak season could have a disproportionate effect on the Company's
results of operations for the full year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Seasonality."
DEPENDENCE ON KEY SUPPLIERS
Although the Company regularly carries products and accessories supplied by
more than 550 business products manufacturers, approximately 27.6% of the
Company's total purchases (on a pro forma basis) during the year ended December
31, 1997 were derived from products purchased from the Company's three largest
suppliers. The Company's purchasing agreements with such suppliers are generally
terminable at any time or on short notice, with or without cause, and, while the
Company considers its relationships with its suppliers to be good, there can be
no assurance that any or all of such relationships will not be terminated or
that such relationship will continue as presently in effect. Termination of such
relationships or changes by its suppliers in their policies regarding wholesale
distributors or volume discount schedules or other marketing programs applicable
to the Company may have a material adverse effect on the Company's business.
IMPACT OF CHANGING MANUFACTURERS' PRICES
The Company maintains substantial inventories to accommodate the prompt
service and delivery requirements of its customers. Accordingly, the Company
purchases its products on a regular basis in an effort to maintain its inventory
at levels that it believes to be sufficient to satisfy the anticipated needs of
its customers based upon historic buying practices and market conditions.
Although the Company has historically been able to pass through manufacturers'
price increases to its customers on a timely basis, competitive conditions will
influence how much of future price increases can be passed on to the Company's
customers. Conversely, when manufacturers' prices decline, lower sales prices
could result in lower margins as the Company sells existing inventory. Changes
in the prices paid by the Company for its products therefore could have a
material effect on the Company's net sales, gross margins and net income, and
the timing of such changes throughout the year could materially impact quarterly
results.
EFFECT OF CHANGES IN THE ECONOMY
Demand for business products is affected by, among other things, white
collar employment levels. Changes in the economy resulting in decreased white
collar employment levels may therefore adversely affect the Company's operations
and profitability. In addition, pricing and, to an extent, profitability of the
Company's product offerings generally decrease under deflationary economic
conditions. Deflationary swings in the economy may therefore adversely affect
the Company's profitability.
POTENTIAL SERVICE INTERRUPTIONS
Substantially all of the Company's shipping, warehouse and maintenance
employees at certain of the Company's facilities in Chicago, Detroit,
Philadelphia, Baltimore, Los Angeles, Minneapolis and New York City are covered
by various collective bargaining agreements that expire at various times during
the next three years. Although the Company considers its relations with
employees to be good, a prolonged
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labor dispute could have a material adverse effect on the Company's business
(including its ability to deliver its products in a timely manner) as well as
the Company's results of operations and financial condition. The Company has not
experienced any work stoppages during the past five years.
The Company's ability to receive and deliver products is largely dependent
on the availability of trucking and package delivery services utilized by
manufacturers and the Company. Therefore, the occurrence of a strike or other
work stoppage by any such service provider could materially affect the Company's
sales and profitability.
DEPENDENCE ON TECHNOLOGY; YEAR 2000 MODIFICATIONS
The Company believes that the successful operation of its business depends
to a large extent on its computerized inventory management, order processing and
distribution systems. The Company may, from time to time, experience delays,
complications or expenses in integrating and operating these systems, any of
which could have a material adverse effect upon the Company's results of
operations and financial condition. While the Company believes that its computer
systems will be adequate for its future needs, such systems may require
modification, improvement or replacement as the Company grows or as technologies
make these systems obsolete. For example, the Company is currently taking steps
to make all necessary modifications to its systems for the year 2000. In 1997,
the Company incurred approximately $1.4 million of expenses related to this
issue, and expects to incur an additional $2.6 to $3.3 million of such expenses
during the next two years. Any such modifications, improvements or replacements
may require substantial additional expenditures to design and implement and may
require interruptions in operations during periods of implementation, any of
which could have a material adverse effect on the Company's results of
operations and financial condition. Further, since approximately 90% of the
Company's orders are received electronically, any disruption of a significant
reseller's computer systems could have an adverse impact on the Company's sales.
The Company's service levels also would be affected in the event of an
interruption in operation of its telecommunications network on a company-wide
scale for an extended period of time, although the Company has developed
contingency plans to limit its exposure to such risks.
DEPENDENCE ON KEY PERSONNEL
The Company's success relies on the efforts and abilities of its executive
officers and certain other key employees, particularly Mr. Frederick B. Hegi,
Jr., the Company's non-executive Chairman of the Board, Mr. Randall W.
Larrimore, President and Chief Executive Officer, Mr. Daniel H. Bushell, an
Executive Vice President and the Chief Financial Officer of the Company, and Mr.
Michael D. Rowsey and Mr. Steven R. Schwarz, each an Executive Vice President of
the Company. The loss of any of these individuals could have a material adverse
effect on the Company. The Company has entered into employment agreements with
the executive officers listed above. The Company currently does not have any
"key man" life insurance for its key personnel. See "Management."
INFLUENCE OF CERTAIN STOCKHOLDERS
As of July 31, 1998, Wingate Partners, L.P. ("Wingate Partners") and Wingate
Partners II, L.P. ("Wingate II" and, collectively with Wingate Partners
"Wingate"), Cumberland Capital Corporation ("Cumberland") and its affiliates,
and Mr. Daniel J. Good and his affiliates beneficially owned approximately
17.5%, 1.9% and 2.4%, respectively, of the outstanding shares of Common Stock.
Two of the current nine directors of United are affiliates of Wingate Partners
or Wingate II. In addition, Mr. Gary G. Miller, who is the President and a
stockholder of Cumberland, and Mr. Good each serve as directors of United.
Consequently, such persons and their affiliates will continue to have
significant influence over the policies of United and the Company and any
matters submitted to a stockholder vote. See "Management--Directors and
Executive Officers," "Certain Transactions" and "Security Ownership of Certain
Beneficial Owners."
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LIMITATIONS ON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer for cash to repurchase the Notes (which could include Additional
Notes, to the extent any are issued) and the 12 3/4% Notes at a price equal to
101% of the principal amount thereof, together with accrued and unpaid interest,
if any, to the date of repurchase. If a Change of Control were to occur, there
can be no assurance that the Company would have sufficient funds to pay the
purchase price for all of the Notes and the 12 3/4% Notes that the Company might
be required to purchase. Certain events involving a Change of Control may result
in an event of default under the New Credit Facilities or other indebtedness of
the Company that may be incurred in the future. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing the Notes and
the 12 3/4% Notes, the Company could seek the consent of its lenders to purchase
the Notes and the 12 3/4% Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such consent or
repay such borrowings, the Company would remain prohibited from purchasing the
Notes and the 12 3/4% Notes. In such case, the Company's failure to purchase
tendered Notes and 12 3/4% Notes would constitute an Event of Default under the
Indenture and the 12 3/4% Notes Indenture, respectively. If, as a result
thereof, a default occurs with respect to any Indebtedness, the New Credit
Agreement, the Notes and the 12 3/4% Notes would require payment in full of the
New Credit Facilities before repurchase of the New Notes and the 12 3/4% Notes.
See "Description of Certain Indebtedness," "Description of the New
Notes--Subordination" and "--Certain Covenants--Purchase of Notes upon a Change
of Control."
FRAUDULENT CONVEYANCE CONSIDERATIONS
A substantial portion of the proceeds of the Original Offering were used to
refinance indebtedness under the New Credit Facilities. Accordingly, the
obligations of the Company under the Notes may be subject to review under
relevant federal and state fraudulent conveyance statutes ("fraudulent
conveyance statutes") in a bankruptcy, reorganization or rehabilitation case or
similar proceeding or a lawsuit by or on behalf of unpaid creditors of the
Company. If a court were to find under relevant fraudulent conveyance statutes
that, at the time the Notes were issued, (a) the Company issued the Notes with
the intent of hindering, delaying or defrauding current or future creditors or
(b)(i) the Company received less than reasonably equivalent value or fair
consideration for issuing the Notes (including, to the extent the proceeds from
the Notes are used to refinance any indebtedness of the Company or any of its
subsidiaries, by virtue of an invalidation as a fraudulent conveyance of the
incurrence of such indebtedness) and (ii)(A) was insolvent or was rendered
insolvent by reason of such issuance and/or such related transactions, (B) was
engaged, or about to engage, in a business or transaction for which its assets
constituted unreasonably small capital, (C) intended to incur, or believed that
it would incur, obligations beyond its ability pay as such obligations matured
(as all of the foregoing terms are defined in or interpreted under such
fraudulent conveyance statutes) or (D) was a defendant in an action for money
damages, or had a judgment for money damages docketed against it (if, in either
case, after final judgment, the judgment was unsatisfied), such court could
subordinate the Notes to presently existing and future indebtedness of the
Company and take other action detrimental to the holders of the Notes,
including, under certain circumstances, invalidating the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or state law that is being applied in any such
proceeding. Generally, however, the Company would be considered insolvent if, at
the time it incurs the obligations constituting the Notes, either (i) the fair
market value (or fair saleable value) of its assets is less than the amount
required to pay the probable liability on its total existing indebtedness and
liabilities (including contingent liabilities) as they become absolute and
mature or (ii) it is incurring obligations beyond its ability to pay as such
obligations mature.
In addition, the Guarantees may be subject to review under fraudulent
conveyance statutes in a bankruptcy, reorganization or rehabilitation case or
similar proceeding or a lawsuit on behalf of other creditors of any of the
Guarantors. In such a case, the analysis set forth above would generally apply,
23
<PAGE>
except that that the Guarantees could also be subject to the claim that, since
the Guarantees were incurred for the benefit of the Company (and only indirectly
for the benefit of the Guarantors), they were incurred for less than reasonably
equivalent value or fair consideration. A court could therefore subordinate the
Guarantees to the other obligations of the Guarantors, or take other action
detrimental to holders of the Notes, including, under certain circumstances,
invalidating the Guarantees.
The Boards of Directors and management of the Company, United and the other
Guarantors believe that at the time of issuance of the Notes and the Guarantees,
respectively, the Company, United and the other Guarantors (i) will be (a)
neither insolvent nor rendered insolvent thereby, (b) in possession of
sufficient capital to meet their obligations as the same mature or become due
and to operate their businesses effectively and (c) incurring obligations within
their ability to pay as the same mature or become due and (ii) will have
sufficient assets to satisfy any probable money judgment against them in any
pending action. In reaching the foregoing conclusions, such Boards of Directors
and management have relied upon their analysis of internal cash flow projections
and estimated values of assets and liabilities of the Company, United and the
other Guarantors. There can be no assurance, however, that such analyses will
prove to be correct or that a court passing on such questions would reach the
same conclusions.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the holders of the Old Notes. The New
Notes constitute a new class of securities with no established trading market.
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") Market. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
the remaining untendered Old Notes could be adversely affected. There is no
existing trading market for the New Notes, and there can be no assurance
regarding the future development of a market for the New Notes, or the ability
of holders of the New Notes to sell their New Notes or the price at which such
holders may be able to sell their New Notes. If such a market were to develop,
the New Notes could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. Each Initial Purchaser has advised the Company that it
currently intends to make a market in the New Notes. The Initial Purchasers are
not obligated to do so, however, and any market-making with respect to the New
Notes may be discontinued at any time without notice. Therefore, there can be no
assurance as to the liquidity of any trading market for the New Notes or that an
active public market for the New Notes will develop. The Company does not intend
to apply for listing or quotation of the New Notes on any securities exchange or
stock market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on Holders of the New Notes.
24
<PAGE>
RECENT TRANSACTIONS
JUNE EQUITY OFFERING
In June 1998, United completed an offering of 2,005,507 shares of Common
Stock, consisting of 1,500,000 primary shares sold by United, and 505,507
secondary shares sold by certain selling stockholders. The aggregate net
proceeds to United of approximately $77.1 million were delivered to USSC and
used to repay a portion of indebtedness under the Tranche A Term Loan Facility
which caused a permanent reduction of the amount borrowable thereunder.
United did not receive any of the proceeds from the sale of the 505,507
shares of Common Stock offered by the selling stockholders, other than an
aggregate of approximately $6.4 million paid by the selling stockholders upon
exercise of employee stock options in connection with the June Equity Offering,
which were delivered to USSC and applied to the repayment of indebtedness under
the New Credit Facilities.
Subsequent to the closing of the June Equity Offering, the underwriters for
such offering exercised an over-allotment option to purchase an additional
200,000 shares from United. The net proceeds to United of approximately $10.3
million from the sale of such Additional Shares were delivered to USSC and used
to repay an additional portion of the indebtedness outstanding under the Tranche
A Term Loan Facility. The pro forma financial information contained in this
Prospectus that gives effect to the June Equity Offering does not include the
sale of the Additional Shares and the application of net proceeds therefrom.
AZERTY ACQUISITION
On April 3, 1998, the Company completed the acquisition of all of the
capital stock of Azerty Incorporated ("Azerty"), Azerty de Mexico, S.A. de C.V.
("Azerty Mexico"), Positive ID Wholesale Inc. ("Positive ID"), and AP Support
Services Incorporated ("AP Support Services"), which conducted substantially all
of the United States and Mexican operations of the Office Products Division of
Abitibi-Consolidated Inc. The aggregate purchase price paid by the Company for
the Azerty Acquisition was approximately $115.2 million (including fees and
expenses), following an initial post-closing adjustment and subject to final
audit and review by the Company. For the fiscal year ended December 31, 1997,
the Azerty Business had combined net sales and EBITDA of $355.4 million and
$12.6 million, respectively.
AZERTY
Azerty was founded in 1983 and is a leading wholesale distributor of
computer consumables, peripherals and accessories in the United States. Azerty
serves over 12,000 major customers in the United States which consist primarily
of information product dealers and value-added resellers. Azerty distributes a
broad range of products consisting of printers, printer supplies, magnetic and
optical data storage media, workstation accessories, fax machines and basic
office products essentials. Azerty provides a high level of customer service,
including high order fill rates, late order cut-off times and guaranteed
next-day delivery via UPS for products under 100 pounds.
Azerty sells through marketing employees who utilize advanced data
management and telesales capabilities that enable highly customized and
segmented marketing, whereby customers' calls are automatically routed to sales
representatives familiar with their accounts. In addition, Azerty runs catalog
marketing programs, collecting co-op allowances from vendors to produce product
catalogs for their customers. Azerty also has established a new world wide web
site on the Internet which allows on-line inventory availability, pricing and
UPS order tracking, as well as vendor and product information, applications for
new accounts and general company information.
Azerty currently operates through four distribution facilities that stock
over 7,200 SKUs. Azerty's primary competitors are Daisytek International, Ingram
Micro, Tech Data and Merisel. For the fiscal year
25
<PAGE>
ended December 31, 1997, Azerty accounted for approximately 88% and 98% of the
net sales and EBITDA, respectively, of the combined Azerty Business.
AZERTY MEXICO
Azerty Mexico was founded in 1995 to distribute computer consumables,
peripherals and accessories under the Azerty name in Mexico. Azerty Mexico
operates through a single distribution facility located in Mexico City, Mexico.
POSITIVE ID
Positive ID is a wholesale distributor of bar code scanning products.
Founded in 1996, Positive ID has attempted to capitalize on an emerging
opportunity for wholesale distribution of products using the bar code scanning
technology that has been created by the increasing use of such technology by
small and medium-sized companies, as well as new applications in the medical and
insurance industries. Positive ID offers approximately 2,000 SKUs primarily to
information products dealers and value-added resellers and distributes products
consisting of scanners, printers, consumables, data collection terminals and
software through its distribution facility located in Tonawanda, New York.
AP SUPPORT SERVICES
Formed in 1996, AP Support Services is a third-party provider that offers
telemarketing, direct response marketing, logistics and data management services
to companies that are outsourcing such non-core activities. AP Support Services
offers a unique combination of sophisticated telemarketing support and the
ability to physically handle product. The strategy of AP Support Services is to
differentiate itself as a third-party provider by offering vendors a broad range
of services from marketing through product delivery and invoicing.
NEW CREDIT FACILITIES
On April 3, 1998, the Company entered into the New Credit Facilities
concurrently with the closing of the Azerty Acquisition in order to fund the
purchase price of the Azerty Acquisition, refinance borrowings under the
Existing Credit Facilities, and pay related fees and expenses in connection
therewith. The New Credit Facilities consisted initially of a $250.0 million
Revolving Credit Facility, a $150.0 million Tranche A Term Loan Facility, and a
$100.0 million Tranche B Term Loan Facility. The net proceeds of the Original
Offering were used to repay a substantial portion of indebtedness then
outstanding under the Tranche B Term Loan Facility and the remainder of such
facility was repaid with proceeds from the sale of certain receivables. See "Use
of Proceeds." A portion of the Tranche A Term Loan Facility was repaid from the
net proceeds of the June Equity Offering. Upon consummation of the Original
Offering (including the application of net proceeds therefrom), approximately
$16.0 million (excluding approximately $36.5 million of outstanding letters of
credit under the Revolving Credit Facility) was outstanding under the Revolving
Credit Facility.
For a description of the terms of the New Credit Facilities, see
"Description of Certain Indebtedness--New Credit Facilities."
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its Existing Credit
Facilities, the Company entered into the $163.0 million 364-day Receivables
Securitization Program pursuant to which the Company sells its Eligible
Receivables (except for certain excluded receivables) to the Receivables
Company, a wholly-owned offshore, special purpose limited liability company
intended to be bankruptcy-remote. The Receivables Company then transfers the
Eligible Receivables to a third-party, multi-seller asset-backed commercial
paper program. The Third-Party Seller's purchases of the Eligible
26
<PAGE>
Receivables are supported by a facility between the Third-Party Seller and banks
with ratings of A-1/P-1 or higher. The sale of trade receivables includes not
only those Eligible Receivables that were existing on the closing date of the
Receivables Securitization Program, but also Eligible Receivables created
thereafter. The Chase Manhattan Bank ("Chase") acts as funding agent and,
together with other commercial banks rated at least A-1/P-1, provides standby
liquidity funding to support the purchase of the receivables by the Receivables
Company. The proceeds from the Receivables Securitization Program were used to
reduce borrowings under the Company's Revolving Credit Facility. The Receivables
Company retains an interest in the Eligible Receivables transferred to the third
party. The Receivables Securitization Program carries an effective interest rate
of LIBOR plus 0.37%. As a result of the Receivables Securitization Program,
balance sheet assets of the Company of approximately $160.0 million, consisting
of accounts receivable, have been sold to the Receivables Company and do not
secure the Company's obligations under the New Credit Facilities. The Unaudited
Consolidated Pro Forma Financial Statements included in this Prospectus reflect
$150.0 million in proceeds from the sale of Eligible Receivables under the
Receivables Securitization Program, as this amount was deemed to more fairly
represent the average amount of receivables that would have been sold in 1997.
Management of United believes that the Unaudited Consolidated Pro Forma
Financial Statements included herein represent a fair presentation of how the
historical financial statements of United might have been affected if the
transaction described therein had been consummated at the beginning of the
periods presented. See "Unaudited Consolidated Pro Forma Financial Statements."
COMPUTER SERVICES CONTRACT WRITE-OFF
As a condition to the spinoff of ASI from the Wholesale Division of Boise
Cascade Office Products Corporation in January 1992, ASI entered into the
Computer Services Contract with a third-party service provider to perform
certain computer services.
Upon completion of the systems integration between USSC and ASI, increasing
differences in the operating processes and technical environment between the
Company and the third-party service provider became evident. The Computer
Services Contract was modified to allow the Company, at its discretion, not to
perform any processing at the third-party service provider's facilities.
Accordingly, related fees were reduced. Payments made to the third-party service
provider subsequent to this latest renegotiation were effectively for disaster
recovery purposes only. The Company has recently consolidated its disaster
recovery services under an agreement with another third-party service provider.
In May 1998, the Company completed an assessment of the future utility of the
Computer Services Contract. Based upon such assessment, the Company has
determined that it is no longer feasible to use the prior third-party service
provider for disaster recovery purposes.
During the second quarter of 1998, the Company wrote off the remaining term
of the Computer Services Contract. Accordingly, $2.6 million of prepaid expense
related to the Computer Services Contract has been eliminated and $2.6 million
and $8.7 million of current and long-term payments, respectively, have been
added to the supplemental pro forma March 31, 1998 balance sheet to reflect a
non-recurring $13.9 million pre-tax charge to write off the remainder of the
Computer Services Contract. A related deferred tax asset of $5.6 million has
also been recorded. This $8.3 million charge, net of tax benefit of $5.6
million, shown as a reduction to supplemental pro forma retained earnings at
March 31, 1998, has been excluded from supplemental pro forma income statement
purposes as it is non-recurring in nature.
For supplemental pro forma income statement purposes, the three months ended
March 31, 1998 and the twelve months ended December 31, 1997 reflect $0.8
million and $3.2 million in cost savings, respectively, related to the Computer
Services Contract had such agreement been written off prior to each period
presented.
27
<PAGE>
OCTOBER EQUITY OFFERING
On October 10, 1997, United completed an offering of 2.0 million primary
shares of Common Stock, and a 3.4 million share secondary offering of Common
Stock by certain selling stockholders. The shares of Common Stock sold in the
October Equity Offering were priced at $38.00 per share, before underwriting
discounts and commissions of $1.90 per share. The aggregate net proceeds to
United of $72.2 million (before deducting expenses) and proceeds of $0.1 million
resulting from the exercise of 1,119,038 warrants to purchase Common Stock sold
in the October Equity Offering were contributed to USSC and used to (i)
repurchase $50.0 million principal amount of USSC's existing 12 3/4% Notes and
pay the redemption premium thereof of approximately $6.4 million, (ii) pay fees
related to the October Equity Offering, and (iii) reduce indebtedness under its
existing senior secured term loan facilities by $15.5 million. The repayment of
indebtedness from the proceeds of the October Equity Offering resulted in an
extraordinary loss of $9.8 million ($5.9 million net of tax benefit of $3.9
million).
28
<PAGE>
USE OF PROCEEDS
The Company and the Guarantors will not receive any proceeds from the
exchange of New Notes for Old Notes pursuant to the Exchange Offer. The proceeds
from the Original Offering were used by the Company to (i) repay a substantial
portion of the indebtedness of the Company outstanding under the Tranche B Term
Loan Facility and (ii) pay fees and expenses related to the Original Offering.
The remainder of the Tranche B Term Loan Facility was repaid with proceeds from
the sale of certain receivables.
The Tranche B Term Loan Facility bore interest at the prime rate plus 0.75%
or, at the Company's option, LIBOR plus 2.00%. The Tranche B Term Loan Facility
was payable in 27 quarterly installments, and was scheduled to mature on or
about December 31, 2004.
CAPITALIZATION
The following table sets forth the unaudited capitalization of United as of
March 31, 1998 on a historical basis and on an as adjusted basis giving effect
to (i) the Senior Credit Facilities Refinancing, (ii) the Azerty Acquisition,
(iii) the Original Offering (including application of the net proceeds
therefrom) and (iv) the June Equity Offering (including application of the net
proceeds therefrom). The table set forth below should be read in conjunction
with the Unaudited Consolidated Pro Forma Financial Statements and the
Consolidated Financial Statements of United, together with the related notes
thereto, included elsewhere herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
HISTORICAL AS ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 11,504 $ 11,504
----------- ------------
----------- ------------
Current portion of long-term debt...................................................... $ 19,551 $ 10,649
Long-term debt:
Revolving credit facility............................................................ 224,000 57,225(1)
Term loan facilities................................................................. 100,020 62,917
12 3/4% Notes........................................................................ 100,000 100,000
Notes................................................................................ -- 100,000
Other long-term debt................................................................. 31,630 31,878
----------- ------------
Total long-term debt............................................................... 455,650 352,020
Total stockholders' equity(2).......................................................... 236,629 309,834
----------- ------------
Total capitalization (including current portion of long-term debt)................. $ 711,830 $ 672,503
----------- ------------
----------- ------------
</TABLE>
- --------------
(1) The Revolving Credit Facility under the New Credit Agreement provides for
borrowings of up to $250.0 million. See "Description of Certain
Indebtedness--New Credit Facilities."
(2) Public market capitalization of United's equity as of July 31, 1998 was $1.2
billion.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
UNITED
Set forth below and on the following pages are selected historical
consolidated financial data for United. 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.
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 post-Merger United for the
nine months ended December 31, 1995. The balance sheet data at December 31, 1995
reflects the consolidated balances of post-Merger United, including various
Merger-related adjustments.
The selected consolidated financial data set forth below for the fiscal
years ended December 31, 1993 and 1994 have been derived from the audited
consolidated financial statements of Associated. The selected consolidated
financial data of United for the fiscal years 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 post-Merger United for the
nine months ended December 31, 1995), 1996 and 1997 have been derived from the
consolidated financial statements of United, which have been audited by Ernst &
Young LLP, independent auditors. Income statement data for all periods presented
reflect a reclassification of delivery and occupancy costs to cost of goods sold
from operating expenses. The data for the three months ended March 31, 1997 and
1998 are derived from unaudited condensed consolidated financial statements and
in the opinion of management reflect all adjustments considered necessary for
the fair presentation of such data. Results for the three months ended March 31,
1998 are not necessarily indicative of results that may be achieved for a full
twelve-month period. 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" and "--Liquidity and Capital
Resources" and the Consolidated Financial Statements of United, together with
the related notes thereto, included elsewhere herein.
30
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................. $ 455,731 $ 470,185 $1,751,462 $2,298,170 $2,558,135 $ 635,021 $ 712,517
Cost of goods sold......... 375,226 382,299 1,446,949 1,907,209 2,112,204 526,279 589,455
--------- --------- ---------- ---------- ---------- ---------- ----------
Gross profit............... 80,505 87,886 304,513 390,961 445,931 108,742 123,062
--------- --------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Warehousing, marketing
and administrative
expenses............... 69,527 69,765 246,956(1) 277,957 311,002 76,704 85,037
Non-recurring
charges(2)............. -- -- -- -- 64,698 -- --
--------- --------- ---------- ---------- ---------- ---------- ----------
Total operating expenses... 69,527 69,765 246,956 277,957 375,700 76,704 85,037
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from operations..... 10,978 18,121 57,557 113,004 70,231 32,038 38,025
Interest expense........... 7,235 7,725 46,186 57,456 53,511 14,661 11,826
--------- --------- ---------- ---------- ---------- ---------- ----------
Income before income taxes
and extraordinary item... 3,743 10,396 11,371 55,548 16,720 17,377 26,199
Income taxes............... 781 3,993 5,128 23,555 8,532 7,368 11,108
--------- --------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
item..................... 2,962 6,403 6,243 31,993 8,188 10,009 15,091
Extraordinary item(3)...... -- -- (1,449) -- (5,884) -- --
--------- --------- ---------- ---------- ---------- ---------- ----------
Net income................. 2,962 6,403 4,794 31,993 2,304 10,009 15,091
Preferred stock
dividends................ 2,047 2,193 1,998 1,744 1,528 455 --
--------- --------- ---------- ---------- ---------- ---------- ----------
Net income attributable to
common stockholders...... $ 915 $ 4,210 $ 2,796 $ 30,249 $ 776 $ 9,554 15,091
--------- --------- ---------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ---------- ----------
Net income per common
share--
assuming dilution:
Income before
extraordinary item..... $ 0.11 $ 0.51 $ 0.33 $ 2.03 $ 0.43 $ 0.65 $ 0.88
Extraordinary item....... -- -- (0.11) -- (0.38) -- --
--------- --------- ---------- ---------- ---------- ---------- ----------
Net income............... $ 0.11 $ 0.51 $ 0.22 $ 2.03 $ 0.05 $ 0.65 $ 0.88
--------- --------- ---------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ---------- ----------
Weighted average shares
and assumed conversions
(in thousands)......... 8,071 8,309 12,809 14,923 15,380 14,608 17,098
OTHER DATA:
EBITDA(4).................. $ 16,481 $ 23,505 $ 81,241 $ 139,046 $ 96,272 $ 38,573 $ 45,458
Adjusted EBITDA(5)......... 16,481 23,505 91,000 139,046 160,970 38,573 45,458
EBITDA margin(6)........... 3.6% 5.0% 4.6% 6.1% 3.8% 6.1% 6.4%
Adjusted EBITDA margin..... 3.6% 5.0% 5.2% 6.1% 6.3% 6.1% 6.4%
Depreciation and
amortization............. $ 5,503 $ 5,384 $ 23,684 $ 26,042 $ 26,041 $ 6,535 $ 7,433
Capital expenditures,
net...................... 3,273 554 8,017 (2,886 (7) 12,991 1,612 3,975
Ratio of EBITDA to interest
expense.................. 2.3x 3.0x 1.8x 2.4x 1.8x 2.6x 3.8x
Ratio of Adjusted EBITDA to
interest expense......... 2.3x 3.0x 2.0x 2.4x 3.0x 2.6x 3.8x
Ratio of net debt to
EBITDA................... 4.6x 2.5x 6.6x 4.2x 5.5x 3.0x 2.6x
Ratio of net debt to
Adjusted EBITDA.......... 4.6x 2.5x 5.9x 4.2x 3.3x 3.0x 2.6x
Ratio of earnings to fixed
charges(8)............... 1.5x 2.2x 1.2x 1.9x 2.4x 2.1x 2.9x
OPERATING RESULTS BEFORE
CHARGES(9)(10):
Income from operations..... $ 10,978 $ 18,121 $ 67,316 $ 113,004 $ 134,929 $ 32,038 $ 38,025
Net income attributable to
common stockholders...... 915 4,210 10,081 30,249 45,364 9,544 15,091
Net income per common
share--assuming
dilution................. 0.11 0.51 0.79 2.03 2.95 0.65 0.88
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS
ENDED MARCH 31,
----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 991 $ 1,849 $ 11,660 $ 10,619 $ 12,367 $ 17,584 $ 11,504
Working capital............ 57,302 56,454 355,465 404,973 451,449 403,269 431,324
Total assets............... 190,979 192,479 1,001,383 1,109,867 1,148,021 1,065,172 1,087,692
Total debt and capital
lease obligation(11)..... 86,350 64,623 551,990 600,002 537,135 559,119 475,201
Redeemable preferred
stock.................... 20,996 23,189 18,041 19,785 -- 20,240 --
Redeemable warrants........ 1,435 1,650 39,692 23,812 -- 24,807 --
Total stockholders'
equity................... 11,422 24,775 30,024 75,820 223,308 84,369 236,629
</TABLE>
- ------------------
(1) For the year ended December 31, 1995, includes restructuring charge of $9.8
million related to United's consolidation plan in conjunction with the
Merger.
(2) In the fourth quarter of 1997, United recognized a non-recurring non-cash
charge of $59.4 million ($35.5 million net of tax benefit of $23.9 million)
and a non-recurring cash charge of $5.3 million ($3.2 million net of tax
benefit of $2.1 million) relating to the vesting of the Merger Incentive
Options and Management Agreements Termination, respectively.
(3) Loss on early retirement of debt of $2.4 million ($1.4 million net of tax
benefit of $1.0 million) in 1995 and $9.8 million ($5.9 million net of tax
benefit of $3.9 million) in 1997.
(4) "EBITDA" refers to earnings before interest, income taxes, depreciation and
amortization, and costs associated with the sale of certain accounts
receivable. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to incur and service debt and is also one
of the financial measures by which certain covenants under the Company's
New Credit Agreement are calculated. However, EBITDA should not be
considered in isolation or as a substitute for net income or cash flow data
prepared in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity. Also, the EBITDA
definition used herein may not be comparable to similarly titled measures
reported by other companies.
(5) "Adjusted EBITDA" is defined as in note 4 above except for the add back of
restructuring and non-recurring charges discussed in notes 1 and 2 above
and the extraordinary items discussed in note 3 above.
(6) EBITDA margin represents EBITDA as a percentage of net sales.
(7) Includes $11.1 million of proceeds from the sale of property and plant
equipment.
(8) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes and extraordinary item plus
fixed charges. Fixed charges consist of interest expense, including
amortization of discount and financing costs and one-third of operating
rental expense which management believes is representative of the interest
component of rent expense. In addition, the ratio of earnings to fixed
charges for 1997 excludes the non-recurring charges discussed in note 2
above.
(9) In the fourth quarter of 1997, United recognized a non-recurring non-cash
charge of $59.4 million ($35.5 million net of tax benefit of $23.9 million)
and a non-recurring cash charge of $5.3 million ($3.2 million net of tax
benefit of $2.1 million) related to the vesting of the Merger Incentive
Options and the Management Agreements Termination, respectively. In
addition, during the fourth quarter of 1997, United recorded an
extraordinary loss of $9.8 million ($5.9 million net of tax benefit of $3.9
million) related to the early retirement of debt.
(10) During 1995, United recorded a restructuring charge of $9.8 million ($5.9
million net of tax benefit of $3.9 million) and an extraordinary loss of
$2.4 million ($1.4 million net of tax benefit of $1.0 million) related to
early retirement of debt.
(11) Includes current maturities.
32
<PAGE>
PRE-MERGER UNITED
The selected consolidated financial data of pre-Merger United (a predecessor
of post-Merger United) set forth below for the seven months ended March 30, 1995
(at which time pre-Merger United and Associated merged to create United) have
been derived from the Consolidated Financial Statements of pre-Merger United
which have been audited by Ernst & Young LLP, independent auditors. The selected
financial data at and for the seven-month period ended March 31, 1994 are
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 pre-Merger United for each of the two fiscal years ended
August 31, 1993 and 1994 have been derived from the audited consolidated
financial statements of pre-Merger United.
<TABLE>
<CAPTION>
PRE-MERGER UNITED
----------------------------------------------------
SEVEN MONTHS ENDED
YEARS ENDED AUGUST 31, ------------------------
-------------------------- MARCH 31, MARCH 30,
1993 1994 1994 1995
------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................................... $ 1,470,115 $ 1,473,024 $ 871,585 $ 980,575
Cost of sales................................................ 1,197,664 1,220,245 717,546 814,780
------------ ------------ ----------- -----------
Gross profit on sales........................................ 272,451 252,779 154,039 165,795
Operating expenses........................................... 226,337 216,485 128,594 133,098
Merger-related costs(1)...................................... -- -- -- 27,780
------------ ------------ ----------- -----------
Income from operations....................................... 46,114 36,294 25,445 4,917
Interest expense, net........................................ 9,550 10,461 5,837 7,500
Other income, net............................................ 355 225 117 41
------------ ------------ ----------- -----------
Income (loss) before income taxes............................ 36,919 26,058 19,725 (2,542)
Income taxes................................................. 15,559 10,309 8,185 4,692
------------ ------------ ----------- -----------
Net income (loss)............................................ $ 21,360 $ 15,749 $ 11,540 $ (7,234)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Net income (loss) per common share--assuming dilution........ $ 1.15 $ 0.85 $ 0.62 $ (0.39)
Cash dividends declared per share............................ 0.40 0.40 0.30 0.30
OPERATING AND OTHER DATA:
EBITDA(2).................................................... $ 67,712 $ 57,755 $ 37,665 $ 17,553
EBITDA margin(3)............................................. 4.6% 3.9% 4.3% 1.8%
Depreciation and amortization................................ $ 21,243 $ 21,236 $ 12,103 $ 12,595
Net capital expenditures..................................... 29,958 10,499 4,287 7,764
Ratio of earnings to fixed charges(4)........................ 4.0x 3.0x 3.8x 3.5x
BALANCE SHEET DATA (AT PERIOD END):
Working capital.............................................. $ 216,074 $ 239,827 $ 297,099 $ 257,600
Total assets................................................. 634,786 618,550 608,728 711,839
Total debt and capital lease(5).............................. 150,251 155,803 227,626 233,406
Stockholders' investment..................................... 237,697 246,010 243,636 233,125
</TABLE>
- ----------------
(1) In connection with the Merger, pre-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) For purposes of this table only, 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) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before income taxes and extraordinary item plus fixed
charges. Fixed charges consist of interest expense, including amortization
of discount and financing costs and one-third of operating rental expense
which management believes is representative of the interest component of
rent expense. In addition, the ratio of earnings to fixed charges for 1995
excludes the Merger-related costs discussed in note 1 above.
(5) Total debt and capital lease include current maturities.
33
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Consolidated Pro Forma Financial Statements are
based on the historical financial statements of United. The pro forma balance
sheet is presented giving effect to (i) the Senior Credit Facilities
Refinancing, (ii) the Azerty Acquisition, (iii) the Original Offering (including
the application of net proceeds to United therefrom), and (iv) the June Equity
Offering (including the application of net proceeds to the Company therefrom),
all as more fully described in the notes to Unaudited Consolidated Pro Forma
Financial Statements below, as if all such transactions were effected on March
31, 1998. The pro forma income statements give effect to (i) the Senior Credit
Facilities Refinancing, (ii) the Azerty Acquisition, (iii) the Original Offering
(including the application of net proceeds to the Company therefrom) and (iv)
the June Equity Offering (including the application of net proceeds to United
therefrom), all as more fully described in the notes to Unaudited Consolidated
Pro Forma Financial Statements below, as if all such transactions were effected
as of January 1, 1997. The supplemental pro forma balance sheet is presented
giving effect to (i) the Senior Credit Facilities Refinancing, (ii) the Azerty
Acquisition, (iii) the Original Offering (including the application of net
proceeds to the Company therefrom), (iv) the June Equity Offering (including the
application of net proceeds to United therefrom) and (v) the Computer Services
Contract Write-off, as if all such transactions occurred on March 31, 1998. The
1997 supplemental pro forma income statement is presented giving effect to (i)
the October Equity Offering (including the application of net proceeds to United
therefrom), (ii) the Preferred Stock Redemption, (iii) the Management Agreements
Termination, (collectively the "Financing Transactions") (iv) the Computer
Services Contract Write-Off, (v) the Senior Credit Facilities Refinancing, (vi)
the Azerty Acquisition, (vii) the Original Offering (including the application
of net proceeds to the Company therefrom) and (viii) the June Equity Offering
(including the application of net proceeds to United therefrom), as if all such
transactions occurred on January 1, 1997. The supplemental pro forma income
statement for the three months ended March 31, 1998 is presented giving effect
to (i) the Computer Services Contract Write-Off, (ii) the Senior Credit
Facilities Refinancing, (iii) the Azerty Acquisition, (iv) the Original Offering
(including the application of net proceeds to the Company therefrom) and (v) the
June Equity Offering (including the application of net proceeds to United
therefrom), as if all such transactions occurred on January 1, 1997.
The pro forma income statements exclude the extraordinary non-recurring
charge of approximately $9.3 million ($5.5 million net of tax benefit of $3.8
million) related to the write-off of unamortized financing fees in conjunction
with the Senior Credit Facilities Refinancing. For pro forma balance sheet
purposes, this extraordinary non-recurring charge has been reflected as a
reduction of retained earnings.
In addition to the above described extraordinary non-recurring charge of
$9.3 million, the 1997 Unaudited Consolidated Supplemental Pro Forma Income
Statement also excludes the following: (i) an extraordinary non-recurring charge
of $9.8 million ($5.9 million net of tax benefit of $3.9 million) on early
retirement of debt, (ii) a non-recurring non-cash charge of $59.4 million ($35.5
million net of tax benefit of $23.9 million) related to the vesting of the
Merger Incentive Options, and (iii) a non-recurring cash charge of $5.3 million
($3.2 million net of tax benefit of $2.1 million) related to the Management
Agreements Termination, all of which are related to the 1997 Financing
Transactions. These additional non-recurring charges are reflected in the
historical balance sheet as of March 31, 1998.
The supplemental pro forma income statements also exclude the non-recurring
charge of approximately $13.9 million ($8.3 million net of tax benefit of $5.6
million) related to the Computer Servcies Contract Write-Off. For supplemental
pro forma balance sheet purposes, this non-recurring charge has been reflected
as a reduction of retained earnings.
The Unaudited Consolidated Pro Forma Financial Statements are intended for
informational purposes only and are not necessarily indicative of the future
financial position or future results of operations of United after the Senior
Credit Facilities Refinancing, the Azerty Acquisition, the Original Offering and
the June Equity Offering, or of the financial position or results of operations
of United that would have actually occurred had the Computer Services Contract
Write-Off, the 1997 Financing Transactions, the Senior Credit Facilities
Refinancing, the Azerty Acquisition, the Original Offering or the June Equity
Offering occurred January 1, 1997. The Unaudited Consolidated Pro Forma
Financial Statements and the accompanying notes should be read in conjunction
with, and are qualified in their entirety by, the Consolidated Financial
Statements of United, together with the related notes thereto, included
elsewhere herein.
34
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED PRO FORMA
AND SUPPLEMENTAL PRO FORMA BALANCE SHEETS
AS OF MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SENIOR CREDIT
FACILITIES AZERTY ORIGINAL
REFINANCING ACQUISITION OFFERING
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
---------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 11,504 $ -- $ -- $ --
Accounts receivable............................. 282,237 (150,435)(a) 48,610(e) --
Inventories..................................... 484,911 -- 33,477(e) --
Other........................................... 15,754 -- 488(e) --
---------- --------------- ------------ --------------
Total current assets.......................... 794,406 (150,435) 82,575 --
Net property, plant and equipment................. 161,894 -- 5,847(e) --
Goodwill.......................................... 111,110 -- 72,129(e) --
Other............................................. 20,282 (6,944)(b) -- 2,800(f)
---------- --------------- ------------ --------------
Total assets.................................. $1,087,692 $(157,379) $160,551 $ 2,800
---------- --------------- ------------ --------------
---------- --------------- ------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 19,551 $ (9,004)(c) $ 102(e) $ --
Accounts payable................................ 235,915 -- 40,288(e) --
Accrued expenses................................ 107,616 (3,931)(d) 4,704(e) (80)(f)
---------- --------------- ------------ --------------
Total current liabilities..................... 363,082 (12,935) 45,094 (80)
Deferred income taxes............................. 19,208 -- -- --
Long-term obligations:
Long-term debt.................................. 455,650 (138,596)(c) 115,457(e) 3,000(f)
Other long-term liabilities..................... 13,123 -- -- --
---------- --------------- ------------ --------------
Total long term obligations................... 468,773 (138,596) 115,457 3,000
---------- --------------- ------------ --------------
Stockholders' equity:
Common stock (voting)........................... 1,602 -- -- --
Capital in excess of par value.................. 211,261 -- -- --
Retained earnings............................... 23,766 (5,848)(d) -- (120)(f)
---------- --------------- ------------ --------------
Total stockholders' equity.................... 236,629 (5,848) -- (120)
---------- --------------- ------------ --------------
Total liabilities and stockholders' equity.... $1,087,692 $(157,379) $160,551 $ 2,800
---------- --------------- ------------ --------------
---------- --------------- ------------ --------------
<CAPTION>
COMPUTER
SERVICES
JUNE EQUITY CONTRACT
OFFERING WRITE-OFF SUPPLEMENTAL
ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
-------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ -- $ 11,504 $ -- $ 11,504
Accounts receivable............................. -- 180,412 -- 180,412
Inventories..................................... -- 518,388 -- 518,388
Other........................................... -- 16,242 (2,639)(h) 13,603
-------------- ---------- -------------- ------------
Total current assets.......................... -- 726,546 (2,639) 723,907
Net property, plant and equipment................. -- 167,741 -- 167,741
Goodwill.......................................... -- 183,239 -- 183,239
Other............................................. (307)(g) 15,831 -- 15,831
-------------- ---------- -------------- ------------
Total assets.................................. $ (307) $1,093,357 $ (2,639) $1,090,718
-------------- ---------- -------------- ------------
-------------- ---------- -------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ -- $ 10,649 $ -- $ 10,649
Accounts payable................................ -- 276,203 -- 276,203
Accrued expenses................................ 4,011(g) 112,320 2,599(h) 114,919
-------------- ---------- -------------- ------------
Total current liabilities..................... 4,011 399,172 2,599 401,771
Deferred income taxes............................. -- 19,208 (5,589)(h) 13,619
Long-term obligations:
Long-term debt.................................. (83,491)(g) 352,020 -- 352,020
Other long-term liabilities..................... -- 13,123 8,665(h) 21,788
-------------- ---------- -------------- ------------
Total long term obligations................... (83,491) 365,143 8,665 373,808
-------------- ---------- -------------- ------------
Stockholders' equity:
Common stock (voting)........................... 191(g) 1,793 -- 1,793
Capital in excess of par value.................. 79,166(g) 290,427 -- 290,427
Retained earnings............................... (184)(g) 17,614 (8,314)(h) 9,300
-------------- ---------- -------------- ------------
Total stockholders' equity.................... 79,173 309,834 (8,314) 301,520
-------------- ---------- -------------- ------------
Total liabilities and stockholders' equity.... $ (307) $1,093,357 $ (2,639) $1,090,718
-------------- ---------- -------------- ------------
-------------- ---------- -------------- ------------
</TABLE>
See accompanying Notes to Unaudited Consolidated Pro Forma Financial Statements.
35
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED PRO FORMA
AND SUPPLEMENTAL PRO FORMA INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SENIOR CREDIT
FACILITIES AZERTY ORIGINAL JUNE EQUITY
REFINANCING ACQUISITION OFFERING OFFERING
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $2,558,135 $ -- $355,423(l) $ -- $ -- $2,913,558
Cost of goods sold.............................. 2,112,204 -- 323,160 -- -- 2,435,364
---------- ------------- ----------- ----------- ----------- ----------
Gross profit.................................... 445,931 -- 32,263(l) -- -- 478,194
Operating expense:
Warehousing, marketing and administrative
expenses...................................... 311,002 -- 22,599(m) -- -- 333,601
Non-recurring charges........................... 64,698 -- -- -- -- 64,698
---------- ------------- ----------- ----------- ----------- ----------
Total operating expenses........................ 375,700 -- 22,599 -- -- 398,299
---------- ------------- ----------- ----------- ----------- ----------
Income from operations.......................... 70,231 -- 9,664 -- -- 79,895
Interest expenses............................... 53,511 (15,872)(i) 8,775(n) 1,230(o) (5,988)(p) 41,656
Other expense................................... -- 9,251(j) -- -- -- 9,251
---------- ------------- ----------- ----------- ----------- ----------
Income before income taxes and extraordinary
item.......................................... 16,720 6,621 889 (1,230) 5,988 28,988
Income taxes.................................... 8,532 2,661(k) 1,055(k) (494)(k) 2,407(k) 14,161
---------- ------------- ----------- ----------- ----------- ----------
Income before extraordinary item................ 8,188 3,960 (166) (736) 3,581 14,827
Extraordinary item--loss on early retirement of
debt, net of tax benefit of $3,956............ (5,884) -- -- -- -- (5,884)
---------- ------------- ----------- ----------- ----------- ----------
Net income...................................... 2,304 3,960 (166) (736) 3,581 8,943
Preferred stock dividends issued and accrued.... 1,528 -- -- -- -- 1,528
---------- ------------- ----------- ----------- ----------- ----------
Net income attributable to common
stockholders.................................. $ 776 $ 3,960 $ (166) $ (736) $ 3,581 $ 7,415
---------- ------------- ----------- ----------- ----------- ----------
---------- ------------- ----------- ----------- ----------- ----------
Net income per common share--basic:
Income before extraordinary item.............. $ 0.51 $ 0.89
Extraordinary item............................ (0.45) (0.39)
---------- ----------
Net income.................................... $ 0.06 $ 0.50
---------- ----------
---------- ----------
Weighted average shares (in thousands)........ 13,064 14,969
Net income per common share--assuming dilution:
Income before extraordinary item.............. $ 0.43 0.79
Extraordinary item............................ (0.38) (0.35)
---------- ----------
Net income.................................... $ 0.05 $ 0.44
---------- ----------
---------- ----------
Weighted average shares and assumed
conversions (in thousands).................. 15,380 16,950
OTHER DATA:
EBITDA.......................................... $ 96,272 $ 108,903
EBITDA margin................................... 3.8% 3.7%
OTHER DATA BEFORE CHARGES:
Income from operations.......................... $ 134,929 $ 144,593
Net income attributable to common
stockholders.................................. 45,364 51,988
Net income per common share assuming dilution... 2.95 3.07
EBITDA.......................................... 160,970 173,601
EBITDA margin................................... 6.3% 6.0%
<CAPTION>
COMPUTER
SERVICES 1997
CONTRACT FINANCING
WRITE-OFF TRANSACTIONS SUPPLEMENTAL
ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $ -- $ -- $2,913,558
Cost of goods sold.............................. -- -- 2,435,364
------------ ------------ ------------
Gross profit.................................... -- -- 478,194
Operating expense:
Warehousing, marketing and administrative
expenses...................................... (3,240)(q) (708)(r) 329,653
Non-recurring charges........................... -- (64,698)(r) --
------------ ------------ ------------
Total operating expenses........................ (3,240) (65,406) 329,653
------------ ------------ ------------
Income from operations.......................... 3,240 65,406 148,541
Interest expenses............................... -- (5,096)(s) 36,560
Other expense................................... -- -- 9,251
------------ ------------ ------------
Income before income taxes and extraordinary
item.......................................... 3,240 70,502 102,730
Income taxes.................................... 1,302(k) 28,342(k) 43,805
------------ ------------ ------------
Income before extraordinary item................ 1,938 42,160 58,925
Extraordinary item--loss on early retirement of
debt, net of tax benefit of $3,956............ -- 5,884(t) --
------------ ------------ ------------
Net income...................................... 1,938 48,044 58,925
Preferred stock dividends issued and accrued.... -- (1,528)(u) --
------------ ------------ ------------
Net income attributable to common
stockholders.................................. $ 1,938 $ 49,572 $ 58,925
------------ ------------ ------------
------------ ------------ ------------
Net income per common share--basic:
Income before extraordinary item.............. $ 3.57
Extraordinary item............................ --
------------
Net income.................................... $ 3.57
------------
------------
Weighted average shares (in thousands)........ 16,519
Net income per common share--assuming dilution:
Income before extraordinary item.............. $ 3.19
Extraordinary item............................ --
------------
Net income.................................... $ 3.19
------------
------------
Weighted average shares and assumed
conversions (in thousands).................. 18,500
OTHER DATA:
EBITDA.......................................... $ 177,549
EBITDA margin................................... 6.1%
OTHER DATA BEFORE CHARGES:
Income from operations.......................... $ 148,541
Net income attributable to common
stockholders.................................. 58,925
Net income per common share assuming dilution... 3.19
EBITDA.......................................... 177,549
EBITDA margin................................... 6.1%
</TABLE>
See accompanying Notes to Unaudited Consolidated Pro Forma Financial Statements.
36
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED PRO FORMA
AND SUPPLEMENTAL PRO FORMA INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SENIOR CREDIT
FACILITIES AZERTY ORIGINAL JUNE EQUITY
REFINANCING ACQUISITION OFFERING OFFERING
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................. $ 712,517 $ -- $ 99,723(l) $ -- $ -- $ 812,240
Cost of goods sold......................... 589,455 -- 91,050 -- -- 680,505
---------- ------------- ----------- ----------- ----------- ----------
Gross profit............................... 123,062 -- 8,673(l) -- -- 131,735
Operating expense:
Warehousing, marketing and administrative 85,037
expenses................................. -- 6,275(m) -- -- 91,312
Non-recurring charges...................... -- -- -- -- -- --
---------- ------------- ----------- ----------- ----------- ----------
Total operating expenses................... 85,037 -- 6,275 -- -- 91,312
---------- ------------- ----------- ----------- ----------- ----------
Income from operations..................... 38,025 -- 2,398 -- -- 40,423
Interest expense........................... 11,826 (3,700)(i) 2,218(n) 287(o) (1,497)(p) 9,134
Other expense.............................. -- 2,313 -- -- -- 2,313
---------- ------------- ----------- ----------- ----------- ----------
Income before income taxes and 26,199
extraordinary item....................... 1,387 180 (287) 1,497 28,976
Income taxes............................... 11,108 558(k) 250(k) (115)(k) 602(k) 12,403
---------- ------------- ----------- ----------- ----------- ----------
Income before extra item................... 15,091 829 (70) (172) 895 16,573
Extraordinary item......................... -- -- -- -- -- --
---------- ------------- ----------- ----------- ----------- ----------
Net income................................. 15,091 829 (70) (172) 895 16,573
Preferred dividends........................ -- -- -- -- -- --
---------- ------------- ----------- ----------- ----------- ----------
Net income attributable to common $ 15,091
stockholders............................. $ 829 $ (70) $ (172) $ 895 $ 16,573
---------- ------------- ----------- ----------- ----------- ----------
---------- ------------- ----------- ----------- ----------- ----------
Net income per common share--basic......... $ 0.94 $ 0.93
---------- ----------
---------- ----------
Weighted average shares (in thousands)..... 15,995 17,900
Net income per common share-- assuming $ 0.88
dilution................................. $ 0.89
---------- ----------
---------- ----------
Weighted average shares and assumed 17,098
conversions (in thousands)............... 18,646
<CAPTION>
COMPUTER
SERVICES
CONTRACT
WRITE-OFF SUPPLEMENTAL
ADJUSTMENTS PRO FORMA
------------ ------------
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................. $ -- $ 812,240
Cost of goods sold......................... -- 680,505
------------ ------------
Gross profit............................... -- 131,735
Operating expense:
Warehousing, marketing and administrative
expenses................................. (802)(q) 90,510
Non-recurring charges...................... -- --
------------ ------------
Total operating expenses................... (802) 90,510
------------ ------------
Income from operations..................... 802 41,225
Interest expense........................... -- 9,134
Other expense.............................. -- 2,313
------------ ------------
Income before income taxes and
extraordinary item....................... 802 29,778
Income taxes............................... 322(k) 12,725
------------ ------------
Income before extra item................... 480 17,053
Extraordinary item......................... -- --
------------ ------------
Net income................................. 480 17,053
Preferred dividends........................ -- --
------------ ------------
Net income attributable to common
stockholders............................. $ 480 $ 17,053
------------ ------------
------------ ------------
Net income per common share--basic......... $ 0.95
------------
------------
Weighted average shares (in thousands)..... 17,900
Net income per common share-- assuming
dilution................................. $ 0.91
------------
------------
Weighted average shares and assumed
conversions (in thousands)............... 18,646
</TABLE>
See accompanying Notes to Unaudited Consolidated Pro Forma Financial Statements.
37
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The pro forma financial statements have been prepared giving effect to the
following:
(1) In June 1998, United completed an offering of 2,005,507 shares of Common
Stock, consisting of 1,500,000 primary shares sold by United and 505,507
secondary shares sold by certain selling stockholders at an offering price
of $54.00 per share. The aggregate net proceeds to United of approximately
$77.1 million were delivered to USSC and used to repay a portion of
indebtedness under the Tranche A Term Loan Facility which caused a permanent
reduction of the amount borrowable thereunder.
United did not receive any of the proceeds from the sale of the 505,507
shares of Common Stock offered by the selling stockholders, other than an
aggregate of approximately $6.4 million paid by the selling stockholders
upon exercise of employee stock options in connection with the June Equity
Offering, which was delivered to USSC and applied to the repayment of
indebtedness under the New Credit Facilities.
Subsequent to the closing of the June Equity Offering, the underwriters for
such offering exercised an overallotment option to purchase an additional
200,000 shares of Common Stock from United. The net proceeds to United of
approximately $10.3 million from the sale of such Additional Shares were
delivered to USSC and used to repay an additional portion of the
indebtedness outstanding under the Tranche A Term Loan Facility. The pro
forma financial statements exclude the sale of the Additional Shares and the
application of net proceeds therefrom.
(2) The New Credit Facilities and Receivables Securitization Program replaced
all preexisting debt under the Existing Credit Agreement (which, as of
December 31, 1997 and March 31, 1998, consisted of $148.8 million and $119.0
million of term loan facilities and $256.0 million and $224.0 million in a
revolving credit facility, respectively). Accordingly, $9.3 million of
unamortized financing fees as of March 31, 1998 related to the credit
agreement governing the Existing Credit Facilities ($5.6 million net of tax
benefit of $3.7 million) were expensed as an extraordinary charge due to the
early retirement of such debt. As this extraordinary charge will be
non-recurring it is not considered for pro forma income statement purposes.
Proceeds from the receivables sold under the Receivables Securitization
Program of approximately $150.0 million and will be used to reduce
borrowings under the New Credit Facilities. The Company received
approximately $160.0 million in proceeds from the sale of certain Eligible
Receivables on April 3, 1998. These Unaudited Consolidated Pro Forma
Financial Statements reflect $150.0 million in proceeds from the sale of
certain Eligible Receivables under the Receivables Securitization Program as
this amount was deemed to more fairly represent the average amount of
receivables that would have been sold in 1997. The anticipated annual costs
related to the sale of certain accounts receivable is estimated to be $9.3
million and is shown in other expense.
(3) The Tranche B Term Loan Facility ($100.0 million) and a portion of the
Revolving Credit Facility under the New Credit Facilities ($15.1 million)
were used to purchase the Azerty Business and pay approximately $1.0 million
in acquisition fees and expenses.
38
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(4) The total purchase price for the Azerty Business (including fees and
expenses) was approximately $115.2 million and has been preliminarily
allocated as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 82,575
Property, plant and equipment.................................... 5,847
Goodwill......................................................... 72,129
Liabilities assumed.............................................. (45,342)
---------
Total purchase price........................................... $ 115,209
---------
---------
</TABLE>
(5) The operating results for the year ended December 31, 1997 and for the three
months ended March 31, 1998 for the Azerty Business have been included as
follows:
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- --------------
<S> <C> <C>
Net sales.................................................... $ 355,423 $ 99,723
Cost of goods sold........................................... 323,160 91,050
-------------- --------------
Gross Profit............................................... 32,263 8,673
Warehousing, marketing and administrative expenses(a)(b)..... 22,599 6,275
-------------- --------------
Earnings before interest and taxes........................... $ 9,664 $ 2,398
-------------- --------------
-------------- --------------
- --------------
</TABLE>
(a) Includes $1.8 million of annual goodwill amortization based on
$72.1 million of goodwill as computed above amortized over 40
years.
(b) Excludes special bonuses paid by Abitibi-Consolidated Inc.,
amounting to approximately $3.5 million, to senior Azerty
Business executives related to the Azerty Acquisition; such
bonuses do not represent continuing obligations of the Azerty
Business. Also excludes approximately $1.5 million of annual
goodwill amortization related to the purchase cost paid by
Abitibi-Consolidated, Inc. for the Azerty Business; such goodwill
is eliminated under purchase accounting as applied to the Azerty
Acquisition.
(6) Pro forma interest expense has been calculated based upon pro forma debt
levels and the applicable interest rates. The Existing Credit Facilities'
term loan facilities and revolving credit facility were assumed to bear
interest at their respective current rates of 7.71% and 7.67%, respectively,
for the year ended December 31, 1997 and 7.71% and 7.67%, respectively, for
the three months ended March 31, 1998. The Revolving Credit Facility, the
Tranche A Term Loan Facility and the Tranche B Term Loan Facility under the
New Credit Facilities were assumed to bear interest at rates of 7.45%, 7.15%
and 7.65%, respectively, for the year ended December 31, 1997 and 7.45%,
7.15% and 7.65%, respectively, for the three months ended March 31, 1998,
based on current LIBOR/prime rates and spread terms. A variation of 0.125%
in effective interest rates used for pro forma purposes has a $0.5 million
impact for the year ended December 31, 1997 and a $0.1 million impact for
the three months ended March 31, 1998 on pro forma interest expense.
(7) Income taxes have been provided for all adjustments at an assumed rate of
40.2%. Goodwill resulting from the Azerty Acquisition will not be tax
deductible and as such is not tax affected.
39
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The December 31, 1997 supplemental pro forma income statement reflecting the
1997 Financing Transactions and the Computer Services Contract Write-Off has
been prepared giving effect to all the assumptions made in the pro forma income
statement and the following:
(1) The Computer Services Contract Write-Off results in a $13.9 million
non-recurring charge ($8.3 million net of tax benefit of $5.6 million) and
$3.2 million in annual cost savings.
(2) The October Equity Offering and the resulting proceeds thereof were
contributed to the Company and used to redeem $50.0 million of the Company's
12 3/4% Notes, pay the redemption premium of $6.4 million thereon, and pay
down $15.5 million of indebtedness under the Existing Credit Facilities. The
resulting extraordinary loss of $9.8 million ($5.9 million net of tax
benefit of $3.9 million) on early retirement of debt was eliminated for pro
forma purposes.
(3) The October Equity Offering also resulted in the recognition of a pre-tax
non-recurring non-cash charge of $59.4 million ($35.5 million net of tax
benefit of $23.9 million) and a non-recurring cash charge of $5.3 million
($3.2 million net of tax benefit of $2.1 million) related to the vesting of
the Merger Incentive Options and the Management Agreements Termination,
respectively. These non-recurring charges have been eliminated for pro forma
purposes. Approximately $0.7 million in management advisory service
agreement fees were paid prior to the Management Agreements Termination.
Accordingly, these fees which were charged to 1997 operating expenses have
been eliminated for pro forma purposes.
(4) On September 2, 1997, United completed the redemption of all outstanding
shares of its Series A and Series C Preferred Stock for an aggregate
redemption price of approximately $21.3 million. Accordingly, the $1.5
million of Preferred Stock dividends issued and accrued for the year ended
December 31, 1997 has been eliminated for pro forma purposes.
The supplemental pro forma income statement for the three months ended March
31, 1998 has been prepared giving effect to all assumptions made in the pro
forma income statement and the adjustment for the Computer Services Contract
Write-Off described above. Approximately $2.6 million in prepaid expense related
to the Computer Services Contract has been eliminated for supplemental pro forma
balance sheet purposes and $2.6 million and $8.7 million of current and
long-term payments have been added to current and long-term liabilities,
respectively, as a result of the Computer Services Contract Write-Off.
Pro forma adjustments have been made to the pro forma and supplemental pro
forma balance sheets to reflect the following effects of the Senior Credit
Facilities Refinancing, the Azerty Acquisition, the Original Offering, the June
Equity Offering, and the Computer Services Contract Write-off:
<TABLE>
<C> <S> <C>
(a) Reflects the sale of accounts receivable related to the Receivables
Securitization Program.
(b) Write-off of capitalized financing costs associated with the $ (9,344)
retirement of the Existing Credit Facilities' revolving credit
facility, tranche A and tranche B term loans.......................
Capitalize financing costs related to the New Credit Facilities.... 2,400
---------
$ (6,944)
---------
---------
</TABLE>
40
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(c) Reflects retirement of debt under the Existing Credit Facilities and the
issuance of new debt under the New Credit Facilities:
<TABLE>
<S> <C>
Retirement of existing tranche A term loan...................... $ (18,337)
Retirement of existing tranche B term loan...................... (667)
Tranche A Term Loan Facility.................................... 10,000
---------
Adjustment to current maturities of long-term debt(1)......... $ (9,004)
---------
---------
Retirement of existing tranche A term loan...................... $ (58,345)
Retirement of existing tranche B term loan...................... (41,675)
Retirement of existing revolving credit facility................ (224,000)
Tranche A Term Loan Facility.................................... 140,000
Revolving Credit Facility....................................... 45,424
---------
Adjustment to long-term debt(1)............................... $(138,596)
---------
---------
- --------------
</TABLE>
(1) Totals $147.6 million and combined with the $2.4 million of
financing costs related to the New Credit Facilities (see Note b)
reflects the use of proceeds from the Receivables Securitization
Program.
(d) Adjustment to current income tax liability for the tax effect and to
retained earnings for the net effect of the write-off of the capitalized
financing costs and the initial costs related to the sale of certain
accounts receivable.
(e) Reflects the use of $100.0 million of the Tranche B Term Loan Facility
and $15.2 million of the Revolving Credit Facility under the New Credit
Facilities to purchase the Azerty Business. The Company has also assumed
$0.3 million of debt from the Azerty Business. The assets and liabilities
of the Azerty Business (including fees and expenses) are preliminarily
allocated as follows:
<TABLE>
<S> <C>
Current assets................................................... $ 82,575
Property, plant and equipment.................................... 5,847
Goodwill......................................................... 72,129
Liabilities assumed.............................................. (45,342)
---------
Purchase price................................................. $ 115,209
---------
---------
</TABLE>
(f) Reflects net proceeds of $97.0 million from the Original Offering
($100.0 million net of approximately $3.0 million in financing costs)
plus an additional $3.0 million in borrowings under the Revolving Credit
Facility used to pay down the indebtedness outstanding under the Tranche
B Term Loan Facility, and as a result $0.2 million ($0.12 million net of
tax benefit of $0.08 million) in financing fees associated with the
Tranche B Term Loan Facility was expensed as an extraordinary loss due to
the early retirement of debt (which loss is excluded for pro forma income
statement purposes as it is non-recurring).
41
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(g) The pro forma adjustments related to the June Equity Offering consist of
the following:
<TABLE>
<S> <C>
Adjustment to other assets:
Write-off of capitalized financing costs associated with the
reduction of the Tranche A Term Loan Facility............... $ (307)
---------
---------
Adjustments to accrued expenses:
Tax benefit related to options exercised...................... $ (3,235)
Tax benefit related to write-off of capitalized financing
costs associated with the reduction of the Tranche A Term
Loan Facility............................................... (123)
Employee withholding tax liability associated with options
exercised................................................... 7,369
---------
Increase in accrued expenses.................................... $ 4,011
---------
---------
Adjustments to long-term obligations:
Proceeds from the exercise of stock options................... $ (6,408)
Proceeds from the issuance of Common Stock by United in
conjunction with the Offering (net of underwriting discounts
and commissions and expenses)............................... (77,083)
---------
Decrease in long-term obligations............................... $ (83,491)
---------
---------
Adjustments to stockholders' equity:
Common Stock:
Issuance of shares of Common Stock by United in conjunction
with the Offering......................................... $ 150
Issuance of shares of Common Stock by United in conjunction
with the exercise of stock options........................ 41
---------
Increase in Common Stock.................................... $ 191
---------
---------
Capital in excess of par value:
Issuance of shares of Common Stock by United in conjunction
with the Offering (net of underwriting discounts and
commissions and expenses)................................. $ 76,933
Issuance of shares of Common Stock by United in conjunction
with the exercise of stock options........................ 2,233
---------
Increase in capital in excess of par value.................. $ 79,166
---------
---------
Retained earnings:
Write-off of capitalized financing costs associated with the
reduction of the Tranche A Term Loan Facility, net of tax
benefit................................................... (184)
---------
---------
Increase in stockholders' equity................................ $ 79,173
---------
---------
</TABLE>
(h) The supplemental pro forma adjustments for the Computer Services
Contract Write-Off consist of the following:
(1) Reduction in other current assets of $2,639 reflecting the write-off
of the prepaid expense related to the Computer Services Contract
Write-Off.
42
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(2) Increase in accrued expenses of $2,599 reflecting the current portion
of the remaining payments on the Computer Services Contract.
(3) Reduction in deferred income taxes of $5,589 reflecting the future
tax benefit of the Computer Services Contract Write-Off.
(4) Increase in long-term liabilities of $8,665 reflecting the long-term
portion of the remaining payments on the Computer Services Contract.
(5) Reduction in retained earnings of $8,314 reflecting the after tax
impact of the Computer Services Contract Write-Off.
Pro forma adjustments have been made to the pro forma and supplemental pro
forma income statements to reflect the following effects of the Senior Credit
Facilities Refinancing, the Azerty Acquisition, the Original Offering, the June
Equity Offering, the Computer Services Contract Write-Off and the 1997 Financing
Transactions:
(i) The pro forma adjustments to interest expense related to the Senior
Credit Facilities Refinancing consist of the following:
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- --------------
<S> <C> <C>
Elimination of interest related to Existing Credit Facilities:
Revolving credit facility....................................... $ (12,540) $ (3,896)
Tranche A term loan............................................. (9,412) (1,812)
Tranche B term loan............................................. (4,794) (1,048)
Elimination of amortization of deferred financing costs on
retired debt.................................................. (3,027) (717)
-------------- -------
Decrease in interest expense...................................... (29,773) (7,473)
-------------- -------
Interest on new indebtedness (New Credit Facilities):
Revolving Credit Facility....................................... 3,133 954
Tranche A Term Loan Facility.................................... 10,368 2,719
Amortization of deferred financing costs on the New Credit
Facilities(1)................................................. 400 100
-------------- -------
Increase in interest expense.................................... 13,901 3,773
-------------- -------
Net decrease in interest expense.................................. $ (15,872) $ (3,700)
-------------- -------
-------------- -------
- --------------
</TABLE>
(1) Debt issuance costs are amortized over the life of the related
new debt, 6 years.
(j) Reflects the costs related to the sale of certain accounts receivable
under the Receivables Securitization Program.
(k) Income taxes have been provided for all adjustments at an assumed rate
of 40.2%. Goodwill resulting from the Azerty Acquisition will not be tax
deductable and as such is not tax affected.
(l) Reflects the historical Azerty Business net sales and gross profit.
43
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(m) Reflects the Azerty Business historical operating expenses for the year
ended December 31, 1997, as adjusted (see page 39 note (5)), and the
three months ended March 31, 1998 for the Azerty Business plus $1.8
million and $0.4 million, respectively, of goodwill amortization related
to the Azerty Acquisition.
(n) The pro forma adjustments to interest expense related to the Azerty
Acquisition consist of the following:
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- ---------------
<S> <C> <C>
Interest on new indebtedness (New Credit Facilities):
Tranche B Term Loan Facility.................................... $ 7,650 $ 1,938
Revolving Credit Facility....................................... 1,125 280
------- -------
Increase in interest expense.................................. $ 8,775 $ 2,218
------- -------
------- -------
</TABLE>
(o) The pro forma adjustments to interest expense related to the Original
Offering consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE
DECEMBER 31, MONTHS ENDED
1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Elimination of interest related to New Credit Facilities:
Tranche B Term Loan Facility.................................... $ (7,650) $ (1,938)
------- -------
Interest on new indebtedness (New Credit Facilities and the 8 3/8%
Notes):
Revolving Credit Facility....................................... 205 56
Original Offering............................................... 8,375 2,094
Amortization of deferred financing costs on 8 3/8% Notes(1)..... 300 75
------- -------
Increase in interest expense.................................... 8,880 2,225
------- -------
Net increase in interest expense.............................. $ 1,230 $ 287
------- -------
------- -------
- --------------
</TABLE>
(1) Debt issuance costs are amortized over the life of the related
new debt, 10 years.
44
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(p) The pro forma adjustments to interest expense related to the June Equity
Offering consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE
DECEMBER 31, MONTHS ENDED
1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Elimination of interest expense related to the reduction of
Tranche A Term Loan Facility with the proceeds from the June
Equity Offering................................................. $ (5,511) $ (1,378)
Elimination of interest expense related to the reduction of the
Revolving Credit Facility with the proceeds realized from the
exercise of stock options....................................... (477) (119)
------- -------
Net decrease in interest expense.................................. $ (5,988) $ (1,497)
------- -------
------- -------
</TABLE>
Additional pro forma adjustments have been made in the supplemental pro
forma income statement to give effect to the following:
(q) Reflects the cost savings associated with the Computer Services Contract
Write-Off.
(r) In the fourth quarter of 1997, the Company recognized a non-recurring
non-cash charge of $59.4 million ($35.5 million net of tax benefit of
$23.9 million) and a non-recurring cash charge of $5.3 million ($3.2
million net of tax benefit of $2.1 million) related to the vesting of the
Merger Incentive Options and the Management Agreements Termination,
respectively. In addition, approximately $0.7 million in management
advisory service fees were paid in 1997 prior to the Management
Agreements Termination. These charges and expenses are excluded for pro
forma income statement purposes as they are non-recurring.
(s) The pro forma adjustments to interest expense related to the 1997
Financing Transactions consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
<S> <C>
Addition (Elimination) of interest related to:
Existing Credit Facilities.................................................. $ 701
12 3/4% Notes............................................................... (5,467)
Elimination of amortization of deferred financing costs on retired debt..... (330)
-------
Decrease in interest expense.................................................. $ (5,096)
-------
-------
</TABLE>
(t) In the fourth quarter of 1997, United recorded an extraordinary loss of
$9.8 million ($5.9 million net of tax benefit of $3.9 million) related to
early retirement of debt. This non-recurring charge is excluded for pro
forma purposes.
(u) On September 2, 1997, United completed the redemption of all outstanding
shares of its Series A and Series C Preferred Stock for an aggregate
redemption price of approximately $21.3 million. Accordingly, no
Preferred Stock dividends would be paid or accrued on a pro forma basis.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of United and related notes appearing elsewhere in this
Prospectus.
Certain information set forth in this discussion includes forward-looking
statements regarding United's future results of operations. United is confident
that its expectations are based on reasonable assumptions given its knowledge of
its operations and business. However, there can be no assurance that United's
actual results will not differ materially from its expectations. The matters
referred to in forward-looking statements may be affected by the risks and
uncertainties involved in United's business including, among others, competition
with business products manufacturers and other wholesalers, consolidation of the
business products industry, the ability to maintain gross profit margins, the
ability to reduce operating expenses as a percent of net sales, changing
end-user demands, changes in manufacturers' pricing, service interruptions and
availability of liquidity and capital resources.
OVERVIEW
On October 10, 1997, United completed the October Equity Offering. The
shares of Common Stock sold by United in the October Equity Offering were priced
at $38.00 per share, before underwriting discounts and a commission of $1.90 per
share. The aggregate net proceeds from this October Equity Offering of $72.2
million (before deducting expenses) and proceeds of $0.1 million resulting from
the conversion of 1,119,038 warrants into Common Stock were contributed to USSC
and used to (i) redeem $50.0 million of 12 3/4% Notes and pay the redemption
premium thereon of $6.4 million, (ii) pay fees related to the October Equity
Offering, and (iii) reduce the indebtedness under the Existing Credit
Facilities' term loan facilities by $15.5 million. The repayment of indebtedness
resulted in an extraordinary loss of $9.8 million ($5.9 million net of tax
benefit of $3.9 million) and caused a permanent reduction of the amount
borrowable under the Existing Credit Facilities.
On March 30, 1995, Associated merged with and into United. 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. Therefore, the results of operations 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 United for the nine months ended
December 31, 1995. As a result of the Merger, the results of operations of
United for the year ended December 31, 1995 are not comparable to those of
previous and subsequent periods.
To facilitate a meaningful comparison of the years ended December 31, 1996
and 1995, a supplemental discussion and analysis is included and based on the
supplemental pro forma results of operations for United for the year ended
December 31, 1995. The supplemental pro forma 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.
GENERAL INFORMATION
EMPLOYEE STOCK OPTIONS. United's Management Equity Plan allows the Board of
Directors of United to designate, and the directors have designated the
Performance Incentive Compensation Committee as the option committee to
administer the Management Equity Plan. The Management Equity Plan provides for
the issuance of options to purchase shares of Common Stock to key officers and
management employees of United, either as incentive stock options or as
non-qualified stock options.
Effective November 1997, United's stockholders approved an amendment to the
Management Equity Plan which provided for the issuance of approximately 1.5
million additional options to key
46
<PAGE>
management employees and directors of United. During 1997, approximately 0.3
million options were granted to management employees and directors at fair
market value. In 1998 to date, United has granted 467,575 options to management
employees and directors at fair market value.
In September 1995, United's Board of Directors approved an amendment to the
Management Equity Plan which provided for the issuance of Merger Incentive
Options to key management employees of United exercisable for up to 2.2 million
additional shares of its Common Stock. Subsequently, approximately 2.2 million
options were granted during 1995 and 1996 to management employees. Some of the
options were granted at an option price below market value and the option price
of certain options increased by $0.625 on a quarterly basis from April 1, 1996
through October 1, 1997.
These Merger Incentive Options were granted in order to provide incentives
to management with respect to the successful development of ASI and the
integration of ASI with United. All Merger Incentive Options were vested and
became exercisable with the completion of the October Equity Offering in October
1997. All Common Stock issued upon the exercise of Merger Incentive Options is
subject to a six month holding period which expired on April 10, 1998. In the
fourth quarter of 1997, United was required to recognize compensation expense
based upon the difference between the fair market value of the Common Stock and
the exercise prices of Merger Incentive Options. Based on the closing stock
price on October 10, 1997 of $39.125 and options outstanding as of October 10,
1997, United recognized a non-recurring non-cash charge of $59.4 million ($35.5
million net of tax benefit of $23.9 million).
RESTRUCTURING CHARGE. The historical results for the twelve months ended
December 31, 1995 include a restructuring charge of $9.8 million ($5.9 million
net of tax benefit of $3.9 million). The restructuring charge included severance
costs totaling $1.8 million. The Company's Merger consolidation plan specified
that 330 distribution, sales and corporate positions, 180 of which related to
pre-Merger Associated, were to be eliminated substantially within one year
following the Merger. The Company achieved its target, with the related
termination costs of approximately $1.8 million charged against the reserve. The
restructuring charge also included distribution center closing costs totaling
$6.7 million and stockkeeping unit reduction costs totaling $1.3 million. The
consolidation plan called for the closing of eight redundant distribution
centers, six of which related to pre-Merger Associated, 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 included (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 included losses on the sale of inventory items
which have been discontinued solely as a result of the Merger. As of December
31, 1997, five of the six redundant pre-Merger Associated distribution centers
had been closed with $5.5 million charged against the reserve and $2.0 million
related to stockkeeping unit reduction costs had also been charged against the
reserve. As of December 31, 1997, the Company's consolidation plan had been
substantially completed. Seven of the eight redundant distribution centers had
been closed. Management believes the restructuring reserve balance at December
31, 1997 of $0.3 million is adequate to cover the remaining estimated
expenditures related to Merger integration and transition costs. See Note 5 to
the Consolidated Financial Statements of United included elsewhere herein.
ACTUAL AND SUPPLEMENTAL PRO FORMA RESULTS OF OPERATIONS
The following table of summary actual and supplemental pro forma results of
operations (see Note 5 to the Consolidated Financial Statements of United
included elsewhere herein) 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
second paragraph under "--Overview" occurred on January 1, 1995. The following
information should be read in conjunction
47
<PAGE>
with, and is qualified in its entirety by, the historical Consolidated Financial
Statements of United, including the related notes thereto, included elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------- -------------------------------
SUPPLEMENTAL
PRO FORMA
1995 1996 1997 1997 1998
--------------------- --------------------- --------------------- -------------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $2,201,860 100.0% $2,298,170 100.0% $2,558,135 100.0% $ 635,021 100.0% $ 712,517
Gross profit.......... 381,270 17.3 390,961 17.0 445,931 17.4 108,742 17.1 123,062
Operating expenses.... 299,861 13.6 277,957 12.1 311,002 12.2 76,704 12.1 85,037
Non-recurring
charges............. -- -- -- -- 64,698 2.5 -- -- --
---------- --------- ---------- --------- ---------- --------- --------- --------- ---------
Income from
operations.......... $ 81,409 3.7% $ 113,004 4.9% $ 70,231 2.7% $ 32,038 5.0% $ 38,025
---------- --------- ---------- --------- ---------- --------- --------- --------- ---------
---------- --------- ---------- --------- ---------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
Net sales............. 100.0%
Gross profit.......... 17.2
Operating expenses.... 11.9
Non-recurring
charges............. --
---------
Income from
operations.......... 5.3%
---------
---------
</TABLE>
COMPARISON OF ACTUAL RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NET SALES. Net sales were $712.5 million in the first quarter of 1998, a
12.2% increase over net sales of $635.0 million in the first quarter of 1997.
However, the first quarter of 1998 benefited from the timing of the Easter
holiday that occurred in the first quarter of 1997. Excluding this effect, sales
would have increased approximately 11%. The Company experienced sales strength
in all geographic regions and across all product categories.
GROSS PROFIT. Gross profit as a percent of net sales of 17.2% in the first
quarter of 1998 was up from 17.1% in the comparable period of 1997.
OPERATING EXPENSES. Operating expenses as a percent of net sales decreased
to 11.9% in the first quarter of 1998 from 12.1% in the first quarter of 1997.
The reduction in operating expenses as a percent of net sales is primarily due
to the leveraging of fixed expenses on a higher sales base.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales
increased to 5.3% in the first quarter of 1998 from 5.0% in the first quarter of
1997.
INTEREST EXPENSE. Interest expense as a percent of net sales was 1.7% in
the first quarter of 1998, compared with 2.3% in the comparable period in 1997.
In addition to the impact of leveraging such expense against a higher sales
base, this reduction also reflects the prepayment of $50.0 million of the
12 3/4% Notes and $15.5 million of term loans during the fourth quarter of 1997
with a portion of the proceeds from the October Equity Offering.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income
taxes as a percent of net sales was 3.6% in the first quarter of 1998, compared
with 2.7% in the first quarter of 1997.
NET INCOME. Net income before preferred stock dividends was $15.1 million
in the first quarter of 1998, compared with $10.0 million in the first quarter
of 1997.
COMPARISON OF ACTUAL RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased 11.8%, on equivalent workdays, to $2.6
billion for 1997 compared with $2.3 billion for 1996. This increase represents
strength in all geographic regions. Also, the Company's janitorial and
sanitation products, office furniture and traditional office supplies
experienced strong growth throughout the year.
Net sales for 1997 include ten months of incremental sales related to the
October 1996 acquisition of Lagasse. Excluding the Lagasse acquisition, sales
growth for 1997 was 8.8%.
48
<PAGE>
GROSS PROFIT. Gross profit as a percent of net sales increased to 17.4% in
1997 from 17.0% in 1996. This increase reflects higher vendor rebates obtained
by meeting higher purchase volume hurdles. In addition, the Company continued to
see a shift in product mix toward higher margin items. Lower margin computer
hardware declined as a percent of total sales.
OPERATING EXPENSES. Operating expenses as a percent of net sales, before
non-recurring charges, remained nearly flat at 12.2% in 1997 compared with 12.1%
in 1996. Non-recurring charges recorded in the fourth quarter of 1997 were $59.4
million (non-cash) and $5.3 million (cash) related to the vesting of the Merger
Incentive Options and the Management Agreements Termination, respectively.
During 1997, the Company accelerated certain discretionary expenditures that
represent investments in the future, specifically, preparation for the Year 2000
computer system issues and investments related to strategic planning. In
addition, the Company continues to improve warehouse and systems efficiencies to
produce high levels of customer and consumer satisfaction. Operating expenses as
a percent of net sales, including the aforementioned non-recurring charges, was
14.7% in 1997.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales,
before non-recurring charges, increased to 5.2% from 4.9% in 1996. Including
non-recurring charges, income from operations as a percent of net sales was 2.7%
in 1997.
INTEREST EXPENSE. Interest expense as a percent of net sales was 2.1%
compared with 2.5% in 1996. This reduction reflects the continued leveraging of
fixed interest costs against higher sales.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income
taxes and extraordinary item as a percent of net sales, excluding the impact of
non-recurring charges, increased to 3.1% from 2.4% in 1996. Including
non-recurring charges, income before income taxes and extraordinary item as a
percent of net sales was 0.6% in 1997.
NET INCOME. Net income in 1997 includes an extraordinary item, loss on the
early retirement of debt of $9.8 million ($5.9 million net of tax benefit of
$3.9 million) or 0.2% of net sales. Net income as a percent of net sales,
excluding the impact of non-recurring charges and early retirement of debt,
increased to 1.8% in 1997 from 1.4% in 1996. Including non-recurring charges and
extraordinary item, net income as a percent of net sales was 0.1% in 1997.
FOURTH QUARTER RESULTS. Certain expense and cost of sale estimates are
recorded throughout the year including inventory shrinkage, required LIFO
reserve, manufacturers' allowances, advertising costs and various expense items.
During the fourth quarter of 1997, the Company recorded a favorable net income
adjustment of approximately $2.9 million relating to the refinement of estimates
recorded in the prior three quarters.
In the fourth quarter of 1997, United recognized the following charges (i)
pre-tax non-recurring charges of $59.4 million (non-cash) and $5.3 million
(cash) related to the vesting of the Merger Incentive Options and the Management
Agreements Termination (see Notes 10 and 13 to the Consolidated Financial
Statements of United included elsewhere herein), respectively, and (ii) an
extraordinary loss of $9.8 million ($5.9 million net of tax benefit of $3.9
million) related to the early retirement of debt (see Note 6 to the Consolidated
Financial Statements of United included elsewhere herein).
COMPARISON OF ACTUAL RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales increased 31.2% to $2.3 billion for 1996 from $1.8
billion for 1995. This increase was primarily the result of the Merger for a
full twelve months in 1996. Sales in 1995 include only nine months of the
Company's sales.
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GROSS PROFIT. Gross profit as a percent of net sales declined to 17.0% in
1996 from 17.4% in 1995. This decrease reflected a shift in product mix, the
continuing consolidation of the Company's dealer base and deflation across the
Company's product mix.
OPERATING EXPENSES. Operating expenses decreased as a percent of net sales
to 12.1% in 1996, compared with 14.1% in 1995. The 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). The decline in the operating expense ratio before the
restructuring charge (12.1% in 1996 versus 13.5% in 1995) was primarily due to
the realization of merger synergies, cost containment, productivity improvements
and leveraging of fixed expenses.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales
increased to 4.9% in 1996 from 3.3% in 1995.
INTEREST EXPENSE. Interest expense as a percent of net sales was 2.5% in
1996, compared with 2.6% in 1995. This reduction reflects the leveraging of
fixed interest costs against higher sales, partially offset by funding required
to acquire Lagasse (see Note 1 to the Consolidated Financial Statements of
United, included elsewhere herein).
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income
taxes and extraordinary item as a percent of net sales increased to 2.4% in 1996
from 0.7% in 1995.
NET INCOME. Net income as a percent of net sales increased to 1.4% in 1996
from 0.3% in 1995 resulting from the aforementioned reasons. Net income in 1995
includes an extraordinary item, loss on the early retirement of debt related to
the Merger of $2.4 million ($1.4 million net of tax benefit of $1.0 million) or
0.1% of net sales.
FOURTH QUARTER RESULTS. Certain expense and cost of sale estimates are
recorded throughout the year including inventory shrinkage, required LIFO
reserve, manufacturers' allowances, advertising costs and various expense items.
During the fourth quarter of 1996, the Company recorded approximately $3.0
million of additional net income relating to the refinement of estimates
recorded in the prior three quarters.
COMPARISON OF ACTUAL RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND
SUPPLEMENTAL PRO FORMA RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 4.4% to $2.3 billion for 1996 from $2.2
billion for 1995. This increase is primarily the result of higher unit sales in
all product categories. In addition, the Micro United division continued to
report strong growth resulting from the underlying strength in the marketplace.
The Company's year-long focus on improving the consistency and reliability of
its service led to increased sales and higher customer and consumer
satisfaction.
GROSS PROFIT. Gross profit as a percent of net sales declined to 17.0% in
1996 from 17.3% in 1995. This decrease reflected a shift in product mix, the
continuing consolidation of the Company's dealer base and deflation across the
Company's product mix.
OPERATING EXPENSES. Operating expenses decreased as a percent of net sales
to 12.1% in 1996, compared with 13.6% in 1995. This decrease is primarily due to
the realization of merger synergies, cost containment, productivity improvements
and leveraging of fixed expenses.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales
increased to 4.9% in 1996 from 3.7% in 1995.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the credit facilities under the Amended and Restated
Credit Agreement (the "Credit Agreement") consisted of $119.0 million of term
loan borrowings (the "Term Loan Facilities"), and $224.0 million of borrowings
under a $325.0 revolving loan facility under the Existing Credit Facilities. In
addition, the Company has $100.0 million of 12 3/4% Notes due 2005, $29.8
million of industrial revenue bonds and a $2.0 million mortgage.
The term loan facilities under the Existing Credit Facilities consisted of a
$76.7 million tranche A term loan facility and a $42.3 million tranche B term
loan facility. On March 31, 1998, principal payments of $15.8 million and $8.7
million were paid from Excess Cash Flow (as defined in the Credit Agreement) for
the tranche A and tranche B facilities, respectively.
The Credit Agreement contained representations and warranties, affirmative
and negative covenants and events of default customary for financings of this
type. As of March 31, 1998, the Company was in compliance with all covenants
contained in the Credit Agreement.
Management believes that the Company's cash on hand, anticipated funds
generated from operations and available borrowings under the New 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.
United is a holding company and, as a result, its primary source of funds is
cash generated from operating activities of its operating subsidiary, USSC, and
bank borrowings by USSC. The New Credit Agreement, the 8 3/8% Notes Indenture
and the 12 3/4% Notes Indenture contain restrictions on the ability of USSC to
transfer cash to United.
The statements of cash flows for the Company for the periods indicated is
summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities.................... $ 26,329 $ 1,609 $ 41,768 $ 48,928 $ 67,500
Net cash used in investing
activities.................... (266,291) (49,871) (12,991) (1,612) (3,975)
Net cash provided by (used in)
financing activities.......... 249,773 47,221 (27,029) (40,351) (64,388)
</TABLE>
COMPARISON OF ACTUAL CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997
Net cash provided by operating activities during the first three months of
1998 increased to $67.5 million from $48.9 million in the comparable prior-year
period. This increase was due to higher net income, a decrease in accounts
receivable and a decrease in inventory, partially offset by a decrease in
accrued liabilities.
Net cash used in investing activities during the first three months of 1998
was $4.0 million compared with $1.6 million used in the first three months of
1997. The increase in cash used was due solely to an increase in capital
investments during 1998.
Net cash used in financing activities during the first three months of 1998
was $64.4 million compared with $40.4 million for the first three months of
1997. This increase was due primarily to the reduction of debt due to lower
working capital requirements.
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COMPARISON OF ACTUAL CASH FLOWS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND
1996
Net cash provided by operating activities for 1997 increased to $41.8
million from $1.6 million in 1996. This change was due to slower inventory
growth of $23.0 million, higher net income (before non-recurring charge) and an
increase in accrued liabilities of $35.2 million partially offset by a $21.4
million decline in deferred tax expense and a $38.0 million decline in accounts
payable. Net cash provided by operating activities for 1996 declined to $1.6
million from $26.3 million in 1995. This reduction was due to an increased
investment in inventory and a decrease in accrued liabilities offset by higher
net income and an increase in accounts payable.
Net cash used in investing activities during 1997 was $13.0 million compared
with $49.9 million in 1996. The decrease was due to the acquisition of Lagasse
on October 31, 1996 offset by the collection of $11.1 million in 1996 from the
successful sale of closed facilities and related equipment. The decrease in net
cash used in investing activities of $49.9 million in 1996 from $266.3 million
in 1995 was primarily the result of the Merger.
Net cash used in financing activities in 1997 was $27.0 million compared
with net cash provided of $47.2 million in 1996. The decrease was due to a $50.0
million partial redemption of the 12 3/4% Notes, a reduction of indebtedness
under the term loan facilities related to the Existing Credit Facilities of
$15.5 million, redemption of the Preferred Stock of $21.2 million and a $8.5
million payment related to employee income tax withholding for stock option
exercises offset by proceeds of $72.2 million (before deducting expenses)
related to the issuance of 2.0 million shares of Common Stock in the October
Equity Offering and additional borrowings under the revolver of $49.0 million
during 1997 compared with additional borrowings of $22.0 million in 1996. Net
cash provided by financing activities in 1996 was $47.2 million compared with
$249.8 million in 1995. The decrease was due to the financing of the Merger in
1995 offset by additional borrowings to finance the purchase of Lagasse.
NEW CREDIT FACILITIES
On April 3, 1998, the Company entered into the New Credit Agreement with
United as guarantor, The Chase Manhattan Bank, as agent, and a group of banks
and financial institutions (including Chase, the "Senior Lenders"). The
following is a summary of the principal terms of the New Credit Agreement which
summary does not purport to be complete and is subject, and is qualified in its
entirety by reference, to all the provisions of the New Credit Agreement, as it
may be further amended from time to time, a copy of which is available upon
request to the Company.
The New Credit Agreement provides for the funding of the Azerty Acquisition,
the refinancing of certain existing indebtedness and for other general corporate
purposes of the Company and its subsidiaries. The New Credit Facilities under
the New Credit Agreement consisted initially of $150.0 million of borrowings
pursuant to the Tranche A Term Loan Facility and commitments of up to $250.0
million of revolving loan borrowings pursuant to the Revolving Credit Facility
(including a sublimit of $90.0 million under the Revolving Credit Facility for
letters of credit). A portion of the Revolving Credit Facility is allocated for
swingline loans. The New Credit Facilities also initially included borrowings of
$100.0 million under the Tranche B Term Loan Facility. A substantial portion of
the Tranche B Term Loan Facility was repaid with the net proceeds from the Notes
Offering. The remainder of the Tranche B Term Loan Facility was permanently
repaid with proceeds from the sale of certain receivables under the Receivables
Securitization Program. A portion of the Tranche A Term Loan Facility was repaid
from the net proceeds of the June Equity Offering.
The loans under the Tranche A Term Loan Facility and the Revolving Credit
Facility generally bear interest as determined within a set range with the rate
based on the ratio of total debt (which excludes the face amount of any undrawn
letters of credit) of United and its subsidiaries to EBITDA (as defined in the
New Credit Agreement). The Tranche A Term Loan Facility and the Revolving Credit
Facility bear interest, at the option of the Company and based upon financial
performance, at the base rate (i.e., the higher of
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the prime rate or federal funds plus 0.50%) plus 0% to 0.75% or London Interbank
Offered Rate ("LIBOR") plus 1.00% to 2.00%.
As of the date of this Prospectus, the outstanding principal balance of the
Tranche A Term Loan Facility consists of $61.5 million and matures on or about
March 31, 2004, and no amount of the Tranche B Term Loan Facility remained
outstanding, which had been scheduled to mature on or about December 31, 2004.
The term loans under the Tranche A Term Loan Facility are repayable in
consecutive quarterly installments which began on June 30, 1998, the first four
of which are each in the amount of $1.0 million, the next four of which are each
in the amount of $1.6 million, the next four of which are each in the amount of
$2.6 million, the next four of which are each in the amount of $3.1 million and
the last eight of which are each in the amount of $3.7 million.
Loans under the Tranche A Term Loan Facility and the Revolving Credit
Facility may be prepaid at any time, and are subject to certain mandatory
prepayments out of (i) net proceeds received from the issuance of equity by
United or any of its subsidiaries subject to certain exceptions provided in the
New Credit Agreement, (ii) net proceeds from certain asset sales in excess of
$15.0 million, (iii) 50% of the Company's Excess Cash Flow (as defined in the
New Credit Agreement) minus any optional prepayments made on the Term Loans for
any fiscal year (commencing with the fiscal year ending December 31, 1998), but
only if the Debt to Cash Flow Ratio (as defined in the New Credit Agreement) as
of the last day of the fiscal year is greater than 3.75 to 1, (iv) net proceeds
received from casualty events subject to certain exceptions provided within the
New Credit Agreement and (v) net proceeds received from certain debt issuances.
Prepayments under the Tranche A Term Loan Facility will be applied pro rata to
the remaining installments due under the Tranche A Term Loan Facility and, next,
to the permanent reduction of commitments (and the payment of loans outstanding)
under the Revolving Credit Facility. Net proceeds of this Offering will be used
to repay a portion of the indebtedness under the Tranche A Term Loan Facility.
See "Use of Proceeds."
The Tranche A Term Loan Facility and the Revolving Credit Facility are
guaranteed, on a joint and several basis, by the Company and certain of the
direct and indirect domestic subsidiaries of USSC.
The Tranche A Term Loan Facility and the Revolving Credit Facility are
secured by perfected first priority pledges of the stock of the USSC, all of the
stock of the domestic direct and indirect subsidiaries of United and certain of
the stock of all of the foreign direct and indirect subsidiaries (other than the
Receivables Company) of United and security interests in, and liens upon,
certain accounts receivable, inventory, contract rights and other personal and
certain real property of the USSC and its domestic subsidiaries. The New Credit
Agreement provides for the complete release, upon request by USSC, of the liens
upon achievement of an investment grade rating for the unsecured long-term debt
of United or USSC for any quarter and a complete release in the event the
Leverage Ratio (as defined in the New Credit Agreement) is less than or equal to
3 to 1. The Majority Lenders (as defined in the New Credit Agreement) may
request that the security interests be regranted if the Leverage Ratio for any
subsequent quarter exceeds 3 to 1. In addition, the New Credit Agreement does
not permit the Senior Lenders to secure a lien in connection with the sale of
specified receivables under the Receivables Securitization Program.
The New Credit Agreement contains certain restrictive covenants that, among
other things, limit the ability of United and its subsidiaries to dispose of
assets, incur indebtedness or liens, pay dividends or make other payments in
respect of capital stock or subordinated indebtedness, make investments or other
acquisitions, engage in mergers or consolidations, engage in transactions with
affiliates and engage in any business other than specified businesses. In
addition, the New Credit Agreement requires United to comply with certain
financial ratios and tests, including ratios of total debt to EBITDA, cash flow
to fixed charges, and EBITDA to interest expense and a minimum net worth test.
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12 3/4% NOTES
The 12 3/4% Notes were originally issued on May 3, 1995 pursuant to the
12 3/4% Notes Indenture. As of the date hereof, the aggregate outstanding
principal amount of the 12 3/4% Notes was $100.0 million. The 12 3/4% Notes are
unsecured senior subordinated obligations of USSC, and payment of the 12 3/4%
Notes is fully and unconditionally guaranteed by the Company and USSC's domestic
"restricted" subsidiaries on a senior subordinated basis. The 12 3/4% Notes
mature on May 1, 2005, and bear interest at the rate of 12 3/4% per annum,
payable semi-annually on May 1 and November 1 of each year.
The 12 3/4% Notes Indenture governing the 12 3/4% Notes contains certain
covenants, including limitations on the incurrence of indebtedness, the making
of restricted payments, transactions with affiliates, the existence of liens,
disposition of proceeds of asset sales, the making of guarantees by restricted
subsidiaries, transfer and issuances of stock of subsidiaries, the imposition of
certain payment restrictions on restricted subsidiaries and certain mergers and
sales of assets. See "Description of Certain Indebtedness--12 3/4% Notes."
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its Existing Credit
Facilities, the Company entered into the $163.0 million 364-day Receivables
Securitization Program pursuant to which the Company sells its Eligible
Receivables (except for certain excluded receivables) to the Receivables
Company, a wholly-owned offshore, special purpose limited liability company
intended to be bankruptcy-remote. The Receivables Company then transfers the
Eligible Receivables to a third-party, multi-seller asset-backed commercial
paper program. The Third-Party Seller's purchases of the Eligible Receivables
are supported by a facility between the Third-Party Seller and banks with
ratings of A-1/P-1 or higher. The sale of trade receivables includes not only
those Eligible Receivables that were existing on the closing date of the
Receivables Securitization Program, but also Eligible Receivables created
thereafter. The Company received approximately $160.0 million in proceeds from
the initial sale of Eligible Receivables on April 3, 1998.
The Chase Manhattan Bank acts as funding agent and, together with other
commercial banks rated at least A-1/P-1, provides standby liquidity funding to
support the purchase of the receivables by the Receivables Company. The proceeds
from the Receivables Securitization Program were used to reduce borrowings under
the Company's Revolving Credit Facility. The Receivables Company retains an
interest in the Eligible Receivables transferred to the third party. The
Receivables Securitization Program carries an effective interest rate of LIBOR
plus 0.37%. As a result of the Receivables Securitization Program, actual
balance sheet assets of the Company as of March 31, 1998 of approximately $160.0
million, consisting of accounts receivable, have been sold to the Receivables
Company and do not secure the Company's obligations under the New Credit
Facilities.
INFLATION/DEFLATION AND CHANGING PRICES
Inflation can have an impact on the Company's earnings. During inflationary
times, the Company generally seeks to increase prices to its customers creating
incremental gross profit resulting from the sale of inventory purchased at lower
prices. Alternatively, significant deflation may adversely affect the Company's
profitability.
YEAR 2000 MODIFICATIONS
The Company recognizes the potential business impacts related to the Year
2000 computer system issue. The issue is one where computer systems may
recognize the designation "00" as 1900 when it means 2000, resulting in system
failure or miscalculations. The Company began to address the Year 2000 issue in
1996, and continues to implement measures to ensure its business operations are
not disrupted. The Company's plan requires that all modifications necessary to
make its computer systems
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<PAGE>
Year 2000 compliant must be completed during 1999. In 1997, the Company incurred
approximately $1.4 million of expenses related to this issue and expects to
incur an additional $2.6 million to $3.3 million of such expenses over the next
two years. For the three months ended March 31, 1998, the Company incurred $0.3
million of such expenses.
SEASONALITY
Although the Company's sales are generally 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 January 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. See "--Liquidity
and Capital Resources."
55
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BUSINESS
OVERVIEW
United Stationers is the largest broad line wholesale distributor of
business products in North America, with annual sales of more than twice its
next largest competitor. The Company offers more than 35,000 SKUs, including
traditional office products, office furniture, computer supplies, facilities
management supplies and janitorial and sanitation supplies. The Company's
customer base is comprised of more than 20,000 reseller customers, including
office products dealers, office furniture dealers, office products superstores,
mass merchandisers, computer products resellers, mail order companies, and
sanitary supply distributors. United Stationers serves its customers through an
integrated nationwide network of 40 business products distribution centers and
19 janitorial and sanitation distribution centers. In addition to its broad
product offering, the Company provides value-added marketing and logistics
services to both manufacturers and resellers. For the year ended December 31,
1997, the Company's net sales and EBITDA were $2.6 billion and $96.3 million
(after non-recurring charges of $64.7 million), respectively, and the Company's
supplemental pro forma net sales and EBITDA would have been $2.9 billion and
$177.5 million, respectively.
THE BUSINESS PRODUCTS INDUSTRY
The Company operates in a large and fragmented industry that has been
experiencing consolidation (with sales of more than $120 billion in
manufacturers' shipments in 1996 based on independent industry sources). The
business products industry consists of several different channels by which
business products are distributed from the manufacturer to the end user,
including resellers buying through wholesalers and resellers purchasing directly
from manufacturers. Consolidation has occurred in recent years throughout all
levels of the business products industry. As a result of this consolidation, the
distinct boundaries that once clearly defined distribution channels have become
blurred. Over the last decade, office products superstores (which largely buy
directly from manufacturers) have entered virtually every major metropolitan
market. Despite the industry consolidation, no single reseller accounted for
more than 6% of the Company's net sales in 1997. The business products industry
consists principally of wholesalers, business products dealers (including
commercial, contract and retail), office products superstores, computer
resellers, office furniture dealers, sanitary supply distributors, mail order
companies and mass merchandisers, each as described in greater detail below:
BUSINESS PRODUCTS WHOLESALERS. The wholesale segment of the business
products industry consists of national, specialty and regional wholesalers. The
Company competes with one other national business products wholesaler on the
basis of breadth and depth of product offering, price and the provision of
extensive marketing and distribution services for their reseller customers.
Specialty office products wholesalers focus on limited product lines such as
computer supplies, legal supplies, writing instruments, office furniture and
facilities management supplies. Regional office products wholesalers generally
offer a broad range of office products and marketing services on a smaller and
more limited scale and within a much more limited geographic area than national
office products wholesalers.
BUSINESS PRODUCTS DEALERS. Business products dealers include commercial
dealers, contract stationers (e.g., Boise Cascade Office Products, BT Office
Products International, Corporate Express, U.S. Office Products) and the
contract stationer divisions of national office product superstores (e.g.,
Staples and Office Depot) and retail dealers. The most significant reseller
channel for office products distribution continues to be commercial dealers and
contract stationers that serve medium and large-sized business customers through
the use of catalogs and sales forces. These resellers typically stock products
in distribution centers and deliver them to customers on a next-day basis
against orders received electronically, by telephone or fax, or taken by a
salesperson while calling on a customer. Major commercial dealers and contract
stationers purchase in large quantities directly from manufacturers and rely
upon wholesalers for safety stock and certain slower-moving generally higher
margin SKUs in order
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to provide product breadth and offer significant volume-related discounts and a
high level of service to their customers.
Retail office products dealers typically serve small and medium-sized
businesses, home offices and individuals. For many years, retail dealers
consisted principally of a large number of independent dealers, operating one or
a few relatively small stores in a single local area. During the last decade,
however, the office products retail market has undergone significant change,
including the elimination or consolidation of many retail dealers (including
most traditional stationery stores), as a result of the emergence and rapid
growth of discount office supply retailers, which are known as superstores. To
compete with the lower prices generally offered on commodity products by
superstores, many independent retail dealers have joined marketing or buying
groups to negotiate on a collective basis directly with manufacturers and
wholesalers, or have altered their business strategies to adapt to lower gross
margins and reduce their operating expenses.
OFFICE PRODUCTS SUPERSTORES. Office products superstores (e.g., Office
Depot, OfficeMax, Staples) employ a warehouse format, are typically open for
business seven days a week, stock a select number of items in inventory
(typically in the range of 5,000 to 7,000 products), purchase in volume,
typically take delivery at their stores directly from manufacturers and offer
many of their products at discounts from manufacturers' suggested list prices.
Virtually every major metropolitan area in the United States is now served by at
least one, and most by more than one, office products superstore. Office
products superstores may also purchase from wholesalers for "fill-in" needs and
to fill customer orders from special wholesaler catalogs made available to end
users in certain superstores when the superstore does not carry an item. This
allows the office products superstores to expand the range of products offered
without increasing their inventory levels.
COMPUTER RESELLERS. Because computers are now widely used in offices, more
business products are computer related and, therefore, are sold through computer
resellers (e.g., Computer Discount Warehouse, CompUSA). In addition, most
computer resellers now offer a limited selection of more traditional office
products.
OFFICE FURNITURE DEALERS. Office furniture is a major product category
within the business products industry. Although nearly all broad line office
products dealers sell office furniture, approximately 75% of all new office
furniture is sold through office furniture dealers.
SANITARY SUPPLY DISTRIBUTORS. This customer class is now included in the
business products industry as wholesalers have expanded their product offerings
to include janitorial and sanitation supplies.
MAIL ORDER COMPANIES. Mail order marketers of office products (e.g., Quill,
Reliable Office Products, Viking Office Products) typically serve small and
medium-sized business customers and home offices. While their procurement and
order fulfillment functions are similar to contract stationers, they rely
exclusively on catalogs and other database marketing programs, rather than
direct sales forces, to sell their product offerings. Their operations are based
upon large, proprietary customer data bases and sophisticated circulation
strategies drawn from end-user marketing programs. Mail order companies purchase
from both wholesalers and manufacturers.
MASS MERCHANDISERS. The mass market retailers (e.g., Kmart, Price/Costco,
Sears, Target, Wal-Mart Stores/Sam's Club) have recently taken a growing
interest in business products. Office supplies is one of many categories of
products typically available in these stores. Certain of these retailers rely on
wholesalers to fulfill a portion of their customers' orders.
COMPETITIVE STRENGTHS
During the last several years, the Company has strengthened its competitive
position in the business products industry through the following:
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SIGNIFICANT SCALE. As the largest broad line business products wholesaler
in North America, the Company qualifies for substantial volume allowances and
can realize significant economies of scale. In addition, the Company's size and
nationwide service and distribution capabilities enable it to: (i) service the
demands of large national, regional, local and individual reseller accounts by
offering products from over 550 manufacturers; (ii) seek cost-effective sourcing
of products both in North America and internationally; and (iii) mitigate the
effect of local or regional economic downturns.
COST EFFECTIVE OPERATIONS. The Company seeks cost reductions at both the
corporate and operating levels in order to improve its efficiency. Examples of
such cost reduction efforts include: (i) reduced merchandise procurement and
handling costs through higher manufacturers' incentives and better terms; (ii)
continued efforts to increase inventory efficiency without lowering order fill
rates; (iii) reduced payroll and benefits costs through improved labor
allocation and higher productivity; (iv) reduced freight costs through ongoing
refinements to delivery systems; (v) increased sourcing of certain products from
lower cost sources; (vi) streamlined work practices and procedures; and (vii)
increased leveraging of fixed costs over an increasing sales base.
BROAD PRODUCT SELECTION. Stocking over 35,000 SKUs, the Company offers the
broadest selection of business products in the industry, providing resellers
with one-stop shopping for their business products needs. The Company's size
allows it to maintain a broad product selection, thereby enabling its customers
to hold less inventory while still providing end users with a high level of
service.
HIGH LEVEL OF CUSTOMER SERVICE. The Company believes that a key component
of its success has been its focus on customer service and support. Customer
service includes: ease of ordering, rapid access to information, high order fill
rates, on-time accurate shipments and value-added management and marketing
assistance. The Company's integrated computer information system serves an
important role in providing a high level of customer service, as it allows the
Company to provide resellers with the ability to manage electronically critical
business functions, including order entry, purchasing, pricing, accounts
receivable, accounts payable and inventory control. This integrated computer
system also is designed, in part, to enable the Company to monitor five key
measures of customer satisfaction: order fill rate, order accuracy, inventory
accuracy, on-time delivery and accessibility of the Company's personnel to
customers. The Company also supports resellers' marketing efforts by designing
informative, user-friendly catalogs and other marketing materials.
The Company continues to introduce additional services, such as its "wrap
and label" program that offers resellers the option to receive prepackaged
orders customized (and labeled with the reseller's name) to meet the
specifications of particular end users. The Company can also drop ship orders
directly to end users on behalf of resellers. These services allow resellers to
lower their inventory investment and minimize handling costs.
BUSINESS STRATEGY
United Stationers' strategy is to create value in the supply chain for both
resellers and manufacturers. By reducing the overall cost of distribution, the
Company believes its role as a wholesaler will continue to grow and that it can
achieve above industry average growth rates by:
CAPTURING A GREATER SHARE OF EXISTING CUSTOMERS' PURCHASES. The Company
believes that it has the opportunity to capture a portion of the sales of
business products currently sold directly by manufacturers to resellers and end
users without wholesaler involvement. The Company estimates that only
approximately 20% of business products sales are made through wholesale
distributors and that approximately 80% are made directly from manufacturers to
resellers. As resellers intensify their focus on asset management and return on
investment, the Company believes that they will increasingly rely on the
Company's value-added marketing and logistics services to meet end-user
requirements for a high and accurate order fill rate on an overnight basis. The
Company also believes that the focus by resellers
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on inventory efficiency leading to de-stocking will continue in the foreseeable
future, creating an opportunity to capture a greater percentage of the
resellers' purchases. Further, the Company believes that manufacturers support
this shift to wholesaler involvement for products that are ordered in less-than-
case quantities because of the relatively high handling costs of such orders.
EXPANDING ITS CUSTOMER BASE. The Company plans to continue to expand its
customer base by: (i) maintaining and building its business with commercial
dealers and contract stationers (including the contract stationer divisions of
national office products superstores) who, through consolidation, have continued
to increase in size; (ii) developing additional programs for marketing and
buying groups that represent groups of dealers; (iii) continuing to focus on
complementary markets, including specialty dealers (e.g., furniture, computer
and janitorial and sanitation supply distributors); and (iv) expanding
geographically and potentially into international markets.
OFFERING A BROADER LINE OF PRODUCTS AND SERVICES. While United Stationers
carries the broadest product line in the industry, it continues to enhance its
product and service offerings to meet changing end-user demands. The Company's
product line expansion plans include developing its newer product categories,
such as office furniture, computer supplies and peripherals, facilities
management supplies and janitorial and sanitation supplies and potentially
offering new products and services. The Company believes that these product
categories will allow it to make additional sales to existing reseller customers
and thereby strengthen its position with such resellers as a one-stop shopping
experience. Such products also allow the Company to enter into new distribution
channels and add new types of resellers beyond broad line office products
dealers, thereby expanding its customer base.
The Company also continues to expand its line of private brand products,
including approximately 1,200 products under the Universal brand name. Private
brand products represented approximately 9% of the Company's net sales in 1997.
The Company believes its private brand products offer significant benefits both
to resellers, by providing an alternative to brand name products that offers
similar quality at a moderate price, and to manufacturers, by enabling the
manufacturer to increase sales without diluting its brand name pricing
structure. To further develop the Universal brand, the Company operates a
trading office in Hong Kong to facilitate the global purchasing of products.
CAPITALIZING ON CROSS-SELLING OPPORTUNITIES. Historically, the Company has
marketed its business products and services primarily to office products
resellers, including commercial dealers, contract stationers, retail dealers and
office products superstores. As the Company has expanded into new product lines
(e.g., janitorial and sanitation supplies), its sales efforts have been focused
primarily on traditional distributors of these specialty products. Although the
Company will continue to utilize these marketing channels as its primary method
of product distribution, the Company believes that its various products and
services are complementary and that significant opportunities exist to
cross-sell to its existing customer base. It is the Company's goal to become
known among its customers not just as an office products distributor, but as a
distributor of a broad range of products and services for the office. Management
believes that by implementing this strategy, the Company can enhance sales to
its existing customer base as resellers purchase a broader selection of products
offered by the Company, thereby reducing procurement cost and enhancing reseller
profitability.
INCREASING TECHNOLOGICAL CAPABILITIES AND UTILIZING ELECTRONIC
COMMERCE. The Company intends to continue to invest in systems enhancements as
well as customer interfaces to make its systems more user friendly. Increased
electronic linkages for transactions with customers and suppliers enable both
the Company and its business partners to reduce their costs and execute
transactions faster and more accurately. In 1997, approximately 90% of the
Company's orders were received electronically. As the Company increases the
functionality of its proprietary systems, the Company believes it will be able
to garner a growing percentage of its customers' business.
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As the Internet becomes increasingly important as a marketing channel, the
Company is positioned to participate in this trend. The Company currently
provides resellers with access to its 25,000 SKU general line catalog online
through seamless links to its web site. This service allows resellers to place
orders electronically with the Company for overnight delivery as well as to
provide a hot link on their own web site to the Company's general line catalog
for use by end users.
MAKING STRATEGIC ACQUISITIONS. The Company believes it can enhance its
growth by continuing to make strategic acquisitions, such as the acquisition of
Lagasse in 1996, which substantially increased the Company's position in the
janitorial and sanitation supplies product category. In addition, the Company
believes that the Azerty Acquisition will expand its product offerings and make
the Company one of the largest distributors of computer consumable supplies in
the United States. The Company intends to continue, from time to time, to pursue
acquisitions that expand its customer base, increase its geographic reach and/or
broaden its product offering.
PRODUCTS
The Company's current product offerings, comprised of more than 35,000 SKUs,
may be divided into five primary categories:
TRADITIONAL OFFICE PRODUCTS. The Company's core business continues to be
traditional office products, which includes both brand-name products and the
Company's private brand products. Traditional office products include writing
instruments, paper products, organizers and calendars and various office
accessories. The Company's traditional office product offerings are quite deep,
including, for example, more than 1,000 different SKUs of ring binders and 800
types of file folders.
INFORMATION TECHNOLOGY PRODUCTS. The Company offers computer supplies,
peripherals and hardware with major brand names to computer resellers and office
products dealers. These products represented approximately 22% of the Company's
1997 net sales. With the Azerty Acquisition, this product category as a percent
of net sales is expected to increase significantly.
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 4,000 furniture items from 50 different manufacturers. Office
furniture represented approximately 15% of the Company's 1997 net sales. The
Company's "Pro-Image" consulting 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
support office products dealers as well as to attract new furniture dealers.
JANITORIAL AND SANITATION SUPPLIES. The Company's dedicated marketing
effort for janitorial and sanitation supplies was created in 1993 with the
development of United Facility Supply. In October 1996, the Company acquired
Lagasse, the largest pure wholesaler of janitorial and sanitation supplies in
North America. The Company currently distributes these products through 19
Lagasse distribution centers. Janitorial and sanitation supplies represented
approximately 5% of the Company's 1997 net sales.
OTHER PRODUCTS. The Company's newest product categories encompass
facilities management 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).
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PURCHASING AND MERCHANDISING
As the largest business products wholesaler in North America, the Company
qualifies for substantial volume allowances and can realize significant
economies of scale. The Company obtains products from over 550 manufacturers,
for many of whom the Company believes it is a significant customer. In 1997, no
supplier accounted for more than 17% 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.
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 6% of
the Company's net sales in 1997.
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 growing larger. As a
result, net sales to these commercial dealers and contract stationers as a group
have grown 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. To adapt to this
highly competitive environment, many retail dealers, commercial dealers and
contract stationers have joined 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 purchasing power.
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 also has 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 and to
non-stocking resellers.
MARKETING AND CUSTOMER SUPPORT
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.
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Substantially all of the Company's 35,000 SKUs are sold through its
comprehensive general line catalogs, promotional pieces and specialty catalogs
for the office products, office furniture, facilities management supplies and
other specialty markets. The Company produces the following annual catalogs:
General Line Catalog; Office Furniture Catalog featuring furniture and
accessories; Universal Catalog promoting the Company's private-brand
merchandise; Computer Products Catalog offering hardware, supplies, accessories
and furniture; Facilities and Maintenance Supplies Catalog featuring janitorial,
maintenance, food service, warehouse, mailroom supplies and products and
supplies used for meetings and presentations; and the Lagasse Catalog offering
janitorial and sanitation supplies. In addition, the Company produces the
following quarterly promotional catalogs: Action 2000, featuring over 1,000
high-volume commodity items, and Computer Concepts, featuring computer supplies,
peripherals, accessories and furniture. The Company also produces separate
quarterly flyers covering general office supplies, office furniture and
Universal products. The majority of the expenses related to the production of
such catalogs is borne by the Company's suppliers. 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. Also, the Company offers an electronic catalog available on CD-ROM and
through the Company's web site.
The Company also offers to its resellers a variety of electronic order entry
systems and business management and marketing programs that enhance the
resellers' ability to manage their businesses profitably. For instance, the
Company maintains electronic data interchange 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 forward its
customers' orders directly to the Company, resulting in the delivery of pre-sold
products to the reseller or directly to its customers. The Company estimates
that in 1997, it received approximately 80% of its orders electronically.
In addition to marketing its products and services through the use of its
catalogs, the Company employs a sales force of approximately 150 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.
PRODUCT DISTRIBUTION AND DELIVERY SYSTEMS
The Company has a network of 40 business products regional distribution
centers located in 37 metropolitan areas in 25 states in the United States, most
of which carry the Company's full line of inventory. The Company also maintains
19 Lagasse distribution centers that carry a full line of janitorial and
sanitation supplies. The Company supplements its regional distribution centers
with 24 local distribution points throughout the United States that serve as
reshipment points for orders filled at the regional distribution centers. As a
result of the Azerty Acquisition, the Company will have five additional
distribution centers used by the Azerty Business. The Company utilizes more than
400 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 aided by its proprietary,
computer-driven inventory locator 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 that enables it to
provide higher service levels to the reseller,
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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. See "Risk Factors--Potential Service
Interruptions."
Another service offered by the Company to resellers is its "wrap and label"
program, that offers resellers the option to receive prepackaged orders
customized to meet the specifications of particular end users. For example, when
a reseller receives orders from a number of separate end users, the Company can
group and wrap 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. The Company also can ship orders
directly to end users on behalf of resellers.
TECHNOLOGY
The Company believes its management information systems, telecommunications
network and warehouse automation system, along with its participation in
electronic commerce are integral to the Company's success and have enabled the
Company to achieve one of the lowest cost structures and highest levels of
service in the industry.
The Company operates one of the few fully integrated management information
systems in the industry. Order entry, fulfillment and billing, along with
inventory replenishment and accounts payable disbursement, are all automated.
The Company's management information systems are designed to process over
600,000 customer orders per day, supporting relatively short order-to-delivery
time windows. Management believes speed and accuracy are important in the highly
competitive business products industry. Over 80% of the orders received from the
Company's customers are electronic orders and over 85% of the Company's purchase
orders to its 550 suppliers are transmitted electronically.
The Company also employs a sophisticated warehouse automation system. In
certain locations, computerized conveyor systems, carousels and bar-code
scanning are utilized to increase efficiency and quality. The Company
continuously enhances its warehousing operations through the use of technology
to meet the changing business environment and customer and consumer
requirements.
The Company believes electronic commerce conducted over the Internet will
grow in importance in the future and has invested in developing its own
interactive web site (www.unitedstationers.com), an Intranet and software
products available to its reseller customers. Electronic product catalogs are
available both over the Internet and in CD-ROM versions.
Management plans to continue to invest in technology to improve quality,
reliability and cost-effective operations. The Company believes its systems are
sufficient to meet its current needs and estimates it will spend approximately
$8 million in computer-related capital improvements in 1998.
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. Manufacturers typically sell their products
through a variety of distribution channels, including wholesalers and resellers.
See "--Marketing and Customer Support" and "--Product Distribution and Delivery
Systems."
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Competition between the Company and other wholesalers is based primarily on
breadth of product lines, availability of products, speed of delivery to
resellers, order fill rates, net pricing to resellers 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.
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).
EMPLOYEES
As of July 31, 1998, the Company employed approximately 5,900 persons.
The Company considers its relations with employees to be good. Approximately
1,000 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. The Company has not
experienced any work stoppages during the past five years. See "Risk
Factors--Potential Service Interruptions."
LEGAL PROCEEDINGS
In May 1998, Azerty Mexico received an official notice and request for
documents from the Director General of Investigations of the Federal Competition
Commission of Mexico with respect to an investigation of the distribution
practices of one of Azerty Mexico's suppliers. At this time, the Company does
not believe that Azerty Mexico is a target of this investigation or that this
investigation will result in a material adverse effect upon the Company's
financial condition or results of operations taken as a whole.
Although the Company is also 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 the financial condition or results of operations of
the Company.
TRADEMARKS
The trade names United Stationers, Micro United, Universal, United Facility
Supply, Azerty and others, are actively used and are significant to the
Company's business. Certain of the Company's trademarks have been federally
registered with the United States Patent and Trademark Office.
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 owns its office facility in Des Plaines,
Illinois which has approximately 135,800 square feet of office and storage
space. In addition, the Company leases approximately 47,000 square feet of
office space located in Mount Prospect, Illinois. This lease expires in 1999,
with an option to renew for two consecutive three-year terms. Azerty owns its
corporate headquarters office facility in Orchard Park, New York, which has
approximately 28,000 square feet (19,000 square feet of which consists of
unutilized warehouse space).
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DISTRIBUTION CENTERS. The Company presently has more than 8.0 million
square feet of warehouse space in 40 business products distribution centers and
19 Lagasse distribution centers. The Company also operates 24 local distribution
points. The following table sets forth information regarding the principal
leased and owned distribution centers:
USSC AND LAGASSE FACILITIES:
<TABLE>
<CAPTION>
METROPOLITAN OWNED LEASED
STATE CITY AREA SERVED APPROX. SQUARE FEET
- ------------------------------------- --------------------- ------------------------- --------- ------------
<S> <C> <C> <C> <C>
Arizona.............................. Tempe Phoenix -- 110,000
California........................... City of Industry(1).. Los Angeles 344,487 125,000
Sacramento(1) Sacramento -- 119,260
Sacramento Sacramento -- 267,284
Santa Fe Springs Los Angeles -- 40,000
Union City San Francisco -- 25,986
Colorado............................. Denver Denver 104,244 --
Denver Denver -- 134,893
Florida.............................. Dania Miami -- 22,564
Jacksonville(1) Jacksonville 95,500 --
Tampa Tampa 128,000 --
Tampa Tampa -- 30,000
Ft. Lauderdale Miami -- 151,500
Georgia.............................. Atlanta Atlanta -- 54,400
Norcross Atlanta 372,000 --
Illinois............................. Carol Stream Chicago -- 139,444
Forest Park Chicago 222,280 81,000
Forest Park Chicago -- 34,600
Glendale Heights Chicago -- 50,533
Greenville St. Louis 210,000 --
Indiana.............................. Indianapolis Indianapolis 128,000 --
Indianapolis Indianapolis -- 41,539
Louisiana............................ Harahan New Orleans -- 104,885
Harahan(1) New Orleans -- 82,650
Maryland............................. Harmans Baltimore/Wash., D.C. 323,980 85,500
Harmans Baltimore/Wash., D.C. -- 37,597
Massachusetts........................ Sharon Boston -- 40,000
Woburn Boston 309,000 --
Michigan............................. Livonia Detroit 229,700 33,500
Van Buren Detroit -- 52,924
Minnesota............................ Brooklyn Park Minneapolis/St. Paul 127,480 --
Eagan Minneapolis/St. Paul 210,468 --
Missouri............................. Kansas City Kansas City -- 95,205
New Jersey........................... Edison New York 257,579 133,177
Edison New York -- 44,855
Pennsauken Philadelphia 231,000 25,316
New York............................. Coxsackie Albany 256,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN OWNED LEASED
STATE CITY AREA SERVED APPROX. SQUARE FEET
- ------------------------------------- --------------------- ------------------------- --------- ------------
<S> <C> <C> <C> <C>
North Carolina....................... Charlotte Charlotte -- 24,800
Charlotte Charlotte 104,000 67,183
Ohio................................. Cincinnati Cincinnati 108,778 --
Columbus Columbus -- 171,665
Twinsburg Cleveland 206,136 136,966
Valley View Cleveland -- 28,000
Oklahoma............................. Tulsa Tulsa 52,600 22,500
Oregon............................... Portland Portland -- 91,603
Pennsylvania......................... Pittsburgh Pittsburgh -- 84,176
Tennessee............................ Memphis Memphis -- 78,286
Nashville Nashville -- 59,250
Nashville(2) Nashville -- 191,250
Texas................................ Dallas(1) Dallas/Fort Worth 223,230 159,864
Dallas Dallas -- 72,000
Houston Houston -- 223,709
Houston Houston -- 24,600
Lubbock Lubbock -- 58,725
San Antonio San Antonio -- 63,098
San Antonio San Antonio -- 31,750
Utah................................. Salt Lake City Salt Lake City -- 101,324
Washington........................... Kent Seattle -- 24,000
Tukwila Seattle -- 144,031
Wisconsin............................ Milwaukee Milwaukee 67,300 --
</TABLE>
- --------------
(1) A portion of such property is subleased to a third party.
(2) This new facility is expected to replace the other Nashville facility before
the end of 1998.
AZERTY BUSINESS LEASED FACILITIES:
<TABLE>
<CAPTION>
APPROXIMATE
STATE/COUNTRY CITY USE SQUARE FEET
- --------------------------------------------------------- ----------------- -------------------- -------------
<S> <C> <C> <C>
California............................................... Visalia Warehouse 30,000
Florida.................................................. Miami Warehouse 25,000
Call Center 3,200
Indiana.................................................. Fort Wayne Warehouse 75,000
Mexico................................................... Mexico City Office/Warehouse 12,800
Pennsylvania............................................. Chambersburg Warehouse 65,000
</TABLE>
Substantially all property rights of the Company are pledged to secure its
obligations under the New Credit Agreement. See "Description of Certain
Indebtedness--New Credit Facilities."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information, as of July 29, 1998, with respect to
those individuals who are serving as members of the Boards of Directors of
United and the Company or as executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Frederick B. Hegi, Jr.......................... 54 Chairman of the Board of United
Randall W. Larrimore........................... 51 Director of United and the Company; President and Chief
Executive Officer
Daniel H. Bushell.............................. 46 Director of the Company; Executive Vice President, Chief
Financial Officer and Assistant Secretary
Michael D. Rowsey.............................. 45 Director of United and the Company; Executive Vice
President
Steven R. Schwarz.............................. 44 Director of the Company; Executive Vice President
Kathleen S. Dvorak............................. 41 Vice President, Investor Relations
Mark J. Hampton................................ 45 Vice President, Marketing
R. Thomas Helton............................... 50 Vice President, Human Resources
James A. Pribel................................ 45 Treasurer
Albert H. Shaw................................. 48 Vice President, Operations
Ergin Uskup.................................... 60 Vice President, Management Information Systems and Chief
Information Officer
Susan M. Meyer................................. 54 Vice President, Secretary and General Counsel
Gary G. Miller................................. 48 Director of United
Daniel J. Good................................. 58 Director of United
James A. Johnson............................... 44 Director of United
Joel D. Spungin................................ 60 Director of United
Benson P. Shapiro.............................. 56 Director of United
Roy W. Haley................................... 51 Director of United
</TABLE>
Set forth below is a description of the backgrounds of the directors of
United and the Company and executive officers of the Company. There is no family
relationship between any director or executive officer of United or 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.
FREDERICK B. HEGI, JR. was elected to the Board of Directors of United upon
consummation of the Merger and served as Chairman, interim President and Chief
Executive Officer upon the resignation of Thomas W. Sturgess in November 1996
and until Randall Larrimore became President and Chief Executive Officer in May
1997. 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 Executive
Committee of the Board of Loomis, Fargo & Co., an armored car service company;
Chairman of Tahoka First Bancorp, Inc., a bank holding company; and Chairman of
Cedar Creek Bancshares, Inc., a bank holding company. Additionally, he is a
director of Lone Star Technologies, Inc., a diversified company engaged in the
manufacture of tubular products; and Cattle Resources, Inc., a manufacturer of
animal feeds and operator of commercial cattle feedlots.
RANDALL W. LARRIMORE was elected to the Boards of Directors of United and
the Company and became President and Chief Executive Officer of the Company on
May 23, 1997. From February 1988 to
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<PAGE>
May 1997, Mr. Larrimore had been President and Chief Executive Officer of
MasterBrand Industries, Inc., a manufacturer of leading brands including Master
Lock padlocks and Moen faucets, and a subsidiary of Fortune Brands (formerly
American Brands). Prior to that time, Mr. Larrimore was President and Chief
Executive Officer of Twentieth Century Companies, a manufacturer of plumbing
repair parts and a division of Beatrice Foods. Prior thereto he was Vice
President of Marketing for Beatrice Home Specialties, the operating parent of
Twentieth Century. Fortune Brands acquired Twentieth Century Companies and other
Beatrice divisions and subsidiaries in 1988. Before joining Beatrice in 1983,
Mr. Larrimore was with Richardson-Vicks, McKinsey & Company and then with
PepsiCo International. Mr. Larrimore serves as a director of Olin Corporation, a
diversified manufacturer of chemicals, metals, micro-electronic materials and
sporting ammunition.
DANIEL H. BUSHELL was elected to the Board of Directors of the Company and
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.
MICHAEL D. ROWSEY was elected to the Boards of Directors of United and the
Company 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 Boise Cascade Office Products, most recently as the North
Regional Manager.
STEVEN R. SCHWARZ was elected to the Board of Directors of the Company and
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, Micro United since 1990
and Vice President, General Manager, Micro United since September 1989. He had
held a staff position in the same capacity since February 1987.
KATHLEEN S. DVORAK became Vice President, Investor Relations of the Company
in July 1997. Ms. Dvorak began her career at United in 1982 and has held various
positions with increasing responsibility within the investor relations function.
Most recently, she was Director of Investor Relations of the Company.
MARK J. HAMPTON has served as Vice President of Marketing of the Company
since September 1994. Mr. Hampton began his United career in 1980 and held
various positions in the sales and marketing area. In 1991, Mr. Hampton left
United to pursue an opportunity to work in the dealer community and was the
primary architect in developing a successful national buying and marketing
group. After rejoining the Company in September 1992, he was made a Regional
Vice President in charge of the Midwest Region and then Vice President and
General Manager of Micro United.
R. THOMAS HELTON became Vice President of Human Resources of the Company in
February 1998. Prior to joining United, Mr. Helton spent 11 years, from 1986 to
1997, at Whirlpool Corporation where he held a variety of management and
executive positions within the human resources function. Most recently, he was
Vice President of Human Resources for Whirlpool Asia. From 1980 to 1986, Mr.
Helton was with Kaiser Aluminum and Chemical working in personnel and labor
relations.
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JAMES A. PRIBEL became Treasurer of the Company upon consummation of the
Merger. Prior thereto he was Treasurer of United since 1992. Mr. Pribel
previously had been Assistant Treasurer of the Company since 1984 and had served
in various positions since joining the Company in 1978.
ALBERT H. SHAW became Vice President, Operations of the Company shortly
after consummation of the Merger. Prior thereto, he was Vice President, Midwest
Region of the Company since March 1994. He had been a Vice President of the
Company since 1992 and prior to that had served in various management positions
since joining the Company 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.
SUSAN M. MEYER became Vice President, Secretary and General Counsel of the
Company in July 1998. Prior thereto, since 1991 Ms. Meyer was at General
Instrument Corporation, a broadband technology company, most recently serving as
vice president, secretary and deputy general counsel. From 1986 through 1991,
Ms. Meyer served as senior counsel for Beatrice Companies, Inc., a leveraged
buyout firm with multiple subsidiaries in a wide variety of businesses.
GARY G. MILLER was elected to the Board of Directors of United upon
consummation of the Merger. Mr. Miller served as Vice President and Secretary of
the Company from consummation of the Merger until June 27, 1995, and Assistant
Secretary of the Company from June 27, 1995 to May 8, 1996. Prior thereto, Mr.
Miller had been a director of Associated since 1992 and Vice President and
Secretary of Associated since January 1992. Mr. Miller also currently serves as
President of Cumberland, a private investment firm which is located in Fort
Worth, Texas. In addition, from 1977 to December 1993, Mr. Miller served as
Executive Vice President, Chief Financial Officer and a director of AFG
Industries, Inc., and its parent company, Clarity Holdings Corp. He is Chairman
of the Board of both CFData Corp., a nationwide provider of check collection and
check verification services, and Fore Star Golf, Inc., which was formed in 1993
to own and operate golf course facilities.
DANIEL J. GOOD was elected to the Board of Directors of United 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.
JAMES A. JOHNSON was elected to the Board of Directors of United 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 Company, a manufacturer and
distributor of baby seats and other juvenile products.
JOEL D. SPUNGIN has served as a member of the Board of Directors of United
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
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<PAGE>
partnership, and as a director of AAR Corp., an aviation and aerospace company,
and Home Products International, Inc., a manufacturer of home improvement
products.
BENSON P. SHAPIRO was elected to the Board of Directors of United in
November 1997. Professor Shapiro has served on the faculty of Harvard University
for 27 years and until July 1997 was THE MALCOLM P. MCNAIR PROFESSOR OF
MARKETING at the Harvard Business School. He continues to teach a variety of
Harvard's executive programs and spends much of his time on research, writing
and consulting.
ROY W. HALEY was elected to the Board of Directors of United in March 1998.
Mr. Haley currently serves as President and Chief Executive Officer of WESCO
Distribution, Inc. ("WESCO"). Prior to joining WESCO in 1994, he served as
President and Chief Operating Officer of American General Corporation, one of
the nation's largest consumer financial services organizations. Mr. Haley also
serves as a director for the National Association of Wholesalers and The
National Association of Electrical Distribution Education Foundation.
COMPOSITION OF THE BOARD OF DIRECTORS
United's Restated Certificate of Incorporation (as amended from time to
time, the "Charter") provides that the Board of Directors of United 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 1999)--Messrs. Good, Johnson
and Spungin; Class II (having terms expiring in 2000)--Messrs. Hegi, Miller and
Rowsey; and Class III (having terms expiring in 1998)--Messrs. Larrimore,
Shapiro and Haley. Directors of the Company are elected by United, the sole
stockholder of the Company.
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
In connection with the Associated Transaction, Associated entered into a
registration rights agreement (the "Stockholders' Registration Rights
Agreement") with Wingate Partners, Cumberland, ASI Partners, L.P., Good Capital
and certain other holders of Associated common stock (including Mr. Rowsey),
pursuant to which it granted to such stockholders certain rights with respect to
registration under the Securities Act of shares of Associated common stock held
by them. The Company assumed the obligation of Associated under the
Stockholders' Registration Rights Agreement in connection with the Merger, and
such agreement has been amended accordingly. Under the amended agreement, a
holder of 20% of the shares of Common Stock subject to the Stockholders'
Registration Rights Agreement can, in certain circumstances, require the Company
to effect up to three short-form and two long-form registrations of all or part
of such holder's shares of Common Stock. The Company is not required to honor
any request to register shares of Common Stock if the request is less than 300
days following the effective date of any previous registration statement filed
in connection with any such request.
MANAGEMENT AGREEMENTS
Pursuant to certain Investment Banking Fee and Management Agreements
(collectively, the "Management Agreements") assumed in the Merger, the Company
paid to each of Wingate Partners, Cumberland and Good Capital aggregate fees of
$2.3 million, $100,000, and $100,000, respectively, upon the consummation of the
Merger. In addition, the Company has paid annual fees for monitoring and
oversight services provided by such parties pursuant to the Management
Agreements as follows: (i) Wingate Partners received annual fees in the amount
of $603,000, $725,000 and $513,540 pursuant to its agreement in each of the
fiscal years ended 1995, 1996 and 1997, respectively; (ii) Cumberland received
annual fees in the amount of $129,000, $137,500 and $97,400 pursuant to its
agreement in each of the fiscal years ended 1995, 1996 and 1997, respectively;
and (iii) Good Capital received annual
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<PAGE>
fees in the amount of $129,000, $137,500 and $97,400 pursuant to its Agreement
in each of the fiscal years ended 1995, 1996 and 1997, respectively. In
addition, pursuant to the Management Agreements, each of Wingate Partners,
Cumberland and Good Capital was entitled to reimbursement for its reasonable
out-of-pocket expenses and the Company agreed to indemnify each of them and
their respective affiliates for any losses in connection with the provision of
their services under the Management Agreements.
In October 1997, the Management Agreements were terminated in exchange for
one-time payments of approximately $2.4 million, $400,000 and $400,000 to
Wingate Partners, Cumberland and Good Capital, respectively. Pursuant to the
terms of the termination of such Management Agreements, certain indemnity
obligations of the Company survived and remain in effect.
REDEMPTION OF SERIES A PREFERRED STOCK
As a result of United's redemption of all of its outstanding Series A
Preferred Stock effected on September 2, 1997, Wingate and ASI Partners, L.P.
(of which Cumberland serves as the general partner) received approximately $5.4
million and $2.1 million, respectively, in aggregate proceeds. In addition, Mr.
Rowsey, Executive Vice President and a director of United and the Company, and
Mr. Johnson, a director of United, received $92,166 and $25,854, respectively,
in aggregate proceeds from such redemption.
OPTION AND RESTRICTED STOCK AWARDS
Effective May 23, 1997, United granted to Mr. Larrimore, the Company's
President and Chief Executive Officer, options to purchase an aggregate of
250,000 shares of Common Stock at an exercise price of $21.625 per share, the
fair market value of the Common Stock on the date of such grant. The options
vest in five equal annual installments, beginning on the first anniversary of
the date of grant, and terminate on May 23, 2007 or earlier in the event of the
termination of Mr. Larrimore's employment.
In connection with the Associated transaction in 1992 and the Merger in
1995, United has granted Merger Incentive Options to acquire approximately 2.6
million shares of Common Stock to certain members of management at exercise
prices currently ranging from $1.45 to $16.875 per share. Of such Merger
Incentive Options, United has granted to Messrs. Rowsey and Bushell Merger
Incentive Options exercisable for an aggregate of (i) 94,506 and 89,199 shares,
respectively, at an exercise price of $1.45 per share; (ii) 15,000 and 15,000
shares, respectively, at an exercise price of $5.12 per share; and (iii) 105,000
and 105,000 shares, respectively, at an exercise price of $16.875 per share.
United has also granted Merger Incentive Options to Messrs. Schwarz and Uskup
exercisable for an aggregate of (i) 15,000 and 7,500 shares, respectively, at an
exercise price of $5.12 per share and (ii) 105,000 and 52,500 shares,
respectively, at an exercise price of $16.875 per share.
On January 28, 1998, Messrs. Larrimore, Rowsey, Bushell, Schwarz and Uskup
were each granted options for 35,000, 15,000, 15,000, 15,000 and 6,000,
respectively, at an exercise price of $46.75, under the Management Equity Plan.
All such options vest in 20% increments on each anniversary of the grant, except
that vesting may be accelerated on the third or fourth anniversary of the grant
if the stock price has increased by at least a 15% compounded annual growth
rate.
On May 13, 1998, following the consummation of the Azerty Acquisition,
United granted to key management employees of the Azerty Business options for
4,500 shares of Common Stock at an exercise price of $61.125 per share, under
the management Equity Plan. All such options vest in 20% increments on each
anniversary of the grant, except that vesting may be accelerated on the third or
fourth anniversary of the grant if the stock price has increased by at least a
15% compounded annual growth rate.
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<PAGE>
On November 29, 1995, United granted a restricted stock award of 9,678
shares of Common Stock to Joel D. Spungin, a director of United, in
consideration for his service on the Board of Directors in lieu of directors'
compensation for a three-year period. Additionally, United granted to Jeffrey K.
Hewson, a former director of United, options exercisable for an aggregate of
14,648 shares of Common Stock at an exercise price of $5.12 per share in
consideration for his service on the Board of Directors in lieu of directors'
compensation. Mr. Hewson exercised this option in September 1997.
Effective January 1, 1996, United granted to Mr. Sturgess, the Company's
former Chairman, President and Chief Executive Officer, in consideration for
services rendered in such capacity (i) options exercisable for an aggregate of
240,000 shares of Common Stock at an exercise price of $16.875 per share and
(ii) options exercisable for an aggregate of 120,000 shares of Common Stock at
an exercise price of $5.12 per share. In November 1996, in connection with the
resignation of Mr. Sturgess as Chairman, President and Chief Executive Officer
of the Company, United and Mr. Sturgess entered into a termination agreement
whereby Mr. Sturgess retained options exercisable for an aggregate of 240,000
shares of Common Stock, at an exercise price of $16.875 per share with the terms
of such options being amended such that options exercisable for 160,000 of such
shares are currently exercisable and options exercisable for the remaining
80,000 of such shares would become exercisable upon the occurrence of certain
events by March 31, 1997. The contingent events mentioned above did not occur
within the prescribed period and, therefore, such options to purchase 80,000
shares of Common Stock have terminated.
In December 1996, the 1997 Special Bonus Plan (the "Special Bonus Plan") was
adopted. The special bonuses are payable to the participants in two equal annual
installments, beginning on the first anniversary of the date of a liquidity
event. The aggregate amount that may be awarded to the 177 current participants
in the Special Bonus Plan is approximately $2.0 million. Messrs. Rowsey, Bushell
and Schwarz each are eligible to receive, in the aggregate, up to $130,000 and
Mr. Uskup is eligible to receive, in the aggregate, up to $65,000 under the
Special Bonus Plan.
In July 1997, in connection with the negotiation of the executive vice
president employment agreements discussed below, United and each of Messrs.
Rowsey, Bushell and Schwarz entered into amendments to their respective stock
option agreements under United's Management Equity Plan. The amendments revised
the terms of exercisability of such options following a termination of such
employee without Cause or such employee's termination for Good Reason (each as
defined in such employee's respective employment agreement).
Effective November 1997, United amended its Management Equity Plan to
increase the number of options available for issuance thereunder by
approximately 1.5 million shares.
EMPLOYMENT AGREEMENTS
Randall W. Larrimore entered into an employment agreement with the Company
as of May 23, 1997 to serve as President and Chief Executive Officer. Pursuant
to the agreement, Mr. Larrimore's employment began on May 23, 1997 and continues
until Mr. Larrimore or the Company notifies the other party of a termination of
such employment. If Mr. Larrimore notifies the Company, the term of employment
is deemed to end 90 days after such notification, and if the Company notifies
Mr. Larrimore, the term of employment is deemed to end two years after such
notification. The term of employment may also be terminated earlier by either
Mr. Larrimore or the Company as described below. The agreement provides for an
annual base salary of at least $495,000, plus participation in all bonus, stock
option and other benefit plans generally available to executive officers of the
Company. In addition, Mr. Larrimore is entitled to reimbursement of premiums
paid on long-term disability insurance up to a specified amount. Finally, the
agreement also provides for a supplemental pension benefit that will provide Mr.
Larrimore with an amount equivalent to five additional credited years of service
under the Company's pension plan.
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If Mr. Larrimore's employment is terminated by the Company (other than for
Cause, as defined in the agreement) without the specified notice, or by Mr.
Larrimore for Good Reason (as defined in the agreement), he generally will be
entitled to his salary and bonuses earned to the date of termination plus an
amount equal to two times his base pay plus bonuses, and his stock options will
continue to be or become exercisable during the 24 months following such
termination. If his employment terminates due to his death or disability, he
generally will receive an amount equal to his annual salary plus bonus, his
unexercisable options will be forfeited, and his exercisable options will remain
exercisable for up to one year following such termination. If there is a Change
in Control (as defined in the agreement), all stock options held by Mr.
Larrimore will become exercisable. If Mr. Larrimore's employment is terminated
other than for Cause, Mr. Larrimore, his spouse, and his eligible dependents may
be allowed to participate in the Company's health plan for a specified period,
subject to certain limitations on nonemployee participation and subject to Mr.
Larrimore (or his spouse or dependents) paying for such coverage.
Effective as of June 1, 1997, the Company entered into new employment
agreements with Messrs. Bushell, Rowsey and Schwarz. Pursuant to such
agreements, the term of employment began on June 1, 1997 and continues until the
executive or the Company notifies the other party. If the executive notifies the
Company, the term of employment ends 90 days after such notification, and if the
Company notifies the executive, the term of employment ends at the later of (i)
June 1, 2000 or (ii) two years after such notification. The term of employment
may also be terminated earlier by either the executive or the Company. The
agreements provide for an annual base salary of at least $265,000, plus
participation in all bonus, stock option and other benefit plans generally
available to executive officers of the Company.
If the executive's employment is terminated due to death or disability, he
generally is entitled to an amount equal to the sum of his annual base salary
and his previous year's annual incentive compensation award payable over a
12-month period. If the executive's employment is terminated by the Company
without Cause (as defined in the agreement) or by him for Good Reason (as
defined in the agreement), he generally is entitled to a severance amount
(subject to mitigation) equal to the sum of his base salary and bonuses for the
months remaining in the term of employment (or which would have been remaining
in the term of employment if the Company had given notice on the termination
date) payable over the severance period, and continued welfare benefit coverage
over such severance period. If the executive's employment is terminated for any
reason other than for Cause, the Company will allow the executive, his spouse,
and his eligible dependents to participate in the Company's health plan for a
specified period, subject to certain limitations on nonemployee participation
and subject to the executive (or his spouse or dependents) paying for such
coverage.
In addition, the Company has also entered into employment agreements with
certain of its other executive officers. Such agreements typically have a one or
two year term.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of July 31, 1998 with respect
to the beneficial ownership of Common Stock by (i) each person who is known by
United to own beneficially more than five percent of United's Common Stock, (ii)
each of United's and the Company's directors and executive officers and (iii)
all current directors and executive officers as a group. Unless otherwise
indicated, each person has sole voting power and investment power with respect
to the shares attributed to him/her.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
--------------------------
<S> <C> <C>
NUMBER OF PERCENT OF
NAMES OF BENEFICIAL OWNER SHARES CLASS
- ------------------------------------------------------------------ ----------- -------------
Wingate Partners, L.P. ........................................... 3,210,380(2) 17.5%
750 N. St. Paul Street
Suite 1200
Dallas, TX 75201
Daniel H. Bushell................................................. 85,000(3) *
Kathleen S. Dvorak................................................ 3,022 *
Daniel J. Good.................................................... 76,180(4) *
Roy W. Haley...................................................... -- --
Mark J. Hampton................................................... 1,000 *
Frederick B. Hegi, Jr............................................. 91,906(5) *
R. Thomas Helton.................................................. -- --
James A. Johnson.................................................. 24,279(6) *
Randall W. Larrimore.............................................. 50,000(7) *
Susan M. Meyer.................................................... -- --
Gary G. Miller(8)................................................. -- --
James A. Pribel................................................... 6,975 *
Michael D. Rowsey................................................. 100,032(9) *
Steven R. Schwarz................................................. 15,628 10) *
Benson P. Shapiro................................................. -- --
Albert H. Shaw.................................................... 3,429 *
Joel D. Spungin................................................... 18,392 *
Ergin Uskup....................................................... 7,626 11) *
All current directors and executive officers as a group
(18 persons).................................................... 483,469 12) 2.6
</TABLE>
- --------------
* Represents less than 1.0%.
(1) For purposes of calculating the beneficial ownership of each stockholder,
it was assumed (in accordance with the Securities and Exchange Commission's
definition of "beneficial ownership") that such stockholder had exercised
all options, conversion rights or warrants by which such stockholder had
the right within 60 days following July 31, 1998, to acquire shares of such
class of stock.
(2) Includes (i) 2,422,620 shares owned by Wingate Partners, (ii) 782,780
shares owned by Wingate II, (iii) 4,340 shares owned by Wingate Management
Corporation, and (iv) 640 shares owned by Wingate Management Limited,
L.L.C.
(3) Includes 85,000 shares issuable upon exercise of employee stock options.
(4) Does not include 363,899 shares owned by Good Capital. Mr. Good is Chairman
and a controlling stockholder of Good Capital and, accordingly, may be
deemed to beneficially own the shares of record by Good Capital.
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<PAGE>
(5) Includes (i) 46,328 shares owned by Mr. Hegi, (ii) 134 shares held of
record by a family company of which he is managing partner, (iii) 23,853
shares held in trust for his benefit and for which he serves as trustee,
and (iv) 21,591 shares held in trusts for unrelated third parties of which
he is trustee. Does not include (i) 2,422,620 shares held by Wingate
Partners, (ii) 782,780 shares held by Wingate II, (iii) 4,340 shares held
by Wingate Management Corporation, and (iv) 640 shares held by Wingate
Management Limited, L.L.C. Mr. Hegi is an indirect general partner of each
of Wingate Partners and Wingate II, President of Wingate Management
Corporation, and a manager of Wingate Management Limited, L.L.C. and
accordingly, may be deemed to beneficially own the shares owned of record
by these entities. See Note (1) above and "Management."
(6) Includes 18,477 shares owned by Mr. Johnson and 5,802 shares held in a
self-directed individual retirement account for the benefit of Mr. Johnson.
Does not include (i) 782,780 shares held by Wingate II, and (ii) 640 shares
held by Wingate Management Limited, L.L.C. Mr. Johnson is an indirect
general partner of Wingate II and a manager of Wingate Management Limited,
L.L.C. and accordingly, may be deemed to beneficially own the shares owned
of record by these entities. See Note (1) above and "Management."
(7) Includes 50,000 shares issuable upon exercise of employee stock options.
(8) Does not include (i) 338,084 shares owned by Cumberland and (ii) Warrants
exercisable for 1,548 shares held by ASI Partners III, L.P. (of which
Cumberland serves as general partner). Mr. Miller is President and
stockholder of Cumberland and, accordingly, may be deemed to beneficially
own the shares and Warrants owned of record by Cumberland and ASI Partners
III, L.P.
(9) Includes (i) 9,318 shares owned by Mr. Rowsey and (ii) 90,714 shares
issuable upon exercise of employee stock options.
(10) Includes (i) 628 shares owned by Mr. Schwarz and (ii) 15,000 shares
issuable upon exercise of employee stock options.
(11) Includes (i) 126 shares owned by Mr. Uskup and (ii) 7,500 shares issuable
upon exercise of employee stock options.
(12) Includes all securities beneficially owned by the current directors and
executive officers of United and the Company, including an aggregate of
(i) 235,255 shares of Common Stock and (ii) 248,214 shares issuable upon
exercise of employee stock options.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITIES
On April 3, 1998, the Company entered into the New Credit Agreement with
United as guarantor, Chase, as agent, and a group of banks and financial
institutions (including Chase, the "Senior Lenders"). The following is a summary
of the principal terms of the New Credit Agreement which summary does not
purport to be complete and is subject, and is qualified in its entirety by
reference to, all the provisions of the New Credit Agreement, as it may be
further amended from time to time, a copy of which is available upon request to
the Company. See "Available Information."
The New Credit Agreement provided for the funding of the Azerty Acquisition,
the refinancing of certain existing indebtedness and for other general corporate
purposes of the Company and its subsidiaries. The New Credit Facilities under
the New Credit Agreement consist of $150.0 million of borrowings pursuant to the
Tranche A Term Loan Facility and commitments of up to $250.0 million of
revolving loan borrowings pursuant to the Revolving Credit Facility (including a
sublimit of $90.0 million under the Revolving Credit Facility for letters of
credit) of which approximately $16.0 million (excluding approximately $36.5
million of outstanding letters of credit under the Revolving Credit Facility)
was outstanding as of the date of the consummation of the Original Offering. A
portion of the Revolving Credit Facility is allocated for swingline loans. The
New Credit Facilities also included borrowings of $100.0 million under the
Tranche B Term Loan Facility. A substantial portion of the Tranche B Term Loan
Facility was repaid with the net proceeds from the Original Offering. The
remainder of the Tranche B Term Loan Facility was repaid with proceeds from the
sale of certain receivables. See "Use of Proceeds."
The loans under the Tranche A Term Loan Facility and the Revolving Credit
Facility generally bear interest as determined within a set range with the rate
based on the ratio of total debt (which excludes the face amount of any undrawn
letters of credit) of United and its subsidiaries to EBITDA (as defined in the
New Credit Agreement). The Tranche A Term Loan Facility and the Revolving Credit
Facility bear interest, at the option of the Company and based upon financial
performance, at the base rate (i.e., the higher of the prime rate or federal
funds plus 0.50%) plus 0% to 0.75% or LIBOR plus 1.00% to 2.00%. The Tranche B
Term Loan Facility bore interest, at the option of the Company, at the base rate
plus 0.75% or LIBOR plus 2.00%.
As of the date of this Prospectus, the outstanding principal balance of the
Tranche A Term Loan Facility consists of $61.5 million and matures on or about
March 31, 2004, and no amount of the Tranche B Term Loan Facility is
outstanding, which had been scheduled to mature on or about December 31, 2004.
The term loans under the Tranche A Term Loan Facility are repayable in
consecutive quarterly installments which began on June 30, 1998, the first four
of which are each in the amount of $1.0 million, the next four of which are each
in the amount of $1.6 million, the next four of which are each in the amount of
$2.6 million, the next four of which are each in the amount of $3.1 million and
the last eight of which are each in the amount of $3.7 million. The term loans
under the Tranche B Term Loan Facility were scheduled to be repaid in
consecutive quarterly installments commencing on or about June 30, 1998, the
first twenty of which were to be each in the amount of $0.25 million and the
last seven of which were to be each in the amount of approximately $13.6
million. The Company used the net proceeds of the Original Offering to repay a
substantial portion of the indebtedness outstanding under the Tranche B Term
Loan Facility. The remainder of the Tranche B Term Loan Facility was repaid with
proceeds from the sale of certain receivables.
Loans under the Tranche A Term Loan Facility and the Revolving Credit
Facility may be prepaid at any time, and are subject to certain mandatory
prepayments out of (i) net proceeds received from the issuance of equity by
United or any of its subsidiaries subject to certain exceptions provided in the
New Credit Agreement, (ii) net proceeds from certain asset sales in excess of
$15.0 million, (iii) 50% of the Company's Excess Cash Flow (as defined in the
New Credit Agreement) for any fiscal year (commencing with the fiscal year
ending December 31, 1998), but only if the Debt to Cash Flow Ratio (as defined
in
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the New Credit Agreement) as of the last day of the fiscal year is greater than
3.75 to 1, (iv) net proceeds received from casualty events subject to certain
exceptions provided within the New Credit Agreement and (v) net proceeds
received from certain debt issuances (including the issuance of the Notes).
Optional prepayment under the Tranche A Term Loan Facility will be applied PRO
RATA to loans outstanding under the Tranche A Term Loan Facility (in each case,
PRO RATA to the remaining installments). Mandatory prepayments will be applied,
first, PRO RATA to loans outstanding under the Tranche A Term Loan Facility (in
each case, PRO RATA to the remaining installments) and, next, to the permanent
reduction of commitments (and the payment of loans outstanding) under the
Revolving Credit Facility, except that mandatory prepayments in connection with
the issuance of the Notes will be applied, first to the Tranche A Term Loan
Facility and, then, to the permanent reduction of commitments and/or prepayments
under the Revolving Credit Facility.
The Tranche A Term Loan Facility and the Revolving Credit Facility are
guaranteed, on a joint and several basis, by United and all of the direct and
indirect domestic subsidiaries of the Company.
The Tranche A Term Loan Facility and the Revolving Credit Facility are
secured by perfected first priority pledges of the stock of the Company, all of
the stock of the domestic direct and indirect subsidiaries of the Company and
certain of the stock of all of the foreign direct and indirect subsidiaries
(other than the Receivables Company) of the Company and security interests in,
and liens upon, certain accounts receivable, inventory, contract rights and
other personal and certain real property of the Company and its domestic
subsidiaries. The New Credit Agreement provides for the complete release, upon
request by the Company, of the liens upon achievement of an investment grade
rating from S&P or Moody's for the unsecured long-term debt of United or the
Company for any quarter, and a partial release in the event the Leverage Ratio
(as defined in the New Credit Agreement) is less than or equal to 3 to 1. The
Majority Lenders (as defined in the New Credit Agreement) may request that the
security interests be regranted if the Leverage Ratio for any subsequent quarter
exceeds 3 to 1. In addition, the New Credit Agreement permits the release of the
Senior Lenders' lien in connection with the sale of specified receivables under
the Receivables Securitization Program. See "Recent Transactions-- Receivables
Securitization Program."
The New Credit Agreement contains certain restrictive covenants that, among
other things, limit the ability of United, the Company and its subsidiaries to
dispose of assets, incur indebtedness or liens, pay dividends or make other
payments in respect of capital stock or subordinated indebtedness, make
investments or other acquisitions, engage in mergers or consolidations, engage
in transactions with affiliates, and engage in any business other than specified
businesses. In addition, the New Credit Agreement requires the Company to comply
with certain financial ratios and tests, including ratios of total debt to
EBITDA, cash flow to fixed charges, and EBITDA to interest expense, and a
minimum net worth test.
Defaults under the New Credit Agreement include, among other things, (i)
failure to pay principal when due; (ii) failure to pay interest within three
business days after the due date; (iii) default in the performance of certain
covenants and other obligations which, in some cases, continues for ten days;
(iv) default by United, the Company or any of its subsidiaries in respect of any
of its indebtedness above specified levels; (v) certain bankruptcy events; (vi)
certain judgments against United, the Company or any of its subsidiaries; (vii)
the occurrence of a change of control (as defined in the New Credit Agreement);
and (viii) the existence of certain environmental claims or liabilities.
12 3/4% NOTES
The 12 3/4% Notes were issued on May 3, 1995 pursuant to the 12 3/4% Notes
Indenture. As of the date hereof, the aggregate outstanding principal amount of
12 3/4% Notes was $100.0 million. The Notes are unsecured senior subordinated
obligations of the Company, and payment of the 12 3/4% Notes is fully and
unconditionally guaranteed by United and the Company's domestic "restricted"
subsidiaries on a
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senior subordinated basis. The 12 3/4% Notes mature on May 1, 2005, and bear
interest at the rate of 12 3/4% per annum, payable semiannually on May 1 and
November 1 of each year.
In addition, the 12 3/4% Notes are redeemable at the option of the Company
at any time on or after May 1, 2000, in whole or in part, at the following
redemption prices (expressed as percentages of principal amount):
<TABLE>
<CAPTION>
REDEMPTION
YEAR BEGINNING MAY 1 PRICE
- -------------------------------------------------------------------------------- ------------
<S> <C>
2000............................................................................ 106.375%
2001............................................................................ 104.781%
2002............................................................................ 103.188%
2003............................................................................ 101.594%
</TABLE>
and thereafter at 100.0% of the principal amount, in each case together with
accrued and unpaid interest, if any, to the redemption date.
Upon the occurrence of a change of control (which term includes the
acquisition by any person or group of more than 50% of the voting power of the
outstanding common stock of either United or the Company or certain significant
changes in the composition of the Board of Directors of either United or the
Company), the Company shall be obligated to offer to redeem all or a portion of
each holder's 12 3/4% Notes at 101% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of such redemption. Such
obligation, if it arose, could have a material adverse effect on the Company.
The 12 3/4% Notes Indenture governing the 12 3/4% Notes contains certain
covenants, including limitations on the incurrence of indebtedness, the making
of restricted payments, transactions with affiliates, the existence of liens,
disposition of proceeds of asset sales, the making of guarantees by restricted
subsidiaries, transfer and issuances of stock of subsidiaries, the imposition of
certain payment restrictions on restricted subsidiaries and certain mergers and
sales of assets.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company on April 15, 1998, in the Original
Offering. In connection with that placement, the Company entered into the
Registration Rights Agreement, which requires that the Company file the
Registration Statement under the Securities Act with respect to the New Notes
and, upon the effectiveness of that Registration Statement, offer to the holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive legend
and which generally may be reoffered and resold by the holder without
registration under the Securities Act. The Registration Rights Agreement further
provides that the Company must use its reasonable best efforts to (i) cause the
Registration Statement with respect to the Exchange Offer to be declared
effective on or before September 12, 1998 and (ii) consummate the Exchange Offer
on or before November 1, 1998. Except as provided below, upon the completion of
the Exchange Offer, the Company's obligations with respect to the registration
of the Old Notes and the New Notes will terminate. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement, of
which this Prospectus is a part, and the summary herein of the material
provisions thereof does not purport to be complete and is qualified in its
entirety by reference thereto. As a result of the timely filing and the
effectiveness of the Registration Statement, certain liquidated damages provided
for in the Registration Rights Agreement will not become payable by the Company.
Following the completion of the Exchange Offer (except as set forth in the
paragraph immediately below), holders of Old Notes not tendered will not have
any further registration rights and those Old Notes will continue to be subject
to certain restrictions on transfer. Accordingly, the liquidity of the market
for the Old Notes could be adversely affected upon completion of the Exchange
Offer.
In order to participate in the Exchange Offer, a holder must represent to
the Company and the Guarantors, among other things, that (i) the New Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving the New Notes, (ii) neither the
holder nor any such other person is engaging in or intends to engage in a
distribution of the New Notes, (iii) neither the holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of the New Notes, and (iv) neither the holder nor any such other
person is an "affiliate," as defined under Rule 405 promulgated under the
Securities Act, of the Company and the Guarantors. Pursuant to the Registration
Rights Agreement, the Company is required to file a "shelf" registration
statement for a continuous offering pursuant to Rule 415 under the Securities
Act in respect of the Old Notes if (i) because of any change in law or
applicable interpretations thereof by the staff of the Commission, the Company
determines that it is not permitted to effect the Exchange Offer as contemplated
hereby, (ii) any Old Notes validly tendered pursuant to the Exchange Offer are
not exchanged for New Notes within 200 days after the Issue Date, (iii) any
Initial Purchaser so requests with respect to Old Notes not eligible to be
exchanged for New Notes in the Exchange Offer and held by it following the
consummation of the Exchange Offer, (iv) any applicable law or interpretations
do not permit any Holder to participate in the Exchange Offer, or (v) any holder
that participates in the Exchange Offer does not receive freely transferable New
Notes in exchange for tendered Old Notes (the obligation to comply with a
prospectus delivery requirement being understood not to constitute a restriction
on transferability). In the event that the Company is obligated to file a
"shelf" registration statement, it will be required to keep such "shelf"
registration statement effective for at least two years. Other than as set forth
in this paragraph, no holder will have the right to participate in the "shelf"
registration statement nor otherwise to require that the Company register such
holder's shares of Old Notes under the Securities Act. See "--Procedures for
Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company and the Guarantors, the
Company believes that, with the exceptions set forth below, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any person receiving such New Notes,
whether or
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not such person is the registered holder (other than any such holder or such
other person which is an "affiliate" of the Company or the Guarantors within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the New Notes are acquired in the ordinary course of business of the holder
or such other person and neither the holder nor such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes cannot rely on this
interpretation by the Commission's staff and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offer (except as set forth in the
second paragraph under "--Purpose and Effect" above), holders of Old Notes not
tendered will not have any further registration rights and those Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for a holder's Old Notes could be adversely affected
upon completion of the Exchange Offer if the holder does not participate in the
Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000 in principal amount.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the Indenture pursuant to which the Old
Notes were issued.
As of July 31, 1998, Old Notes representing $100.0 million aggregate
principal amount were outstanding and there was one registered holder, a nominee
of DTC. This Prospectus, together with the Letter of Transmittal, is being sent
to such registered holder and to others believed to have beneficial interests in
the Old Notes. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and
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expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 2, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will notify the Exchange Agent and each registered
holder of any extension by oral or written notice prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth under "--Conditions to Exchange Offer" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender the Old Notes in the Exchange Offer.
Except as set forth under "--Book Entry Transfer," to tender in the Exchange
Offer a holder must complete, sign, and date the Letter of Transmittal, or a
copy thereof, have the signatures thereon guaranteed if required by the Letter
of Transmittal, and mail or otherwise deliver the Letter of Transmittal or copy
to the Exchange Agent prior to the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal prior to the Expiration Date, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if that procedure is available, into the Exchange Agent's account at DTC
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth under "--Exchange Agent" prior to the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date will
constitute an agreement between that holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee and who wishes to
tender should contact the registered holder promptly and instruct the registered
holder to tender on the beneficial owner's behalf. If the beneficial owner
wishes to tender on the owner's own behalf, the owner must, prior to completing
and executing the Letter of Transmittal and delivering the owner's Old Notes,
either make appropriate arrangements to register ownership of the Old Notes in
the beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
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Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
Old Notes tendered pursuant thereto are tendered (i) by a registered holder who
has not completed the box entitled "Special Registration Instruction" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, the Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by the registered holder
as that registered holder's name appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities, or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent, nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "--Conditions to the Exchange Offer," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to the Company and the Guarantors
that, among other things, (i) the New Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the registered holder,
(ii) neither the holder nor any such other person is engaging in or intends to
engage in a distribution of such New Notes, (iii) neither the holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes, and (iv) neither the holder
nor any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company and the Guarantors.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old
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Notes or a timely Book-Entry Confirmation of such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal (or, with respect to the DTC and its
participants, electronic instructions in which the tendering holder acknowledges
its receipt of and agreement to be bound by the Letter of Transmittal), and all
other required documents. If any tendered Old Notes are not accepted for any
reason set forth in the terms and conditions of the Exchange Offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering Holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such nonexchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature guarantees and any other required documents, must, in any
case other than as set forth in the following paragraph, be transmitted to and
received by the Exchange Agent at the address set forth under "--Exchange Agent"
on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a
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Book-Entry Confirmation, as the case may be, and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 pm., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or (for
DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth on the back cover page
of this Prospectus prior to 5:00 pm., New York City time, on the Expiration
Date. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee register the
transfer of such Old Notes into the name of the person withdrawing the tender,
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form,
and eligibility (including time of receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures under "--Procedures for Tendering" at any time on or prior to
the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA"). In any such event the Company is required to use every reasonable
effort to obtain the withdrawal of any stop order at the earliest possible time.
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EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. The Bank of New York has been appointed as Exchange Agent for the
Exchange Offer. Questions, requests for assistance and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
THE BANK OF NEW YORK
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT DELIVERY:
101 Barclay Street 101 Barclay Street
Floor 7-E Corporate Trust Services Window
New York, New York 10286 Ground Level
Attn: Reorganization Section New York, New York 10286
Attn: Reorganization Section
BY FACSIMILE (FOR ELIGIBLE INSTITUTIONS):
(212) 815-6339
FOR INFORMATION OR
CONFIRMATION BY TELEPHONE:
(212) 815-6333
</TABLE>
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$200,000, which includes fees and expenses of the Exchange Agent, accounting,
legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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DESCRIPTION OF THE NEW NOTES
The New Notes will be issued under the Indenture dated as of April 15, 1998
(as amended, the "Indenture") among the Company, United, Lagasse, Azerty,
Positive ID and AP Support Services and other guarantors which may be added in
the future, as Guarantors, and The Bank of New York, as trustee (the "Trustee"),
a copy of the form of which is available upon request to the Company. See
"Available Information." The Old Notes were also issued under the Indenture.
Upon the effectiveness of the Exchange Offer, the Indenture will be subject to
and governed by the TIA. The Indenture will not be qualified under the TIA,
except upon effectiveness of a registration statement for the Exchange Offer.
The following summary of the provisions of the Indenture and and the New Notes
and those terms made a part of the Indenture by the TIA sets forth all material
elements of such documents, but does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of the
Indenture (including the definitions of certain terms therein) and the New
Notes. For definitions of certain capitalized terms used in the following
summary, see "--Certain Definitions." References in this "Description of the New
Notes" to the Company or United are to United Stationers Supply Co. or United
Stationers Inc., respectively, excluding any subsidiaries thereof, and their
successors.
GENERAL
The Notes will be unsecured senior subordinated obligations of the Company,
will be issued in an aggregate principal amount of $100.0 million and will
mature on April 15, 2008. Interest on the Notes will accrue at a rate per annum
shown on the front cover of this Prospectus from April 15, 1998, or from the
most recent date to which interest has been paid or provided for, payable
semi-annually to holders of record at the close of business on April 1 or
October 1, (whether or not such day is a business day) immediately preceding the
interest payment date on April 15 and October 15 of each year commencing October
15, 1998. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. The Indenture provides for the issuance thereunder of up
to $100.0 million aggregate principal amount of additional Notes having
substantially identical terms and conditions to the Notes offered hereby (the
"Additional Notes"), subject to compliance with the covenants contained in the
Indenture (including compliance with restrictions regarding a new incurrence of
Indebtedness by the Company under the "Limitation on Indebtedness" covenant).
Any Additional Notes will be part of the same issue as the Notes offered hereby
(and accordingly will participate in purchase offers and partial redemptions)
and will vote on all matters with the Notes offered hereby. For purposes of this
"Description of the New Notes," all references herein to "Notes" shall be deemed
to refer collectively to Old Notes, New Notes and Additional Notes, unless the
context otherwise requires.
Payment of the Notes will be guaranteed initially by United, Lagasse,
Azerty, Positive ID and AP Support Services, on an unsecured senior subordinated
basis and will be guaranteed on an unsecured senior subordinated basis by any
domestic Restricted Subsidiary of the Company created or acquired after the
Issue Date which incurs any Indebtedness, other than any Securitization
Subsidiary that has entered into or established a Permitted Receivables
Securitization Program. See "--Guarantees."
Principal of, premium, if any, interest and Additional Amounts, if any, on
the Notes will be payable, and the Notes will be exchangeable and transferable,
at the office or agency of the Company in the City of New York maintained for
such purposes (which initially will be the office of the Trustee, The Bank of
New York, maintained at 101 Barclay Street, 21st Floor, New York, New York 10286
Attention: Corporate Trust Administration); provided, however, that payment of
principal or interest may be made at the option of the Company by check mailed
to the registered holders entitled thereto as shown on the Note register.
The Notes will be represented by one or more Notes in global form and in
certain circumstances may be represented by Notes in certificated form. See
"Book-Entry; Delivery and Form."
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. Initially, the
Trustee will act as Paying Agent and Registrar for the Notes.
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The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar, which initially will be the Trustee's corporate trust
office. The Company may change any Paying Agent and Registrar without prior
notice to holders of the Notes. No service charge will be made for any
registration of transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
After giving pro forma effect to the Azerty Acquisition, the Senior Credit
Facilities Refinancing and the Original Offering (including the application of
net proceeds therefrom) as if such transactions had occurred on March 31, 1998,
there would have been approximately $162.7 million of Senior Indebtedness
(excluding unused commitments) of the Company (all of which would have been
Designated Senior Indebtedness) and approximately $162.7 million of Senior
Guarantor Indebtedness of the Guarantors (all of which would have been
Designated Senior Guarantor Indebtedness) outstanding on such date,
substantially all of which represents Indebtedness or guarantees of Indebtedness
under the New Credit Facilities which will be secured by substantially all of
the assets of the Company and the Guarantors, respectively; in addition, after
taking into account approximately $36.5 million of outstanding letters of
credit, there would have been approximately $63.5 million available to be drawn
by the Company as secured Senior Indebtedness under the Revolving Credit
Facility (all of which would have been Designated Senior Indebtedness), which
amount would have been secured Senior Guarantor Indebtedness of the Guarantors
(all of which would have been Designated Senior Guarantor Indebtedness); and, on
a pro forma basis on such date, Indebtedness pari passu to the Notes would have
been $100.0 million of 12 3/4% Notes, and the Company would have had $78.4
million in Subordinated Indebtedness, consisting of intercompany indebtedness
payable to United. See "Risk Factors--Subordination" and "--Limited Practical
Value of Guarantee by United," "Capitalization" and "Unaudited Consolidated Pro
Forma Combined Financial Statements."
OPTIONAL REDEMPTION
The Notes will be subject to redemption at any time on or after April 15,
2003, at the option of the Company, in whole or in part, on not less than 30 nor
more than 60 days' prior notice in amounts of $1,000 or an integral multiple
thereof at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning April 15, of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------------------- ------------
<S> <C>
2003............................................................................ 104.188%
2004............................................................................ 102.792%
2005............................................................................ 101.396%
</TABLE>
and thereafter at 100.000% of the principal amount, in each case together with
accrued and unpaid interest and Additional Amounts, if any, to the redemption
date (subject to the right of holders of record on relevant record dates to
receive interest due on relevant interest payment dates).
In addition, at any time and from time to time prior to April 15, 2001, the
Company may redeem up to 35% of the aggregate principal amount of the Notes
(calculated giving effect to any issuance of Additional Notes) within 180 days
following one or more Public Equity Offerings with the net proceeds of such
offerings at a redemption price equal to 108.375% of the principal amount
thereof, together with accrued and unpaid interest and Additional Amounts, if
any, to the date of redemption (subject to the right of holders of record on
relevant record dates to receive interest due on relevant interest payment
dates); provided that immediately after giving effect to each such redemption,
at least 65% of the aggregate principal amount of the Notes (as so calculated)
remain outstanding after giving effect to each such redemption.
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SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, in the absence of such requirements or if the Notes are not
so listed, the Trustee shall select the Notes or portions thereof to be redeemed
pro rata, by lot or by any other method the Trustee shall deem fair and
reasonable, provided that no such Notes of $1,000 or less in principal amount
shall be redeemed in part. Notice of redemption shall be mailed by first class
mail at least 30 but not more than 60 days before the redemption date to each
holder of Notes to be redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On and after
the redemption date, interest ceases to accrue on Notes or portions of them
called for redemption. The Company has no current intention to list the Notes on
any national or regional securities exchange.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund or other
mandatory redemption obligation prior to maturity.
SUBORDINATION
The payment of the principal of, premium, if any, and interest on, the Notes
and any Additional Amounts on the Notes pursuant to the Exchange and
Registration Rights Agreement will be subordinated, as set forth in the
Indenture, in right of payment to the prior payment in full of all Senior
Indebtedness (which, by definition, includes existing and future Senior
Indebtedness) in cash or in any other form acceptable to the holders of such
Senior Indebtedness (or such payment shall be duly provided for to the
satisfaction of the holders of the Senior Indebtedness). However, payment from
the money or the proceeds of U.S. Government Obligations (as defined in the
Indenture) held in any defeasance trust described under "--Defeasance or
Covenant Defeasance of Indenture" below is not subordinate to any Senior
Indebtedness or subject to the restrictions described herein. As of March 31,
1998 on a pro forma basis, the Company would have had $162.7 million of Senior
Indebtedness outstanding (excluding unused commitments). Although the Indenture
contains limitations on the amount of additional Indebtedness that the Company
and its Subsidiaries may incur, under certain circumstances, the amount of such
additional Indebtedness could be substantial and, in any case, all or a portion
of such Indebtedness may be Senior Indebtedness and may be secured. See
"--Certain Covenants." The Notes will be senior subordinated Indebtedness of the
Company ranking PARI PASSU in right of payment with all other existing and
future senior subordinated indebtedness of the Company, including the 12 3/4%
Notes, and senior in right of payment to all existing and future Subordinated
Indebtedness of the Company. Each of the Company and the Guarantors have agreed
in the Indenture that it will not, directly or indirectly, incur, or otherwise
permit to exist any Indebtedness that is subordinate in right of payment to any
of its Indebtedness unless such Indebtedness is either PARI PASSU with the Notes
and the Guarantees on the Notes or subordinate in right of payment to the Notes
and the Guarantees on the Notes, as the case may be. Unsecured Indebtedness is
not deemed to be subordinate or junior to secured Indebtedness merely because it
is unsecured, nor is any Indebtedness deemed to be subordinate or junior to
other Indebtedness merely because it matures after such other Indebtedness.
Secured Indebtedness is not deemed to be Senior Indebtedness merely because it
is secured.
During the continuance of any default in the payment of any Senior
Indebtedness beyond any applicable grace period, no payment (other than payments
previously made pursuant to the provisions described under "--Defeasance or
Covenant Defeasance of Indenture") or distribution of any assets of
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the Company of any kind or character shall be made by the Company on account of
principal of premium, if any, interest or Additional Amounts, if any, on, the
Notes or on account of the purchase, redemption, defeasance or other acquisition
of the Notes (other than such payments or distributions as may be agreed to by
the lenders under the Designated Senior Indebtedness in accordance with the
terms of the Designated Senior Indebtedness) unless and until such default shall
have been cured or waived or shall have ceased to exist or the Senior
Indebtedness with respect to which such payment default shall have occurred
shall have been discharged or paid in full in cash or in any other form
acceptable to the holders of such Senior Indebtedness (or such payment shall be
duly provided for to the satisfaction of the holders of such Senior
Indebtedness), after which the Company shall resume making any and all required
payments in respect of the Notes, including any missed payments.
During the continuance of any non-payment event of default with respect to
any Designated Senior Indebtedness (as such event of default is defined in the
instrument creating or evidencing such Designated Senior Indebtedness) pursuant
to which the maturity thereof may be accelerated (a "Non-payment Default") and
after receipt by the Trustee and the Company from a representative of the
holders of such Designated Senior Indebtedness of written notice of such event
of default, no payment (other than payments previously made pursuant to the
provisions described under "--Defeasance or Covenant Defeasance of Indenture")
or distribution of any assets of the Company of any kind or character (other
than such payments or distributions as may be agreed to by the holders of such
Designated Senior Indebtedness in accordance with the terms of the agreement
governing such Designated Senior Indebtedness and, only to the extent acceptable
to holders of the Notes, payment (i) in Qualified Capital Stock issued by the
Company to pay interest on the Notes or issued in exchange for the Notes, (ii)
in securities substantially identical to the Notes issued by the Company in
payment of interest accrued thereon or (iii) in securities issued by the Company
which are subordinated to the Senior Indebtedness at least to the same extent as
the Notes and do not provide for the payment of principal or mandatory
redemption or repurchase prior to the final maturity of such Designated Senior
Indebtedness) shall be made by the Company on account of any principal of,
premium, if any, interest or Additional Amounts, if any, on the Notes or on
account of the purchase, redemption, defeasance or other acquisition of the
Notes for the period specified below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Trustee from a Representative of the holders of any
Designated Senior Indebtedness and shall end on the earliest of (i) the first
date on which 179 days shall have elapsed since the receipt of such written
notice, (ii) the date on which such Non-payment Default is cured, waived or
ceases to exist or on which such Designated Senior Indebtedness is discharged or
paid in full in cash or in any other manner acceptable to the holders of
Designated Senior Indebtedness (as determined in accordance with the terms of
the agreement governing such Designated Senior Indebtedness) (or the date on
which payment shall be duly provided for to the satisfaction of the holders of
such Designated Senior Indebtedness) or (iii) the date on which such Payment
Blockage Period shall have been terminated by written notice to the Company or
the Trustee from the Representative of, or the holders of at least a majority in
principal amount of, the Designated Senior Indebtedness initiating such Payment
Blockage Period, after which, in the case of clause (i), (ii) and (iii), the
Company shall resume making any and all required payments in respect of the
Notes, including any missed payments. In no event will a Payment Blockage Period
extend beyond 179 days from the date of the receipt by the Company or the
Trustee of the notice initiating such Payment Blockage Period (such 179-day
period referred to as the "Initial Period"). Any number of notices of
Non-payment Defaults may be given during the Initial Period; provided that
during any 365 consecutive day period, only one such period during which payment
of principal of, or interest or Additional Amounts, if any, on, the Notes may
not be made may be commenced, and the duration of such period may not exceed 179
days. No Non-payment Default with respect to Designated Senior Indebtedness
which existed or was continuing on the date of the commencement of any Payment
Blockage Period will be, or can be, made the basis for the commencement of a
second Payment
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Blockage Period, whether or not within a period of 365 consecutive days, unless
such event of default has been cured or waived for a period of not less than 90
consecutive days.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the subordination
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "--Events of Default."
The Indenture provides that, in the event of any insolvency, bankruptcy or
reorganization case or proceeding, or any receivership, liquidation, or other
similar case or proceeding, relative to the Company, or to its assets, or any
liquidation, dissolution or other winding up of the Company, whether voluntary
or involuntary, or any assignment for the benefit of creditors or any other
marshalling of assets or liabilities of the Company, all Senior Indebtedness
must be paid in full in cash or in any other form acceptable to the holders of
Senior Indebtedness (or such payment must be duly provided for to the
satisfaction of the holders of Senior Indebtedness), before any payment or
distribution is made on account of the principal of, premium, if any, interest
or Additional Amounts, if any, on the Notes. If a distribution is made to the
Trustee or to holders of the Notes that, due to the subordination provisions of
the Notes, should not have been made to them, the Trustee or such holders are
required to hold the distribution in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and funds which would be otherwise
payable to the holders of the Notes will be paid to the holders of the Senior
Indebtedness to the extent necessary to pay the Senior Indebtedness in full in
cash or in any other form acceptable to the holders of Senior Indebtedness, and
the Company may be unable to meet its obligations fully with respect to the
Notes. In addition, any other senior subordinated indebtedness (including any
12 3/4% Notes) that was outstanding at the time of any such liquidation or
insolvency of the Company would be PARI PASSU in right of payment with the
Notes. Therefore, any assets of the Company that remained available after
payment in full of (or satisfactory provision of payment for) the Senior
Indebtedness would be required to satisfy obligations under the Notes and any
other existing senior subordinated indebtedness (including any outstanding
12 3/4% Notes) on a PARI PASSU basis, which could reduce assets available to pay
the Company's obligations under the Notes in full.
In addition, the Indenture does not prohibit the transfer or contribution of
assets of the Company to its Restricted Subsidiaries. In the event of any such
transfer or contribution, holders of the Notes will be effectively subordinated
to the claims of creditors of such Restricted Subsidiaries with respect to such
assets.
"Senior Indebtedness" means the principal of, premium, if any, interest
(including interest accruing after the filing of a petition initiating any
proceeding under any state, federal or foreign bankruptcy law whether or not
allowable as a claim in such proceeding) and all obligations of every nature of
the Company from time to time owed under any Indebtedness of the Company (except
as otherwise provided in this definition), whether outstanding on the Issue Date
or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Indebtedness" shall include
the principal of (and premium, if any) and interest (including interest accruing
after the filing of a petition initiating any proceeding under any state,
federal or foreign bankruptcy laws whether or not allowable as a claim in such
proceeding) and all other obligations of every nature of the Company from time
to time owed under the Credit Facilities (including, without limitation, agency
fees, commitment fees and letter of credit fees); provided, however, that any
Indebtedness under any refinancing, refunding or replacement of the Credit
Facilities shall not constitute Senior
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Indebtedness to the extent that the Indebtedness thereunder is by its express
terms subordinate to any other Indebtedness of the Company. Notwithstanding the
foregoing, "Senior Indebtedness" shall not include any of the following (whether
or not constituting Indebtedness under the Indenture): (i) Indebtedness
evidenced by the Notes or the 12 3/4% Notes, (ii) Indebtedness that, by its
express terms, is subordinate or junior in right of payment to any Indebtedness
of the Company, (iii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Bankruptcy Code of
1978, as amended, is without recourse to the Company, (iv) Indebtedness which is
represented by Redeemable Capital Stock, (v) any liability for foreign, federal,
state, local or other taxes owed or owing by the Company, (vi) Indebtedness of
the Company to a Subsidiary, and (vii) any trade payables.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness under the
Credit Facilities; and (ii) any other Senior Indebtedness which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend, at
least $75.0 million, and which is specifically designated by the Company in the
agreement governing or the instrument evidencing such Senior Indebtedness as
"Designated Senior Indebtedness."
GUARANTEES
Payment of the Notes will be fully and unconditionally guaranteed initially
by United, Lagasse, Azerty, Positive ID and AP Support Services, on an unsecured
senior subordinated basis and will be guaranteed on an unsecured senior
subordinated basis by any domestic Restricted Subsidiary of the Company created
or acquired after the Issue Date which incurs any Indebtedness, other than any
Securitization Subsidiary that has entered into or established a Permitted
Receivables Securitization Program. See the "Limitation of Issuances of
Guarantees of Indebtedness" covenant below. On or after the Issue Date, the
Company will cause each Subsidiary which is required to deliver a Guarantee of
the Notes to execute and deliver to the Trustee a supplemental indenture
pursuant to which such Subsidiary will guarantee payment of the Notes.
United is a holding company with no significant assets, liabilities or
operations other than the capital stock of the Company. See "Risk
Factors--Limited Practical Value of Guarantee by United."
Each Guarantee of the Notes will be an unsecured senior subordinated
obligation of the Guarantor, ranking pari passu with, or senior in right of
payment to, all other existing and future indebtedness of such Guarantor that is
expressly subordinated to Senior Guarantor Indebtedness of such Guarantor. The
Indebtedness of any Guarantor evidenced by its Guarantee will be subordinated to
Senior Guarantor Indebtedness of such Guarantor to the same extent as the Notes
are subordinated to Senior Indebtedness, and during any period when payment on
the Notes is prohibited pursuant to the subordination provisions of the
Indenture, payment on any Guarantee will be similarly prohibited.
"Senior Guarantor Indebtedness" means, with respect to any Guarantor, the
principal of, premium, if any, and interest (including interest accruing after
the filing of a petition initiating any proceeding under any state, federal or
foreign bankruptcy laws whether or not allowable as a claim in such proceeding)
and all obligations of every nature of such Guarantor from time to time owed
under any Indebtedness of such Guarantor (except as otherwise provided in this
definition), whether outstanding on the Issue Date or thereafter created,
incurred or assumed, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to such Guarantor's Guarantee of the Notes. Without limiting
the generality of the foregoing, "Senior Guarantor Indebtedness" shall include
the principal of (and premium, if any) and interest (including interest accruing
after the filing of a petition initiating any proceeding under any state,
federal or foreign bankruptcy laws whether or not allowable as a claim in such
proceeding) and all other obligations of every nature of any Guarantor from time
to time owed under the Credit Facilities; provided, however, that any
Indebtedness under any refinancing, refunding or replacement of the Credit
Facilities shall not constitute Senior Guarantor
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Indebtedness to the extent that the Indebtedness thereunder is by its express
terms subordinate to any other Indebtedness of any Guarantor. Each Guarantor
will grant a security interest in all or substantially all of its assets to
secure its obligations under the Credit Facilities. Notwithstanding the
foregoing, "Senior Guarantor Indebtedness" shall not include any of the
following (whether or not constituting Indebtedness under the Indenture): (i)
Indebtedness evidenced by the Guarantees of the Notes or guarantees of the
12 3/4% Notes, (ii) Indebtedness that, by its express terms, is subordinate or
junior in right of payment to any Indebtedness of any Guarantor, (iii)
Indebtedness which when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Bankruptcy Code of 1978, as amended,
is without recourse to any Guarantor, (iv) Indebtedness which is represented by
Redeemable Capital Stock, (v) any liability for foreign, federal, state, local
or other taxes owed or owing by any Guarantor, (vi) Indebtedness of any
Guarantor to a Subsidiary and (vii) any trade payables.
"Designated Senior Guarantor Indebtedness" means (i) all Senior Guarantor
Indebtedness under the Credit Facilities; and (ii) any other Senior Guarantor
Indebtedness outstanding in a principal amount of at least $75.0 million, and
which is specifically designated by the Guarantor in the agreement governing or
the instrument evidencing such Senior Guarantor Indebtedness as "Designated
Senior Guarantor Indebtedness."
Each Guarantor shall not, and (except in the case of United) the Company
will not permit any Guarantor to, in a single transaction or through a series of
related transactions, merge or consolidate with or into any other corporation
(other than the Company or any Restricted Wholly Owned Subsidiary) or other
entity, sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of such Guarantor's properties and assets on a Consolidated
basis to any entity (other than the Company or any Restricted Wholly Owned
Subsidiary) unless at the time and after giving effect thereto: (i) either (1)
such Guarantor shall be the continuing corporation, partnership or other legal
entity or (2) the entity (if other than such Guarantor) formed by such
consolidation or into which such Guarantor is merged or the entity which
acquires by sale, assignment, conveyance, transfer, lease or disposition the
properties and assets of such Guarantor shall be a corporation, partnership or
other legal entity duly organized and validly existing under the laws of the
United States, any state thereof or the District of Columbia and shall expressly
assume by a supplemental indenture, executed and delivered to the Trustee, all
the obligations of such Guarantor under its Guarantee of the Notes and the
Indenture; (ii) immediately before and immediately after giving effect to such
transaction or transactions, no Default shall have occurred and be continuing;
and (iii) such Guarantor shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel in form and substance reasonably
satisfactory to the Trustee, each stating that such consolidation, merger, sale,
assignment, conveyance, transfer, lease or disposition and such supplemental
indenture comply with the Indenture, and thereafter all obligations of the
predecessor shall terminate; provided that the foregoing shall not apply to any
Guarantor (other than United) if (A) immediately after such merger,
consolidation, sale, assignment, conveyance, transfer, lease or other
disposition, the Person surviving such merger or consolidation or the assignee,
conveyee, transferee, lessee or recipient of such other disposition is not a
Subsidiary and (B) the "Limitation on Sale of Assets" covenant of the Indenture
is complied with in connection with such transaction.
In the event of any transaction described in and complying with the
conditions listed in the immediately preceding paragraph in which any Guarantor
is not the continuing corporation, the successor Person formed or remaining, if
it has so assumed the obligations of such Guarantor under the Notes, shall
succeed to, and be substituted for, and may exercise every right and power of,
and shall succeed to the obligations of, such Guarantor and the Guarantor will
be discharged from all obligations and covenants under the Indenture and its
Guarantee. However, in the event that all or substantially all of the assets of
any Guarantor or all of the Capital Stock in any Guarantor are sold (including
through merger, consolidation, by issuance or otherwise) by the Company or a
Restricted Subsidiary in a transaction constituting an Asset Sale and the Net
Cash Proceeds from such Asset Sale are used in accordance with the provisions of
the Indenture, then such Guarantor (in the event of a sale or other disposition
of all of the Capital Stock of such Guarantor) or the Person acquiring the
assets (in the event of a sale or other
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disposition of all or substantially all of the assets of such Guarantor) shall
be released and discharged from its Guarantee obligations in respect of the
Indenture and the Notes.
Any Guarantor that is designated an Unrestricted Subsidiary shall upon such
designation be released and discharged from its Guarantee obligations in respect
of the Indenture and the Notes and any domestic Unrestricted Subsidiary that is
designated as a Restricted Subsidiary shall upon such designation be required to
become a Guarantor.
CERTAIN COVENANTS
The Indenture contains, among others, the covenants described below.
LIMITATION ON INDEBTEDNESS. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, create, issue, assume, incur, guarantee,
or otherwise in any manner become directly or indirectly liable for
(collectively, "incur") any Indebtedness (including any Acquired Indebtedness);
provided that the Company may incur Indebtedness (including any Acquired
Indebtedness) (A) if the Consolidated Fixed Charge Coverage Ratio of the Company
for the four full fiscal quarters immediately preceding the incurrence of such
Indebtedness (and for which such financial information is available) taken as
one period is at least equal to 2.00:1.00 and (B) if such Indebtedness is
Subordinated Indebtedness, such Indebtedness shall have an Average Life to
Stated Maturity longer than the Average Life to Stated Maturity of the Notes and
a final Stated Maturity of principal later than the final Stated Maturity of
principal of the Notes.
(b) The foregoing limitation will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company incurred pursuant to the Credit Facilities and
any other agreements or indentures governing Senior Indebtedness
outstanding at any time in an aggregate principal amount not to exceed the
greater of (x) the sum of (I) $500.0 million and (II) if and when the
Receivables Securitization Program is terminated and the Company and its
Subsidiaries have no obligation to sell Receivables and Related Assets to
any unaffiliated third party, $175.0 million less the Program Funded
Amount at such time, and (y) $150.0 million plus the Borrowing Base;
(ii) subject to the "Limitation on Guarantees of Indebtedness" covenant,
Guarantees by Restricted Subsidiaries of Senior Indebtedness of the
Company; provided that such Indebtedness of the Company is incurred in
compliance with the provisions of the Indenture;
(iii) Indebtedness of the Company pursuant to the Notes issued on the Issue
Date and the Exchange Notes and Indebtedness of any Guarantor pursuant to
its Guarantee of the Notes and the Exchange Notes;
(iv) Indebtedness of the Company and its Restricted Subsidiaries (other than
Indebtedness described in clauses (i), (ii) and (iii) above) outstanding
on the Issue Date;
(v) Indebtedness of the Company owing to a Restricted Wholly Owned Subsidiary,
provided that any such Indebtedness (x) is made pursuant to an intercompany
note in the form attached to the Indenture and (y) is subordinated in right
of payment to the prior payment and performance of the Company's
obligations under the Notes, if applicable; provided further that (A) any
disposition, pledge or transfer of any such Indebtedness to a Person (other
than a disposition, pledge or transfer to a Restricted Wholly Owned
Subsidiary or a pledge to or for the benefit of any holder of Senior
Indebtedness) or (B) any transaction pursuant to which such Restricted
Wholly Owned Subsidiary ceases to be a Restricted Wholly Owned Subsidiary
shall be deemed to be an incurrence of such Indebtedness by the Company not
permitted by this clause (v);
(vi) Indebtedness of a Restricted Wholly Owned Subsidiary owing to the Company
or to a Restricted Wholly Owned Subsidiary; provided that, with respect to
Indebtedness owing to any Restricted Wholly Owned Subsidiary, (x) any such
Indebtedness is made pursuant to an intercompany note in the form attached
to the Indenture and (y) any such Indebtedness shall be subordinated in
right of
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payment to the payment and performance of such Subsidiary's obligations
under its Guarantee of the Notes, if applicable; provided further that (A)
any disposition, pledge or transfer of any such Indebtedness to a Person
(other than a disposition, pledge or transfer to the Company or a
Restricted Wholly Owned Subsidiary or a pledge to or for the benefit of
any holder of Senior Indebtedness) and (B) any transaction pursuant to
which any Restricted Wholly Owned Subsidiary, which has Indebtedness owing
to the Company or any other Restricted Wholly Owned Subsidiary, ceases to
be a Restricted Wholly Owned Subsidiary shall be deemed to be an
incurrence of Indebtedness by the obligor that is not permitted by this
clause (vi);
(vii) any renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness
described in clause (iv) of this paragraph (b) (including any successive
refinancings), so long as the aggregate principal amount of Indebtedness
represented thereby is not increased by such refinancing, except by an
amount equal to the lesser of (x) the stated amount of any premium,
interest or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Indebtedness being refinanced or
(y) the amount of premium, interest or other payment actually paid at
such time to refinance the Indebtedness, plus, in either case, the amount
of expenses incurred in connection with such refinancing; provided that
in the case of Pari Passu Indebtedness or Subordinated Indebtedness, (A)
such new Indebtedness does not have a shorter Average Life to Stated
Maturity or a final Stated Maturity of principal earlier than the
Indebtedness being refinanced, (B) in the case of Pari Passu
Indebtedness, such new Indebtedness is pari passu with, or subordinated
to, the Notes and (C) in the case of Subordinated Indebtedness, such new
Indebtedness is subordinated to the Notes at least to the same extent as
the Indebtedness being refinanced; and provided further that in no event
may Indebtedness of the Company be refinanced with Indebtedness of any
Restricted Subsidiary pursuant to this clause (vii);
(viii) Indebtedness of the Company or any Restricted Subsidiary consisting of
Capitalized Lease Obligations, mortgage financings or purchase money
obligations in an aggregate principal amount at any time outstanding not
in excess of $50.0 million;
(ix) Indebtedness of the Company or any Restricted Subsidiary (A) in respect of
judgment, appeal, surety, performance and other like bonds, bankers'
acceptances and letters of credit provided by the Company or any
Restricted Subsidiary in the ordinary course of its business and which do
not secure other Indebtedness and (B) consisting of bona fide Interest
Rate Agreements or currency swap agreements designed to protect the
Company and/or its Restricted Subsidiaries from, or control the exposure
of the Company and/or its Restricted Subsidiaries to, fluctuations in
interest rates or foreign currency fluctuations in respect of
Indebtedness;
(x) Indebtedness of the Company or any Restricted Subsidiary consisting of
guarantees, indemnities or obligations in respect of customary closing
purchase price or similar adjustments, in connection with the acquisition
or disposition of any business, assets or Subsidiary of the Company
permitted under the Indenture;
(xi) Indebtedness of the Company and its Restricted Subsidiaries, to the extent
the proceeds thereof are immediately used after the incurrence thereof to
purchase Notes tendered in an offer to purchase made as a result of a
Change of Control;
(xii) Indebtedness of a Securitization Subsidiary incurred in connection with a
Permitted Receivables Securitization Program; and
(xiii) Indebtedness of the Company or any Restricted Subsidiary in an aggregate
principal amount at any time outstanding not in excess of $25.0 million.
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LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders of,
any shares of its Capital Stock (other than dividends or distributions
payable solely in shares of its Qualified Capital Stock or in options,
warrants or other rights to acquire such Qualified Capital Stock and other
than dividends and distributions paid to the Company or another Restricted
Subsidiary (and, if such Restricted Subsidiary has shareholders other than
the Company or other Restricted Subsidiaries, to its other shareholders on
a pro rata basis or on a basis that results in the receipt by the Company
or a Restricted Subsidiary of dividends or distributions of equal or
greater value));
(ii) purchase, redeem or otherwise acquire or retire for value, directly or
indirectly, any shares of the Capital Stock of United, the Company or any
Restricted Subsidiary (other than any Restricted Wholly Owned Subsidiary)
or options, warrants or other rights to acquire such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease, retire or
otherwise acquire for value, prior to the relevant scheduled principal
payment, sinking fund or maturity, any Subordinated Indebtedness; or
(iv) make any Investment in any Person, including, without limitation, any
Unrestricted Subsidiary (other than any Permitted Investments)
(the foregoing actions described in clauses (i) through (iv), collectively,
"Restricted Payments") unless at the time the Company or such Restricted
Subsidiary makes such Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined in good faith by the Board of
Directors of the Company, such determination to be conclusive and evidenced by a
Board Resolution), (A) no Default shall have occurred and be continuing (or
would result therefrom); (B) the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the "Limitation on
Indebtedness" covenant; and (C) the aggregate amount of all such Restricted
Payments declared or made after the Issue Date (including such Restricted
Payment) does not exceed the sum of:
(I) 50% of the aggregate cumulative Consolidated Net Income (or, if such
aggregate cumulative Consolidated Net Income shall be a loss, minus 100%
of such loss) of the Company accrued on a cumulative basis during the
period (taken as one accounting period) beginning on January 1, 1998 and
ending on the last day of the Company's last fiscal quarter ending prior
to the date of the Restricted Payment for which such financial
information is available;
(II) the aggregate Net Cash Proceeds received after the Issue Date by
the Company from the issuance or sale (other than to any of its
Subsidiaries) of its shares of Qualified Capital Stock or any options,
warrants or rights to purchase such shares of Qualified Capital Stock
(less the value of any equity security referred to (and determined in
accordance with) the parenthetical in clause (a)(i) of the definition of
Consolidated Interest Expense);
(III) the aggregate Net Cash Proceeds received after the Issue Date by
the Company (other than from any of its Subsidiaries) upon the exercise
of any options, warrants or rights to purchase shares of Qualified
Capital Stock of the Company;
(IV) the aggregate Net Cash Proceeds received after the Issue Date by
the Company from Indebtedness of the Company or Redeemable Capital Stock
of the Company that has been converted into or exchanged for Qualified
Capital Stock of the Company (or options, warrants or rights to purchase
such Qualified Capital Stock), to the extent such Indebtedness of the
Company or Redeemable Capital Stock of the Company was originally
incurred or issued for cash, plus the aggregate Net Cash Proceeds
received by the Company at the time of such conversion or exchange;
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(V) without duplication of any of the foregoing, 100% of the aggregate
Net Cash Proceeds received by the Company as a capital contribution from
United; and
(VI) to the extent not included in Consolidated Net Income, the net
reduction (received by the Company or any Restricted Subsidiary in cash)
in Investments (other than Permitted Investments) (A) made by the
Company and the Restricted Subsidiaries since the Issue Date, and (B) as
a result of the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, not to exceed the amount of Investments (other
than Permitted Investments) made by the Company and the Restricted
Subsidiaries in such Person or in such Unrestricted Subsidiary since the
Issue Date.
(b) Notwithstanding the foregoing, and in the case of clauses (ii), (iii),
(iv), (v), (vi), (vii), (viii) and (ix) below, so long as there is no Default
continuing, the foregoing provisions shall not prohibit the following actions:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would
be permitted by the provisions of paragraph (a) of this "Limitation on
Restricted Payments" covenant (such payment shall be deemed to have been
paid on such date of declaration for purposes of the calculation
required by paragraph (a) of this "Limitation on Restricted Payments"
covenant);
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or United or
warrants, options or other rights to acquire such stock (x) in exchange
for, or out of the Net Cash Proceeds of a substantially concurrent issue
and sale (other than to United or a Subsidiary) for cash of, any
Qualified Capital Stock of the Company or warrants, options or other
rights to acquire such stock or (y) in the case of Redeemable Capital
Stock, solely in exchange for, or through the application of the net
proceeds of a substantially concurrent sale for cash (other than to
United or a Subsidiary) of, Redeemable Capital Stock that has a
redemption date no earlier than, and requires the payment of current
dividends or distributions in cash no earlier than, in each case, the
Redeemable Capital Stock being purchased, redeemed or otherwise acquired
or retired;
(iii) any repurchase, redemption, defeasance, retirement, refinancing or
acquisition for value or payment of principal of any Subordinated
Indebtedness in exchange for, or out of the net proceeds of a
substantially concurrent issuance and sale (other than to United or a
Subsidiary) for cash of, any Qualified Capital Stock of the Company or
United or warrants, options or other rights to acquire such stock or for
shares of Redeemable Capital Stock that have a redemption date no
earlier than, and require the payment of current dividends or
distributions in cash no earlier than, in each case, the maturity date
and interest payment dates, respectively, of the Indebtedness being
repurchased, redeemed, defeased, retired, refinanced or acquired;
(iv) the repurchase, redemption, defeasance, retirement or other
acquisition for value or payment of principal of any Subordinated
Indebtedness through the issuance of Indebtedness meeting the
requirements of clause (vii) of paragraph (b) of the "Limitation on
Indebtedness" covenant;
(v) the repurchase, redemption, acquisition or retirement of shares of
Capital Stock of United or options, warrants or other rights to purchase
such shares held by officers or employees or former officers or
employees of United and the Subsidiaries (or their estates or
beneficiaries), upon death, disability, retirement or termination of
employment, pursuant to the terms of any employee stock option or stock
purchase plan or agreement under which such shares were acquired;
provided that the aggregate consideration paid for all such shares
following the Issue Date does not exceed $2.5 million in any fiscal year
of the Company; and provided further that the amount by which $2.5
million exceeds the amount so used in any fiscal year of the
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Company shall be available to be so used in subsequent fiscal years of
the Company, notwithstanding the immediately preceding proviso;
(vi) payments to United, to the extent used by United to (x) pay its
operating and administrative expenses including, without limitation,
directors' fees, legal and audit expenses, Commission compliance
expenses and corporate franchise and other taxes, not to exceed $2.5
million in any fiscal year of the Company, (y) make payments in respect
to its indemnification obligations owing to directors, officers or other
Persons under United's Charter or by-laws or pursuant to written
agreements with any such Person or (z) make payments in respect of
indemnification obligations and costs and expenses incurred by United in
connection with any offering of common stock of United;
(vii) payments to United, not to exceed $5.0 million in the aggregate
after the Issue Date, to the extent used by United to make cash payments
to holders of its Capital Stock in lieu of the issuance of fractional
shares of Capital Stock and to redeem or repurchase stock purchase or
similar rights issued as a shareholder rights device and repurchases of
shares from holders of Common Stock who hold less than 100 shares in
each instance;
(viii) upon the occurrence of a Change of Control or an Asset Sale and
within 60 days after the completion of the offer to repurchase the Notes
pursuant to the "Purchase of Notes upon a Change of Control" covenant or
the "Limitation on Asset Sales" covenant below (including the purchase
of all Notes tendered), any purchase, defeasance, retirement, redemption
or other acquisition of Subordinated Indebtedness required pursuant to
the terms thereof as a result of such Change of Control or Asset Sale;
(ix) advances to employees, agents and consultants for expenses incurred
or to be incurred in the ordinary course of business consistent with
past practice; and
(x) other Restricted Payments in an aggregate amount since the Issue
Date not to exceed $25.0 million.
The actions described in clauses (i) through (iii) and clauses (v), (viii) and
(x) of this paragraph (b) shall be Restricted Payments that shall be permitted
to be taken in accordance with this paragraph (b) but shall reduce the amount
that would otherwise be available for Restricted Payments under clause (C) of
paragraph (a) of this "Limitation on Restricted Payments" covenant (provided
that any dividend paid pursuant to clause (i) of this paragraph (b) shall reduce
the amount that would otherwise be available under clause (C) of paragraph (a)
of this "Limitation on Restricted Payments" covenant when declared, but not also
when paid pursuant to such clause (i)) and the actions described in clauses
(iv), (vi), (vii) and (ix) of this paragraph (b) shall be permitted to be taken
in accordance with this paragraph and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (C) of paragraph
(a).
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or suffer to exist any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of assets
or property or the rendering of any services) with any Affiliate of the Company
unless (i) such transaction or series of transactions is in writing on terms
that are no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than would be available in a comparable transaction in arm's-length
dealings with an unrelated third party, (ii) with respect to any such
transaction or series of transactions involving aggregate payments in excess of
$10.0 million, the Company delivers an officers' certificate to the Trustee
certifying that such transaction or series of related transactions complies with
clause (i) above and such transaction or series of related transactions has been
approved by the Board of Directors, and (iii) with respect to a transaction or
series of related transactions involving aggregate value in excess of $25.0
million, the Company delivers to the Trustee an opinion of an independent
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investment banking firm of national standing stating that the transaction or
series of transactions is fair to the Company or such Restricted Subsidiary from
a financial point of view.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment or Permitted Investment permitted to be made pursuant to the
"Limitation on Restricted Payments" covenant, (ii) fees, compensation or
employee benefit arrangements paid to, and any indemnity provided for the
benefit of, directors, officers, employees, consultants or agents in the
ordinary course of business or any Indebtedness permitted to be incurred
pursuant to clause (xiii) of paragraph (b) of the covenant described under
"Limitation on Indebtedness," or any payments in respect thereof, (iii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iv)
transactions pursuant to agreements entered into or in effect on the Issue Date,
including amendments thereto entered into after the Issue Date, provided that
the terms of any such amendment are not, in the aggregate, less favorable to the
Company or such Restricted Subsidiary than the terms of such agreement prior to
such amendment, (v) advances to employees, agents and consultants for moving,
entertainment and travel expenses, drawing accounts and similar expenditures in
the ordinary course of business and consistent with past practices, (vi) any
transaction between or among United, the Company and/or one or more Restricted
Subsidiaries (so long as the other stockholders of any participating Restricted
Subsidiaries which are not Wholly Owned Subsidiaries are not themselves
Affiliates of the Company), or (vii) the entering into by the Company, United
and one or more of its Restricted Subsidiaries of a tax sharing agreement or
similar arrangement.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS. The Company and each
Guarantor will not, directly or indirectly, incur or otherwise permit to exist
any Indebtedness that is subordinate in right of payment to any Indebtedness of
the Company or such Guarantor, as the case may be, unless such Indebtedness is
also PARI PASSU with the Notes or the Guarantee of the Notes by such Guarantor,
as the case may be, or subordinate in right of payment to the Notes or such
Guarantee of the Notes, as the case may be, to at least the same extent as the
Notes or such Guarantee are subordinate in right of payment to Senior
Indebtedness or Senior Guarantor Indebtedness, as the case may be, as set forth
in the Indenture.
LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, incur, assume or suffer to
exist any Lien of any kind upon any of its property or assets (including any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary), owned on
the Issue Date or acquired after the Issue Date, or any income or profits
therefrom, except if the Notes (or the Guarantee of the Notes, in the case of
Liens on properties or assets of a Restricted Subsidiary that is a Guarantor)
and all other amounts due under the Indenture are directly secured equally and
ratably with (or prior to in the case of Liens with respect to Subordinated
Indebtedness) the obligation or liability secured by such Lien, excluding,
however, from the operation of the foregoing any of the following:
(a) any Lien existing or provided for under written arrangements
existing as of the Issue Date;
(b) any Lien arising by reason of (i) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of
such judgment, decree or order shall not have been finally terminated or
the period within which such proceedings may be initiated shall not have
expired; (ii) taxes, assessments or other governmental charges not yet
delinquent or which are being contested in good faith; (iii) security
for payment of workers' compensation or other insurance; (iv) good faith
deposits in connection with tenders, leases or contracts (other than
contracts for the payment of money); (v) zoning restrictions, easements,
licenses, reservations, provisions, covenants, conditions, waivers,
restrictions on the use of property or minor irregularities of title
(and with respect to leasehold interests, mortgages, obligations, liens
and other encumbrances incurred, created, assumed or permitted to exist
and arising by, through or under a
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landlord or owner of the leased property, with or without consent of the
lessee), none of which materially impairs the use of any property or
assets material to the operation of the business of the Company or any
Restricted Subsidiary or the value of such property or assets for the
purpose of such business; (vi) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds with respect to
matters not yet finally determined and being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection
thereof; or (vii) operation of law in favor of mechanics, materialmen,
laborers, employees or suppliers, incurred in the ordinary course of
business for sums which are not yet delinquent or are being contested in
good faith by negotiations or by appropriate proceedings which suspend
the collection thereof;
(c) any Lien now or hereafter existing on property of the Company or any
Guarantor securing Senior Indebtedness or Senior Guarantor Indebtedness,
as the case may be, of such Person;
(d) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of
such Indebtedness by the Company, which Indebtedness is permitted under
the "Limitation on Indebtedness" covenant; provided that any such Lien
only extends to the assets that were subject to such Lien securing such
Acquired Indebtedness prior to the related acquisition;
(e) any Lien now or hereafter existing on Receivables and Related Assets
in connection with a Permitted Receivables Securitization Program;
(f) any Lien on property, assets or shares of Capital Stock of a Person
at the time such Person becomes a Subsidiary; provided, however, such
Lien is not created, incurred or assumed by such Person in connection
with, or in contemplation of, such other Person becoming such a
Subsidiary; provided further, however, that such Lien may not extend to
any other property owned by the Company or any Restricted Subsidiary;
(g) any Lien on property or assets at the time the Company or a
Restricted Subsidiary acquired the property or assets, including any
acquisition by means of a merger or consolidation with or into the
Company or a Restricted Subsidiary; provided, however, that such Lien is
not created in connection with, or in contemplation of, such
acquisition; provided further, however, that the Lien may not extend to
any other property owned by the Company or any Restricted Subsidiary;
(h) Liens related to Capitalized Lease Obligations, mortgage financings
or purchase money obligations (including refinancings thereof), in each
case incurred in accordance with the "Limitation on Indebtedness"
covenant and for the purpose of financing all or any part of the
purchase price or costs of construction or improvement of property,
plant or equipment used in the business of the Company or any Restricted
Subsidiary, provided that any such Lien encumbers only the asset or
assets so financed, purchased, constructed or improved;
(i) any Lien on Capital Stock or other securities of an Unrestricted
Subsidiary; and
(j) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (i) so
long as the amount of property or assets subject to such Lien is not
increased to any amount greater than the sum of (i) the outstanding
principal amount or, if greater, committed amount of the Indebtedness
described under such clauses (a) through (i) at the time the original
Lien became a Lien permitted hereunder and (ii) an amount necessary to
pay any fees and expenses, including premiums, related to such
extension, renewal, refinancing or replacement.
LIMITATION ON SALE OF ASSETS. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, consummate an
Asset Sale unless (i) at least 75% of the proceeds from such Asset Sale are
received in cash and (ii) the Company or such Restricted Subsidiary receives
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consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the shares or assets sold.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale is not
applied to repay permanently any Senior Indebtedness or Senior Guarantor
Indebtedness then outstanding as required by the terms thereof, and the Company
determines not to apply such Net Cash Proceeds to the prepayment of such Senior
Indebtedness or Senior Guarantor Indebtedness or if no such Senior Indebtedness
or Senior Guarantor Indebtedness is then outstanding, then the Company may,
within 12 months of the Asset Sale, invest (or enter into a written, legally
binding commitment to invest, provided that the investment provided for in such
commitment is actually made within 24 months of the Asset Sale) the Net Cash
Proceeds in other properties and assets that will be used in the businesses of
the Company and its Restricted Subsidiaries or in any company having such
properties and assets. The amount of such Net Cash Proceeds neither used to
permanently repay or prepay Senior Indebtedness or Senior Guarantor Indebtedness
nor used or invested as set forth in this paragraph (b) constitutes "Excess
Proceeds."
(c) When the aggregate amount of Excess Proceeds equals $10.0 million or
more, the Company shall, within 15 Business Days in accordance with the
procedures set forth in the Indenture: (i) make an offer (an "Offer") to
purchase, for cash, at 100% of the principal amount thereof, plus accrued and
unpaid interest to the repurchase date (the "Repurchase Date"), the maximum
principal amount (expressed as a multiple of $1,000) of Notes that may be
purchased out of an amount (the "Note Amount") equal to the product of such
Excess Proceeds multiplied by a fraction, the numerator of which is the
outstanding principal amount of the Notes, and the denominator of which is the
sum of the outstanding principal amount of the Notes and any Pari Passu
Indebtedness that is required to be repurchased under the instrument governing
such Pari Passu Indebtedness and (ii) to the extent required by such Pari Passu
Indebtedness, the Company shall make an offer to purchase or, if required by the
terms of such Pari Passu Indebtedness, otherwise repurchase or redeem Pari Passu
Indebtedness (a "Pari Passu Repayment") in an amount (the "Pari Passu Debt
Amount") equal to the excess of the Excess Proceeds over the Note Amount;
provided that in no event shall the Pari Passu Debt Amount exceed the principal
amount of such Pari Passu Indebtedness plus the amount of any premium, if any,
and accrued and unpaid interest required to be paid to repurchase such Pari
Passu Indebtedness. To the extent that the aggregate principal amount of and
accrued but unpaid interest with respect to the Notes tendered pursuant to the
Offer is less than the Note Amount relating thereto or the aggregate amount of
Pari Passu Indebtedness that is purchased is less than the Pari Passu Debt
Amount, the Company may use such amounts not necessary to purchase the tendered
Notes and the Pari Passu Indebtedness required to be purchased for any purpose
not prohibited by the Indenture. Upon completion of the purchase of all the
Notes tendered pursuant to an Offer and the purchase of the Pari Passu
Indebtedness pursuant to a Pari Passu Repayment, the amount of Excess Proceeds,
if any, shall be reset at zero.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations in connection with an Offer.
LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. (a) The Company will
not permit any Restricted Subsidiary to incur any Guaranteed Debt, other than
Guaranteed Debt in respect of Senior Indebtedness of the Company; provided that,
concurrently with the incurrence of such Guaranteed Debt by any Restricted
Subsidiary, the Restricted Subsidiary incurring such Guaranteed Debt (if it is
not a Guarantor) shall execute a supplemental indenture setting forth such
Restricted Subsidiary's senior subordinated guarantee of the Notes, such
guarantee to be on the same terms as United's Guarantee of the Notes. Neither
the Company nor any Guarantor shall be required to make a notation on the Notes
or the Guarantees to reflect such Guarantee. In connection with such Guarantee
of the Notes, such Restricted Subsidiary shall waive, and agree that it will not
in any manner whatsoever claim or take the benefit or advantage of, any rights
of reimbursement, indemnity or subrogation or any other rights against the
Company or any Guarantor as a result of any payment by such Restricted
Subsidiary with respect to such Guaranteed Debt.
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(b) United will not incur any Guaranteed Debt with respect to any Pari Passu
Indebtedness or Subordinated Indebtedness unless such Guaranteed Debt is
subordinated (at least to the extent that Notes are subordinated in right of
payment to Senior Indebtedness) in right of payment to (or, in the case of
Guaranteed Debt with respect to Pari Passu Indebtedness, is pari passu in right
of payment with) United's Guarantee of the Notes.
(c) The Company will cause each of its domestic Restricted Subsidiaries
which incurs any Indebtedness, other than the Joint Venture and any
Securitization Subsidiary that has entered into or established a Permitted
Receivables Securitization Program, simultaneously with the first incurrence of
any Indebtedness, to execute a supplemental indenture providing for a Guarantee
of the Notes on the same terms as United's Guarantee of the Notes, including,
without limitation, the waiver and agreement referred to in the last sentence of
paragraph (a) above. Neither the Company nor any Guarantor shall be required to
make a notation on the Notes or the Guarantees to reflect such Guarantee.
LIMITATION ON SUBSIDIARY CAPITAL STOCK. The Company will not transfer, and
will not permit the transfer or issuance of, any Capital Stock of any Restricted
Subsidiary (including options, warrants or other rights to purchase shares of
such Capital Stock) except for (i) Capital Stock issued to and held by the
Company or a Restricted Wholly Owned Subsidiary, (ii) Capital Stock issued by a
Person prior to the time (A) such Person becomes a Restricted Subsidiary, (B)
such Person merges with or into a Restricted Subsidiary or (C) a Restricted
Subsidiary merges with or into such Person; provided that such Capital Stock was
not issued or incurred by such Person in anticipation of the type of transaction
contemplated by subclause (A), (B) or (C), (iii) the transfer of all of the
Capital Stock of a Restricted Subsidiary or (iv) the issuance or transfer of
directors' qualifying shares or a de minimis number of shares required to be
held by foreign nationals, in each case to the extent required by applicable
law. The foregoing shall not prohibit the pledge of any shares of Capital Stock
permitted under the "Limitation on Liens" covenant.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends, in cash or otherwise, or make any
other distribution on or in respect of its Capital Stock, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make
any loans or advances to, or Investments in, the Company or any other Restricted
Subsidiary or (iv) transfer any of its properties or assets to the Company or
any other Restricted Subsidiary, except in any such case (1) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date; (2) any encumbrance or restriction, with respect to a Person that becomes
a Restricted Subsidiary after the Issue Date, in existence at the time such
Person becomes a Restricted Subsidiary and not incurred in connection with, or
in contemplation of, such Person becoming a Restricted Subsidiary (other than as
consideration in, in contemplation of, or to provide all or any portion of the
funds or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was otherwise acquired by the Company or another
Restricted Subsidiary); (3) any encumbrance or restriction existing under any
agreement that extends, renews, refinances or replaces the agreements containing
the encumbrances or restrictions in the foregoing clauses (1) and (2), or in
this clause (3), provided that the terms and conditions of any such encumbrances
or restrictions are (A) not materially less favorable to the Holders of the
Notes than those under or pursuant to the agreement so extended, renewed,
refinanced or replaced (as determined in good faith by the Company) and (B) with
respect to any instrument relating to any Indebtedness, no more restrictive in
any material respect than the encumbrances and restrictions contained in the
Credit Facilities as in effect on the Issue Date (as determined in good faith by
the Company); (4) any encumbrance or restriction created pursuant to an asset
purchase agreement, stock sale agreement or similar instrument pursuant to which
a bona-fide Asset Sale the proceeds of which are applied as provided in the
Indenture is to be consummated, so long as such restriction or encumbrance shall
apply only to the assets subject to such Asset Sale and
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shall be effective only for a period from the execution and delivery of such
agreement or instrument through the earlier of the consummation of such Asset
Sale or the termination of such agreement or instrument; (5) customary
nonassignment provisions of any lease governing any leasehold interest of the
Company or any Restricted Subsidiaries; (6) to the extent required by the
Indenture; (7) any encumbrance or restriction existing under or by reason of
applicable law; (8) with respect to a Restricted Subsidiary, any encumbrance or
restriction imposed pursuant to an agreement that has been entered into for the
sale of all or substantially all of the Capital Stock of such Restricted
Subsidiary; and (9) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the type referred to in
clause (iv) above.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount of such
Notes, plus accrued and unpaid interest and Additional Amounts, if any, to the
date of purchase (the "Change of Control Purchase Date"), pursuant to the offer
described below (the "Change of Control Offer") and the other procedures set
forth in the Indenture.
Within 30 days following the date upon which the Company becomes aware that
any Change of Control has occurred, the Company shall notify the Trustee thereof
and give written notice of such Change of Control to each holder of Notes by
first-class mail, postage prepaid, at his address appearing in the security
register, stating, among other things, (i) the purchase price and the purchase
date which shall be a Business Day no earlier than 30 days nor later than 60
days from the date such notice is mailed, or such later date as is necessary to
comply with requirements under the Exchange Act; (ii) that any Note not tendered
will continue to accrue interest; (iii) that, unless the Company defaults in the
payment of the purchase price, any Notes accepted for payment pursuant to the
Change of Control offer shall cease to accrue interest after the Change of
Control Purchase Date; and (iv) certain other procedures that a holder of Notes
must follow to accept a Change of Control Offer or to withdraw such acceptance.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company or United would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, restructurings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The Credit Facilities
prohibit the purchase of the Notes by the Company prior to full repayment of
Indebtedness thereunder and, upon a Change of Control, all amounts outstanding
under the Credit Facilities may become due and payable. There can be no
assurance that, in the event of a Change in Control, the Company will be able to
obtain the necessary consents from the lenders under the Credit Facilities to
consummate a Change of Control Offer. The failure of the Company to make or
consummate the Change of Control Offer or pay the Change of Control Purchase
Price when due would result in an Event of Default and would give the Trustee
and the holders of the Notes the rights described under "--Events of Default,"
subject to the subordination provisions of the Indenture. The 12 3/4% Notes
contain similar provisions requiring that the Company make an offer to
repurchase the 12 3/4% Notes on a change of control (as defined in the 12 3/4%
Notes Indenture). The failure of the Company to consummate a change of control
offer as required by the 12 3/4% Notes Indenture would result in an event of
default thereunder.
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"Change of Control" is defined in the Indenture to mean the occurrence of
any of the following events: (i) any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of more than 50% of the voting power of the total
outstanding Voting Stock of United (or any successor) or the Company (or any
successor) voting as one class; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of United or the Company (together with any new directors whose
election to such Board of Directors or whose nomination for election by the
shareholders of such Person, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to have a majority of the total voting power of such Board of
Directors then in office; (iii) United or the Company conveys, transfers, or
leases or otherwise disposes of all or substantially all of its assets to any
Person; (iv) United (or any successor) or the Company (or any successor) is
liquidated or dissolved or adopts a plan of liquidation or dissolution other
than in a transaction which complies with the provisions described under
"--Consolidation, Merger, Sale of Assets"; and (v) the failure of United (or any
successor) to "beneficially own" 100% of the voting power of the total
outstanding Voting Stock of the Company (or any successor).
The phrase "all or substantially all" as used in the definition of "Change
of Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court interpreting New York law would
interpret such phrase.
The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
United will not, and will not permit any Subsidiary to, create or permit to
exist or become effective any restriction (other than restrictions in effect on
the Issue Date with respect to Indebtedness outstanding on the Issue Date and
refinancings thereof and customary default provisions) that would materially
impair the ability of the Company to make a Change of Control Offer to purchase
the Notes or, if such Change of Control Offer is made, to pay for the Notes
tendered for purchase.
PROVISION OF FINANCIAL STATEMENTS. Whether or not United or the Company is
subject to Section 13(a) or 15(d) of the Exchange Act, United and the Company
will, to the extent permitted under the Exchange Act, deliver to the Commission
for filing the annual reports, quarterly reports and other documents which
United and the Company would have been required to file with the Commission
pursuant to such Section 13(a) or 15(d) if United and the Company were so
subject, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which United and the Company
would have been required to so file such documents if United and the Company
were so subject (subject to a five day grace period). United and the Company
will also in any event (x) within 15 days of each Required Filing Date (subject
to a five day grace period) (i) transmit by mail to all holders, as their names
and addresses appear in the security register, without cost to such holders and
(ii) file with the Trustee copies of the annual reports, quarterly reports and
other documents which United and the Company would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if
United and the Company were subject to such Sections and (y) if filing such
documents by United and the Company with the Commission is not permitted under
the
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Exchange Act, promptly upon written request, supply copies of such documents to
any prospective holder at United's and the Company's cost
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company shall not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety to any Person or
group of affiliated Persons (and the Company will not permit any Restricted
Subsidiary to enter into any such transaction or transactions if such
transaction or transactions, in the aggregate, would result in the sale,
assignment, conveyance, transfer, lease or disposal of all or substantially all
of the properties and assets of the Company and its Restricted Subsidiaries on a
Consolidated basis to any other Person or group of affiliated Persons) unless at
the time and after giving effect thereto: (i) either (a) the Company shall be
the continuing corporation or (b) the Person (if other than the Company) formed
by such consolidation or into which the Company or such Subsidiary is merged or
the Person which acquires by sale, assignment, conveyance, transfer, lease or
disposition of all or substantially all of the properties and assets of the
Company or such Subsidiary, as the case may be, substantially as an entirety
(the "Surviving Entity") shall be a corporation, limited liability company,
limited partnership or business trust duly organized and validly existing under
the laws of the United States of America, any state thereof or the District of
Columbia and such Person shall expressly assume, by a supplemental indenture
executed and delivered to the Trustee, all the obligations of the Company under
the Notes and the Indenture, and the Indenture shall remain in full force and
effect; (ii) immediately before and immediately after giving effect to such
transaction or transactions, no Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a pro forma basis,
the Consolidated Net Worth of the Company (or of the Surviving Entity if other
than the Company), is equal to or greater than the Consolidated Net Worth of the
Company immediately prior to such transaction or transactions; (iv) immediately
before and immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred on the first day of the
four-quarter period immediately prior to the consummation of such transaction
with the appropriate adjustments with respect to the transaction being included
in such pro forma calculation), the Company (or the Surviving Entity if other
than the Company), could incur at least $1.00 of additional Indebtedness under
the "Limitation on Issuance of Indebtedness" covenant (other than Permitted
Indebtedness); and (v) the Company or the Surviving Entity shall have delivered,
or caused to be delivered, to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an Officers' Certificate and an opinion of counsel,
each to the effect that such consolidation, merger, transfer, sale, assignment,
conveyance, lease or other transaction and the supplemental indenture in respect
thereto comply with the Indenture and that all conditions precedent herein
provided for relating to such transaction have been complied with.
In the event of any transaction described in and complying with the
conditions listed in the immediately preceding paragraph in which the Company is
not the continuing corporation, the successor Person formed or remaining shall
succeed to, and be substituted for, and may exercise every right and power of
the Company and the Company will be discharged from all obligations and
covenants under the Indenture and the Notes.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) failure to pay any interest on any Note when it becomes due and
payable, and such failure shall continue for a period of 30 days;
(ii) failure to pay the principal of (or premium, if any, on) any Note at
its Maturity (upon acceleration, optional or mandatory redemption, required
repurchase or otherwise);
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(iii) (a) failure to perform, or breach of, any covenant or agreement of the
Company, United or any Guarantor under the Indenture (other than a default in
the performance of, or breach of, a covenant or agreement which is specifically
dealt with in clause (i) or (ii) or in clauses (b), (c) and (d) of this clause
(iii)), and such default or breach shall continue for a period of 30 days after
written notice of such failure has been given, by certified mail, (x) to the
Company by the Trustee or (y) to the Company and the Trustee by the holders of
at least 25% in aggregate principal amount of the outstanding Notes, specifying
such default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the Indenture; (b) default in the
performance or breach of the provisions described under the "Consolidation,
Merger, Sale of Assets" covenant; (c) the Company shall have failed to make or
consummate an Offer in accordance with the provisions of the "Limitation on Sale
of Assets" covenant; or (d) the Company shall have failed to make or consummate
a Change of Control Offer in accordance with the provisions of the "Purchase of
Notes Upon a Change of Control" covenant;
(iv) one or more defaults shall have occurred under any agreements,
indentures or instruments under which the Company or any Restricted Subsidiary
then has outstanding Indebtedness in excess of $25.0 million principal amount in
the aggregate and, if not already matured at its final maturity in accordance
with its terms, such Indebtedness shall have been accelerated;
(v) any Guarantee shall for any reason cease to be, or shall be asserted in
writing by such Guarantor, United or the Company not to be, in full force and
effect and enforceable in accordance with its terms (other than a Guarantee of a
Subsidiary that is not a Significant Subsidiary and has Consolidated Net Worth
of less than $1.0 million at such time) or any Restricted Subsidiary shall fail
to Guarantee the Notes as required by the "Limitation on Issuances of Guarantees
of Indebtedness" covenant;
(vi) one or more judgments, orders or decrees for the payment of money in
excess of $25.0 million, either individually or in the aggregate (net of amounts
covered by insurance, bond, surety or similar instrument), shall be entered
against the Company, United or any Restricted Subsidiary, or any of their
respective properties, and shall not be discharged and either (a) any creditor
shall have commenced an enforcement proceeding upon such judgment, order or
decree or (b) there shall have been a period of 60 consecutive days during which
a stay of enforcement of such judgment or order, by reason of an appeal or
otherwise, shall not be in effect;
(vii) there shall have been the entry by a court of competent jurisdiction
of (a) a decree or order for relief in respect of the Company, United or any
Significant Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or (b) a decree or order adjudging the Company, United or any
Significant Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company, United
or any Significant Subsidiary under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Company, United or any Significant Subsidiary
or of any substantial part of their respective properties, or ordering the
winding up or liquidation of their affairs, and any such decree or order for
relief shall continue to be in effect, or any such other decree or order shall
be unstayed and in effect, for a period of 60 consecutive days; or
(viii) (a) the Company, United or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any other
case or proceeding to be adjudicated bankrupt or insolvent, (b) the Company,
United or any Significant Subsidiary consents to the entry of a decree or order
for relief in respect of the Company, United or any Significant Subsidiary in an
involuntary case or proceeding under any applicable Bankruptcy Law or to the
commencement of any bankruptcy or insolvency case or proceeding against it, (c)
the Company, United or any Significant Subsidiary files a petition or answer or
consent seeking reorganization or relief under any applicable federal or state
law, (d) the Company, United or any Significant Subsidiary (x) consents to the
filing of such petition or the appointment of, or taking possession by, a
custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company, United or any Significant Subsidiary or of any
substantial part of
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their respective properties or (y) makes an assignment for the benefit of
creditors or (e) the Company, United or any Significant Subsidiary takes any
corporate action in furtherance of any such actions in this paragraph (viii).
If an Event of Default (other than as specified in clauses (vii) and (viii)
of the prior paragraph) shall occur and be continuing, the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may, and the Trustee at the request of such holders shall, declare
all unpaid principal of (and premium, if any, on) and accrued interest on all
the Notes to be due and payable immediately, by a notice in writing to the
Company (and to the Trustee if given by the holders of the Notes); provided that
so long as the Credit Facilities are in effect, such declaration shall not
become effective until the earlier of (a) five business days after receipt of
such notice of acceleration from the holders or the Trustee by the agent under
the Credit Facilities or (b) acceleration of the Indebtedness under the Credit
Facilities. Thereupon such principal shall become immediately due and payable,
and the Trustee may, at its discretion, proceed to protect and enforce the
rights of the holders of Notes by appropriate judicial proceeding. If an Event
of Default specified in clause (vii) or (viii) of the prior paragraph occurs,
then all the Notes shall ipso facto become and be immediately due and payable,
in an amount equal to the principal amount of the Notes, together with accrued
and unpaid interest, if any, to the date the Notes become due and payable,
without any declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes,
and (iii) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the Notes; and (b) all Events of Default,
other than the non-payment of principal of the Notes which has become due solely
by such declaration of acceleration, have been cured or waived; and (c) the
rescission will not conflict with any judgment or decree.
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all the Notes waive any past
defaults under the Indenture and its consequences, except a default in the
payment of the principal of (and premium, if any, on) or interest on any Note,
or in respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each Note outstanding.
The Company is also required to notify the Trustee within five business days
of the occurrence of any Default.
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided that if it acquires any conflicting
interest, it must eliminate such conflict upon the occurrence of an Event of
Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company and each Guarantor and any other obligor upon the
Notes, if any, discharged with respect to the outstanding Notes ("defeasance").
Such defeasance means that the Company shall be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding Notes, except
for (i) the rights of holders of outstanding Notes to receive payments in
respect of the principal of (and premium, if any, on) and interest on such Notes
when such payments are due, (ii) the Company's obligations with respect to
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the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company and each Guarantor released with
respect to certain covenants that are described in the Indenture ("covenant
defeasance") and any omission to comply with such obligations shall not
constitute a Default with respect to the Notes. In the event covenant defeasance
occurs, certain events (not including non-payment, enforceability of any
Guarantee, bankruptcy and insolvency events) described in "--Events of Default"
will no longer constitute an Event of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay and discharge the principal of (and premium, if any, on) and interest on
the outstanding Notes on the Stated Maturity of such principal or installment of
principal (or, if specified by the Company in an Officers' Certificate delivered
to the Trustee at the time of such deposit, any date upon which the Company
would be entitled to redeem all Notes outstanding); (ii) in the case of
defeasance, the Company shall have delivered to the Trustee an opinion of
independent counsel in the United States stating that since the Issue Date (A)
the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, the holders of
the outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred; (iii) in the case
of covenant defeasance, the Company shall have delivered to the Trustee an
opinion of independent counsel in the United States to the effect that the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default shall have occurred and be continuing on the date of
such deposit; (v) such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest with respect to any securities of the
Company or any Guarantor; (vi) such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a default under, the Indenture
or any other material agreement or instrument to which the Company or any
Guarantor is a party or by which it is bound; (vii) the Company shall have
delivered to the Trustee an opinion of independent counsel to the effect that
(A) the trust funds will not be subject to any rights of holders of Senior
Indebtedness or Senior Guarantor Indebtedness, including, without limitation,
those arising under the Indenture and (B) after the 123rd day following the
deposit, the trust funds will not be subject to avoidance under any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (viii) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the holders of the Notes or any Guarantee over the
other creditors of the Company or any Guarantor or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company, any Guarantor or
others; (ix) no event or condition shall exist that would prohibit the Company
from making payments of the principal of (and premium, if any, on) and interest
on the Notes on the date of such deposit; and (x) the Company shall have
delivered to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to either
defeasance or covenant defeasance, as the case may be, have been complied with.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes theretofore authenticated and delivered (other
than lost, stolen or destroyed Notes which have been replaced or paid) have been
delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee for cancellation (x) have become due and payable, (y)
will become due and payable at their Stated Maturity within one year or (z) are
to be called for redemption within one year under arrangements satisfactory to
the Trustee for the giving of notice of redemption by the Trustee in the name,
and at the expense, of the Company, and the Company or any Guarantor has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, including principal of
(and premium, if any, on) and accrued interest at such Stated Maturity or
redemption date; (b) the Company or any Guarantor has paid or caused to be paid
all other sums payable under the Indenture by the Company and each Guarantor;
and (c) the Company has delivered to the Trustee an Officers' Certificate and an
opinion of counsel each stating that (i) all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have been
complied with and (ii) such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company or any Guarantor is
a party or by which the Company or any Guarantor is bound.
MODIFICATIONS AND AMENDMENTS
Without the consent of any holder, the Company, the Guarantors and the
Trustee, at any time and from time to time, may enter into one or more
indentures supplemental to the Indenture for any of the following purposes: (1)
to add to the covenants of the Company and the Guarantors for the benefit of the
holders, or to surrender any right or power therein conferred upon the Company
and the Guarantors; (2) to add additional Events of Default; (3) to evidence and
provide for the acceptance of the appointment under the Indenture by a successor
Trustee; (4) to secure the Notes; (5) to cure any ambiguity, to correct or
supplement any provision in the Indenture which may be defective or inconsistent
with any other provision in the Indenture, or to make any other provisions with
respect to matters or questions arising under the Indenture, provided that such
actions pursuant to this clause shall not adversely affect the interests of the
holders in any material respect; or (6) to comply with any requirements of the
Commission in order to effect and maintain the qualification of the Indenture
under the Trust Indenture Act; provided that certain legal opinions and
Officers' Certificates are delivered.
Modifications and amendments of the Indenture may be made by the Company,
the Guarantors and the Trustee with the consent of the holders of not less than
a majority in aggregate outstanding principal amount of the Notes; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby: (i) change the Stated Maturity
of the principal of, or any installment of interest on, any Note or reduce the
principal amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the coin or currency in which the
principal of any Note or any premium or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof; (ii) amend, change or modify the obligation
of the Company to make and consummate an Offer with respect to any Asset Sale or
Asset Sales in accordance with the "Limitation on Sale of Assets" covenant or
the obligation of the Company to make and consummate a Change of Control Offer
in the event of a Change of Control in accordance with the "Purchase of Notes
upon a Change of Control" covenant, including, without limitation, amending,
changing or modifying any definitions with respect thereto; (iii) reduce the
percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any such modifications and amendments, or the consent of
whose holders is required for any waiver; (iv) modify any of the provisions
relating to supplemental indentures requiring the consent of holders or
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relating to the waiver of past defaults or relating to the waiver of certain
covenants, except to increase the percentage of outstanding Notes required for
such actions or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the holder of each Note affected
thereby; (v) except as otherwise permitted under "--Consolidation, Merger, Sale
of Assets," consent to the assignment or transfer by the Company or any
Guarantor of any of its rights and obligations under the Indenture; or (vi)
amend or modify any of the provisions of the Indenture relating to the
subordination of the Notes or any Guarantee in any manner adverse to the holders
of the Notes.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or United, as such, shall have any liability for any obligations of the Company
or United under the Notes or the Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws, and it is the
view of the Commission that such waiver is against public policy.
GOVERNING LAW
The Indenture, the Notes and the Guarantees are governed by, and construed
in accordance with the laws of the State of New York, without giving effect to
the conflicts of law principles thereof.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person. Acquired Indebtedness shall be
deemed to be incurred on the date of the related acquisition of assets from any
Person or the date the acquired Person becomes a Subsidiary.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or any executive officer or director of any such specified Person or other
Person or, with respect to any natural Person, any person having a relationship
with such Person by blood, marriage or adoption not more remote than first
cousin. For the purposes of this definition, "control" when used with respect to
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Restricted Subsidiary; (ii) all or substantially all of the properties
and assets of any division or line of business of the Company or any Restricted
Subsidiary; or (iii) any other properties or assets of the Company or any
Restricted Subsidiary, other than in the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include (w) any
transfer of properties or assets (A) that is governed by the first paragraph
under the "Consolidation, Merger, Sale of Assets" covenant, (B) that is by the
Company to any Restricted Wholly Owned Subsidiary, or by any Restricted Wholly
Owned Subsidiary to the Company or any Restricted Wholly Owned Subsidiary in
accordance with the terms of the Indenture, (x) dispositions with a Fair Market
Value of less than $2.5 million in the aggregate in any fiscal year, (y) any
Sale of Receivables and Related Assets pursuant to a Permitted Receivables
Securitization Program, or (z) the sale of real or personal property or
equipment that has become worn out,
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obsolete or damaged or otherwise unsuitable or not required for use in
connection with the business of the Company or any Restricted Subsidiary, as the
case may be.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal, state or foreign law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means, as of any date of determination, an amount equal to
the sum of (a) 85% of the face amount of all accounts receivable of the Company
and its Restricted Subsidiaries as of such date and (b) 65% of the book value
(calculated on a FIFO basis) of all inventory owned by the Company and its
Restricted Subsidiaries as of such date, all calculated on a Consolidated basis
and in accordance with GAAP. To the extent that information is not available as
to the amount of accounts receivable or inventory as of a specific date, the
Company may utilize the most recent available quarterly or annual financial
report for purposes of calculating the Borrowing Base; provided, that any
subsequent sale of Receivables and Related Assets on or prior to the date of
determination pursuant to a Permitted Receivables Securitization Program shall
be deducted from "Borrowing Base" for purposes of the calculation thereof.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capital Lease Obligation" means any obligations of the Company and its
Restricted Subsidiaries on a Consolidated basis under any capital lease of real
or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations, partnership interests or other equivalents (however designated)
of such Person's capital stock.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio, determined on a pro forma basis, of (a) the sum of
Consolidated Net Income (Loss), Consolidated Interest Expense, Consolidated
Income Tax Expense and Consolidated Non-cash Charges deducted in computing
Consolidated Net Income (Loss) in each case, for such period, of the Company and
its Restricted Subsidiaries on a Consolidated basis, all determined in
accordance with GAAP to (b) the sum of Consolidated Interest Expense for such
period and cash and non-cash dividends required to be paid or accrued on any
Preferred Stock of the Company and its Restricted Subsidiaries during such
period; provided that (i) in making such computation, the Consolidated Interest
Expense attributable to interest on any Indebtedness computed on a pro forma
basis and (A) bearing a floating interest rate, shall be computed as if the rate
in effect on the date of computation had been the applicable rate for the entire
period and (B) which was not outstanding during the period for which the
computation is being made but which bears at the option of the Company, a fixed
or floating rate of interest, shall be computed by applying at the option of the
Company, either the fixed or floating rate and (ii) in making such computation,
the Consolidated Interest Expense of the Company and its Restricted Subsidiaries
attributable to interest on any Indebtedness under a revolving credit facility
computed on a pro forma basis shall be computed based upon the average daily
balance of such Indebtedness during the applicable period. "Pro forma basis"
means, for purposes of calculating the Consolidated Fixed Charge Coverage Ratio,
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giving pro forma effect to (i) the incurrence of the Indebtedness giving rise to
the need for such calculation and the application of the net proceeds therefrom,
including to refinance other Indebtedness, as if such Indebtedness was incurred,
and the application of such proceeds occurred, at the beginning of the relevant
four-quarter period; (ii) the incurrence, repayment or retirement of any other
Indebtedness by the Company and its Restricted Subsidiaries since the first day
of the relevant four-quarter period as if such Indebtedness was incurred, repaid
or retired at the beginning of such four-quarter period (except that, in making
such computation, the amount of Indebtedness outstanding under any revolving
credit facility shall be computed based upon the average daily balance of such
Indebtedness during such four-quarter period); (iii) in the case of Acquired
Indebtedness, the related acquisition as if such acquisition occurred at the
beginning of the relevant four-quarter period; and (iv) any acquisition or
disposition by the Company or its Restricted Subsidiaries of any company or any
business or any assets out of the ordinary course of business, whether by
merger, stock purchase or sale or asset purchase or sale, as if such acquisition
or disposition, as the case may be, occurred at the beginning of the relevant
four-quarter period, and any related incurrence or repayment of Indebtedness, in
each case since the first day of the relevant four-quarter period, assuming such
acquisition or disposition had been consummated on the first day of such
four-quarter period. For purposes of clause (iv) of this definition of "pro
forma basis", in connection with an acquisition of any company, business or
assets, any such pro forma calculation may include (1) any pro forma adjustments
relating to the relevant four-quarter period that would satisfy the requirements
of Rule 11-02(a) of Regulation S-X, and (2) any other reduction of operating or
other expenses in respect of restructuring or consolidating any business,
operations or facilities, any compensation or headcount reduction, or any other
cost savings, of any Persons either alone or together with the Company or any
Restricted Subsidiary, that would otherwise have resulted in the payment of cash
within the next four full fiscal quarters after the date of consummation of such
acquisition (collectively, the "Cost Savings"); provided that (a) the Company
reasonably believes in good faith that such Cost Savings would have been
achieved during the next four full fiscal quarters after the date of
consummation of such acquisition (regardless of whether such Cost Savings could
be reflected in pro forma financial statements under generally accepted
accounting principles, Regulation S-X or any other regulation or policy of the
SEC), (b) such Cost Savings are set forth in reasonable detail in an operating
plan which has been approved pursuant to a resolution of the Board of Directors
and are (X) limited to the lowest amount of a range if any such Cost Savings are
set forth as a range and (Y) net of any operating expenses reasonably expected
to be incurred during the next four full fiscal quarters after the date of
consummation of such acquisition to implement such Cost Savings, and (c) such
Cost Savings are identified and quantified in an officers' certificate signed by
the chief financial officer and another officer of the Company and delivered to
the Trustee at the time of consummation of such acquisition.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes of the Company and its Restricted
Subsidiaries for such period as determined in accordance with GAAP on a
Consolidated basis.
"Consolidated Interest Expense" of the Company means, without duplication,
for any period, the sum of (a) the interest expense of the Company and its
Restricted Subsidiaries for such period, on a Consolidated basis, including,
without limitation, (i) amortization of debt discount (other than debt discount
attributable solely to a discount in the purchase price of Indebtedness sold
with an equity security, to the extent of the amount of the value reasonably
attributed in good faith to such equity security at the time of such sale and
reflected in an Officers' Certificate delivered promptly thereafter to the
Trustee), (ii) the net cost under Interest Rate Agreements (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation, (iv) accrued interest and (v) the amortization of deferred financing
costs, plus (b) (i) the interest component of the Capital Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by the Company during such
period and (ii) all capitalized interest of the Company and its Restricted
Subsidiaries, less (c) the amortization of any
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deferred financing costs to the extent paid, in each case as determined in
accordance with GAAP on a Consolidated basis.
"Consolidated Net Income (Loss)" of the Company means, for any period, the
Consolidated net income (or loss) of the Company and its Restricted Subsidiaries
for such period as determined in accordance with GAAP, adjusted, to the extent
included in calculating such net income (loss), by excluding, without
duplication, (i) all extraordinary, unusual or nonrecurring gains or losses
(less all fees and expenses relating thereto), (ii) the portion of net income
(or loss) of the Company and its Restricted Subsidiaries allocable to minority
interests in unconsolidated Persons to the extent that cash dividends or
distributions have not actually been received by the Company or one of its
Restricted Subsidiaries, (iii) net income (or loss) of any Person combined with
the Company or any of its Restricted Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any gain
or loss, net of taxes, realized upon the termination of any employee pension
benefit plan, (v) net gains (or losses), less all fees and expenses relating
thereto, in respect of dispositions of assets other than in the ordinary course
of business and the net income of any Unrestricted Subsidiary, except to the
extent paid to the Company or any Restricted Subsidiary in cash as a dividend or
distribution or (vi) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" of any Person means the Consolidated stockholders'
equity (excluding Redeemable Capital Stock) of such Person and its subsidiaries
(or, in the case of United or the Company, the Restricted Subsidiaries), as
determined in accordance with GAAP on a Consolidated basis.
"Consolidated Non-cash Charges" of the Company means, for any period, the
aggregate depreciation, amortization and other non-cash charges of the Company
and its Restricted Subsidiaries on a Consolidated basis reducing the
Consolidated Net Income of the Company and its Restricted Subsidiaries for such
period, as determined in accordance with GAAP (excluding any non-cash charge
which requires an accrual or reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries (or, in the case of United
or the Company, the Restricted Subsidiaries) if and to the extent the accounts
of such Person and each of its subsidiaries (or, in the case of United or the
Company, the Restricted Subsidiaries) would normally be consolidated with those
of such Person, all in accordance with GAAP. The term "Consolidated" shall have
a similar meaning.
"Credit Facilities" means the New Credit Agreement among the Company,
United, the subsidiaries of the Company identified on the signature pages
thereof under the caption "Subsidiary Guarantors," the lenders named therein and
The Chase Manhattan Bank, as Administrative Agent for said lenders, including a
term loan made pursuant to the term loan agreement, a revolving credit loan made
pursuant to the revolving credit loan agreement, and any ancillary documents
executed in connection therewith, as such agreements may be amended, renewed,
extended, substituted, refinanced, restructured, replaced, supplemented or
otherwise modified from time to time (including, without limitation, any
successive renewals, extensions, substitutions, refinancings, restructuring,
replacements, supplements or other modifications of the foregoing, including the
addition of new lenders or agents). For purposes of the Indenture, "Credit
Facilities " shall include any amendments, renewals, extensions, substitutions,
refinancings, restructuring, replacements, supplements or any other
modifications that increase the principal amount of the Indebtedness or the
commitments to lend thereunder, whether under one or more credit facilities or
agreements; provided that, for purposes of the definition of "Permitted
Indebtedness," no such increase may result in the principal amount of
Indebtedness under the Credit Facilities exceeding the amount permitted by
subparagraph (b)(i) of the "Limitation on Indebtedness" covenant.
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"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy as determined by the Board of Directors in good faith
and evidenced by a resolution of the Board of Directors.
"GAAP" or "Generally Accepted Accounting Principles" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect at the time any given calculation is made.
"Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations pursuant to a guarantee given in accordance with the Indenture.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make payment
of such Indebtedness or to assure the holder of such Indebtedness against loss,
(iii) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without requiring that
such property be received or such services be rendered), (iv) to maintain
working capital or equity capital of the debtor, or otherwise to maintain the
net worth, solvency or other financial condition of the debtor or (v) otherwise
to assure a creditor against loss; provided that the term "guarantee" shall not
include endorsements for collection or deposit, in either case in the ordinary
course of business.
"Guarantor" means United, Lagasse, Azerty, Positive ID and AP Support
Services, and each Restricted Subsidiary that is organized under the laws of the
United States or any state or territory thereof, including the District of
Columbia, which incurs any Indebtedness, other than the Joint Venture and any
Securitization Subsidiary that has entered into or established a Permitted
Receivables Securitization Program.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities now or hereafter outstanding,
if, and to the extent, any of the foregoing would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (iv) all obligations under Interest Rate Agreements of such Person,
(v) all Capital Lease Obligations of such Person, (vi) all Indebtedness referred
to in clauses (i) through (v) above of other Persons and all dividends of other
Persons, the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vii) all
Guaranteed Debt of such Person and (viii) all Redeemable Capital Stock valued at
the greater of its voluntary or involuntary maximum fixed repurchase price. For
purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital
Stock which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Redeemable Capital Stock as if such Redeemable
Capital Stock were purchased on any date on which Indebtedness
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shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar arrangements) and/or other types of interest rate
hedging agreements from time to time.
"Investments" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued by, any other Person and all other
items that would be classified as investments on a balance sheet prepared in
accordance with GAAP. In addition, the Fair Market Value of the net assets of
any Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary shall be deemed to be an "Investment" made
by the Company in such Unrestricted Subsidiary. The amount of any non-cash
Investment shall be equal to the Fair Market Value of the assets invested, as
determined in good faith by (i) in the case of any Investment in excess of $5.0
million, the Board of Directors of the Company (provided that such determination
is evidenced by a Board Resolution) or (ii) in any other case, an executive
officer of the Company.
"Issue Date" means the date on which the Notes are first issued.
"Joint Venture" means United Business Computers, Inc., a Delaware
corporation.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Maturity" when used with respect to any Note means the date on which the
principal of such Note becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Repurchase Date or
the redemption date and whether by declaration of acceleration, offer in respect
of Excess Proceeds, Change of Control, call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof in the form of cash or Temporary Cash Investments including
payments in respect of deferred payment obligations when received in the form
of, or stock or other assets when disposed for, cash or Temporary Cash
Investments (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage
commissions and other actual fees and expenses (including fees and expenses of
counsel and investment bankers) related to such Asset Sale, (ii) provisions for
all taxes payable as a result of such Asset Sale, (iii) payments made to retire
Indebtedness where payment of such Indebtedness is secured by the assets or
properties the subject of such Asset Sale, (iv) amounts required to be paid to
any Person (other than the Company or any Restricted Subsidiary) owning a
beneficial interest in the assets subject to the Asset Sale and (v) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP or, until no longer required by
contract with the buyer, as required by contract with the buyer, against any
liabilities associated with such Asset Sale and retained by the Company or any
Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the Trustee and (b) with respect to any
issuance or sale of Capital Stock or options, warrants or rights to purchase
Capital Stock or Indebtedness or Capital Stock that have been converted into or
exchanged for Capital Stock, the proceeds of such issuance or sale in the form
of cash
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or Temporary Cash Investments, including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when disposed
for, cash or Temporary Cash Investments (except to the extent that such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary), net of attorneys' fees, accountants' fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Pari Passu Indebtedness" means any Indebtedness of the Company or a
Guarantor that is PARI PASSU in right of payment to the Notes or a Guarantee of
the Notes, as the case may be.
"Permitted Investment" means (i) Investments in the Company or any
Restricted Subsidiary or any Person which, as a result of such Investment,
becomes a Restricted Subsidiary; (ii) Indebtedness of the Company or a
Restricted Subsidiary described under clauses (vi) and (vii) of the definition
of "Permitted Indebtedness"; (iii) Temporary Cash Investments; (iv) receivables
owing to the Company or any Restricted Subsidiary, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms PROVIDED, HOWEVER, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) Investments acquired by the Company or
any Restricted Subsidiary in connection with an Asset Sale permitted under the
"Limitation on Sale of Assets" covenant to the extent such Investments are
non-cash proceeds as permitted under such covenant; (vi) guarantees of
Indebtedness otherwise permitted by the Indenture; (vii) Investments in
existence on the Issue Date; (viii) customer advances not to exceed $2.5 million
at any one time outstanding; (ix) travel and relocation loans and advances made
to employees in the ordinary course of business; (x) Investments received in
settlement of defaulted receivables or in connection with the bankruptcy or
reorganization of suppliers and customers and in connection with the settlement
of other disputes with customers and suppliers arising in the ordinary course of
business; and (xi) additional Investments not to exceed $25.0 million at any one
time outstanding.
"Permitted Receivables Securitization Program" means a transaction or series
of transactions (including amendments, supplements, extensions, renewals,
replacements, refinancings or modifications thereof) pursuant to which a
Securitization Subsidiary purchases Receivables and Related Assets from the
Company or any Restricted Subsidiary and finances such Receivables and Related
Assets through the issuance of Indebtedness or equity interests or through the
sale of the Receivables and Related Assets or a fractional undivided interest in
the Receivables and Related Assets; PROVIDED that (i) the Board of Directors
shall have determined in good faith that such Permitted Receivables
Securitization Program is economically fair and reasonable to the Company and
the Securitization Subsidiary, (ii) all sales of Receivables and Related Assets
to or by the Securitization Subsidiary are made at Fair Market Value (as
determined in good faith by the Board of Directors), (iii) the financing terms,
covenants, termination events and other provisions thereof shall be market terms
(as determined in good faith by the Board of Directors), (iv) no portion of the
Indebtedness of a Securitization Subsidiary is Guaranteed by or is recourse to
the Company or any Restricted Subsidiary (other than recourse for customary
representations, warranties, covenants and indemnities, none of which shall
relate to the collectability of the Receivables and Related Assets) and (v)
neither the Company nor any Subsidiary has any obligation to maintain or
preserve the Securitization Subsidiary's financial condition.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
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<PAGE>
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred stock whether now outstanding, or issued after the Issue
Date, and including, without limitation, all classes and series of preferred or
preference stock.
"Program Funded Amount" means, at any time, the amount of the unrecovered
aggregate "invested amount" of the purchaser or purchasers (other than the
Company or any Subsidiary) of Receivables and Related Assets or interests
therein sold by the Company and the Subsidiaries pursuant to the Receivables
Securitization Program, excluding amounts representative of yield or interest
earned on such aggregate "invested amount."
"Public Equity Offering" means a bona-fide underwritten sale to the public
of Common Stock of the Company or of United, to the extent that the net cash
proceeds thereof are paid to the Company as a capital contribution, pursuant to
a registration statement (other than Form S-8 or a registration statement
relating to securities issuable by any benefit plan of United, the Company or
any Subsidiary) that is declared effective by the Securities and Exchange
Commission.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Receivables and Related Assets" means accounts receivable in respect of
merchandise, goods or services, and instruments, documents, chattel paper,
obligations, general intangibles and other similar assets, in each case,
relating to such receivables, including interests in merchandise or goods, the
sale or lease of which gave rise to such receivable, related contractual rights,
guarantees, insurance proceeds, collections, other related assets, and proceeds
of all of the foregoing.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Notes or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity.
"Representative" means, with respect to any Designated Senior Indebtedness
or Designated Senior Guarantor Indebtedness, the indenture trustee or other
trustee, agent or representative in respect of such Indebtedness; provided that
if, and so long as, any such Indebtedness lacks such a representative, then the
"Representative" with respect to such Indebtedness shall be the holders of a
majority in outstanding principal amount (or, if no amounts thereunder are
outstanding, the committed amounts) of such Indebtedness.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Restricted Subsidiary sells or
transfers any property or asset in connection with the leasing, or the resale
against installment payments, of such property or asset to the seller or
transferor.
"Securitization Subsidiary" means a Consolidated Restricted Subsidiary or an
Unrestricted Subsidiary of the Company which is established for the limited
purpose of acquiring and financing Receivables and Related Assets and engaging
in activities ancillary thereto.
"Significant Subsidiary" means, at any date of determination any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the Consolidated revenues of
the Company or (ii) as of the end of such fiscal year, was the owner of more
than 10% of the Consolidated assets of the Company, all as set forth on the most
recently available Consolidated financial statements of the Company for such
fiscal year.
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"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes or a Guarantee of the Notes, as
the case may be.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries.
"Temporary Cash Investments" means (i) any evidence of Indebtedness with a
maturity of one year or less and issued by the United States of America, or an
instrumentality or agency thereof and guaranteed fully as to principal, premium,
if any, and interest by the United States of America, (ii) any certificate of
deposit with a maturity of one year or less and issued by, or a time deposit of,
a commercial banking institution that is a member of the Federal Reserve System
and that has combined capital and surplus and undivided profits of not less than
$500.0 million whose debt has a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's Investors Service,
Inc. ("Moody's") or any successor rating agency or "A-1" (or higher) according
to Standard and Poor's Ratings Group ("S&P") or any successor rating agency,
(iii) commercial paper with a maturity of one year or less or industrial revenue
bonds issued by a corporation (other than an Affiliate or Subsidiary of United)
organized and existing under the laws of any state of the United States of
America or the District of Columbia with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's or "A-1"
(or higher) according to S&P and (iv) any money market deposit accounts issued
or offered by a domestic commercial bank having capital and surplus in excess of
$500.0 million.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means (1) any Subsidiary which at the time of
determination shall be designated an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below), (2) any Subsidiary of
an Unrestricted Subsidiary, and (3) United Stationers Hong Kong Limited and
United Worldwide Limited, each of which is a corporation organized under the
laws of Hong Kong. The Board of Directors may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary so long as (a) neither the Company nor any Restricted Subsidiary is
directly or indirectly liable for any Indebtedness of such Subsidiary (except
pursuant to a guarantee that, if it had been made after such designation, would
have been permitted to be made under the "Limitation on Restricted Payments"
covenant, including Permitted Investments), (b) no default with respect to any
Indebtedness of such Subsidiary would permit (upon notice, lapse of time or
otherwise) any holder of any other Indebtedness of the Company or any Restricted
Subsidiary having a principal amount of $25.0 million or more to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity, (c) neither the Company nor
any Restricted Subsidiary has, prior to the date of such designation, made an
Investment in such Subsidiary unless the amount of such Investment, if it had
been made after the date of such designation, would have been permitted under
the "Limitation on Restricted Payments" covenant (including Permitted
Investments), (d) neither the Company nor any Restricted Subsidiary has a
contract, agreement, arrangement, understanding or obligation of any kind,
whether written or oral, with such Subsidiary other than those that might be
obtained at the time from Persons who are not Affiliates of the Company. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing a Board Resolution with the Trustee giving effect to such designation
and, for purposes of the "Limitation on Restricted Payments" covenant, shall
constitute the making of an Investment in such Unrestricted Subsidiary as
provided under the definition of Investment. The Board of Directors may
designate any Unrestricted Subsidiary as a Restricted Subsidiary if immediately
after giving effect to such designation there would be no Default under the
Indenture and the Company could incur $1.00 of additional
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Indebtedness (other than Permitted Indebtedness) pursuant to the "Limitation on
Indebtedness" covenant.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than directors' qualifying shares or a de minimis number of shares
required, under applicable law, to be owned by foreign nationals) is owned by
the Company or another Wholly Owned Subsidiary; and "Restricted Wholly Owned
Subsidiary" means a Wholly Owned Subsidiary that is a Restricted Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered notes in global form without coupons (each a
"Global Note"). Each Global Note will be deposited on the date of the closing of
the sale of the Notes (the "Closing Date") with, or on behalf of, the Depository
Trust Company (the "Depository") and registered in the name of Cede & Co., as
nominee of the Depository, or will remain in the custody of the Trustee pursuant
to the FAST Balance Certificate Agreement between DTC and the Trustee.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depository was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers, banks and trust companies, clearing corporations and
certain other organizations. Access to the Depository's system is also available
to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit, on
its internal system, the principal amount of New Notes to the respective
accounts of Participants with an interest in such Global Notes and (ii)
ownership of the New Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depository
(with respect to the interest of Participants), the Participants and the
Indirect Participants. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own and that
security interests in negotiable instruments can only be perfected by delivery
of certificates representing the instruments. Consequently, the ability to
transfer New Notes or to pledge the New Notes as collateral will be limited to
such extent.
So long as the Depository or its nominee is the registered owner of the
Global Notes, the Depository or such nominee, as the case may be, will be
considered the sole owner or Holder of the New Notes represented by such Global
Notes for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have New Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities (as defined
below), and will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to giving of any directions,
instruction or approval to the Trustee thereunder. As a result, the ability of a
person having a beneficial interest in New Notes represented by a Global Note to
pledge such interest to persons or entities that do not participate
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<PAGE>
in the Depository's system or to otherwise take action with respect to such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Accordingly, each Holder of a beneficial interest in a Global Note must rely
on the procedures of the Depository and, if such Holder is not a Participant or
an Indirect Participant, on the procedures of the Participant through which such
Holder owns its interest, to exercise any rights of a Holder under the Indenture
or such Global Note. The Company understands that under existing industry
practice, in the event the Company requests any action of Holders or an owner of
a beneficial interest in a Global Note desires to take any action that the
Depository, as the Holder of such Global Note, is entitled to take, the
Depository would authorize the Participants to take such action and the
Participant would authorize such Holders owning through such Participants to
take such action or would otherwise act upon the instruction of such Holders.
Neither the Company nor the Trustee will have any responsibility or liability
for any aspect of the records relating to or payments made on account of New
Notes by the Depository, or for maintaining, supervising or reviewing any
records of the Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any New Notes represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Trustee to or at the direction of the Depository or its nominee in its capacity
as the registered Holder of the Global Notes representing such New Notes under
the Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the New Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payment and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of New Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Notes as shown
on the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of New Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
Notes in definitive form under the Indenture or (iii) upon the occurrence of
certain other events as provided in the Indenture, then, upon surrender by DTC
of the Global Notes, Certificated Notes will be issued to each person that DTC
identifies as the beneficial owner of the Notes represented by the Global Notes.
Upon any such issuance, the Trustee is required to register such Certificated
Notes in the name of such person or persons (or the nominee of any thereof) and
cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
119
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of Old Notes for New Notes, but does not
purport to be a complete analysis of all potential tax effects. The discussion
is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, Internal Revenue Service rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the New Notes.
The description does not consider the effect of any applicable foreign, state,
local or other tax laws or estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not constitute a sale or an exchange for federal income tax purposes.
Accordingly, such exchange should have no federal income tax consequences to
holders of Old Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes pursuant to the Exchange Offer, where such Old Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until December 1, 1998, all dealers effecting transactions in the New
Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
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For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the
Notes) other than commissions or concessions of any broker-dealers and will
indemnify holders of the Old Notes (including any broker-dealers) against
certain liabilities, including certain liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the New Notes offered hereby will be
passed upon for the Company by Weil, Gotshal & Manges LLP, Dallas, Texas and New
York, New York.
EXPERTS
The consolidated financial statements of United Stationers Inc. at December
31, 1996 and 1997, and for each of the three years in the period ended December
31, 1997, appearing herein and incorporated by reference herein, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing and incorporated by reference herein. Such consolidated
financial statements are included herein and incorporated by reference herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three months ended March 31, 1997 and 1998, Ernst & Young
LLP have reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
report, included in the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 and incorporated herein by reference, states that they did
not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their report on such
information should be restricted considering the limited nature of the review
procedures applied. The independent auditors are not subject to the liability
provisions of Section 11 of the Securities Act for their report on the unaudited
interim financial information because that report is not a "report" or a "part"
of the Registration Statement prepared or certified by the auditors within the
meaning of Sections 7 and 11 of the Securities Act.
The combined financial statements of The U.S. and Mexican Office Products
Operations of Abitibi-Consolidated Inc. as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse,
Chartered Accountants, given on the authority of said firm as experts in
auditing and accounting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated into this
Prospectus by reference:
(1) United's Current Report on Form 8-K filed March 17, 1998;
(2) United's Proxy Statement for the 1998 Annual Meeting of Stockholders
filed April 3, 1998;
(3) The Company's and United's Annual Report on Form 10-K for the year ended
December 31, 1997;
(4) The Company's and United's Current Report on Form 8-K filed on April 20,
1998;
(5) The Company's Current Report on Form 8-K filed on April 28, 1998; and
(6) The Company's and United's Quarterly Report on Form 10-Q for the first
quarter ended March 31, 1998.
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All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any and all of the documents which have been or may be
incorporated by reference into this Prospectus, except that exhibits to such
documents will not be provided unless they are specifically incorporated by
reference into such documents. Requests for copies of any such document should
be directed to United Stationers Supply Co., 2200 East Golf Road, Des Plaines,
Illinois 60016-1267, Attention: Investor Relations, telephone number (847)
699-5000.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UNITED STATIONERS INC. AND SUBSIDIARIES
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997......................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and
1997............................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997............................................................................... F-7
Notes to Consolidated Financial Statements........................................... F-8
Condensed Consolidated Balance Sheets as of December 31, 1997 (audited) and March 31,
1998 (unaudited)................................................................... F-29
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 1997
and 1998 (unaudited)............................................................... F-30
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1997 and 1998 (unaudited).......................................................... F-31
Notes to Condensed Consolidated Financial Statements................................. F-32
U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS OF ABITIBI-CONSOLIDATED INC.
Report of Independent Auditors....................................................... F-36
Combined Balance Sheets as of December 31, 1996 and 1997............................. F-37
Combined Statements of Earnings and Retained Earnings for the Years Ended December
31, 1995, 1996 and 1997............................................................ F-38
Combined Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997............................................................................... F-39
Notes to Combined Financial Statements............................................... F-40
Condensed Combined Balance Sheets as of December 31, 1997 (audited) and March 31,
1998 (unaudited)................................................................... F-47
Condensed Combined Statements of Income for the Three Months Ended March 31, 1997 and
1998 (unaudited)................................................................... F-48
Condensed Combined Statements of Cash Flows for the Three Months Ended March 31, 1997
and 1998 (unaudited)............................................................... F-49
Notes to Condensed Combined Financial Statements..................................... F-50
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of
Directors of United Stationers Inc.
We have audited the accompanying consolidated balance sheets of United
Stationers Inc. and Subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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 United
Stationers Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
January 27, 1998
F-2
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 10,619 $ 12,367
Accounts receivable, less allowance for doubtful accounts of $6,318 in 1996 and
$7,071 in 1997.................................................................. 291,401 311,920
Inventories....................................................................... 463,239 511,555
Other............................................................................. 25,221 14,845
------------- -------------
TOTAL CURRENT ASSETS................................................................ 790,480 850,687
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land.............................................................................. 21,878 21,857
Buildings......................................................................... 100,031 101,322
Fixtures and equipment............................................................ 102,092 113,037
Leasehold improvements............................................................ 1,040 1,026
------------- -------------
Total property, plant and equipment............................................... 225,041 237,242
Less--accumulated depreciation and amortization................................... 51,266 72,699
------------- -------------
NET PROPERTY, PLANT AND EQUIPMENT................................................... 173,775 164,543
GOODWILL............................................................................ 115,449 111,852
OTHER............................................................................... 30,163 20,939
------------- -------------
TOTAL ASSETS........................................................................ $ 1,109,867 $ 1,148,021
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt.............................................. $ 46,923 $ 44,267
Accounts payable.................................................................. 238,124 236,475
Accrued expenses.................................................................. 93,789 107,935
Accrued income taxes.............................................................. 6,671 10,561
------------- -------------
TOTAL CURRENT LIABILITIES........................................................... 385,507 399,238
DEFERRED INCOME TAXES............................................................... 36,828 19,383
LONG-TERM DEBT...................................................................... 552,613 492,868
OTHER LONG-TERM LIABILITIES......................................................... 15,502 13,224
REDEEMABLE PREFERRED STOCK
Preferred Stock Series A, $0.01 par value, 15,000 and 0, respectively, authorized;
5,000 and 0, respectively, issued and outstanding, 3,086 and 0, respectively,
accrued......................................................................... 8,086 --
Preferred Stock Series C, $0.01 par value; 15,000 and 0, respectively, authorized;
11,699 and 0, respectively, issued and outstanding.............................. 11,699 --
------------- -------------
TOTAL REDEEMABLE PREFERRED STOCK.................................................... 19,785 --
REDEEMABLE WARRANTS................................................................. 23,812 --
STOCKHOLDERS' EQUITY
Common Stock (voting), $0.10 par value; 40,000,000 authorized 11,446,306 and
15,905,273, respectively, issued and outstanding................................ 1,145 1,591
Common Stock (nonvoting), $0.01 par value, 5,000,000 authorized; 758,994 and 0,
respectively, issued and outstanding............................................ 8 --
Capital in excess of par value.................................................... 44,418 213,042
Retained earnings................................................................. 30,249 8,675
------------- -------------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 75,820 223,308
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 1,109,867 $ 1,148,021
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- -------------
NET SALES........................................................... $ 1,751,462 $ 2,298,170 $ 2,558,135
COST OF GOODS SOLD.................................................. 1,446,949 1,907,209 2,112,204
------------- ------------- -------------
GROSS PROFIT........................................................ 304,513 390,961 445,931
OPERATING EXPENSES:
Warehousing, marketing and administrative expenses................ 237,197 277,957 311,002
Non-recurring charges............................................. -- -- 64,698
Restructuring charge.............................................. 9,759 -- --
------------- ------------- -------------
Total operating expenses.......................................... 246,956 277,957 375,700
------------- ------------- -------------
Income from operations.............................................. 57,557 113,004 70,231
INTEREST EXPENSE.................................................... 46,186 57,456 53,511
------------- ------------- -------------
Income before income taxes and extraordinary item................. 11,371 55,548 16,720
INCOME TAXES........................................................ 5,128 23,555 8,532
------------- ------------- -------------
Income before extraordinary item.................................. 6,243 31,993 8,188
EXTRAORDINARY ITEM--loss on early retirement of debt, net of tax
benefit of $967 in 1995 and $3,956 in 1997........................ (1,449) -- (5,884)
------------- ------------- -------------
NET INCOME.......................................................... 4,794 31,993 2,304
PREFERRED STOCK DIVIDENDS ISSUED AND ACCRUED........................ 1,998 1,744 1,528
------------- ------------- -------------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS...................... $ 2,796 $ 30,249 $ 776
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER COMMON SHARE:
Income before extraordinary item.................................. $ 0.39 $ 2.48 $ 0.51
Extraordinary item................................................ (0.13) -- (0.45)
------------- ------------- -------------
Net income per common share....................................... $ 0.26 $ 2.48 $ 0.06
------------- ------------- -------------
------------- ------------- -------------
Average number of common shares (in thousands)...................... 10,747 12,205 13,064
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER COMMON SHARE--ASSUMING DILUTION:
Income before extraordinary item.................................. $ 0.33 $ 2.03 $ 0.43
Extraordinary item................................................ (0.11) -- (0.38)
------------- ------------- -------------
Net income per common share....................................... $ 0.22 $ 2.03 $ 0.05
------------- ------------- -------------
------------- ------------- -------------
Average number of common shares (in thousands)...................... 12,809 14,923 15,380
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF
REDEEMABLE PREFERRED STOCK COMMON COMMON
------------------------------------------ REDEEMABLE SHARES STOCK
A B C TOTAL WARRANTS (VOTING) (VOTING)
--------- --------- --------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994............................ $ 6,788 $ 6,560 $ 9,841 $ 23,189 $ 1,650 960,346 $ 10
Net income................................. -- -- -- -- -- -- --
Preferred stock dividends.................. 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 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) (11)
Increase in value of stock option grants... -- -- -- -- -- -- --
Common stock issued:
Acquisition.............................. -- -- -- -- -- 4,831,873 563
Exercise of warrants..................... -- -- -- -- (1,673) 58,977 6
100% stock dividend -- -- -- -- -- 5,683,463 575
Stock option exercises................... -- -- -- -- -- 20,806 2
Other...................................... -- -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------- -----------
DECEMBER 31, 1995............................ 7,437 -- 10,604 18,041 39,692 11,446,306 1,145
Net income................................. -- -- -- -- -- -- --
Preferred stock dividends.................. 649 -- 1,095 1,744 -- -- --
Reduction of warrants to fair market
value.................................... -- -- -- -- (15,880) -- --
Decrease in value of stock option grants... -- -- -- -- -- -- --
Other...................................... -- -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------- -----------
DECEMBER 31, 1996............................ $ 8,086 $ -- $ 11,699 $ 19,785 $ 23,812 11,446,306 $ 1,145
Net income................................. -- -- -- -- -- -- --
Stock dividends issued..................... 489 -- 898 1,387 -- -- --
Redemption of Series A and Series C
preferred stock.......................... (8,575) -- (12,597) (21,172) -- -- --
Accretion of lender warrants to fair market
value.................................... -- -- -- -- 23,254 -- --
Increase in value of stock option grants... -- -- -- -- -- -- --
Compensation associated with stock
options.................................. -- -- -- -- -- -- --
Conversions of redeemable warrants into
common stock............................. -- -- -- -- (47,066) 1,408,398 141
Issuance of common stock, net of offering
expenses................................. -- -- -- -- -- 2,000,000 200
Stock options exercised.................... -- -- -- -- -- 299,889 30
Conversion of nonvoting common stock into
common stock............................. -- -- -- -- -- 758,994 76
Cancellation of common stock............... -- -- -- -- -- (8,314) (1)
Other...................................... -- -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------- -----------
DECEMBER 31, 1997............................ $ -- $ -- $ -- $ -- $ -- 15,905,273 $ 1,591
--------- --------- --------- --------- ------------- ----------- -----------
--------- --------- --------- --------- ------------- ----------- -----------
<CAPTION>
NUMBER OF CAPITAL TOTAL
COMMON COMMON IN STOCK-
SHARES STOCK EXCESS RETAINED HOLDERS'
(NONVOTING) (NONVOTING) OF PAR EARNINGS EQUITY
------------ --------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1994............................ -- $ -- $ 18,139 $ 6,626 $ 24,775
Net income................................. -- -- -- 4,794 4,794
Preferred stock dividends.................. -- -- -- (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 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..................... 139,474 1 2,749 -- 2,739
Increase in value of stock option grants... -- -- 2,407 -- 2,407
Common stock issued:
Acquisition.............................. 215,614 3 35,223 -- 35,789
Exercise of warrants..................... -- -- 1,673 -- 1,679
100% stock dividend 403,906 4 -- (579) --
Stock option exercises................... -- -- 28 -- 30
Other...................................... -- -- 90 (106) (16)
------------ --- --------- ----------- ---------
DECEMBER 31, 1995............................ 758,994 8 28,871 -- 30,024
Net income................................. -- -- -- 31,993 31,993
Preferred stock dividends.................. -- -- -- (1,744) (1,744)
Reduction of warrants to fair market
value.................................... -- -- 15,880 -- 15,880
Decrease in value of stock option grants... -- -- (339) -- (339)
Other...................................... -- -- 6 -- 6
------------ --- --------- ----------- ---------
DECEMBER 31, 1996............................ 758,994 $ 8 $ 44,418 $ 30,249 $ 75,820
Net income................................. -- -- -- 2,304 2,304
Stock dividends issued..................... -- -- -- (1,528) (1,528)
Redemption of Series A and Series C
preferred stock.......................... -- -- -- -- --
Accretion of lender warrants to fair market
value.................................... -- -- (915) (22,339) (23,254)
Increase in value of stock option grants... -- -- 380 -- 380
Compensation associated with stock
options.................................. -- -- 59,398 -- 59,398
Conversions of redeemable warrants into
common stock............................. -- -- 47,074 -- 47,215
Issuance of common stock, net of offering
expenses................................. -- -- 71,254 -- 71,454
Stock options exercised.................... -- -- (8,270) -- (8,240)
Conversion of nonvoting common stock into
common stock............................. (758,994) (8) (68) -- --
Cancellation of common stock............... -- -- 1 -- --
Other...................................... -- -- (230) (11) (241)
------------ --- --------- ----------- ---------
DECEMBER 31, 1997............................ -- $ -- $ 213,042 $ 8,675 $ 223,308
------------ --- --------- ----------- ---------
------------ --- --------- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 4,794 $ 31,993 $ 2,304
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation............................................................... 19,708 22,766 21,963
Amortization............................................................... 3,976 3,276 4,078
Amortization of capitalized financing costs................................ 4,172 5,333 4,323
Extraordinary item--early retirement of debt............................... 2,416 -- 9,840
Deferred income taxes...................................................... (163) 5,299 (16,091)
Compensation expense on stock option grants................................ 2,407 (339) 60,041
Other...................................................................... 301 1,584 51
Changes in operating assets and liabilities, net of acquisition in 1995 and
1996:
Increase in accounts receivable............................................ (32,330) (15,379) (20,519)
Decrease (increase) in inventory........................................... 31,656 (71,282) (48,316)
Decrease in other assets................................................... 2,765 1,814 9,985
(Decrease) increase in accounts payable.................................... (5,104) 36,352 (1,649)
Decrease (increase) in accrued liabilities................................. (3,474) (17,185) 18,036
Decrease in other liabilities.............................................. (4,795) (2,623) (2,278)
---------- --------- ----------
Net cash provided by operating activities.............................. 26,329 1,609 41,768
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions:
United Stationers Inc., net of cash acquired of $14,500.................... (258,438) -- --
Lagasse Bros., Inc......................................................... -- (51,896) --
Capital expenditures......................................................... (8,086) (8,190) (13,036)
Proceeds from disposition of property, plant & equipment..................... 69 11,076 45
Other........................................................................ 164 (861) --
---------- --------- ----------
Net cash used in investing activities.................................. (266,291) (49,871) (12,991)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolver................................... (3,608) 22,000 49,000
Retirements and principal payments of debt................................... (412,342) (30,861) (117,776)
Borrowings under financing agreements........................................ 686,854 57,933 --
Financing costs.............................................................. (25,290) (1,851) --
Issuance of common stock..................................................... 12,006 -- 71,606
Payment of employee withholding tax related to stock option exercises........ -- -- (8,546)
Redemption of Series A and Series C Preferred Stock.......................... -- -- (21,172)
Redemption of Series B Preferred Stock....................................... (6,892) -- --
Cash dividend................................................................ (254) -- (141)
Other........................................................................ (701) -- --
---------- --------- ----------
Net cash provided (used in) financing activities............................. 249,773 47,221 (27,029)
---------- --------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS...................................... 9,811 (1,041) 1,748
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................. 1,849 11,660 10,619
---------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR....................................... $ 11,600 $ 10,619 $ 12,367
---------- --------- ----------
---------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
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. All common and common
equivalent shares have been adjusted to reflect the 100% stock dividend
effective November 9, 1995.
The Acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price was 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 was as follows (dollars in thousands):
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
Immediately following the Merger, the number of outstanding shares of Common
Stock was 11,996,154 (or 13,947,440 on a diluted basis), of which (i) the former
holders of Class A Common Stock,
F-8
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND PURCHASE ACCOUNTING (CONTINUED)
$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 diluted basis)
and (ii) pre-Merger holders of shares of Common Stock (other than
Associated-owned and treasury shares) in the aggregate owned 2,789,488 shares of
Common Stock constituting approximately 23.3% of the outstanding shares (or
20.0% on a diluted basis). As used in this paragraph, the term "Common Stock"
includes shares of nonvoting common stock, $0.01 par value, of the Company, all
of which were converted into voting Common Stock in the fourth quarter of 1997.
On October 31, 1996, the Company acquired all of the capital stock of
Lagasse Bros., Inc. ("Lagasse") for approximately $51.9 million. The acquisition
was financed primarily through senior debt. The Lagasse 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 of approximately $39.0 million allocated to
goodwill. The financial information for the year ended December 31, 1996
includes the results of Lagasse for two months ended December 31, 1996. The
actual and pro forma effects of this acquisition are not material.
On October 9, 1997, the Company completed a 2.0 million share primary
offering of Common Stock and a 3.4 million share secondary offering of Common
Stock ("October Equity Offering"). The shares were priced at $38.00 per share,
before underwriting discounts and a commission of $1.90 per share. The aggregate
net proceeds to the Company from this October Equity Offering of $72.2 million
(before deducting expenses) and proceeds of $0.1 million resulting from the
conversion of 1,119,038 warrants into Common Stock were used to (i) redeem $50.0
million of the Company's 12 3/4% Senior Subordinated Notes and pay the
redemption premium thereon of $6.4 million, (ii) pay fees related to the October
Equity Offering, and (iii) reduce by $15.5 million the indebtedness under the
Term Loan Facilities. The repayment of indebtedness resulted in an extraordinary
loss of $9.8 million ($5.9 million net of tax benefit of $3.9 million) and
caused a permanent reduction of the amount borrowable under the Term Loan
Facilities.
As a result of the October Equity Offering, the Company recognized the
following charges in the fourth quarter of 1997 (i) pre-tax non-recurring
non-cash charge of $59.4 million ($35.5 million net of tax benefit of $23.9
million) and a non-recurring cash charge of $5.3 million ($3.2 million net of
tax benefit of $2.1 million) related to the vesting of stock options (see Note
10) and the termination of certain management advisory service agreements (see
Note 13), respectively, and (ii) an extraordinary loss of $9.8 million ($5.9
million net of tax benefit of $3.9 million) related to the early retirement of
debt (see Note 6), (collectively "Charges").
Net income attributable to common stockholders for the year ended December
31, 1997, before Charges, was $45.4 million, up 50.3%, compared with $30.2
million in 1996. Diluted earnings per share, before Charges, for 1997 was $2.95
on 15.4 million weighted average shares outstanding, up 45.3%, compared with
$2.03 on 14.9 million weighted average shares outstanding for the prior year.
F-9
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. OPERATIONS
The Company operates in a single segment as a national wholesale distributor
of business products. The Company offers approximately 30,000 items from more
than 500 manufacturers. This includes a broad spectrum of office products,
computer supplies, office furniture and facilities management supplies. The
Company primarily serves commercial and contract office products dealers. Its
customers include more than 15,000 resellers--such as office products dealers,
buying groups, office furniture dealers, super stores and mass merchandisers,
mail order houses, computer products resellers, sanitary supply distributors and
warehouse clubs. The Company has a distribution network of 41 Regional
Distribution Centers. Through its integrated computer system, the Company
provides a high level of customer service and overnight delivery. In addition,
the Company has 16 Lagasse Distribution Centers, specifically serving janitorial
and sanitary supply distributors.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when a product is shipped and title is transferred to
the customer in the period the sale is reported.
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 92% and 91% of total inventories at
December 31, 1996 and 1997, respectively, 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 believed that the LIFO method
provided a better matching of current costs and current revenues and that
earnings reported under the LIFO method were 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 $0.41 per
common and common equivalent share) for the year ended December 31, 1995.
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 $4.8 million and $4.3 million higher
than reported at December 31, 1996 and 1997, respectively.
F-10
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. 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 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, 1996 and 1997 is $4.0 million and $7.6 million, 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.
INCOME TAXES
Income taxes are accounted for using the liability method under which
deferred income taxes are recognized for the estimated tax consequences for
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities. Provision has not been made for deferred
U.S. income taxes on the undistributed earnings of the Company's foreign
subsidiaries because these earnings are intended to be permanently invested.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the local
currency.
F-11
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain amounts from prior periods have been reclassified to conform to the
1997 basis of presentation.
During the fourth quarter of 1996, the Company reclassified certain delivery
and occupancy costs from operating expenses to cost of goods sold to conform the
Company's presentation to the presentation used by others in the business
products industry. The following table sets forth the impact of the
reclassification for the years presented in the Consolidated Statements of
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1995(1) 1996
----------- ---------
Gross Margin as a Percent of Net Sales:
Gross margin prior to reclassification................................. 21.8% 21.0%
Gross margin as reported............................................... 17.4% 17.0%
Operating Expenses as a Percent of Net Sales:
Operating expense ratio prior to reclassification...................... 17.9%(2) 16.1%
Operating expense ratio as reported.................................... 13.5 (2) 12.1%
</TABLE>
- --------------
(1) 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.
(2) Excludes a restructuring charge of $9.8 million.
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.
NEW ACCOUNTING PRONOUNCEMENTS
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share." SFAS No. 128
establishes standards for computing and presenting earnings per share ("EPS").
These new standards simplify the calculation of EPS presently contained in
Accounting Principles Board Opinion No. 15, "Earnings Per Share," and various
other pronouncements, and makes them comparable to international standards. SFAS
No. 128 replaces the presentation of primary and fully diluted EPS with basic
and diluted EPS. The Company currently has a complex capital structure; as a
result, the Company is required to present (i) both basic and diluted EPS on the
face of the consolidated statement of income and (ii) a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS calculation. The earnings per share amounts prior
to 1997 have been restated as required to comply with SFAS No. 128.
F-12
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1996, the Company adopted the supplemental disclosure requirement of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation." SFAS No. 123 encourages but does not
require adoption of a fair value method of accounting for stock options. For
those entities which do not elect to adopt the fair value method, the new
standard requires supplemental disclosure regarding the pro forma effects of
that method. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value based method of accounting prescribed by
the Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
Stocks Issued to Employees," and related Interpretations. Adoption of SFAS No.
123 will have no impact on the financial position or results of operations of
the Company.
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that an
impairment loss be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed. The effect of adoption was not material.
4. EARNINGS PER SHARE
Net income per common share is based on net income after preferred stock
dividend requirements. Basic earnings per share is calculated on the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated on the weighted average number of common and common equivalent shares
outstanding during the period. Stock options and warrants are considered to be
common equivalent shares.
F-13
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C> <C>
1997
BEFORE
1995 1996 1997 CHARGES(1)
--------- --------- --------- -----------
Numerator:
Income before extraordinary item............................... $ 6,243 $ 31,993 $ 8,188 $ 46,892
Preferred stock dividends...................................... 1,998 1,744 1,528 1,528
--------- --------- --------- -----------
Numerator for basic and diluted earnings per share-- income
available to common stockholders before extraordinary item... $ 4,245 $ 30,249 $ 6,660 $ 45,364
--------- --------- --------- -----------
--------- --------- --------- -----------
Denominator:
Denominator for basic earnings per share--weighted average
shares....................................................... 10,747 12,205 13,064 13,064
Effect of dilutive securities:
Employee stock options....................................... 601 1,315 1,258 1,258
Warrants..................................................... 1,461 1,403 1,058 1,058
--------- --------- --------- -----------
Dilutive potential common shares............................... 2,062 2,718 2,316 2,316
Denominator for diluted earnings per share--adjusted weighted
average shares and assumed conversions....................... 12,809 14,923 15,380 15,380
--------- --------- --------- -----------
--------- --------- --------- -----------
Basic earnings per share......................................... $ 0.39 $ 2.48 $ 0.51 $ 3.47
--------- --------- --------- -----------
--------- --------- --------- -----------
Diluted earnings per share....................................... $ 0.33 $ 2.03 $ 0.43 $ 2.95
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
- --------------
(1) In the fourth quarter of 1997, the Company recognized the following charges
(i) pre-tax non-recurring charges of $59.4 million (non-cash) and $5.3
million (cash) related to the vesting of stock options (see Note 10) and the
termination of certain management advisory service agreements (see Note 13),
respectively, and (ii) an extraordinary loss of $9.8 million ($5.9 million
net of tax benefit of $3.9 million) related to the early retirement of debt
(see Note 6).
5. BUSINESS COMBINATION AND RESTRUCTURING CHARGE
The following summarized unaudited pro forma operating data for the year
ended December 31, 1995 is presented giving effect to the Acquisition as if it
had been consummated at the beginning of the respective period 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 date indicated, or which may
result in the future. The pro forma results exclude one-time
F-14
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS COMBINATION AND RESTRUCTURING CHARGE (CONTINUED)
non-recurring charges or credits directly attributable to the transaction
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
PRO FORMA TWELVE MONTHS
ENDED DECEMBER 31, 1995
--------------------------
<S> <C>
Net sales......................................................... $ 2,201,860
Income before income taxes........................................ 22,737
Net income........................................................ 13,063
Net income per diluted common and common equivalent share......... $ 0.80
</TABLE>
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.
The historical results for the twelve months ended December 31, 1995 include
a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9
million). The restructuring charge included severance costs totaling $1.8
million. The Company's consolidation plan specified that 330 distribution, sales
and corporate positions, 180 of which related to pre-Merger Associated, were to
be eliminated substantially within one year following the Merger. The Company
had achieved its target, with the related termination costs of approximately
$1.8 million charged against the reserve. The restructuring charge also included
distribution center closing costs totaling $6.7 million and stockkeeping unit
reduction costs totaling $1.3 million. The consolidation plan called for the
closing of eight redundant distribution centers, six of which related to
pre-Merger Associated, 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 included (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
included losses on the sale of inventory items which have been discontinued
solely as a result of the Acquisition. As of December 31, 1997, five of the six
redundant pre-Merger Associated distribution centers had been closed with $5.5
million charged against the reserve and $2.0 million related to stockkeeping
unit reduction costs had also been charged against the reserve. As of December
31, 1997, the Company's consolidation plan had been completed. Seven of the
eight redundant distribution centers had been closed.
The historical results for 1995 also included 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 included 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.
F-15
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revolver............................................................ $ 207,000 $ 256,000
Term Loans
Tranche A, due in installments until September 30, 2001........... 144,374 97,524
Tranche B, due in installments until September 30, 2003........... 64,750 51,275
Senior Subordinated Notes........................................... 150,000 100,000
Mortgage at 9.4%, due in installments until 1999.................... 2,071 1,957
Industrial development bonds, at market interest rates, maturing at
various dates through 2011........................................ 14,300 14,300
Industrial development bonds, at 66% to 78% of prime, maturing at
various dates through 2004........................................ 15,500 15,500
Other long-term debt................................................ 1,541 579
----------- -----------
599,536 537,135
Less--current maturities.......................................... (46,923) (44,267)
----------- -----------
Total............................................................... $ 552,613 $ 492,868
----------- -----------
----------- -----------
</TABLE>
The prevailing prime interest rate at the end of 1996 and 1997 was 8.25% and
8.50%, respectively.
As of December 31, 1997, the credit facilities under the Amended and
Restated Credit Agreement (the "Credit Agreement") consisted of $148.8 million
of term loan borrowings (the "Term Loan Facilities"), and up to $325.0 million
of revolving loan borrowings (the "Revolving Credit Facility"). In the fourth
quarter of 1997, the Company redeemed $50.0 million of Notes (as defined) with
net proceeds from the October Equity Offering and as a result the Company
recognized an extraordinary loss on the early retirement of debt of $9.8 million
($5.9 million net of tax benefit of $3.9 million). Therefore, the Company has
$100.0 million of borrowings remaining under the 12 3/4% Senior Subordinated
Notes due 2005 (the "Notes").
The Term Loan Facilities consist of a $97.5 million Tranche A term loan
facility (the "Tranche A Facility") and a $51.3 million Tranche B term loan
facility (the "Tranche B Facility"). Quarterly payments under the Tranche A
facility range from $5.03 million at December 31, 1997 to $6.25 million at
September 30, 2001. Quarterly payments under the Tranche B Facility range from
$0.20 million at December 31, 1997 to $5.00 million at September 30, 2003. On
March 31, 1998, principal payments of $15.8 million and $8.7 million are
required to be paid from Excess Cash Flow (as defined in the Credit Agreement)
at December 31, 1997 for the Tranche A and Tranche B Facilities, respectively.
During October 1997, Tranche A and Tranche B Facilities were paid down by $10.3
million and $5.2 million, respectively, from net proceeds received from the
October Equity Offering in October 1997.
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 in the Credit Agreement). In
addition, for each year, the Company must
F-16
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
repay revolving loans so that for a period of 30 consecutive days in each year
the aggregate revolving loans do not exceed $250.0 million. The Revolving Credit
Facility matures on October 31, 2001.
The Term Loan Facilities and the Revolving Credit Facility are secured by
first priority pledges of the stock of USSC, all of the stock of the domestic
direct and indirect subsidiaries of USSC, certain of the stock of all of the
foreign direct and indirect subsidiaries of USSC and security interests in, and
liens upon, all accounts receivable, inventory, contract rights and other
certain personal and certain real property of USSC and its domestic
subsidiaries.
The loans outstanding under the Term Loan Facilities and the Revolving
Credit Facility bear interest as determined within a set range with the rate
based on the ratio of total debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The Tranche A Facility and the
Revolving Credit Facility bear interest, at prime plus 0.25% to 1.25% or, at the
Company's option, the London Interbank Offering Rate ("LIBOR") plus 1.50% to
2.50%. The Tranche B Facility bears interest at prime plus 1.25% to 1.75% or, at
the Company's option, LIBOR plus 2.50% to 3.00%.
The Credit Agreement contains representations and warranties, affirmative
and negative covenants and events of default customary for financings of this
type. As of December 31, 1997, the Company was in compliance with all covenants
contained in the Credit Agreement.
The Company is exposed to market risk for changes in interest rates. The
Company may enter into interest rate protection agreements, including collar
agreements, to reduce the impact of fluctuations in interest rates on a portion
of its variable rate debt. 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 to
interest expense. At December 31, 1997, the Company had agreements which collar
$200.0 million of the Company's borrowings under the Credit Facilities at LIBOR
rates between 6.0% and 8.0%, which expire in April 1998. From April 1998 through
October 1999, the Company has interest rate collar agreements on $200.0 million
of borrowings at LIBOR rates between 5.2% and 8.0%. For the years ended December
31, 1995, 1996 and 1997, the Company recorded $0.1 million, $0.9 million and
$0.6 million, respectively, to interest expense resulting from LIBOR rate
fluctuations below the floor rate specified in the collar agreements.
The right of United to participate in any distribution of earnings or assets
of USSC is subject to the prior claims of the creditors of USSC. In addition,
the Credit Agreement contains certain restrictive covenants, including covenants
that restrict or prohibit USSC's ability to pay dividends and make other
distributions to United.
F-17
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Debt maturities for the years subsequent to December 31, 1997 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
1998............................................................................. $ 44,267
1999............................................................................. 25,684
2000............................................................................. 26,722
2001............................................................................. 282,555
2002............................................................................. 31,304
Later years...................................................................... 126,603
-----------
Total............................................................................ $ 537,135
-----------
-----------
</TABLE>
At December 31, 1996 and 1997, the Company had available letters of credit
of $55.3 million and $52.9 million, respectively, of which $52.8 million and
$49.8 million, respectively, were outstanding.
7. LEASES
The Company has entered into several non-cancelable long-term leases for
certain property and equipment. Future minimum rental payments under operating
leases in effect at December 31, 1997 having initial or remaining non-cancelable
lease terms in excess of one year are as follows (dollars in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES(1)
- ---------------------------------------------------------------------------------- -----------
<S> <C>
1998.............................................................................. $ 19,108
1999.............................................................................. 15,675
2000.............................................................................. 12,811
2001.............................................................................. 10,467
2002.............................................................................. 7,235
Later years....................................................................... 15,455
-----------
Total minimum lease payments...................................................... $ 80,751
-----------
-----------
</TABLE>
- --------------
(1) Operating leases are net of immaterial sublease income.
Rental expense for all operating leases was approximately $14.2 million,
$18.8 million and $20.5 million in 1995, 1996 and 1997, respectively.
F-18
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PENSION PLANS AND DEFINED CONTRIBUTION PLAN
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 entered the pension plans on July 1, 1996. As of this date,
the Company has 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, 1996
and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Actuarial Present Value of Benefit Obligation
Vested benefits...................................................... $ 19,015 $ 22,611
Non-vested benefits.................................................. 1,431 2,092
--------- ---------
Accumulated benefit obligation......................................... 20,446 24,703
Effect of projected future compensation levels......................... 3,110 4,070
--------- ---------
Projected benefit obligation........................................... 23,556 28,773
Plan assets at fair value.............................................. 28,373 33,562
--------- ---------
Plan assets in excess of projected benefit obligation.................. 4,817 4,789
Unrecognized prior service cost........................................ 720 888
Unrecognized net gain due to past experience different from
assumptions.......................................................... (4,348) (6,020)
--------- ---------
Prepaid pension (asset) liability recognized in the Consolidated
Balance Sheets....................................................... $ 1,189 $ (343)
--------- ---------
--------- ---------
</TABLE>
The plans' assets consist of corporate and government debt securities and
equity securities. Net periodic pension cost for 1995, 1996 and 1997 for pension
and supplemental benefit plans includes the following components (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefit earned during the period............... $ 1,142 $ 1,884 $ 2,333
Interest cost on projected benefit obligation............... 1,157 1,652 1,833
Actual return on assets..................................... (2,711) (3,468) (5,496)
Net amortization and deferral............................... 1,382 1,495 3,375
--------- --------- ---------
Net periodic pension cost................................... $ 970 $ 1,563 $ 2,045
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PENSION PLANS AND DEFINED CONTRIBUTION PLAN (CONTINUED)
The assumptions used in accounting for the Company's defined benefit plans
for the three years presented are set forth below:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ----- ---------
<S> <C> <C> <C>
Assumed discount rate.................................................. 7.25% 7.5% 7.25%
Rates of compensation increase......................................... 5.5% 5.5% 5.5%
Expected long-term rate of return on plan assets....................... 7.5% 7.5% 7.5%
</TABLE>
DEFINED CONTRIBUTION
The Company has a defined contribution plan in which all salaried employees
and certain hourly paid employees of the Company are eligible to participate
following completion of six consecutive months of employment. The plan permits
employees to have contributions made as 401(k) salary deferrals on their behalf,
or as voluntary after-tax contributions, and provides for Company contributions,
or contributions matching employees salary deferral contributions, at the
discretion of the Board of Directors. In addition, the Board of Directors
approved a special contribution in 1997 of approximately $1.0 million to the
United Stationers 401(k) Savings Plan on behalf of certain non-highly
compensated employees who are eligible for participation in the plan. Company
contributions for matching of employees contributions were approximately $0.6
million, $0.9 million and $1.0 million in 1995, 1996 and 1997, respectively.
9. POSTRETIREMENT BENEFITS
The Company maintains 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.
Retirees pay one-half of the projected plan costs.
The following table sets forth the amounts recognized in the Company's
Consolidated Balance Sheets as of December 31, 1996 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Retirees................................................................. $ 877 $ 618
Other fully eligible plan participants................................... 632 632
Other active plan participants........................................... 1,588 1,795
--------- ---------
Total accumulated postretirement benefit obligation...................... 3,097 3,045
Unrecognized net gain.................................................... 1 415
--------- ---------
Accrued postretirement benefit obligation................................ $ 3,098 $ 3,460
--------- ---------
--------- ---------
</TABLE>
F-20
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. POSTRETIREMENT BENEFITS (CONTINUED)
The cost of postretirement health care benefits for the years ended December
31, 1995, 1996 and 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost......................................................... $ 161 $ 239 $ 268
Interest on accumulated benefit obligation........................... 109 204 190
Unrecognized net gain................................................ -- -- (15)
--------- --------- ---------
Net postretirement benefit cost...................................... $ 270 $ 443 $ 443
--------- --------- ---------
--------- --------- ---------
</TABLE>
The assumptions used in accounting for the Company's postretirement plan for
the three years presented are set forth below. Because the Company's annual
medical cost increases for current and future retirees and their dependents are
capped at 3% per year, which is the assumed health care trend rate used in
calculating the accumulated benefit obligation, an increase in the medical trend
rate above 3% has no effect on the accumulated postretirement benefit
obligation.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ---------
<S> <C> <C> <C>
Assumed average heath care cost trend rate.............................. 3.0% 3.0% 3.0%
Assumed discount rate................................................... 7.5% 7.5% 7.25%
</TABLE>
10. STOCK OPTION PLAN
The Management Equity Plan (the "Plan"), as amended, is administered by the
Board of Directors, although the Plan allows the Board of Directors of the
Company to designate an option committee to administer the Plan. The Plan
provides for the issuance of shares of Common Stock through the exercise of
options, to key officers and management employees of the Company, either as
incentive stock options or as non-qualified stock options.
In October 1997, the Company's stockholders approved an amendment to the
Plan which provided for the issuance of approximately 1.5 million additional
options to key management employees and directors of the Company. During 1997,
approximately 0.3 million options were granted to management employees and
directors at fair market value.
In September 1995, the Company's Board of Directors approved an amendment to
the Plan which provided for the issuance of options in connection with the
Merger ("Merger Incentive 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 during 1995 and
1996 to management employees. Some of the options were granted at an option
price below market value and the option price of certain options increases by
$0.625 on a quarterly basis effective April 1, 1996.
These Merger Incentive Options were granted in order to provide incentives
to management with respect to the successful development of ASI and the
integration of ASI with the Company. All Merger Incentive Options were vested
and became exercisable with the completion of the October Equity Offering in
October 1997. All Common Stock issued from the exercise of Merger Incentive
Options is subject to a six month holding period which expires on April 10,
1998. In the fourth quarter of 1997, the Company was required to recognize
compensation expense based upon the difference between the fair market value of
the Common Stock and the exercise prices. Based on the closing stock price on
F-21
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
October 10, 1997 of $39.125 and options outstanding as of October 10, 1997, the
Company recognized a non-recurring non-cash charge of $59.4 million ($35.5
million net of tax benefit of $23.9 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 mature 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>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
MANAGEMENT EQUITY PLAN EXERCISE EXERCISE EXERCISE
(EXCLUDING RESTRICTED STOCK) 1995 PRICES 1996 PRICES 1997 PRICES
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
the period......................... 217,309 $ 1.45 2,030,996 $ 10.73 2,497,768 $ 11.61
Granted.............................. 1,854,649 11.65 650,772 7.95 269,000 22.87
Exercised............................ (20,804) 1.45 -- -- (846,871) 15.41
Canceled............................. (20,158) 1.45 (184,000) 7.64 (121,000) 14.76
----------- ----------- -----------
Options outstanding at end of the
period............................. 2,030,996 $ 10.73 2,497,768 $ 11.61 1,798,897 $ 13.77
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The following table summarizes information concerning outstanding options of
the Plan at
December 31, 1997:
<TABLE>
<CAPTION>
REMAINING
NUMBER CONTRACTUAL
EXERCISE PRICES OUTSTANDING LIFE (YEARS)
- ------------------------------------------------------------------ ------------ ---------------
<S> <C> <C>
$ 1.45............................................................ 378,183 4.09
5.12............................................................ 116,250 4.74
16.88............................................................ 1,037,464 4.74
20.25............................................................ 2,000 4.74
21.63............................................................ 250,000 9.00
44.25............................................................ 15,000 9.87
------------
Total............................................................. 1,798,897
------------
------------
</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.
During 1996, the Company adopted the supplemental disclosure requirements of
SFAS No. 123. Accordingly, the Company is required to disclose pro forma net
income and earnings per share as if the fair value-based accounting method in
SFAS No. 123 had been used to account for stock-based
F-22
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
compensation cost. The Company's Merger Incentive Options granted under the Plan
were considered "all or nothing" awards because the options did not vest to the
employee until the occurrence of a Vesting Event. The fair value of "all or
nothing" awards were measured at the grant date; however, amortization of
compensation expense began when it was probable that the awards were vested. The
October 1997 October Equity Offering constituted a Vesting Event; as a result,
all Merger Incentive Options vested and became exercisable by the optionees.
Options granted under the Plan during 1997 did not require compensation cost
to be recognized in the income statement; however, they are subject to the
supplemental disclosure requirements of SFAS No. 123. Net income and earnings
per share, before charges (see (1) and (2) below), for 1995 and 1997 represent
the Company's results excluding one-time charges and the pro forma adjustments
required by SFAS No. 123. Had compensation cost been determined on the basis of
SFAS No. 123 for options granted during 1995, 1996 and 1997, net income and
earnings per share would have been adjusted as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income attributable to common stockholders
As reported........................................................... $ 2,796 $ 30,249 $ 776
Before charges........................................................ 10,081(1) 30,249 45,364(2)
Pro forma............................................................. 2,796 30,249 18,396
Net income per common share--basic
As reported........................................................... $ 0.26 $ 2.48 $ 0.06
Before charges........................................................ 0.94(1) 2.48 3.47(2)
Pro forma............................................................. 0.26 2.48 1.41
Weighted average shares outstanding................................... 10,747 12,205 13,064
Net income per common share--diluted
As reported........................................................... $ 0.22 $ 2.03 $ 0.05
Before charges........................................................ 0.79(1) 2.03 2.95(2)
Pro forma............................................................. 0.22 2.03 1.20
Weighted average shares outstanding and assumed conversions........... 12,809 14,923 15,380
</TABLE>
- --------------
(1) During 1995, the Company recorded a restructuring charge of $9.8 million and
an extraordinary loss of $2.4 million ($1.4 million net of tax benefit of
$1.0 million) related to early retirement of debt.
(2) The year ended December 31, 1997 reflects non-recurring charges of $59.4
million (non-cash) and $5.3 million (cash) related to the vesting of stock
options and the termination of certain management advisory service
agreements. In addition, during the fourth quarter of 1997 the Company
recorded an extraordinary loss of $9.8 million ($5.9 million net of tax
benefit of $3.9 million) related to early retirement of debt.
F-23
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
The Company uses a binomial option pricing model to estimate the fair value
of options at the date of grant. The weighted average assumptions used to value
options and the weighted average fair value of options granted during 1995, 1996
and 1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Fair value of options granted................................ $ 9.33 $ 17.67 $ 13.69
Exercise price............................................... $ 11.65 $ 8.59 $ 22.87
Expected stock price volatility.............................. 102.2% 80.7% 64.7%
Expected dividend yield...................................... 0.0% 0.0% 0.0%
Risk-free interest rate...................................... 5.9% 5.2% 6.4%
Expected life of options..................................... 3 years 2 years 5 years
</TABLE>
11. REDEEMABLE PREFERRED STOCK
At December 31, 1996, 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 C preferred stock, and
1,470,000 shares remained undesignated. Series C preferred stock was junior in
relation to the Series A 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 September 2, 1997, the Company completed the
redemption of all Series A and Series C preferred stock issued and outstanding
for $8.6 million and $12.7 million, respectively, including accrued and unpaid
dividends thereon. On July 28, 1995, the Company repurchased all Series B
preferred stock issued and outstanding for $7.0 million, including accrued and
unpaid dividends thereon. Upon redemption, each series of preferred stock
resumed the status of undesignated preferred stock. The Company does not have
any preferred stock outstanding as of December 31, 1997.
During the year ended December 31, 1996, 649 shares of Series A preferred
stock were accrued but not issued. As of December 31, 1996, 3,086 shares of
Series A preferred stock have been accrued as dividends but not issued. Also,
noncash dividends were declared and issued for Series C preferred stock in the
amount of 1,095 shares during 1996.
12. REDEEMABLE WARRANTS
The Company had 1,227,438 warrants ("Lender Warrants") outstanding at
December 31, 1996, which allowed holders thereof to buy shares of Common Stock
at an exercise price of $0.10 per share. During 1997, 1,227,438 warrants were
exercised into Common Stock resulting in proceeds of $122,744, which was used to
repay indebtedness under the Term Loan Facilities. Outstanding Lender Warrants
as of December 31, 1996 were valued at $19.50 per warrant. During 1996, 203,030
warrants were contributed back to the Company and terminated in connection with
anti-dilution agreements.
13. TRANSACTIONS WITH RELATED PARTIES
The Company had management advisory service agreements with three investor
groups. These investor groups provided certain advisory services to the Company
in connection with the Acquisition.
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
F-24
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
$725,000, payment (but not accrual) of which is subject to restrictions under
the Credit Agreement related to certain Company performance criteria. At the
Merger, 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, $725,000 and $513,540 with respect to each of the years
ended 1995, 1996 and 1997, respectively, for such oversight and monitoring
services. Under the agreement, the Company was 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.
Pursuant to an agreement, Cumberland Capital Corporation ("Cumberland") had
agreed to provide certain oversight and monitoring services to the Company in
exchange for 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. At the Merger, the Company paid aggregate fees to
Cumberland of $100,000 for services rendered in connection with the Acquisition.
Pursuant to the agreement, Cumberland earned an aggregate of $129,000, $137,000
and $97,400 with respect to the years ended 1995, 1996 and 1997, respectively,
for such oversight and monitoring services. The Company was also obligated to
reimburse Cumberland for its out-of-pocket expenses and indemnify Cumberland and
its affiliates from loss in connection with these services.
Pursuant to an agreement, Good Capital Co., Inc. ("Good Capital") had an
agreement to provide certain oversight and monitoring services to the Company in
exchange for 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. At the Merger, 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 of $129,000,
$137,500 and $97,400 with respect to the years ended 1995, 1996 and 1997,
respectively, for such oversight and monitoring services. The Company was 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.
In the fourth quarter of 1997, the Company terminated the management
advisory service agreements for one-time payments of approximately $2.4 million,
$400,000 and $400,000 to Wingate Partners, Cumberland and Good Capital,
respectively. As indicated in Note 1, these one-time payments were included as
non-recurring charges on the Consolidated Statements of Income.
F-25
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES
The provision for (benefit from) income taxes consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Currently payable--
Federal................................................... $ 4,172 $ 14,724 $ 19,812
State..................................................... 1,119 3,532 4,811
--------- --------- ---------
Total currently payable................................... 5,291 18,256 24,623
Deferred, net--
Federal................................................... (142) 4,614 (12,889)
State..................................................... (21) 685 (3,202)
--------- --------- ---------
Total deferred, net..................................... (163) 5,299 (16,091)
--------- --------- ---------
Provision for income taxes.................................. $ 5,128 $ 23,555 $ 8,532
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's effective income tax rates for the years ended December 31,
1995, 1996 and 1997 varied from the statutory Federal income tax rate as set
forth in the following table (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997
---------------------- ---------------------- ----------------------
<CAPTION>
% 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% $ 19,442 35.0% $ 5,852 35.0%
State and local income taxes--net of federal income
tax benefit...................................... 705 6.2 3,000 5.4 1,053 6.3
Non-deductible and other........................... 443 3.9 1,113 2.0 1,627 9.7
--------- --- --------- --- --------- ---
Provision for income taxes......................... $ 5,128 45.1% $ 23,555 42.4% $ 8,532 51.0%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</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,
----------------------------------------------
<S> <C> <C> <C> <C>
1996 1997
---------------------- ----------------------
<CAPTION>
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Accrued expenses.............................. $ 17,882 $ -- $ 18,280 $ --
Allowance for doubtful accounts............... 11,036 -- 8,632 --
Inventory reserves and adjustments............ -- 13,795 -- 16,852
Depreciation and amortization................. -- 43,798 -- 41,588
Reserve for stock option compensation......... -- -- 16,792 --
Other......................................... 6,915 -- 5,720 --
--------- ----------- --------- -----------
Total......................................... $ 35,833 $ 57,593 $ 49,424 $ 58,440
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
F-26
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
In the Consolidated Balance Sheets, these deferred assets and liabilities
are classified on a net basis as current and non-current based on the
classification of the related asset or liability or the expected reversal date
of the temporary difference.
15. 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 years ended December 31, 1995, 1996 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................................. $ 36,120 $ 52,871 $ 49,279
Income taxes............................................. 8,171 17,482 13,663
</TABLE>
The following are supplemental disclosures of noncash investing and
financing activities for the years ended December 31, 1995, 1996 and 1997
(dollars in thousands):
- On March 30, 1995, the Company issued stock valued at $2,162 in exchange
for services related to financing the Acquisition.
- On May 3, 1995, the Company issued stock valued at $2,406 in exchange for
services related to the issuance of the Notes.
16. 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, 1996 DECEMBER 31, 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Cash and cash equivalents.................................... $ 10,619 $ 10,619 $ 12,367 $ 12,367
Current maturities of long-term obligations and capital
lease...................................................... 46,923 46,923 44,267 44,267
Long-term debt and capital lease:
Notes...................................................... 150,000 168,000 100,000 114,750
All other.................................................. 403,079 403,079 392,868 392,868
Interest rate collar......................................... -- 1,200 -- 387
</TABLE>
The fair value of the Notes and interest rate collar are based on quoted
market prices and quotes from counterparties, respectively.
17. SUBSEQUENT EVENT
The Company announced on February 10, 1998 that its subsidiary, USSC, signed
a definitive purchase agreement with Abitibi-Consolidated Inc. to acquire the
U.S. and Mexican operations of its
F-27
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENT (CONTINUED)
Office Products Division, a specialty wholesale division of computer
consumables, peripherals and accessories. The purchase price is anticipated to
be approximately $110.0 million. The proposed transaction involves three of the
five business units of the Office Products Division, including: Azerty (U.S. and
Mexico); Positive ID (which distributes bar-code scanning products); and AP
Support Services (which provides outsourcing services in telemarketing, direct
response marketing, logistics and data management services). The Company has
filed for antitrust (Hart-Scott-Rodino) clearance and expects to close the
transaction in April 1998 subject to obtaining the necessary approvals and the
completion of due diligence.
18. SELECTED FINANCIAL DATA FOR LAGASSE BROS., INC.
On October 31, 1996, the Company acquired all of the capital stock of Lagasse.
Therefore, the following summary income statement data for the year ended
December 31, 1996 reflects the financial information of Lagasse for two months.
Set forth below is the summary balance sheet data for Lagasse as of December 31,
1996 and 1997 and the related summary income statement data for the two months
ended December 31, 1996 and the year ended December 31, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Balance Sheet Data:
Current assets........................................................................... $ 18,619 $ 29,731
Total assets............................................................................. 58,365 68,766
Current liabilities...................................................................... 6,295 13,564
Total liabilities........................................................................ 12,338 18,490
</TABLE>
<TABLE>
<CAPTION>
FOR THE TWO MONTHS
ENDED DECEMBER 31, FOR THE YEAR ENDED
1996 DECEMBER 31, 1997
------------------- -------------------
<S> <C> <C>
Income Statement Data:
Net sales............................................................. $ 12,668 $ 97,275
Gross margin.......................................................... 1,790 18,014
Operating income...................................................... 173 7,976
Net (loss) income..................................................... (21) 4,190
</TABLE>
F-28
<PAGE>
UNITED STATIONERS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(AUDITED)
DECEMBER 31, (UNAUDITED)
1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 12,367 $ 11,504
Accounts receivable, net...................................................... 311,920 282,237
Inventories................................................................... 511,555 484,911
Other current assets.......................................................... 14,845 15,754
-------------- --------------
Total current assets........................................................ 850,687 794,406
Property, plant and equipment, net.............................................. 164,543 161,894
Goodwill, net................................................................... 111,852 111,110
Other........................................................................... 20,939 20,282
-------------- --------------
Total assets................................................................ $ 1,148,021 $ 1,087,692
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 236,475 $ 235,915
Accrued liabilities........................................................... 118,496 107,616
Current maturities of long-term debt.......................................... 44,267 19,551
-------------- --------------
Total current liabilities................................................... 399,238 363,082
Deferred income taxes........................................................... 19,383 19,208
Long-term obligations........................................................... 506,092 468,773
-------------- --------------
Total liabilities........................................................... 924,713 851,063
Stockholders' equity:
Common stock (voting), $0.10 par value; 40,000,000 authorized; 15,905,273 and
16,024,019, respectively, issued and outstanding............................ 1,591 1,602
Additional paid-in capital.................................................... 213,042 211,261
Retained earnings............................................................. 8,675 23,766
-------------- --------------
Total stockholders' equity.................................................. 223,308 236,629
-------------- --------------
Total liabilities and stockholders' equity.................................. $ 1,148,021 $ 1,087,692
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
F-29
<PAGE>
UNITED STATIONERS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net sales............................................................................... $ 635,021 $ 712,517
Cost of goods sold...................................................................... 526,279 589,455
----------- -----------
Gross profit............................................................................ 108,742 123,062
Operating expenses
Warehousing, marketing and administrative expenses.................................... 76,704 85,037
----------- -----------
Income from operations.................................................................. 32,038 38,025
Interest expense........................................................................ 14,661 11,826
----------- -----------
Income before income taxes.............................................................. 17,377 26,199
Income taxes............................................................................ 7,368 11,108
----------- -----------
Net income.............................................................................. 10,009 15,091
Preferred stock dividends issued and accrued............................................ 455 --
----------- -----------
Net income attributable to common stockholders.......................................... $ 9,554 $ 15,091
----------- -----------
----------- -----------
Net income per share.................................................................... $ 0.78 $ 0.94
----------- -----------
----------- -----------
Average number of common shares......................................................... 12,205 15,995
----------- -----------
----------- -----------
Net income per common share--assuming dilution.......................................... $ 0.65 $ 0.88
----------- -----------
----------- -----------
Average number of common shares--assuming dilution...................................... 14,608 17,098
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-30
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 10,009 $ 15,091
Depreciation and amortization............................................................ 6,534 7,433
Transaction costs and other amortization................................................. 1,179 930
Changes in operating assets and liabilities.............................................. 31,206 44,046
---------- ----------
Net cash provided by operating activities.............................................. 48,928 67,500
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................................... (1,642) (3,984)
Proceeds from disposition of property, plant and equipment............................... 30 9
---------- ----------
Net cash used in investing activities.................................................. (1,612) (3,975)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of debt............................................................... (29,417) (29,934)
Net repayments under revolver............................................................ (11,000) (32,000)
Payment of employee withholding tax related to stock option exercises.................... -- (2,571)
Issuance of common shares................................................................ -- 243
Other.................................................................................... 66 (126)
---------- ----------
Net cash used in financing activities.................................................. (40,351) (64,388)
---------- ----------
Net change in cash and cash equivalents.................................................. 6,965 (863)
Cash and cash equivalents, beginning of period........................................... 10,619 12,367
---------- ----------
Cash and cash equivalents, end of period............................................... $ 17,584 $ 11,504
---------- ----------
---------- ----------
Other Cash Flow Information:
Cash payments during the three month period for:
Income taxes paid...................................................................... $ 349 $ 742
Interest paid.......................................................................... 8,340 10,424
</TABLE>
See notes to condensed consolidated financial statements.
F-31
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited,
except for the Consolidated Balance Sheet as of December 31, 1997. These
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of the Company's
management, the condensed consolidated financial statements for the unaudited
interim periods presented include all adjustments necessary to fairly present
the results of such interim periods and the financial position as of the end of
said periods. These adjustments were of a normal recurring nature and did not
have a material impact on the financial statements presented. Certain interim
expense and inventory estimates are recognized throughout the fiscal year
relating to marginal income tax rates, shrinkage, price changes and product mix.
Any refinements to these estimates based on actual experience are recorded when
known.
2. OPERATIONS
The Company is a national wholesale distributor of business products. The
Company offers approximately 35,000 items from more than 550 manufacturers. This
includes a broad spectrum of office products, computer supplies, office
furniture and facilities management supplies. The Company primarily serves
commercial and contract office products dealers. Its customers include more than
20,000 resellers--such as computer products resellers, office furniture dealers,
mass merchandisers, sanitary supply distributors, warehouse clubs, mail order
houses and office products superstores. The Company has a distribution network
of 64 Regional Distribution Centers. Through its integrated computer system, the
Company provides a high level of customer service and overnight delivery.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement 130, "Reporting Comprehensive Income." Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or stockholders' equity. Statement 130 requires foreign currency
translation adjustments, which prior to adoption were included in stockholders'
equity, to be included in other comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive income amounted
to $14,968,000 and $9,982,000, respectively.
4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common share is based on net income after preferred stock
dividend requirements. Basic earnings per share is calculated on the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated on the weighted average number of common and common equivalent shares
outstanding during the period. Stock options and warrants are considered to be
common equivalent shares.
F-32
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
NUMERATOR:
Net income............................................................................... $ 10,009 $ 15,091
Preferred stock dividends................................................................ 455 --
--------- ---------
Numerator for basic and diluted earnings per share--
Net income attributable to common stockholders......................................... $ 9,554 $ 15,091
--------- ---------
--------- ---------
DENOMINATOR:
Denominator for basic earnings per share--
Weighted average shares................................................................ 12,205 15,995
Effect of dilutive securities:
Employee stock options................................................................. 1,001 1,103
Warrants............................................................................... 1,402 --
--------- ---------
Dilutive potential common shares......................................................... 2,403 1,103
--------- ---------
Denominator for diluted earnings per share--
Adjusted weighted average shares and assumed conversions............................... 14,608 17,098
--------- ---------
--------- ---------
Basic earnings per share................................................................... $ 0.78 $ 0.94
--------- ---------
--------- ---------
Diluted earnings per share................................................................. $ 0.65 $ 0.88
--------- ---------
--------- ---------
</TABLE>
5. SUBSEQUENT EVENTS
AZERTY ACQUISITION
On April 3, 1998, the Company completed the acquisition of all of the capital
stock of Azerty Incorporated, Azerty de Mexico, S.A. de C.V., Positive ID
Wholesale Inc., and AP Support Services Incorporated (collectively, the "Azerty
Acquisition"), which together comprised substantially all of the United States
and Mexican operations of the Office Products Division of Abitibi-Consolidated
Inc. (collectively, the "Azerty Business"). The aggregate purchase price paid by
the Company for the Azerty Business was approximately $115.1 million (including
fees and expenses) following an initial post-closing adjustment, and subject to
final audit and review by the Company. The Azerty Business is primarily a
specialty wholesaler of computer consumables, peripherals and accessories in the
United States and Mexico. It is currently anticipated that the Company's
existing Micro United division will be integrated into the Azerty Business.
The purchase price for the Azerty Business was funded from borrowings under the
Company's New Credit Facilities (as defined).
F-33
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SUBSEQUENT EVENTS (CONTINUED)
THE NEW CREDIT FACILITIES
On April 3, 1998, in order to fund the purchase price of the Azerty Business,
refinance borrowings under the Company's then-existing senior secured credit
facilities, and pay related fees and expenses in connection therewith, the
Company amended and restated its existing credit agreement (as amended and
restated, the "New Credit Agreement") governing its senior secured credit
facilities (the "New Credit Facilities"). The New Credit Facilities initially
consisted of a $250.0 million six-year revolving credit facility (the "Revolving
Credit Facility"), a $150.0 million six-year tranche A term loan facility (the
"Tranche A Term Loan Facility"), and a $100.0 million six and three-quarter year
tranche B term loan facility (the "Tranche B Term Loan Facility"). The net
proceeds of the Notes Offering (as defined) were used to permanently repay a
substantial portion of indebtedness outstanding under the Tranche B Term Loan
Facility and the remainder of such facility was permanently repaid with proceeds
from the sale of certain receivables, following which the Tranche B Term Loan
Facility was terminated. As a result of the early retirement of the Existing
Credit Facilities, approximately $9.5 million ($5.7 million net of tax benefit
of $3.8 million) of unamortized financing fees will be expensed as a non-cash
extraordinary charge during the second quarter of 1998.
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its Existing Credit
Facilities, the Company entered into a $163.0 million 364-day liquidity facility
(the "Receivables Securitization Program"), pursuant to which the Company sells
certain of its U.S. dollar trade receivables to a wholly-owned offshore
bankruptcy-remote subsidiary of the Company (the "Receivables Company"). The
Receivables Company then transfers the Eligible Receivables to a third-party,
multi-seller asset-backed commercial paper program existing solely for the
purpose of issuing commercial paper rated A-1/P-1 or higher. The Company
received approximately $160.0 million proceeds from the initial sale of Eligible
Receivables on April 3, 1998.
The proceeds to the Company from the Receivables Securitization Program were
used to reduce borrowings under the Revolving Credit Facility and a portion of
the Tranche B Term Loan Facility.
THE NOTES OFFERING
On April 15, 1998, USSC consummated the sale (the "Notes Offering") of $100.0
million of its 8 3/8% Senior Subordinated Notes due 2008 (the "8 3/8% Notes") in
a transaction not subject to the registration requirements of the Securities Act
of 1933. The 8 3/8% Notes were immediately resold by the initial purchasers
thereof in reliance on Rule 144A under the Securities Act of 1933. The aggregate
net proceeds to the Company (aggregating approximately $97.0 million) from the
sale of the 8 3/8% Notes were used to repay a substantial portion of the
indebtedness outstanding under the Tranche B Term Loan Facility.
COMPUTER SERVICES CONTRACT WRITE-OFF
As a condition to the spinoff of ASI from the Wholesale Division of Boise
Cascade Office Products Corporation in January 1992, ASI entered into the
Computer Services Contract with a third party service provider to perform
certain computer services.
F-34
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SUBSEQUENT EVENTS (CONTINUED)
Upon completion of the systems integration between USSC and ASI, increasing
differences in the operating processes and technical environment between the
Company and the third-party service provider, became evident. The Computer
Services Contract was modified to allow the Company, at its discretion, not to
perform any processing at the third-party service provider's facilities.
Accordingly, the related fees were reduced. Payments made to the third-party
service provider subsequent to this final renegotiation were effectively for
disaster recovery purposes only. The Company has recently consolidated its
disaster recovery services under an agreement with another third-party service
provider. In May 1998, the Company completed an assessment of the future utility
of the Computer Services Contract. Based upon such assessment, the Company has
determined that it is no longer feasible to use the prior third-party service
provider for disaster recovery purposes.
During the second quarter of 1998, the Company will write off the remaining term
of the Computer Services Contract. As a result, the Company will record a
non-recurring charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million), which includes a $2.6 million prepaid expense and $11.3 million of
future payments.
6. SELECTED FINANCIAL DATA FOR LAGASSE BROS., INC.
Set forth below is the summary balance sheet data for Lagasse Bros., Inc. as of
December 31, 1997 and March 31, 1998 and the related summary income statement
data for the three months ended March 31, 1997 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
1997 1998
-------------- -----------
<S> <C> <C>
Balance Sheet Data:
Current assets...................................................................... $ 29,731 $ 32,499
Total assets........................................................................ 68,766 71,227
Current liabilities................................................................. 13,564 15,914
Total liabilities................................................................... 18,490 19,875
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
---------------------------
1997 1998
-------------- -----------
<S> <C> <C>
Income Statement Data:
Net sales........................................................................... $ 21,976 $ 26,925
Gross margin........................................................................ 3,919 5,073
Operating income.................................................................... 1,581 2,155
Net income.......................................................................... 737 1,072
</TABLE>
F-35
<PAGE>
REPORT OF CHARTERED ACCOUNTANTS
AUDITORS' REPORT
To the Directors of
Abitibi-Consolidated Inc.
We have audited the combined balance sheets of THE U.S. AND MEXICAN OFFICE
PRODUCTS OPERATIONS OF ABITIBI-CONSOLIDATED INC. as described in Note 2 to the
financial statements as at December 31, 1997 and 1996 and the combined
statements of earnings and retained earnings and cash flows for each of the
years in the three-year period ended December 31, 1997. These combined financial
statements are the responsibility of Abitibi-Consolidated Inc.'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 an audit to obtain
reasonable assurance 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.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of The U.S. and Mexican Office
Products Operations of Abitibi-Consolidated Inc. as at December 31, 1997 and
1996 and the results of its operations and the changes in its cash flows for
each of the years in the three-year period ended December 31, 1997 in accordance
with generally accepted accounting principles in the United States.
PRICE WATERHOUSE Toronto, Canada
Chartered Accountants January 31, 1998
F-36
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash................................................................................. $ 6,916 $ 7,034
Accounts receivable:
Trade, less allowance for doubtful accounts of $779 (1997-$873).................... 14,737 39,051
Affiliated companies (NOTE 3)...................................................... 18,000 --
Inventories.......................................................................... 31,624 33,639
Prepaid expenses and other current assets............................................ 3,941 4,262
Due from affiliate................................................................... 186 --
----------- ------------
75,404 83,986
Property and equipment (NOTE 4)........................................................ 5,833 5,392
Goodwill, net of amortization of $12,223 (1997-$13,763)................................ 18,155 16,615
----------- ------------
$ 99,392 $ 105,993
----------- ------------
----------- ------------
LIABILITIES
Current liabilities
Trade accounts payable............................................................... $ 35,655 $ 47,758
Accrued expenses..................................................................... 3,185 3,365
Current portion of long-term debt (NOTE 5)........................................... 86 99
Due to affiliate..................................................................... -- 456
----------- ------------
38,926 51,678
Advances from Abitibi-Consolidated Inc. (NOTE 6)....................................... 34,161 22,495
Long-term debt (NOTE 6)................................................................ 425 287
----------- ------------
73,512 74,460
EQUITY
Capital stock (NOTE 7)................................................................. 16,623 16,623
Contributed surplus.................................................................... 436 2,463
Retained earnings...................................................................... 8,880 12,496
Cumulative foreign exchange translation adjustment..................................... (59) (49)
----------- ------------
25,880 31,533
----------- ------------
$ 99,392 $ 105,993
----------- ------------
----------- ------------
Commitments, contractual obligations and contingencies (NOTE 12)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
COMBINED STATEMENTS OF EARNINGS
AND RETAINED EARNINGS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Net sales................................................................. $ 255,102 $ 303,938 $ 355,423
Cost of sales (including purchased inventory from an affiliated company of
$8 million)............................................................. 232,881 274,990 323,161
------------ ----------- -----------
Gross profit.............................................................. 22,221 28,948 32,262
Selling, general and administrative expenses (NOTE 6)..................... 17,764 19,955 25,374
Unusual items (NOTE 8).................................................... (1,563) (1,423) 451
------------ ----------- -----------
Operating profit.......................................................... 2,894 7,570 7,339
Interest expense, net (NOTE 6)
Abitibi-Consolidated Inc................................................ 1,459 1,470 636
Other................................................................... -- 35 42
------------ ----------- -----------
1,459 1,505 678
Other expenses (income), net.............................................. (62) 186 184
------------ ----------- -----------
Earnings before income taxes.............................................. 1,497 5,879 6,477
Income tax expense (NOTE 9)
State taxes............................................................. 217 464 302
Deferred income taxes................................................... 1,001 3,136 2,559
------------ ----------- -----------
1,218 3,600 2,861
------------ ----------- -----------
Net earnings for the year................................................. 279 2,279 3,616
Retained earnings, beginning of year...................................... 6,322 6,601 8,880
------------ ----------- -----------
Retained earnings, end of year............................................ $ 6,601 $ 8,880 $ 12,496
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- ---------
<S> <C> <C> <C>
Cash provided by (used in)
OPERATING ACTIVITIES
Net earnings for the year................................................... $ 279 $ 2,279 $ 3,616
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation............................................................ 729 1,014 1,233
Goodwill amortization................................................... 1,458 1,519 1,540
Deferred income taxes................................................... 1,001 3,136 2,559
Changes in current assets and liabilities
Accounts receivable--trade.............................................. (1,917) 12,893 (24,314)
Inventories............................................................. (3,307) (3,362) (2,015)
Advances (repayments) to affiliate...................................... -- (186) 642
Prepaid expenses and other current assets............................... (407) (557) (321)
Trade accounts payable and accrued expenses............................. 10,848 5,596 12,283
---------- ---------- ---------
8,684 22,332 (4,777)
INVESTING ACTIVITIES
Property and equipment additions............................................ (1,985) (1,519) (792)
Acquisition of business, including goodwill................................. -- (1,198) --
---------- ---------- ---------
(1,985) (2,717) (792)
FINANCING ACTIVITIES
Borrowings on long-term debt................................................ -- 511 --
Payments on long-term debt.................................................. (1,280) -- (125)
Advances (repayments) to Abitibi-Consolidated, Inc., net.................... (1,407) 1,808 (14,225)
Obligation assumed by parent company...................................... (907) (188) 2,027
Accounts receivable--affiliated companies (NOTE 3)........................ -- (18,000) 18,000
Other....................................................................... 171 (230) 10
---------- ---------- ---------
(3,423) (16,099) 5,687
---------- ---------- ---------
INCREASE IN CASH DURING THE YEAR.............................................. 3,276 3,516 118
CASH, BEGINNING OF YEAR....................................................... 124 3,400 6,916
---------- ---------- ---------
CASH, END OF YEAR............................................................. $ 3,400 $ 6,916 $ 7,034
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
1. ORGANIZATION
The U.S. and Mexican Office Products Operations of Abitibi-Consolidated Inc.
(the "division"), as described in Note 2, are effectively wholly owned by
Abitibi-Consolidated Inc. The division is a distributor of computer consumables,
peripherals and accessories. The division's customers include specialized
computer supplies dealers, value added computer resellers, office products
dealers and retailers, including superstores.
No single customer accounted for more than 5% of the division's annual net
sales during the three-year period ended December 31, 1997 and the operations of
the division are predominately in the United States.
The ultimate shareholder of the U.S. and Mexican Office Products Operations
entered into an agreement in February 1998 to sell these businesses. These
special purpose financial statements have been prepared to enable the purchaser
to meet certain U.S. regulatory filing requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The division's financial statements are expressed in U.S. dollars and are
prepared in accordance with accounting principles generally accepted in the
United States.
PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION
The combined financial statements include the operations of the following
entities:
- certain wholly-owned subsidiaries of Abitibi-Consolidated Sales
Corporation (formerly Abitibi-Price Sales Corporation), a Delaware
corporation, including Azerty Incorporated, Positive I.D. Wholesale Inc.
and AP Support Services Incorporated; Azerty Incorporated also owns a 1%
interest in Azerty de Mexico, S.A. de C.V.; and
- Azerty de Mexico, S.A. de C.V. (99% share owned by Abitibi-Consolidated
Inc.)
All significant intercompany transactions and balances have been eliminated
in the combined financial statements. Bonuses earned by senior executives which
were paid on behalf of the entities by the parent company in 1998 have also been
included in selling, general and administrative expenses on the combined
statements of earnings and retained earnings and in contributed surplus in the
combined balance sheets. The benefit conferred by Abitibi-Consolidated Sales
Corporation after taxes was $2,027,000 for the year ended December 31, 1997
(1996-expense of $188,000; 1995-expense of $907,000).
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-40
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Azerty de Mexico, S.A. de C.V. are translated into
U.S. dollars at the end-of-the-year exchange rate. The resulting translation
adjustment is recorded in the foreign currency translation adjustment account
which is included as a component of equity. Revenues and expenses are translated
at average prevailing exchange rates during the year.
Monetary assets and liabilities for integrated operations are translated at
the rates of exchange on the balance sheet date and nonmonetary assets and
liabilities are translated at historic rates. Revenues and expenses are
translated at average prevailing exchange rates during the year. Gains and
losses from foreign currency transactions are included in net earnings. The
Mexican operations were translated on a self-sustaining basis starting January
1, 1996. Previously, they had been accounted for on an integrated basis.
CASH
Cash includes cash equivalents. Cash equivalents are short-term investments
with maturities of three months or less from the date of purchase.
REVENUE RECOGNITION
Revenues are recognized at the time of shipment of products or upon
completion of the performance of services.
FINANCIAL INSTRUMENTS
The recorded values of the financial instruments, which include short-term
investments, accounts receivable, accounts payable and accrued expenses,
approximate market value. In the opinion of management, the operations do not
have any significant concentration of credit risk. Concentration of credit risk
with respect to accounts receivable is limited due to the wide variety of
customers and channels to and through which the products are sold.
INVENTORIES
Inventories consist of product held for sale and are stated at the lower of
cost and net realizable value with cost determined on a first-in, first-out
basis.
F-41
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged directly to earnings. Depreciation is calculated using the straight-line
method at rates that depreciate the related assets over their estimated useful
lives as follows:
<TABLE>
<S> <C>
Buildings............................................... 30 years
Machinery and equipment................................. 5-10 years
Office furniture, fixtures and equipment................ 3-10 years
</TABLE>
GOODWILL
Goodwill represents the excess of purchase price over the fair value of net
assets acquired and is amortized on a straight-line basis over twenty years. Any
impairment in value is recorded in earnings when it is identified based on
projected undiscounted future cash flows from the related operations.
3. ACCOUNTS RECEIVABLE
Under agreements with major banks, accounts receivables were sold to two of
the parent company's wholly-owned subsidiary companies beginning in late 1996.
This program was discontinued in early 1997. These affiliated companies then
sold the receivables, with minimal recourse, to the banks. The division acted as
a service agent and administered the collection of the accounts receivable. At
December 31, 1996, the banks owned approximately $18.2 million of such
receivables, with a maximum credit risk exposure to the division of $1.4
million.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Land............................................................................. $ 216 $ 216
Buildings and improvements....................................................... 1,892 1,909
Machinery and equipment.......................................................... 2,078 2,086
Office furniture, fixtures and equipment......................................... 5,625 6,279
Leasehold improvements........................................................... 290 371
--------- ---------
10,101 10,861
Less: Accumulated depreciation................................................... 4,268 5,469
--------- ---------
$ 5,833 $ 5,392
--------- ---------
--------- ---------
</TABLE>
F-42
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Promissory notes........................................................................ $ 472 $ 382
Other................................................................................... 39 4
--------- ---------
Total debt.............................................................................. 511 386
Less: Current portion................................................................... 86 99
--------- ---------
Long-term portion....................................................................... $ 425 $ 287
--------- ---------
--------- ---------
</TABLE>
The unsecured notes bear interest at a rate of 10% per annum and are
repayable in monthly instalments of $11,000 of principal and interest through to
May 2001.
6. RELATED PARTY TRANSACTIONS
Advances from Abitibi-Consolidated Inc. of $5,475,000 (1996-$2,749,000;
1995-$18,000,000) bore interest at LIBOR plus 1/8% per annum (1996 and
1995-LIBOR plus 3/4% per annum) with no fixed terms of repayment. The LIBOR rate
at the end of 1997 was 5.7% (1996-5.53%; 1995-5.72%). Interest expense on these
advances amounted to $636,000, $1,470,000 and $1,459,000 for the years ended
December 31, 1997, 1996 and 1995. The remainder of the advances are noninterest
bearing with no fixed repayment terms. The noninterest bearing advances averaged
$15,450,000 in 1997 (1996-$13,250,000; 1995-$11,704,000). Subsequent to December
31, 1997, all of the advances from Abitibi-Consolidated Inc. were repaid
primarily through the subscription by Abitibi-Consolidated Inc. for, and the
issuance of, common shares by the respective companies.
Included in selling, general and administrative expenses are parent company
administrative charges related primarily to executive administration, legal,
treasury and internal audit services of $97,000, $148,000 and $126,000,
respectively, for the years ended December 31, 1997, 1996 and 1995. In the
opinion of management, these costs have been allocated on a reasonable and
consistent basis.
F-43
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
7. CAPITAL STOCK
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Azerty Incorporated
Authorized
1,000 common shares
125 preferred shares
Issued
542,857 common shares.............................................. $ 16,468 $ 16,468
Azerty de Mexico, S.A. de C.V.
Authorized
100 Class 1 shares
Unlimited Class 2 shares
Issued
100 Class 1 shares
1,000 Class 2 shares............................................... 155 155
AP Support Services Incorporated
Authorized
1,000 common shares
125 preferred shares
Issued
100 common shares.................................................. -- --
Positive I.D. Wholesale Inc.
Authorized
1,000 common shares
125 preferred shares
Issued
100 common shares.................................................. -- --
--------- ---------
$ 16,623 $ 16,623
--------- ---------
--------- ---------
</TABLE>
8. UNUSUAL ITEMS
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Reduction in vendor allowances.................................................. $ -- $ -- $ 800
Incremental costs relating to United Parcel Service strike...................... -- -- (349)
Start-up costs and losses associated with new businesses........................ -- (1,423) --
Costs related to restructuring, including employee severance costs.............. (1,086) -- --
Foreign exchange loss relating to Mexican operations............................ (477) -- --
--------- --------- ---------
$ (1,563) $ (1,423) $ 451
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-44
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
State taxes
U.S.A......................................................................... $ 217 $ 464 $ 300
Mexico........................................................................ -- -- 2
--------- --------- ---------
217 464 302
Deferred taxes
U.S.A......................................................................... 1,001 3,136 2,559
Mexico........................................................................ -- -- --
--------- --------- ---------
1,001 3,136 2,559
--------- --------- ---------
Total provision for income taxes................................................ $ 1,218 $ 3,600 $ 2,861
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income before taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
U.S.A........................................................................... $ 1,803 $ 5,578 $ 5,885
Mexico.......................................................................... (306) 301 592
--------- --------- ---------
$ 1,497 $ 5,879 $ 6,477
--------- --------- ---------
--------- --------- ---------
</TABLE>
The U.S. entities are part of a tax sharing agreement with
Abitibi-Consolidated Sales Corporation. As part of this agreement, earnings are
charged with income taxes relating to reported profits and the federal taxes
allocated to the U.S. entities are recorded through advances from
Abitibi-Consolidated Inc. The amounts allocated are calculated on the basis that
the U.S. entities are a separate taxable entity. The U.S. combined effective
federal and state income tax rate is 40%. The goodwill on the balance sheets
does not have an income tax base and the related amortization expense is a
permanent difference for tax purposes.
Azerty de Mexico, S.A. de C.V. is a separate entity for taxation purposes.
An income tax expense for the year ended December 31, 1997 of $200,000
(1996-$85,000; 1995-$60,000) was offset by the utilization of unrecorded tax
benefits relating to accounting losses of previous years. At December 31,1997,
Azerty de Mexico, S.A. de C.V. had approximately $1.7 million of income tax
losses available to be carried forward and offset against future taxable income.
These tax losses expire in 2005 and 2006. The income tax benefit arising from
these losses has not been recognized in the financial statements.
10. PENSION COSTS AND OBLIGATIONS
Certain of the operations have defined contribution retirement plans
covering substantially all of their employees. The contributions vary by entity
and provide for payments as a percentage or multiple of employee contributions.
Pension costs approximated $200,000 in 1997 (1996-$100,000; 1995-$100,000).
F-45
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
11. BANK INDEBTEDNESS
The division borrows on an unsecured line of credit of $4,000,000 bearing
interest at LIBOR plus 1/2% per annum to fund general operating requirements. As
at December 31, 1997, no amounts were outstanding under the line of credit. The
line of credit will be terminated April 3, 1998.
12. COMMITMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
Equipment and facilities under operating leases expiring in various years
through 2007 are summarized below. In most cases, management expects that, in
the normal course of business, leases will be renewed or replaced by other
leases.
Minimum future annual rental payments under noncancellable operating leases
having original terms in excess of one year, are as follows:
<TABLE>
<S> <C>
1998............................................... $ 1,114
1999............................................... 802
2000............................................... 785
2001............................................... 383
2002............................................... 271
Thereafter......................................... 716
---------
$ 4,071
---------
---------
</TABLE>
Total rental expense under operating leases approximated $820,000, $800,000
and $660,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The division carries products and accessories purchased from numerous
suppliers and approximately 60% of net sales in each of the three years ended
December 31, 1997 were derived from products purchased from the five largest
suppliers.
The division is involved in certain litigation arising in the ordinary
course of business. Management believes that such litigation will be resolved
without material effect on the financial position or results of operations.
F-46
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
(AUDITED) (UNAUDITED)
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 7,034 $ 2,375
Accounts receivable, net....................................................... 39,051 45,458
Inventories.................................................................... 33,639 33,476
Other current assets........................................................... 4,262 3,641
-------------- ------------
Total current assets....................................................... 83,986 84,950
Property and equipment......................................................... 5,392 5,345
Goodwill, net.................................................................. 16,615 16,271
-------------- ------------
Total assets............................................................... $ 105,993 $ 106,566
-------------- ------------
-------------- ------------
LIABILITIES
Current liabilities:
Accounts payable............................................................... $ 47,758 $ 40,288
Accrued liabilities............................................................ 3,821 3,103
Current maturities of long-term debt........................................... 99 102
-------------- ------------
Total current liabilities.................................................. 51,678 43,493
Advances from Abitibi-Consolidated Inc......................................... 22,495 30,145
Long-term obligations.......................................................... 287 248
-------------- ------------
Total liabilities.......................................................... 74,460 73,886
Divisional equity.............................................................. 31,533 32,680
-------------- ------------
Total liabilities and equity............................................... $ 105,993 $ 106,566
-------------- ------------
-------------- ------------
</TABLE>
See notes to condensed combined financial statements.
F-47
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Net sales.................................................................................. $ 88,367 $ 99,723
Cost of goods sold......................................................................... 80,390 91,050
--------- ---------
Gross profit............................................................................... 7,977 8,673
Operating expenses
Selling, general and administrative expenses............................................. 5,295 6,219
--------- ---------
Operating income........................................................................... 2,682 2,454
Interest expense........................................................................... 255 185
Other income and (expense), net............................................................ 10 (221)
--------- ---------
Income before income taxes................................................................. 2,437 2,048
Income taxes............................................................................... 1,072 901
--------- ---------
Net income................................................................................. $ 1,365 $ 1,147
--------- ---------
--------- ---------
</TABLE>
See notes to condensed combined financial statements.
F-48
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................. $ 1,365 $ 1,147
Depreciation and amortization.............................................................. 683 680
Changes in operating assets and liabilities................................................ (10,632) (13,771)
--------- ---------
Net cash used in operating activities.................................................. (8,584) (11,944)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................................................... (187) (289)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................................................. (30) (39)
Advances to Abitibi-Consolidated Inc., net................................................. 2,244 7,650
Other...................................................................................... (151) (37)
--------- ---------
Net cash provided by financing activities................................................ 2,063 7,574
--------- ---------
Net change in cash and cash equivalents.................................................... (6,708) (4,659)
Cash and cash equivalents, beginning of period............................................. 6,916 7,034
--------- ---------
Cash and cash equivalents, end of period................................................. $ 208 $ 2,375
--------- ---------
--------- ---------
</TABLE>
See notes to condensed combined financial statements.
F-49
<PAGE>
THE U.S. AND MEXICAN OFFICE PRODUCTS OPERATIONS
OF ABITIBI-CONSOLIDATED INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
The U.S. and Mexican Office Products Operations of Abitibi-Consolidated Inc.
(the "division") are effectively wholly owned by Abitibi-Consolidated Inc. The
division is a leading distributor of computer consumables, peripherals and
accessories. The division's customers include specialized computer supplies
dealers, value added computer resellers, office products dealers and retailers,
including superstores.
No single customer accounted for more than 5% of the division's annual net
sales during the three months ended March 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The division's financial statements are expressed in U.S. dollars and are
prepared in accordance with accounting principles generally accepted in the
United States.
PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION
The combined financial statements include the operations of the following
entities and divisions:
- certain wholly-owned subsidiaries of Abitibi-Consolidated Sales
Corporation (formerly Abitibi-Price Sales Corporation), a Delaware
corporation, including Azerty Incorporated, Positive I.D. Wholesale Inc.
and AP Support Services Incorporated. Azerty Incorporated also has a 1%
share of Azerty de Mexico, S.A. de C.V.; and
- Azerty de Mexico, S.A. de C.V. (99% share owned by Abitibi-Consolidated
Inc.).
All significant intercompany transactions and balances have been eliminated
in the combined financial statements.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the division adopted Financial Accounting Standards
Board Statement 130, "Reporting Comprehensive Income." Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
division's net income or stockholders' equity. Statement 130 requires foreign
currency translation adjustments, which prior to adoption were included in
stockholders' equity, to be included in other comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive income
amounted to $1,626,000 and $1,613,000, respectively.
4. SUBSEQUENT EVENTS
On April 3, 1998, United Stationers Supply Co. ("USSC") completed the
acquisition of all of the capital stock of Azerty Incorporated, Azerty de
Mexico, S.A. de C.V., Positive ID Wholesale Inc., and AP Support Services
Incorporated, which together comprised substantially all of the United States
and Mexican operations of the Office Products Division of Abitibi-Consolidated
Inc. (collectively, the "Azerty Business"). The aggregate purchase price paid by
USSC for the Azerty Business was approximately $115.1 million (including fees
and expenses) following an initial post-closing adjustment, and subject to final
audit and review by USSC.
F-50
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NEW NOTES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF THE NEW NOTES
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS NOT
BEEN A CHANGE IN FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
---------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................... i
Prospectus Summary...................... 1
Risk Factors............................ 17
Recent Transactions..................... 25
Use of Proceeds......................... 29
Capitalization.......................... 29
Selected Consolidated Financial Data.... 30
Unaudited Consolidated Pro Forma
Financial Statements.................. 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 46
Business................................ 56
Management.............................. 67
Certain Transactions.................... 70
Security Ownership of Certain Beneficial
Owners................................ 74
Description of Certain Indebtedness..... 76
The Exchange Offer...................... 79
Description of the New Notes............ 86
Certain Federal Income Tax
Considerations........................ 120
Plan of Distribution.................... 120
Legal Matters........................... 121
Experts................................. 121
Incorporation of Certain Documents by
Reference............................. 121
Index to Financial Statements........... F-1
</TABLE>
---------------------------------------------
UNTIL DECEMBER 1, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
OFFER TO EXCHANGE ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 2008
OF
UNITED STATIONERS SUPPLY CO.
[LOGO]
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P R O S P E C T U S
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AUGUST 5, 1998
