<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
---------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ---------------
Commission file numbers: United Stationers Inc.: 0-10653
United Stationers Supply Co.: 33-59811
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
-----------------------------------
(Exact name of registrant as specified in its charter)
United Stationers Inc.: Delaware United Stationers Inc.: 36-3141189
United Stationers Supply Co.: Illinois United Stationers Supply Co.: 36-2431718
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2200 East Golf Road, Des Plaines, Illinois 60016-1267
- ------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 699-5000
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
United Stationers Inc.: Yes /X/ No / /
United Stationers Supply Co.: Yes /X/ No / /
On May 10, 2000, United Stationers Inc. had outstanding 34,203,792 shares of
Common Stock, par value $0.10 per share. On May 10, 2000, United Stationers
Supply Co. had 880,000 shares of Common Stock, $1.00 par value per share,
outstanding; United Stationers Inc. owns 100% of these shares.
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
IMPORTANT EXPLANATORY NOTE 1
Independent Accountants' Review Report 2
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income
for the Three Months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION 16
SIGNATURE 18
INDEX TO EXHIBITS 19
</TABLE>
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPORTANT EXPLANATORY NOTE
THIS INTEGRATED FORM 10-Q IS FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, FOR EACH OF UNITED STATIONERS INC. ("UNITED"), A DELAWARE
CORPORATION, AND ITS WHOLLY OWNED SUBSIDIARY, UNITED STATIONERS SUPPLY CO.
("USSC"), AN ILLINOIS CORPORATION (COLLECTIVELY, THE "COMPANY"). UNITED
STATIONERS INC. IS A HOLDING COMPANY WITH NO OPERATIONS SEPARATE FROM ITS
OPERATING SUBSIDIARY, UNITED STATIONERS SUPPLY CO. AND ITS SUBSIDIARIES. NO
SEPARATE FINANCIAL INFORMATION FOR UNITED STATIONERS SUPPLY CO. AND ITS
SUBSIDIARIES HAS BEEN PROVIDED HEREIN BECAUSE MANAGEMENT FOR THE COMPANY
BELIEVES SUCH INFORMATION WOULD NOT BE MEANINGFUL BECAUSE (i) UNITED
STATIONERS SUPPLY CO. IS THE ONLY DIRECT SUBSIDIARY OF UNITED STATIONERS
INC., WHICH HAS NO OPERATIONS OTHER THAN THOSE OF UNITED STATIONERS SUPPLY
CO. AND (ii) ALL ASSETS AND LIABILITIES OF UNITED STATIONERS INC. ARE
RECORDED ON THE BOOKS OF UNITED STATIONERS SUPPLY CO. THERE IS NO MATERIAL
DIFFERENCE BETWEEN UNITED STATIONERS INC. AND UNITED STATIONERS SUPPLY CO.
FOR THE DISCLOSURE REQUIRED BY THE INSTRUCTIONS TO FORM 10-Q AND THEREFORE,
UNLESS OTHERWISE INDICATED, THE RESPONSES SET FORTH HEREIN APPLY TO EACH OF
UNITED STATIONERS INC. AND UNITED STATIONERS SUPPLY CO.
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<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
United Stationers Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
United Stationers Inc. and Subsidiaries as of March 31, 2000, and the related
condensed consolidated statements of income for the three month periods ended
March 31, 2000 and 1999, and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States, which will be performed for the full year with the objective
of expressing an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements referred to above for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of United
Stationers Inc. as of December 31, 1999, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year then ended (not presented herein) and in our report dated January 26,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999, is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Ernst & Young LLP
Chicago, Illinois
April 21, 2000
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<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, December 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,829 $ 18,993
Accounts receivable, net 265,302 263,432
Inventories 583,089 607,682
Other current assets 23,469 24,424
----------- -----------
Total current assets 900,689 914,531
Property, plant and equipment, net 169,077 167,544
Goodwill, net 180,143 181,456
Other 18,115 16,372
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Total assets $ 1,268,024 $ 1,279,903
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 337,857 $ 346,558
Accrued liabilities 144,745 142,858
Current maturities of long-term debt 10,585 9,567
----------- -----------
Total current liabilities 493,187 498,983
Deferred income taxes 29,010 28,926
Long-term obligations 315,100 345,985
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Total liabilities 837,297 873,894
Stockholders' equity:
Common stock, $0.10 par value, authorized 100,000,000 shares,
issued 37,213,207 shares in 2000 and 1999 3,721 3,721
Additional paid-in capital 303,970 304,288
Treasury stock, at cost - 3,170,699 shares in 2000 and
3,220,481 shares in 1999 (48,395) (49,145)
Retained earnings 172,187 148,262
Accumulated translation adjustment (756) (1,117)
----------- ------------
Total stockholders' equity 430,727 406,009
----------- -----------
Total liabilities and stockholders' equity $ 1,268,024 $ 1,279,903
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------------
2000 1999
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<S> <C> <C>
Net sales $ 979,358 $ 824,261
Cost of goods sold 821,566 690,393
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Gross profit 157,792 133,868
Operating expenses:
Warehousing, marketing and
administrative expenses 107,388 91,982
--------------- --------------
Income from operations 50,404 41,886
Interest expense 7,414 7,467
Other expense 2,646 2,199
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Income before income taxes 40,344 32,220
Income taxes 16,420 13,532
--------------- --------------
Net income $ 23,924 $ 18,688
=============== ==============
Net income per common share $ 0.70 $ 0.51
=============== ==============
Average number of common shares outstanding (in thousands) 34,019 36,840
Net income per common share - assuming dilution $ 0.69 $ 0.50
=============== ==============
Average number of common shares outstanding - assuming
dilution (in thousands) 34,751 37,409
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 23,924 $ 18,688
Depreciation and amortization 7,598 6,804
Amortization of capitalized financing costs 492 358
Changes in operating assets and liabilities 14,100 (6,464)
----------- ----------
Net cash provided by operating activities 46,114 19,386
Cash Flows From Investing Activities:
Capital expenditures (7,163) (8,702)
Proceeds from disposition of property, plant
and equipment - - 3,200
----------- ----------
Net cash used in investing activities (7,163) (5,502)
Cash Flows From Financing Activities:
Principal payments on debt (1,705) (1,119)
Net (repayments) borrowings under revolver (28,000) 26,000
Issuance of common shares 648 2,447
Acquisition of treasury stock - - (34,656)
Payment of employee withholding tax related to
stock option exercises (419) (2,381)
Other 361 236
----------- ----------
Net cash used in financing activities (29,115) (9,473)
----------- ----------
Net change in cash and cash equivalents 9,836 4,411
Cash and cash equivalents, beginning of period 18,993 19,038
----------- ----------
Cash and cash equivalents, end of period $ 28,829 $ 23,449
=========== ==========
Other Cash Flow Information:
Income taxes paid $ 3,101 $ 1,196
Interest paid 2,695 1,635
Discount on the sale of accounts receivable 2,540 2,207
</TABLE>
See notes to condensed consolidated financial statements.
- 5 -
<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, 1999. 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 accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations.
Accordingly, the reader of this Form 10-Q should refer to the Company's Form
10-K for the year ended December 31, 1999 for further information. 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. Certain interim expense and
inventory estimates are recognized throughout the 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 operates in a single segment as the nation's largest wholesale
distributor of business products in North America. The Company offers
approximately 35,000 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 20,000
resellers - such as computer products resellers, office furniture dealers,
office products superstores, janitorial and sanitation supply distributors,
e-tailers, warehouse clubs, mail order houses and mass merchandisers. The
Company has a distribution network of 66 regional distribution centers. Through
its integrated mainframe systems, the Company provides a high level of customer
service and overnight delivery.
On April 18, 2000, the Company announced that it had signed an operating lease
for a warehouse located in Memphis, Tennessee, dedicated to third party
fulfillment. This new 654,000 square foot facility will act as an air hub
enabling the Company's e-Nited Business Solutions Division to provide both
ground and overnight express delivery capability. The warehouse, which is
expected to open in September 2000, will incorporate the latest warehouse and
distribution technology.
3. COMPREHENSIVE INCOME (in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
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<S> <C> <C>
Net income $23,924 $18,688
Unrealized currency translation adjustment 361 235
------- -------
Comprehensive income $24,285 $18,923
======= =======
</TABLE>
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that could occur if dilutive securities were
exercised into common stock. Stock options are considered dilutive securities.
- 6 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
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<S> <C> <C>
NUMERATOR:
Net income $ 23,924 $ 18,688
========= =========
DENOMINATOR (in thousands):
Denominator for basic earnings per share -
Weighted average shares 34,019 36,840
Effect of dilutive securities:
Employee stock options 732 569
--------- ---------
Denominator for diluted earnings per share -
Adjusted weighted average shares
And assumed conversions 34,751 37,409
========= =========
EARNINGS PER COMMON SHARE:
Net income per share - basic $ 0.70 $ 0.51
Net income per share - diluted $ 0.69 $ 0.50
</TABLE>
5. LONG-TERM DEBT
Long-term debt consisted of the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
2000 1999
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<S> <C> <C>
Revolver $ 25,000 $ 53,000
Tranche A term loan, due in installments until March 31, 2004 52,147 53,711
8.375% Senior Subordinated Notes, due April 15, 2008 100,000 100,000
12.75% Senior Subordinated Notes, due May 1, 2005 100,000 100,000
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 275 416
----------- ------------
Subtotal 307,222 336,927
Less - current maturities (10,585) (9,567)
----------- ------------
Total $ 296,637 $ 327,360
============ ============
</TABLE>
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<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The prevailing prime interest rate at March 31, 2000 and December 31, 1999 was
9.0% and 8.5%, respectively.
At March 31, 2000, the available credit under the Second Amended and Restated
Credit Agreement (the "Credit Agreement") included $52.1 million of term loan
borrowings (the "Term Loan Facilities"), and up to $250.0 million of revolving
loan borrowings (the "Revolving Credit Facility"). In addition, the Company had
$100.0 million of 12.75% Senior Subordinated Notes due 2005 (as defined), $100.0
million of 8.375% Senior Subordinated Notes due 2008, and $29.8 million of
industrial revenue bonds. Amounts outstanding under the Term Loan Facilities are
to be repaid in 16 quarterly installments ranging from $2.6 million at June 30,
2000 to $3.7 million at March 31, 2004.
The Revolving Credit Facility is limited to $250.0 million, less the aggregate
amount of letter of credit liabilities, and contains a provision for swingline
loans in an aggregate amount up to $25.0 million. The Revolving Credit Facility
matures on March 31, 2004, and $25.0 million was outstanding at March 31, 2000.
12.75% Senior Subordinated Notes:
The 12.75% Senior Subordinated Notes ("12.75% Notes") were originally issued on
May 3, 1995, pursuant to the 12.75% Notes Indenture. As of March 31, 2000, the
aggregate outstanding principal amount of the 12.75% Notes was $100.0 million.
The 12.75% Notes are unsecured senior subordinated obligations of USSC, and
payment of the 12.75% Notes is fully and unconditionally guaranteed by the
Company and USSC's domestic "restricted" subsidiaries on a senior subordinated
basis. The 12.75% Notes mature on May 1, 2005, and bear interest at the rate of
12.75% per annum, payable semi-annually on May 1 and November 1 of each year.
On May 2, 2000, $100.0 million of the Company's 12.75% Notes were redeemed at
the redemption price of 106.375% of the principal amount plus accrued interest.
As a result, the Company will record an after-tax extraordinary charge of
approximately $6.5 million in the second quarter of 2000. This charge includes
approximately $2.6 million (after-tax) related to the write-off of capitalized
costs. The redemption was funded through the Company's Revolving Credit
Facility. The Company's annual interest expense saving will be approximately
$4.0 million based on a 375 basis point reduction to the interest rate and the
elimination of the amortization of capitalized costs.
8.375% Senior Subordinated Notes:
The 8.375% Senior Subordinated Notes ("8.375% Notes") were issued on April 15,
1998, pursuant to the 8.375% Notes Indenture. As of March 31, 2000, the
aggregate outstanding principal amount of 8.375% Notes was $100.0 million. The
8.375% Notes are unsecured senior subordinated obligations of USSC, and payment
of the 8.375% Notes is fully and unconditionally guaranteed by the Company and
USSC's domestic "restricted" subsidiaries that incur indebtedness (as defined in
the 8.375% Notes Indenture) on a senior subordinated basis. The 8.375% Notes
mature on April 15, 2008, and bear interest at the rate of 8.375% per annum,
payable semi-annually on April 15 and October 15 of each year.
- 8 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. SUMMARIZED FINANCIAL DATA FOR GUARANTOR SUBSIDIARIES
Azerty Incorporated, Positive ID Wholesale, and AP Support Services
(collectively, the "Azerty Guarantor") and Lagasse Bros., Inc. ("Lagasse")
guarantee the 8.375% Senior Subordinated Notes due 2008 (the "Notes") issued by
United Stationers Supply Co. ("USSC"). The Azerty Guarantor Subsidiaries and
Azerty de Mexico, S.A. de C.V. (collectively, the "Azerty Business") were
acquired on April 3, 1998.
Summarized below is the combined financial data for the Azerty Business
(subsequent to its acquisition by USSC) and Lagasse. Summarized financial data
for the three months ended March 31, 2000 reflects the operations of Lagasse and
the Azerty Business.
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
2000 1999
---------------- -----------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 254,442 $ 247,413
Total assets 371,090 364,551
Current liabilities 117,627 99,679
Total liabilities 114,390 96,275
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Income Statement Data:
Net sales $ 211,999 $ 175,710
Gross margin 20,259 18,084
Operating income 7,293 6,729
Net income 3,492 3,741
</TABLE>
7. RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 amends SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which was issued in June 1998 and was to be effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No.
137 defers the effective date of SFAS No. 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Earlier application is permitted. SFAS No.
133 requires all derivatives to be recorded on the balance sheet at fair value
and establishes "special accounting" for the following three different types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in recognizing offsetting changes in value or
cash flows of both the hedge and the hedged item in earnings in the same period.
Changes in the fair value of derivatives that do not meet the criteria of one of
these three categories of hedges are included in earnings in the period of the
change. The Company anticipates that SFAS No. 133 will not have a material
impact on its consolidated financial statements.
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<PAGE>
ITEM 2. 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 and related notes appearing elsewhere in this Form 10-Q.
Information contained or incorporated by reference in this Form 10-Q 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 fact included in this Form 10-Q, 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 Form 10-Q 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. Such risks and uncertainties include, but
are not limited to, the highly-competitive environment in which the Company
operates, the integration of acquisitions, changes in end-users' traditional
demands for business products, reliance by the Company on certain key suppliers,
the effects on the Company of fluctuations in manufacturers' pricing, potential
service interruptions, customer credit risk, dependence on key personnel and
general economic conditions. A description of these factors, as well as other
factors that could affect the Company's business, is set forth in certain
filings by the Company with the Securities and Exchange Commission. All
forward-looking statements contained in this Form 10-Q and/or 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.
First Quarter Ended March 31, 2000 compared with the
First Quarter Ended March 31, 1999
- -----------------------------------------------------
NET SALES. Net sales for the first quarter of 2000 totaled $979.4 million, up
18.8% or 15.2% on equivalent workdays, compared with $824.3 million in the first
quarter of 1999. The Company experienced sales growth in all product categories,
customer channels, and across all geographies.
The janitorial and sanitation supply product category continued to achieve
strong growth rates. These products are primarily distributed through the
Lagasse business unit, which achieved a growth rate of nearly 30%. This increase
is based on continued market expansion into a fragmented industry. Consolidated
purchasing power has allowed the Company to leverage pricing to become more
competitive in the marketplace. The growth within customer channels is mainly
concentrated in national accounts, mail order, and within independent dealers.
The Company's sales into the office furniture market grew 20%, compared with
the prior year quarter. The Company is focusing on this product category
recognizing the opportunity for increased sales penetration with existing
customers and introducing new marketing programs to reach new customers. The
continued strong sales growth in this category resulted from increased volume
across all customer channels.
- 10 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Traditional office product growth was in the low teens versus the prior year
quarter. As sales grow the Company is able to leverage pricing, thus gaining
market share. The Company has been exceptionally successful with national
accounts and mail order partners.
The computer supplies category remained strong posting a growth rate in the low
teens over the prior year quarter. This is a very competitive market with
relatively low margins. However, based on the Company's scale and efficient
distribution capabilities, sales will continue to increase as relationships with
customers are strengthened. National accounts, mail order, and emerging channels
continued to show exceptional growth. However, sales growth to retail stores
fell to the high single digits, reflecting the initial build-up of inventory. It
is expected that sell-through to the retail channel will remain at current
levels.
GROSS MARGIN. Gross margin declined to 16.1% in the first quarter of 2000,
compared with 16.3% in 1999. This decline reflects product mix and incremental
freight costs. Pricing margin has been impacted by higher dealer rebates due to
increased sales and strong growth among our national account dealers who receive
a higher rebate percentage due to volume. However, during the first quarter the
Company experienced approximately 1.0% inflation resulting in higher margin and
the increased volume has created higher vendor allowances.
OPERATING EXPENSES. Operating expenses as a percent of net sales declined to
11.0% in the first quarter of 2000, compared with 11.2% in the prior year. This
decline reflects the Company's ability to gain operating leverage, at the same
time the higher than anticipated sales volume resulted in higher payroll and
other warehouse expenses. There is ongoing opportunity to reduce operating
expenses as the Company installs best practices across all facilities, more
advanced technology, and continues to leverage its infrastructure.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales
remained flat at 5.1%.
INTEREST EXPENSE. Interest expense as a percent of net sales was 0.8% in 2000,
compared with 0.9% in 1999. This reduction reflects the Company's strong cash
flow and the continued leveraging of interest costs against higher sales. These
transactions were partially offset by slightly higher interest rates on variable
rate debt.
OTHER EXPENSE. Other expense as a percent of net sales was 0.3% in 2000 and
1999. This expense represents the costs associated with the sale of certain
trade accounts receivable through the Receivables Securitization Program (as
defined). Costs related to the Receivables Securitization Program vary on a
monthly basis and are generally related to certain interest rates.
INCOME BEFORE TAXES. Income before taxes as a percent of net sales increased to
4.0% from 3.9% in 1999.
NET INCOME. Net income as a percent of net sales increased to 2.4% in 2000,
compared with 2.3% in 1999.
- 11 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Credit Agreement
At March 31, 2000, the available credit under the Second Amended and Restated
Credit Agreement (the "Credit Agreement") included $52.1 million of term loan
borrowings (the "Term Loan Facilities"), and up to $250.0 million of revolving
loan borrowings (the "Revolving Credit Facility"). In addition, the Company had
$100.0 million of 12.75% Senior Subordinated Notes due 2005 (as defined), $100.0
million of 8.375% Senior Subordinated Notes due 2008 and $29.8 million of
industrial revenue bonds.
The Term Loan Facilities consist of a $52.1 million Tranche A term loan facility
("Tranche A Facility"). Amounts outstanding under the Tranche A Facility are to
be repaid in 16 quarterly installments ranging from $2.6 million at June 30,
2000 to $3.7 million at March 31, 2004.
The Revolving Credit Facility is limited to $250.0 million, less the aggregate
amount of letter of credit liabilities, and contains a provision for swingline
loans in an aggregate amount up to $25.0 million. The Revolving Credit Facility
matures on March 31, 2004 and $25.0 million was outstanding at March 31, 2000.
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 domestic direct and
indirect subsidiaries of USSC, certain of the stock of Lagasse and Azerty, and
certain of the foreign and direct and indirect subsidiaries of USSC (excluding
USS Receivables Company, Ltd.) and security interests and liens upon all
accounts receivable, inventory, contract rights and certain real property of
USSC and its domestic subsidiaries other than accounts receivables sold in
connection with the Receivables Securitization Program.
The loans outstanding under the Term Loan Facilities and the Revolving Credit
Facility bear interest as determined within a set range. The interest rate is
based on the ratio of total debt to earnings before interest, taxes,
depreciation, and amortization ("EBITDA"). The Tranche A Facility and
Revolving Credit Facility bear interest at prime to prime plus 0.75%, or, at
the Company's option, the London Interbank Offering Rate ("LIBOR") plus 1.00%
to 2.00%.
The Credit Agreement contains representations and warranties, affirmative and
negative covenants and events of default customary for financings of this type.
At March 31, 2000, the Company was in compliance with all covenants.
The right of United to participate in any distribution of earnings or assets of
USSC is subject to the prior claims of USSC's creditors. In addition, the Credit
Agreement contains certain restrictive covenants, including covenants that
restrict or prohibit USSC's ability to pay cash dividends and make other
distributions to United.
- 12 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Management believes that the Company's cash on hand, anticipated funds
generated from operations and available borrowings under the Credit Agreement,
will be sufficient to meet the short-term (less than 12 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 Credit Agreement and the indentures governing the
Notes contain restrictions on the ability of USSC to transfer cash to United.
12.75% Senior Subordinated Notes
The 12.75% Senior Subordinated Notes ("12.75% Notes") originally were issued on
May 3, 1995, pursuant to the 12.75% Notes Indenture. As of March 31, 2000, the
aggregate outstanding principal amount of the 12.75% Notes was $100.0 million.
The 12.75% Notes are unsecured senior subordinated obligations of USSC, and
payment of the 12.75% Notes is fully and unconditionally guaranteed by the
Company and USSC's domestic "restricted" subsidiaries on a senior subordinated
basis. The Notes are redeemable on May 1, 2000, in whole or in part, at a
redemption price of 106.375% (percentage of principal amount). The 12.75% Notes
mature on May 1, 2005, and bear interest at the rate of 12.75% per annum,
payable semi-annually on May 1 and November 1 of each year.
On May 2, 2000, $100.0 million of the Company's 12.75% Notes were redeemed at
the redemption price of 106.375% of the principal amount plus accrued interest.
As a result, the Company will record an after-tax extraordinary charge of
approximately $6.5 million in the second quarter of 2000. This charge includes
approximately $2.6 million (after-tax) related to the write-off of capitalized
costs. The redemption was funded through the Company's Revolving Credit
Facility. The Company's annual interest expense saving will be approximately
$4.0 million based on a 375 basis point reduction to the interest rate and the
elimination of the amortization of capitalized costs.
8.375% Senior Subordinated Notes
The 8.375% Senior Subordinated Notes ("8.375% Notes") were issued on April 15,
1998, pursuant to the 8.375% Notes Indenture. As of March 31, 2000 the aggregate
outstanding principal amount of 8.375% Notes was $100.0 million. The 8.375%
Notes are unsecured senior subordinated obligations of USSC, and payment of the
8.375% Notes is fully and unconditionally guaranteed by the Company and USSC's
domestic "restricted" subsidiaries that incur indebtedness (as defined in 8.375%
Notes Indeture) on a senior subordinated basis. The Notes are redeemable on
April 15, 2003 in whole or in part, at a redemption price of 104.188%
(percentage of principal amount). The 8.375% Notes mature on April 15, 2008, and
bear interest at the rate of 8.375% per annum, payable semi-annually on April 15
and October 15 of each year.
- 13 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Receivables Securitization Program
The Receivables Securitization Program allows the Company to sell eligible
receivables (except for certain excluded receivables, which initially
includes all receivables from the Azerty Business and Lagasse) to the USS
Receivables Company, Ltd. (the "Receivables Company"), a wholly owned
offshore, bankruptcy-remote special purpose limited liability company. This
company in turn ultimately 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 sale of trade receivables includes not only those eligible receivables
that existed on the closing date of the Receivables Securitization Program,
but also eligible receivables created thereafter. At March 31, 2000, the
Company had $160.0 million of off-balance-sheet financing provided by this
program. Proceeds from this financing were used to repay certain
indebtedness. Costs related to this facility vary on a monthly basis and
generally are related to certain interest rates. These costs are included in
the Consolidated Statements of Income under the caption Other Expense.
Affiliates of PNC Bank and Chase Manhattan Bank act as funding agents. Other
commercial banks, in agreement with Chase Manhattan Bank, rated at least
A-1/P-1, provide standby liquidity funding to support the purchase of the
receivables by the Receivables Company under a 364-day liquidity facility. 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. As a result of the Receivables Securitization Program, the balance sheet
assets of the Company as of March 31, 2000 exclude approximately $160.0 million
of accounts receivable sold to the Receivables Company.
Cash Flow
The statements of cash flows for the Company for the periods indicated are
summarized below:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------
2000 1999
---------- -----------
(dollars in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 46,114 $ 19,386
Net cash used in investing activities (7,163) (5,502)
Net cash used in financing activities (29,115) (9,473)
</TABLE>
Net cash provided by operating activities for the three months ended March 31,
2000 increased to $46.1 million from $19.4 million in the comparable prior year
period. This increase was primarily due to a $5.2 million increase in net
income, a $25.3 million increase in accounts payable, and a $10.2 million
increase in accounts receivable partially offset by a $13.6 million increase in
inventory.
Net cash used in investing activities for the three months ended March 31, 2000
was $7.2 million compared with $5.5 million used in the prior period. This
increase is due to lower proceeds from the sale of property, plant, and
equipment totaling $3.2 million partially offset by a $1.5 million reduction in
capital expenditures.
- 14 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used in financing activities for the three months ended March 31,
2000 was $29.1 million compared with $9.5 million in the prior period. This
increase was due primarily to repayments of $28.0 million under the Revolving
Credit Facility in the current year compared with $26.0 millon of borrowings
in the last year partially offset by $34.7 million in treasury stock
purchases.
Year 2000 Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to market risk associated principally with changes in
interest rates and foreign currency exchange rates. Interest rate exposure is
principally limited to the Company's outstanding long-term debt at March 31,
2000 of $307.2 million and $160.0 million of receivables sold under the
Receivables Securitization Program, whose discount rate varies with market
interest rates ("Receivables Exposure"). Approximately 43% of the outstanding
debt and Receivables Exposure are priced at interest rates that are fixed, or
approximately 27% after taking into account the 12.75% Notes redemption. The
remaining debt and Receivables Exposure is priced at interest rates that float
with the market. A 50 basis point movement in interest rates would result in an
approximate $1.3 million annualized increase or decrease in interest expense,
loss on the sale of certain accounts receivable and cash flows, or approximately
$1.8 million after taking into account the 12.75% Notes redemption.
The Company will from time to time enter into interest rate swaps or collars on
its debt. The Company does not use derivative financial or commodity instruments
for trading purposes. Typically, the use of such derivative instruments is
limited to interest rate swaps or collars on the Company's outstanding long-term
debt. The Company's exposure related to such derivative instruments is, in the
aggregate, not material to the Company's financial position, results of
operations and cash flows.
The Company's foreign currency exchange rate risk is limited principally to the
Mexican Peso, Canadian Dollar, Italian Lira, as well as product purchases from
Asian countries currently paid in U.S. dollars. Many of the products which the
Company sells in Mexico and Canada are purchased in U.S. dollars while the sale
is invoiced in the local currency. The Company's foreign currency exchange rate
risk is not material to the Company's financial position, results of operations
and cash flows. The Company has not previously hedged these transactions, but is
considering such a program, and may enter into such transactions when it
believes there is a clear financial advantage to do so.
- 15 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable
ITEM 2 CHANGES IN SECURITIES
Not applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit
Number
------
<S> <C>
2 Not applicable
11 Not applicable
15.1 Letter regarding unaudited interim financial information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27.1 Financial Data Schedule - United Stationers Inc.
27.2 Financial Data Schedule - United Stationers Supply Co.
99 Not applicable
</TABLE>
- 16 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
(b) The Company filed a report with the Securities and Exchange Commission on
Form 8-K on January 19, 2000 reporting under Item 5 that the Company
elected Ilene S. Gordon to its Board of Directors.
The Company filed a report with the Securities and Exchange Commission on
Form 8-K on March 6, 2000 reporting under Item 5 that Daniel H. Bushell
resigned as Executive Vice President, Chief Development Officer, and
Chief Financial Officer of the Company.
The Company filed a report with the Securities and Exchange Commission on
Form 8-K on March 24, 2000 reporting under Item 5 that United Stationers
Inc. announced that United Stationers Supply Co., its wholly owned
subsidiary, is calling the remaining $100.0 million of its 12.75% Senior
Subordinated Notes on May 2, 2000.
- 17 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
---------------------------------------------
(Registrant)
Date: May 11, 2000 /s/ Randall W. Larrimore
------------------- ----------------------------------------------
Randall W. Larrimore
Director, President, Chief Executive Officer
and Interim Chief Financial Officer
- 18 -
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
(a) Exhibit
Number
------
<S> <C>
2 Not applicable
11 Not applicable
15.1 Letter regarding unaudited interim
financial information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27.1 Financial Data Schedule - United Stationers Inc.
27.2 Financial Data Schedule - United Stationers Supply Co.
99 Not applicable
</TABLE>
- 19 -
<PAGE>
Exhibit 15.1
May 11, 2000
The Board of Directors
United Stationers Inc.
We are aware of the incorporation by reference in the Registration Statement on
Form S-8 of United Stationers Inc. for the registration of 8,200,000 shares of
its common stock of our report dated April 21, 2000, relating to the unaudited
condensed consolidated interim financial statements of United Stationers Inc.
which are included in its Form 10-Q for the quarter ended March 31, 2000.
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not
part of the registration statement prepared or certified by accountants
within the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000355999
<NAME> UNITED STATIONERS, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 28,829
<SECURITIES> 0
<RECEIVABLES> 277,990
<ALLOWANCES> 12,688
<INVENTORY> 583,089
<CURRENT-ASSETS> 900,689
<PP&E> 293,559
<DEPRECIATION> 124,482
<TOTAL-ASSETS> 1,268,024
<CURRENT-LIABILITIES> 493,187
<BONDS> 0
0
0
<COMMON> 3,721
<OTHER-SE> 427,006
<TOTAL-LIABILITY-AND-EQUITY> 430,727
<SALES> 979,358
<TOTAL-REVENUES> 979,358
<CGS> 821,566
<TOTAL-COSTS> 821,566
<OTHER-EXPENSES> 110,034
<LOSS-PROVISION> 1,050
<INTEREST-EXPENSE> 7,414
<INCOME-PRETAX> 40,344
<INCOME-TAX> 16,420
<INCOME-CONTINUING> 23,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,924
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.69
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000945633
<NAME> UNITED STATIONERS SUPPLY CO.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 28,829
<SECURITIES> 0
<RECEIVABLES> 277,990
<ALLOWANCES> 12,688
<INVENTORY> 583,089
<CURRENT-ASSETS> 900,689
<PP&E> 293,559
<DEPRECIATION> 124,482
<TOTAL-ASSETS> 1,268,024
<CURRENT-LIABILITIES> 493,187
<BONDS> 0
0
0
<COMMON> 3,721
<OTHER-SE> 427,006
<TOTAL-LIABILITY-AND-EQUITY> 430,727
<SALES> 979,358
<TOTAL-REVENUES> 979,358
<CGS> 821,566
<TOTAL-COSTS> 821,566
<OTHER-EXPENSES> 110,034
<LOSS-PROVISION> 1,050
<INTEREST-EXPENSE> 7,414
<INCOME-PRETAX> 40,344
<INCOME-TAX> 16,420
<INCOME-CONTINUING> 23,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,924
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.69
</TABLE>
