<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the year ended December 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the
transition period from __________ to ____________
Commission file numbers: United Stationers Inc.: 0-10653
United Stationers Supply Co.: 33-59811
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
2200 EAST GOLF ROAD
DES PLAINES, ILLINOIS 60016-1267
(847) 699-5000
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrants' Principal Executive Offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
United Stationers Inc.: Common Stock $0.10 par value
(Title of Class)
INDICATE BY CHECK MARK WHETHER EACH REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
UNITED STATIONERS INC.: YES ( X ) NO ( )
UNITED STATIONERS SUPPLY CO.: YES ( X ) NO ( )
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENT
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. ( X )
AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES OF UNITED
STATIONERS INC. AS OF MARCH 1, 2000, WAS $894,224,363, BASED ON THE LAST SALE
PRICE OF THE COMMON STOCK AS QUOTED BY THE NASDAQ NATIONAL MARKET SYSTEM ON SUCH
DATE. UNITED STATIONERS SUPPLY CO. HAS NO SHARES OF COMMON STOCK OUTSTANDING
HELD BY NON-AFFILIATES.
ON MARCH 1, 2000, UNITED STATIONERS INC. HAD OUTSTANDING 34,032,047 SHARES OF
COMMON STOCK, PAR VALUE $0.10 PER SHARE. ON MARCH 1, 2000, UNITED STATIONERS
SUPPLY CO. HAD 880,000 SHARES OF COMMON STOCK, $1.00 PAR VALUE PER SHARE
OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF FORM 10-K
- -----------------
Part III Portions of United Stationers Inc.'s definitive Proxy
Statement relating to the 2000 Annual Meeting of Stockholders of
United Stationers Inc., to be filed within 120 days of the year
end of United Stationers Inc.
================================================================================
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
UNITED STATIONERS SUPPLY CO.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
CONTENTS AND CROSS REFERENCE SHEET
FURNISHED PURSUANT TO GENERAL INSTRUCTION G(4) OF FORM 10-K
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<C> <C> <S> <C>
FORM 10-K FORM 10-K FORM 10-K
PART NO. ITEM NO. DESCRIPTION PAGE NO.
--------- --------- ------------ ---------
I
1 Explanatory Note 1
Business 1
General 1
Products 1-2
Customers 2
Marketing and Customer Support 2-3
Distribution 3
Purchasing and Merchandising 3
Competition 4
Employees 4
2 Properties 4-5
3 Legal Proceedings 6
4 Submission of Matters to a Vote of Security Holders 6
II 5 Market for Registrant's Common Equity
and Related Stockholder Matters 6
6 Selected Consolidated Financial Data 7-11
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
7A Quantitative and Qualitative Disclosure About Market Risk 20
8 Financial Statements and Supplementary Data 20-45
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
III 10 Directors and Executive Officers of the Registrant 46-48
11 Executive Compensation 48
12 Security Ownership of Certain Beneficial
Owners and Management 48
13 Certain Relationships and Related Transactions 48
IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 49-51
Signatures 52
</TABLE>
<PAGE>
PART I
EXPLANATORY NOTE
THIS INTEGRATED FORM 10-K IS FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, FOR EACH OF UNITED STATIONERS INC., A DELAWARE CORPORATION,
AND ITS WHOLLY OWNED SUBSIDIARY, UNITED STATIONERS SUPPLY CO., AN ILLINOIS
CORPORATION (COLLECTIVELY, THE "COMPANY"). UNITED STATIONERS INC. IS A HOLDING
COMPANY WITH NO OPERATIONS SEPARATE FROM ITS OPERATING SUBSIDIARY, UNITED
STATIONERS SUPPLY CO. 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 DISCLOSURES REQUIRED BY THE INSTRUCTIONS TO FORM 10-K AND
THEREFORE, UNLESS OTHERWISE INDICATED, THE RESPONSES SET FORTH HEREIN APPLY TO
EACH OF UNITED STATIONERS INC. AND UNITED STATIONERS SUPPLY CO.
ITEM 1. BUSINESS
GENERAL
On March 30, 1995, Associated Holdings, Inc., ("Associated"), was merged with
and into United Stationers Inc., ("United"), with United surviving (the
"Merger"). Immediately thereafter, Associated Stationers, Inc. ("ASI"), the
wholly owned subsidiary of Associated, was merged with and into United
Stationers Supply Co. ("USSC"), the wholly owned subsidiary of United, with USSC
surviving. Although United was the surviving corporation in the Merger, the
transaction was treated as a reverse acquisition for accounting purposes with
Associated as the acquiring corporation.
United is the parent company of its direct wholly owned subsidiary, USSC. Except
where the context clearly indicates otherwise, including references to the
capital structure of United Stationers Inc., the term "Company" hereinafter used
includes United Stationers Inc. together with its subsidiary.
On October 31, 1996, USSC acquired all of the capital stock of Lagasse Bros.,
Inc. ("Lagasse"), a wholesaler of janitorial and sanitary supplies. Lagasse
operates as a subsidiary of USSC.
On April 3, 1998, USSC acquired 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 Azerty Business is primarily a specialty wholesaler of computer
consumables, peripherals and accessories in the United States and Mexico.
The Company is the largest general line business products wholesaler in the
United States with 1999 net sales of $3.4 billion. The Company sells its
products through national distribution networks to more than 20,000 resellers,
who in turn sell directly to end users. These products are distributed through a
computer-based network of warehouse facilities and truck fleets radiating from
39 regional distribution centers, 21 Lagasse distribution centers and six Azerty
distribution centers.
PRODUCTS
The Company's product offerings, comprised of more than 35,000 stockkeeping
units (SKUs), may be divided into five primary categories:
TRADITIONAL OFFICE PRODUCTS. The Company's core business continues to be
traditional office products, which include both brand-name products and the
Company's private brand products. Traditional office products include writing
instruments, paper products, organizers, calendars and general office
accessories.
1
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COMPUTER CONSUMABLES. The Company offers computer supplies, and peripherals to
value-added computer resellers and office products dealers. In April 1998, the
Company acquired Azerty, a wholesaler of computer consumables within the United
States and Mexico.
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. The Company currently offers
nearly 5,000 furniture items from 50 different manufacturers.
FACILITIES SUPPLIES. The major products in this category are janitorial and
sanitation supplies, safety and security items, and shipping and mailing
supplies. 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 to sanitary supply dealers through 21
Lagasse distribution centers.
BUSINESS MACHINES AND AUDIO-VISUAL PRODUCTS. This product category includes
business machines - from calculators to telephones - as well as audio-visual
equipment and supplies.
CUSTOMERS
The Company sells to more than 20,000 resellers, including office products
dealers, mega-dealers, office products superstores, computer products resellers,
office furniture dealers, mass merchandisers, mail order companies, sanitary
supply distributors and e-commerce merchants. Of its 20,000 customers, no single
reseller accounted for more than 7% of the Company's net sales in 1999.
Independent commercial dealers and contract stationers are the most significant
reseller channel for office products distribution and typically serve medium to
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 individual commercial dealers
and contract stationers have grown rapidly. Many dealers have joined marketing
or buying groups in order to increase their purchasing leverage. The Company
believes it is the leading wholesale source for most of these groups, providing
not only merchandise but also special programs that enable these dealers to
benefit from their combined marketing efforts.
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.
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 its overnight distribution capabilities. In addition to emphasizing
its broad product line, extensive inventory, integrated systems 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 electronic commerce options, promotional programs and pricing
services. These services are designed to aid the reseller in differentiating
itself from its competitors by addressing the needs of the end-user's
procurement process.
Substantially all of the Company's 35,000 SKUs are sold through its
comprehensive general line catalog, promotional pieces and specialty catalogs
for the office products, computer supplies, 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(TM) Catalog promoting the
Company's private-brand merchandise; Computer Supplies and Accessories Catalog
offering information technology supplies, accessories and furniture; Computer
Products Catalog promoting specialized information technology products; Facility
Supplies Catalog featuring food service, warehouse, mailroom supplies and
products and supplies used for meetings and presentations; the Lagasse Catalog
offering janitorial and sanitation supplies; the B2500 Catalog featuring a
selection of everyday office supplies; the F1000 Catalog promoting commodity
furniture and accessory products; the A/V2000 Catalog featuring audio-visual
equipment and supplies; and the
2
<PAGE>
Signature Images Catalog with an assortment of imprinted, promotional, and ad
specialty items. 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(TM)
products. Because commercial dealers, contract stationers and retail dealers
typically distribute only one wholesaler's catalogs in order to streamline
and concentrate order entry, the Company attempts to maximize the
distribution of its catalogs by offering advertising credits to resellers,
which can be used to offset the cost of the catalogs. Also, the Company's
general line catalog is available in an electronic version.
The Company also offers resellers a variety of electronic order entry systems
and business management and marketing programs. For instance, the Company
maintains electronic data interchange 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 the reseller's customer. The
Company estimates that in 1999, 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 160 field
salespersons and a telemarketing and telesales staff of 160 people. 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.
DISTRIBUTION
The Company has a network of 39 business products regional distribution centers
located in 36 metropolitan areas in 25 states in the United States, most of
which carry the Company's full line of inventory. The Company also maintains 21
Lagasse distribution centers that carry a full line of janitorial and sanitation
supplies and six Azerty distribution centers that carry information technology
supplies. The Company supplements its regional distribution centers with 21
local distribution points throughout the United States that serve as reshipment
points for orders filled at the regional distribution centers. The Company
utilizes more than 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, 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.
Another service offered by the Company to resellers is its "wrap and label"
program that offers resellers the option to receive individually packaged orders
customized to meet the needs of specific end users. For example, when a reseller
receives orders from several individual end users, the Company can group and
wrap the items separately, identifying the specific 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 ships orders directly to end users on behalf of its resellers.
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 500 manufacturers.
The Company believes it is a significant customer for most of these
manufactures. In 1999, no supplier accounted for more than 18% of the Company's
aggregate purchases. As a centralized function, the Company's merchandising
department interviews and selects suppliers and products for inclusion in the
catalogs. Selection is based upon end-user acceptance, demand for the product
and the manufacturer's total service, price and product quality offering.
3
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COMPETITION
The Company competes with office products manufacturers and with other
national, regional and specialty wholesalers of office products, office
furniture, computer supplies and related items, and facility management
supplies. Competition between the Company and manufacturers is based
primarily upon net pricing, minimum order quantity and speed of delivery.
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, which includes wholesalers and resellers.
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 December 31, 1999, the Company employed approximately 6,400 persons.
The Company considers its relations with employees to be good. Approximately
900 of the shipping, warehouse and maintenance employees at certain of the
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.
ITEM 2. PROPERTIES
The Company considers its properties to be suitable and adequate for their
intended uses. The Company continually evaluates its properties to ensure
that they provide for peak efficiency to maximize customer satisfaction and
economies of scale. These properties consist of the following:
EXECUTIVE OFFICES. The Company's office facility in Des Plaines, Illinois has
approximately 135,800 square feet of office and storage space. In addition,
the Company owns approximately 43,600 square feet of office space in Orchard
Park, New York and approximately 22,000 square feet of office space in
Haraham, Louisiana (not including approximately 61,000 square feet of
warehouse space) and leases approximately 50,000 square feet of office space
located in Mt. Prospect, Illinois.
4
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DISTRIBUTION CENTERS. The Company presently has more than nine million square
feet of warehouse space in 39 business products distribution centers, 21
janitorial and sanitation supply distribution centers and six information
technology distribution centers. The Company also operates 21 local
distribution points. The following table sets forth information regarding the
Company's principal leased and owned distribution centers:
<TABLE>
<CAPTION>
Approx. Square Feet
----------------------------
State/Country City Metropolitan Area Served Owned Leased
- ----------------- --------------------------------- ------------------------------ ---------- -----------
<C> <S> <C> <C> <C>
Arizona Tempe Phoenix -- 203,800
California City of Industry (1) / Santa Fe
Springs Los Angeles 344,500 165,000
Sacramento / Union City / Sacramento / San Francisco
Visalia / Oakland -- 505,800
Colorado Denver / Aurora Denver 104,200 180,700
Florida Miami / Dania / Ft. Lauderdale Miami -- 211,000
Jacksonville Jacksonville 150,000 --
Tampa Tampa 128,000 30,000
Georgia Atlanta / Norcross Atlanta 372,000 85,600
Illinois Carol Stream / Glendale Heights Chicago -- 579,100
Greenville St. Louis 210,000 --
Indiana Fort Wayne Fort Wayne -- 75,000
Indianapolis Indianapolis 128,000 41,600
Louisiana Harahan (1) New Orleans -- 165,900
Maryland Harmans Baltimore/Washington, D.C. 324,000 178,500
Massachusetts Woburn / Sharon Boston 309,000 115,700
Mexico Mexico City Mexico City -- 4,000
Monterrey Monterrey -- 1,300
Michigan Livonia / Van Buren Detroit 229,700 52,900
Minnesota Eagan / Brooklyn Park Minneapolis / St. Paul 338,000 --
Missouri Kansas City Kansas City -- 95,200
St. Louis St. Louis -- 43,200
New Jersey Edison New York 257,600 289,700
Pennsauken Philadelphia 231,000 25,300
New York Coxsackie Albany 256,500 8,000
Orchard Park New York -- 12,000
North Carolina Charlotte Charlotte 104,000 144,500
Ohio Cincinnati Cincinnati 108,800 --
Columbus Columbus -- 194,700
Twinsburg / Valley View Cleveland 206,100 165,000
Oklahoma Tulsa Tulsa 52,600 22,500
Oregon Portland Portland -- 106,500
Pennsylvania Pittsburgh / Chambersburg Pittsburgh / Baltimore -- 197,200
Tennessee Memphis Memphis -- 78,300
Nashville Nashville -- 191,300
Texas Dallas Dallas / Fort Worth 223,200 231,900
Houston Houston -- 290,000
Lubbock Lubbock -- 58,800
San Antonio San Antonio -- 94,900
Utah Salt Lake City Salt Lake City -- 113,300
Washington Tukwila / Kent Seattle -- 181,500
Wisconsin Milwaukee Milwaukee 67,300 --
</TABLE>
(1) A portion of such property is subleased to a third party.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary course of
its business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect upon its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the
solicitation of proxies in the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted through the Nasdaq National Market System
under the symbol USTR. The following table sets forth on a per share basis, for
the periods indicated, the high and low closing sale prices for the Company's
common stock as reported by Nasdaq. On August 17, 1998, the Company announced a
two-for-one stock split in the form of a common stock dividend paid on September
28, 1998. All share data and number of common shares contained in this Form 10-K
have been retroactively adjusted to reflect the stock split.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
1999
------------
First Quarter $26.00 $13.00
Second Quarter 22.00 13.56
Third Quarter 26.31 20.25
Fourth Quarter 28.56 20.88
1998
--------------
First Quarter 32.66 21.94
Second Quarter 32.38 26.56
Third Quarter 36.00 23.88
Fourth Quarter 30.19 22.50
</TABLE>
On March 1, 2000, there were approximately 955 holders of record of common
stock.
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid cash dividends and does not anticipate
declaring cash dividends on its common stock in the foreseeable future.
Furthermore, as a holding company, the ability of United to pay cash dividends
in the future depends upon the receipt of dividends or other payments from its
operating subsidiary, USSC. The payment of dividends by USSC is subject to
certain restrictions imposed by the Company's debt agreements. See Note 7 to the
Consolidated Financial Statements.
On March 11, 1999, the Company's Board of Directors authorized the repurchase of
up to $50.0 million of its common stock. Under this authorization, the Company
purchased 3,250,000 shares of common stock at a cost of approximately $49.6
million in 1999. Acquired shares are included in the issued shares of the
Company, but are not included in average shares outstanding when calculating
earnings per share. During 1999, the Company reissued 29,519 shares of treasury
stock to fulfill its obligations under its stock option plan.
6
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is the selected historical consolidated financial data for the
Company. Although United was the surviving corporation in the Merger, the
Acquisition was treated as a reverse acquisition for accounting purposes, with
Associated as the acquiring corporation. As a result, the income statement,
operating, and other data for the year ended December 31, 1995 reflect the
financial information of Associated only for the three months ended March 30,
1995, and the results of the Company for the nine months ended December 31,
1995.
THE COMPANY/ASSOCIATED
The selected consolidated financial data of the Company for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 (which for Income Statement,
Operating, and Other Data includes Associated only for the three months ended
March 30, 1995, and the results of the Company for the nine months ended
December 31, 1995) have been derived from the Consolidated Financial Statements
of the Company, which have been audited by Ernst & Young LLP, independent
auditors. All selected consolidated financial data set forth below should be
read in conjunction with, and is qualified in its entirety by Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements of the Company.
7
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<TABLE>
<CAPTION>
The Company
---------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------- ----------- -----------
(dollars in thousands, except per share data)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales $3,393,045 $3,059,166 $2,558,135 $2,298,170 $1,751,462
Cost of goods sold 2,830,968 2,529,928 2,112,204 1,907,209 1,446,949
----------- ----------- ----------- ----------- -----------
Gross profit 562,077 529,238 445,931 390,961 304,513
Operating expenses:
Warehousing, marketing
and administrative
expenses 379,883 359,875 311,002 277,957 246,956(1)
Non-recurring charges -- 13,852(2) 64,698(3) -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses 379,883 373,727 375,700 277,957 246,956(1)
----------- ----------- ----------- ----------- -----------
Income from operations 182,194 155,511 70,231 113,004 57,557
Interest expense, net 29,195 36,301 53,511 57,456 46,186
Other expense 9,432(4) 8,221(4) -- - - --
----------- ----------- ----------- ----------- -----------
Income before income
taxes and extraordinary
item 143,567 110,989 16,720 55,548 11,371
Income taxes 60,158 47,064 8,532 23,555 5,128
----------- ----------- ----------- ----------- -----------
Income before
extraordinary item 83,409 63,925 8,188 31,993 6,243
Extraordinary item - loss
on early retirement of debt,
net of tax benefit of $3,970
in 1998, $3,956 in 1997,
and $967 in 1995 -- (5,907) (5,884) -- (1,449)
----------- ----------- ----------- ----------- -----------
Net income $ 83,409 $ 58,018 $ 2,304 $ 31,993 $ 4,794
=========== =========== =========== =========== ===========
Net income attributable to
common stockholders $ 83,409 $ 58,018 $ 776 $ 30,249 $ 2,796
=========== =========== =========== =========== ===========
Net income per common
share- assuming dilution
Income before extraordinary
item $ 2.37 $ 1.76 $ 0.22 $ 1.01 $ 0.17
Extraordinary item -- (0.16) (0.19) -- (0.06)
----------- ----------- ----------- ----------- -----------
Net income $ 2.37 $ 1.60 $ 0.03 $ 1.01 $ 0.11
=========== =========== =========== =========== ===========
Cash dividends declared per
common share $ -- $ -- $ -- $ -- $ --
OPERATING AND OTHER DATA:
- --------------------------
EBITDA (5) 211,642 182,449 96,272 139,046 81,241
EBITDA margin (6) 6.2% 6.0%(7) 3.8%(8) 6.1% 4.6%(9)
Depreciation and
amortization (10) $ 29,448 $ 26,938 $ 26,041 $ 26,042 $ 23,684
Capital expenditures 21,331 24,616 12,991 (2,886)(11) 8,017
</TABLE>
8
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<TABLE>
<CAPTION>
The Company
----------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------------------------
1999 1998(12) 1997(13) 1996 1995(14)
----------- -------------- --------------- --------------- -------------
(dollars in thousands, except per share data)
OPERATING RESULTS BEFORE CHARGES:
<S> <C> <C> <C> <C> <C>
Income from operations $ 182,194 $ 169,363 $ 134,929 $ 113,004 $ 67,316
Net income attributable to
common stockholders 83,409 72,212 45,364 30,249 10,081
Net income per common
share-assuming dilution 2.37 2.00 1.47 1.01 0.40
EBITDA 211,642 196,301 160,970 139,046 91,000
EBITDA margin 6.2% 6.4% 6.3% 6.1% 5.2%
<CAPTION>
As of December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------------- --------------- --------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 415,548(15) $ 357,024(15) $ 451,449 $ 404,973 $ 355,465
Total assets 1,279,903(15) 1,166,991(15) 1,148,021 1,109,867 1,001,383
Total debt and capital lease(16) 336,927 315,384 537,135 600,002 551,990
Redeemable preferred stock -- -- -- 19,785 18,041
Redeemable warrants -- -- -- 23,812 39,692
Total stockholders' equity 406,009 370,563 223,308 75,820 30,024
</TABLE>
(1) Includes a restructuring charge of $9.8 million ($5.9 million net of
tax benefit of $3.9 million) for the year ended December 31, 1995.
(2) In the second quarter of 1998, the Company recognized a non-recurring
charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million) related to the write off of the remaining payments and prepaid
expense under a contract for computer services from a vendor. See Note
1 to the Consolidated Financial Statements.
(3) 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), (see Notes 1 and 11 to the Consolidated Financial
Statements) 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 and the termination of certain management advisory
service agreements (see Notes 1 and 13 to the Consolidated Financial
Statements).
(4) Represents the loss on the sale of certain trade accounts receivable
through an asset-backed securitization program and the loss on the sale
of certain capital assets. See Note 5 to the Consolidated Financial
Statements.
(5) EBITDA excluding non-recurring charges would have been $196.3 million
and $161.0 million for 1998 and 1997, respectively. EBITDA is defined
as earnings before interest, taxes, depreciation and amortization, and
extraordinary item. EBITDA 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.
(6) EBITDA margin represents EBITDA as a percent of net sales.
(7) EBITDA margin would have been 6.4% excluding the non-recurring charge.
(8) EBITDA margin would have been 6.3% excluding the non-recurring charges.
(9) EBITDA margin would have been 5.2% excluding the restructuring charge.
(10) Excludes amortization related to deferred financing costs, which is a
component of interest expense.
9
<PAGE>
(11) Includes $11.1 million of proceeds from the sale of property, plant and
equipment.
(12) In the second quarter of 1998, the Company recognized a non-recurring
charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million) related to the write off of the remaining payments and prepaid
expense under a contract for computer services from a vendor (see Note
1 to the Consolidated Financial Statements). In addition, during the
second quarter of 1998 the Company recorded an extraordinary loss of
$9.9 million ($5.9 million net of tax benefit of $4.0 million) related
to the early retirement of debt (see Notes 1 and 7 to the Consolidated
Financial Statements).
(13) 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), (see Notes 1 and 11 to the Consolidated Financial
Statements) 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 and the termination of certain management advisory
service agreements (see Notes 1 and 13 to the Consolidated Financial
Statements). 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 (see Note
1 to the Consolidated Financial Statements).
(14) During 1995, the Company 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.
(15) Excludes $160.0 million of certain trade accounts receivable sold
through an asset-backed securitization program. See Note 5 to the
Consolidated Financial Statements.
(16) Total debt and capital lease include current maturities.
10
<PAGE>
UNITED
The following table sets forth the selected consolidated financial data of
United (a predecessor of the Company) for the seven months ended March 30, 1995
(at which time United and Associated merged to create the Company) and have
been derived from the Consolidated Financial Statements of United which have
been audited by Ernst & Young LLP, independent auditors.
<TABLE>
<CAPTION>
Seven Months Ended
March 30,1995
--------------------
<S> <C>
Income Statement Data (dollars in thousands, except per share data):
Net sales $ 980,575
Cost of sales 814,780
---------
Gross profit on sales 165,795
Operating expenses 133,098
Merger-related costs 27,780(1)
---------
Income from operations 4,917
Interest expense, net 7,500
Other income, net 41
---------
Loss before income taxes (2,542)
Income taxes 4,692
---------
Net loss $ (7,234)
=========
Net loss per common
share - assuming dilution $ (0.39)
Cash dividends declared per share 0.30
Operating and Other Data:
EBITDA(2) 17,553
EBITDA margin(3) 1.8%
Depreciation and amortization $ 12,595
Net capital expenditures 7,764
Balance Sheet Data (at period end):
Working capital 257,600
Total assets 711,839
Total debt and capital leases(4) 233,406
Stockholders' investment 233,125
</TABLE>
(1) In connection with the Merger, United incurred approximately $27.8 million
of Merger-related costs, consisting of severance payments under employment
contracts ($9.6 million); insurance benefits under employment contracts
($7.4 million); legal, accounting and other professional services fees
($5.2 million); retirement of stock options ($3.0 million); and fees for
letters of credit related to employment contracts and other costs ($2.6
million).
(2) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and is presented because it is commonly used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance and to determine a company's ability to service and
incur debt. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability
or liquidity.
(3) EBITDA margin represents EBITDA as a percentage of net sales.
(4) Total debt and capital leases include current maturities.
11
<PAGE>
ITEM 7. 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-K.
Information contained or incorporated by reference in this Form 10-K 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-K, 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-K 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, the Company's
reliance on certain key suppliers, the effects of fluctuations in
manufacturers' pricing, potential service interruptions, dependence on key
personnel, and general economic conditions. A description of these factors, as
well as other factors which 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-K 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.
OVERVIEW
On March 30, 1995, Associated Holdings, Inc. ("Associated") purchased 92.5% of
the 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. United and USSC continued as
the respective surviving corporations. 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.
CONSUMER DEVELOPMENT GROUP ACQUISITION. On November 1, 1999, the Company
acquired all of the capital stock of Consumer Development Group Inc. ("CDG")
for approximately $4.8 million and made an initial payment to the seller of
approximately $2.4 million, financed through senior debt. The remaining
purchase price of approximately $2.4 million will be paid ratably on each of
the first three anniversaries of the acquisition. The CDG 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. The
excess of cost over fair value of approximately $4.8 million was allocated to
goodwill. The financial information for the year ended December 31, 1999,
includes the results of CDG for November and December only. The pro forma
effects of this acquisition were not material.
A Certificate of Dissolution was filed with the State of Delaware to dissolve
CDG as of December 31, 1999. Upon its dissolution, CDG was merged into USSC.
COMMON STOCK REPURCHASE. On March 11, 1999, the Company's Board of Directors
authorized the repurchase of up to $50.0 million of its Common Stock. Under
this authorization, the Company purchased 3,250,000 shares of Common Stock at a
cost of approximately $49.6 million in 1999. Acquired shares are included in
the issued shares of the Company, but are not included in average shares
outstanding when calculating earnings per share. During 1999, the Company
reissued 29,519 shares of treasury stock to fulfill its obligations under its
stock option plan.
COMMON STOCK DIVIDEND. All share and per share data reflect a two-for-one stock
split in the form of a 100% Common Stock dividend paid September 28, 1998.
12
<PAGE>
JUNE 1998 EQUITY OFFERING. In June 1998, United completed an offering of 4.0
million shares of Common Stock (the "June 1998 Equity Offering"), consisting of
3.0 million primary shares sold by United, and 1.0 million secondary shares
sold by certain selling stockholders. The shares were priced at $27.00 per
share, before underwriting discounts and commissions of $1.15 per share. The
aggregate proceeds to United of approximately $77.6 million (before deducting
expenses) 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 1.0 million
shares of Common Stock offered by the selling stockholders. It did, however,
receive an aggregate of approximately $6.4 million paid by the selling
stockholders upon exercise of employee stock options in connection with the
June 1998 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 1998 Equity Offering, the underwriters
exercised an overallotment option to purchase an additional 0.4 million shares
from United. The net proceeds to United of approximately $10.3 million from the
sale were delivered to USSC and used to repay an additional portion of the
indebtedness outstanding under the Tranche A Term Loan Facility.
In the second quarter of 1998, the Company recognized the following charges: a
non-recurring charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million) to write off the remaining payments and related prepaid expense under
a contract for computer services from a vendor (see Note 1 to the Consolidated
Financial Statements), and an extraordinary loss of $9.9 million ($5.9 million
net of tax benefit of $4.0 million) related to the early retirement of debt
(collectively "1998 Charges"), see Notes 1 and 7 to the Consolidated Financial
Statements.
Net income attributable to common stockholders for the year ended December 31,
1998, before the 1998 Charges, was $72.2 million, up 59.0%, compared with $45.4
million, before the 1997 Charges (as defined). In 1998, diluted earnings per
share before the 1998 Charges were $2.00 on 36.2 million weighted average
shares outstanding, up 36.1%, compared with $1.47, before the 1997 Charges (as
defined), on 30.8 million weighted average shares outstanding for the prior
year.
AZERTY BUSINESS ACQUISITION. On April 3, 1998, the Company acquired 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 Business"). These businesses comprised 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 Business was approximately $115.7 million (including fees and
expenses). The acquisition was financed primarily through senior debt. The
Azerty Business 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 of
approximately $73.7 million allocated to goodwill. The financial information
for the year ended December 31, 1998, included nine months of the Azerty
Business. The pro forma effects of this acquisition were not material.
OCTOBER 1997 EQUITY OFFERING. On October 9, 1997, the Company completed a 4.0
million share primary offering of Common Stock and a 6.8 million share
secondary offering of Common Stock (the "October 1997 Equity Offering"). The
shares were priced at $19.00 per share, before underwriting discounts and
commissions of $0.95 per share. The aggregate net proceeds to the Company from
this equity offering of $72.2 million (before deducting expenses) and proceeds
of $0.1 million resulting from the conversion of approximately 2.2 million
warrants into Common Stock were used to: (i) redeem $50.0 million of the
Company's 12.75% Senior Subordinated Notes and pay the redemption premium of
$6.4 million, (ii) pay fees related to the October 1997 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 1997 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), (see Notes 1 and 11 to the Consolidated Financial Statements) 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 and the termination of
certain management advisory service agreements (see Notes 1 and 13 to the
Consolidated Financial Statements), and (ii) an extraordinary loss of $9.8
million ($5.9 million net of tax benefit of $3.9 million)
13
<PAGE>
related to the early retirement of debt (collectively "1997 Charges"), see Note
1 to the Consolidated Financial Statements.
Net income attributable to common stockholders for the year ended December 31,
1997, before the 1997 Charges, was $45.4 million, up 50.3%, compared with $30.2
million in 1996. Diluted earnings per share before the 1997 Charges were $1.47
on 30.8 million weighted average shares outstanding, up 45.3%, compared with
$1.01 on 29.8 million weighted average shares outstanding for the prior year.
LAGASSE BROS., INC. ACQUISITION. 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 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 of approximately $39.0
million allocated to goodwill. The pro forma effects of this acquisition were
not material.
GENERAL INFORMATION
EMPLOYEE STOCK OPTIONS. The Management Equity Plan (the "Plan") 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 Common Stock, through the exercise of options, to
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
that provided for the issuance of approximately 3.0 million additional options
to management employees and directors. During 1999, 1998 and 1997, options of
approximately 1.3 million, 1.0 million and 0.5 million, respectively, were
granted to management employees and directors, with option exercise prices
equal to 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 management employees of the Company,
exercisable for up to 4.4 million additional shares of its Common Stock.
Subsequently, approximately 4.4 million options were granted during 1995 and
1996 to management employees. Some of the options were granted at an option
exercise price below market value, and the exercise price of certain options
increased by $0.31 on a quarterly basis effective April 1, 1996.
These Merger Incentive Options, which were performance-based, were granted 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 1997
Equity Offering. In the fourth quarter of 1997, the Company recognized
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
October 10, 1997, of $19.56, 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).
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NET SALES. Net sales increased 10.9% to $3.4 billion for 1999, compared with
$3.1 billion for 1998. The Company's sales growth was broad based, with
strength in all geographic regions, across all product categories and customer
channels. Specifically, the janitorial and sanitation products, computer
consumables and office furniture categories experienced strong sales growth.
The Company's sales with both national accounts and independent dealers are
strengthening. Organic sales for the year ended December 31, 1999, increased
7.8%. This included pre-acquisition first quarter 1998 net sales of $99.7
million for the Azerty Business.
Net sales for the two months ended February 29, 2000, were up 14% on
equivalent workdays, compared with the prior year. However, the Company's
long-term goal is to produce a consistent top-line organic growth rate of 6%
to 9%.
GROSS MARGIN. Gross margin in 1999 reached $562.1 million, up 6.2% from last
year and was 16.6% of net sales, compared with $529.2 million, or 17.3% of
net sales, in 1998. This rate decrease reflected the trend toward a
lower-margin product mix. The lower margin rate reflecting product mix
partially was offset by incremental vendor allowances earned as a result of
higher sales volume.
14
<PAGE>
OPERATING EXPENSES. Operating expenses for 1999 totaled $379.9 million, up 5.6%
from last year and were 11.2% of net sales, compared with $359.9 million, or
11.8% of net sales, in the prior year (excluding non-recurring charges). The
decline in the operating expense rate is attributable to the continued
leveraging of fixed costs. The non-recurring charge recorded in the second
quarter of 1998 of $13.9 million ($8.3 million net of tax benefit of $5.6
million) was related to the write off of a contract for computer services from
a vendor (see Note 1 to the Consolidated Financial Statements). Operating
expenses, including these charges, totaled $373.8 million, or 12.2% of net
sales, in 1998.
INCOME FROM OPERATIONS. Income from operations totaled $182.2 million, or 5.4%
of net sales, compared with $169.3 million, or 5.5% of net sales in 1998,
before non-recurring charges. Including the non-recurring charge, income from
operations totaled $155.4 million, or 5.1% of net sales, in 1998.
INTEREST EXPENSE. Interest expense for 1999 was $29.2 million, or 0.9% of net
sales, compared with $36.3 million, or 1.2% of net sales, in 1998. This
reduction reflects the continued leveraging of fixed interest costs against
higher sales, and the repayment of indebtedness with the proceeds received from
the June 1998 Equity Offering and the Receivables Securitization Program (as
defined). These transactions were partially offset by three months of
incremental interest expense related to the acquisition of the Azerty Business
in April of 1998 for a purchase price of approximately $115.7 million, and the
placement of $100.0 million of Senior Subordinated Notes at 8.375% in April
1998.
OTHER EXPENSE. Other expense for 1999 reached $9.4 million, or 0.3% of net
sales, compared with $8.2 million, or 0.3% of net sales in 1998. This expense
primarily represents the costs associated with the sale of certain trade
accounts receivable through the Receivables Securitization Program (as
defined). These costs vary on a monthly basis and generally are related to
certain interest rates.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income taxes
and extraordinary item were $143.6 million, or 4.2% of net sales, compared with
$124.8 million, or 4.0% of net sales in 1998, before non-recurring charges.
Including the non-recurring charge, income before income taxes and
extraordinary item totaled $110.9 million, or 3.6% of net sales, in 1998.
NET INCOME. Net income for 1999 increased 15.5% to $83.4 million, or 2.5% of
net sales, from $72.2 million, or 2.4% of net sales, in 1998, excluding the
non-recurring charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million) and an extraordinary item - loss on the early retirement of debt of
$9.9 million ($5.9 million net of tax benefit of $4.0 million) (see Note 1 to
the Consolidated Financial Statements). Net income in 1998, excluding the
impact of the non-recurring charge and the extraordinary item, totaled $58.0
million, or 1.9% of net sales.
FOURTH QUARTER RESULTS. Certain expense and cost of sale estimates are recorded
throughout the year, including inventory shrinkage and obsolescence, required
LIFO reserve, manufacturers' allowances, advertising costs and various expense
items. During the fourth quarter of 1999, the Company recorded a favorable net
income adjustment of approximately $4.0 million related to the refinement of
estimates recorded in the prior three quarters.
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 19.6%, on equivalent workdays, to $3.1 billion
for 1998, compared with $2.6 billion for 1997. The Company experienced sales
strength in all geographic regions and across all product categories.
Specifically, the janitorial and sanitation products and computer consumables
product categories experienced sales growth rates of 26% and 7%, respectively,
during 1998.
Net sales for 1998 included nine months of incremental sales resulting from the
April 1998 Azerty Acquisition. After adjusting for the acquisition, the Company
achieved an organic net sales growth rate of 8.4%, on equivalent workdays.
15
<PAGE>
GROSS MARGIN. Gross margin declined to 17.3% in 1998, compared with 17.4% in
1997. This decrease is primarily the result of the blending in of the
lower-margin computer consumables Azerty Business, which was substantially
offset by the continuing shift away from lower-margin hardware items and a
higher level of vendor allowances.
OPERATING EXPENSES. Operating expenses as a percent of net sales, before a
non-recurring charge, declined to 11.8% in 1998, compared with 12.2% before
non-recurring charges in 1997. This reduction represents the impact of
combining the lower operating expense ratio from the Azerty Business with the
Company's traditional operating expense ratio. The non-recurring charge
recorded in the second quarter of 1998 of $13.9 million ($8.3 million net of
tax benefit of $5.6 million) was related to the write off of a contract for
computer services from a vendor (see Note 1 to the Consolidated Financial
Statements). Non-recurring charges recorded in the fourth quarter of 1997 were
$59.4 million (non-cash), (see Notes 1 and 11 to the Consolidated Financial
Statements) and $5.3 million (cash) related to the vesting of stock options and
the termination of certain management advisory service agreements (see Notes 1
and 13 to the Consolidated Financial Statements). Operating expenses, as a
percent of net sales, including the above charges, were 12.2% in 1998, compared
with 14.7% in 1997.
INCOME FROM OPERATIONS. Income from operations as a percent of net sales,
before non-recurring charges in 1998 and 1997, increased to 5.5% in 1998 from
5.2% in 1997. Including the non-recurring charge, income from operations as a
percent of net sales was 5.1% in 1998, compared with 2.7% in 1997.
INTEREST EXPENSE. Interest expense as a percent of net sales was 1.2% in 1998,
compared with 2.1% in 1997. This reduction reflected the continued leveraging
of fixed interest costs against higher sales and the repayment of indebtedness
with the proceeds received from the June 1998 Equity Offering, the Receivables
Securitization Program (as defined), and the October 1997 Equity Offering.
These transactions were partially offset by the acquisition of the Azerty
Business in April of 1998 for a purchase price of approximately $115.7 million
and the placement of $100.0 million of Senior Subordinated Notes at 8.375% in
April 1998.
OTHER EXPENSE. Other expense as a percent of net sales was 0.3% in 1998. This
expense primarily represented the costs associated with the sale of certain
trade accounts receivable through the Receivables Securitization Program (as
defined). These costs vary on a monthly basis and generally are related to
certain interest rates.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income taxes
and extraordinary item as a percent of net sales, excluding the impact of the
non-recurring charges in 1998 and 1997, increased to 4.0% in 1998 from 3.1% in
1997. Including the non-recurring charge, income before income taxes and
extraordinary item as a percent of net sales was 3.6% in 1998, compared with
0.6% in 1997.
NET INCOME. Net income in 1998 and 1997 included an extraordinary item: loss on
the early retirement of debt of $9.9 million ($5.9 million net of tax benefit
of $4.0 million) and $9.8 million ($5.9 million net of tax benefit of $3.9
million), respectively (see Note 1 to the Consolidated Financial Statements).
Net income as a percent of net sales, excluding the impact of the non-recurring
charge and the extraordinary item, increased to 2.4% compared with 1.8% in
1997. Including the impact of the non-recurring charge and the extraordinary
item, net income as a percent of net sales was 1.9% in 1998, compared with 0.1%
in 1997.
In the second quarter of 1998, the Company recognized the following charges: a
non-recurring charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million) related to the write off of a contract for computer services from a
vendor (see Note 1 to the Consolidated Financial Statements) and an
extraordinary loss of $9.9 million ($5.9 million net of tax benefit of $4.0
million) related to the early retirement of debt (see Notes 1 and 7 to the
Consolidated Financial Statements).
FOURTH QUARTER RESULTS. Certain expense and cost of sale estimates are recorded
throughout the year, including inventory shrinkage and obsolescence, required
LIFO reserve, manufacturers' allowances, advertising costs and various expense
items. During the fourth quarter of 1998, the Company recorded a favorable net
income adjustment of approximately $2.3 million related to the refinement of
estimates recorded in the prior three quarters.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CREDIT AGREEMENT
At December 31, 1999, the available credit under the Second Amended and
Restated Credit Agreement (the "Credit Agreement") included $53.7 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 $53.7 million Tranche A term loan
facility ("Tranche A Facility"). Amounts outstanding under the Tranche A
Facility are to be repaid in 17 quarterly installments ranging from $1.6
million at March 31, 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 $53.0 million was outstanding at December 31,
1999.
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, 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 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 Offered 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 December 31, 1999, 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 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.
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. These 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. Any payments
received or made as a result of the agreements are recorded as an addition to
or a reduction from interest expense. For the years ended December 31, 1999,
1998, and 1997, the Company recorded $0.2 million, $0.2 million, and $0.6
million, respectively, to interest expense resulting from LIBOR rate
fluctuations below the floor rate specified in the collar agreements. The
Company's interest rate collar agreements on $200.0 million of borrowings at
LIBOR rates between 5.2% and 8.0% expired on October 29, 1999. As of December
31, 1999 the Company had not entered into any new interest rate collar
agreements.
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 (fewer 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.
17
<PAGE>
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 December 31, 1999,
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.
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 December 31, 1999, 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 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.
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its credit facilities,
the Company entered into a $163.0 million Receivables Securitization Program.
Under this program the Company sells its eligible receivables (except for
certain excluded receivables, which initially includes all receivables from the
Azerty Business and Lagasse) to 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. The Company received approximately $160.0
million in proceeds from the initial sale of certain eligible receivables on
April 3, 1998. These proceeds were used to repay a portion of indebtedness
under the Credit Agreement. 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, included elsewhere herein,
under the caption Other Expense.
The Chase Manhattan Bank acts as funding agent and, 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 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 December 31, 1999 and
1998, exclude approximately $160.0 million of accounts receivable sold to the
Receivables Company.
CASH FLOW INFORMATION
The statements of cash flows for the Company for the periods indicated are
summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 53,581 $ 290,866 $ 41,768
Net cash used in investing activities (26,011) (140,356) (12,991)
Net cash used in financing activities (27,615) (143,839) (27,029)
</TABLE>
18
<PAGE>
Net cash provided by operating activities for 1999 declined to $53.6 million
from $290.9 million in 1998. This decrease was due primarily to the initial
sale of $160.0 million of certain accounts receivable in 1998. Other factors
contributing to the change were: an increase in inventory of $40.0 million, an
increase in accounts receivable (excluding the impact of the receivables sold)
of $59.6 million, partially offset by higher net income and an increase in
accounts payable of $23.5 million. Net cash provided by operating activities
for 1998 increased to $290.9 million from $41.8 million in 1997. This increase
was due to the sale of certain accounts receivable totaling $160.0 million,
higher net income (before non-recurring charges), an increase in accounts
payable of $22.7 million, an increase in deferred taxes of $20.5 million, and a
$35.5 million decrease in inventory partially offset by a $18.2 million
increase in other assets.
Net cash used in investing activities during 1999 was $26.0 million compared
with $140.0 million in 1998. This decline was due to the activity during 1998
including the $115.7 million acquisition of Azerty, Inc. on April 3, 1998 and
an increase in proceeds from the disposition of property, plant and equipment
of $4.0 million in 1999, partially offset by the acquisition of Consumer
Development Group, Inc. on November 1, 1999 for $4.7 million, and an increase
in capital expenditures of $0.8 million in 1999. Net cash used in investing
activities during 1998 was $140.4 million, compared with $13.0 million in 1997.
The increase was due to the acquisition of Azerty, Inc. and an increase in
capital expenditures of $11.7 million.
Net cash used in financing activities during 1999 totaled $27.6 million
compared with $143.8 million in 1998. This decline was due to the activity
during 1998 including the financing required to purchase Azerty Inc., and
additional borrowings in 1999 under the revolver of $51.0 million partially
offset by $49.6 million in treasury stock purchases and lower proceeds from the
issuance of Common Stock of $96.6 million. Net cash used in financing
activities during 1998 was $143.8 million compared with $27.0 million in 1997.
This increase resulted from the financing required to purchase Azerty Inc., the
additional payment of $8.4 million for employee withholding tax related to
stock option exercises, and changes in working capital requirements, partially
offset by the net proceeds from the timely placement of $100.0 million 8.375%
Notes, and the incremental proceeds of $27.8 million from the issuance of
Common Stock.
SEASONALITY
Although the Company's sales generally are relatively level throughout the
year, 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
usually are higher than average during January, when many businesses begin
operating under new annual budgets.
The Company experiences seasonality in 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 the seasonal working capital needs for the foreseeable future.
INFLATION/DEFLATION AND CHANGING 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 are sufficient to satisfy the anticipated needs of its
customers, based upon historical buying practices and market conditions.
Although the Company historically has 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. As a
result, changes in the prices paid by the Company for its products could have a
material adverse effect on the Company's net sales, gross margins and net
income.
19
<PAGE>
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of its planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes
those systems successfully responded to the Year 2000 date change. The Company
is not aware of any material problems resulting from Year 2000 issues, either
with its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the Year 2000 to
be prepared to promptly address any latent Year 2000 matters that may arise.
ITEM 7A. 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 December 31,
1999, of $336.9 million, and $160.0 million of receivables sold under the
Receivables Securitization Program, whose discount rate varies with market
interest rates ("Receivables Exposure"). Approximately 40% of the outstanding
debt and Receivables Exposure is priced at interest rates that are fixed. 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
annualized increase or decrease of approximately $1.5 million in interest
expense, loss on the sale of certain accounts receivable and cash flows. 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 its financial position, results of
operations and cash flows. As of December 31, 1999, the Company had no
derivative financial or commodity instruments outstanding.
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 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 its financial position, results of operations and
cash flows. The Company has not previously hedged these transactions, but is
considering such a program, and it may enter into such transactions when it
believes there is a clear financial advantage to do so.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages include the Consolidated Statements of Income, Changes in
Stockholders' Equity and Cash Flows of the Company for the years ended December
31, 1999, 1998 and 1997, and the Consolidated Balance Sheets of the Company as
of December 31, 1999 and 1998.
20
<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, 1999 and 1998 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, 1999.
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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ERNST & YOUNG LLP
Chicago, Illinois
January 26, 2000
21
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 3,393,045 $ 3,059,166 $ 2,558,135
Cost of goods sold 2,830,968 2,529,928 2,112,204
----------- ----------- -----------
Gross profit 562,077 529,238 445,931
Operating expenses:
Warehousing, marketing and administrative expenses 379,883 359,875 311,002
Non-recurring charges - - 13,852 64,698
----------- ----------- -----------
Total operating expenses 379,883 373,727 375,700
----------- ----------- -----------
Income from operations 182,194 155,511 70,231
Interest expenses 29,195 36,301 53,511
Other expense 9,432 8,221 - -
----------- ----------- -----------
Income before income taxes and extraordinary item 143,567 110,989 16,720
Income taxes 60,158 47,064 8,532
----------- ----------- -----------
Income before extraordinary item 83,409 63,925 8,188
Extraordinary item - loss on early retirement of debt, net
of tax benefit of $3,970 in 1998 and $3,956 in 1997 - - (5,907) (5,884)
----------- ----------- -----------
Net income 83,409 58,018 2,304
Preferred stock dividends issued and accrued - - - - 1,528
----------- ----------- -----------
Net income attributable to common stockholders $ 83,409 $ 58,018 $ 776
=========== =========== ===========
Net income per common share:
Income before extraordinary item $ 2.40 $ 1.84 $ 0.26
Extraordinary item - - (0.17) (0.23)
----------- ----------- -----------
Net income per common share $ 2.40 $ 1.67 $ 0.03
=========== =========== ===========
Average number of common shares (in thousands) 34,708 34,680 26,128
=========== =========== ===========
Net income per common share - assuming dilution:
Income before extraordinary item $ 2.37 $ 1.76 $ 0.22
Extraordinary item - - (0.16) (0.19)
----------- ----------- -----------
Net income per common share $ 2.37 $ 1.60 $ 0.03
=========== =========== ===========
Average number of common shares (in thousands) 35,208 36,171 30,760
=========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
As of December 31,
---------------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,993 $ 19,038
Accounts receivable, less allowance for doubtful accounts
of $12,561 in 1999 and $9,775 in 1998 263,432 203,467
Inventories 607,682 554,940
Other 24,424 21,293
---------- ----------
Total current assets 914,531 798,738
Property, plant and equipment, at cost:
Land 19,982 21,857
Buildings 94,113 95,944
Fixtures and equipment 170,477 148,658
Leasehold improvements 1,823 1,508
---------- ----------
Total property, plant and equipment 286,395 267,967
Less - accumulated depreciation and amortization 118,851 98,907
---------- ----------
Net property, plant and equipment 167,544 169,060
Goodwill 181,456 181,009
Other 16,372 18,184
---------- ----------
Total assets $1,279,903 $1,166,991
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 346,558 $ 301,952
Accrued expenses 126,481 119,471
Accrued income taxes 16,377 12,582
Current maturities of long-term debt 9,567 7,709
----------- -----------
Total current liabilities 498,983 441,714
Deferred income taxes 28,926 26,223
Long-term liabilities 327,360 307,675
Other long-term liabilities 18,625 20,816
----------- -----------
Total liabilities 873,894 796,428
Stockholders' equity:
Common stock (voting), $0.10 par value; authorized
100,000,000 shares, issued - 37,213,207 shares in
1999 and 36,912,173 shares in 1998 3,721 3,691
Capital in excess of par value 304,288 303,330
Treasury stock, at cost - 3,220,481 shares (49,145) - -
Retained earnings 148,262 64,853
Accumulated translation adjustment (1,117) (1,311)
----------- -----------
Total stockholders' equity 406,009 370,563
----------- -----------
Total liabilities and stockholders' equity $ 1,279,903 $ 1,166,991
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
United Stationers Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Number Number
of of
Redeemable Preferred Stock Re- Common Common Common
-------------------------- deemable Shares Stock Shares
A C Total Warrants (Voting) (Voting) (Non-voting)
---------- --------- --------- --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 $ 8,086 $ 11,699 $ 19,785 $ 23,812 11,446,306 $ 1,145 758,994
Net income - - - - - - - - - - - - - -
Unrealized translation
adjustment - - - - - - - - - - - - - -
Comprehensive 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 (758,994)
Cancellation of common stock - - - - - - - - (8,314) (1) - -
Other - - - - - - - - - - - - - -
---------- --------- --------- --------- ---------- --------- ------------
DECEMBER 31, 1997 $ - - $ - - $ - - $ - - 15,905,273 $ 1,591 - -
========== ========= ========= ========= ========== ========= ============
<CAPTION>
Common Number Capital Total
Stock of Treasury in Other Stock-
(Non- Treasury Stock Excess Comprehen- Retained holders'
voting) Shares at Cost of Par sive Income Earnings Equity
--------- --------- ---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 $ 8 - - $ - - $ 44,398 $ 20 $ 30,249 $ 75,820
Net income - - - - - - - - - - 2,304 2,304
Unrealized translation
adjustment - - - - - - - - (238) - - (238)
------------ ----------- ------------
Comprehensive income - - - - - - - - (238) 2,304 2,066
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 (8) - - - - (68) - - - - - -
Cancellation of common stock - - - - - - 1 - - - - - -
Other - - - - - - 8 - - (11) (3)
---------- --------- ---------- ----------- ------------ ----------- ------------
DECEMBER 31, 1997 $ - - - - $ - - $ 213,260 $ (218) $ 8,675 $ 223,308
========== ========= ========== =========== ============ =========== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
United Stationers Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (continued)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Number Number
of of
Redeemable Preferred Stock Common Common Shares
-------------------------- Redeemable Shares Stock (Non-
A C Total Warrants (Voting) (Voting) voting)
---------- --------- -------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 $ - - $ - - $ - - $ - - 15,905,273 $ 1,591 - -
Net income - - - - - - - - - - - - - -
Unrealized translation
adjustment - - - - - - - - - - - - - -
Comprehensive income - - - - - - - - - - - - - -
Stock options exercised - - - - - - - - 904,409 90 - -
Issuance of common stock,
net of offering expenses - - - - - - - - 1,700,000 170 - -
100% stock dividend - - - - - - - - 18,402,491 1,840 - -
Other - - - - - - - - - - - - - -
---------- --------- -------- --------- ---------- --------- ---------
DECEMBER 31, 1998 - - - - - - - - 36,912,173 3,691 - -
Net income - - - - - - - - - - - - - -
Unrealized translation
adjustment - - - - - - - - - - - - - -
Comprehensive income - - - - - - - - - - - - - -
Acquisition of treasury stock - - - - - - - - - - - - - -
Stock options exercised - - - - - - - - 299,254 30 - -
Other - - - - - - - - 1,780 - - - -
---------- --------- -------- --------- ---------- --------- ---------
DECEMBER 31, 1999 $ - - $ - - $ - - $ - - 37,213,207 $ 3,721 - -
========== ========= ======== ========= ========== ========= =========
<CAPTION>
Common Number Capital Total
Stock of Treasury in Other Stock-
(Non- Treasury Stock Excess Comprehen- Retained holders'
voting) Shares at Cost of Par sive Income Earnings Equity
--------- ---------- ---------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 $ - - - - $ - - $ 213,260 $ (218) $ 8,675 $ 223,308
Net income - - - - - - - - - - 58,018 58,018
Unrealized translation
adjustment - - - - - - - - (1,093) - - (1,093)
----------- ----------- ---------
Comprehensive income - - - - - - - - (1,093) 58,018 56,925
Stock options exercised - - - - - - 3,095 - - - - 3,185
Issuance of common stock,
net of offering expenses - - - - - - 86,979 - - - - 87,149
100% stock dividend - - - - - - - - - - (1,840) - -
Other - - - - - - (4) - - - - (4)
--------- ---------- ---------- --------- ------------ ---------- ---------
DECEMBER 31, 1998 - - - - - - 303,330 (1,311) 64,853 370,563
Net income - - - - - - - - - - 83,409 83,409
Unrealized translation
adjustment - - - - - - - - 194 - - 194
------------ ---------- ----------
Comprehensive income - - - - - - - - 194 83,409 83,603
Acquisition of treasury stock - - (3,250,000) (49,600) - - - - - - (49,600)
Stock options exercised - - 29,519 455 666 - - - - 1,151
Other - - - - - - 292 - - - - 292
--------- ------------ ---------- --------- ------------ ---------- ----------
DECEMBER 31, 1999 $ - - (3,220,481) $ (49,145) $ 304,288 $ (1,117) $148,262 $ 406,009
========= ============ ========== ========= ============ ========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 83,409 $ 58,018 $ 2,304
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 22,817 22,406 21,963
Amortization 6,631 4,532 4,078
Amortization of capitalized financing costs 1,828 2,062 4,323
Extraordinary item - early retirement of debt - - 9,877 9,840
Deferred income taxes 662 4,380 (16,091)
Compensation expense on stock option grants - - - - 60,041
Other 236 2,044 51
Changes in operating assets and liabilities,
net of acquisitions in 1999 and 1998:
(Increase) decrease in accounts receivable (59,965) 159,593 (20,519)
Increase in inventory (52,742) (12,777) (48,316)
(Increase) decrease in other assets (2,831) (8,246) 9,985
Increase (decrease) in accounts payable 44,606 21,090 (1,649)
Increase in accrued liabilities 11,120 20,543 18,036
(Decrease) increase in other liabilities (2,190) 7,344 (2,278)
--------- --------- ---------
Net cash provided by operating activities 53,581 290,866 41,768
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions:
Azerty, Inc. - - (115,740) - -
Consumer Development Group, Inc. (4,680) - - - -
Capital expenditures (25,461) (24,709) (13,036)
Proceeds from the disposition of property, plant & equipment 4,130 93 45
--------- --------- ---------
Net cash used in investing activities (26,011) (140,356) (12,991)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolver 29,000 (22,000) 49,000
Retirements and principal payments of debt (7,604) (549,852) (117,776)
Borrowings under financing agreements 145 350,000 - -
Financing costs 250 (4,526) - -
Issuance of common stock 2,846 99,442 71,606
Acquisition of treasury stock, at cost (49,600) - - - -
Payment of employee withholding tax related to stock
option exercises (2,652) (16,903) (8,546)
Redemption of series A and series C preferred stock - - - - (21,172)
Cash dividend - - - - (141)
--------- --------- ---------
Net cash used in financing activities (27,615) (143,839) (27,029)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (45) 6,671 1,748
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 19,038 12,367 10,619
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 18,993 $ 19,038 $ 12,367
========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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. United and USSC continued as the
respective surviving corporations. United, as the surviving corporation
following the Merger, is referred to herein as the "Company." 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 Company is the largest general line business products wholesaler in the
United States, with 1999 net sales of $3.4 billion. The Company sells its
products through national distribution networks to more than 20,000 resellers,
who in turn sell directly to end users. These products are distributed through a
computer-based network of warehouse facilities and truck fleets radiating from
39 regional distribution centers, 21 Lagasse distribution centers and six Azerty
distribution centers.
CONSUMER DEVELOPMENT GROUP ACQUISITION
On November 1, 1999, the Company acquired all of the capital stock of Consumer
Development Group Inc. ("CDG") for approximately $4.8 million and made an
initial payment to the seller of approximately $2.4 million, financed through
senior debt. The remaining purchase price of approximately $2.4 million will be
paid ratably on each of the first three anniversaries of the acquisition. The
CDG 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. The excess of cost over fair value of approximately $4.8 million
was allocated to goodwill. The financial information for the year ended December
31, 1999, includes the results of CDG for November and December only. The pro
forma effects of this acquisition were not material.
A Certificate of Dissolution was filed with the State of Delaware to dissolve
CDG as of December 31,1999. Upon its dissolution CDG was merged into USSC.
COMMON STOCK REPURCHASE
On March 11, 1999, the Company's Board of Directors authorized the repurchase of
up to $50.0 million of its Common Stock. Under this authorization, the Company
purchased 3,250,000 shares of Common Stock at a cost of approximately $49.6
million. Acquired shares are included in the issued shares of the Company, but
are not included in average shares outstanding when calculating earnings per
share. During 1999, the Company reissued 29,519 shares of treasury stock to
fulfill its obligations under its stock option plan.
COMMON STOCK DIVIDEND
All share and per share data reflect a two-for-one stock split in the form of a
100% Common Stock dividend paid September 28, 1998.
JUNE 1998 EQUITY OFFERING
In June 1998, United completed an offering of 4.0 million shares of Common Stock
(the "June 1998 Equity Offering"), consisting of 3.0 million primary shares sold
by United, and 1.0 million secondary shares sold by certain selling
stockholders. The shares were priced at $27.00 per share, before underwriting
discounts and commissions of $1.15 per share. The aggregate proceeds to United
of approximately $77.6 million (before deducting expenses) 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.
28
<PAGE>
United did not receive any of the proceeds from the sale of the 1.0 million
shares of Common Stock offered by the selling stockholders. It did, however,
receive an aggregate of approximately $6.4 million paid by the selling
stockholders upon exercise of employee stock options in connection with the June
1998 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 1998 Equity Offering, the underwriters
exercised an overallotment option to purchase an additional 0.4 million shares
from United. The net proceeds to United of approximately $10.3 million from the
sale were delivered to USSC and used to repay an additional portion of the
indebtedness outstanding under the Tranche A Term Loan Facility.
In the second quarter of 1998, the Company recognized the following charges: (i)
a non-recurring charge of $13.9 million ($8.3 million net of tax benefit of $5.6
million) to write off the remaining payments and related prepaid expense under a
contract for computer services from a vendor, and an extraordinary loss of $9.9
million ($5.9 million net of tax benefit of $4.0 million) related to the early
retirement of debt (collectively "1998 Charges").
Net income attributable to common stockholders for the year ended December 31,
1998, before the 1998 Charges, was $72.2 million, up 59.0%, compared with $45.4
million, before the 1997 Charges (as defined). In 1998, diluted earnings per
share, before the 1998 Charges, were $2.00 on 36.2 million weighted average
shares outstanding, up 36.1%, compared with $1.47, before the 1997 Charges (as
defined), on 30.8 million weighted average shares outstanding for the prior
year.
AZERTY BUSINESS ACQUISITION
On April 3, 1998, the Company acquired 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 Business"). These
businesses comprised 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 Business was
approximately $115.7 million (including fees and expenses). The acquisition was
financed primarily through senior debt. The Azerty Business 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 of approximately $73.7 million allocated to goodwill.
The financial information for the year ended December 31, 1998, included nine
months of the Azerty Business. The pro forma effects of this acquisition were
not material.
OCTOBER 1997 EQUITY OFFERING
On October 9, 1997, the Company completed a 4.0 million share primary offering
of Common Stock and a 6.8 million share secondary offering of Common Stock
("October 1997 Equity Offering"). The shares were priced at $19.00 per share,
before underwriting discounts and commissions of $0.95 per share. The aggregate
net proceeds to the Company from this equity offering of $72.2 million (before
deducting expenses) and proceeds of $0.1 million resulting from the conversion
of approximately 2.2 million warrants into Common Stock were used to: (i) redeem
$50.0 million of the Company's 12.75% Senior Subordinated Notes and pay the
redemption premium of $6.4 million, (ii) pay fees related to the October 1997
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 1997 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 and the
termination of certain management advisory service agreements (see Note 13), 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 1),
(collectively "1997 Charges").
Net income attributable to common stockholders for the year ended December 31,
1997, before the 1997 Charges, was $45.4 million, up 50.3%, compared with $30.2
million in 1996. Diluted earnings per share before the 1997 Charges were $1.47
on 30.8 million weighted average shares outstanding, up 45.3%, compared with
$1.01 on 29.8 million weighted average shares outstanding for the prior year.
29
<PAGE>
LAGASSE BROS., INC. ACQUISITION
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 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 of approximately $39.0 million allocated to goodwill. The pro forma
effects of this acquisition were not material.
2. OPERATIONS
The Company operates in a single reportable segment as a national wholesale
distributor of business products. The Company offers approximately 35,000 items
from more than 500 manufacturers. This includes a broad spectrum of office
products, computer supplies, office furniture, business machines, audio-visual
products and facilities management supplies. The Company primarily serves
commercial and contract office products dealers. Its customers include more than
20,000 resellers -- such as office products dealers, mega-dealers, office
furniture dealers, office products superstores and mass merchandisers, mail
order companies, computer products resellers, sanitation supply distributors and
e-commerce dealers. The Company has a distribution network of 39 regional
distribution centers. In addition, the Company has 21 Lagasse distribution
centers, specifically serving janitorial and sanitation supply distributors, and
six Azerty distribution centers that carry information technology supplies.
Through its integrated computer system, the Company provides a high level of
customer service and overnight delivery.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All 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 may be liquidated within three months
from the purchase date are considered cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
INVENTORIES
Inventories constituting approximately 78% and 80% of total inventories at
December 31, 1999 and 1998, respectively, have been valued under the last-in,
first-out ("LIFO") method. The decline in the percentage of inventory on LIFO
resulted from increased inventory levels at the Azerty Business and Lagasse,
whose inventory is valued under the first-in, first-out ("FIFO") method.
Inventory valued under the FIFO and LIFO accounting methods are recorded at the
lower of cost or market. If the lower of FIFO cost or market method of inventory
accounting had been used by the Company for all inventories, merchandise
inventories would have been approximately $8.3 million and $4.2 million higher
than reported at December 31, 1999 and 1998, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are 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 10
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.
30
<PAGE>
GOODWILL
Goodwill represents the excess cost over the value of net assets of businesses
acquired and is amortized on a straight-line basis principally 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. If factors indicate that goodwill should be evaluated for possible
impairment, the Company will use an estimate of undiscounted future operating
income compared with the carrying value of goodwill to determine if a write-off
is necessary. The cumulative amount of goodwill amortized at December 31, 1999
and 1998 is $16.7 million and $11.8 million, respectively.
SOFTWARE CAPITALIZATION
The Company capitalizes internal use software development costs in accordance
with the American Institute of Certified Public Accountants' Statement of
Position ("SOP") No. 98-1 "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use." Amortization is recorded on a straight-line
basis over the estimated useful life of the software, generally not to exceed
five 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
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.
4. SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which was adopted by the Company in 1998.
SFAS No. 131 requires companies to report financial and descriptive information
about their reportable operating segments, including segment profit or loss,
certain specific revenue and expense items, and segment assets, as well as
information about the revenues derived from the company's products
31
<PAGE>
and services, the countries in which the company earns revenues and holds
assets, and major customers. This statement also requires companies that have
a single reportable segment to disclose information about products and
services, information about geographic areas, and information about major
customers. This statement requires the use of the management approach to
determine the information to be reported. The management approach is based on
the way management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. It is management's
opinion that, at this time, the Company has several operating segments,
however only one reportable segment.
The following discussion sets forth the required disclosure regarding single
segment information:
The Company operates as a single reportable segment as the largest general line
business products wholesaler in the United States with 1999 net sales of $3.4
billion - including operations outside the United States, which were immaterial.
The Company sells its products through national distribution networks to more
than 20,000 resellers, who in turn sell directly to end-users. These products
are distributed through a computer-based network of warehouse facilities and
truck fleets radiating from 39 regional distribution centers, 21 Lagasse
distribution centers, and six Azerty distribution centers.
The Company's product offerings, comprised of more than 35,000 stockkeeping
units (SKUs), may be divided into five primary categories. (i) 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. (ii) The Company
offers computer supplies, and peripherals to computer resellers and office
products dealers. (iii) 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. The Company
currently offers nearly 5,000 furniture items from 50 different
manufacturers. (iv) A fourth category is facility supplies, including
janitorial and sanitation supplies, safety and security items, and shipping
and mailing supplies. In October 1996, the Company acquired Lagasse, the
largest pure wholesaler of janitorial and sanitation supplies in North
America. The Company distributes these products through 21 Lagasse
distribution centers to sanitary supply dealers. (v) The Company also
distributes business machines and audio-visual equipment and supplies.
The Company's customers include office products dealers, mega-dealers, office
furniture dealers, office products superstores and mass merchandisers, mail
order companies, computer products resellers, sanitary supply distributors and
e-commerce dealers. No single customer accounted for more than 7% of the
Company's net sales in 1999.
The following table sets forth net sales by product category (dollars in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------- --------------- ------------
<S> <C> <C> <C>
Traditional office products $1,204 $1,183 $1,248
Computer consumables 1,136 878 504
Office furniture 435 425 379
Facilities supplies 240 202 74
Business machines and audio-visual
products 344 334 315
Other 34 37 38
------ ------ ------
Total net sales $3,393 $3,059 $2,558
====== ====== ======
</TABLE>
5. OTHER EXPENSE
The following table sets forth the components of other expense (dollars in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Loss on the sale of accounts receivable, net of
servicing revenue $9,393 $7,477 $ - -
Other 39 744 - -
------ ------ ------
Total $9,432 $8,221 $ - -
====== ====== ======
</TABLE>
RECEIVABLES SECURITIZATION PROGRAM
On April 3, 1998, in connection with the refinancing of its credit facilities,
the Company entered into a $163.0 million Receivables Securitization Program.
Under this program the Company sells its eligible receivables (except for
certain excluded receivables, which initially includes all receivables from the
Azerty Business and Lagasse) to the Receivables
32
<PAGE>
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. The
Company received approximately $160.0 million in proceeds from the initial
sale of certain eligible receivables on April 3, 1998. These proceeds were
used to repay a portion of indebtedness under the Credit Agreement (as
defined). 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.
The Chase Manhattan Bank acts as funding agent and, 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 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 December 31, 1999 and 1998 exclude approximately
$160.0 million of accounts receivable sold to the Receivables Company.
6. 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 common
equivalent shares.
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,
--------------------------------------------------------------------------------
1998 Before 1997 Before
1999 1998 Charges(1) 1997 Charges(2)
---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Income before extraordinary item $ 83,409 $ 63,925 $ 72,212 $ 8,188 $ 46,892
Preferred stock dividends - - - - - - 1,528 1,528
---------- ---------- ---------- ---------- ----------
Numerator for basic and diluted earnings
per share - income attributable to
common stockholders before
extraordinary item $ 83,409 $ 63,925 $ 72,212 $ 6,660 $ 45,364
========== ========== ========== ========== ==========
Denominator:
Denominator for basic earnings per
share - weighted average shares 34,708 34,680 34,680 26,128 26,128
Effect of dilutive securities:
Employee stock options 500 1,491 1,491 2,516 2,516
Warrants - - - - - - 2,116 2,116
---------- ---------- ---------- ---------- ----------
Dilutive potential common shares 500 1,491 1,491 4,632 4,632
---------- ---------- ---------- ---------- ----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 35,208 36,171 36,171 30,760 30,760
========== ========== ========== ========== ==========
Basic earnings per share $ 2.40 $ 1.84 $ 2.08 $ 0.26 $ 1.74
========== ========== ========== ========== ==========
Diluted earnings per share $ 2.37 $ 1.76 $ 2.00 $ 0.22 $ 1.47
========== ========== ========== ========== ==========
</TABLE>
33
<PAGE>
(1) The year ended December 31, 1998 reflects a write-off of the remaining
term of a contract for computer services from a vendor. As a result,
the Company recorded a non-recurring charge of $13.9 million ($8.3
million net of tax benefit of $5.6 million) to write off the remaining
payments and related prepaid expense under this contract (see Note 1).
In addition, during 1998 the Company recorded an extraordinary loss of
$9.9 million ($5.9 million net of tax benefit of $4.0 million) related
to the early retirement of debt (see Notes 1 and 7).
(2) The year ended December 31, 1997 reflects non-recurring charges of
$59.4 million ($35.5 million net of tax benefit of $23.9 million),
(non-cash), (see Notes 1 and 11), and $5.3 million ($3.2 million net of
tax benefit of $2.1 million), (cash) related to the vesting of stock
options and the termination of certain management advisory service
agreements (see Notes 1 and 13). In addition, during 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 (see Note
1).
7. LONG-TERM DEBT
Long-term debt consisted of the following amounts (dollars in thousands):
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
1999 1998
------------- -----------
<S> <C> <C>
Revolver $ 53,000 $ 24,000
Tranche A term loan, due in installments until March 31, 2004 53,711 59,448
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
Mortgage at 9.4%, due September 1, 1999 - - 1,832
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 416 304
---------- ----------
Subtotal 336,927 315,384
Less - current maturities (9,567) (7,709)
---------- ----------
Total $ 327,360 $ 307,675
========== ==========
</TABLE>
The prevailing prime interest rate at the end of 1999 and 1998 was 8.50% and
7.75%, respectively.
At December 31, 1999, the available credit under the Second Amended and Restated
Credit Agreement (the "Credit Agreement") included $53.7 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 has
$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 consisted initially of $150.0 million Tranche A term
loan facility ("Tranche A Facility") and a $100.0 million Tranche B term loan
facility ("Tranche B Facility"). The Company repaid a substantial portion of the
Tranche A Facility with proceeds from the June 1998 Equity Offering. As a
result, the Company recognized an extraordinary loss on the early retirement of
debt of $9.9 million ($5.9 million net of tax benefit of $4.0 million). Amounts
outstanding under the Tranche A Facility are to be repaid in 17 quarterly
installments ranging from $1.6 million at March 31, 2000 to $3.7 million at
March 31, 2004. All amounts outstanding under the Tranche B Facility were repaid
as of April 15, 1998, with net proceeds from the sale of $100.0 million of
8.375% Senior Subordinated Notes and from a portion of the proceeds generated
from the sale of certain receivables under the Receivables Securitization
Program (see Note 5).
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 $53.0 million was outstanding at December 31,
1999.
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, 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.
34
<PAGE>
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 Revolving Credit Facility
bear interest at prime to prime plus 0.75%, or, at the Company's option, the
London Interbank Offer 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 financing of this type.
At December 31, 1999, the Company was in compliance with all covenants contained
in the Credit Agreement.
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 cash dividends and make other
distributions to United.
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. These 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 these
agreements is amortized to interest expense over the term of the agreements, and
the unamortized cost is included in other assets. Any payments received or made
as a result of the agreements are recorded as an addition to or a reduction from
interest expense. For the years ended December 31, 1999, 1998, and 1997, the
Company recorded $0.2 million, $0.2 million, and $0.6 million, respectively, to
interest expense resulting from LIBOR rate fluctuations below the floor rate
specified in the collar agreements. The Company's interest rate collar
agreements on $200.0 million of borrowings at LIBOR rates between 5.2% and 8.0%
expired on October 29, 1999. As of December 31, 1999 the Company has not entered
into any new interest rate collar agreements.
Debt maturities for the years subsequent to December 31, 1999 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Year Amount
- ---- --------
<S> <C>
2000 $ 9,567
2001 14,409
2002 23,930
2003 19,955
2004 62,266
Later years 206,800
--------
Total $336,927
========
</TABLE>
At December 31, 1999 and 1998, the Company had available letters of credit of
$53.0 million and $53.4 million, respectively, of which $48.8 million and $49.4
million, respectively, were outstanding.
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 December 31, 1999,
the aggregate outstanding principal amount of the 12.75% Notes was $100.00
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.
In addition, the 12.75% Notes are redeemable at the option of USSC 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>
35
<PAGE>
After 2003 the Notes are payable 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 the Company or USSC or certain significant changes in the
composition of the Board of Directors of either the Company or USSC), USSC shall
be obligated to offer to redeem all or a portion of each holder's 12.75% 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 12.75% Notes Indenture governing the 12.75% 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.
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 December 31, 1999, 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.
The 8.375% Notes Indenture provides that, prior to April 15, 2001, USSC may
redeem, at its option, up to 35% of the aggregate principal amount of the 8.375%
Notes within 180 days following one or more Public Equity Offerings (as defined
in the 8.375% Notes Indenture) 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 (as defined in the
8.375% Notes Indenture), if any, to the date of redemption; provided that
immediately after giving effect to each such redemption, at least 65% of the
aggregate principal amount of the 8.375% Notes remain outstanding after giving
effect to such redemption.
In addition, the 8.375% Notes are redeemable at the option of USSC at any time
on or after April 15, 2003, in whole or in part, at the following redemption
prices (expressed as percentages of principal amount):
<TABLE>
<CAPTION>
Redemption
Year Beginning April 15, Price
------------------------ -----------------
<S> <C>
2003 ..................................................................... 104.188%
2004 ..................................................................... 102.792%
2005 ..................................................................... 101.396%
</TABLE>
After 2005 the Notes are payable 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 the Company or USSC or certain significant changes in the
composition of the Board of Directors of either the Company or USSC), USSC shall
be obligated to offer to redeem all or a portion of each holder's 8.375% Notes
at 101% of the principal amount, together with accrued and unpaid interest, if
any, to the date of the redemption. Such obligation, if it arose, could have a
material adverse effect on the Company.
The 8.375% Notes Indenture governing the 8.375% 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. In addition, the 8.375% Notes Indenture provides for the
issuance of up to $100.0 million aggregate principal amount of additional 8.375%
Notes having substantially identical terms and conditions to the 8.375% Notes,
36
<PAGE>
subject to compliance with the covenants contained in the 8.375% Notes
Indenture, including compliance with the restrictions contained in the 8.375%
Notes Indenture relating to incurrence of indebtedness.
8. 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, 1999, 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>
2000 $ 28,621
2001 24,507
2002 18,314
2003 11,516
2004 9,389
Later years 26,502
---------
Total minimum lease payments $ 118,849
=========
</TABLE>
(1) Operating leases are net of immaterial sublease income.
Rental expense for all operating leases was approximately $27.1 million, $20.8
million, and $20.5 million in 1999, 1998, and 1997, respectively.
9. PENSION PLANS AND DEFINED CONTRIBUTION PLAN
PENSION PLANS
As of December 31, 1999, 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' changes in Projected Benefit
Obligation for the years ended December 31, 1999 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Benefit obligation at beginning of year $ 37,122 $ 28,773
Service cost 3,231 2,734
Interest cost 2,598 2,113
Amendments 430 346
Actuarial (gain) loss (6,754) 4,043
Benefits paid (980) (887)
-------- --------
Benefit obligation at end of year $ 35,647 $ 37,122
======== ========
</TABLE>
The plans' assets consist of corporate and government debt securities and equity
securities. The following table sets forth the change in the plans' assets for
the years ended December 31, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Fair value of assets at beginning of year $ 40,974 $ 33,562
Actual return on plan assets 7,634 5,207
Company contributions 263 3,092
Benefits paid (980) (887)
--------- ---------
Fair value of plan assets at end of year $ 47,891 $ 40,974
========= =========
</TABLE>
37
<PAGE>
The following table sets forth the plans' funded status at December 31, 1999 and
1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Funded status of the plan $ 12,244 $ 3,852
Unrecognized prior service cost 1,273 1,135
Unrecognized net actuarial gain (15,282) (4,391)
----------- -----------
Pension (liability) / prepaid asset recognized
in the Consolidated Balance Sheets $ (1,765) $ 596
=========== ===========
</TABLE>
Net periodic pension cost for 1999, 1998 and 1997 for pension and supplemental
benefit plans includes the following components (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefit earned during the period $ 3,231 $ 2,734 $ 2,333
Interest cost on projected benefit obligation 2,598 2,113 1,833
Expected return on plan assets (3,485) (2,648) (2,135)
Amortization of prior service cost 99 99 77
Plan curtailment loss 193 - - - -
Amortization of actuarial loss (13) (243) (63)
---------- ---------- ----------
Net periodic pension cost $ 2,623 $ 2,055 $ 2,045
========== ========== ==========
</TABLE>
The assumptions used in accounting for the Company's defined benefit plans are
set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -----------
<S> <C> <C> <C>
Assumed discount rate 7.75% 6.75% 7.25%
Rates of compensation increase 5.50% 5.50% 5.50%
Expected long-term rate of return on plan assets 8.50% 7.50% 7.50%
</TABLE>
DEFINED CONTRIBUTION
The Company has a defined contribution plan. All salaried employees and certain
hourly paid employees are eligible to participate following the 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 of approximately $1.0 million in 1998 and 1997
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 $1.5
million, $1.4 million and $1.0 million in 1999, 1998 and 1997, respectively.
10. 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, deductible, co-payment provision and other limitations. Retirees
pay one-half of the projected plan costs. The following tables set forth the
plan's change in Accrued Postretirement Benefit Obligation ("APBO"), plan assets
and funded status for the years ended December 31, 1999 and 1998 (dollars in
thousands):
38
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Benefit obligation at beginning of year $ 3,748 $ 3,045
Service cost 498 479
Interest cost 229 209
Plan participants' contributions 106 89
Actuarial (gain) loss (770) 163
Benefits paid (205) (237)
------- -------
Benefit obligation at end of year $ 3,606 $ 3,748
======= =======
Fair value of assets at beginning of year $ - - $ - -
Company contributions 99 148
Plan participants' contributions 106 89
Benefits paid (205) (237)
------- -------
Fair value of plan assets at end of year $ - - $ - -
======= =======
Funded status of the plan $(3,606) $(3,748)
Unrecognized net actuarial gain (789) (148)
------- -------
Accrued postretirement benefit obligation
in the Consolidated Balance Sheets $(4,395) $(3,896)
======= =======
</TABLE>
The cost of postretirement health care benefits for the years ended December 31,
1999, 1998 and 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost $ 498 $ 479 $ 268
Interest cost 229 209 190
Amortization of actuarial loss (7) (15) (15)
-------- -------- --------
Net periodic postretirement benefit cost $ 720 $ 673 $ 443
======== ======== ========
</TABLE>
The assumptions used in accounting for the Company's postretirement plan for the
three years presented are set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------- --------------
<S> <C> <C> <C>
Assumed average health care cost trend 3.0% 3.0% 3.0%
Assumed discount rate 7.75% 6.75% 7.25%
</TABLE>
The Company's postretirement plan states that medical cost increases for current
and future retirees and their dependents are capped at 3%. Since annual medical
cost increases are trending above 4% and the Company's portion of any increase
is capped at 3%, a 1% increase or decrease in these costs will have no effect on
the APBO, the service cost or the interest cost.
11. STOCK OPTION PLAN
The Management Equity Plan (the "Plan") 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 Common Stock, through the exercise of options, to 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 3.0 million additional options
to management employees and directors. During 1999, 1998 and 1997, options of
approximately 1.3 million, 1.0 million and 0.5 million, respectively, were
granted to management employees and directors, with option exercise prices equal
to 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 management employees of the Company, exercisable
for up to 4.4 million additional shares of its Common Stock. Subsequently,
approximately 4.4 million options were granted during 1995 and 1996 to
management employees. Some of the options were granted at an option exercise
price below market value, and the exercise price of certain options increased by
$0.31 on a quarterly basis effective April 1, 1996.
39
<PAGE>
These Merger Incentive Options, which were performance-based, were granted 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 1997
Equity Offering and all time varying exercise prices became fixed. 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 October 10, 1997, of
$19.56 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 the
optionee and having a fair market value at least equal to the exercise price; or
(iii) in any combination of the above. 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 to meet only the minimum statutory withholding requirement
(except in the case of incentive stock 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) 1999 Prices 1998 Prices 1997 Prices
- ---------------------------- ---------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of the year 2,212,578 $ 15.28 3,597,794 $ 6.89 4,995,536 $ 5.81
Granted 1,293,025 22.89 965,150 24.13 538,000 11.44
Exercised (434,978) 6.52 (2,303,666) 5.73 (1,693,742) 7.71
Canceled (101,750) 23.41 (46,700) 22.89 (242,000) 7.38
---------- --------- ---------- --------- ---------- ---------
Options outstanding at
end of the year 2,968,875 $ 19.60 2,212,578 $ 15.28 3,597,794 $ 6.89
========== ========= ========== ========= ========== =========
Number of options
exercisable 707,160 $ 12.98 862,128 $ 7.64 3,067,794 $ 6.09
========== ========= ========== ========= ========== =========
</TABLE>
The following table summarizes information concerning outstanding options of the
Plan at December 31, 1999:
<TABLE>
<CAPTION>
Remaining
Exercise Number Contractual Number
Prices Outstanding Life (years) Exercisable
--------------- ---------------- --------------- --------------
<S> <C> <C> <C>
$ 2.56 15,000 0.8 15,000
8.44 312,150 0.8 312,150
10.81 500,000 7.5 200,000
22.00 450,275 9.6 - -
22.13 30,000 8.0 6,000
23.38 696,850 8.2 146,010
23.38 824,600 9.3 - -
24.13 62,000 8.2 12,400
27.06 5,000 8.3 1,000
30.56 7,000 8.5 1,400
31.63 30,000 8.3 6,000
33.06 30,000 8.7 6,000
33.56 6,000 8.7 1,200
------------ -----------
Total 2,968,875 707,160
============ ===========
</TABLE>
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 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.
40
<PAGE>
The October 1997 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 1999, 1998 and 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 1998 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 1999, 1998 and 1997, net
income and earnings per share would have been adjusted as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net income attributable to common stockholders:
As reported $ 83,409 $ 58,018 $ 776
Before charges 83,409 72,212(1) 45,364(2)
Pro forma 79,821 55,758 18,396
Net income per common share - basic:
As reported $ 2.40 $ 1.67 $ 0.03
Before charges 2.40 2.08(1) 1.74(2)
Pro forma 2.30 1.61 0.70
Average number of common shares (in thousands) 34,708 34,680 26,128
Net income per common share - diluted:
As reported $ 2.37 $ 1.60 $ 0.03
Before charges 2.37 2.00(1) 1.47(2)
Pro forma 2.27 1.54 0.60
Average number of common shares (in thousands) 35,208 36,171 30,760
</TABLE>
(1) The year ended December 31, 1998, reflected a write off of the
remaining term of a contract for computer services from a vendor. As a
result, the Company recorded a non-recurring charge of $13.9 million
($8.3 million net of tax benefit of $5.6 million) to write off the
remaining payments and related prepaid expense under this contract (see
Note 1). In addition, during 1998 the Company recorded an extraordinary
loss of $9.9 million ($5.9 million net of tax benefit of $4.0 million)
related to the early retirement of debt (see Notes 1 and 7).
(2) The year ended December 31, 1997, reflected non-recurring charges of
$59.4 million ($35.5 million net of tax benefit of $23.9 million),
(non-cash), (see Note 1) and $5.3 million ($3.2 million net of tax
benefit of $2.1 million), (cash) related to the vesting of stock
options and the termination of certain management advisory service
agreements (see Note 13). In addition, during 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 (see Note 1).
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 1999, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- --------------- --------------
<S> <C> <C> <C>
Fair value of options granted $ 13.20 $ 14.58 $ 6.85
Exercise price 22.89 24.13 11.44
Expected stock price volatility 55.5% 59.0% 64.7%
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.1% 5.5% 6.4%
Expected life of options 6 years 6 years 5 years
</TABLE>
12. PREFERRED STOCK
The Company's authorized capital shares include 15,000,000 shares of preferred
stock. The rights and preferences of preferred stock are established by the
Company's Board of Directors upon issuance. At December 31, 1999, the Company
had zero shares of preferred stock outstanding, all 15,000,000 shares are
specified as undesignated preferred stock.
41
<PAGE>
13. TRANSACTIONS WITH RELATED PARTIES
Prior to the fourth quarter of 1997, the Company had management advisory service
agreements with three investor groups. These investor groups provided certain
advisory services to the Company.
Pursuant to an agreement, Wingate Partners, L.P. ("Wingate Partners") had agreed
to provide certain oversight and monitoring services to the Company in exchange
for an annual fee of up to $725,000, payment (but not accrual) of which was
subject to restrictions under the former credit agreement related to certain
Company performance criteria. Wingate Partners earned an aggregate of $513,540
for the year ended 1997 for its 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 (i) an annual fee of up to $137,500, payment (but not accrual) of
which was subject to restrictions under the former credit agreement related to
certain Company performance criteria. Pursuant to the agreement, Cumberland
earned an aggregate of $97,400 for the year ended 1997 for its oversight and
monitoring services. The Company also was 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") provided
certain oversight and monitoring services to the Company in exchange for (i) an
annual fee of up to $137,500, payment (but not accrual) of which is subject to
restrictions under the former credit agreement related to certain Company
performance criteria. Pursuant to the agreement, Good Capital earned an
aggregate of $97,400 for the year ended 1997 for such oversight and monitoring
services. The Company also was 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.
14. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Currently payable -
Federal $ 47,774 $ 34,281 $ 19,812
State 11,722 8,403 4,811
---------- ---------- ----------
Total currently payable 59,496 42,684 24,623
Deferred, net -
Federal 530 3,508 (12,889)
State 132 872 (3,202)
---------- ---------- ----------
Total currently payable 662 4,380 (16,091)
---------- ---------- ----------
Provision for income taxes $ 60,158 $ 47,064 $ 8,532
========== ========== ==========
</TABLE>
42
<PAGE>
The Company's effective income tax rates for the years ended December 31, 1999,
1998 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,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- -------------------------- -----------------------------
% of Pre-tax % of Pre-tax % of Pre-tax
Amount Income Amount Income Amount Income
---------- --------------- ---------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision based on the
federal statutory rate $ 50,248 35.0% $ 38,846 35.0% $ 5,852 35.0%
State and local income
taxes - net of federal
income tax benefit 7,710 5.4 5,993 5.4 1,053 6.3
Non-deductible and other 2,200 1.5 2,225 2.0 1,627 9.7
-------- ------ -------- ------ -------- ------
Provision for income taxes $ 60,158 41.9% $ 47,064 42.4% $ 8,532 51.0%
======== ====== ======== ====== ======== ======
</TABLE>
The deferred tax assets and liabilities resulted 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,
------------------------------------------------------------------------
1999 1998
-------------------------------- ------------------------------------
Assets Liabilities Assets Liabilities
------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Accrued expenses $ 24,384 $ - - $ 24,254 $ - -
Allowance for doubtful accounts 6,354 - - 6,754 - -
Inventory reserves and adjustments - - 18,089 - - 17,201
Depreciation and amortization - - 37,557 - - 38,315
Reserve for stock option compensation 1,688 - - 3,902 - -
Other 6,412 - - 6,672 - -
--------- --------- --------- ---------
Total $ 38,838 $ 55,646 $ 41,582 $ 55,516
========= ======== ========= =========
</TABLE>
In the Consolidated Balance Sheets, these deferred assets and liabilities were
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, 1999, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 27,449 $ 35,464 $ 49,279
Discount on the sale of accounts receivable 8,919 7,128 - -
Income taxes 54,520 26,439 13,663
</TABLE>
43
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------------- ----------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------------- -------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 18,993 $ 18,993 $ 19,038 $ 19,038
Current maturities of long-term
Obligations 9,567 9,567 7,709 7,709
Long-term debt:
12.75% Subordinated Notes 100,000 107,640 100,000 111,500
8.375% Subordinated Notes 100,000 92,220 100,000 99,750
All other 127,360 127,360 107,675 107,675
Interest rate collar - - - - - - 463
</TABLE>
The fair value of the Notes and interest rate collar are based on quoted market
prices and quotes from counterparties, respectively.
17. SUMMARIZED FINANCIAL DATA FOR GUARANTOR SUBSIDIARIES
Azerty Incorporated, Positive ID Wholesale, and AP Support Services
(collectively, the "Azerty Guarantor") and Lagasse guarantee the 12.75% Notes
and the 8.375% Notes issued by USSC. The Azerty Guarantor and Azerty de Mexico,
S.A. de C.V. (collectively, the "Azerty Business") were acquired on April 3,
1998.
Set forth below is summarized combined financial data for the Azerty Business
(subsequent to its acquisition by USSC) and Lagasse. Summarized combined
financial data as of December 31, 1999 and 1998 reflect both Lagasse and the
Azerty Business. The summarized combined income statement data for the year
ended December 31, 1999, reflected the operations of Lagasse and the Azerty
Business for 12 months. The summarized combined income statement data for the
year ended December 31, 1998, reflected the operations of Lagasse for the 12
months and the Azerty Business, subsequent to its acquisition by USSC, for the
nine months ended December 31, 1998. Summarized financial data for the 12 months
ended December 31, 1997, reflected Lagasse only.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 247,413 $ 175,745
Total assets 364,551 293,914
Current liabilities 99,679 90,498
Total liabilities 96,275 90,560
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Income Statement Data:
Net sales $ 808,631 $ 423,297 $ 97,275
Gross margin 79,665 47,756 18,014
Operating income 28,620 17,254 7,976
Net income 13,046 9,799 4,190
</TABLE>
44
<PAGE>
18. QUARTERLY FINANCIAL DATA - UNAUDITED
<TABLE>
<CAPTION>
Income Income Per
Before Share Before Net
(dollars in thousands, Extraordinary Net Extraordinary Income Per
except share data) Net Sales Gross Profit Item Income Item(1) Share (1)
----------- ------------- -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
First Quarter $ 824,261 $ 133,868 $ 18,688 $ 18,688 $ 0.50 $ 0.50
Second Quarter 800,753 128,289 17,317 17,317 0.50 0.50
Third Quarter 877,802 144,050 22,293 22,293 0.65 0.65
Fourth Quarter 890,229 155,870 25,111 25,111 0.73 0.73
----------- ---------- ----------- ---------
Totals $ 3,393,045 $ 562,077 $ 83,409 $ 83,409 2.37 2.37
=========== ========== =========== =========
YEAR ENDED DECEMBER 31, 1998
First Quarter $ 712,517 $ 123,062 $ 15,091 $ 15,091 $ 0.44 $ 0.44
Second Quarter(2) 751,966 125,890 7,229 1,322 0.21 0.04
Third Quarter 795,407 136,275 19,879 19,879 0.52 0.52
Fourth Quarter 799,276 144,011 21,726 21,726 0.58 0.58
----------- ---------- ---------- ---------
Totals $ 3,059,166 $ 529,238 $ 63,925 $ 58,018 1.76 1.60
=========== ========== ========== =========
</TABLE>
(1) As a result of changes in the number of common and common equivalent
shares during the year, the sum of quarterly earnings per share will not
equal earnings per share for the total year.
(2) The second quarter and the year ended December 31, 1998, reflect a
non-recurring charge of $13.9 million ($8.3 million net of tax benefit of
$5.6 million) related to the write off of a contract for computer services
from a vendor (see Note 1) and an extraordinary loss of $9.9 million ($5.9
million net of tax benefit of $4.0 million) related to the early
retirement of debt (see Notes 1 and 7).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant had no disagreements on accounting and financial disclosure of
the type referred to in Item 304 of Regulation S-K.
45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information with respect to those individuals who are
currently serving as members of the Board of Directors or as executive officers
of the Company on March 6, 2000:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frederick B. Hegi, Jr........... 56 Chairman of the Board of Directors
Randall W. Larrimore............ 52 Director, President, Chief Executive Officer,
and Interim Chief Financial Officer
Daniel J. Good.................. 59 Director
Ilene S. Gordon................. 46 Director
Roy W. Haley.................... 53 Director
Max D. Hopper................... 65 Director
James A. Johnson................ 46 Director
Benson P. Shapiro............... 58 Director
Steven R. Schwarz............... 46 Executive Vice President and President, United Supply Division
Kathleen S. Dvorak.............. 43 Vice President, Investor Relations and Assistant Secretary
Tom Helton...................... 52 Vice President, Human Resources
Susan Maloney Meyer............. 56 Vice President, General Counsel and Secretary
James A. Pribel................. 46 Treasurer
Ergin Uskup..................... 62 Vice President, Management Information Systems
and Chief Information Officer
</TABLE>
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company. There is no family relationship between any
directors or executive officers of the Company. Officers of the Company are
elected by the Board of Directors and hold office until their respective
successors are duly elected and qualified.
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 founding partner of Wingate Partners,
including the indirect general partner of each of Wingate Partners and
Wingate II. Since May 1982, Mr. Hegi has served as President of Valley View
Capital Corporation, a private investment firm. Mr. Hegi also currently
serves as Chairman of the Board of Loomis, 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 Texas Capital Bancshares, Inc., a
bank holding company, Lone Star Technologies, Inc. (NYSE), a diversified
company engaged in the manufacture of tubular products, and Pro Parts
Xpress. Mr. Hegi is also Chairman, President and Chief Executive Officer of
Kevco, Inc., a publicly held distributor of building products to the
manufactured housing and recreational vehicle industries.
RANDALL W. LARRIMORE was elected to the Board of Directors of the Company and
became President and Chief Executive Officer of the Company on May 23, 1997.
On March 6, 2000, Mr. Larrimore was elected to the additional office of
Interim Chief Financial Officer. From February 1988 to May 1997, Mr.
Larrimore had been President and Chief Executive Officer of MasterBrand
Industries, Inc., a manufacturer of leading brands including Master
Lock-Registered Trademark- padlocks and Moen-Registered Trademark- 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, and sporting ammunition. He also serves as
a director of Evanston Northwestern Healthcare and S.I.F.E., Students in Free
Enterprise.
46
<PAGE>
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 and Chairman of
COM2001.com, a computer telephony business in San Diego, California. 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 of Shearson Lehman Bros. and President
of A.G. Becker Paribas, Inc. Mr. Good serves as a director of Tibersoft, Inc.
and Mindbuilder Group, Inc. and as an advisory director of AON Risk Services,
Inc., and as Chairman of the Advisory Board of Brown Simpson Asset Management
LLC.
ILENE S. GORDON was elected to the Board of Directors of United in January 2000.
She currently serves as Senior Vice President of Pechiney Group and President of
Pechiney Plastic Packaging, overseeing all aspects of Pechiney's worldwide
flexible films and laminations, and plastic bottles activities, including
manufacturing, sales and marketing operations. Prior to joining Pechiney, Ms.
Gordon spent 17 years with Tenneco Inc. where she most recently headed the
folding-carton business. She currently serves as a director of A.J. Gallagher &
Co. (NYSE: AJG), an international company in the insurance brokerage and risk
management business and Evanston Northwestern Healthcare.
MAX D. HOPPER has served as a Director of the company since August 1998. In
1995, he founded Max D. Hopper Associates, Inc., a consulting firm specializing
in creating benefits from the strategic use of advanced information systems. He
is the retired chairman of the SABRE Technology Group and served as Senior Vice
President for American Airlines, both units of AMR Corporation. Mr. Hopper
currently serves as a director of Gartner Group, Inc., Metrocall, Inc., USDATA
Corporation, Inc., Payless Cashways, Inc., Accrue Software, Inc. and Exodus
Communications, Inc.
ROY W. HALEY was elected to the Board of Directors of United in March 1998. Mr.
Haley currently serves as Chairman and Chief Executive Officer of WESCO
International 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 Cambrex, Corp. (NYSE), Development Dimensions, Inc.,
and The National Association of Electrical Distribution Education Foundation.
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 Kevco, Inc., a distributor of building
products to the manufactured housing industry and Pro Parts Xpress, a wholesale
distributor of automotive parts.
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
30 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 on a part-time basis and spends much of his time
consulting, public speaking, and writing. He serves as a director of Indus
River Networks, Inc., Caswell-Massey Co. LLP and serves on several advisory
boards for private companies.
STEVEN R. SCHWARZ became Executive Vice President of the Company upon
consummation of the Merger with primary responsibility for marketing and
merchandising. In January 1999, Mr. Schwarz was also named to the position of
President, United Supply Division which is the Company's core office supply
business. 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 in July 1997 and
Assistant Secretary in November 1999. 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.
47
<PAGE>
TOM HELTON became Vice President of Human Resources 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 resource 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.
SUSAN MALONEY MEYER became Vice President, General Counsel and Secretary 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 large
conglomerate in a wide variety of businesses.
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 USSC since 1984 and had served in various positions
since joining USSC in 1978.
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.
The Charter provides that the Board of Directors shall be divided into three
classes, each class as nearly equal in number as possible, and each term
consisting of three years. The directors currently in each class are as follows:
Class I (having terms expiring in 2002)--Messrs. Good, Hopper, Johnson; Class II
(having terms expiring in 2000)--Messrs. Hegi and Larrimore and Ms. Gordon, and
Class III (having terms expiring in 2001)--Messrs. Haley and Shapiro.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference, pursuant to General Instruction G(3) to Form
10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 10, 2000, to be filed within 120 days
after the end of the Registrant's year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference, pursuant to General Instruction G(3) to Form
10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 10, 2000, to be filed within 120 days
after the end of the Registrant's year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference, pursuant to General Instruction G(3) to Form
10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 10, 2000, to be filed within 120 days
after the end of the Registrant's year.
48
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) The following financial statements, schedules and exhibits are filed as
part of this report:
<TABLE>
<CAPTION>
PAGE NO.
--------
<C> <S> <C>
(1) Financial Statements of the Company
Report of Independent Auditors...................................................... 21
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997................................................. 22
Consolidated Balance Sheets as of December 31, 1999 and 1998........................ 23-24
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997............................. 25-26
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................................. 27
Notes to Consolidated Financial Statements.......................................... 28-45
(2) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Certificate of Ownership and Merger merging Associates Stationers, Inc.
into the Company(2).
2.2 Stock Purchase Agreement among USSC and Lagasse Bros., Inc. and the
shareholders of Lagasse Bros., Inc. (Exhibit 99.1 to the Company's
Report on Form 8-K filed November 5, 1996)(3).
2.3 Stock Purchase Agreement, dated as of February 10, 1998, among the
Company, United, Abitibi-Consolidated Inc., Abitibi-Consolidated
Sales Corporation, Azerty Incorporated, Azerty de Mexico, S.A. de
C.V., AP Support Services Incorporated and Positive I.D. Wholesale
Inc. (Exhibit 2.1 to the Company's Report on Form 8-K filed April 20,
1998)(3).
3.1 Second Restated Certificate of Incorporation dated as of November 5,
1998.(Exhibit 3.1 to the Company's Annual Report on Form 10-K filed
March 29, 1999)(3)
3.2 Amended and Restated Bylaws dated as of March 24, 1999. (Exhibit 3.2 to
the Company's Annual Report on Form 10-K filed March 29, 1999)(3)
3.3 Restated Articles of Incorporation of USSC(6).
3.4 Restated Bylaws of USSC(1).
4.1 Indenture, dated as of April 15, 1998, among the Company, USSC as
issuer, Lagasse Bros., Inc., Azerty Incorporated, Positive ID
Wholesale Inc., AP Support Services Incorporated, as guarantors, and
The Bank of New York, as trustee (Exhibit 4.1 to the Company's Report
on Form 8-K filed April 20, 1998)(3).
4.2 Indenture, dated as of May 3, 1995, among the Company, as guarantor,
USSC, as issuer, and The Bank of New York, as trustee(1).
4.3 First Supplemental Indenture, dated as of July 28, 1995, among the
Company, USSC and The Bank of New York(1).
4.4 Second Supplemental Indenture, dated as of April 3, 1998, among the
Company, Lagasse Bros., Inc., Azerty Incorporated, Positive ID
Wholesale Inc., AP Support Services Incorporated, and The Bank of New
York, as trustee (Exhibit 4.4 to the Company's Report on Form 8-K filed
April 20, 1998)(3).
4.5 Second Amended and Restated Credit Agreement, dated April 3, 1998,
among United, the Company, the lenders parties thereto, Chase
Securities Inc., as arranger, and the Chase Manhattan Bank, as agent
(Exhibit 10.1 to the Company's Report on Form 8-K filed April 20,
1998)(3).
4.6 Second Amended and Restated Security Agreement, dated as of April 3,
1998, between the Company and the Chase Manhattan Bank, as
administrative agent (Exhibit 10.2 to the Company's Report on Form 8-K
filed April 20, 1998)(3).
4.7 Subsidiary Guarantee and Security Agreement, dated as of April 3,
1998, among Lagasse Bros., Inc., Azerty Incorporated, Positive ID
Wholesale Inc., AP Support Services Incorporated and the Chase
Manhattan Bank, as administrative agent (Exhibit 10.3 to the
Company's Report on Form 8-K filed April 20, 1998)(3).
4.8 Pooling Agreement, dated as of April 3, 1998, among USS Receivables
Company, Ltd., the Company, as servicer, and The Chase Manhattan
Bank, as trustee (Exhibit 10.4 to the Company's Report on Form 8-K
filed April 20, 1998)(3).
</TABLE>
49
<PAGE>
<TABLE>
<C> <S>
4.9 Receivables Sale Agreement, dated as of April 3, 1998, among the
Company, as seller, USS Receivables Company, Ltd., and the Company,
as servicer (Exhibit 10.6 to the Company's Report on Form 8-K filed
April 20, 1998)(3).
4.10 Servicing Agreement, dated as of April 3, 1998, among USS Receivables
Company, Ltd., the Company, as servicer, and the Chase Manhattan
Bank, as trustee (Exhibit 10.7 to the Company's Report on Form 8-K
filed April 20, 1998(3).
4.11 Amendment No. 1 to Second Amended and Restated Credit Agreement dated
as of December 30, 1998. (Exhibit 4.5 to the Company's Annual Report on
Form 10-K filed March 29, 1999)(3)
4.12 Amendment No. 2 to Second Amended and Restated Credit Agreement dated
as of March 17, 1999. (Exhibit 4.6 to the Company's Annual Report on
Form 10-K filed March 29, 1999)(3)
10.1 Management Incentive Plan for 1997 (Exhibit 10.39 to Company's Report
on Form 10-K dated March 26, 1997)(3).**
10.2 1997 Special Bonus Plan (Exhibit 10.40 to the Company's Report on Form
10-K dated March 26, 1997)(3).**
10.3 Lease Agreement, dated as of March 4, 1988, between Crow-Alameda
Limited Partnership and Stationers Distributing Company, Inc., as
amended(1).
10.4 Industrial Real Estate Lease, dated as of May 17, 1993, among Majestic
Realty Co. and Patrician Associates, Inc., as Landlord, and United
Stationers Supply Co., as Tenant(1).
10.5 Standard Industrial Lease, dated as of March 15, 1991, between Shelley
B. & Barbara Detrik and Lynn Edwards Corp.(1).
10.6 Lease Agreement, dated as of January 12, 1993, as amended, among
Stationers Antelope Joint Venture, AVP Trust, Adon V. Panattoni and
Yolanda M. Panattoni, as landlord, and United Stationers Supply Co., as
tenant(1).
10.7 Lease, dated as of February 1, 1993, between CMD Florida Four Limited
Partnership and United Stationers Supply Co., as amended(1).
10.8 Standard Industrial Lease, dated March 2, 1992, between Carol Point
Builders I and Associated Stationers, Inc.(1).
10.9 First Amendment to Industrial Lease dated January 23, 1997 between
ERI-CP, Inc. (successor to Carol Point Builders I) and United
Stationers Supply Co. (successor to Associated Stationers, Inc.)(5).
10.10 Lease Agreement, dated July 20, 1993, between OTR, acting as the duly
authorized nominee of the Board of the State Teachers Retirement
System of Ohio, and United Stationers Supply Co., as amended(1).
10.11 Lease Agreement, dated as of December 20, 1988, between Corporate
Property Associates 8, L.P., and Stationers Distributing Company,
Inc., as amended(1).
10.12 Industrial Lease, dated as of February 22, 1988, between Northtown
Devco and Stationers Distributing Company, as amended(1).
10.13 Lease, dated as of April 17,1989, between Isaac Heller and USSC, as
amended(1).
10.14 Lease Agreement, dated as of May 10, 1984, between Westbelt Business
Park Joint Venture and Boise Cascade Corporation, as amended(1).
10.15 Fourth Amendment to Lease between Keystone-Ohio Property Holding Corp.
(as successor to Westbelt Business Park) and USSC (as successor to
Associated Stationers, Inc.) dated December 3, 1996(5).
10.16 Lease effective March 1, 1997 between Davis Partnership and USSC(6).
10.17 Lease Agreement, dated as of August 17, 1981, between Gulf United
Corporation and Crown Zellerbach Corporation, as amended(1).
10.18 Lease Agreement, dated November 7, 1988, between Central East Dallas
Development Limited Partnership and Stationers Distributing Company,
Inc., as amended(1).
10.19 Lease Agreement, dated as of March 17, 1989, between Special Asset
Management Company of Texas, Inc., and Stationers Distributing
Company, Inc., as amended(1).
10.20 Sublease, dated January 9, 1992, between Shadrall Associates and
Stationers Distributing Company, Inc.(1).
10.21 Agreement of Lease, dated as of January 5, 1994, between the Estate of
James Campbell, deceased, and USSC(1).
10.22 Amendment No. 2 to Agreement of Lease dated February 1, 1997 between
the Estate of James Campbell, deceased, and USSC (7).
10.23 Lease Agreement dated January 5, 1996, between Robinson Properties,
L.P.and USSC (4).
10.24 Certificate of Insurance covering directors' and officers' liability
insurance effective April 1, 1997 through April 1, 1998(5).
10.25 Employment Agreement dated as of May 23, 1997 between the Company,
USSC and Randall W. Larrimore (5).**
10.26 Employment Agreements dated as of June 1, 1997 between the Company
and each of Daniel H. Bushell, Michael D. Rowsey and Steven R.
Schwarz(5).**
10.27 Lease dated as of October 20, 1997 between Ozburn-Hessey Storage Co.
and USSC(7).
10.28 United Stationers Inc. Non-employee Directors' Deferred Stock
Compensation Plan(7).**
10.29 Amendments to Stock Option Grants, dated as of June 1, 1997, between
the Company and each of Daniel H. Bushell, Michael D. Rowsey and Steven
R. Schwarz(5).**
50
<PAGE>
10.30 Certificate of Insurance covering directors' and officers' liability
insurance effective April 1, 1998 through April 1, 2000(6).
10.31 Lease Agreement, dated as of October 12, 1998, between Corum Carol
Stream Associates, LLC and USSC. (Exhibit 10.94 to the Company's Annual
Report on Form 10-K filed March 29, 1999)(3)
10.32 Management Incentive Plan for 1998. (Exhibit 10.95 to the Company's
Annual Report on Form 10-K filed March 29, 1999)(3)(**)
10.33 Restated Management Equity Plan as of November 5, 1998. (Exhibit 10.96
to the Company's Annual Report on Form 10-K filed March 29, 1999)(3)
(**)
10.34 Severance Agreement between the Company, USSC and Michael Rowsey and
Cynthia Rowsey, dated as of January 1, 1998. (Exhibit 10.97 to the
Company's Annual Report on Form 10-K filed March 29, 1999)(3)(**)
10.35 Lease Agreement dated May 29,1998, between VRS/TA/S Houston, L.P., a
Texas limited partnership and USSC.*
10.36 Lease Agreement dated July 30,1999, between Valley View Business
Center, Ltd, a Texas limited partnership and USSC.*
10.37 Certificate of Insurance covering directors' and officers' liability
insurance effective April 1, 1999 through April 1, 2001.*
10.38 Resignation Agreement between the Company, USSC and Daniel H. Bushell,
dated as of March 4, 2000.*
21 Subsidiaries of the issuer.*
23.1 Consent of Ernst & Young LLP, independent auditors.*
27.1 Financial Data Schedule for United Stationers Inc. (EDGAR filing
only)*.
27.2 Financial Data Schedule for United Stationers Supply Co. (EDGAR filing
only)*.
</TABLE>
- -----------------------------
* Filed herewith.
** Compensatory Plan Arrangement
(1) Incorporated by reference to the USSC Form S-1 (No. 33-59811), as
amended, initially filed with the Commission on June 12, 1995.
(2) Incorporated by reference to the Company's Schedule 14D-9 dated
February 21, 1995.
(3) Incorporated by reference to other prior filings of the Company as
indicated.
(4) Incorporated by reference to the Company's Form S-2 (No. 333-01089) as
filed with the Commission on February 20, 1996.
(5) Incorporated by reference to the Company's Form S-2 (No. 333-34937) as
filed with the Commission on October 3, 1997.
(6) Incorporated by reference to the Company's 10-K as filed with
Commission on March 29, 1999.
(7) Incorporated by reference to the Company's Form 10-K as filed
with the Commission on March 12, 1998.
B) Reports on Form 8-K by the Registrant are as follows:
(1) The Company filed a report on Form 8-K on January 20, 2000, reporting
under Item 5 the election of Ilene S. Gordon to its Board of Directors.
(2) The Company filed a report on Form 8-K on March 6, 2000, reporting
under Item 5 the resignation of Daniel H. Bushell as Executive Vice
President, Chief Development Officer, and Chief Financial Officer.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
BY: /s/ Randall W. Larrimore
-----------------------------------
Randall W. Larrimore
Director, President, Chief
Executive Officer, and
Interim Chief Financial Officer
(principal accounting officer)
Dated: March 7, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Frederick B. Hegi, Jr. Chairman of the Board of Directors March 7, 2000
- --------------------------------------
Frederick B. Hegi, Jr.
/s/ Daniel J. Good Director March 7, 2000
- --------------------------------------
Daniel J. Good
/s/ Ilene S. Gordon Director March 7, 2000
- --------------------------------------
Ilene S. Gordon
/s/ Roy W. Haley Director March 7, 2000
- --------------------------------------
Roy W. Haley
/s/ Max D. Hopper Director March 7, 2000
- --------------------------------------
Max D. Hopper
/s/ James A. Johnson Director March 7, 2000
- --------------------------------------
James A. Johnson
/s/ Benson P. Shapiro Director March 7, 2000
- --------------------------------------
Benson P. Shapiro
</TABLE>
52
<PAGE>
Exhibit 10.35
LEASE AGREEMENT
THIS AGREEMENT is made and entered into this 29 day of May, 1998, by and
between VRS/TA/S Houston, L.P., a Texas limited partnership (hereinafter
called "Lessor"), and United Stationers Supply Co., an Illinois corporation
(hereinafter called "Lessee").
W I T N E S S E T H:
Lessor, for and in consideration of the covenants of Lessee herein contained,
and subject to the terms, provisions and conditions hereinafter set forth,
hereby leases, demises and lets unto Lessee, and Lessee hereby leases and takes
from Lessor, that certain tract or parcel of land situated in Harris County,
Texas, as described in EXHIBIT A attached hereto and made a part hereof (the
"Land"), together with and including the building containing approximately
240,000 square feet of floor space and improvements to be made thereon by Lessor
as provided in ARTICLE 1 below, said Land and improvements being hereinafter
referred to as the "Leased Premises".
TO HAVE AND TO HOLD the said Leased Premises, together with all and singular
rights, privileges, and appurtenances "hereunto attaching and belonging, unto
the said Lessee for and during the term hereinafter set forth and in accordance
with the terms, provisions and conditions set forth below.
Wherever and as often as the words this "Agreement" or this "Lease" are used or
appear in this instrument, the same shall mean and refer to this instrument, and
all exhibits hereto and all plans, drawings and specifications identified herein
and any amendments to the same.
Article 1
CONSTRUCTION OF IMPROVEMENTS BY LESSOR
(a) CONSTRUCTION DOCUMENTS: Lessor will construct on
the Leased Premises a warehouse and office building containing a total of
approximately 240,000 square feet of space (the "Building"), together with
adjacent outdoor surface parking consisting of not less than 80 spaces, and the
landscaping and other improvements, if any, located outside of the Building on
the Property (the "Common Areas") all as described on the site plan, the floor
plan, and the related documents attached hereto as EXHIBIT B (collectively, the
" Site Plan Documents"). As used herein, the term "Improvements'' shall mean
the Building and the Common Areas. Based upon the Site Plan Documents, Lessor
and Lessee shall consult and cooperate with each other to finalize the initial
construction plans so that the Lessor can prepare all of the detailed
architectural plans and specifications and the structural, mechanical,
electrical, and related construction documents for the Building (the
"Construction Documents"). The Site Plan Documents have been prepared by
Lessor in consultation with, and approved by, Lessee. Within 75 days after the
date of this Lease (as extended due to any Initial Delay [as defined below])
Lessor shall deliver to Lessee final and complete copies of all
<PAGE>
of the final Construction Documents which shall be prepared by Lessor, at
Lessor's expense, pursuant to and in accordance with the Site Plan Documents
and the procedures set forth herein. Within twenty (20) days after Lessee's
receipt of the Construction Documents, Lessee shall deliver to Lessor a
written notice approving the same or a written notice specifying any of
Lessee's objections thereto; provided that Lessee shall not have the right to
object to any aspect of the Construction Documents which are logical
extensions of detail and substantially consistent with the general nature and
scope of the Improvements as shown on the Site Plan Documents. Lessor and
Lessee shall use reasonable good faith efforts to resolve any disagreements
regarding any objection made by Lessee to the Construction Documents. If
Lessor and Lessee do not resolve any such disagreements within twenty (20)
days after the date of Lessee's notice to Lessor, both Lessor and Lessee
shall have the right to terminate this Lease by written notice given to the
other party at any time after such date and prior to the mutual approval of
the Construction Documents. As used herein, the term "Initial Delay" shall
mean any delay in the completion of the initial Construction Documents which
is directly attributable to (i) any new or additional changes to the
Improvements requested by Lessee prior to the completion of the initial
Construction Documents, or (ii) any delay by Lessee in responding to the
initial Construction Documents beyond the 20-day period provided herein.
(b) CONSTRUCTION SCHEDULE: The general contractor for the
Improvements selected by Lessor and approved by Lessee is Dillard & Weaver
Construction, Inc. (the "Contractor"). If Lessor determines that it is
necessary or desirable to find a substitute general contractor, Lessor shall
have the right to dismiss the contractor and select an appropriate substitute,
which selection shall be subject to the approval of Lessee, which approval shall
not be unreasonably withheld. All of the construction work shall be carried out
by a Contractor under the sole direction of Lessor. Within thirty (30) days
after the date hereof, Lessor shall prepare and furnish to Lessee a construction
schedule for the Improvements showing the time periods estimated by Lessor for
the completion of the major phases of the Improvements (the "Construction
Schedule"). Lessor shall make a good faith effort to advise Lessee as soon as
reasonably possible if Lessor determines that Lessor's actual progress in
completing any phase of the Improvements is behind the time periods set forth on
the Construction Schedule in any material way.
(c) COMMENCEMENT AND COMPLETION DATES: On or before
September 1, 1998 (as extended due to any Initial Delays) (which date is
referred to herein as the ("Construction Date"), Lessor shall, at Lessor's
sole cost and expense, commence the on-site physical construction of the
Improvements on the land. From and after the Construction Date, Lessor shall
use diligent efforts to cause Substantial Completion of the Improvements in
accordance with the Construction Documents to occur on or before May 1, 1999
(the "Scheduled Completion Date").
(d) TAX ABATEMENT: Lessee has filed an application for
property tax abatement with the City of Houston - Harris County - Independent
School District. The parties agree that the receipt of such tax abatement is
a material condition for Lessee
2
<PAGE>
to enter into this Lease. Accordingly, it is agreed that if such tax
abatement is not received by Lessee, Lessee may terminate the Lease as
provided in Section 1(e).
(e) LESSEE'S RIGHT TO TERMINATE:
(1) If Lessee has not received a property tax abatement by
AUGUST 1, 1998 or if Lessor has not commenced construction of the
Improvements on or before Commencement Date in accordance with the
terms set forth in SECTION 1(c) of this Lease, Lessee shall have
the right to terminate this Lease by written notice given to
Lessor at any time after denial of the tax abatement or after the
Construction Date and prior to the date that Lessor actually
commences such construction. If Lessor has not caused Substantial
Completion of the Improvements to occur on or before the Scheduled
Completion Date (as extended due to any Lessee Delay and to any
Unavoidable Delay), Lessee shall have the right to terminate this
Lease by written notice given to Lessor at any time after the
Scheduled Completion Date and before the date that Substantial
Completion actually occurs. If Lessor has not caused Substantial
Completion of the Improvements to occur on or before JULY 1, 1999
(as extended due to any Lessee Delay but not extended for any
Unavoidable Delay), Lessee shall have the right to terminate this
Lease by written notice given to Lessor at any time after such
date and prior to the date that Substantial Completion actually
occurs.
(2) In the event of any termination of this Lease under
SECTION 1(a) or under this SECTION 1(e), Lessor and Lessee shall
be relieved of all further obligations under this Lease, which
obligations shall continue in full force and effect.
(f) SUBSTANTIAL COMPLETION: As used herein, the term
"Substantial Completion" shall mean the date when all of the following events
have occurred:
(1) The project architect (the "Architect") shall have
delivered to Lessor and Lessee a written certificate stating that all of
the Improvements have been substantially completed in substantial
accordance with the Construction Documents, except for the Punch List
Items.
(2) Lessor shall have obtained a final Certificate of
Occupancy for the Building permitting the use of the Building for
warehouse and office use.
(3) Lessor shall have delivered to Lessee written certification
3
<PAGE>
that Lessor has met its obligations under clauses (1) and (2) of this
SECTION 1(f), together with a current list of the approved Punch List
Items.
Notwithstanding the foregoing, Lessor shall give to Lessee not
less than ten (10) days written notice of the date on which Lessor expects to
achieve Substantial Completion.
(g) CHANGE ORDERS: Lessee may, from time to time, submit to
Lessor any written requests for changes or additions to the Construction
Documents and/or the Improvements desired by the Lessee in such detail as
Lessor may reasonably require (each a "Change Order"), which changes or
additions shall be subject to Lessor's approval, which approval shall not be
unreasonably withheld or delayed. Such approval shall include Lessor's
written notice to Lessee of (i) the net increase, if any, in the actual out
of-pocket cost to be incurred by Lessor in completing the work associated
with the Change Order (the "Change Cost"), and (ii) the anticipated delays,
if any, in completing the work as a result of such Change Order, including
the processing thereof (the "Change Delay"). Within five (5) business days
after Lessee's receipt of such notice, Lessee shall give to Lessor written
notice to proceed or not to proceed with the Change Order. Lessee's notice
to proceed with the Change Order shall include a specific written agreement
from Lessee to pay to Lessor the Change Cost and written confirmation of
Lessee's acceptance of the Change Delay as a Lessee Delay hereunder.
Following the required approvals, upon Lessee's written acceptance of any
such Change Order, Lessor shall promptly revise the Construction Documents to
incorporate the Change Order and shall proceed to complete the Improvements
in accordance with the Change Order. Any and all Change Costs approved by
Lessee and incurred by Lessor hereunder shall be reimbursed by Lessee to
Lessor over the initial ten (10) year term of this Lease in amounts equal to
for each year the sum of 10.5% multiplied by the total amount of the Change
Costs. Such amounts shall be reimbursed by Lessee to Lessor in equal monthly
installments together with the base rent payable by Lessee hereunder.
Notwithstanding the foregoing, Lessor shall not be obligated hereby to pay
any Change Costs after the total sum of all Change Costs paid by Lessor
hereunder causes the total change order to exceed $200,000.00. Any Change
Costs which will not be paid by Lessor hereunder shall be paid by Lessee on
an item by item basis within ten (10) business days after the date that each
such Change Order has been completed by Lessor and Lessor has delivered to
Lessee a written invoice for such work. Calculations of any Change Costs
shall be subject to audit, verification, and correction, if necessary, by
Lessee (who shall have access to the relevant books and records maintained by
Lessor for such purpose) without either party being prejudiced by any prior
payment thereof; provided that any such audit shall be completed for each
Change Order within forty-five (45) days after the date of Lessee's receipt
of the relevant invoices, statements, and other documents supporting Lessor's
calculation of the Change Cost for each such Change Order. Any disagreements
between Lessor and Lessee regarding the calculation of any Change Costs shall
be resolved in accordance with the procedures set forth in Section l(p) of
this Lease.
(h) SUBSTANTIAL COMPLETION AND PUNCH LIST ITEMS: As used
herein, the term "Punch List Items" shall mean details of construction,
4
<PAGE>
decoration, and mechanical adjustment which are part of the Improvements and
which in the aggregate, are minor in character and do not materially interfere
with the Lessee's use or enjoyment of the Leased Premises. Concurrently with
Substantial Completion, the Architect, the Contractor, Lessor, and Lessee shall
meet to review and approve of the matters to be included as Punch List Items,
which approvals shall not be unreasonably withheld. Punch List Items shall be
completed by Lessor at Lessor's expense. Lessor shall use its best efforts to
complete all of the Punch List Items within thirty (30) days after the date of
Substantial Completion.
(i) LESSOR'S WARRANTY: In addition to (and not in lieu of)
Lessor's obligations under the Lease with respect to repairs, Lessor warrants to
Lessee that the Improvements will be free from defects in workmanship and
materials for a period of one (1) year after the date of Substantial Completion.
If, at any time during such warranty period, any of the workmanship or material
used in the construction of the Improvement is defective, and Lessee shall,
within the warranty period, so notify Lessor in writing that such workmanship or
material is defective, Lessor shall cause such defective workmanship or material
to be corrected, repaired, or replaced in a manner reasonably acceptable to both
Lessor and Lessee. Such correction, repair, or replacement shall be performed
by Lessor, at Lessor's expense, as promptly as reasonably possible and in such
manner so as to minimize any interference with Lessee in its operations in and
about the Leased Premises. If Lessor fails to correct any such defect within a
reasonable period of time after Lessor's receipt of notice thereof, Lessee shall
have the right (but not the obligation), in addition to all other rights and
remedies available to Lessee for such failure, to correct such defect and to
require Lessor to reimburse Lessee for all of the costs incurred by Lessee in
connection therewith, including a reasonable amount for Lessee's overhead and
administrative costs in coordinating such work. Lessor shall pay such costs to
Lessee within five (5) business days after Lessor's receipt of a written
statement therefor. Within thirty (30) days after the Commencement Date, Lessor
shall deliver to Lessee one complete set of an as built mylar drawing for the
Building and copies of all manuals, pamphlets, and other instructional materials
received by Lessor covering the care, use, operation, and maintenance of the
materials and equipment used in the construction of the Improvements.
(j) INSPECTIONS AND ACCESS BY LESSEE: Lessee and Lessee's
representatives shall have the right, from time to time, to observe the progress
of the Improvements, to inspect the installation of the Improvements, and to
object to any aspect of the Improvements which is not in substantial conformance
with the Construction Documents; provided, however, no such observation shall
create liability or responsibility on the part of Lessee with respect to the
nature or quality or the Improvements. Lessor shall be available, and cause the
Contractor to be available, to Lessee or its representatives from time to time
upon reasonable prior notice when necessary or desirable for the purpose of
reviewing the Improvements.
(k) COMPLIANCE WITH LAWS: Lessor, at its expense, shall obtain
all approvals, permits, and other consents required to commence, perform and
complete the Improvements; shall at all times cause all work in connection with
the Improvements
5
<PAGE>
to be carried out in compliance with all such consents and in compliance with
all applicable laws, codes, regulations, and other legal requirements; and
shall maintain for inspection by Lessee, upon reasonable request and at
reasonable intervals, copies of the invoices and statements relating to the
Improvements which Lessor generally maintains and all approvals, permits,
inspection reports, notices, and other similar documents prepared or received
by Lessor or the Contractor.
(l) LESSEE'S WORK: All finishing work, equipment installation,
cabling, and interior wall finish for the offices, or other work (the "Lessee's
Work") desired by Lessee, if any, and not initially or thereafter included in
the Improvements, shall be performed by Lessee, at Lessee's expense, through
contractors selected by Lessee and approved by Lessor, which approval shall not
to be unreasonably withheld or delayed. Lessor and Lessee shall each cause
their respective general contractor and/or subcontractors for the Improvements
and Lessee's Work to cooperate with each other in facilitating the mutual access
to the Leased Premises and in coordinating the timing of the stages of the
Improvements and the Lessee's Work so as to facilitate the completion on a
timely basis. To the extent reasonably possible and without having to incur
additional expense, Lessor shall, prior to Substantial Completion, provide
Lessee with access to the Leased Premises and storage space at the site for
Lessee's equipment, trade fixtures, and other property in connection with
Lessee's Work and shall furnish water, electricity, elevator service, and HVAC
to the Leased Premises during the performance of any Lessee's Work; provided
that, if requested by Lessor, Lessee shall reimburse Lessor for the cost of any
such utility services used by Lessee, which cost shall be prorated by Lessor on
a fair and equitable basis to reflect the amount of such services actually used
by Lessee in connection with the performance of any of the Lessee's Work.
(m) LESSEE DELAYS: The term "Lessee Delay" shall mean any
actual delay in the completion of the Improvements which delays Substantial
Completion and which is due to any act or omission of Lessee, its agents, or
contractors. Lessee Delays shall include:
(1) Initial Delays
(2) Change Delays.
(3) Any unreasonable delay by Lessee in giving Lessor notice
of Lessee's approval of any Change Orders or in giving Lessor notice of any
other consents or approvals required of Lessee hereunder in connection with the
Improvements.
(n) UNAVOIDABLE DELAY: In the event Lessor shall be delayed or
hindered in or prevented from the performance of any act required
hereunder in connection with the completion of the Improvements by reason
of strikes, lockouts, labor troubles, inability to procure materials,
failure of power, restrictive governmental laws or regulations, riots,
insurrection, war or other reason of a like nature and not within the
reasonable control of Lessor ("Unavoidable Delay"), then the time allowed
for performance of such act shall be extended by a period
6
<PAGE>
equivalent to the period directly attributable to such delay.
(o) NOTICE OF DELAY: At the request of either the Lessor or
the Lessee, at any time and from time to time prior to the date of Substantial
Completion, Lessor or Lessee may require the other party to provide a written
notice setting out whether or not Lessor or Lessee, as the case may be, is aware
of any delays under either Section 1(m) or Section 1(n) hereof as of the date of
such notice.
(p) RESOLUTION OF DISPUTES: If Lessor and Lessee disagree as
to whether the Construction Documents have been properly prepared or as to
whether any aspect of the Improvements has been fully or properly completed, or
is otherwise defective, or as to the appropriate manner to correct any such
deficiency, or as to the calculation of Change Costs hereunder, or as to the
designation of any Lessee Delay or Lessor Delay hereunder, and if Lessor and
Lessee, using their reasonable good faith efforts, are otherwise unable to
resolve such dispute, then such dispute shall be resolved by referring the same
to Joe Powers architect, whose address is 811 Rusk, Suite 101, Houston, Texas
77002 and whose telephone number is (713) 227-0811 (the "Consulting
Architect"). In order to initiate such a resolution of any dispute, a party
shall be required to give the other party and the Consulting Architect written
notice requesting such resolution, which notice shall identify the issue in
dispute. The Consulting Architect shall promptly notify the parties of the
date, time, and place for the meeting to resolve of such dispute, which date
shall in no event be later than ten (10) business days after the Consulting
Architect's receipt of the demand for resolution. Such notice may be given by
telephone if promptly confirmed by written notice. At the conclusion of such
meeting, the Consulting Architect shall advise both parties of the Consulting
Architect's decision. The Consulting Architect shall send the parties written
notice confirming such decision immediately thereafter. Both parties shall be
bound by any and all decisions made by the Consulting Architect and shall
perform their obligations hereunder in accordance with such decisions. The
Consulting Architect's fees and expenses shall be split equally between the
parties.
Article 2
TERM
(a) Subject to and upon terms, provisions and conditions
hereinafter set forth, this Lease shall be and continue in full force and effect
for an initial term of ten (10) years ("Initial Term" or "Term"), beginning on
the Commencement Date as hereinafter defined.
b) The Initial Term of this Lease shall commence on the date
that Lessor has Substantially Completed the Improvements and delivered
possession of the Leased Premises to Lessee (the "Commencement Date"). There is
attached to this Lease as EXHIBIT C a form of declaration by Lessor and Lessee
relating to the date of commencement of the term hereof, which declaration shall
be executed by both Lessor and Lessee upon said Commencement Date. The date of
delivery of such possession, as
7
<PAGE>
shown by said declaration, shall be the Commencement Date of the Initial
Term of this Lease.
(c) It is agreed that Lessee may enter into the Leased Premises
prior to the completion of the Improvements for the purpose of completing the
Lessee's Work, if any, without being deemed thereby to have taken possession of
the Leased Premises or obligated itself to pay rent; provided that Lessee's Work
shall in no way interfere with the construction of such Improvements or the work
of Lessor or of Lessor's Contractor and shall not subject Lessor to any
liabilities whatsoever. Any equipment or fixtures installed by Lessee during
such period shall remain vested in Lessee; provided, however, that if any such
equipment or fixtures installed by Lessee pursuant to the terms of this SECTION
2(c) shall be removed prior to the expiration date of this Lease, Lessee shall
be obligated, at its expense, to restore the Building to the condition existing
prior to the installation of such equipment and fixtures.
(d) So long as there is no uncured default hereunder by Lessee
as of the date of Lessee's exercise of any Renewal Option or as of the date of
the commencement of any Renewal Term, Lessee shall be entitled and is hereby
granted two (2) successive options (the "Renewal Options") to extend the Term of
this Lease for an additional period of five (5) years each (the "Renewal
Terms"). Except for rental, as hereinafter defined and separately provided for,
the Renewal Terms shall be on all the other terms and conditions of this Lease.
Lessee shall be entitled to exercise each Renewal Option by giving notice of
such exercise to Lessor not less than twelve (12) months prior to the expiration
of the Initial Term or first Renewal Term, as the case may be. Should Lessee
fail to timely exercise a Renewal Option in accordance with the preceding
provisions, said Renewal Options shall expire and be of no further force and
effect.
(e) At the request of either party, the parties agree to
execute a short form memorandum of lease confirming the basic terms of this
Lease for recordation purposes.
ARTICLE 3
RENTS
(a) BASE RENT AND ADJUSTMENTS.
(1) BASE RENT. As consideration for the use and
occupancy of, and as rental for, the Leased Premises, Lessee
promises and agrees to pay Lessor, while this Lease remains in
force and effect, for the Initial Term, $7,300,000.00 paid in
monthly payments in advance $ 60,833.33 per month.
(2) UNANTICIPATED SITE CONDITIONS. Within thirty (30)
days after the date of this Lease, Lessor shall complete an
engineering evaluation and analysis of the Land to determine
whether the site contains
8
<PAGE>
any unanticipated physical conditions (an "Unanticipated Site
Condition") which will cause the Lessor to incur any Material
Construction Cost which was not foreseen by Lessor and not
budgeted for in the cost estimates prepared by Lessor and
delivered to Lessee prior to the date of this Lease. If Lessor
discovers any such Unanticipated Site Condition, Lessor shall
give prompt written notice thereof to Lessee describing the
condition, the actions required to correct it, and the
estimated cost of such actions. If, within thirty (30) days
after Lessee's receipt of such notice from Lessor, Lessee and
Lessor have not agreed upon an allocation of such costs
(through an adjustment of rent or otherwise), both Lessor and
Lessee shall have the right to terminate this Lease by written
notice given to the other party. Any such termination shall
have the same effect as described in SECTION 1 (e) (2).
(b) If the term of this Lease, as provided in SECTION 2(b),
commences on a day other than the first day of a calendar month, then the first
monthly rental payment shall be reduced to and shall be the proportionate part
of the monthly rental owed for the number of days between such Commencement Date
and the first day of the following month. Such first rental payment shall be
due on the Commencement Date of this Lease, as provided in SECTION 2(b), and the
succeeding payments of monthly rental shall be due and payable on or before the
first day of each succeeding calendar month thereafter during the full term of
the Lease.
(c) The rental for each Renewal Term shall be equal to the
rental for the previous period plus 10% or the total increase in the Consumer
Price Index (CPI) over the previous five years, whichever is less.
(d) Except as may otherwise be provided herein, Lessee agrees
to pay the rental herein reserved at the times set forth above, without
deduction or offset, in lawful money of the United States of America. All such
rental payments shall be made to Lessor at the following address:
VRS/TA/S Houston, L.P.
520 Post Oak Blvd., Suite 320
Houston, Texas 77027
or to such other person or to such other place as Lessor may from time to time
designate.
Article 4
TAXES
(a) The term "Taxes" as used herein shall mean all taxes,
levies and
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<PAGE>
assessments of every character imposed or assessed upon or against
the Leased Premises by any governmental agency or authority having jurisdiction,
whether foreseen or unforeseen; provided nothing herein shall require or be
construed to require Lessee to pay any gift, estate, inheritance, excess
profits, succession, capital levy, transfer tax, income tax, payroll tax or
other tax assessment, lien, charge or levy arising out of the rent payable by
Lessee or other income received by Lessor, its successors or assigns. If at any
time during the term, the State of Texas or any political subdivision of the
state, including any county, city, city and county, public corporation,
district, or the United States of America, levies or assesses against Lessor a
tax, fee or excise: (i) on rents, (ii) on the square footage of the Leased
Premises, (iii) on the act of entering into this Lease, (iv) on the occupancy of
Lessee, or any other tax, fee, or excise, however described, including, without
limitation, a so-called value added tax, as a direct substitution in whole or in
part for, or (except in the case of (i) above) in addition to, any real property
taxes, Lessee shall pay before delinquency said tax, fee, or excise.
(b) Lessee shall pay all Taxes during the Term of this Lease
and any Renewal Term directly to the taxing authority therefor prior to the
date on which any such Taxes would become delinquent. Lessee shall furnish to
Lessor, within thirty (30) days after the date when due, proof of payment of all
Taxes paid by Lessee.
(c) If any Taxes are paid by Lessor to any taxing authority for
any tax year in installments, the amount payable by Lessee hereunder shall be
payable in similar installments, and no amount shall be payable by Lessee on
account of installments becoming payable after the expiration of the term of
this Lease which are attributable to a period of time after the expiration of
the term hereof or attributable to any period of time prior to the Commencement
Date. If any assessment for new public improvements (and not for repair or
replacement of existing public improvements) is payable only in a lump sum,
rather than in installments, Lessee shall pay a pro rata share of such
assessment based upon the proportion that the number of years remaining in the
term of this Lease bears to the expected useful life of such new public
improvements as determined by a third party consultant. For purposes of the
preceding sentence, the "term" of this Lease shall mean the Initial Term;
provided that, if Lessee exercises a Renewal Option, Lessee shall be assessed
its pro rata share based upon the proportion that the number of years of such
Renewal Term bears to the expected remaining useful life of such public
improvement.
(d) Lessor shall within ten (10) days of receipt, deliver to
Lessee statements, assessments and other notices relative to any tax or
assessment.
(e) Lessee shall have the right, before delinquency occurs, of
contesting, objecting to or opposing the legality, validity or amount of any
such Taxes; provided that prompt notice of such contest, objection or opposition
shall be given to Lessor by Lessee at least twenty (20) days before any
delinquency; and provided, further, that such contest, objection or opposition
shall not be carried on or maintained after the aforementioned time limit for
the payment of said obligations unless Lessee shall have duly paid the amount
involved under protest or shall have procured and maintained a stay
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of all proceedings to enforce any collection thereof and shall also have
provided for payment thereof, together with all penalties, interest, costs,
and expenses, by a deposit of sufficient sum of money or by a good and
sufficient undertaking as may be required or permitted by law to accomplish
such a stay. In the event of any such contest, objection or opposition,
Lessee agrees to pay and discharge any unpaid amounts finally determined to
be due within thirty (30) days after the final determination thereof or
within such later grace period as may be allowed by law.
Article 5
INSURANCE
(a) During the entire term of this Lease, Lessee, at its own
cost and expense, shall provide and keep in force for the benefit of Lessor and
Lessee comprehensive general public liability insurance policies with insurance
companies approved by Lessor and in standard form, protecting Lessor and Lessee
(and specifically naming Lessor as an additional assured) against any or all
liability in the amount of not less than $1,000,000 in respect of any one
occurrence and in the amount of not less than $1,000,000 in respect of injuries
to or death of any one person, and in the amount of not less than $1,000,000 in
respect of destruction or damage to property, which policies shall cover the
entirety of the Leased Premises. Lessee may provide its insurance under a
blanket policy, provided the insurance has a Lessor's protective liability
endorsement attached.
(b) During the entire term of this Lease, Lessee shall keep
the Building and other improvements constituting a portion of the Leased
Premises insured in the name of and for the benefit of Lessor and Lessee and
the holder of any mortgage or deed of trust on the Leased Premises as their
respective interests may appear, against loss or damage by fire and all
hazards covered by the standard form of extended coverage endorsement, and
containing six (6) months' rents insurance. Such insurance shall be for not
less than one hundred percent (100%) of the full replacement value thereof,
as the same shall change from time to time. The term "full insurable value"
as used herein means agreed value for actual replacement costs, including the
cost of debris removal. In addition to such fire and extended coverage
insurance, Lessor shall carry Difference In Conditions coverage or its
equivalent coverage through an acceptable company admitted in the State of
Texas. Lessee shall carry, at Lessee's sole cost and expense, fire and
extended coverage casualty insurance on all of the alterations and
improvements completed by Lessee in the Leased Premises and all trade
fixtures, equipment, inventory, and personal property located on the Leased
Premises.
(c) All insurance policies required by this Article 5 shall be
written by companies of recognized financial standing which are highly rated by
national rating organizations and are legally qualified to issue such insurance.
(d) At the commencement of the Initial Term of this Lease,
Lessee shall deliver to Lessor Certificates of Insurance manifesting the
insurance coverage
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required by this Article 5 and, at least ten (10) days prior to the
expiration of each such policy, shall pay the premiums for the renewal of
such insurance and provide information satisfactory to Lessor evidencing
payment thereof. All policies shall provide at least twenty (20) days'
written notice to both Lessor and Lessee of any cancellation, termination, or
material alteration.
(e) Lessee and Lessor shall cooperate in connection with the
collection of any insurance monies that may be due in the event of loss and
shall execute and deliver such proofs of loss and other instruments which may be
required for the purposes of obtaining recovery of any such insurance monies.
(f) Anything in this Lease to the contrary notwithstanding,
Lessor and Lessee each hereby waive and release the other from and against any
and all rights of recovery, claims or causes of action, against the other, its
agents, officers, contractors, or employees, for any loss or damage that may
occur to the Improvements, the Leased Premises, or any other improvements
thereto, or any personal property of such party therein, by reason of fire, the
elements, or any other cause which could be insured against under the terms of
any of the insurance policies required to be maintained by the respective
parties under ARTICLE 5 hereof, regardless of cause or origin, including the
negligence of the other party hereto, its agents, officers, contractors, or
employees, and covenants that no insurer shall hold any right of subrogation
against the other party.
Article 6
USE OF LEASED PREMISES AND COMPLIANCE WITH LAWS
(a) It is understood and agreed that Lessee will use and occupy
the Leased Premises for general office and warehouse use and other purposes
reasonably related to Lessee's business operations.
(b) Lessee shall comply with and fulfill all state, federal and
municipal laws, regulations and ordinances applicable to the use of the Leased
Premises by Lessee and the business of Lessee conducted thereon. In the event
that any installations or alterations to any of the Improvements are required by
changes in the laws, rules, regulations or ordinances applicable to the Leased
Premises because of their use by Lessee becoming effective after the
Commencement Date, Lessee shall be required to make such installations or
alterations, but Lessee shall be reimbursed by Lessor, within thirty (30) days
after receipt of an itemized invoice for same, for a pro rata share of the cost
of complying with any such changes applicable to the use of the Leased Premises
equal to (i) the excess, if any, of the expected useful life of such alterations
or installations over the number of years remaining in the term of this Lease,
divided by (ii) the expected useful life of such alterations or installations.
For the purposes of the preceding sentence, the "term" of this Lease shall mean
the Initial Term; provided that, if Lessee exercises either or both of the
Renewal Options, during the applicable Renewal Term, Lessee shall pay its pro
rata share of any such remaining costs based upon the proportion that the number
of years in such Renewal Term bears to the expected
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remaining useful life of such alterations.
(c) Lessee hereby acknowledges the existence of certain laws
and regulations at the local, state and federal levels ("Environmental Laws")
that control the production, use, transfer, storage and disposal of certain
materials that have the potential to cause harm to either the physical
environment or living things, such substances hereinafter referred to as
"Hazardous Materials". Lessee further acknowledges that it is Lessee's
responsibility to ensure that all activities carried out in the Leased Premises
during the Term of the Lease and any Renewal Terms thereof are in compliance
with the Environmental Laws. Lessee hereby agrees that (i) no activity will be
conducted on the Leased Premises that will produce any Hazardous Materials; (ii)
the Leased Premises shall not be used for the storage of Hazardous Materials
except in accordance with Environmental Laws; and (iii) no toxic or dangerous
chemicals or Hazardous Materials shall be released or discharged by Lessee or
anyone for whom Lessee is in law responsible on the Leased Premises in excess of
quantities permitted by applicable laws. If Lessee violates any of the
foregoing covenants, Lessor will provide written notice to Lessee to take
corrective action and Lessee will be given a reasonable period of time to
commence corrective action. Upon reasonable prior notice to Lessee, Lessor or
Lessor's representative shall have the right, but not the obligation, to enter
the Leased Premises during normal business hours for the purpose of inspecting
the storage, use and disposal of chemicals and materials used in the conduct of
Lessee's business to ensure compliance with the Environmental Laws. Should it
be determined, in the exercise of Lessor's reasonable discretion, that said
chemicals or materials are being improperly stored, transferred, used, or
disposed of, then Lessee shall immediately take such corrective action as
reasonably requested by Lessor. Should Lessee fail to commence to take such
corrective action in a prompt manner, Lessor shall have the right to peform such
work and Lessee shall promptly reimburse Lessor for any and all costs associated
with said work. If at any time during or after the term of the Lease, the
Leased Premises are found to be so contaminated or subject to said conditions,
as a result of matters which occurred on or after the Commencement Date and
which are caused by Lessee, Lessee shall, within a reasonable time period,
diligently institute proper and thorough cleanup procedures at Lessee's sole
cost, and Lessee agrees to indemnify and hold Lessor harmless from all claims,
demands, actions, liabilities, costs, expenses, damages, fines, reimbursement,
restitution and response costs incurred by Lessor in connection therewith, and
the obligations for the foregoing indemnification and the responsibilities of
Lessee shall survive the termination or expiration of this Lease. Lessor will
provide a complete copy of a Level 1 environmental survey to Lessee within
fifteen (15) days of lease execution. Lessee shall notify Lessor within fifteen
(15) days of receipt of any objections to the environmental survey.
Article 7
CONDITION OF LEASED PREMISES AND REPAIRS
(a) Following completion of the Improvements by Lessor as
provided in ARTICLE 1 above, and except as otherwise herein provided, Lessee
agrees, at its sole cost
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and expense, to maintain all of the Leased Premises in good condition and
repair during the full term of this Lease (except for such repairs made
necessary by fire or other casualty and which are repaired in accordance with
the provisions of ARTICLE 9 below) and shall deliver the Leased Premises to
Lessor in as good a condition as existed on the date Lessee took possession,
the effects of Latent Defects (hereinafter defined), ordinary wear and tear,
and obsolescence in spite of repairs excepted. As used herein, the term
"Latent Defects" shall mean any defect in design, materials or workmanship in
the initial construction of the Improvements, the plans and specifications
for same, and/or subsurface soil conditions. Lessee, at its expense shall
maintain in good condition the structure of the Building including the roof,
foundation, load bearing and exterior walls. Lessee shall, at its own cost
and expense, keep and maintain in good order and repair (except for any
Latent Defects, ordinary wear and tear, and obsolescence in spite of repairs)
all plumbing, wiring, fixtures, equipment, heating and air conditioning
equipment, interior and exterior decorations, glass and painting in and on
the Building and the parking area and ingress and egress lanes, it being
understood and agreed that Lessor shall have no obligation to maintain the
Leased Premises after Lessee takes possession other than as provided in this
Article 7, Section 1(i), Article 9, and Article 16 herein, except such
repairs caused by Lessor's tortious acts or omissions, improper workmanship,
or variance from plans and specifications.
(b) Lessor hereby assigns to Lessee all construction or
equipment warranties, guarantees, and/or service policies received by it which
are applicable to the Improvements; provided that such assignment shall not
prevent Lessor from enforcing same for its own benefit in order to perform its
obligations herein. Lessor hereby represents and warrants to Lessee that, in
addition to any other warranties, Lessor shall obtain a warranty covering the
roof of the Leased Premises for a period of not less than 10 years.
(c) In the event Lessee refuses or neglects to commence or to
complete properly and adequately any repairs which are the responsibility of
Lessee hereunder, then Lessor may (but shall not be obligated to) make such
repairs after thirty (30) working days' written notice to Lessee, or such
shorter period required by any emergency. In such event, Lessee shall be
obligated to repay the cost thereof to Lessor, upon demand, as additional rent.
(d) In the event Lessor refuses or neglects to commence or to
complete properly and adequately any repairs which are the responsibility of
Lessor hereunder, Lessee may (but shall not be obligated to) make such repairs
after ten (10) working days' written notice to Lessor, or such shorter period
required by any emergency. In such event, Lessor shall be obligated to repay
the cost thereof to Lessee, upon demand, or after thirty (30) days' notice to
Lessor of such costs incurred by Lessee, Lessee shall deduct the costs from the
next installments of rent until Lessee is fully compensated.
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Article 8
INDEMNIFICATION
Lessee shall indemnify, defend and hold Lessor harmless from any
and all Claims arising from Lessee's use of the Leased Premises or from the
conduct of its business or from any activity, work or things which may be
permitted or suffered by Lessee on or about the Leased Premises and shall
further indemnify, defend and hold Lessor harmless from and against any and all
Claims arising from any negligence of Lessee or any of its agents, contractors,
employees or invitees and any and all cost, attorney's fees, expenses and
liabilities necessarily incurred in the defense of any Claim or any action or
proceeding brought thereon, but excepting any Claims caused by the intentional
acts or negligence of Lessor, its employees, contractors or agents, or Lessor's
breach of any of its obligations set forth in this Lease. Lessee hereby assumes
all risk of damage to property or injury to persons in or about the Leased
Premises from any cause, and Lessee hereby waives all Claims in respect thereof
against Lessor, excepting where said damages are caused by the intentional acts
or negligence of Lessor, its employees, contractors or agents, or Lessor's
breach of any of its obligations set forth in this Lease. "Claims" is hereby
defined to include claims, suits, actions, debts, damages, costs, losses,
obligations, or judgments.
Article 9
DAMAGE OR DESTRUCTION
(a) Subject to the further provisions of this ARTICLE 9, if
the Improvements are damaged or destroyed (whether partially or totally) by
fire or other casualty or cause whatsoever, Lessor at its sole expense shall
promptly thereafter commence and diligently pursue to completion, the
rebuilding, restoration or repair of the Building and Improvements, in a good
and workmanlike manner, to a state and condition of repair in which their
value is not substantially less than their value immediately prior to the
damage and destruction, and this Lease shall continue in full force and
effect, subject to the abatement provision of SECTION 9(b).
(b) If the Improvements are destroyed or damaged and are
repaired or restored pursuant to the provisions of this ARTICLE 9, the monthly
rentals payable hereunder for the period from the date of such destruction or
damage to the date the Building is repaired or restored shall be abated in
proportion to the degree to which the Building is rendered untenantable by
Lessee for its intended purposes.
(c) If Lessor shall be obligated or shall elect to repair or
restore the Building under the provision of this ARTICLE 9, but does not
commence such repair or restoration within ninety (90) days after such
obligation shall accrue (except where such delay is not within the reasonable
control of Lessor) or complete such repair or
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restoration within one hundred and eighty (180) days after the commencement
thereof (except where such delay is not within the reasonable control of
Lessor), Lessee may at Lessee's option cancel and terminate this Lease as of
the date of the occurrence of such damage by giving Lessor written notice of
Lessee's election to do so at any time after the expiration of such periods
of time and prior to the completion of such restoration work by Lessor.
(d) Upon cancellation of this Lease pursuant to this ARTICLE 9,
all rental and other charges due from Lessee shall terminate, Lessor shall
refund to Lessee any prepayments of rent or other charges, and both parties
shall be relieved of all further obligations under this Lease.
Article 10
ALTERATIONS
(a) Lessee shall not make, or suffer to be made, any
structural alterations of or improvements to the Building or the Leased
Premises, or any part thereof, in excess of $25,000, without the prior
written consent of Lessor, which consent shall not unreasonably be withheld
or delayed.
(b) Any equipment or trade fixtures of whatsoever nature as
shall have been installed in the Building by Lessee, whether permanently affixed
or not, shall continue to be the property of Lessee and may, but need not be,
removed by Lessee at the termination of this Lease; provided, however, Lessee
shall at its own expense repair any injury to the Building resulting from any
such removal and shall pay the cost of removing any trade fixtures installed by
Lessee which are not removed by Lessee on or prior to the termination of this
Lease.
(c) All alterations and improvements made to the Building under
SECTION 10(a) shall become the property of Lessor upon expiration of this Lease
and need not be removed by Lessee at its expense.
Article 11
UTILITIES
Lessee shall pay, before delinquency, all charges for water, gas,
electricity, telephone service and all other services and public utilities
furnished to or used in, upon or about the Leased Premises by Lessee during the
term of this Lease.
Article 12
HOLDING OVER
(a) Lessee agrees that upon the expiration or termination of
this Lease
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(however the same may be brought about), peaceable possession of the Leased
Premises will be promptly surrendered and delivered to Lessor.
(b) In case of holding over by Lessee after the termination of
this Lease without the written consent of Lessor (however such termination shall
be brought about), Lessee shall be obligated to pay rent to Lessor on a per diem
basis for the entire hold over period at one hundred fifty percent (150%) of the
rental rate in effect at the time of the termination of this Lease. In the
event of a holding over by Lessee after the term of this Lease (whether with or
without the written consent of Lessor), Lessee shall be and continue as the
tenant at will of Lessor and in the event of Lessee's failure to surrender,
Lessor shall be entitled to institute and maintain an action of forcible
detainer of the Leased Premises in any court of competent jurisdiction.
Article 13
ASSIGNMENT AND SALE
(a) In the event Lessee should desire to assign this Lease
or sublet the Leased Premises or any part thereof, Lessee shall give Lessor
written notice of such desire, together with financial information as to the
proposed assignee or sublessee sufficiently complete to allow Lessor to
determine the financial condition of such assignee or sublessee, at least
twenty (20) days in advance of the date on which Lessee desires to make such
assignment or sublease. Lessor shall then have a period of twenty (20) days
following receipt of such notice and financial information within which to
notify Lessee in writing that (i) Lessor consents to such assignment or
sublease, which consent shall not be unreasonably withheld, or delayed, or
(ii) Lessor does not consent thereto provided, however, that Lessee may
without prior written notice and consent from Lessor, assign this Lease or
sublet all or part of the Leased Premises to any entity which controls, is
controlled by, or is under common control with Lessee or any entity which is
a successor to Lessee by acquisition, merger, or consolidation of or with
Lessee. No assignment or subletting by Lessee shall relieve Lessee of any
obligation under this Lease. (iii) Upon request by Lessor, Lessee shall
furnish to Lessor copies of its latest consolidated annual report together
with quarterly income statements and balance sheet to date when such reports
and financial statements have been publicly released.
(b) Lessor shall have the continuing right at any time to sell
or convey the Leased Premises and Lessor's rights under this Lease, and nothing
herein contained shall be construed as restricting such rights of Lessor. In
the event Lessor should hereafter sell or convey the Leased Premises to a third
party or parties, such party or parties shall acquire the Leased Premises
subject to the terms and provisions of this Lease and shall be subrogated to all
of the rights and privileges of Lessor hereunder, and Lessor shall thereupon be
completely relieved and discharged from all duties and obligations herein
imposed upon Lessor which accrue after the effective date of such conveyance;
provided that such transferee of Lessor shall have assumed all of Lessor's
duties and obligations which accrue under this Lease after such date.
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Article 14
INSOLVENCY AND BANKRUPTCY
It is mutually agreed, covenanted and understood by and between
the parties hereto that in the event any proceeding under the Bankruptcy Code
or any amendment thereto is commenced by or against Lessee, as debtor or in
the event Lessee is adjudged insolvent or makes an assignment for the benefit
of its creditors, or if a writ of attachment or execution is levied on the
leasehold estate created hereby and is not released or satisfied within a
reasonable time thereafter, or if a receiver is appointed in any proceeding
or action to which Lessee is a party as debtor, with authority to take
possession or control of the Leased Premises or the business conducted
therein by Lessee, subject to the then current bankruptcy and similarly
applicable laws, the same shall be a default by Lessee hereunder and Lessor
shall have the right to exercise its remedies as provided hereafter.
In the event that the obligations of Lessor under this Lease
are not performed during the pendency of a bankruptcy or insolvency
proceeding involving the Lessor as the debtor, or following the rejection of
this Lease in accordance with Section 365 of the United States Bankruptcy
Code and the election of the Lessee to remain in the possession of the Leased
Premises in a bankruptcy or insolvency proceeding involving the Lessor as the
debtor, then nothwithstanding any provision of this Lease to the contrary,
Lessee shall have the right to set off against Rents next due and owing under
this Lease (a) any and all damages that it demonstrates to the Bankruptcy
Court were caused by such non-performance of the Lessor's obligations under
this Lease by Lessor, debtor-in-possession, or the bankruptcy trustee and (b)
any and all damages caused by the non-performance of the Lessor's obligations
under this Lease following any rejection of this Lease in accordance with
Section 365 of the United States Bankruptcy Code.
Article 15
DEFAULT AND ABANDONMENT
(a) If Lessee shall at any time fail to pay when due any
payment of rent or other sums provided for herein to be paid to Lessor, and
such failure continues uncured for a period of ten (10) days after the date
that Lessee receives written notice thereof from Lessor, or if Lessee shall
at any time fail to perform any of the covenants, terms, conditions or
provisions of this Lease (other than the payment of rent or other sums), and
such failure continues uncured for a period of thirty (30) days (or if such
failure cannot with reasonable diligence be cured within thirty (30) days,
then such longer period of time as may be reasonably necessary, provided that
Lessee shall continuously use reasonable diligence in attempting to cure such
failure) after Lessor gives Lessee written notice of such failure, or if
Lessee shall assign or sublet without written approval of Lessor (unless such
approval is not required by the terms of this Lease), Lessor shall have any
one or more of the following described remedies, in
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addition to all other rights and remedies provided at law or in equity:
(i) Lessor may terminate this Lease, upon written
notice to Lessee and all of Lessee's rights shall be forfeited and lapsed, as
fully as if this Lease had expired by lapse of time.
(ii) Lessor may terminate Lessee's right of possession
(but not this Lease) and may repossess the Leased Premises by any lawful
means, without further demand or notice any kind to Lessee and without
terminating this Lease, in which event Lessor will use reasonable efforts to
relet the same for the account of Lessee for such rent and upon such terms as
shall be reasonably satisfactory to Lessor. For the purpose of such
reletting, Lessor is authorized to decorate or to make any repairs, changes
alterations or additions in or to Leased Premises that may be reasonably
necessary. Such reletting will not be construed as an election on the part
of Lessor to terminate this Lease unless a written notice of such intention
be given Lessee by Lessor.
Article 16
EMINENT DOMAIN
(a) If during the term hereof, all or substantially all, of the
Leased Premises, shall be taken in any condemnation or eminent domain
proceeding, this Lease shall thereupon terminate. In such event the obligation
to pay rent and Lessee's right of possession hereunder shall terminate on the
date of such taking. Any rent paid in advance shall be apportioned as of the
date of such taking, and Lessee's portion thereof shall be refunded to Lessee.
(b) If only a part of the Leased Premises are taken so as to
materially affect the operation of Lessee's business from the Leased Premises
and such effect would continue even though the Leased Premises were restored
by Lessor as hereinafter provided, either party hereto shall have the option
to terminate this Lease as of the date of ouster by giving written notice of
termination within fifteen (15) days after Lessee has been ousted from
possession of such part, whereupon this Lease shall be of no further force or
effect, and Lessor and Lessee shall each be relieved of any obligations or
liabilities hereunder as of said date of ouster. If this Lease is not
terminated pursuant to the foregoing provisions, Lessor, at its own risk,
expense and liability to Lessee, shall promptly (but only to the extent of
the proceeds of the condemnation award) make such repairs and alterations to
such part of the Leased Premises not taken so as to constitute a complete
building and land site suitable for the uses and purpose for which said
Leased Premises are being utilized by Lessee. In such event Lessee's right
of possession as to the portion so taken shall terminate on the date of such
taking, and the rental payable hereunder shall be reduced by a just and
proportionate amount to be agreed to by Lessor and Lessee, taking into
consideration the amount of land, and the usable space in the Building and
other improvements remaining after any such taking; but, if so much is taken
as to render the Leased Premises completely untenantable or unsuitable for
the purpose for which they are hereby leased, and neither Lessee nor Lessor
exercises the
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option to terminate this Lease as herein provided, all rental payments shall
be suspended until the date of completion by Lessor of such repairs and
alterations.
(c) The provisions of this ARTICLE 16 shall only apply to
the Improvements, and in no event shall Lessor be obligated to reconstruct
any improvements constructed by Lessee but Lessor shall pay to Lessee a fair
and equitable portion of the condemnation award in lieu thereof.
(d) Any condemnation award or recovery shall belong and be
paid to Lessor, and Lessee shall have no claim thereto except as specified
herein. Lessee reserves the right to bring an action in its own name for its
loss of business and leasehold interest as well as any other damages which
Lessee may recover as a result of such condemnation action. The provisions
herein shall not be subject to the rights of Lessor's mortgagors to apply
condemnation proceeds to the debt secured by its mortgage.
Article 17
ACCESS TO PREMISES
Lessee shall permit Lessor and its agents to enter into and upon
the Leased Premises at all reasonable times during normal business hours and
with at least five (5) days written notice, except in an emergency situation, in
accordance with the provisions hereof, for the purpose of making repairs,
alterations, or additions to any other portion of the Leased Premises, including
the erection and maintenance of such scaffolding, canopy, fences and props as
may be required or for the purpose of posting notices of nonliability for
alterations, additions or repairs. Lessor shall conduct its activities in the
Leased Premises in a manner that will cause the least possible interference with
Lessee's business operations and rent shall ratably abate during the time Lessee
is deprived of use of any portion of the Leased Premises as a result of Lessor's
presence in the Leased Premises. Lessee shall permit Lessor, at any time within
ninety (90) days prior to the expiration of this Lease, to place upon the Leased
Premises usual or ordinary "For Lease" signs, and during such ninety (90) day
period Lessor or its agents may, during normal business hours, enter upon the
Leased Premises and exhibit same to prospective tenants.
Article 18
SUBORDINATION OF LEASE
Upon Lessor's request, and at Lessor's sole option, Lessee will
subordinate this Lease to the liens of any first mortgage or under first lien
resulting from any method of financing or refinancing except Industrial
Development Bond financing or refinancing (hereinafter collectively referred
to as a "Mortgage") now or hereafter existing against all or part of the
Leased Premises, and to all renewal, modifications, replacements,
consolidations and extensions thereof; provided that the holder of any such
Mortgage agrees in writing that if the Lessor defaults under such Mortgage,
the
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holder shall not disturb Lessee's possession, rights and leasehold interest
hereunder while Lessee is not in default hereunder beyond the time allowed
for curing the same. At any time and from time to time during the Term of
this Lease, within twenty (20) days after Lessee's receipt of a written
request from Lessor or any of Lessor's lenders, Lessee shall execute and
deliver a document, in form and substance reasonably acceptable to Lessee,
Lessor, and any such lender, confirming such subordination and
nondisturbance. Within ninety (90) days after the date of this Lease, Lessor
shall deliver to Lessee a written nondisturbance agreement from the holder of
any Mortgage executed prior to the Commencement Date in form and substance
reasonably acceptable to Lessee. In the event of such default by Lessor, or
any foreclosure, sale or other event causing Lessor's ownership of the Leased
Premises to terminate, Lessee shall attorn to the new owner and shall
recognize the new owner as Lessee's Lessor under this Lease. Lessee shall,
upon request of the holder of any such Mortgage, execute and deliver any
instrument reasonably requested by such holder to evidence the subordination,
attornment, and nondisturbance provisions set forth herein. Lessee waives any
right which it might have by law or in equity to terminate this Lease or to
surrender possession of the Leased Premises upon termination of, or
institution of proceedings against, Lessor's rihts of ownership in the Leased
Premises; provided that none of Lessee's rights and interests under this
Lease are disturbed. The new owner shall recognize Lessee as a direct tenant
under this Lease; provided that Lessee is not in default as would permit
Lessor to terminate this Lease, and that Lessee delivers to the new owner
upon demand an instrument certifying to such effect and confirming the
agreement of Lessee to attorn to the owner. As herein used, the term
"foreclosure" shall include both judicial proceedings and the exercise of a
power of sale under any mortgage or deed of trust without recourse to
judicial proceedings.
Article 19
ESTOPPEL CERTIFICATE
Lessor and Lessee each hereby agree, at any time and from time to
time within thirty (30) days after requested by the other party, to execute and
deliver to the other party a written certificate stating (a) whether this Lease
is in full force and effect; (b) whether this Lease has been modified or amended
and if so, identifying and describing any such modification or amendment; (c)
whether rent and other charges have been paid more than thirty (30) days in
advance of the date when due and if so that date to which that have been paid in
advance; and (d) whether, to the knowledge of the party giving the certificate,
any uncured default exists on the part of the other party, and, if so,
specifying the nature of such default.
Article 20
WAIVER
No covenant or condition of this Lease to be performed by
Lessee and/or Lessor can be waived except by the written consent of Lessor
and/or Lessee, and
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forbearance or indulgence by Lessor or Lessee in any regard whatsoever shall
not constitute a waiver of the covenant or condition to be performed by
Lessee and/or Lessor to which the same may apply; and until complete
performance by Lessee or Lessor of said covenant or condition, Lessor and/or
Lessee shall be entitled to invoke any remedy available to it under this
Lease or at law, despite said forbearance or indulgence. The subsequent
acceptance of rental hereunder by Lessor shall not be deemed to be a waiver
of any preceding breach by Lessee of any term, covenant or condition of this
Lease, other than the failure of Lessee to pay the particular rental so
accepted, regardless of Lessor's knowledge of such preceding breach at the
time of acceptance of such rental.
Article 21
QUIET ENJOYMENT
Lessor agrees that so long as Lessee is not in default
hereunder Lessee shall have the quiet enjoyment of the Leased Premises
without hindrance on the part of Lessor, and Lessor will defend Lessee in the
peaceful and quiet enjoyment of the Leased Premises (other than those
claiming by, through, or under Lessee).
Article 22
ATTORNEY FEES AND INTEREST
(a) In the event either party hereto shall institute suit
against the other with reference to the terms and conditions of this Lease,
the prevailing party shall be entitled to reasonable attorney's fees and
court costs.
(b) All sums due from one party to the other party hereunder
which are not paid when due shall bear interest at the lesser of ten percent
(10%) per annum or the national prime interest rate plus two percent (2%) per
annum from the date same became due until paid.
Article 23
SIGNS
Lessee shall have the right to install, maintain and replace
exterior signs in or on the Leased premises subject to any applicable laws,
codes or ordinances and subject to any reasonable rules and regulations
adopted for the Leased Premises. Lessee shall make all repairs required by
reason of the installation and maintenance of its signs, except damage caused
by the acts of Lessor, its agents, servants or employees.
Article 24
SERVICE OF NOTICE
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Any notice or demand which either party hereby may desire to
serve upon the other in furtherance of any provisions of this Lease shall be
in writing and shall be sufficiently served if the same shall be sent by
Federal Express or other overnight courier service, or shall be sent United
States Mail, postage prepaid, certified or registered, or shall be sent by
facsimile transmission, addressed, in the instance of Lessor, as follows:
VRS/TA/S Houston, L.P.
520 Post Oak Blvd., Suite 320
Houston, Texas 77027
(Fax) 713-963-8079
or to such other address as Lessor shall designate by written notice to Lessee,
and in the instance of Lessee, addressed as follows:
United Stationers Supply Co.
2200 East Golf Road
Des Plaines, Illinois 60016-1267
Attention: President
(Fax) 847-699-8046
or such other address as Lessee shall designate by written notice to Lessor.
Such notices shall be deemed to have been served at the time of the actual
receipt or refusal of delivery thereof.
Article 25
CAPTIONS
The various headings and numbers herein and the grouping of the
provisions of this Lease into separate articles and paragraphs are for the
purpose of convenience only and shall not be considered a part hereof.
Article 26
TIME
Time is of the essence of this Lease and each and all of its
provisions.
Article 27
SUCCESSORS AND ASSIGNS
This Lease shall inure to the benefit of and be binding upon the
heirs,
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executors, administrators, successors and assigns of Lessor and Lessee;
provided, however, that nothing herein shall impair any of the provisions
herein above set forth inhibiting assignment or subletting without the
written consent of Lessor.
Article 28
PARTIAL INVALIDITY
If any term, covenant, condition or provision of this Lease or
the application thereof to any person or circumstance shall, to any extent,
be invalid or unenforceable, the remainder of this Lease shall not be
affected thereby and each term, covenant, condition and provision of this
Lease shall be valid and be enforced to the fullest extent permitted by law.
Article 29
CONSENT
Whenever the consent of either Lessor or Lessee must be
obtained hereunder, such consent shall not be unreasonably withheld or
delayed.
Article 30
FORCE MAJEURE
(a) Whenever Lessor or Lessee shall be required hereunder or
by law to perform or provide any contract, act, work, labor or service, or to
perform or comply with any law, order, ordinance, or building, zoning or
other regulations, requirements, or rule of any governmental authority having
jurisdiction, or to perform any covenant hereunder (other than the payment of
any sum of money) such party shall not be deemed in default therein and the
other party hereto shall not enforce or exercise any of its rights hereunder
if and so long as:
(i) Non-performance or default therein shall be caused by
strikes, lockouts, non-availability of labor or materials, war or national
defense, governmental restrictions, acts of God or other such unforeseeable
events or circumstances beyond the control of such party; and
(ii) To the extent applicable and reasonable, such party
shall contest the matter involved with due diligence and in good faith in a
proper forum or court with the person or governmental authority requiring
such payment, act, work, labor, services, contract or lien.
(b) The foregoing provision of this ARTICLE 30 shall not
apply to the payment by Lessee to Lessor of rent or any other monetary sums
due by Lessee
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hereunder or to any of Lessor's obligations under ARTICLE 1 of this Lease.
Article 31
ALTERATION
This Lease shall not be altered, amended, or modified in any
way or terminated except by an instrument in writing, executed by both
parties.
Article 32
PERSONAL PROPERTY TAXES
During the term hereof, Lessee shall pay prior to delinquency
all taxes assessed against and levied upon fixtures, furnishings, equipment
and all other personal property of Lessee contained in the Leased Premises;
and, when possible, Lessee shall cause said fixtures, furnishings, equipment
and other personal property to be assessed and billed separately from the
Leased Premises.
Article 33
LEGAL CONSTRUCTION
This Agreement shall be construed in accordance with the laws of the State of
Texas.
Article 34
LIMITATION OF LIABILITY
Neither party shall ever be liable for consequential or
punitive damage in connection with any of its obligations hereunder.
Article 35
NET LEASE
This Lease is a net lease, and except as otherwise expressly
provided herein, Lessee shall pay all costs and other expenses of every
character, foreseen or unforeseen, for the payment of which Lessee is or shall
become liable by reason of its estate or interest in the Leased Premises, or
which are connected with or arise out of the possession, use, occupancy,
maintenance or repair of the Leased Premises or any portion thereof by Lessee.
Rent and any and all other amounts payable by Lessee hereunder shall
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be paid by Lessee without notice or demand (except as herein otherwise
provided), and without any set off, deduction, abatement, suspension,
deferment, diminution or reduction of any kind for any reason, except as
specifically provided herein.
Article 36
LIMITATION OF LESSOR'S PERSONAL LIABILITY
Notwithstanding any other provision in this Lease to the
contrary, Lessee specifically agrees to look solely to Lessor's interest in
the Leased Premises and in this Lease for the recovery of any judgment from
Lessor, it being agreed that Lessor shall never be personally liable for any
such judgment.
Article 37
COMPLIANCE WITH ENVIRONMENTAL LAWS
(a) Lessor warrants and represents to Lessee that, to the
best of Lessor's knowledge and after reasonable inquiry, the Leased Premises
will be in full compliance at the date of delivery to Lessee with all
applicable Environmental Laws.
(b) Lessor shall defend, indemnify and save Lessee, its
officers, directors, agents and employees, harmless from and against all
claims, obligations, demands, actions, proceedings and judgments, loss,
damage, liability and expense (including reasonable attorney's fees and
expenses) which any one or more of them may sustain in connection with any
noncompliance of the Leased Premises as of the Commencement Date with all
Environmental Laws or in connection with any environmental condition
affecting the Leased Premises not caused by Lessee.
Article 38
LESSOR'S REPRESENTATIONS AND WARRANTIES
Lessor will represent and warrant to Lessee, as of the
Commencement Date, that to the best of its knowledge:
(a) Lessor does not have knowledge of, or reason to believe
that there are grounds for, the filing of a lien against the Leased Premises,
other than the lien for the construction loan.
(b) Lessor does not have knowledge of any pending condemnation
or similar proceeding affecting the Leased Premises or any portion thereof.
(c) Lessor does not have knowledge of any legal actions, suits,
or other legal or administrative proceedings, pending or threatened against the
Leased Premises or Lessor nor that any such action, suit, proceeding or claim
has been threatened
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or asserted against Lessor or the Leased Premises.
(d) Lessor has granted no leases or license, nor created any
tenancies, affecting the Leased Premises and there are no parties in possession
of any portion of the Leased Premises as trespassers or otherwise.
(e) Lessor does not have knowledge of any uncured violations of
federal, state or municipal laws, ordinances, orders, regulations, or
requirements affecting any portion of the Leased Premises.
(f) The Leased Premises have adequate legal access to abutting
public highways, streets and roads.
(g) Lessor does not have knowledge of any pending or threatened
governmental or private proceedings which would impair or result in the
termination of access from the Leased Premises to abutting public highways,
streets and roads.
(h) Lessor does not have knowledge of, or reason to believe
that there are (i) any government agencies investigating the Leased Premises,
(ii) any environmental defects affecting the Leased Premises or property, (iii)
radon or radon decay products, asbestos or asbestos decay products, within the
Building or (iv) mines or other subsurface conditions which would have a
materially adverse effect on the Leased Premises.
(i) Lessor does not have knowledge that the Leased Premises
or any adjacent property now are or have been the site of any place of
business engaged in operations which involve the generation, manufacture,
refining, transportation, treatment, storage, handling or disposal of any
Hazardous Materials, above or below ground.
(j) There is presently in existence or available adequate
water, electrical, sewage, stormwater and drainage systems, and gas utility
service required for the intended use of the Leased Premises.
(k) The intended use and occupancy of the Leased Premises are
in full compliance with all requirements of applicable building, zoning and land
development ordinances and all conditions of applicable planning board
subdivision, site plan and variance (if any) approvals.
(l) Lessor has obtained or will obtain all required plan
approvals, permits and certificates of occupancy necessary for Lessee's
occupancy and intended use.
(m) Lessor has no knowledge, or reason to believe that there
are underground storage tanks located on the Leased Premises, nor have there
been any in the past.
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Article 39
OWNERSHIP OF LEASED PREMISES
Lessor represents and warrants that, upon acquisition of title
to the Leased Premises by Lessor, there shall be no reservations, easements,
building lines, covenants, restrictions, encumbrances or other objections or
exceptions to good and marketable title that would prevent or impair either
the timely construction of the Improvements in accordance with the
Construction Documents approved by Lessee, or the use thereof as contemplated
by Lessee. Immediately upon acquiring title to the site Lessor shall furnish
Lessee a copy of the title policy showing title in Lessor. If it is
determined that Lessor and/or its assigns does not have good and clear title
to the Leased Premises at any time after commencement of construction Lessee
may terminate this Agreement by giving Lessor written notice of its election
to terminate, whereupon Lessee shall have no further obligation to Lessor
under this Lease.
Article 40
COMPLIANCE WITH PUBLIC ACCOMMODATION LAWS
(a) Lessor represents, warrants and covenants that, upon the
Commencement Date, the Leased Premises will comply with all applicable laws,
regulations, and building codes, including, without limitation, all laws
governing non discrimination in public accommodations and commercial
facilities, including, without limitation, the requirements of the Americans
with Disabilities Act and all regulations thereunder.
(b) Lessor agrees to indemnify, defend and hold harmless
Lessee, its officers, directors and employees from and against any and all
claims, liabilities, losses and expenses (including reasonable attorney's
fees) arising in connection with Lessor's failure to comply with the
provisions of this Article, save and except the continued negligence of
Lessee.
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EXECUTED as of the date set forth hereinabove.
LESSOR:
VRS/TA/S Houston, L.P.
A Texas limited partnership
By: VRS/TA Realty Corp. (its general partner)
By: /s/ [Iillegible]
---------------------------
Its: Sr. Vice President
--------------------------
LESSEE:
United Stationers Supply Co.
An Illinois Corporation
By: /s/ James A. Pribel
----------------------------
Its: Treasurer & Secretary
---------------------------
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EXHIBIT A
METES AND BOUNDS DESCRIPTION OF 9.6737 ACRES OR 421,387 SQUARE FEET OF LAND
OUT OF THAT CERTAIN 21.873-ACRE TRACT BEING ALL OF UNRESTRICTED RESREVE "A",
NORTHWEST PLACE, A SUBDIVISION RECORDED IN VOLUME 302, PAGE 16, HARRIS COUNTY
MAP RECORDS (H.C.M.R.) IN THE W. C. WALLACE SURVEY, A-848, CITY OF HOUSTON,
HARRIS COUNTY, TEXAS:
BEGINNING: AT A FOUND "X" CUT IN CONCRETE IN THE SOUTH LINE OF PINEMONT
DRIVE, AN 80-FOOT RIGHT-OF-WAY, MARKING THE NORTHWEST CORNER OF SAID RESERVE
"A", SAID "X" BEING THE 10-FOOT SETBACK CORNER OF THE EAST LINE OF HOLLISTER
ROAD, A 100-FOOT RIGHT-OF-WAY;
THENCE: NORTH 87 DEG 36 MIN 10 SEC EAST, ALONG THE SOUTH LINE OF PINEMONT
DRIVE, A DISTANCE OF 607.00 FEET TO A SET 5/8-INCH IRON ROD MARKING THE
NORTHEAST CORNER OF THE HEREIN DESCRIBED TRACT;
THENCE: SOUTH 02 DEG 23 MIN 50 SEC EAST, DEPARTING FROM THE SOUTH LINE OF
PINEMONT DRIVE A DISTANCE OF 682.58 FEET TO A SET 5/8-INCH IRON ROD IN THE
NORTH LINE OF LANGTRY STREET, A 60-FOOT RIGHT-OF-WAY MAKING THE SOUTHEAST
CORNER OF THE HEREIN DESCRIBED TRACT;
THENCE: SOUTH 87 DEG 57 MIN 34 SEC WEST, ALONG THE NORTH LINE OF LANGTRY
STREET, A DISTANCE OF 613.97 FEET TO A FOUND 5/8-INCH IRON ROD MARKING THE
MOST SOUTHERLY SOUTHWEST CORNER OF SAID RESERVE "A" AND THE HEREIN DESCRIBED
TRACT, SAID 5/8-INCH IRON ROD BEING THE 10-FOOT SETBACK CORNER OF THE EAST
LINE OF HOLLISTER ROAD;
THENCE: NORTH 45 DEG 42 MIN 19 SEC WEST, A DISTANCE OF 13.82 FEET TO A FOUND
5/8-INCH IRON ROD IN THE EAST LINE OF HOLLISTER ROAD, SAID 5/8-INCH IRON ROD
BEING IN THE LEFT;
THENCE: ALONG THE EAST LINE OF HOLLISTER ROAD, IN A NORTHEASTERLY DIRECTION,
AROUND A CURVE TO THE LEFT WHOSE RADIUS EQUALS 2,350.00 FEET, HAVING A
CENTRAL ANGLE OF 02 DEG 33 MIN 39 SEC, AN ARC LENGTH OF 105.04 FEET, A CHORD
BEARING OF NORTH 00 DEG 45 MIN 59 SEC EAST AND A DISTANCE OF 105.03 FEET TO A
FOUND 5/8-INCH IRON ROD, THE POINT OF TANGENCY OF THE CURVE;
THENCE: NORTH 02 DEG 02 MIN 49 SEC WEST, ALONG THE EAST LINE OF HOLLISTER
ROAD, A DISTANCE OF 553.73 FEET TO A FOUND "X" CUT IN CONCRETE, MARKING THE
MOST WESTERLY NORTHWEST CORNER OF SAID RESERVE "A" AND THE HEREIN DESCRIBED
TRACT;
THENCE: NORTH 42 DEG 46 MIN 14 SEC EAST, A DISTANCE OF 14.19 FEET TO THE
PLACE OF BEGINNING AND CONTAINING 9.6737 ACRES OR 421,387 SQUARE FEET OF
LAND, MORE OR LESS.
<PAGE>
Exhibit B
Blueprint of office building appears here.
<PAGE>
EXHIBIT "B"
IMPROVEMENT SPECIFICATIONS
Our proposal is based on the initial construction of a 240,000 square foot
facility on a 9.56 square acre site. Parking will be provided for 80 cars.
The proposed building will have 8,000 square feet of office area. Further, as
the enclosed site plan indicates, the building is a rear loading facility
with a 130' truck court. Although the building is designed to be cost
efficient it will appropriately present the image of a significant facility
for United Stationers, Inc. Please review the following construction features:
EARTH WORK
We will strip the site to a depth of 4" with strippings hauled off-site if
they are not used for back fill of curbs and/or top soil at landscaped areas.
Subgrade at concrete paving is assumed to be an average excavation of 6" to
9", which is to be relocated and compacted within the building pad. The
building pad will require approximately 2"-0" of off-site select fill
material (minimum 20 P.I.) and compacted in 8" lifts to create a 48" dock
height.
SITE WORK
We will pour the sidewalks to be 4-1/2" thick 3,000 PSI concrete reinforced
with 10-gauge wire mesh and a broom finish. The car parking will be 5" thick
3,000 PSI concrete reinforced with one (1) layer of No.3 rebar at 18" on
center each direction with a broom finish. The truck court and outside
storage area shall be 6" thick 3,000 PSI concrete also reinforced with one
(1) layer of No.3 rebar at 18" on center each direction with a broom finish.
All paved areas will have sealed joints at an average spacing of 30'-0" on
center. Car parking, drives, and the East elevation of the truck court shall
receive a 6" machine extruded, cast-on type curb with reinforcing steel.
Storm drainage shall be underground plastic and concrete pipe for all paved
surfaces.
BUILDING CONCRETE AND STRUCTURE
The foundation will consist of drilled under-ream footings. The warehouse
slab shall be 6" thick 3,000 PSI concrete with one (1) layer of No.4 rebar at
16" on center in each direction with a smooth trowel finish. The slab area is
to receive one (1) coat of Lapidolith floor hardener. The slab will be
leveled to a standard of FF-50. All slabs to be placed with a 1/8" wide saw
cut control joint placed at 20'-0" centers in each direction. The office slab
shall be 6" thick 3,000 PSI concrete with one (1) layer of No.4 rebar at 16"
on center in each direction with a smooth trowel finish.
The roof framing will consist of structural steel columns, joist girders and
bar joists. Warehouse column spacing shall be 40'-0"x40'-0. The warehouse
roof structure will provide a minimum clear height of 30'.
<PAGE>
Improvement Specifications
Page 2
There will be a 22 gauge galvanized roof deck covered with 1" rigid
insulation board. The board will be covered with two base sheets and hot
asphalt and these two sheets will be covered with a .060 mil thick modified
bituminous cap sheet set in hot asphalt. The resulting roof has a 15 year
warranty and is 20 year bondable if so desired.
Roof drainage has been designed to drain front and rear of the warehouse to
surface mounted gutters and recessed downspouts.
The windows are punched type, 8'-0" x 6'-0" with sloped concrete sill and jam
with glass set in aluminum frames. The main entry shall receive one (1) pair
of 3'-0" x 9'-0" doors. All aluminum is designed to be clear or black with
bronze or gray non-reflective glass. The warehouse area shall receive seventy
five (75) 4'-0' x 4'-0" skylights.
All of the exterior tiltwall panels will be approximately 15'-0" wide with
3,000 PSI standard gray concrete reinforcing bars necessary for in-service
use. The panels will be load bearing job cast with thickness as designed by
the structural engineer.
All surfaces of exterior tiltwall panels shall receive a medium textured flat
latex with reveal pattern.
The exterior door and dock equipment are as follows:
6 EACH - 3' x 7' hollow metal doors and frames
30 EACH - 9' x 10' nominal 24-gauge sectional overhead
door
28 EACH - 3,000 pound capacity mechanical edge-of-dock
levelers
The special equipment is as follows:
EYE WASH - Included in office finish allowance
WATER FOUNTAIN - Included in office allowance
INTERIOR LADDER - An interior roof ladder will be provided from
the slab to the roof deck
OFFICE INTERIORS
The development of 8,000 square feet of office area is included within the
scope of this proposal at a cost of $30.00 per square foot. This allowance is
to include the separation wall between the warehouse and office areas. If we
are selected as the developer for this project it is our team's intention to
work closely with United Stationers, Inc. in designing the most functional
and cost efficient office layout possible.
<PAGE>
Improvements Specifications
Page 3
FIRE SPRINKLER SYSTEM
The sprinkler system will be a ESFR system for class 4 ordinary hazard with
28 foot storage height.
PLUMBING
The domestic water service will be a 2-1/2" Type-K copper underground service
extending from a 2" water meter. The sanitary sewer has been designed to be
PVC material with a 6" line connecting the existing sanitary manhole to the
building with clean-out spacings per the City of Houston requirements.
Interior plumbing is provided within the office finish allowance.
Four (4) hose bibs will be provided and located as determined.
HEATING, VENTILATION AND AIR CONDITIONING
1. OFFICE
The HVAC cost is included within the office finish allowance. It is
our intention to have the system consist of bottom discharge,
summer/winter, DX rooftop package units. Air distribution will be
through ducted supply systems with ducted return. Ductwork will be
1" thick fiberglass duct board. All rooftop units shall be provided
with insulated factory curbs.
2. WAREHOUSE
Six air changes per hour will be achieved through roof fans with fixed
in-take wall louvers with bird screens. Heating will provide freeze
protection of the fire sprinkler system.
ELECTRICAL
The building service will consist of 2,000 amp overhead service to a location
on the East elevation behind the office section.
SITE LIGHTING
400 watt wall pack lighting units at 75 feet on center located on the
front and back of the building.
<PAGE>
Improvement Specifications
Page 4
WAREHOUSE LIGHTING
400 watt metal halide fixtures are provided for an average
illumination of thirty foot-candles.
OFFICE LIGHTING
Cost to be included within the office finish allowance and designed
accordingly.
<PAGE>
EXHIBIT 10.36
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into by and between VALLEY VIEW
BUSINESS CENTER, LTD., A TEXAS LIMITED PARTNERSHIP(hereinafter called
"Landlord"), and UNITED STATIONERS SUPPLY CO., an Illinois corporation
(hereinafter called "Tenant").
W I T N E S S E T H:
Landlord, for and in consideration of the covenants of Tenant herein
contained, and subject to the terms, provisions and conditions hereinafter set
forth, hereby leases, demises and lets unto Tenant, and Tenant hereby leases and
takes from Landlord, that certain approximate 18.55 acre tract or parcel of land
situated in Dallas County, Texas, as described in EXHIBIT "A" attached hereto
and made a part hereof (the "Land"), together with and including the Building
(hereinafter defined) and the other Improvements (hereinafter defined) to be
constructed by Landlord on the Land pursuant to the Construction Documents
(hereinafter defined), and any other improvements constructed by or on behalf of
Landlord on the Land. The Land, the Building and the Improvements of which the
Building is a part and all other improvements made by Landlord on or to the Land
from time to time are collectively referred to herein as the "Leased Premises".
TO HAVE AND TO HOLD the said Leased Premises unto the said Tenant,
together with the non-exclusive use of all rights, privileges, easements,
appurtenances, and amenities belonging to or in any way pertaining to the Land,
for and during the Term (hereinafter defined) and in accordance with the terms,
provisions and conditions set forth below.
Wherever and as often as the words this "Agreement" or this "Lease" are
used or appear in this instrument, the same shall mean and refer to this
instrument, and all exhibits hereto and all plans, drawings and specifications
identified herein and any amendments to the same. All references in this Lease
to "the date hereof" or "the date of this Lease" or similar references shall be
deemed to refer to the last date, in point of time, on which all parties hereto
have executed this Lease.
ARTICLE 1
CONSTRUCTION OF IMPROVEMENTS BY LANDLORD
(a) CONSTRUCTION DOCUMENTS. Landlord will construct on the Land a
warehouse distribution center containing a total of approximately 400,000 square
feet of space, inclusive of approximately 15,000 square feet of office space
(the "Building"), together with adjacent outdoor surface parking consisting of
not less than 225 spaces, and the landscaping and other improvements, if any,
located outside of the Building on the Land, pursuant to the plans and
specifications described on EXHIBIT "B" and made a part hereof for all purposes
(the "Construction Documents"). The Building and such other improvements as are
contemplated by the Construction Documents are collectively referred to herein
as the "Improvements". The Site Plan attached hereto as EXHIBIT "C" and made a
part hereof for all purposes is a general illustration of the Land and the
contemplated Building.
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(b) CONSTRUCTION SCHEDULE. A construction schedule for the
Improvements showing the time periods estimated by Landlord for the completion
of the major phases of the Improvements is attached hereto as EXHIBIT "G" (the
"Construction Schedule"). Landlord shall make a good faith effort to advise
Tenant as soon as reasonably possible if Landlord determines that Landlord's
actual progress in completing any phase of the Improvements is behind the time
periods set forth on the Construction Schedule in any material way. The general
contractor for the Improvements selected by Landlord and approved by Tenant is
Rogers O'Brien Construction Company (the "Contractor"). If Landlord determines
that it is necessary or desirable to find a substitute general contractor,
Landlord shall have the right to dismiss Contractor and select an appropriate
substitute, which selection shall be subject to the approval of Tenant, which
approval shall not be unreasonably withheld or delayed. All of the construction
work shall be carried out by Contractor under the sole direction of Landlord.
(c) COMPLETION DATE. Subject to the terms of this Lease, on or before
August 30, 1999 (which date is referred to herein as the "Construction Date"),
Landlord shall, at Landlord's sole cost and expense, commence the on-site
physical construction of the Improvements on the Land. Such commencement will
be deemed to have occurred upon Landlord beginning earth-grading work on the
Land. From and after the Construction Date, Landlord shall endeavor to cause
Substantial Completion (hereinafter defined) of the Improvements in accordance
with the Construction Documents to occur on or before April 1, 2000 (the "Target
Completion Date"). Additionally, Landlord agrees to endeavor to complete the
Improvements to a stage sufficient to allow Tenant to commence Tenant's Work
(hereinafter defined) no later than December 22, 1999. If Landlord has not
caused Substantial Completion of the Improvements to occur on or before June 15,
2000 (the "Outside Completion Date") for any reason other than a Tenant Delay
(hereinafter defined), or an event of Force Majeure (hereinafter defined),
Tenant shall receive an abatement of one (1) day of Base Rent (hereinafter
defined) for each day beyond the Outside Completion Date it takes for Landlord
to achieve Substantial Completion, as Tenant's sole and exclusive remedy.
(d) SUBSTANTIAL COMPLETION. "Substantial Completion" of the
Improvement shall not have occurred until (i) Landlord's architect, Halff &
Associates (the "Architect") shall have delivered to Landlord and Tenant a
written certificate stating that all of the Improvements have been substantially
completed in substantial accordance with the Construction Documents, except for
the Punch List Items; and (ii) a certificate of occupancy has been issued
allowing Tenant to occupy and use the Leased Premises; provided, however, that
if the reason that a certificate of occupancy has not or cannot be issued is (A)
because of work yet to be performed by Tenant (E.G., Tenant's Work (hereinafter
defined)), or (B) due to Tenant Delays, then the failure or inability to obtain
a certificate of occupancy shall not delay or prevent the occurrence of
Substantial Completion . The term "Punch List Items" shall mean details of
construction, decoration, and mechanical adjustment which are part of the
Improvements and which in the aggregate, are minor in character and do not
materially interfere with the Tenant's use or enjoyment of the Leased Premises.
Landlord shall give Tenant not less than ten (10) days notice of the date upon
which Landlord estimates Substantial Completion to be achieved. Upon receipt of
Landlord's notification, Tenant shall verbally notify Landlord of the date
Tenant intends to make a walk-through inspection of the Leased Premises, such
date to be on the date specified in Landlord's notice for the estimated
occurrence of Substantial Completion. The Architect, the Contractor, Landlord's
project representative and Tenant's project representative shall meet to review
and approve of the matters to be included as Punch List Items, which approvals
shall not
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be unreasonably withheld. Punch List Items shall be completed by Landlord at
Landlord's expense. Landlord shall use its best efforts to complete all of
the Punch List Items within thirty (30) days after the occurrence of
Substantial Completion. At the conclusion of the walk-through inspection,
Tenant will be deemed to have acknowledged that, subject only to Landlord's
completion of the Punch List Items, (i) it has inspected and accepts the
Leased Premises, (ii) the Leased Premises is suitable for the purpose for
which it is leased, (iii) the Leased Premises is in good and satisfactory
condition, and (iv) no representations as to the repair of the Leased
Premises, nor promises to alter, remodel or improve the Leased Premises which
have been made by Landlord remain unsatisfied. At the conclusion of the
walk-through inspection Tenant further agrees to execute an Acceptance of
Leased Premises Memorandum in the form attached hereto and made a part hereof
as EXHIBIT "D", whereupon possession of the Leased Premises will be delivered
to Tenant and Tenant will be deemed to have accepted the Leased Premises, and
Tenant may thereafter occupy the Leased Premises. Tenant's failure to
conduct a walk-through inspection or execute the Acceptance of Leased
Premises Memorandum will not delay the occurrence of the Commencement Date.
(e) CHANGE ORDERS: Tenant may, from time to time prior to the
occurrence of Substantial Completion, submit to Landlord any written requests
for changes or additions to the Construction Documents and/or the Improvements
desired by the Tenant in such detail as Landlord may reasonably require (each a
"Change Order"), which changes or additions shall be subject to Landlord's
approval, which approval shall not be unreasonably withheld or delayed. Such
approval shall include Landlord's written notice to Tenant of (i) the net
increase, if any, in the actual out-of-pocket cost to be incurred by Landlord in
completing the work associated with the Change Order including the preparation
of plans therefor (the "Change Cost"), and (ii) the anticipated delays, if any,
in completing the work as a result of such Change Order, including the
processing and permitting thereof (the "Change Delay"). Within five (5) business
days after Tenant's receipt of such notice, Tenant shall give to Landlord
written notice to proceed or not to proceed with the Change Order. Tenant's
notice to proceed with the Change Order shall include a specific written
agreement from Tenant to pay to Landlord the Change Cost and written
confirmation of Tenant's acceptance of the Change Delay. Following the required
approvals and subject thereto (Landlord shall not be required to implement
Change Orders if necessary approvals and permits cannot be obtained), upon
Tenant's written acceptance of any such Change Order, Landlord shall promptly
revise the Construction Documents to incorporate the Change Order and shall
proceed to complete the Improvements in accordance with the Change Order. Any
and all Change Costs up to a total amount of $300,000 shall, at Tenant's option
exercised by written notice to Landlord included in Tenant's notice to proceed
with the work contemplated by the Change Order, (i) be paid by Tenant within
fifteen (15) days after the occurrence of Substantial Completion and written
demand by Landlord accompanied by substantiating documentation, or (ii) be
initially paid by Landlord and shall be charged back to Tenant as an adjustment
to Base Rent (hereinafter defined). In the case of (ii), the annual adjustment
to Base Rent shall be the total Change Cost (up to a maximum of $300,000)
multiplied by ten and one-half percent (10.50%). If Tenant fails to provide
written notice of its election as provided above, Landlord shall have the
option, exercisable by written notice to Tenant prior to the occurrence of
Substantial Completion, to elect repayment under (i) or (ii) above, and if
Landlord fails to give such written notice, Landlord shall be deemed to have
elected option (i) above. Tenant shall pay total Change Costs in excess of
$300,000 as follows: (A) fifty percent (50%) of the Change Cost shall be paid to
Landlord upon approval of the applicable Change Order, and (B) the balance shall
be paid within fifteen (15) days after the occurrence of Substantial Completion
and written
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demand by Landlord. Any disagreements between Landlord and Tenant regarding
the calculation of any Change Costs shall be resolved in accordance with the
procedures set forth in Article l(m) of this Lease.
(f) CONSTRUCTION COSTS. Subject to the terms of this paragraph,
Landlord will (i) pay the cost of the Building and all other improvements other
than the Finish Work (hereinafter defined) for the office portion of the
Building, and (ii) the cost of the Finish Work up to, but not in excess of the
sum of $525,000 (the "Finish Allowance"). The "Finish Work" is the work to be
performed by Landlord pursuant to the specific Construction Documents identified
on EXHIBIT "H" attached hereto and made a part hereof. Notwithstanding the
preceding, Tenant will be responsible for the following costs of completing the
Improvements:
(1) All Change Costs (as set forth above);
(2) The cost of the Finish Work in excess of the Finish
Allowance. If Landlord determines that the actual cost of the Finish
Work will exceed the Finish Allowance, or if during construction the
actual cost of the Finish Work exceeds the Finish Allowance, Landlord
will not be obligated to commence the Finish Work or continue its
construction until it receives from Tenant fifty percent (50%) of the
estimated cost of such amount as is in excess, in Landlord's estimation,
of the Finish Allowance, with the actual amount of such excess, less the
initial payment by Tenant, being due upon Substantial Completion.
(3) The cost of Tenant specified electrical distribution not
included in the Construction Documents in excess of $125,000. Such
excess, if any, shall be determined through Change Order and paid by
Tenant in the same manner as for the cost of Finish Work in excess of the
Finish Allowance; and
(4) All costs, expenses and damages incurred or suffered by
Landlord that are caused by Tenant Delays.
(g) LANDLORD'S WARRANTY. In addition to (and not in lieu of)
Landlord's obligations under the Lease with respect to repairs, Landlord
covenants to construct the Improvements in a good and workmanlike manner and in
accordance with all Applicable Laws (hereinafter defined). Without limitation,
Landlord represents, warrants and covenants that upon the Commencement Date, the
Improvements will comply with all Applicable Laws including, without limitation,
all laws governing non-discrimination in public accommodations and commercial
facilities, including, without limitation, the requirements of the Americans
with Disabilities Act and all regulations thereunder. Landlord further warrants
that the Improvements will be free from defects in workmanship and materials for
a period of one (1) year after the date of Substantial Completion. If, at any
time during such warranty period, any of the workmanship or material used in the
construction of the Improvements are determined to be defective, and Tenant
shall, within the warranty period, so notify Landlord in writing that such
workmanship or material is defective, Landlord shall cause such defective
workmanship or material to be corrected, repaired, or replaced in a manner
reasonably acceptable to both Landlord and Tenant. Such correction, repair, or
replacement shall be performed by Landlord, at Landlord's expense, as promptly
as reasonably possible and in such manner so as to minimize any interference
with Tenant in its operations in and about the Leased Premises. If Landlord
fails to correct any such
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defect within fifteen (15) days after receipt of written notice from Tenant,
or such longer period as is reasonably required, then Tenant may (but shall
not be obligated to) correct such defect and Landlord shall reimburse Tenant
for the actual cost thereof. Landlord's liability for breach of any
covenant, representation or warranty set forth in this subparagraph shall
finally and automatically expire on the first (1st) anniversary of the
Commencement Date.
(h) INSPECTIONS. Landlord, through its appointed project
representative, shall maintain direct contact with Contractor and conduct
regularly scheduled job and progress meetings at the Land, or such other place
as agreed to, with Contractor and Tenant's representative, as appointed by
Tenant, as well as extraordinary meetings where deemed necessary by Landlord,
Architect or Contractor, to discuss such matters such as, but not limited to,
procedures, progress, safety and scheduling. Tenant may inspect the
installation of the Improvements and the progress of the Improvements. Landlord
shall be available, and cause the Contractor to be available, to Tenant or its
representatives from time to time upon reasonable prior notice when necessary or
desirable for the purpose of reviewing the Improvements. Tenant shall not
communicate directly with Contractor or any subcontractors or interfere with
construction of the Improvements in connection with its inspections.
(i) COMPLIANCE WITH LAWS. Landlord, at its expense, shall obtain all
approvals, permits, and other consents required to commence, perform and
complete the Improvements; shall at all times cause all work in connection with
the Improvements to be carried out in compliance with all such consents and in
compliance with all Applicable Laws. All approvals, permits, inspection
reports, notices, and other similar documents prepared or received by Landlord
or the Contractor.
(j) TENANT'S WORK. All finishing work, equipment installation,
cabling, and interior wall finish for the offices, or other work (the "Tenant's
Work") desired by Tenant, if any, and not initially or thereafter included in
the Improvements, shall be performed by Tenant, at Tenant's expense, through
contractors selected by Tenant and approved by Landlord, which approval shall
not to be unreasonably withheld or delayed; provided that Landlord's approval
shall not be required for contractor's or subcontractors who provide materials
or labor the aggregate cost of which is estimated not to exceed $25,000.
Landlord and Tenant shall each cause their respective general contractor and/or
subcontractors for the Improvements and Tenant's Work to cooperate with each
other in facilitating the mutual access to the Leased Premises and in
coordinating the timing of the stages of the Improvements and the Tenant's Work
so as to facilitate the completion on a timely basis. To the extent reasonably
possible and without having to incur additional expense, Landlord shall, prior
to Substantial Completion, provide Tenant with access to the Leased Premises and
storage space at the site for Tenant's equipment, trade fixtures, and other
property in connection with Tenant's Work and shall furnish water, electricity
and HVAC to the Leased Premises during the performance of any Tenant's Work to
the extent the same are then available at the Leased Premises; provided that,
Tenant shall reimburse Landlord or Contractor, as applicable, within fifteen
(15) days after written demand, for the cost of any such utility services used
by Tenant determined by Contractor and agreed to by Tenant, such not to be
unreasonably withheld, to be in excess of that which would otherwise have been
used by Contractor, or its subcontractors, in the course of constructing the
Improvements. The performance by Tenant of Tenant's Work prior to the
Commencement Date shall be subject to all of the terms and conditions of Article
10 hereof.
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(k) TENANT DELAYS. The term "Tenant Delay" shall mean any actual delay
in the completion of the Improvements which delays Substantial Completion and
which is due to any act or omission of Tenant, its agents, or contractors.
Tenant Delays shall include:
(1) Change Delays;
(2) Any delay by Tenant in giving Landlord notice of Tenant's
approval of any Change Orders or in giving Landlord notice of any other
consents or approvals required of Tenant hereunder in connection with the
Improvements; and
(3) any other delay in the occurrence of Substantial Completion
caused by a Tenant Party (hereinafter defined), including, without
limitation, any delay resulting from Tenant's Work (hereinafter defined)
or the installation by any Tenant Party of any property or equipment of
Tenant in or on the Leased Premises prior to Substantial Completion and
any delay due to interference by any Tenant Party with Landlord's
engineers, consultants, contractors or otherwise. As used in this Lease,
a "Tenant Party" shall mean one or more of Tenant, its agents, employees,
officers, partners or contractors or any of their invitees or licensees.
(l) NOTICE OF DELAY. At the request of either the Landlord or the
Tenant, at any time and from time to time prior to the date of Substantial
Completion, Landlord or Tenant may require the other party to provide a written
notice setting out whether or not Landlord or Tenant, as the case may be, is
aware of any delays under either Article 1(k) or Article 1(l) hereof as of the
date of such notice.
(m) RESOLUTION OF DISPUTES. If Landlord and Tenant disagree as to
whether the Construction Documents have been properly prepared or as to whether
any aspect of the Improvements has been full or properly completed, or is
otherwise defective, or as to the appropriate manner to correct any such
deficiency, or as to the calculation of Change Costs hereunder, or as to the
designation of any Tenant Delay hereunder, and if Landlord and Tenant, using
their reasonable good faith efforts, are otherwise unable to resolve such
dispute, then such dispute shall be resolved by referring the same to the
Consulting Architect. In order to initiate such a resolution of any dispute, a
party shall be required to give the other party and the Consulting Architect
written notice requesting such resolution, which notice shall identify the issue
in dispute. The Consulting Architect shall promptly notify the parties of the
date, time, and place for the meeting to resolve of such dispute, which date
shall in no event be later than ten (10) business days after the Consulting
Architect's receipt of the demand for resolution. Such notice may be given by
telephone if promptly confirmed by written notice. At the conclusion of such
meeting, the Consulting Architect shall advise both parties of the Consulting
Architect's decision. The Consulting Architect shall send the parties written
notice confirming such decision immediately thereafter. Both parties shall be
bound by any and all decisions made by the Consulting Architect and shall
perform their obligations hereunder in accordance with such decisions. The
Consulting Architect's fees and expenses for dispute resolution pursuant hereto
shall be split equally between Landlord and Tenant. The Consulting Architect
shall be AECC until such time as Landlord and Tenant otherwise agree in writing.
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ARTICLE 2
TERM
(a) INITIAL TERM/TERM. Subject to and upon terms, provisions and
conditions hereinafter set forth, the "Initial Term" of this Lease shall begin
on the Commencement Date, and shall expire at 11:59 p.m. on the last day of the
one hundred and twentieth (120) complete calendar month thereafter. The
"Commencement Date" shall be the earlier to occur of (i) the date upon which
Substantial Completion occurs and (ii) the date Tenant takes possession of the
Leased Premises for purposes of business operation and not for the performance
only of Tenant's Work. If the Commencement Date occurs on the first day of a
calendar month, the month in which the Commencement Date occurs shall be the
first complete calendar month after the Commencement Date for purposes of
determining the expiration of the Initial Term. The Initial Term together with
any Renewal Terms is the "Term" of this Lease or the "Lease Term" as such terms
may be used interchangeably in this Lease.
(b) RENEWAL OPTIONS.
(1) So long as there is no uncured default hereunder by Tenant
as of the date of Tenant's exercise of any Renewal Option or as of the
date of the commencement of any Renewal Term, Tenant shall be entitled
and is hereby granted two (2) successive options (the "Renewal Options")
to extend the Term for an additional period of five (5) years each (the
"Renewal Terms"). Except for Base Rent, as hereinafter defined and
separately provided for, the Renewal Terms shall be on all the other
terms and conditions of this Lease; provided, however, that (i) upon the
exercise of the first Renewal Option Tenant shall have only one remaining
Renewal Option and upon its exercise of the second Renewal Option Tenant
shall have no further right or option to renew or extend the Term without
Landlord's written consent, which may be withheld in Landlord's sole
discretion, and (ii) Landlord shall not have any obligations to make any
improvements or otherwise provide any inducement to Tenant. Tenant shall
exercise each Renewal Option, if at all, only by giving written notice of
such exercise to Landlord not less than six (6) months, nor more than
twelve (12) months, prior to the expiration of the Initial Term or first
Renewal Term, as the case may be. Should Tenant fail to timely exercise a
Renewal Option in accordance with the preceding provisions, then the Term
shall expire and this Lease shall terminate at the end of the Initial
Term or the current Renewal Term, as applicable, and Tenant shall have no
further right or option to renew or extend the Term. Tenant's exercise
of a Renewal Option shall be irrevocable.
(2) Within thirty (30) days after Landlord receives Tenant's
written notice of its exercise of a Renewal Option, Landlord shall
deliver a notice to Tenant (the "Market Rate Notice") specifying the
Market Rate for the applicable Renewal Term, such to be based upon
Landlord's reasonable and good-faith determination of rents being charged
for comparable space of equivalent quality, size, utility and location,
and for terms commensurate with the applicable Renewal Term. Tenant
shall have thirty (30) days (the "Examination Period") from its receipt
of the Market Rate Notice to accept or reject Landlord's designation of
the Market Rate. If Tenant accepts Landlord's designation of the Market
Rate, the "Base Rent" for the Renewal Term will be the Market Rate as set
forth in the Market Rate Notice. If Tenant fails to reject in writing
Landlord's
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designation of the Market Rate set forth in the Market Rate Notice
during the Examination Period, Tenant shall be deemed to have accepted
Landlord's designation of the Market Rate, the Base Rent for the Renewal
Term will be the Market Rate set forth in the Market Rate Notice. If
Tenant timely rejects Landlord's designation of the Market Rate prior to
the expiration of the Examination Period and Landlord and Tenant cannot
agree in writing on the Market Rate within fifteen (15) days after the
date Landlord receives Tenant's timely rejection of Landlord's
designation of the Market Rate set forth in the Market Rate Notice (the
"Negotiation Period"), Base Rent for the applicable Renewal Term will be
determined as follows:
(i) Tenant's notice to Landlord of Tenant's rejection of
Landlord's designation of the Market Rate shall include Tenant's
designation of its appraiser for purposes of determining the
Market Rate in the event Landlord and Tenant cannot agree on the
Market Rate during the Negotiation Period. Such notice shall
further include appraiser's name, address and telephone number.
Within ten (10) days after the expiration of the Negotiation
Period (assuming that Landlord and Tenant cannot agree on the Base
Rent during the Negotiation Period); Landlord shall select an
appraiser of its choice and give Tenant written notice of such
appraiser's name, address and telephone number.
(ii) The two (2) selected appraisers shall attempt to
mutually determine the fair rental value of the Leased Premises
for the applicable Renewal Term and the "Base Rent" for such
Renewal Term will be the fair market value as so determined. If
the two (2) selected appraisers cannot agree on the fair rental
value for the Leased Premises for the applicable Renewal Period
within thirty (30) days after Landlord has notified Tenant of
Landlord's selected appraiser, then those appraisers shall select
another individual as a third appraiser within fifteen (15) days
after the expiration of such thirty (30) day period, and shall
furnish Landlord and Tenant written notice of such appraiser's
name, address and telephone number. All appraisers selected shall
be M.A.I. appraisers, unless Landlord and Tenant shall otherwise
agree in writing, each having at least ten (10) years experience
with commercial property in the Dallas/Fort Worth, Texas metroplex
area.
(iii) Each of the three (3) selected appraisers shall then
individually determine the fair rental value of the Leased
Premises for the applicable Renewal Term within thirty (30) days
after the selection of the third appraiser and the "Base Rent" for
such Renewal Term shall be the average of the three (3)
appraisals.
(iv) If the procedure set forth in above is implemented,
and if for any reason whatsoever (including, without limitation,
the institution of any judicial or other legal proceedings), the
Base Rent for any Renewal Term has not been finally determined
prior to the first day of the applicable extended Renewal Term,
then the Market Rate initially determined by Landlord in good
faith shall be the Base Rent for all purposes under the Lease
until such time as the Base Rent is finally determined as set
forth above, and Landlord and Tenant shall, by
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appropriate payments to the other, correct any overpayment or
underpayment which may have been made prior to such final
determination.
(v) All fees, costs and expenses incurred in connection
with obtaining the appraisals and the arbitration procedure set
forth in this paragraph shall be shared equally by Landlord and
Tenant; however, Landlord and Tenant shall each bear their own
attorneys' fees incurred with respect to this procedure.
(3) Tenant may not assign the Renewal Options to any assignee
or subleases of the Lease that is not a Permitted Assignee (hereinafter
defined). No assignee or sublessee may exercise the Renewal Options
unless such is a Permitted Assignee of Tenant.
(4) If the Term is extended pursuant to Tenant's exercise of a
Renewal Option, Landlord shall prepare, and Landlord and Tenant will
execute and deliver an amendment to this Lease extending the Term and
specifying the new Base Rent; provided, however, that the failure of the
parties to enter into such an amendment will not affect the validity of
Tenant's exercise of the Renewal Option or the obligations of the parties
during the Renewal Term.
(c) ENTRY BY TENANT PRIOR TO THE COMMENCEMENT DATE. It is agreed that
Tenant may enter into the Leased Premises prior to the completion of the
Improvements for the purpose of completing the Tenant's Work, if any, without
being deemed thereby to have taken possession of the Leased Premises or
obligated itself to pay Rent; provided that Tenant's Work shall in no way
interfere with the construction of such Improvements or the work of Landlord or
Contractor and shall not subject Landlord to any liabilities whatsoever.
ARTICLE 3
BASE RENT
(a) BASE RENT AND ADJUSTMENTS.
(1) BASE RENT. As consideration for the use and occupancy of,
and as rental for, the Leased Premises, Tenant promises and agrees to pay
Landlord, while this Lease remains in force and effect, for the Initial
Term, paid in monthly payments in advance $93,333.33 per month
($1,119,999.96 annualized). Such rent is herein the "Base Rent".
(2) CHANGE COSTS. Base Rent shall be further adjusted for any
amortized Change Costs as contemplated by Article 1(e).
(b) Base Rent and any other monthly installments of Rent required to
be paid hereunder by Tenant to Landlord shall be due and payable, in advance,
beginning on the Commencement Date and continuing on the first day of each
calendar month during the Term. Any installment of Base Rent due for any
fractional calendar month shall be prorated based upon the actual number of days
in that month. All Rent (hereinafter defined) shall be paid at the times and in
the amounts provided for herein in legal tender of the United States of America
to Landlord at the address specified in Article 25 hereof or to such other
person or at such other
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address as Landlord may from time to time designate in writing. Tenant's
obligation to pay any installment of Rent shall not be deemed satisfied until
such installment of Rent has actually been received by Landlord. As used in
this Lease, "Rent" shall mean the Base Rent and all other amounts provided
for in this Lease to be paid by Tenant to Landlord, all of which shall
constitute rental in consideration for this Lease and the leasing of the
Leased Premises.
(c) If on the Commencement Date there remains an unused and
unallocated balance of the Finish Allowance or any other allowances granted by
Landlord hereunder, Landlord shall (i) apply such balance to any amounts payable
by Tenant to Landlord under Article 1(f) above or otherwise owing by Tenant to
Landlord hereunder, and (ii) any remaining balance shall be paid to Tenant.
(d) Other remedies for nonpayment of Base Rent notwithstanding, if the
monthly Base Rent payment is not in Landlord's possession on or before the fifth
(5th) day of the month for which the Base Rent is due, or if any other payment
is due Landlord by Tenant is not received by Landlord prior to the expiration of
any applicable cure or grace period, a late payment charge of five percent (5%)
of such amount shall, unless waived in writing by Landlord, become due and
payable in addition to such amounts owed under this Lease. In addition,
Landlord shall be entitled to charge one-hundred dollars ($100.00) for each
check or payment which is not honored by Tenant's bank. Said charge to be in
addition to any other amounts owed under this Lease.
ARTICLE 4
TAXES
(a) The term "Taxes" as used herein shall mean all taxes, levies and
assessments of every character imposed or assessed upon or against the Leased
Premises by any governmental agency or authority having jurisdiction, and all
assessments due to deed restrictions and/or owner or community associations,
whether foreseen or unforeseen; provided nothing herein shall require or be
construed to require Tenant to pay any gift, estate, inheritance, excess
profits, succession, capital levy, transfer tax, income tax, payroll tax or
other tax assessment, mortgage, charge or levy arising out of the Rent payable
by Tenant or other income received by Landlord, its successors or assigns. If at
any time during the Term, the State of Texas or any political subdivision of the
state, including any county, city, city and county, public corporation,
district, or the United States of America, levies or assesses against Landlord a
tax, fee or excise: (i) on rents, (ii) on the square footage of the Leased
Premises, (iii) on the act of entering into this Lease, (iv) on the occupancy of
Tenant, or any other tax, fee, or excise, however described, including, without
limitation, a so-called value added, business activity or gross receipts tax, as
a direct substitution in whole or in part for, or (except in the case of (i)
above) in addition to, any real property taxes, Tenant shall pay before
delinquency said tax, fee, or excise.
(b) Subject to Tenant's protest right provided below, Tenant shall pay
all Taxes during the Term directly to the taxing authority therefor not less
than thirty (30) days prior to the date on which any such Taxes would become
delinquent and shall provide evidence thereof to Landlord upon written request.
Without waiver of any other remedies of Landlord for Tenant's failure to timely
pay Taxes, Tenant shall be responsible for all damages, penalties and fines
incurred by the Leased Premises or Landlord due to Tenant's failure to timely
pay Taxes.
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Additionally, if Tenant fails to provide such evidence and Landlord, without
having any obligation to do so, pays Taxes, Tenant shall reimburse Landlord
for the full amount thereof upon demand. Taxes for the partial year in which
the Commencement Date occurs and the year in which the Term expires or this
Lease is terminated shall (unless terminated for Tenant's default) be
prorated between Landlord and Tenant.
(c) If any Taxes are paid by Landlord to any taxing authority for any
tax year in installments, the amount payable by Tenant hereunder shall be
payable in similar installments, and no amount shall be payable by Tenant on
account of installments becoming payable after the expiration of the Term which
are attributable to a period of time after the expiration of the Term or
attributable to any period of time prior to the Commencement Date. If any
assessment for new public improvements (and not for repair or replacement of
existing public improvements) is payable only in a lump sum, rather than in
installments, Tenant shall pay a pro rata share of such assessment based upon
the proportion that the number of years remaining in the Term bears to the
expected useful life of such new public improvements as determined by a third
party consultant. For purposes of the preceding sentence, the "Term" of this
Lease shall mean the Initial Term; provided that, if Tenant exercises a Renewal
Option, Tenant shall be assessed its pro rata share based upon the proportion
that the number of years of such Renewal Term bears to the expected remaining
useful life of such public improvement.
(d) Landlord shall within ten (10) days of receipt, deliver to Tenant
statements, assessments and other notices relative to any tax or assessment;
provided that Landlord's failure to timely deliver such notices shall in no way
relieve Tenant of the obligation to pay Taxes. If Landlord's delay in
delivering any such notices to Tenant is the direct and actual cause of late
payment of Taxes, Landlord shall be responsible for any penalties due thereto.
(e) Tenant shall have the right, before delinquency occurs, of
contesting, objecting to or opposing the legality, validity or amount of any
such Taxes; provided that prompt notice of such contest, objection or opposition
shall be given to Landlord by Tenant at least twenty (20) days before any
delinquency; and provided, further, that such contest, objection or opposition
shall not be carried on or maintained after the aforementioned time limit for
the payment of said obligations unless Tenant shall have duly paid the amount
involved under protest or shall have procured and maintained a stay of all
proceedings to enforce any collection thereof and shall also have provided for
payment thereof, together with all penalties, interest, costs, and expenses, by
a deposit of sufficient sum of money or by a good and sufficient undertaking as
may be required or permitted by law to accomplish such a stay. In the event of
any such contest, objection or opposition, Tenant agrees to pay and discharge
any unpaid amounts finally determined to be due within thirty (30) days after
the final determination thereof or within such later grace period as may be
allowed by law.
(f) If any mortgagee of Landlord requires that Taxes be escrowed with
such mortgagee, Tenant shall pay to Landlord on a monthly basis, on the same
date that Base Rent is due, an amount equal to 1/12 of the estimated total
annual Taxes, as determined by Landlord. Tenant authorizes Landlord to use such
funds to pay Taxes and to fund any escrows required by Landlord's mortgagee. If
Tenant's total Tax payments for any year are less than the actual Taxes, Tenant
shall pay the difference to Landlord within twenty (20) days after written
demand, such to be accompanied by copies of applicable tax bills. If the total
payments of Tenant are
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more than the actual Taxes, Landlord shall retain such excess and credit it
against Tenant's next monthly estimated payments of Taxes or, at Landlord's
option, return such excess to Tenant.
ARTICLE 5
INSURANCE
(a) Tenant shall at its sole expense, maintain at all times during the
Term, comprehensive general liability insurance with respect to the Leased
Premises and the conduct or operation of Tenant's business therein with
contractual liability endorsement, naming Landlord and such other parties
designated by Landlord, as an additional insured, in an amount not less than
$5,000,000.00 combined single limit.
(b) During the entire Term, Tenant shall keep the Building and other
Improvements constituting a portion of the Leased Premises insured in the name
of and for the benefit of Landlord and the holder of any mortgage or deed of
trust on the Leased Premises as their respective interests may appear, on an
"all risk" form, against loss or damage by fire and all hazards covered by the
standard form of extended coverage endorsement (subject to exclusions approved
by and otherwise in form satisfactory to Landlord), and containing twelve (12)
months' rents insurance, flood loss (if the Leased Premises is located in a
flood zone) and sprinkler breakage coverage. Such insurance shall be for not
less than one hundred percent (100%) of the full replacement value thereof, as
the same shall change from time to time. The term "full insurable value" as used
herein means agreed value for actual replacement costs, including the cost of
debris removal. Tenant shall carry, at Tenant's sole cost and expense, fire and
extended coverage casualty insurance on all of the alterations and improvements
completed by Tenant in the Leased Premises and all trade fixtures, equipment,
inventory, and personal property located on the Leased Premises. Deductibles
under policies to be carried by Tenant hereunder shall not exceed $100,000 per
occurrence. Tenant shall not take out separate property insurance concurrent in
form or contributing in the event of loss with that required hereunder, unless
Landlord and Landlord's mortgagee is included therein as a named insured.
(c) All insurance policies required by this Article 5 shall be written
by companies licensed to sell insurance in Texas and having a rating of A VIII
or better, as set forth in the most recent issue of Best's Insurance Reports.
(d) At the commencement of the Initial Term of this Lease, Tenant
shall deliver to Landlord Certificates of Insurance manifesting the insurance
coverage required by this Article 5 and, at least thirty (30) days prior to the
expiration of each such policy, shall pay the premiums for the renewal of such
insurance and provide information satisfactory to Landlord evidencing payment
thereof. All policies shall provide at least thirty (30) days' written notice to
Landlord, Landlord's mortgagee and Tenant of any cancellation, termination, or
material alteration.
(e) Tenant and Landlord shall cooperate in connection with the
collection of any insurance monies that may be due in the event of loss and
shall execute and deliver such proofs of loss and other instruments which may be
required for the purposes of obtaining recovery of any such insurance monies.
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(f) NOTWITHSTANDING ANY OTHER PROVISION OF THIS LEASE, LANDLORD AND
TENANT HEREBY WAIVE ANY RIGHTS EACH MAY HAVE AGAINST THE OTHER ON ACCOUNT OF ANY
LOSS OR DAMAGE OCCASIONED TO LANDLORD OR TENANT, AS THE CASE MAY BE (WHETHER OR
NOT SUCH LOSS OR DAMAGE IS CAUSED BY THE FAULT OR SOLE OR CONCURRENT NEGLIGENCE
OF THE OTHER PARTY), TO THEIR RESPECTIVE PROPERTY OR TO THE LEASED PREMISES OR
ITS CONTENTS ARISING FROM ANY RISK THAT IS COVERED BY ANY INSURANCE REQUIRED TO
BE CARRIED UNDER THIS LEASE OR OTHERWISE CARRIED BY LANDLORD OR TENANT, BUT ONLY
TO THE EXTENT OF INSURANCE PROCEEDS ACTUALLY RECEIVED (SUCH EXTENT TO INCLUDE
APPLICABLE DEDUCTIBLES BUT NOT THE LIMITS OF ANY APPLICABLE SELF INSURANCE).
THE FOREGOING SHALL NOT BE OPERATIVE IN ANY CASE IN WHICH THE EFFECT WOULD BE TO
INVALIDATE ANY INSURANCE COVERAGE REQUIRED TO BE CARRIED HEREUNDER. TENANT, ON
BEHALF OF ITS INSURANCE COMPANIES (WHICH INSURANCE COMPANIES SHALL INCLUDE SUCH
TENANT IF TENANT IS ALLOWED TO SELF INSURE UNDER THIS LEASE) INSURING THE
PROPERTY OF TENANT AGAINST ANY SUCH LOSS, WAIVES ANY RIGHT OF SUBROGATION THAT
IT MAY HAVE AGAINST LANDLORD. TENANT AGREES IMMEDIATELY TO GIVE TO EACH SUCH
INSURANCE COMPANY WRITTEN NOTIFICATION OF THE TERMS OF THE WAIVERS CONTAINED IN
THIS PARAGRAPH, AND TO HAVE ITS INSURANCE POLICIES PROPERLY ENDORSED, IF
NECESSARY, TO PREVENT THE INVALIDATION OF SAID INSURANCE COVERAGES BY REASON OF
SAID WAIVERS, AT TENANT'S SOLE COST.
(g) For the purposes of this Article 5 only, the "Term" shall commence
upon the earlier to occur of (i) the Commencement Date, and (ii) the date that
Tenant or any Tenant Party first enters the Leased Premises to perform any of
Tenant's Work.
ARTICLE 6
USE OF LEASED PREMISES AND COMPLIANCE WITH LAWS
(a) The Leased Premises shall be used only for the purpose of
receiving, storing and distributing products, materials and merchandise made
and/or distributed by Tenant, incidental office use in connection therewith and
for such other lawful purposes as may be incidental thereto. Outside storage,
other than storage of trucks and other vehicles, is prohibited without
Landlord's prior written consent which shall not be unreasonably withheld.
Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas,
noise or vibrations to emanate from the Leased Premises, nor take any other
action that would constitute a health or environmental hazard or nuisance or
that would disturb, interfere with, or endanger Landlord or the occupant of any
other land or buildings in the vicinity of the Leased Premises. Landlord agrees
that odors, smoke or noise emanating from trucks servicing the Leased Premises
in the ordinary course of Tenant's business will not violate these prohibitions
provided that such are not unreasonable.
(b) Tenant shall comply with and fulfill all state, federal and
municipal laws, regulations and ordinances, court decisions and all matters of
record (E.G., deed restrictions) applicable to the use of the Leased Premises by
Tenant and the business of Tenant conducted
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thereon (collectively "Applicable Laws") including without limitation, the
Americans with Disabilities Act ("ADA").
(c) Tenant shall not change locks or install additional locks on doors
without prior written consent of Landlord. Tenant shall not make or cause to be
made duplicates of keys procured from Landlord without prior approval of
Landlord. All keys to Leased Premises shall be surrendered to Landlord upon
termination of this Lease.
(d) The water closets and other water fixtures shall not be used for
any purpose other than those for which they were constructed, and any damage
resulting to them from misuse, including improper disposal of any materials, or
by the defacing or injury of any part of the Building shall be borne by the
person who shall occasion it. No person shall waste water by interfering with
the faucets or otherwise.
ARTICLE 7
CONDITION OF LEASED PREMISES AND REPAIRS/IMPROVEMENTS
(a) Landlord shall not be required to make any improvements,
replacements or repairs of any kind or character to the Leased Premises or the
Building during the Term except as set forth in this section. Landlord shall
repair, maintain in good condition only the roof, foundation, floor slab (but
not the sealant or any floor coverings) and structural soundness of the exterior
walls of the Building except for damage caused by any act or omission of a
Tenant or any Tenant Party or by casualty. Landlord may elect to repair any
damage caused by a Tenant or any Tenant Party, and if Landlord so elects, Tenant
shall pay Landlord the cost or anticipated cost of such repair on demand. The
term "walls" as used herein shall not include windows, glass or plate glass,
doors, special store fronts or office entries. Tenant shall promptly give
Landlord written notice of any defect or need for repairs, after which Landlord
shall have reasonable opportunity to repair same or cure such defect. In the
event Landlord refuses or neglects to commence or to complete properly and
adequately any repairs which are the responsibility of Landlord hereunder and
such failure continues for fifteen (15) days after written notice to Landlord or
such longer period as is reasonably required, then Tenant may (but shall not be
obligated to) make such repairs. In such event, Landlord shall be obligated to
repay the actual cost thereof to Tenant.
(b) From and after the Commencement Date, if any improvement,
modification or alteration of any portion of the Leased Premises is required to
bring same into compliance with the ADA or any other Applicable Laws, or if
Landlord otherwise makes capital repairs, replacements or improvements to the
Leased Premises (as determined using generally accepted accounting principles)
that are not the express obligation of Landlord to undertake at its sole cost
under subparagraph (a) above and (i) Tenant is not otherwise expressly
responsible for such repair, replacement or improvement under this Lease, (ii)
the necessity for such repair, replacement or improvements was not caused, in
whole or in part, by Tenant or any Tenant Party, and (iii) the necessity for
such repair, replacement or improvement was not due to the specific use of the
Leased Premises by Tenant, then Landlord will undertake to complete such repair,
replacement or improvements and the cost thereof will be charged back to Tenant
over the useful life of the subject repair, replacement or improvements with the
assumption that the only portion of such expense chargeable for any one year
will be a fraction of such expense, the
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numerator of which is one and the denominator of which is the estimated
useful life of the subject repair, replacement or improvements. In the event
that (i) Tenant is expressly responsible for such repair, replacement or
improvement under this Lease, (ii) the necessity for such repair, replacement
or improvements was caused, in whole or in part, by Tenant or any Tenant
Party, or (iii) the necessity for such repair, replacement or improvement was
due to the specific use of the Leased Premises by Tenant, Tenant shall be
solely responsible for the entire cost of such repair, replacement or
improvements. In such event, and if Landlord elects to construct such
repair, replacement or improvement, Tenant shall pay the cost thereof to
Landlord in the same manner as Tenant pays for the cost of the Finish Work in
excess of the Finish Allowance under Aticle 1(g)(2). If Landlord elects for
Tenant to complete such repair, replacement or improvement, such shall be
performed by Tenant, at Tenant's cost, subject to all of the terms of Article
10 below.
(c) From and after the Commencement Date, and except as otherwise
herein provided and except for repairs required to be performed by Landlord
under subparagraph (a) above, or covered by Landlord's one-year express warranty
made herein, Tenant agrees, at its sole cost and expense, to maintain all of the
Leased Premises in good condition and repair during the Term (except for such
repairs made necessary by fire or other casualty and which are repaired in
accordance with the provisions of Article 9 below) including, without limitation
landscaping, plumbing, wiring, fixtures, equipment, heating and air
conditioning equipment, interior and exterior decorations, glass and painting in
and on the Building and the parking area and ingress and egress lanes, it being
understood and agreed that Landlord shall have no obligation to maintain the
Leased Premises after Tenant takes possession other than as expressly provided
herein. Upon termination of this Lease, Tenant shall deliver the Leased
Premises to Landlord in as good a condition as existed on the date Tenant took
possession, the effects of ordinary wear and tear, and obsolescence in spite of
repairs excepted.
(d) Upon written request by Tenant, and to the extent assignable
without cost to Landlord, Landlord will assign to Tenant all construction or
equipment warranties, guarantees, and/or service policies received by it which
are applicable to the Improvements that are required to be repaired and
maintained by Tenant; provided that such assignment shall not prevent Landlord
from enforcing same for its own benefit in order to perform its obligations
herein. Landlord hereby represents and warrants to Tenant that, in addition to
any other warranties, Landlord shall obtain a warranty covering the roof of the
Leased Premises for a period of not less than 10 years.
(e) In the event Tenant refuses or neglects to commence or to complete
properly and adequately any repairs which are the responsibility of Tenant
hereunder, then Landlord may (but shall not be obligated to) make such repairs
after thirty (30) working days' written notice to Tenant, or such shorter period
required to protect life or property. In such event, Tenant shall be obligated
to repay the cost thereof to Landlord, upon demand, as additional Rent.
(f) Tenant shall, at its sole cost and expense, during the Term
maintain a regularly scheduled preventative maintenance/service contract on an
annual basis with a maintenance contractor for the servicing of all sprinkler
systems, hot water, heating and air conditioning systems and equipment within or
servicing the Leased Premises. The maintenance contractor and contract must be
approved by Landlord and must include all services suggested by the equipment
manufacturer. A copy of the service contract shall be provided to Landlord
within
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sixty (60) days following the Commencement Date. In the event the service
contract is not provided, then Landlord shall have the right, but not the
obligation to have the work done and the cost therefor shall be charged to
Tenant as additional rent and shall become payable by Tenant with the payment
of the Base Rent next due hereunder.
ARTICLE 8
RELEASE AND INDEMNIFICATION
(a) Except as otherwise expressly provided in this Lease, no Landlord
Party (hereinafter defined) will be liable to Tenant or any Tenant Party, and
Tenant hereby releases Landlord and agrees to hold Landlord harmless from and
against, any injury to person or damage to property on or about the Leased
Premises caused by (A)(i) the Leased Premises becoming out of repair, (ii) the
leakage of gas, oil, water or steam or by electricity emanating from any part of
the Leased Premises, or (iii) any other cause, EXCEPT AND THEN ONLY TO THE
EXTENT THAT SUCH INJURY OR DAMAGE ARISES OUT OF OR RESULTS FROM THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF A LANDLORD PARTY (WHETHER OR NOT MERELY
ALLEGED, THREATENED OR PROVEN), or (B) the act or omission of a Tenant Party.
As used in this Article 8, a "Landlord Party" shall mean one or more of Landlord
and any officer, shareholder, partner, employee or agent of Landlord and its and
their respective heirs, legal representatives, successors and assigns. TENANT
ACKNOWLEDGES THAT THIS PROVISION SHALL BE CONSTRUED TO MEAN THAT NO LANDLORD
PARTY SHALL BE LIABLE TO TENANT, ANY TENANT PARTY OR ANY INVITEE OF TENANT OR A
TENANT PARTY FOR ANY ALLEGED, THREATENED OR PROVEN NEGLIGENCE OF LANDLORD OR ANY
LANDLORD PARTY EXCEPT AS EXPRESSLY SET FORTH HEREIN.
(b) Tenant shall indemnify and hold Landlord harmless from and against
any and all fines, suits, losses, costs, together with reasonable court costs
and reasonable attorneys fees incurred by Landlord in defending same,
liabilities, claims, demands, actions and judgments of every kind and character
suffered by, recovered from, or asserted against a Landlord Party, (i) arising
by reason of any breach, violation or non-performance by Tenant of any term,
provision, covenant, condition or agreement to be performed or abided by Tenant
hereunder, or (ii) arising on account of death, injury or damage to person or
property in, on, or about the Leased Premises, or any part thereof, where such
death, injury or damage is caused, in whole or in party, by a Tenant Party (as
defined in Article 1(k) above) EXCEPT AND TO THE EXTENT SUCH IS CAUSED BY OR
ARISES OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LANDLORD OR ANY
LANDLORD PARTY (WHETHER ALLEGED, THREATENED OR PROVEN), or the willful
misconduct of a Tenant Party, or (iii) arising out of any action brought by any
Tenant Party for which Landlord has been released by Tenant under (a) above.
Upon the occurrence of an event which Tenant is required to indemnify Landlord
against, and upon demand by Landlord, Tenant shall employ counsel reasonably
acceptable to Landlord and defend Landlord against any liability for such event,
all at Tenant's cost. The indemnities and covenants of Tenant in this paragraph
(b) are in addition to, and not in limitation of, any other indemnities made by
Tenant elsewhere in this Lease.
(c) This Article 8 shall survive the expiration or termination of this
Lease with respect to any claims or liability occurring or first arising prior
to such expiration or termination.
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ARTICLE 9
DAMAGE OR DESTRUCTION
(a) If the Building should be damaged or destroyed by fire or other
peril, Tenant immediately shall give written notice to Landlord. If: (i) the
Building should be totally destroyed by any peril not covered by insurance
required to be carried hereunder; or if (ii) the Leased Premises should be so
damaged thereby that, in Landlord's estimation, rebuilding or repairs cannot be
completed within one hundred eighty (180) days after Landlord's receipt of
insurance proceeds and required permits; or if (iii) the Leased Premises should
be so damaged thereby that, in Landlord's estimation, rebuilding or repairs of
the portion thereof required to be insured by Tenant can be substantially
completed within one hundred eighty (180) days after the date of such damage,
but the insurance proceeds available to Landlord will not, in Landlord's
estimation, be sufficient to complete such rebuilding or repairs (due to such
insurance proceeds being applied to mortgage debt or otherwise) and Landlord is
either unable or unwilling to advance sufficient funds to complete such
rebuilding or repairs (such decision to be made within sixty (60) days of the
casualty); then in any of such events this Lease shall cease and terminate as if
and to the extent the effective date of such termination had been the date
originally scheduled for the expiration of the term of this Lease, and the Rent
shall be abated during the previously unexpired term of this Lease, effective
upon the date of the occurrence of such damage.
(b) Subject to the provisions of Article 9(a) above, if the Building
should be damaged by any peril covered by the insurance required to be carried
hereunder, and Landlord does not have the right to or does not elect to
terminate this Lease, then Landlord shall restore the Building to substantially
its previous condition, except that Landlord shall not be required to rebuild,
repair or replace any of Tenant's Property or any of Tenant's Work or any other
property of, or improvements or alterations made by, Tenant. Subject to events
of Force Majeure or Tenant Delays, if such repairs and rebuilding of the Leased
Premises have not been substantially completed within one hundred eighty (180)
days after the date of Landlord's receipt of insurance proceeds and necessary
permits, Tenant, as Tenant's exclusive remedy, may give Landlord notice of
Tenant's intention to terminate the Lease effective as of the date specified in
such notice which date shall be not less than ninety (90) days after the notice.
If the repairs and rebuilding have not been substantially completed by the date
specified in such notice for reasons other than Tenant Delays or Force Majeure,
Tenant, as Tenant's exclusive remedy, may immediately terminate this Lease by
delivering written notice of termination to Landlord, in which event the rights
and obligations hereunder shall cease and terminate as if and to the extent the
effective date of such termination had been the date originally scheduled for
the expiration of the term of this Lease, and Rent shall be abated during the
unexpired term of this Lease, effective upon the date of the termination. Rent
shall not be abated during any repairs or construction performed pursuant to
this Article 9(b).
(c) Notwithstanding any provision herein to the contrary, if Landlord
elects to proceed with the restoration of the Improvements not withstanding the
fact that Landlord estimates available insurance proceeds will be inadequate for
such restoration costs, or in the event available insurance costs are in fact
inadequate for such restoration costs, Tenant will pay the deficiency to
Landlord upon demand. Regardless of whether or not Landlord terminates this
Agreement or restores the Leased Premises, Tenant shall pay Landlord the amount
of any
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applicable deductibles within thirty (30) days after written demand by
Landlord. Such obligations shall survive any termination of this Agreement.
ARTICLE 10
ALTERATIONS
(a) Tenant may not make or permit any alterations, improvements, or
additions in or to the Leased Premises that may affect the structure or
structural integrity of the Building, the foundation or the roof. Tenant may
otherwise make non-structural alterations costing, in the aggregate, less than
$25,000 in any consecutive 12-month period (exclusive of trade fixtures and
equipment), without Landlord's consent. Landlord's consent will not otherwise
be unreasonably withheld. All alterations and improvements desired by Tenant
are subject to the following conditions: (i) all alterations, improvements and
additions will be at the sole cost and expense of Tenant; (ii) all alterations,
improvements and additions in and to the Leased Premises requested by Tenant
must be made in accordance with plans and specifications first approved in
writing by Landlord; (iii) Tenant's contractors and subcontractors are subject
to Landlord's prior approval. In addition, each of Tenant's contractor(s) and
subcontractor(s) must deliver evidence satisfactory to Landlord that such
contractor or subcontractor, as applicable, carries insurance in amounts and
covering events customarily carried by similar contractors or subcontractors.
Upon Landlord's reasonable request, Tenant shall provide, or cause to be
provided, certificates of such insurance to Landlord evidencing such coverage
and naming Landlord and any mortgagee of Landlord as an additional insured
thereunder; (iv) all alterations, improvements and additions made by Tenant must
comply with all Applicable Laws and applicable building permits and certificates
of occupancy. Landlord's approval of Tenant's plans and specifications for the
alterations or improvements will not act as a confirmation or agreement by
Landlord that the improvements and alterations comply with Applicable Laws; (v)
Tenant must deliver to Landlord evidence that Tenant has obtained all necessary
governmental permits and approvals for the improvements, alterations and
additions prior to starting any work; (vi) all alterations, improvements and
additions must be done in a good and workmanlike manner so as not to damage or
alter the primary structure or structural qualities or the utility or other
systems of the Leased Premises or the Building and is subject to approval by
Landlord during and after construction, in its sole discretion; (vii) lien
releases from each of Tenant's contractor(s) and subcontractor(s) must be
submitted to Landlord within ten (10) days after completion of the work
performed by the contractor(s) or subcontractor(s); (viii) Tenant shall be
solely responsible for the safety and security of all equipment and property
installed or placed in, on or about the Leased Premises by a Tenant Party; and
(ix) if the cost of such alterations or improvements are estimated to cost in
excess of $200,000 in any 12-month period, Tenant shall provide, upon Landlord's
request, a performance bond or construction escrow or other security reasonably
satisfactory to Landlord to assure completion thereof and full payment therefor.
(b) Notwithstanding any other provision of this Lease, Tenant, at its
own cost and expense, may erect such shelves, racks, bins and trade fixtures
(collectively, "Tenant's Property") within the Leased Premises as it desires and
without Landlord's prior consent provided that (i) such items do not alter the
basic character of the Leased Premises or the Building; (ii) such items do not
overload or damage the Leased Premises or the Building or the utility or other
systems serving same; (iii) such items may be removed without material injury to
the Leased Premises and the Building; and (iv) the construction, erection or
installation thereof complies with all
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Applicable Laws, applicable building permits and certificates of occupancy;
and (v) provided that Tenant's installation of Tenant's Property prior to the
Commencement Date will be subject to Article 1(j) above. All of Tenant's
Property shall remain the property of Tenant and shall be removed on or
before the earlier to occur of the date of termination of this Lease or
Tenant's vacating of the Leased Premises. Tenant shall promptly repair any
damage to the Leased Premises caused by the removal of any of Tenant's
Property. Any of Tenant's Property not so removed and any other property of
Tenant not removed prior to the termination of this Lease or Tenant's
vacating of the Leased Premises shall thereupon be conclusively presumed to
have been abandoned by Tenant, and Landlord may, at its option, take over
possession of any and all of the foregoing and either (i) declare the same to
be the property of Landlord by written notice to Tenant at the address
provided herein or (ii) at the sole cost and expense of Tenant, remove,
store, and/or dispose of the same or any part thereof, all at Tenant's cost,
in any manner that Landlord shall choose without incurring liability to
Tenant or any other person.
(c) Except as provided in Article 10(a)above, all alterations,
additions, and improvements made to, or fixtures or other improvements placed in
or on, the Leased Premises, whether temporary or permanent in character are a
part of the Leased Premises and are the property of Landlord when they are made
to or placed in or on the Leased Premises, without compensation to Tenant;
provided that, at Landlord's option, upon the termination of this Lease,
Landlord may require Tenant, at Tenant's cost, to remove any improvements made
to the Leased Premises by Tenant and restore the Leased Premises to
substantially the condition it was in on the Commencement Date, reasonable wear
and tear excepted.
(d) Tenant hereby indemnifies and holds Landlord harmless from any
claims, demands, actions, losses, and damages arising from activities of a
Tenant Party, or any of their invites, in connection with any alterations,
improvements or additions made or contracted for by Tenant.
ARTICLE 11
UTILITIES
Tenant shall pay, before delinquency, all charges for water, gas,
electricity, telephone service and all other services and public utilities
furnished to or used in, upon or about the Leased Premises by Tenant during the
Term.
ARTICLE 12
HOLDING OVER
(a) Tenant agrees that upon the expiration or termination of this
Lease (however the same may be brought about), peaceable possession of the
Leased Premises will be promptly surrendered and delivered to Landlord.
(b) In case of holding over by Tenant after the termination of this
Lease without the written consent of Landlord (however such termination shall be
brought about), Tenant shall be obligated to pay Rent to Landlord on a per diem
basis for the entire hold over period at one hundred fifty percent (150%) of the
Base Rent in effect at the time of the termination of this
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Lease. In the event of a holding over by Tenant after the Term (whether with
or without the written consent of Landlord), Tenant shall be and continue as
the Tenant at will of Landlord and in the event of Tenant's failure to
surrender, Landlord shall be entitled to institute and maintain an action of
forcible detainer of the Leased Premises in any court of competent
jurisdiction. No holding over by Tenant, whether with or without consent of
Landlord, will shall operate to extend this Lease except as otherwise
expressly provided. The preceding provisions of this Article 12 shall not be
construed as consent for Tenant to retain possession of the Leased Premises
in the absence of written consent thereto by Landlord. In addition to the
above, and whether or not any holdover is permitted, if Tenant does not
vacate the Leased Premises within sixty (60) days after written demand by
Landlord, Tenant shall be liable to Landlord for Landlord's consequential
damages incurred by Landlord as a result of any holdover by Tenant.
ARTICLE 13
ASSIGNMENT AND SALE
(a) In the event Tenant should desire to assign this Lease or sublet
the Leased Premises or any part thereof, Tenant shall give Landlord written
notice of such desire, together with financial information as to the proposed
assignee or subtenant as required by Landlord to allow Landlord to determine the
financial condition of such assignee or subtenant, at least fifteen (15) days in
advance of the date on which Tenant desires to make such assignment or sublease.
Landlord shall then have a period of fifteen (15) days following receipt of such
notice and financial information within which to notify Tenant in writing that
(i) Landlord consents to such assignment or sublease, which consent shall not be
unreasonably withheld, or delayed, or (ii) Landlord does not consent thereto
provided, however, that Tenant may without prior written notice and consent from
Landlord, assign this Lease or sublet all or part of the Leased Premises to any
entity which controls, is controlled by, or is under common control with Tenant
or any entity which is a successor to Tenant by acquisition, merger, or
consolidation of or with Tenant (herein a "Permitted Assignee"). Upon request
by Landlord, Tenant shall furnish to Landlord copies of its latest consolidated
annual report together with quarterly income statements and balance sheet to
date when such reports and financial statements have been publicly released. No
assignment, subletting or other transfer, whether to a Permitted Assignee
consented to by Landlord or not or otherwise permitted hereunder shall relieve
the Tenant named herein of any liability hereunder for the obligations of the
"Tenant". If an event of default occurs while the Leased Premises or any part
thereof are assigned or sublet, then Landlord, in addition to any other remedies
herein provided, or provided by law, may collect directly from such Transferee
all rents payable to the Tenant and apply such rent against any sum due Landlord
hereunder. No such collection shall be construed to constitute a novation or a
releas of Tenant from the further performance of Tenant's obligations hereunder.
(b) Landlord shall have the continuing right at any time to sell or
convey the Leased Premises and Landlord's rights under this Lease, and nothing
herein contained shall be construed as restricting such rights of Landlord. In
the event Landlord should hereafter sell or convey the Leased Premises to a
third party or parties, such party or parties shall acquire the Leased Premises
subject to the terms and provisions of this Lease and shall be subrogated to all
of the rights and privileges of Landlord hereunder, and Landlord shall thereupon
be completely relieved and discharged from all duties and obligations herein
imposed upon Landlord which accrue after the effective date of such conveyance;
provided that such transferee of Landlord
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shall have assumed all of Landlord's duties and obligations which accrue
under this Lease after such date.
(c) If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et. seq. (the
"Bankruptcy Code"), any and all monies or other consideration payable or
otherwise to be delivered in connection with such assignment shall be paid or
delivered to Landlord, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any and all monies or other considerations
constituting Landlord's property under the preceding sentence not paid or
delivered to Landlord shall be held in trust for the benefit of Landlord and be
promptly paid or delivered to Landlord.
(d) Any person or entity to which this Lease is assigned pursuant to
the provisions of the Bankruptcy Code, shall be deemed, without further act or
deed, to have assumed all of the obligations arising under this Lease on and
after the date of such assignment. Any such assignee shall upon demand execute
and deliver to Landlord an instrument confirming such assumption.
ARTICLE 14
ENVIRONMENTAL
(a) HAZARDOUS MATERIALS DEFINED. As used in this Lease, the term
"Hazardous Materials" means and includes (i) any hazardous, toxic or dangerous
waste, substance or material, as defined for purposes of the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, the
Resource Conservation and Recovery Act of 1976, as amended, or any other
Applicable Laws applicable to the Leased Premises and establishing liability,
standards, or regulating or requiring action as to the industrial hygiene, use,
generation, treatment, discharge, spillage, storage, uncontrolled loss, seepage,
filtration, disposal, removal, or existence of a hazardous, toxic or dangerous
waste, substance or material (collectively, "Environmental Laws") and (ii) any
waste, substance or material which, even if not so regulated, is known to pose a
hazard to the health and safety of persons or property, specifically including,
without limitation, oil and petroleum products and by-products and asbestos.
(b) PROHIBITION OF HAZARDOUS MATERIALS/TENANT'S LIABILITY. Except
for Hazardous Materials that are used only as an incidental part of Tenant's
day-to-day business operations and not as an integral part thereof (E.G., fuel
for forklifts and similar equipment, office supplies, cleaning solvents), or
handled or stored in connection with the ordinary courses of Tenant's business
(provided that any such Hazardous Materials are wholly contained in prepackaged
containers and not repackaged, opened or otherwise disturbed while at the Leased
Premises), Tenant may not, without Landlord's prior written consent, use, treat,
handle, store, generate, dispose of or release or cause or permit any Tenant
Party, to use, handle, store, generate, treat, dispose of or release, in, on,
under or from the Leased Premises any Hazardous Materials. Landlord agrees not
to otherwise unreasonably withhold its consent to Tenant's handling or
temporarily storing Hazardous Materials at the Leased Premises in the normal and
ordinary course of the business of the "Tenant" named herein. To the extent
that Landlord consents to any of the above, but without otherwise limiting any
of the above:
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(1) Tenant covenants and agrees that it shall at its own
expense procure, maintain in effect and comply with all conditions of any
and all permits, licenses and other governmental and regulatory approvals
required for Tenant's use of the Leased Premises and any operations or
conduct of Tenant involving the use, handling, generation, treatment,
storage, disposal, management or release of any Hazardous Materials
including the posting of required Material Safety Data Sheets (copies of
which are to be provided to Landlord). Tenant shall cause any and all
Hazardous Materials that are to be removed from the Leased Premises to be
transported solely by duly licensed haulers and to duly licensed
facilities for final disposal of such Hazardous Materials. Tenant shall
in all respects, handle, treat, deal with and manage any and all
Hazardous Materials in, on, under or about the Leased Premises as a
result of the actions, conduct or any part of the business operations of
Tenant or any Tenant Party, in complete conformity with all Environmental
Laws and prudent industry practices regarding the management of such
Hazardous Materials. All reporting obligations relating to Hazardous
Materials in, on, under or about the Leased Premises as a result of the
actions, conduct or any part of the business operations of Tenant or any
Tenant Party, are solely the responsibility of Tenant. Upon expiration
or earlier termination of this Lease, Tenant covenants and agrees to
cause all Hazardous Materials existing in, on, or under the Leased
Premises to be removed from the Leased Premises and transported for use,
storage or disposal in accordance and in compliance with all
Environmental Laws. In addition, and unless Landlord instructs Tenant
otherwise, at the expiration of the Term, Tenant shall remove all
fixtures which were placed on the Leased Premises by or on behalf of
Tenant or a Tenant Party during the Term and which contain, have
contained or are contaminated with, Hazardous Materials. Tenant may not
install any above or undergroundstorage tanks;
(2) Tenant shall immediately notify Landlord in writing of (a)
any Tenant Release (hereinafter defined), (b) any enforcement, clean-up,
removal or other governmental or regulatory action instituted, completed
or threatened against Tenant, the Leased Premises, pursuant to any
Environmental Laws; (c) any claim made or threatened by any person
against Tenant, Landlord, the Leased Premises, relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from
or claimed to result from any Hazardous Materials; and (d) any reports
made to any environmental agency arising out of or in connection with any
Hazardous Materials in, on or about or under the Leased Premises or with
respect to any Hazardous Materials removed from the Leased Premises,
including, any complaints, notices, warnings, reports or asserted
violations in connection therewith. Tenant shall also provide to
Landlord, as promptly as possible, and in any event within five (5)
business days after Tenant first received or sent the same, with copies
of all claims, reports, complaints, notices, warnings or asserted
violations relating in any way to the Leased Premises or Tenant's use
thereof. Tenant shall not take any remedial action in response to the
presence of any Hazardous Materials in, on, about or under the Leased
Premises, nor enter into any settlement agreement, consent, decree or
other compromise in respect to any claims relating to or in any way
connected with the Leased Premises without first notifying Landlord of
Tenant's intention to do so and affording Landlord ample opportunity to
appear, intervene or otherwise appropriately assert and protect
Landlord's interest with respect thereto;
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(3) Tenant shall indemnify and, at Landlord's option, defend
(with counsel reasonably acceptable to Landlord), protect and hold
Landlord and each of Landlord's officers, directors, partners, employees,
agents, attorneys, successors and assigns free and harmless from and
against any and all claims, liabilities, damages, costs, penalties,
forfeitures, losses or expenses (including attorneys' fees) for death or
injury to any person or damage to any property whatsoever (including
water tables and atmosphere) arising or resulting in whole or in part,
directly or indirectly, from the presence, release or discharge of
Hazardous Materials in, on, under, upon or from the Leased Premises to
the extent that such presence, release or discharge was caused or
permitted by Tenant or a Tenant Party, or from the transportation or
disposal of Hazardous Materials to or from the Leased Premises by a
Tenant Party (herein, a "Tenant Release"). Tenant's obligations
hereunder shall include, without limitation, and whether foreseeable or
unforeseeable, all costs of any required or necessary repairs, clean-up
or detoxification or decontamination of the Leased Premises and any other
land contaminated or adversely effected by a Tenant Release and the
presence and implementation of any closure, remedial action or other
required plans in connection therewith, and shall survive the expiration
of or early termination of this Lease;
(4) Landlord shall have the right from time to time, at its
expense, to commission an environmental audit of the Leased Premises. If
such study or report correctly determines or concludes that a Tenant
Release has occurred or that Tenant has breached any of its obligations
under this Article 14, then, and without limitation of any other remedy
Landlord may have hereunder, Tenant shall reimburse the reasonable
actual costs of the audit to Landlord on demand as additional Rent.
(5) Tenant shall execute affidavits, representations, and the
like from time to time at Landlord's reasonable request concerning
Tenant's actual knowledge and belief regarding the presence of Hazardous
Materials in, on or under the Leased Premises.
(c) Landlord represents and warrants to Tenant that Landlord has not
stored, generated, used, disposed of, released or caused or permitted any other
party to store, generate, use, dispose of or release in or upon the Land any
Hazardous Materials in violation of Environmental Laws and to Landlord's current
actual knowledge, without duty of inquiry or investigation, no Hazardous
Materials are present on, under or about the Land in violation of Environmental
Laws except as may be disclosed in the environmental report dated March 9, 1999
and prepared by TERR-MAR, INC., which report Tenant acknowledges having
received. Landlord makes no warranty or representations regarding the truth or
accuracy of such report. Landlord shall indemnify, at Tenant's option, defend
(with counsel reasonably acceptable to Tenant), protect and hold Tenant harmless
from and against any and all claims, liabilities, damages, costs, penalties,
forfeitures, losses or expenses (including reasonable attorneys' fees) for death
or injury to any person or damage to any property whatsoever (including water
tables and atmosphere) arising or resulting in whole or in part, directly or
indirectly, from the presence, release or discharge of Hazardous Materials in,
on , under, upon or from the Land to the extent that such presence, release or
discharge was actually caused by Landlord or from the transportation or disposal
of Hazardous Materials to or from the Land by Landlord (herein, a "Landlord
Release"). Landlord's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repairs, clean-up or detoxification or decontamination of the Land and any other
land contaminated or adversely
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effected by the Landlord Release and the presence and implementation of any
closure, remedial action or other required plans in connection therewith, and
shall survive the expiration of or early termination of this Lease.
(d) The respective covenants, rights and obligations of Landlord and
Tenant under this Article 14 shall survive the expiration or earlier termination
of this Lease.
ARTICLE 15
DEFAULT AND REMEDIES
(a) The following shall be deemed to be events of default by Tenant
under this Lease:
(1) Tenant shall fail to pay any installment of the Rent herein
reserved when due, or any other payment or reimbursement to Landlord
required herein when due, and such failure shall continue for a period of
ten (10) days after receipt of written notice from Landlord; provided,
however, that an event of default will occur without any obligation of
Landlord to deliver any notice if Landlord has given Tenant written
notice under this subparagraph on two (2) or more occasions during the
twelve (12) month period preceding the current failure by Tenant to
timely pay Rent (though Tenant in such instances is granted a five (5)
day grace period from the date upon which the subject payment was due).
(2) Tenant abandons the Leased Premises.
(3) Tenant or any guarantor of Tenant's obligations hereunder
shall file a petition or be adjudged bankrupt or insolvent under any
applicable federal or state bankruptcy or insolvency law, or admit that
it cannot meet its financial obligations as they become due; or a
receiver or trustee shall be appointed for all or substantially all of
the assets of Tenant or such guarantor; or Tenant or any guarantor of
Tenant's obligations hereunder shall make a transfer in fraud of
creditors or shall make an assignment for the benefit of creditors; or
(4) Tenant shall fail to discharge or bond around to Landlord's
satisfaction any lien filed against the Leased Premises, or any portion
thereof, in violation of Article 40 hereof, within ten (10) days after
receiving notice thereof.
(5) Tenant shall fail to comply with any other term, provision
or covenant of this Lease, other than the payment of Rent; and such other
failure is not cured within thirty (30) days of receipt of written notice
from Landlord specifying the default;
(6) Any of the representations and warranties of Tenant set
forth herein shall be untrue in any material respect on the date of this
Lease or at any time during the Term.
(b) Upon the occurrence of any event of default set forth in this
Lease, Landlord shall have the option to pursue any one or more of the remedies
set forth herein without any additional notice or demand.
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(1) Without declaring the Lease terminated, Landlord may enter
upon and take possession of the Leased Premises, by picking or changing
locks if necessary, and lock out, expel or remove Tenant and any other
person who may be occupying all or any part of the Leased Premises
without being liable for any claim for damages, and relet the Leased
Premises on behalf of Tenant and receive the rent derived by reason of
the reletting. Tenant agrees to pay Landlord on demand any deficiency
that may arise by reason of any reletting of the Leased Premises,
further, Tenant agrees to reimburse Landlord for any expenditures made by
it in order to relet the Leased Premises, including, but not limited to,
leasing commissions, moving allowances, lease incentives, remodeling and
repair costs or in performing any obligations of Tenant hereunder. Tenant
agrees to reimburse Landlord on demand for any reasonable expenses which
Landlord may incur in effecting compliance with Tenant's obligations
under this Lease; further, Tenant agrees that Landlord shall not be
liable for any damages resulting to Tenant from effecting compliance with
Tenant's obligations under this Lease caused by the negligence of
Landlord or otherwise.
(2) Landlord may terminate this Lease, in which event Tenant
shall immediately surrender the Leased Premises to Landlord, and if
Tenant fails to surrender the Leased Premises, Landlord may, without
prejudice to any other remedy which it may have for possession or
arrearages in Rent, enter upon and take possession of the Leased
Premises, by picking or changing locks if necessary, and lock out, expel
or remove Tenant and any other person who may be occupying all or any
part of the Leased Premises without being liable for any claim for
damages. Tenant agrees to pay on demand the amount of all loss and
damage which Landlord may suffer by reason of the termination of this
Lease under this section, including without limitation, loss and damage
due to the failure of Tenant to maintain and or repair the Leased
Premises as required hereunder and/or due to the inability to relet the
Leased Premises on terms satisfactory to Landlord or otherwise, and any
reasonable expenditures made by Landlord in order to relet the Leased
Premises, including, but not limited to, leasing commissions, moving
allowances, lease incentives, and remodeling and repair costs. In
addition, upon termination Landlord may collect from Tenant, as damages
and not as a penalty, the present value (using a discount rate of seven
percent (7%) of all future Rents required to be paid under this Lease
(had it not been terminated) from the date Landlord terminates the Lease
until the expiration of the Term less the fair market rental value of the
Leased Premises over such term. Notwithstanding anything contained in
this Lease to the contrary, this Lease may be terminated by Landlord only
by mailing or delivering written notice of such termination to Tenant,
and no other act or omission of Landlord shall be construed as a
termination of this Lease.
(3) In the event that Landlord exercises its remedy to lock out
Tenant in accordance with any provision of this Lease, Tenant agrees that
no notice shall be required to be posted by Landlord on any door to the
Leased Premises (or elsewhere) disclosing the reason for such action or
any other information, and that Landlord shall not be obligated to
provide a key to the changed lock to Tenant unless Tenant shall have
first:
(I) brought current all payments due to Landlord under
this Lease (unless Landlord has permanently repossessed the Leased
Premises or terminated
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this Lease, in which event payment of all past due amounts shall
not obligate Landlord to provide a key);
(II) fully cured and remedied to Landlord's satisfaction
all other defaults of Tenant under this Lease (unless Tenant has
abandoned or vacated the Leased Premises, in which event Landlord
shall not be obligated to provide the new key to Tenant under any
circumstances); and
(III) provided Landlord with additional security deposit
and assurances satisfactory to Landlord that Tenant intends to and
is able to meet and comply with its future obligations under this
Lease, both monetary and nonmonetary. Landlord may, upon written
request by Tenant, at Landlord's convenience, upon receipt by
Landlord of an amount necessary to reimburse itself for time and
expense in providing such service, and upon Tenant's execution and
delivery of such waivers and indemnifications as Landlord may
require at Landlord's option either:
(i) escort Tenant or its specifically authorized
employees or agents to the Leased Premises to retrieve
personal belongings of Tenant's employees and property of
Tenant that is not subject to a security interest provided
in this Lease, or
(ii) obtain from Tenant a list of such property and
arrange for such items to be removed from the Leased
Premises and made available to Tenant at such place at such
time as Landlord may designate, provided however, that if
Landlord elects option (ii), then Tenant shall be required
to pay in cash in advance to Landlord the estimated costs
that Landlord may incur upon moving and storage charges
theretofore incurred by Landlord with respect to such
property.
(4) THE PROVISIONS OF THIS ARTICLE 15 OVERRIDE AND SUPERSEDE
ARTICLE 93.002 OF THE TEXAS PROPERTY CODE TO THE EXTENT OF ANY CONFLICT.
(5) Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future Applicable Laws in
the event of Tenant being evicted or dispossessed for any cause, or in
the event of Landlord obtaining possession of the Leased Premises by
reason of the violation by Tenant of any of the covenants and conditions
of this Lease or otherwise.
(6) No right or remedy herein conferred upon or reserved to
Landlord is intended to be exclusive of any other right or remedy, and
each and every right and remedy shall be cumulative and in addition to
any other right or remedy given hereunder or now or hereafter existing at
law or in equity or by statute. In addition to the other remedies
provided in this Lease, Landlord shall be entitled, to the extent
permitted by Applicable Laws, to injunctive relief in case of the
violation, or attempted or threatened violation, of any of the covenants,
agreements, conditions or provisions of this Lease, or to a decree
compelling performance of any of the covenants, agreements, conditions or
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provisions of this Lease, or to any other remedy now or hereafter allowed
to Landlord at law or in equity. Tenant shall indemnify and hold
Landlord harmless from any and all actual costs, expenses (including
reasonable attorneys' fees), claims and causes of action arising from or
in connection with any default by Tenant under this Lease.
(7) In the event that Tenant or any guarantor of Tenant's
obligations hereunder is the subject of any insolvency, bankruptcy,
receivership, dissolution, reorganization or similar proceeding, federal
or state, voluntary or involuntary, under any present or future law or
act, Landlord is entitled to the automatic and absolute lifting of any
automatic stay as to the enforcement of its remedies under this Lease,
including specifically the stay imposed by Section 362 of the United
States Federal Bankruptcy Code, as amended. Tenant hereby consents to
the immediate lifting of any such automatic stay, and will not contest
any motion by Landlord to lift such stay. Tenant expressly acknowledges
that the Leased Premises is not now and will never be necessary to any
plan or reorganization of any type.
(8) To the extent required under Applicable Laws, Landlord
agrees to use reasonable efforts to mitigate any of its damages arising
from the occurrence of an event of default by Tenant involving Tenant's
abandonment of the Leased Premises. Tenant agrees that this requirement
to use reasonable efforts will have been satisfied by Landlord: (i)
notifying its leasing agent of the availability of the Leased Premises
for rent, and (ii) showing the Leased Premises to prospective tenants who
request to see the Leased Premises and to prospective tenants referred to
Landlord by Tenant. In no event shall Landlord be deemed to have failed
to mitigate its damages if Landlord chooses to lease to a prospective
tenant some or all of other space in other property owned or controlled
by Landlord, rather than some or all of the Leased Premises or if
Landlord rejects a proposed new tenant because of the credit, reputation
or proposed use of said proposed Tenant is not satisfactory to Landlord
in its sole discretion.
ARTICLE 16
EMINENT DOMAIN
(a) If any portion of the Leased Premises is taken for any public or
quasi-public use under governmental law, ordinance or regulation, or by right of
eminent domain, or by private purchase in lieu thereof and the taking prevents
or materially interferes with the use of the Leased Premises for the purpose for
which it was leased to Tenant or causes the Leased Premises to not comply with
Applicable Laws, then within ten (10) days after such taking Landlord shall
notify Tenant as to whether or not Landlord will reconstitute the Leased
Premises such that it once again complies with Applicable Laws or replicate the
Leased Premises to substantially the condition it was in prior to such taking,
as applicable, within one hundred fifty (150) days after such taking. If
Landlord notifies Tenant that it will not replicate or reconstitute the Leased
Premises, as applicable, or otherwise fails to complete the reconstitution or
replication within one hundred fifty (150) days after such taking, then this
Lease shall terminate and the Rent shall be abated during the unexpired portion
of this Lease, effective as of the date of such taking. In the event any taking
does not materially interfere with the use of the Leased Premises for the
purposes for which it was used by Tenant, this Lease shall not terminate, but
the Base Rent payable hereunder during the unexpired portion of this Lease shall
be reduced based upon the
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percentage reduction of the square feet in the Building caused by the taking
or as is otherwise fair and reasonable under all of the circumstances. Rent
will not otherwise be reduced or abated.
(b) The provisions of this Article 16 shall only apply to the
Improvements, and in no event shall Landlord be obligated to reconstruct any
improvements constructed by Tenant.
(c) Landlord shall be entitled to receive the entire price or award
from any such sale, taking or condemnation, whether applicable to the Land,
Building, or other real estate interests. Tenant hereby assigns all its
interest in such award to Landlord and Tenant waives any right Tenant has or may
have under present or future law to receive any award of damages for its
interest in the Leased Premises or this Lease; provided, however, that Tenant
shall have the right to separately claim and receive any award which may be
allowed to Tenant for Tenant's trade fixtures, loss of business and moving
expenses, provided the same do not reduce Landlord's award.
ARTICLE 17
ACCESS TO PREMISES
Tenant shall permit Landlord and its agents to enter into and upon the
Leased Premises at all reasonable times during normal business hours and with at
least 48-hours written notice, except in an emergency situation, in accordance
with the provisions hereof, for the purpose of making repairs, alterations, or
additions to any other portion of the Leased Premises, including the erection
and maintenance of such scaffolding, canopy, fences and props as may be required
or for the purpose of posting notices of nonliability for alterations, additions
or repairs. Landlord shall conduct its activities in the Leased Premises in a
manner that will cause the least possible interference with Tenant's business
operations. Tenant shall permit Landlord, at any time within one hundred eighty
(180) days prior to the expiration of this Lease, to place upon the Leased
Premises usual or ordinary "For Lease" signs, and during such one hundred eighty
(180) day period Landlord or its agents may, during normal business hours, with
24-hours advance written notice, enter upon the Leased Premises and exhibit same
to prospective Tenants.
ARTICLE 18
SUBORDINATION OF LEASE
Conditioned upon the beneficiary of any mortgages and/or deeds of trust
now existing or hereafter placed upon the Leased Premises entering into a
Subordination, Non-disturbance and Attornment Agreement (herein an "SNDA") with
Tenant in which such beneficiary agrees not to disturb the possession and other
rights of Tenant under this Lease so long as Tenant is not in default in the
performance of its obligations hereunder, and, in the event of the acquisition
of title by such beneficiary through foreclosure proceedings or a deed in lieu
of foreclosure, to accept Tenant as tenant of the Leased Premises under the
terms and conditions of this Lease, Tenant accepts this Lease subject and
subordinate to any mortgages and/or deeds of trust now or hereafter constituting
a lien or charge upon the Leased Premises, provided, however, that if the
mortgagee, trustee, or holder of any such mortgage or deed of trust elects to
have Tenant's interest in this Lease superior to any such instrument, then by
notice to Tenant from such
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mortgagee, trustee or holder, this Lease shall be deemed superior to such
lien, whether this Lease was executed before or after said mortgage or deed
of trust. Subject to the foregoing, Tenant, at any time hereafter on demand,
shall execute any instruments, releases or other documents that may be
required by any mortgagee for the purpose of subjecting and subordinating
this Lease to the lien of any such mortgage or deed of trust. Upon Landlord's
request, Tenant shall execute any SNDA submitted to Tenant if the form
thereof is a type of form that is customarily given by institutional lenders
and otherwise complies with this Article 18.
ARTICLE 19
ESTOPPEL CERTIFICATE
Tenant agrees, at any time and from time to time within ten (10) business
days after requested by Landlord, to execute and deliver to Landlord a written
estoppel certificate in the form of that attached hereto as EXHIBIT "E" or in
such other reasonable form as may be required by Landlord.
ARTICLE 20
WAIVER
No covenant or condition of this Lease to be performed by Tenant and/or
Landlord can be waived except by the written consent of Landlord and/or Tenant,
and forbearance or indulgence by Landlord or Tenant in any regard whatsoever
shall not constitute a waiver of the covenant or condition to be performed by
Tenant and/or Landlord to which the same may apply; and until complete
performance by Tenant or Landlord of said covenant or condition, Landlord and/or
Tenant shall be entitled to invoke any remedy available to it under this Lease,
despite said forbearance or indulgence. The subsequent acceptance of Rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular Rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
Rent.
ARTICLE 21
TIME OF ESSENCE
Time shall be of the essence with respect to the time frames provided for
herein for the performance of obligations and providing any notices required or
permitted hereby.
ARTICLE 22
QUIET ENJOYMENT
Landlord agrees that so long as Tenant is not in default hereunder Tenant
shall have the quiet enjoyment of the Leased Premises without hindrance on the
part of Landlord, and Landlord will defend Tenant in the peaceful and quiet
enjoyment of the Leased Premises (other than those claiming by, through, or
under Tenant).
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ARTICLE 23
ATTORNEY FEES AND INTEREST
In the event either party hereto shall institute suit against the other
with reference to the terms and conditions of this Lease, the prevailing party
shall be entitled to reasonable attorney's fees and court costs.
ARTICLE 24
SIGNS
Any signage or monuments Tenant desires for the Leased Premises shall be
subject to Landlord's written approval and shall be submitted to Landlord prior
to the Commencement Date of this Lease. Tenant shall repair, paint and/or
replace the building facia surface to which its signs are attached upon vacation
of the Leased Premises, or the removal or alteration of its signage. Tenant
shall not (i) make any changes to the exterior of the Building, (ii) install any
exterior lights, decorations, balloons, flags, pennants, banners or painting, or
(iii) erect or install any signs, windows or door lettering, placards,
decorations or advertising media of any type which can be viewed from the
exterior of the Building, without Landlord's prior written consent. All
monuments, signs, decorations, advertising media, blinds, draperies and other
window treatment or bars or other security installations visible from outside
the Building shall conform in all respects to the criteria established by
Landlord and Applicable Laws. Provided that Landlord shall have first approved
of same as provided above, Landlord shall reimburse to Tenant the cost of
approved Building and monument signage up to a maximum one-time cost of $15,000.
ARTICLE 25
SERVICE OF NOTICE
Any notice or demand which either party hereby may desire to serve upon
the other in furtherance of any provisions of this Lease shall be in writing and
shall be sufficiently served if the same shall be sent by Federal Express or
other overnight courier service, or shall be sent United States Mail, postage
prepaid, certified or registered, or shall be sent by facsimile transmission
(provided that the sending telecopier generates an electronic confirmation of
receipt), addressed, in the instance of Landlord, as follows:
Valley View Business Center, Ltd.
c/o Proterra Properties, Inc.
Attn: Ms. Beverly Eversole
8214 Westchester Drive, Suite 730
Dallas, Texas 75225
Telephone: (214) 365-9944
Telecopy: (214) 365-9920
or to such other address as Landlord shall designate by written notice to
Tenant, and in the instance of Tenant, addressed as follows:
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United Stationers Supply Co.
2200 East Golf Road
Des Plaines, Illinois 60016-1267
Attention: Law Department
Telephone:(847) 699-5000, x 2113
Telecopy: (847) 699-0891
or such other address as Tenant shall designate by written notice to Landlord.
Such notices shall be deemed to have been served at the time of the actual
receipt or refusal of delivery thereof.
ARTICLE 26
CAPTIONS
The various headings and numbers herein and the grouping of the
provisions of this Lease into separate articles and paragraphs are for the
purpose of convenience only and shall not be considered a part hereof.
ARTICLE 27
TIME
Time is of the essence of this Lease and each and all of its provisions.
ARTICLE 28
SUCCESSORS AND ASSIGNS
This Lease shall inure to the benefit of and be binding upon the heirs,
executors, administrators, successors and assigns of Landlord and Tenant;
provided, however, that nothing herein shall impair any of the provisions herein
above set forth inhibiting assignment or subletting without the written consent
of Landlord.
ARTICLE 29
PARTIAL INVALIDITY
If any term, covenant, condition or provision of this Lease or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease shall not be affected
thereby and each term, covenant, condition and provision of this Lease shall be
valid and be enforced to the fullest extent permitted by law.
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ARTICLE 30
FORCE MAJEURE
As used in this Lease, "Force Majeure" shall mean a delay caused by
reason of fire, acts of God, unreasonable delays in transportation, embargo,
weather (I.E., rain and rain related conditions, humidity, temperature, wind,
etc.), strike, other labor disputes, governmental preemption of priorities or
other controls in connection with a national or other public emergency,
governmental delays in permitting, delays caused by any governmental disapproval
of, or required revisions to, the Construction Documents, Improvements or
shortages of fuel, supplies or labor or any similar cause not within Landlord's
or Tenant's reasonable control. Neither Landlord nor Tenant shall be held
responsible for delays in the performance of its obligations hereunder caused by
Force Majeure, and such delays shall be excluded from the computation of the
time allowed for the performance of such obligations. It is expressly agreed
that the number of delay days may include not only the day or days upon which
the event of Force Majeure occurred but the number of days thereafter that work
could not resume due to the occurrence of such event of Force Majeure. By way
of example only, rain on a Sunday, which is not scheduled as a normal work day,
may prevent work for several days thereafter due to mud conditions. No event of
Force Majeure shall excuse either party from its monetary obligations hereunder
nor serve to delay any such payment. Without limitation, Tenant's obligation to
timely pay Rent is not affected by events of Force Majeure.
ARTICLE 31
AMENDMENTS
This Lease shall not be altered, amended, or modified in any way or
terminated except by an instrument in writing, executed by both parties.
ARTICLE 32
PERSONAL PROPERTY TAXES
During the Term, Tenant shall pay prior to delinquency all taxes assessed
against and levied upon fixtures, furnishings, equipment and all other personal
property of Tenant contained in the Leased Premises; and, when possible, Tenant
shall cause said fixtures, furnishings, equipment and other personal property to
be assessed and billed separately from the Leased Premises. If any such taxes
are levied or assessed against Landlord or Landlord's property and Landlord
pays the same, Tenant shall pay to Landlord such taxes upon demand.
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ARTICLE 33
LEGAL CONSTRUCTION
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA AS APPLICABLE TO
TRANSACTIONS WITHIN THE STATE OF TEXAS. TENANT HEREBY SUBMITS TO THE
JURISDICTION OF ANY COURT OF COMPETENT JURISDICTION SITTING IN DALLAS COUNTY,
TEXAS. TO THE MAXIMUM EXTENT PERMITTED BY LAW, TENANT AND LANDLORD HEREBY
EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY ACTION, CAUSE OF ACTION,
CLAIM, DEMAND, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO THIS LEASE, OR IN
ANY WAY CONNECTED WITH, RELATED TO, OR INCIDENT TO THE DEALINGS OF LANDLORD AND
TENANT WITH RESPECT TO THIS LEASE, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE. TO THE
MAXIMUM EXTENT PERMITTED BY LAW, TENANT AND LANDLORD HEREBY AGREE THAT ANY SUCH
ACTION, CAUSE OF ACTION, CLAIM, DEMAND OR PROCEEDING SHALL BE DECIDED BY A COURT
TRIAL WITHOUT A JURY AND THAT TENANT OR LANDLORD MAY FILE A COPY OF THIS LEASE
WITH ANY COURT OR OTHER TRIBUNAL AS WRITTEN EVIDENCE OF THE CONSENT OF TENANT
AND LANDLORD TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
ARTICLE 34
NET LEASE
This Lease is a net lease, and except as otherwise expressly provided
herein, Tenant shall pay all costs and other expenses of every character,
foreseen or unforeseen, for the payment of which Tenant is or shall become
liable by reason of its estate or interest in the Leased Premises, or which are
connected with or arise out of the possession, use, occupancy, maintenance or
repair of the Leased Premises or any portion thereof by Tenant. Tenant's
obligation to pay Rent is an obligation and covenant independent of any
obligation or covenant of Landlord hereunder. Rent and any and all other amounts
payable by Tenant hereunder shall be paid by Tenant without notice or demand,
and without any set off, deduction, abatement, suspension, deferment, diminution
or reduction of any kind for any reason.
ARTICLE 35
LIMITATION OF LANDLORD'S PERSONAL LIABILITY
Notwithstanding any other provision in this Lease to the contrary, Tenant
specifically agrees to look solely to Landlord's interest in the Leased Premises
and in this Lease for the recovery of any judgment from Landlord, it being
agreed that Landlord shall never be personally liable for any such judgment.
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ARTICLE 36
LANDLORD'S REPRESENTATIONS AND WARRANTIES
Landlord represents and warrants to Tenant, as of the date hereof and as
of the Commencement Date, that, to its knowledge:
(a) Landlord does not have any knowledge of, or reason to believe that
there are grounds for, the filing of a lien against the Leased Premises, other
than the lien for the construction loan.
(b) Landlord does not have knowledge of any pending condemnation or
similar proceeding affecting the Leased Premises or any portion thereof.
(c) Landlord does not have any knowledge of any legal actions, suits,
or other legal or administrative proceedings, pending or threatened against the
Leased Premises or Landlord nor that any such action, suit, proceeding or claim
has been threatened or asserted against Landlord or the Leased Premises.
(d) Landlord has granted no leases or license, nor created any
tenancies, affecting the Leased Premises.
(e) Landlord does not have any knowledge of any uncured violations of
federal, state or municipal laws, ordinances, orders, regulations, or
requirements affecting any portion of the Leased Premises.
(f) The Leased Premises have adequate legal access to abutting public
highways, streets and roads.
(g) Landlord does not have any knowledge of any pending or threatened
governmental or private proceedings which would impair or result in the
termination of access from the Leased Premises to abutting public highways,
streets and roads.
Landlord's above representations shall survive for a period of one (1)
year from the Commencement Date.
ARTICLE 37
YEAR 2000 COMPLIANCE
(a) Landlord represents, warrants and covenants to Tenant that Tenant
will not incur any lost time costs or other similar damages on account of
Landlord's not being able to complete the construction of the Improvements in
accordance with the approved plans and specifications on or before the required
completion date as a result of a failure by Landlord to be "Year 2000
Compliant". This representation shall expire and thereafter be of no further
force and effect as of the Commencement Date.
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(b) Tenant represents, warrants and covenants to Landlord that
Landlord will not suffer any damages or liabilities and that Tenant's ability
to pay Rent to Landlord as required under this Lease will not be prevented or
delayed as a result of a failure by Tenant to be "Year 2000 Compliant".
(c) As used in this Article 37, the term "Year 2000 Compliant"
means that Landlord's, with respect to Article 37(a), and Tenant's, with
respect to Article 37(b), computer software and hardware and other data
sensitive technology systems are designed to be used prior to, during and
after the Gregorian calendar year 2000 A.D. and will operate during each such
time period without error relating to date data, specifically including any
error relating to, or the product of, date data which represents or
references different centuries or more than one century.
ARTICLE 38
REPRESENTATIONS OF TENANT
Tenant represents, warrants and covenants that it is now in a solvent
condition; that no bankruptcy or insolvency proceedings are pending or
contemplated by or against Tenant or any guarantor of Tenant's obligations
under this Lease; that all reports, statements and other data furnished by
Tenant to Landlord in connection with this Lease are true and correct in all
material respects; that the execution and delivery of this Lease by Tenant
does not contravene, result in a breach of, or constitute a default under any
contract or agreement to which Tenant is a party or by which Tenant may be
bound and does not violate or contravene any law, order, decree, rule or
regulation to which Tenant is subject; and that there are no judicial or
administrative actions, suits, or proceedings pending or threatened against
or affecting Tenant or any guarantor of Tenant's obligations under this
lease. If Tenant is a corporation, limited liability company or partnership,
each of the persons executing this lease on behalf of Tenant represents and
warrants that Tenant is duly organized and existing, is qualified to do
business in the state in which the Leased Premises are located, has full
right and authority to enter into this Lease, that the persons signing on
behalf of Tenant are authorized to do so by appropriate corporate, company or
partnership action and that the terms, conditions and covenants in this Lease
are enforceable against Tenant. If Tenant is a corporation, limited
liability company or partnership, Tenant, upon Landlord's request, will
deliver evidence satisfactory to Landlord that the execution and delivery of
this Lease has been duly authorized and properly executed.
ARTICLE 39
LANDLORD'S CONDITIONS
(a) Landlord has informed Tenant that Landlord currently is under
contract or is negotiating to purchase the Land. If the date of this Lease
occurs prior to the date Landlord obtains title to the Land, then Landlord's
obligations under this Lease are conditioned upon it acquiring title to the Land
on or prior to August 30, 1999. If Landlord has not acquired the Land by such
date and the parties do not agree otherwise in writing, then this Lease shall
automatically terminate.
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(b) Landlord's obligations hereunder are further conditioned upon
Landlord obtaining final permits and approvals from applicable authorities for
the Construction Documents and for the construction of all of the Improvements
pursuant thereto.
ARTICLE 40
MECHANICS' LIENS
Tenant will not permit any mechanic's or materialman's lien(s) or
other lien to be placed upon the Leased Premises or the Building and nothing
in the Lease shall be deemed or construed in any way as constituting the
consent or request of Landlord, express or implied, by inference or
otherwise, to any person for the performance of any labor or the furnishing
of any materials to the Leased Premises, or any part that would give the rise
to any mechanic's or materialman's or other lien against the Leased Premises.
In any event any such lien is attached to the Leased Premises, then, in
addition to any other right or remedy of Landlord, Landlord may, but shall
not be obligated to, obtain the release or otherwise discharge the same. Any
amount paid by Landlord for any of the aforesaid purposes shall be paid by
Tenant to Landlord on demand as additional Rent.
ARTICLE 41
BROKERS
(a) Tenant represents and warrants that, except for Grubb & Ellis
Company ("Broker"), Tenant has not dealt with any broker, agent or other person
in connection with this transaction and that, except for Broker, no broker,
agent or other person brought about this transaction through the acts of or
employment by Tenant, and, except with respect to any commission or fee owed to
Broker, Tenant agrees to indemnify and hold Landlord harmless from and against
any claims by any broker, agent or other person claiming a commission or other
form of compensation by virtue of having dealt with Tenant with regard to this
leasing transaction.
(b) Landlord represents and warrants that, except for Broker,
Landlord has not dealt with any broker, agent or other person in connection
with this transaction and that, except for Broker, no broker, agent or other
person brought about this transaction through the acts of or employment by
Landlord. Landlord has agreed to pay Broker a commission pursuant to a
separate written agreement between Landlord and Broker, and Landlord agrees
to indemnify and hold Tenant harmless from and against any claims by
Broker or any broker, agent or other person claiming a commission or other
form of compensation by virtue of having dealt with Landlord with regard to
this leasing transaction.
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ARTICLE 42
RECORDING
Tenant may not record this Lease or any memorandum thereof.
ARTICLE 43
DISCLAIMER
EXCEPT FOR LANDLORD'S OBLIGATION TO COMPLETE THE IMPROVEMENTS AND THE
PUNCH LIST ITEMS, TENANT ACKNOWLEDGES AND AGREES THAT LANDLORD HAS NOT MADE ANY
REPRESENTATIONS, AGREEMENTS OR PROMISES WITH RESPECT TO THE CONDITION OF THE
LEASED PREMISES, INCLUDING THE ENVIRONMENTAL CONDITION OF THE LAND, OR THEIR
SUITABILITY OF THE LEASED PREMISES FOR ANY PURPOSE OF TENANT AND THAT, EXCEPT
FOR LANDLORD'S OBLIGATION TO COMPLETE THE IMPROVEMENTS AND THE PUNCH LIST ITEMS,
LANDLORD HAS MADE NO PROMISES TO ALTER, REMODEL OR IMPROVE OR REPAIR THE LAND,
THE IMPROVEMENTS OR ANY PORTION THEREOF, EXCEPT FOR LANDLORD'S EXPRESS
WARRANTIES CONTAINED IN THIS LEASE, AND TENANT ACCEPTS THE LEASED PREMISES IN
ITS "AS IS", "WHERE IS" CONDITION AND "WITH ALL FAULTS". EXCEPT FOR LANDLORD'S
EXPRESS WARRANTIES CONTAINED IN THIS LEASE, LANDLORD HEREBY DISCLAIMS ANY AND
ALL REPRESENTATIONS, INCLUDING IMPLIED REPRESENTATIONS, AND SPECIFICALLY
INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATION REGARDING THE LEASED PREMISES'
HABITABILITY, REPAIR, WORKMANSHIP OR SUITABILITY FOR ANY INTENDED PURPOSE.
TENANT SHALL MAKE, AND HEREBY REPRESENTS AND WARRANTS TO LANDLORD THAT IT HAS
MADE, ITS OWN DETERMINATIONS AS TO THE SUITABILITY OF THE LEASED PREMISES FOR
ITS INTENDED USE. BY ENTERING INTO THIS LEASE, TENANT REPRESENTS AND WARRANTS
THAT IT HAS INVESTIGATED AND SATISFIED ITSELF AS TO WHETHER OR NOT APPLICABLE
LAWS PERMIT ITS INTENDED USE OF THE LEASED PREMISES AND THAT TENANT IS RELYING
SOLELY UPON SUCH INVESTIGATIONS, AND NOT UPON ANY REPRESENTATIONS OF LANDLORD,
IN ENTERING INTO THIS LEASE.
ARTICLE 44
EXPANSION OPTION
Landlord hereby grants to Tenant the right and option to expand the
Building and to extend the Term, upon and subject to the following terms and
conditions:
(a) EXPANSION OPTION. At any time within the three (3) year period
following the Commencement Date, Tenant shall have the right and option (the
"Expansion Option") to cause Landlord to expand the Building onto the land
adjacent to the Land and described on Exhibit "F"
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attached hereto and made a part hereof (the "Expansion Land") by written
notice to Landlord (the "Option Notice") that Tenant elects to have Landlord
expand the Building in accordance with the provisions of this Article 44.
The Option Notice shall also contain the number of square feet by which
Tenant desires to expand the Building (the "Expansion Improvements"),
provided that the Expansion Improvements shall not be less than 100,000
square feet nor more than 140,500 square feet with not more than ten percent
(10%) being allocated for office space. The Expansion Improvements shall be
consistent with and, where practical, substantially similar in design,
construction, appearance, materials and quality to the Building. If Tenant
fails to give the Option Notice on or before the third (3rd) anniversary of
the Commencement Date, the Expansion Option shall be null and void and of no
further force and effect.
(b) PLANS AND SPECIFICATIONS; BUDGET. If Tenant properly exercises
the Expansion Option, then, as soon as reasonably possible after receipt of the
Option Notice, Landlord shall cause an architect licensed in the State of Texas
to prepare preliminary plans and specifications for the construction of the
Expansion Improvements. Landlord shall deliver such preliminary plans and a
preliminary budget ("Preliminary Plans and Budget") to Tenant for its approval.
Upon approval of the Preliminary Plans and Budget by Tenant, Landlord shall
cause the architect to prepare complete and final construction drawings and
specifications including, without limitation, site plans, civil engineering
plans, floor plans, elevation plans, plumbing, electrical and mechanical plans
and detailed specifications as may be necessary in Landlord's judgement
(collectively, the "Expansion Plans"). Landlord shall deliver the Expansion
Plans, and any updated project budget, to Tenant for its review and approval.
Following Tenant's approval of the Expansion Plans, Landlord shall deliver its
final estimate of the Expansion Cost (as hereafter defined) for the construction
of the Expansion Improvements (the "Final Budget") to Tenant for approval or
disapproval.
Tenant shall have ten (10) business days to deliver written approval or
disapproval of each of the Preliminary Plans and Budget, the Expansion Plans and
the Final Budget following receipt of each such item. If disapproved, Tenant
shall state with specificity the reasons for disapproval. If Tenant fails to
notify Landlord of its disapproval of any of the foregoing items within such ten
(10) days after receipt of the same, Tenant shall be deemed to have disapproved
such item. In the event that Tenant disapproves in writing the Preliminary
Plans and Budget, the Expansion Plans or the Final Budget and Landlord and
Tenant are unable to agree on revisions within thirty (30) calendar days after
Tenant's initial express written disapproval, or, in any event, if the
Preliminary Plans and Budget, the Expansion Plans and the Final Budget are not
finally approved by Tenant in writing by the date that is ninety (90) days after
the date that Tenant exercises the Expansion Option, then either Landlord or
Tenant shall have the option to terminate Tenant's Expansion Option upon written
notice to the other whereupon this Article 44 shall be null and void, except
that Tenant shall be obligated to reimburse Landlord for Landlord's reasonable
out-of-pocket expenses incurred in connection with the preparation of the
Preliminary Plans and Budget, the Expansion Plans and the Final Budget. Upon
approval, or deemed approval, by Tenant of the Expansion Plans and the Final
Budget, Tenant's Expansion Option shall be irrevocable.
(c) COSTS INCLUDED IN FINAL BUDGET. The Final Budget shall represent
Landlord's good faith estimate of the Expansion Cost. The "Expansion Cost" is
the total of all hard costs and soft costs incurred by Landlord to design and
construct the Expansion Improvements, including, but not limited to: (1)
architectural fees and expenses; (2) construction costs including labor,
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material costs, builder's overhead, profit and contingency; (3) a development
fee to Landlord of eight percent (8%) of all the other Expansion Costs; (4)
temporary utility costs; (5) legal fees and costs; (6) engineering and
testing fees and costs; (7) permit and approval fees and costs; (8) builder's
risk and liability insurance; (9) leasing brokerage commissions; (10) loan
costs, fees, and interest to the Expansion Completion Date, or in the absence
of such loan, imputed interest to Landlord at one percent over the prime rate
then quoted by The Wall Street Journal, on all Expansion Costs incurred from
the Date of the Option Notice to the Expansion Completion Date, and (11) a
contingency not to exceed ten percent (10%) of other Expansion Costs.
(c) CONSTRUCTION OF THE EXPANSION IMPROVEMENTS. Following Tenant's
approval, or deemed approval, of the Expansion Plans and the Final Budget, but
subject to receipt of any necessary governmental permits and approvals, Landlord
shall commence construction of the Expansion Improvements using a reputable,
experienced general contractor or design-builder. Landlord shall prosecute
completion of the Expansion Improvements in a diligent manner, subject to Tenant
Delays or Force Majeure. The Expansion Improvements shall be constructed in a
good and workmanlike manner and in accordance with all Applicable Laws. During
the construction of the Expansion Improvements, Landlord and Landlord's
architects, contractors, engineers, agents, and employees shall have access to
the Leased Premises as reasonably required to complete the construction of the
Expansion Improvements. Landlord shall use reasonable efforts to minimize
disruption to Tenant operations, but Tenant acknowledges and agrees that such
construction activities may result in disruption of Tenant's operations, or may
result in temporary interruption of access or utilities and Landlord shall have
no liability therefor.
(d) SUBSTANTIAL COMPLETION. Landlord shall deliver possession of the
Expansion Improvements to Tenant upon substantial completion thereof (the
"Expansion Completion Date"), substantial completion being determined pursuant
to the provisions of Section 1(d) of this Lease. On the Expansion Completion
Date, the Expansion Improvements shall become part of the Leased Premises, as
that term is defined herein, and shall automatically be governed by all the
terms and provisions of this Lease. Any delay caused to Landlord in the
substantial completion of the Expansion Improvements caused by a Tenant Delay
shall accelerate the Expansion Completion Date on a day-for-day basis.
(e) RENT FOR THE EXPANSION IMPROVEMENTS. Tenant's lease of the
Expansion Improvements shall be upon the same terms and conditions as Tenant's
Lease of the Leased Premises; provided, however, that Base Rent shall be
adjusted as provided herein. Effective from and after the Expansion Completion
Date, Base Rent shall increase by the amount of the Expansion Rent, "Expansion
Rent" is the product of: (a) the greater of (i) the ten (10) year U.S. Treasury
Rate in effect on the Expansion Completion Date plus 500 basis points and (ii)
10.50%; multiplied by (b) the sum of (i) $2.25 per square foot of the Expansion
Land; and (ii) the amount of the Final Budget; and (c) any other reasonably
unforeseeable Expansion Costs incurred by Landlord that were not included in the
Final Budget and that exceed the contingency contained therein.
(f) CONDITIONS PRECEDENT. The parties acknowledge that Landlord's
obligation to build the Expansion Improvements shall be contingent upon the
following:
(i) Landlord's receipt of any and all required approvals,
including, but not limited to, zoning, special use permits, and
architectural review from all local and state
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governments and agencies having jurisdiction over development of the
Expansion Improvements and the Expansion Land.
(ii) No uncured Tenant default shall exist at the time Tenant
exercises the Expansion Option or at the time Landlord is prepared to
commence construction of the Expansion Improvements; and
(iii) Since the Commencement Date, (A) Tenant's net worth shall
not have materially deteriorated, and (B) there shall have been no
downgrading of the senior unsecured credit rating of Tenant or its
publicly traded parent. If not publicly available, Tenant shall, on
request of Landlord, deliver its audited financial statements for the
most recent fiscal year completed prior to the date of the Option Notice.
In the event any of the above contingencies fail, Landlord may, at its option,
terminate Tenant's Expansion Option by written notice to Tenant whereupon this
Article 44 shall be null and void, except that Tenant shall be obligated to
reimburse Landlord for all Expansion Costs incurred to Date.
(g) Notwithstanding any termination of Tenant's Expansion Option, all
other provisions of this Lease shall continue in full force and effect.
ARTICLE 45
TERMINATION
In the event either party terminates this Lease pursuant to an express
right to do so set forth herein, and in the event this Lease naturally expires
at the end of the Term, both Landlord and Tenant shall be relieved of all
further obligations under this Lease except for those which by their express
terms survive termination, which obligations shall continue in full force and
effect. Notwithstanding the preceding, this Article 45 shall not operate or be
construed to release Tenant from any liability to Landlord in the event this
Lease is terminated by Landlord due to a default by Tenant. Additionally,
termination of this Lease shall not relieve a party from any obligations or
liabilities that may have arisen or accrued prior to termination.
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EXECUTED By Landlord, this 30th day of July , 1999.
------- ----------
LANDLORD:
VALLEY VIEW BUSINESS CENTER, LTD.,
A TEXAS LIMITED PARTNERSHIP
By: Proterra Properties, Inc.,
a Texas corporation,
General Partner
By: /s/ Mark Cullins
----------------------
Name: Mark Cullins
--------------------
Its: President
---------------------
EXECUTED By Tenant, this 28th day of July , 1999.
-------- ---------
TENANT:
UNITED STATIONERS SUPPLY CO.,
an Illinois corporation
By: /s/ Daniel H. Bushell
----------------------------
Name: Daniel H. Bushell
--------------------------
Its: EVP & CFO
---------------------------
<TABLE>
<CAPTION>
Exhibits:
<C> <S>
A: Legal Description of the Land
B: Schedule of Construction Documents
C: Site Plan
D: Acceptance of Leased Premises Memorandum
E: Form of Estoppel Agreement
F: Expansion Land
G: Construction Schedule
H: Finish Work
</TABLE>
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EXHIBIT "A"
LEGAL DESCRIPTION
BEING a 808,223 square feet (18.55 acres) tract of land that is part of those
tracts of land described as Tract I and Tract II in deed to Airport Apartment
Joint Venture as recorded in Volume 88056, Page 5058, Deed Records, Dallas
County, Texas and part of tract of land described as Tract III is deed to
Town Lake Corporation as recorded in Volume 83005, Page 102, Deed Records,
Dallas County, Texas, situated in the James J. Goodman Survey, Abstract No.
1718, and the James J. Goodman Survey, Abstract No. 583, in the City of
Irving, Dallas County, Texas and the City of Fort Worth, Tarrant County,
Texas, and being more particularly described as follows:
BEGINNING at a 1/2-inch iron rod with NDM cap found in the north right-of-way
line of FAA Blvd. (80 foot right-of-way), said point being the southeast
corner of Area 3, Section 9, Centreport, Block 313B, Lots 1, 2 and 3, an
addition to the City of Fort Worth, as recorded in Volume 388/212, Page 04 of
the Plat Records of Tarrant County, Texas (P.R.T.C.T.), said point also being
in the approximate Dallas/Tarrant County Line, and the approximate
Irving/Fort Worth City Limits Line;
THENCE North 00 degrees 13 minutes 31 seconds East, departing the north line
of said FAA Blvd. and along the east line of the aforementioned Centreport
Addition, passing at 369.85 feet a "Y" cut on a concrete base to a fence
corner post, continuing a total distance of 371.00 feet to a 1/2-inch iron
rod with an NDM plastic cap found in a fence line, said iron rod being in the
south line of that certain tract of land conveyed to Airport Apartment Joint
Venture and described as Tract I according to the deed recorded in Volume
88056, Page 5058, D.R.D.C.T.;
THENCE South 88 degrees 57 minutes 16 second West, a distance of 30.89 feet
to a 4-inch fence corner post at the southwest corner of the aforementioned
Tract I, said fence corner post also being the southeast corner of a tract of
land conveyed to Centre Development Company, Inc., as recorded in Volume
10191, Page 0577, D.R.T.C.T.;
THENCE North 00 degrees 26 minutes 13 seconds West, a distance of 551.71 feet
to a 5/8-inch iron rod found for an angle point of the herein described
tract, said iron rod also being the northwest corner of said Tract I and the
southwest corner of the aforementioned Tract II;
THENCE North 00 degrees 19 minutes 23 seconds East, a distance of 219.11 feet
to a1/2-inch iron rod w/Halff Assoc. Inc. cap set for a corner;
THENCE North 89 degrees 58 minutes 17 seconds East, a distance of 718.97 feet
to a1/2-inch iron rod w/Halff Assoc. Inc. cap set for a corner;
THENCE South 00 degrees 01 minutes 43 seconds East, a distance of 1141.37
feet to a 1/2-inch iron rod w/Halff Assoc. Inc. cap set for corner, said
point being in the north right-of-way line of F.A.A. Blvd. and also being on
a curve to the left whose radius is 1040.00 feet, whose chord bears North 89
degrees 35 minutes 35 seconds West, a distance of 16.11 feet;
THENCE continuing along said curve to the left an arc distance of 16.11 feet
through a central angle of 00 degrees 53 minutes 16 seconds to a 1/2-inch
iron rod w/cap found for corner;
THENCE South 89 degrees 58 minutes 17 seconds West, a distance of 671.03 feet
to the POINT OF BEGINNING AND CONTAINING 808,223 square feet or 18.55 acres
of land more or less.
NOTE: COMPANY DOES NOT REPRESENT THAT THE ABOVE ACREAGE AND/OR SQUARE FOOTAGE
CALCULATIONS ARE CORRECT.
<PAGE>
Exhibit B
Construction Documents appear here.
<PAGE>
EXHIBIT "D"
ACCEPTANCE OF PREMISES MEMORANDUM
This memorandum is being executed pursuant to the Lease Agreement
(the "Lease") executed on the ____ day of __________, 1999, between Valley
View Business Center, Ltd. ("Landlord"), and United Stationers Supply Co.
("Tenant").
Landlord and Tenant hereby agree that:
1. Except for the Punch List Items (as shown on the attached Punch
List), Landlord has fully completed the Improvements and any other
construction work or improvements required under the terms of the
Lease and any exhibits attached thereto. Landlord will use reasonable
efforts to complete the Punch List Items within thirty (30) days after
the date hereof.
2. Tenant acknowledge that, subject to the Punch List Items, (i) it has
inspected and accepts the Leased Premises, (ii) the buildings and
improvements comprising the same are suitable for the purpose for
which the Leased Premises are leased, (iii) the Leased Premises are
in good and satisfactory condition, and (iv) no representations as to
the repair of the Leased Premises, nor promises to alter, remodel or
improve the Leased Premises which have been made by Landlord remain
unsatisfied.
3. The Commencement Date of the Lease is the ____ day of _________, 2000.
4. Subject to Renewal Options in the Lease, the expiration date of the
Initial Term of the Lease is the ____ day of __________, 2010.
5. All capitalized terms not defined herein shall have the meaning
assigned to them in the Lease.
Agreed and Executed this ____ day of __________, 2000.
Landlord: Tenant:
VALLEY VIEW BUSINESS CENTER, LTD., UNITED STATIONERS SUPPLY CO.
a Texas limited partnership
By:__________________________
By: Proterra Properties, Inc., a Texas Name:________________________
Corporation, General Partner Title:_______________________
By:________________________
Name:______________________
Title:_____________________
<PAGE>
EXHIBIT "E"
TENANT ESTOPPEL CERTIFICATE
As of Date:
Landlord:
Tenant:
Address:
Purchaser:
Premises:
It is understood the below referenced Lease is being assigned to
Purchaser by Seller (Seller being described as "Landlord" under the Lease).
Accordingly, Tenant as lessee of the above referenced Premises under the
Lease, hereby certifies and confirms to Purchaser, Seller, and their assigns,
the following:
A. Lease Date:
Lease Amendment Date(s):
Date of Commencement:
Date of Expiration:
Renewal Options:
Security Deposit: None
Building Square Feet:
Base Rent: Years__________ $____________________($______ft)
Years__________ $____________________($______ft)
Years__________ $____________________($______ft)
B. A true and correct copy of the Lease and all amendments currently
in effect ("LEASE") are attached hereto. The Lease constitutes the entire
understanding between Tenant and the Seller and is currently in full force
and effect. Tenant is the only party having any right to possession or use of
the Premises and no other party is in possession thereof. No sublease
agreement, pursuant to which any sublessee may now or hereafter have any
right to possession or use of the Premises or any part thereof, presently
exists.
C. Tenant is currently paying the full rental payable under the
Lease and no payment of rents or other charges due or to become due under the
Lease has been made more than one month in advance of its due date. If any
rent credit or free rent is applicable with respect to the Lease, such rent
credit or free rent expired or will expire on ______________, 1999 (if blank,
none). Tenant agrees it will not pay any rent under Lease more than one month
in advance of its due date.
<PAGE>
D. All allowances to which Tenant is entitled under Section ____ or
elsewhere under the Lease have been fully utilized or paid to the Tenant in
full prior to the date hereof.
E. Any late delivery payments due from Landlord under Section _____
of the Lease have been paid in full or waived by Tenant prior to the date
hereof.
F. As of this date, neither Tenant, nor to the best of the Tenant's
knowledge, Seller, is in default in the performance of its obligations under
the Lease. At this time, the Tenant has no claim or breach, counterclaim,
lien or offset under the Lease against the Seller and Seller has fulfilled
all of its duties of an inducement nature.
G. Tenant is solvent and free from bankruptcy and other
reorganization proceedings and assignments for the benefit of creditors.
H. Tenant has taken possession of the Premises and affirms that such
property, in its present condition, is satisfactory for the Lessee's use, has
been substantially completed in accordance with agreed plans and
specifications attached to the lease (subject to punchlist items attached
hereto) and otherwise complies fully with the terms of the Lease.
I. Tenant has no option to purchase the Premises pursuant to the
Lease or otherwise.
J. Tenant has waived its termination rights under Section _____ of
the Lease.
K. Any notices which any party hereto may desire or may be required
to give to any other party shall be in writing and the mailing
thereof by certified mail, or equivalent, to the addresses as set
forth above, or to such other places as any party hereto may be
notice in writing designate shall
constitute service of notice hereunder.
IN WITNESS WHEREOF, the undersigned has caused this Estoppel
Certificate to be executed by a duly authorized official as of the date first
above written.
TENANT
By:______________________________
Its:_____________________________
Please indicate the form of Tenant, (i.e., partnership, corporation, sole
proprietorship, and the State of organization) and attach copy of lease and
any amendments, side letters, etc.
<PAGE>
EXHIBIT "F"
EXPANSION LAND
State of Texas
Count of Dallas
BEING a 444.072 square feet (10.19 acre) tract of land that is part of those
tracts of land described as Tract I and Tract II in deed to Airport Apartment
Joint Venture as recorded in Volume 88056, Page 5058 Deed Records, Dallas
County, Texas, situated in The James J. Goodman Survey Abstract No. 1718, and
the James J. Goodman Survey, Abstract No. 583, in the City of Irving Dallas
County, Texas and the City of Fort Worth, Tarrant County, Texas, and being
more particularly described as follows:
COMMENCING at the intersection of the southwesterly right-of-way line of
County Line Road (40 ft. R.O.W.) and the northwesterly right-of-way line of
Valley View Lane (170 ft. R.O.W.) said point being a point of curvature for a
circular curve to the left whose radius is 1494.40 feet and whose chord bears
South 33 degrees 50 minutes 57 seconds West a distance of 47.24 feet;
THENCE along said curve through a central angle of 01 degrees 48 minutes 41
seconds an arc length of 47.25 feet to a point for a corner;
THENCE South 32 degrees 56 minutes 36 seconds West a distance of 88.09 feet
to a point for a corner, said point being the point of curvature for a
circular curve to the right whose radius is 140 feet, and whose chord bears
South 73 degrees 16 minutes 03 seconds West a distance of 181.19 feet;
THENCE along said curve through a central angle of 80 degrees 38 minutes 53
seconds an arc length of 197.06 feet, said point being a point of curvature
for a circular curve to the left whose radius is 1040.00 feet, and whose
chord bears North 77 degrees 45 minutes 53 seconds West a distance of 410.59
feet;
THENCE along said curve through a central angle of 22 degrees 46 minutes 10
seconds an arc length of 413,30 feet, to a point for a corner;
THENCE South 89 degrees 58 minutes 17 seconds West, a distance of 671.03 feet
to a point for a corner;
THENCE North 00 degrees 13 minutes 31 seconds East, a distance of 371.00 feet
to a point for a corner;
THENCE South 88 degrees 57 minutes 16 seconds West, a distance of 30.89 feet
to a point for a corner;
THENCE North 00 degrees 26 minutes 13 seconds West, a distance of 551.71 feet
to a point for a corner;
THENCE North 00 degrees 19 minutes 23 seconds East, a distance of 219.11 feet
to a POINT OF BEGINNING of said 10.19 acre tract;
THENCE North 00 degrees 19 minutes 23 seconds East, a distance of 862.12 feet
to a point for a corner;
THENCE South 86 degrees 48 minutes 27 seconds East, a distance of 55.43 feet
to a point for a corner;
THENCE South 50 degrees 28 minutes 25 seconds East, a distance of 212.21 feet
to a point for a corner;
THENCE South 23 degrees 41 minutes 48 seconds West, a distance of 40.00 feet
to a point for a corner;
<PAGE>
Exhibit "F"
Expansion Land
Page two
THENCE South 66 degrees 18 minutes 16 seconds East, a distance of 49.43 feet
to a point for a corner;
THENCE South 50 degrees 28 minutes 24 seconds East, a distance of 177.91 feet
to a point for a corner;
THENCE South 66 degrees 51 minutes 40 seconds East, a distance of 523.36 feet
to a point for a corner;
THENCE South 89 degrees 45 minutes 23 seconds West, a distance of 278.37 feet
to a point for a corner;
THENCE South 01 degrees 06 minutes 58 seconds East, a distance of 38.87 feet
to a point for a corner;
THENCE North 89 degrees 58 minutes 17 seconds East, a distance of 492.18 feet
to a point for a corner;
THENCE South 00 degrees 01 minutes 43 seconds East, a distance of 310.33 feet
to a point for a corner;
THENCE North 89 degrees 58 minutes 17 seconds East, a distance of 718.97 feet
to the POINT OF BEGINNING and containing 444,072 square feet or 10.19 acres
of land more or less.
<PAGE>
EXHIBIT 10.37
Certificate of Insurance
March 2, 2000
PRODUCER:
Mesirow Insurance Services
321 N. Clark Street, Suite 1200
Chicago, IL 60610
INSURED:
United Stationers Supply Co.
United Stationers Inc.
2200 East Golf Road
Des Plaines, IL 60016-1267
This certificate is issued as matter of information only and confers no rights
upon the certificate holder. This certificate does not amend, extend or alter
the coverage afforded by the policies below.
COVERAGES:
This is to certify that the policies of insurance listed below have been issued
to the insured named above for the policy period indicated, notwithstanding any
requirement, term or condition of any contract or other document with respect to
which this certificate may be issued or say pertain, the insurance afforded by
the policies described herein is subject to all the terms, exclusions and
conditions of such policies. Limits shown may have been reduced by paid claims.
<TABLE>
<CAPTION>
COMPANIES AFFORDING COVERAGE:
<S> <C> <C>
A. FEDERAL INSURANCE COMPANY
Type of Insurance: Directors & Officers Liability
Policy Number: 8146-03-32
Policy Effective Date: 4/01/99
Policy Expiration Date: 4/01/01
Limits: $25,000,000
$250,000 Deductible
B. GREAT AMERICAN INSURANCE COMPANY
Type of Insurance: Excess Directors & Officers Liability
Policy Number: DFX0009370
Policy Effective Date: 4/01/99
Policy Expiration Date: 4/01/01
Limits: $20,000,000
</TABLE>
CANCELLATION:
Should any of the above described policies be cancelled before the
expiration date thereof, the issuing company will endeavor to mail 30 days
written notice to the certificate holder named to the left, but failure to
mail such notice shall impose no obligation or liability of any kind upon
the company, its agents or representatives.
<PAGE>
EXHIBIT 10.38
RESIGNATION
March 4, 2000
WHEREAS, Daniel H. Bushell ("Executive"), United Stationers
Inc. (the "Company") and United Stationers Supply Co. ("Supply") are
parties to an Employment Agreement, dated as of June 1, 1997, pursuant to
which the Company and Supply have employed the Executive as Executive Vice
President and Chief Financial Officer (the "Employment Agreement"); and
WHEREAS, Executive desires to tender his resignation from his
employment with the Company and Supply.
1. RESIGNATION. Executive hereby resigns from his employment with
the Company and Supply effective as of the day and year first above written.
Executive further hereby resigns as of the day and year first above written
from any other appointments or positions which he may hold with or at the
request of the Company or any of its subsidiaries, including, without
limitation, his position as an officer or director of the Company and any of
its subsidiaries. Executive will execute all further documents that either
the Company or Supply may reasonably request of him to effectuate such
resignations.
2. PROPOSED SEPARATION AGREEMENT. The Company and Supply hereby
accept Executive's resignation. Attached hereto as EXHIBIT A is a proposed
Separation Agreement to be entered into among the Company, Supply and the
Executive. Each of the Company and Supply is willing to execute and deliver
the Separation Agreement in the form attached on the date hereof. Each of the
parties hereto agrees that he or it will negotiate toward execution and
delivery of a mutually acceptable Separation Agreement during the period
ending April 7, 2000 (the "Negotiation Period"). The Company and Supply agree
that during the Negotiation Period, Executive will continue to be paid his
Base Salary at the rate of $348,500.00 per year in accordance with Supply's
normal pay practices for its senior executive officers. In addition, during
the Negotiation Period, Executive, his spouse and eligible dependents will be
entitled to health care coverage under Supply's group health plan as it is
currently in effect and Executive will be entitled to group term life
insurance (currently in the coverage amount of $871,250.00), in each case
under the same terms as though Executive were still an employee. In the event
that the Company, Supply and Executive are unable to reach a mutually
acceptable Separation Agreement by April 7, 2000, the Company and Supply will
in the alternative enter into an agreement with the Executive pursuant to
which the Company and Supply will agree to pay or provide, or cause to be
paid or provided, as applicable, to Executive compensation
<PAGE>
in accordance with Section 11(d) of the Employment Agreement as if the
Executive's employment had been terminated in accordance with such section.
b. In the event that the Executive disparages or makes negative,
misleading or untruthful comments orally or in writing regarding the Company,
Supply, or any of their respective officers, directors, stockholders,
employees, operations, plans, strategies, or future performance prior to the
execution and delivery by all parties hereto of a mutually acceptable
Separation Agreement, each of the Company and Supply will be deemed to have
immediately withdrawn its offer and Executive will be entitled only to the
benefits provided in his Employment Agreement.
3. PRESS RELEASE. Upon execution of this Agreement, the Company
shall issue a press release in the form attached hereto as EXHIBIT B. None of
the parties hereto will make any public statements that are inconsistent
with, or are otherwise contrary to, the statements in such joint press
release.
IN WITNESS WHEREOF, the Company and Supply have caused this
Resignation to be executed in their respective corporate names by an officer
thereof thereunto duly authorized, and Executive has executed this
Resignation, as of the day and year first above written.
UNITED STATIONERS INC.
By: /s/ Randall W. Larrimore
--------------------------
Name: ________________________
Title: _______________________
UNITED STATIONERS SUPPLY CO.
By: /s/ Randall W. Larrimore
--------------------------
Name: _________________________
Title: ________________________
DANIEL H. BUSHELL
/s/ Daniel H. Bushell
------------------------------
2
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF UNITED STATIONERS INC.
UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
AZERTY INCORPORATED
LAGASSE BROS., INC.
AZERTY de MEXICO, S.A. de C.V.
UNITED WORLDWIDE LIMITED
UNITED STATIONERS HONG KONG LIMITED
USS RECEIVABLES COMPANY, LTD.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-37665) pertaining to the Management Equity Plan of United Stationers
Inc. of our report dated January 26, 2000 with respect to the consolidated
financial statements of United Stationers Inc. and Subsidiaries, included in
this Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
January 26, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000355999
<NAME> UNITED STATIONERS INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,993
<SECURITIES> 0
<RECEIVABLES> 275,993
<ALLOWANCES> 12,561
<INVENTORY> 607,682
<CURRENT-ASSETS> 914,531
<PP&E> 286,395
<DEPRECIATION> 118,851
<TOTAL-ASSETS> 1,279,903
<CURRENT-LIABILITIES> 498,983
<BONDS> 0
0
0
<COMMON> 3,721
<OTHER-SE> 402,288
<TOTAL-LIABILITY-AND-EQUITY> 1,279,903
<SALES> 3,393,045
<TOTAL-REVENUES> 3,393,045
<CGS> 2,830,968
<TOTAL-COSTS> 2,830,968
<OTHER-EXPENSES> 389,315
<LOSS-PROVISION> 6,657
<INTEREST-EXPENSE> 29,195
<INCOME-PRETAX> 143,567
<INCOME-TAX> 60,158
<INCOME-CONTINUING> 83,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,409
<EPS-BASIC> 2.40
<EPS-DILUTED> 2.37
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000945633
<NAME> UNITED STATIONERS SUPPLY CO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,993
<SECURITIES> 0
<RECEIVABLES> 275,993
<ALLOWANCES> 12,561
<INVENTORY> 607,682
<CURRENT-ASSETS> 914,531
<PP&E> 286,395
<DEPRECIATION> 118,851
<TOTAL-ASSETS> 1,279,903
<CURRENT-LIABILITIES> 498,983
<BONDS> 0
0
0
<COMMON> 3,721
<OTHER-SE> 402,288
<TOTAL-LIABILITY-AND-EQUITY> 1,279,903
<SALES> 3,393,045
<TOTAL-REVENUES> 3,393,045
<CGS> 2,830,968
<TOTAL-COSTS> 2,830,968
<OTHER-EXPENSES> 389,315
<LOSS-PROVISION> 6,657
<INTEREST-EXPENSE> 29,195
<INCOME-PRETAX> 143,567
<INCOME-TAX> 60,158
<INCOME-CONTINUING> 83,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,409
<EPS-BASIC> 2.40
<EPS-DILUTED> 2.37
</TABLE>
