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united stationers 1999ar 

 

 
 
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Slide 2: Acquisitions have expanded United’s reach: United is an indispensable partner for manufacturers— United carries the industry’s broadest product offering: moving products to resellers and consumers that manufacturers could not efficiently reach on their own. United can reach nearly every reseller or consumer in the U.S. on the same day or overnight. 35,000 items from 500 manufacturers, including traditional office products, computer consumables, office furniture, business machines and audio-visual equipment, and janitorial and sanitation supplies. United merged with Associated Stationers in March 1995 to become the industry leader. United’s integrated national distribution network draws on 39 full line regional distribution centers, 21 janitorial and sanitation supply centers, and six computer supply centers—more than nine million square feet of warehouse space. United’s proprietary system is integrated, linking its distribution centers and enabling its reseller customers to optimize a $600 million inventory investment. 95% of United’s orders from resellers are pre-sold— United has a 98% order fill rate, a 99.5% order accuracy rate, and a 99% on-time delivery rate. meaning a reseller already has a consumer order in-hand before requiring fulfillment from United. United acquired Lagasse in October 1996 to aggressively pursue the janitorial and sanitation supply market. United acquired Azerty in April 1998 to expand its computer consumables business. United’s Dealer Economic Model helps resellers evaluate which products they should stock and which should be sourced from United. This allows resellers to reduce their inventory investment and working capital requirements— and improve their profitability. Through its resellers, United distributes nearly 14 million catalogs, plus 16 million flyers annually. United adds value for resellers by: United Stationers serves more than 20,000 reseller customers: office e-NITED Business Solutions allows products dealers, mega-dealers, contract stationers, office products superstores, computer products resellers, office furniture dealers, mass merchandisers, mail order companies, sanitary supply distributors, and e-commerce merchants. • Offering a broad product assortment, which promotes one-stop shopping. • Using an efficient distribution system, which reduces costs while maintaining high in-stock service levels. • Offering multiple distribution solutions, including United’s dedicated fleet, common carriers, and drop shipments direct to end consumers on behalf of its resellers. • Providing customized marketing programs, which include a variety of catalogs and promotional materials. • Conducting consumer research and reseller training programs. Internet e-tailers to focus on sales and marketing, while leveraging United Stationers’ fulfillment capabilities with its substantial inventory and distribution infrastructure. United serves as a “silent partner” for its reseller customers — providing a full range of valueadded services while remaining transparent to the end consumer.
Slide 3: United Stationers is North America’s leading business products wholesale distributor. We help our resellers win in the marketplace by picking individual end-consumer orders for personalized delivery, as well as shipping full cases and even pallets of merchandise. We also help our resellers win through our extensive i n v e n t o r y, b r o a d g e o g r a p h i c r e a c h a n d state-of-the-art technology, which allow us to achieve high fill rates and provide sameday / next-day service. This “pick, pack, ship and track” core competency also enables us t o c a p i t a l i z e o n e m e rg i n g o p p o r t u n i t i e s i n t h e w o r l d o f e - c o m m e rc e .
Slide 4: UNITED STATIONERS INC. AND SUBSIDIARIES Financial Highlights (dollars in thousands, except per share data) Income Statement Data for the Years Ended Net sales . . . . . . . . . . . . . . . . Income from operations . . . . . . . . . . Income before income taxes and extraordinary item Net income . . . . . . . . . . . . . . . . Net income per common share — assuming dilution Average number of common shares (in thousands) Operating Results Before Charges* Income from operations . . . . . . . . . . . . . . Net income .................. Net income per common share — assuming dilution . . . . Balance Sheet Data at Year End Working capital . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . Long-term obligations (including current maturities) Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dec. 31, 1999 $ 3,393,045 182,194 143,567 83,409 2.37 35,208 Dec. 31, 1998* $ 3,059,166 155,511 110,989 58,018 1.60 36,171 $ 182,194 83,409 2.37 $ 169,363 72,212 2.00 $ 415,548 1,279,903 355,552 406,009 $ 357,024 1,166,991 336,200 370,563 *Second quarter results included in the year ended Dec. 31, 1998, reflect the 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. 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. Net Sales 3.5 DOLLARS IN BILLIONS Operating Income $3.4 200 DOLLARS IN MILLIONS Net Income per Share $182 2.50 DOLLARS PER SHARE $2.37 $3.1 3.0 175 $169 2.00 $2.00 $2.6 150 2.5 $135 $2.3 $2.2 125 1.50 $1.47 2.0 100 1.5 75 $113 $ 81 1.00 $1.01 1.0 50 0.50 0.5 25 $0.40 0 951 96 97 98 99 0 951 96 972 982 99 0 951 96 972 982 99 1 2 Pro forma Before charges (See Note 1 to the Consolidated Financial Statements.) 1
Slide 5: To Our Stockholders Last year’s report introduced our strategic plan for growth. As we followed that plan in 1999, it became clear that fulfillment excellence—getting the right products in the right package to the right consumer at the right time, and tracking the package all the way— is critical to our operating strategy. That is why it’s the theme for this report. Let’s review some of the objectives on which we’re focusing. Exceeding Our Financial Goals United’s ordering process is designed for the convenience of its reseller customers. The company can receive orders by phone, fax, the Internet, and through a proprietary order-entry system. Record Sales In 1999, net sales rose 10.9% to $3.4 billion. About 8% of this increase came from organic growth. While sales expanded more slowly at the beginning of the year, momentum accelerated for the remainder of the year as we 1) benefited from increasing interest in products and programs targeted at both independent dealers and national accounts; 2) completed the merger integration between Micro United and Azerty and began to aggressively market their combined capabilities; 3) experienced strong demand for Lagasse’s janitorial and sanitation supply products; 4) began to capitalize on the growth in e-commerce; 5) increased our focus on product categories with excellent growth opportunities, such as office furniture and audio-visual equipment. Record Operating Income As expected, a greater percentage of lower margin computer consumables reduced our gross margin for the year from 1998’s 17.3% to 16.6% in 1999. However, lower operating expenses associated with the sale of computer consumables, combined with ongoing productivity improvements, led to record operating income— up 7.6% to $182.2 million. Record Earnings Net income was $83.4 million, or $2.37 per diluted share. This was 18.5% higher than 1998’s results—exceeding our goal of a 15% increase in annual earnings. R e p u rc h a s i n g Stock Achieved Fifteen Consecutive Quarters of Record Sales and Earnings Early in the second quarter we repurchased 3.3 million shares, paying an average of $15.26 per share, and reducing outstanding shares by 9%. This was financed through free cash flow and our existing revolving credit line. Strengthening Our Balance Sheet We continued to use the $160 million receivables securitization, initiated last year, to provide off-balance sheet funding and reduce interest expense. We also reduced debt, improving our debt-to-total capitalization to 55.0% from 1998’s 56.2%. Then we generated free cash flow of nearly $75 million, using $50 million for the share repurchase. 2
Slide 6: Adding Expertise to Our Board In a continuing effort to strengthen our board, we elected Ilene S. Gordon a director in January. Ilene is president of Pechiney Plastic Packaging, where she oversees its worldwide flexible films and lamination, and plastic bottle activities. We believe her expertise in domestic and international operations will be invaluable. Achieving Fulfillment Excellence Several trends highlight the need for fulfillment excellence. ❏ One-Stop Shopping Both independent dealers and mega-dealers recognize the profit opportunities in selling a broad product offering. Wholesalers such as United Stationers are filling this need. We pick and pack a growing percentage of their orders specifically for an end consumer, and increasingly ship it directly on behalf of the reseller. ❏ E-Commerce Companies initially assumed the challenge of e-commerce was to get orders from consumers over the Internet. Instead, they are finding the greater challenge is to get orders delivered quickly and efficiently to consumers. In 1999, Web retailers shipped about 230 million packages, and Forrester Research expects this number to increase by 59% per year for the next four years. Consumers not only want their products delivered, they want access to “real-time inventory,” including product availability and shipping status. In the office products arena, three types of “e-tailers” have emerged: 1) companies that focus only on office products, 2) companies with established destination sites that are expanding their offerings to include office products, and 3) portals or Internet malls that offer a variety of products from a single site. In most cases, these operations do not have extensive product logistics capabilities as their core competecy, so they need to rely on United Stationers. ❏ Non-Traditional Outlets Retail outlets such as drugstore and grocery chains now are offering computer consumables as convenience items. As they expand into this relatively new product category, they rely on United Stationers for merchandising expertise, inventory management and rapid re-supply. ❏ Outsourcing More office products manufacturers want to focus on what they do best—manufacturing products— rather than dealing with distributing products to their customers. Manufacturers ship 80% of their products directly to resellers, with wholesalers handling the other 20%. We believe the role of the wholesaler will grow, as manufacturers increasingly rely on companies such as United to handle product logistics. This will be beneficial for wholesalers: each 1% shift in marketshare generates a $2.0 billion increase in annual wholesalers’ revenues. These trends will fuel United’s growth in the years ahead. The Internet plays an integral role for each of United’s business units. The company developed a number of informative and easy-to-use Websites: www.unitedstationers.com provides background on the entire company and links to all other sites. United Stationers Inc. www.ussco.com provides background on North America’s leading wholesaler of business products to resellers. United Stationers Supply Co. www.lagassenet.com provides background on the nation’s leading wholesale source of janitorial/sanitary maintenance products. Lagasse Bros., Inc. www.e-nited.com provides background on a new division that focuses on e-commerce and offers integrated marketing, customer solutions and fulfillment services to resellers. C re a t i n g a S u s t a i n a b l e A d v a n t a g e Fulfillment excellence is fundamental to our business. Each day we pick, pack, ship and track hundreds of thousands of individual items for same/ next-day delivery across the U.S. We operate with a consumer satisfaction mindset. In 1999, we had 98% order fill rates and 99% on-time delivery. Our broad product offering—over 35,000 items —offers one-stop shopping for resellers and their consumers. We are a pure wholesale distributor that does not compete with our reseller customers. We serve as an extension of our resellers’ inventory—together we work to get products into consumers’ hands, fast and reliably. By providing our resellers and their end consumers with “best-in-class” service, we create a sustainable competitive advantage that makes us attractive to resellers, and builds value for stockholders. e-NITED Business Solutions www.azerty.com provides background on North America’s largest specialty wholesaler of office technology products, such as computer consumables, hardware and accessories. Azerty Incorporated 5
Slide 7: Strengthening Our Distribution Channels Our goal is to provide resellers with the products and services they need to reach targeted end-consumer markets. We introduced several initiatives in this area during the year. Vision 2000 We confirmed our commitment to understanding the dynamics of endconsumer behavior by undertaking several significant research studies. These studies revealed such factors as what size offices buy the most products and how much they spend each year, how consumers feel about single sourcing, what supplier attributes are most important, etc. The research was presented to our reseller customers in a series of presentations called Vision 2000. Increasing Office Furniture Sales We appointed a vice president of furniture, Steve Odden, to lead this effort. As a result, our National Accounts salesforce began working with their customers to expand the mid-grade furniture portion of their product lines and create opportunities for further growth. Our salespeople explain United’s advantages: its broad line of furniture, same/next-day delivery, and the programs to help resellers market furniture to their customers. This allowed us to increase furniture sales by 5% in 1999, compared with a 1% reduction for the industry, as reported by the Business and Institutional Furniture Manufacturer’s Association (BIFMA). Increasing E-Commerce We are helping dealers capitalize on these opportunities. Our updated Electronic Catalog showcases 25,000 products through color photos and consumer-friendly descriptions, and features enhanced search capabilities. In 1999, we entered into a relationship with Internet Office Solutions and Services (IOS2) to provide our resellers with the “latest and greatest” in Web technology. IOS2 gives resellers a personalized Website, which allows them to use the Internet to market, sell and take orders from their customers. Offering Value-Added Services We continue to offer these programs, which give United a competitive advantage: ❏ Wrap and Label Program allows us to pick and pack the items ordered by an individual consumer, attach an address label featuring the reseller’s name, then deliver it to the reseller or drop ship it directly to the consumer. Resellers appreciate this because they do not have to break down large shipments from manufacturers and repackage them for consumers. ❏ Nationwide Express Delivery provides same-day, next- or second-day delivery via UPS, and can reach the vast majority of all business customers in the U.S. This means local or regional resellers can expand their marketing scope and serve larger, multi-location accounts. ❏ United Dealer Training’s 65 courses in 1999 reached 2,000 reseller “students” who wanted to learn more about subjects from finance to marketing. United provides professional, affordable training that might not otherwise be available to many resellers. 6 Through its value-added programs, United helps resellers generate demand from the end consumer. This includes the most popular general line catalog in the industry and a number of specialty catalogs. Value-Added Programs and Services Give Resellers a Competitive Advantage
Slide 8: Wholesalers Add Value Through Overnight Delivery ❏ Premier Performance Shows let resellers and Providing same-day, overnight and next-day delivery across the U.S. is no small feat. United reaches its resellers and their end consumers through a dedicated fleet of 400 trucks, UPS, common carriers and Federal Express. their consumers preview products and have manufacturers answer their questions. United held seven shows in 1999, featuring products from over 40 suppliers, attracting thousands of resellers and consumers. ❏ United Worldwide Limited is a unique full-service import management company. It works with approximately 25 manufacturers in the Far East, Europe and South America to develop new items based on customer specifications; then it handles the logistics of product distribution. ❏ United’s General Line Catalog and Specialty Catalogs are the most widely distributed in the industry—nearly 14 million copies. In addition, we help our resellers increase their profitability. This includes providing a “right-stocking” model that improves sales and profits for both of us. Resellers use right-stocking to decide which products they should stock in their warehouses and those they should source from us. In 1999, McKinsey & Company developed a model for United that resellers can use to look at the total cost of procuring products —warehousing, investment in inventory, etc.—in addition to invoice price. This means resellers can calculate their return on investment under various scenarios. The benefit for resellers is they can make decisions that increase their operating income, improve their return on investment, increase their cash flow, reduce their risk and overhead. This allows them to spend more time focusing on how to increase sales instead of buying and stocking products. The benefit for our company is increased sales as resellers turn to us for products they traditionally—and less profitably—kept in stock. The Dealer Economic Model Helps Dealers Improve Their Return On Investment Focusing on E- commerce The biggest step we took in 1999 was to introduce e-NITED Business Solutions as a sales and support organization for the exploding Internet economy. Internet office product sales are expected to reach $200 billion—nearly the size of the non-Internet market we currently serve. e-NITED will help us serve this channel by giving us access, through Internet resellers, to consumer markets we do not currently reach — such as small office / home office. It also will allow us to serve a new reseller market — e-tailers. By doing this, we will leverage our infrastructure: 66 distribution centers with nine million square feet and 10 call centers. 8
Slide 9: e-NITED offers a suite of e-commerce support services, including distribution, fulfillment, Internet technologies, and outbound marketing and call capabilities. Our target markets include e-tailers, virtual resellers (who maintain no inventory), and other Internet businesses that can benefit from our infrastructure, so they do not have to build their own. By year end, we had established relationships with 75 new customers, from e-tail start-ups to nationally recognized brand-name organizations. We expect this business will become an important contributor for United in 2000 and beyond. Expanding Our Presence in Canada United has the power of an integrated national distribution network. We took steps to increase our business in Canada during the year. This is a particularly promising market, since no wholesale distributor in this country has a nationwide reach. In 1999, we modified our information technology system to do business in Canadian dollars. Then we broadened our product offering within this market to 25,000 items, and launched a furniture initiative, leveraging our distribution facilities along the northern U.S. border. Enhancing Efficiency MEXICO United Stationers Supply Co. Lagasse Bros., Inc. Azerty Incorporated Adding distribution facilities The 365,000 square foot center in Carol Stream, Illinois, is our second facility in the Chicago area, serving the growing demand within this market. We also opened a 240,000 square foot regional distribution center in Houston. Replacing four older warehouses, this state-of-the-art facility features computerized receiving and picking systems. In addition, Lagasse continued its geographic expansion, adding facilities in St. Louis and Phoenix. This brings its nationwide network to 21 distribution centers. Because these facilities are so efficient—especially when they are replacing older operations—they have a relatively short payback period. Energizing Associates Part of our strategy to enhance productivity and quality is a national initiative called the Facility Development Process (FDP). This initiative creates a link between associate performance and corporate business goals. Leadership teams across the country are being taught how to align themselves and their processes with United’s strategic objectives and the requirements of our resellers, consumers, vendors, stockholders and associates. United Can Reach Nearly Every Reseller or Consumer in the U.S. on the Same Day or Overnight Its 39 full line regional distribution centers stock a wide array of traditional business products. Its 21 janitorial and sanitation supply centers provide more than 7,000 products. Its six computer supply centers offer 6,000 computer consumables and supplies for other office automation products. Many of its warehouses also use computerized conveyor systems and other types of automation. As a result, United has one of the lowest cost structures while offering the highest service levels in the industry. 11
Slide 10: Sharing “Best Practices” Operational excellence has been and always will be central to United’s success. United has an ongoing program to identify and document best practices, and then requires organization-wide adoption. Best practices focuses on the quality of service we provide to our resellers, as well as process improvements that will drive down our costs. Outlook for Another Strong Year As we look ahead in 2000, several factors are clear. ❏ Sales for the two months ending February 29, 2000, were up 14% on equivalent workdays. This gives us confidence that we will be on the high end of our goal of achieving 6 -9% sales growth and 15% earnings growth for 2000. The growth drivers for this year will be additional volume from independent dealers and national accounts, increased participation in e-commerce, expansion of our furniture initiative, and continued increases in computer and janitorial/ sanitation supply products sales. ❏ In addition, we are making progress toward achieving a 6% operating margin by 2003. We expect to bring more to our bottom line by increasing throughput, improving productivity, and implementing best practices throughout the organization. In 1999, our associates proved they are committed to the plan developed in 1998 and will take it to the next level: fulfillment excellence. We believe their efforts, combined with our long-term partnerships with suppliers and resellers, will increase United’s shareholder value in 2000 and beyond. Capitalizing on Opportunities for Growth From left to right: Steven Schwarz (left) Executive Vice President and President, United Supply Division Randall Larrimore (right) President and Chief Executive Officer Randall W. Larrimore President and Chief Executive Officer March 15, 2000 13
Slide 11: 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. Certain information presented in this Annual Report 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 Annual Report, 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 Annual Report 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 highlycompetitive 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 that could affect the Company’s business, is set forth in certain filings by the Company with the Securities and Exchange Commission. All forward-looking statements contained in this Annual Report 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. 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. 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 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. 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 14
Slide 12: UNITED STATIONERS INC. AND SUBSIDIARIES 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) related to the early retirement of debt (collectively “1997 Charges”), see 15
Slide 13: Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. (continued) 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. 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 nonrecurring 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 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. 16
Slide 14: UNITED STATIONERS INC. AND SUBSIDIARIES 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 nonrecurring 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 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. 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). 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 nonrecurring 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. 17
Slide 15: Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 (continued) 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. Liquidity and Capital Resources Credit Agreement 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 nonrecurring 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 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 18
Slide 16: UNITED STATIONERS INC. AND SUBSIDIARIES 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 longterm operating and capital needs of the Company, as well as to service its debt in accordance with its terms. There is, however, no assurance that this will be accomplished. United is a holding company and, as a result, its primary source of funds is cash generated from operating activities of its operating subsidiary, USSC, and bank borrowings by USSC. The Credit Agreement and the indentures governing the Notes contain restrictions on the ability of USSC to transfer cash to United. 12.75% Senior Subordinated Notes The 12.75% Senior Subordinated Notes (“12.75% Notes”) originally were issued on May 3, 1995, pursuant to the 12.75% Notes Indenture. As of 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 19
Slide 17: Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 assetbacked 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 (continued) The statements of cash flows for the Company for the periods indicated are summarized below: Years Ended December 31, Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . 1999 $ 53,581 (26,011) (27,615) 1998 (dollars in thousands) 1997 $ 41,768 (12,991) (27,029) $ 290,866 (140,356) (143,839) 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. 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 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 20
Slide 18: UNITED STATIONERS INC. AND SUBSIDIARIES 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. 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 longterm 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 longterm 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. 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. 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. 21
Slide 19: Selected Consolidated Financial Data Years Ended December 31, (dollars in thousands, except per share data) 1999 ................... ................... ..... ..... ..... 1998 1997 Income Statement Data: Net sales . . . . . . . . . Cost of goods sold . . . . $ 3,393,045 2,830,968 562,077 379,883 — 379,883 182,194 29,195 9,4324 143,567 60,158 83,409 — $ $ $ $ $ 83,409 83,409 2.37 — 2.37 — $ 3,059,166 2,529,928 529,238 359,875 13,8522 373,727 155,511 36,301 8,2214 110,989 47,064 63,925 (5,907) $ $ $ $ $ 58,018 58,018 1.76 (0.16) 1.60 — $ 2,558,135 2,112,204 445,931 311,002 64,698 3 375,700 70,231 53,511 — 16,720 8,532 8,188 (5,884) $ $ $ $ $ 2,304 776 0.22 (0.19) 0.03 — 96,272 3.8% 8 26,041 12,991 134,929 45,364 1.47 160,970 6.3% Gross profit . . . . . . . . . . . . . . . . . . . . . Operating expenses: Warehousing, marketing and administrative expenses Non-recurring charges . . . . . . . . . . . . . . . Total operating expenses Income from operations Interest expense, net . . Other expense . . . . . .................... .................... .................... .................... ..... ..... Income before income taxes and extraordinary item Income taxes . . . . . . . . . . . . . . . . . . . . . Income before extraordinary item . . . . . . 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 . . . . . Net income ........ ........ ........................... ....... Net income attributable to common stockholders. Net income per common share—assuming dilution Income before extraordinary item . . . . . . . . Extraordinary item . . . . . . . . . . . . . . . Net income Cash dividends declared per common share Operating and Other Data: EBITDA . . . . . . . . . . . . . EBITDA margin 6 . . . . . . . . Depreciation and amortization 10 Capital expenditures . . . . . . 5 ...... ...... ......................... .......... ................ ................ ................ ................ 211,642 6.2% $ 29,448 21,331 182,194 83,409 2.37 211,642 6.2% $ 415,54815 1,279,90315 336,927 — — 406,009 182,449 6.0%7 $ 26,938 24,616 169,363 72,212 2.00 196,301 6.4% $ 357,02415 1,166,99115 315,384 — — 370,563 $ Operating Results Before Charges: 12, 13, 14 Income from operations . . . . . . . . . . . . . . Net income attributable to common stockholders . Net income per common share—assuming dilution EBITDA . . . . . . . . . . . . . . . . . . . . . . . EBITDA margin . . . . . . . . . . . . . . . . . . . Balance Sheet Data at Year End: Working capital . . . . . . . . . . Total assets . . . . . . . . . . . . Total debt and capital lease 16 . . . Redeemable preferred stock . . . Redeemable warrants . . . . . . . Total stockholders’ equity . . . . . ...... ...... ...... ...... ...... ............... ............... ............... ............... ............... ............... $ 451,449 1,148,021 537,135 — — 223,308 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 charge. 9. EBITDA margin would have been 5.2% excluding the restructuring charge. 22
Slide 20: UNITED STATIONERS INC. AND SUBSIDIARIES 1996 1995 1994 1993 $ 2,298,170 1,907,209 390,961 277,957 — 277,957 113,004 57,456 — 55,548 23,555 31,993 — $ $ $ $ $ 31,993 30,249 1.01 — 1.01 — $ 1,751,462 1,446,949 304,513 246,9561 — 246,9561 57,557 46,186 — 11,371 5,128 6,243 (1,449) $ $ $ $ $ 4,794 2,796 0.17 (0.06) 0.11 — 81,241 4.6%9 23,684 8,017 67,316 10,081 0.40 91,000 5.2% $ 470,185 382,299 87,886 69,765 — 69,765 18,121 7,725 — 10,396 3,993 6,403 — $ 455,731 375,226 80,505 69,527 — 69,527 10,978 7,235 — 3,743 781 2,962 — $ $ $ $ $ 2,962 915 0.06 — 0.06 — 16,481 3.6% 5,503 3,273 10,978 915 0.06 16,481 3.6% $ $ $ $ $ 6,403 4,210 0.26 — 0.26 — 23,505 5.0% 5,384 554 18,121 4,210 0.26 23,505 5.0% 139,046 6.1% $ 26,042 (2,886)11 113,004 30,249 1.01 139,046 6.1% $ $ $ 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 selected consolidated financial data for the years ended December 31, 1994 and 1993 were derived from the Consolidated Financial Statements of 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 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. $ 404,973 1,109,867 600,002 19,785 23,812 75,820 $ 355,465 1,001,383 551,990 18,041 39,692 30,024 $ 56,454 192,479 64,623 23,189 1,650 24,775 $ 57,302 190,979 86,350 20,996 1,435 11,422 10. Excludes amortization related to deferred financing costs, which is a component of interest expense. 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 and13 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. 23
Slide 21: Quarterly Financial Data (dollars in thousands, except share data) (unaudited) Net Sales Gross Profit Income Before Extraordinary Item Net Income Income Per Share Before Extraordinary Item 1 Net Income Per Share 1 Year Ended December 31, 1999 First Quarter . . . . . . . . . . Second Quarter . . . . . . . . . Third Quarter . . . . . . . . . Fourth Quarter . . . . . . . . . Totals .............. $ 824,261 800,753 877,802 890,229 $3,393,045 $ 712,517 751,966 795,407 799,276 $3,059,166 $ 133,868 128,289 144,050 155,870 $ 562,077 $ 123,062 125,890 136,275 144,011 $ 529,238 $ 18,688 17,317 22,293 25,111 $ 83,409 $ 15,091 7,229 19,879 21,726 $ 63,925 $ 18,688 17,317 22,293 25,111 $ 83,409 $ 15,091 1,322 19,879 21,726 $ 58,018 $ 0.50 0.50 0.65 0.73 $ 2.37 $ 0.44 0.21 0.52 0.58 $ 1.76 $ 0.50 0.50 0.65 0.73 $ 2.37 $ 0.44 0.04 0.52 0.58 $ 1.60 Year Ended December 31, 1998 First Quarter . . . . . . . . . . Second Quarter 2 . . . . . . . . . Third Quarter . . . . . . . . . Fourth Quarter . . . . . . . . . Totals .............. 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 to the Consolidated Financial Statements included elsewhere herein) and an extraordinary loss of $9.9 million ($5.9 million net of the tax benefit of $4.0 million) related to the early retirement of debt (see Notes 1 and 7 to the Consolidated Financial Statements). Quarterly Stock Price Data 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. 1999 High ................ ................ ................ ................ Low First Quarter . . . Second Quarter . Third Quarter . . Fourth Quarter . 1998 $ 26.00 22.00 26.31 28.56 High $ 13.00 13.56 20.25 20.88 Low First Quarter . . . Second Quarter . Third Quarter . . Fourth Quarter . ................ ................ ................ ................ $ 32.66 32.38 36.00 30.19 $ 21.94 26.56 23.88 22.50 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 management to purchase 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. 24
Slide 22: Report of UNITED STATIONERS INC. AND SUBSIDIARIES Management The management of United Stationers Inc. is primarily responsible for the information and representations contained in this Annual Report. The consolidated financial statements and related notes were prepared in accordance with accounting principles generally accepted in the United States and include amounts that are based on management’s best judgments and estimates. The other financial information included in this Annual Report is consistent with that in the financial statements. In meeting its responsibility for the reliability of the consolidated financial statements, the Company depends on its system of internal accounting control. The system is designed to provide reasonable, but not absolute, assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management’s authorization. It is management’s opinion that its system of internal control is effective in providing reasonable assurance that its financial statements are free of material misstatement. In addition, the system is augmented by written policies and an internal audit department. The Audit Committee of the Board of Directors, composed solely of directors who are not officers or employees, meets regularly with management, with the Company’s internal auditors, and with its independent auditors to discuss their evaluation of internal accounting controls and the quality of financial reporting. The independent auditors and the internal auditors have free access to the Audit Committee, without management’s presence. President, Chief Executive Officer, and Interim Chief Financial Officer 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. Chicago, Illinois January 26, 2000 25
Slide 23: Consolidated UNITED STATIONERS INC. AND SUBSIDIARIES Statements of Income (dollars in thousands, except per share data) For the Years Ended December 31, 1999 1998 1997 Net Sales .............................. ........................ $3,393,045 2,830,968 562,077 $3,059,166 2,529,928 529,238 $2,558,135 2,112,204 445,931 Cost of Goods Sold Gross profit .......................... Operating Expenses: Warehousing, marketing and administrative expenses . . Non-recurring charges . . . Total operating expenses Income from operations Interest Expenses Other Expense . . ................. ................. 379,883 — 379,883 182,194 29,195 9,432 143,567 60,158 83,409 — 83,409 — $ $ $ 83,409 2.40 — 2.40 34,708 $ $ 2.37 — 2.37 35,208 $ $ $ $ $ 359,875 13,852 373,727 155,511 36,301 8,221 110,989 47,064 63,925 (5,907) 58,018 — 58,018 1.84 (0.17) 1.67 34,680 1.76 (0.16) 1.60 36,171 $ $ $ $ $ 311,002 64,698 375,700 70,231 53,511 — 16,720 8,532 8,188 (5,884) 2,304 1,528 776 0.26 (0.23) 0.03 26,128 0.22 (0.19) 0.03 30,760 ................... .................... ......................... ......................... ..... Income before income taxes and extraordinary item Income Taxes ........................... ............... Income before extraordinary item Extraordinary Item – loss on early retirement of debt, net of tax benefit of $3,970 in 1998 and $3,956 in 1997 . . . Net Income . ... ............................ Preferred Stock Dividends Issued and Accrued . . . . . . . . . . . Net Income Attributable to Common Stockholders ................ .................... Net Income Per Common Share: Income before extraordinary item Extraordinary item . . . . . . . Net income per common share ............... ............... ................ ......... Average number of common shares (in thousands) Net Income Per Common Share–Assuming Dilution: Income before extraordinary item . . . . . . . . . Extraordinary item . . . . . . . . . . . . . . . . Net income per common share ...... ...... ................ ......... Average number of common shares (in thousands) See notes to consolidated financial statements. 26
Slide 24: Consolidated UNITED STATIONERS INC. AND SUBSIDIARIES Statements of Cash Flows (dollars in thousands) For theYears Ended December 31, 1999 .......... 1998 1997 Cash Flows from Operating Activities: Net income . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . Amortization of capitalized financing costs . . Extraordinary item—early retirement of debt . Deferred income taxes . . . . . . . . . . . . . Compensation expense on stock option grants Other . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities, net of acquisitions in 1999 and 1998: (Increase) decrease in accounts receivable . . . Increase in inventory . . . . . . . . . . . . . (Increase) decrease in other assets . . . . . . . Increase (decrease) in accounts payable . . . . Increase in accrued liabilities . . . . . . . . . (Decrease) increase in other liabilities . . . . . Net cash provided by operating activities Cash Flows from Investing Activities: Acquisitions: Azerty, Inc. . . . . . . . . . . . . . . Consumer Development Group, Inc. . Capital expenditures . . . . . . . . . . . Proceeds from the disposition of property, plant and equipment . . . . . . . . . Net cash used in investing activities $ 83,409 $ 58,018 $ 2,304 .......... .......... .......... .......... .......... .......... .......... 22,817 6,631 1,828 — 662 — 236 22,406 4,532 2,062 9,877 4,380 — 2,044 21,963 4,078 4,323 9,840 (16,091) 60,041 51 .......... .......... .......... .......... .......... .......... (59,965) (52,742) (2,831) 44,606 11,120 (2,190) 53,581 159,593 (12,777) (8,246) 21,090 20,543 7,344 290,866 (20,519) (48,316) 9,985 (1,649) 18,036 (2,278) 41,768 ............ .............. .............. .............. .............. — (4,680) (25,461) 4,130 (26,011) 29,000 (7,604) 145 250 2,846 (49,600) (2,652) — — (27,615) (45) 19,038 $ 18,993 (115,740) — (24,709) 93 (140,356) (22,000) (549,852) 350,000 (4,526) 99,442 — (16,903) — — (143,839) 6,671 12,367 $ 19,038 — — (13,036) 45 (12,991) 49,000 (117,776) — — 71,606 — (8,546) (21,172) (141) (27,029) 1,748 10,619 $ 12,367 ............... Cash Flows from Financing Activities: Net borrowings (repayments) under revolver . . . . . Retirements and principal payments of debt . . . . . . Borrowings under financing agreements . . . . . . . . Financing costs . . . . . . . . . . . . . . . . . . . . Issuance of common stock . . . . . . . . . . . . . . . Acquisition of treasury stock, at cost . . . . . . . . . Payment of employee withholding tax related to stock option exercises . . . . . . . . . . . . . . . . . . . Redemption of series A and series C preferred stock . Cash dividend . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities ....... ....... ....... ....... ....... ....... ....... ....... ....... ............ ........... ........... Net Change in Cash and Cash Equivalents . . Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year See notes to consolidated financial statements. .............. 27
Slide 25: Consolidated Balance Sheets (dollars in thousands, except share data) As of December 31, Assets 1999 1998 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 . . . . . . . . Inventories Other .................. 263,432 607,682 24,424 914,531 203,467 554,940 21,293 798,738 .......................................... ............................................. Total Current Assets .................................... Property, Plant and Equipment, at cost Land ............................................. 19,982 94,113 170,477 1,823 286,395 118,851 167,544 181,456 16,372 $ 1,279,903 21,857 95,944 148,658 1,508 267,967 98,907 169,060 181,009 18,184 $ 1,166,991 Buildings ........................................... Fixtures and equipment Leasehold improvements ................................... ................................... Total property, plant and equipment ............................. Less—accumulated depreciation and amortization Net Property, Plant and Equipment Goodwill Other ...................... ............................ ........................................... ............................................. Total Assets ......................................... See notes to consolidated financial statements. 28
Slide 26: UNITED STATIONERS INC. AND SUBSIDIARIES Liabilities and Stockholders’ Equity 1999 As of December 31, 1998 Current Liabilities Accounts payable Accrued expenses ...................................... $ 346,558 126,481 16,377 9,567 498,983 28,926 327,360 18,625 873,894 $ 301,952 119,471 12,582 7,709 441,714 26,223 307,675 20,816 796,428 ...................................... Accrued income taxes .................................... Current maturities of long-term debt Total Current Liabilities Deferred Income Taxes Long-Term Liabilities ............................ .................................. ................................... .................................... Other Long-Term Liabilities Total Liabilities ................................ ....................................... 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 . . . . . . . . . . . . Capital in excess of par value ... 3,721 304,288 (49,145) 148,262 (1,117) 406,009 $ 1,279,903 3,691 303,330 — 64,853 (1,311) 370,563 $ 1,166,991 ................................ ......................... Treasury stock, at cost — 3,220,481 shares Retained earnings ...................................... ............................ Accumulated translation adjustment Total Stockholders’ Equity ................................. Total Liabilities and Stockholders’ Equity ........................ 29
Slide 27: Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands, except share data) Redeemable Preferred Stock A C Total Redeemable Warrants Number of Common Shares (Voting) December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized translation adjustment . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . Stock dividends issued . . . . . . . . . . . . . . . . . . . . Redemption of Series A and Series C preferred stock . . . . Accretion of lender warrants to fair market value . . . . . . Increase in value of stock option grants . . . . . . . . . . . Compensation associated with stock options . . . . . . . . Conversions of redeemable warrants into common stock . . Issuance of common stock, net of offering expenses . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . Conversion of nonvoting common stock into common stock Cancellation of common stock . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 1997 . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . Unrealized translation adjustment . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . Issuance of common stock, net of offering expenses 100% stock dividend . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . December 31, 1998 . . . . . . . . Net income . . . . . . . . . . . . Unrealized translation adjustment Comprehensive income . . Acquisition of treasury stock Stock options exercised . . Other . . . . . . . . . . . December 31, 1999 .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... $ 8,086 — — — 489 (8,575) — — — — — — — — — — — — — — — — — — — — — — — — $ — $ 11,699 — — — 898 (12,597) — — — — — — — — — — — — — — — — — — — — — — — — $ — $ 19,785 — — — 1,387 (21,172) — — — — — — — — — — — — — — — — — — — — — — — — $ — $ 23,812 — — — — — 23,254 — — (47,066) — — — — — — — — — — — — — — — — — — — — $ — 11,446,306 — — — — — — — — 1,408,398 2,000,000 299,889 758,994 (8,314) — 15,905,273 — — — 904,409 1,700,000 18,402,491 — 36,912,173 — — — — 299,254 1,780 37,213,207 ......... ......... ......... ......... ......... ......... ......... ......... .................. .................. .................. ..................... ..................... ..................... ..................... .......................... See notes to consolidated financial statements. 30
Slide 28: UNITED STATIONERS INC. AND SUBSIDIARIES Common Stock (Voting) Number of Common Shares (Nonvoting) Common Stock (Nonvoting) Number of Treasury Shares Treasury Stock at Cost Capital in Excess of Par Other Comprehensive Income Retained Earnings Total Stockholders’ Equity $ 1,145 — — — — — — — — 141 200 30 76 (1) — 1,591 — — — 90 170 1,840 — 3,691 — — — — 30 — $ 3,721 758,994 — — — — — — — — — — — (758,994) — — — — — — — — — — — — — — — — — — $ 8 — — — — — — — — — — — (8) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (3,250,000) 29,519 — (3,220,481) $ — — — — — — — — — — — — — — — — — — — — — — — — — — — (49,600) 455 — $ 44,398 — — — — — (915) 380 59,398 47,074 71,254 (8,270) (68) 1 8 213,260 — — — 3,095 86,979 — (4) 303,330 — — — — 666 292 $ 304,288 $ 20 — (238) (238) — — — — — — — — — — — (218) — (1,093) (1,093) — — — — (1,311) — 194 194 — — — $ 30,249 2,304 — 2,304 (1,528) — (22,339) — — — — — — — (11) 8,675 58,018 — 58,018 — — (1,840) — 64,853 83,409 — 83,409 — — — $ 148,262 $ 75,820 2,304 (238) 2,066 (1,528) — (23,254) 380 59,398 47,215 71,454 (8,240) — — (3) 223,308 58,018 (1,093) 56,925 3,185 87,149 — (4) 370,563 83,409 194 83,603 (49,600) 1,151 292 $ — $ (49,145) $ (1,117) $ 406,009 31
Slide 29: Notes to Consolidated Financial Statements Note 1. Basis of Presentation 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 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 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 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 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: (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. 32
Slide 30: UNITED STATIONERS INC. AND SUBSIDIARIES 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 nonrecurring 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. 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 has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition with the excess of cost over fair value of approximately $39.0 million allocated to goodwill. The pro forma effects of this acquisition were not material. Note 2. Operations 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. 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 33
Slide 31: Notes to Consolidated Financial Statements Note 3. (continued) Summary of Significant Accounting Policies 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 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 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 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 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 current year presentation. New Accounting Pronouncements 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. 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 was $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 34 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.
Slide 32: UNITED STATIONERS INC. AND SUBSIDIARIES Note 4. Segment Information 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 of products 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): Years Ended December 31, Traditional office products . . . . . . . . Computer consumables . . . . . . . . . . Office furniture . . . . . . . . . . . . . . . . . . Facilities supplies . . . . . . . . . . . . . . . . Business machines and audio-visual products . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net sales . . . . . . . . . . . . . . . . . . . . 1999 $ 1,204 1,136 435 240 344 34 $ 3,393 1998 $ 1,183 878 425 202 334 37 $ 3,059 1997 $ 1,248 504 379 74 315 38 $ 2,558 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 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 Note 5. Other Expense Receivables Securitization Program The following table sets forth the components of other expense (dollars in thousands): Years Ended December 31, Loss on the sale of accounts receivable, net of servicing revenue . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 1998 1997 $ 9,393 39 $ 9,432 $ 7,477 744 $ 8,221 $ $ — — — 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 35
Slide 33: Notes to Consolidated Financial Statements Note 5. (continued) Other Expense (continued) 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. 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. Note 6. Earnings Per Share weighted average number of common and common equivalent shares outstanding during the period. Stock options and warrants are considered common equivalent shares. 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 The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): 1998 Before Charges1 $ 72,212 — 1997 Before Charges 2 $ 46,892 1,528 Years Ended December 31, Numerator: Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Numerator for basic and diluted earnings per share— income attributable to common stockholders before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denominator: Denominator for basic earnings per share— weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of dilutive securities: Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilutive potential common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denominator for diluted earnings per share—adjusted weighted average shares and assumed conversions . . . . . . . . . . . . . . Basic earnings per share Diluted earnings per share .............................................. ............................................ 1999 $ 83,409 — 1998 $ 63,925 — 1997 $ 8,188 1,528 $ 83,409 $ 63,925 $ 72,212 $ 6,660 $ 45,364 34,708 500 — 500 35,208 $ $ 2.40 2.37 $ $ 34,680 1,491 — 1,491 36,171 1.84 1.76 $ $ 34,680 1,491 — 1,491 36,171 2.08 2.00 26,128 2,516 2,116 4,632 30,760 $ 0.26 $ 0.22 $ $ 26,128 2,516 2,116 4,632 30,760 1.74 1.47 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 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 the early retirement of debt (see Note 1). 36
Slide 34: UNITED STATIONERS INC. AND SUBSIDIARIES Note 7. Long -Term Debt 1999 $ 53,000 53,711 100,000 100,000 — 14,300 15,500 416 336,927 (9,567) $ 327,360 1998 $ 24,000 59,448 100,000 100,000 1,832 14,300 15,500 304 315,384 (7,709) $ 307,675 Long-term debt consisted of the following amounts (dollars in thousands): As of December 31, Revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tranche A term loan, due in installments until March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.375% Senior Subordinated Notes, due April 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.75% Senior Subordinated Notes, due May 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage at 9.4%, due September 1, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial development bonds, at market interest rates, maturing at various dates through 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial development bonds, at 66% to 78% of prime, maturing at various dates through 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less—current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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. 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 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 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 37
Slide 35: Notes to Consolidated Financial Statements Note 7. (continued) Long -Term Debt (continued) 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): Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total ................................................ Year Beginning May 1, 2000 2001 2002 2003 Redemption Price 106.375% 104.781% 103.188% 101.594% ................................................ ................................................ ................................................ ................................................ Amount $ 9,567 14,409 23,930 19,955 62,266 206,800 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 $ 336,927 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): 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 38
Slide 36: UNITED STATIONERS INC. AND SUBSIDIARIES 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): Year Beginning April 15, 2003 2004 2005 Redemption Price 104.188% 102.792% 101.396% ................................................ ................................................ ................................................ 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, 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. Note 8. Leases Year Operating Leases 1 $ 28,621 24,507 18,314 11,516 9,389 26,502 $ 118,849 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total minimum lease payments . . . . . . . . . . . . . . . . . . . . 1. Operating leases are net of immaterial sublease income. 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): Rental expense for all operating leases was approximately $27.1 million, $20.8 million, and $20.5 million in 1999, 1998, and 1997, respectively. Note 9. Pension Plans Pension Plans and Defined Contribution Plan 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. 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 39
Slide 37: Notes to Consolidated Financial Statements Note 9. (continued) Pension Plans and Defined Contribution Plan (continued) The following table sets forth the plans’ changes in Projected Benefit Obligation for the years ended December 31, 1999 and 1998 (dollars in thousands): 1999 1998 $ 37,122 $ 28,773 Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 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): 1999 1998 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 The following table sets forth the plans’ funded status at December 31, 1999 and 1998 (dollars in thousands): Funded status of the plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension (liability)/prepaid asset recognized in the Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 $ 12,244 1,273 (15,282) $ (1,765) 1998 $ 3,852 1,135 (4,391) $ 596 Net periodic pension cost for 1999, 1998 and 1997 for pension and supplemental benefit plans includes the following components (dollars in thousands): 1999 1998 1997 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 The assumptions used in accounting for the Company’s defined benefit plans are set forth below: Assumed discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rates of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 7.75% 5.50% 8.50% 1998 6.75% 5.50% 7.50% 1997 7.25% 5.50% 7.50% 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 aftertax contributions, and provides for, Company contributions, or contributions matching employees salary deferral contributions, at 40 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.
Slide 38: UNITED STATIONERS INC. AND SUBSIDIARIES Note 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): 1999 Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit obligation at end of year .................................................................................... 1998 $ 3,045 479 209 89 163 (237) 3,748 — 148 89 (237) — $ 3,748 498 229 106 (770) (205) $ 3,606 $ — 99 106 (205) — $ $ Fair value of assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at end of year ............................................................................. $ $ Funded status of the plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued postretirement benefit obligation in the Consolidated Balance Sheets .................................... $ (3,606) (789) $ (4,395) $ (3,748) (148) $ (3,896) The cost of postretirement health care benefits for the years ended December 31, 1999, 1998 and 1997 were as follows (dollars in thousands): 1999 Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net periodic postretirement benefit cost .......................................................... 1998 $ 479 209 (15) 673 $ 1997 268 190 (15) 443 $ 498 229 (7) 720 $ $ $ The assumptions used in accounting for the Company’s postretirement plan for the three years presented are set forth below: 1999 Assumed average health care cost trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0% 7.75% 1998 3.0% 6.75% 1997 3.0% 7.25% 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. 41
Slide 39: Notes to Consolidated Financial Statements Note 11. (continued) Stock Option Plan 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: 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. These Merger Incentive Options, which were performance-based, were granted to provide incentives to management with respect to Management Equity Plan (excluding restricted stock) Options outstanding at beginning of the year . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled. . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding at end of the year . . . . . . . . . . . . . . . . . . . . Number of options exercisable 1999 2,212,578 1,293,025 (434,978) (101,750) 2,968,875 707,160 Weighted Average Exercise Prices $ 15.28 22.89 6.52 23.41 $ 19.60 $ 12.98 1998 3,597,794 965,150 (2,303,666) (46,700) 2,212,578 862,128 Weighted Average Exercise Prices $ 6.89 24.13 5.73 22.89 $ 15.28 $ 7.64 1997 4,995,536 538,000 (1,693,742) (242,000) 3,597,794 3,067,794 Weighted Average Exercise Prices $ 5.81 11.44 7.71 7.38 $ 6.89 $ 6.09 .... 42
Slide 40: UNITED STATIONERS INC. AND SUBSIDIARIES The following table summarizes information concerning outstanding options of the Plan at December 31, 1999: Exercise Prices $ 2.56 8.44 10.81 22.00 22.13 23.38 23.38 24.13 27.06 30.56 31.63 33.06 33.56 Total Number Outstanding 15,000 312,150 500,000 450,275 30,000 696,850 824,600 62,000 5,000 7,000 30,000 30,000 6,000 2,968,875 Contractual Life (years) 0.8 0.8 7.5 9.6 8.0 8.2 9.3 8.2 8.3 8.5 8.3 8.7 8.7 Remaining Number Exercisable 15,000 312,150 200,000 — 6,000 146,010 — 12,400 1,000 1,400 6,000 6,000 1,200 707,160 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. 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): 1999 1998 $ 58,018 72,2121 55,758 $ 1.67 2.081 1.61 34,680 1.60 2.001 1.54 36,171 $ 1997 776 45,364 2 18,396 0.03 1.742 0.70 26,128 0.03 1.472 0.60 30,760 Net income attributable to common stockholders: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Before charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per common share — basic: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Before charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average number of common shares (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per common share — diluted: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Before charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average number of common shares (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,409 83,409 79,821 $ 2.40 2.40 2.30 34,708 2.37 2.37 2.27 35,208 $ $ $ $ 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: 1999 1998 $ 14.58 24.13 59.0% 0.0% 5.5% 6 years $ 1997 6.85 11.44 64.7% 0.0% 6.4% 5 years Fair value of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.20 22.89 55.5% 0.0% 5.1% 6 years 43
Slide 41: Notes to Consolidated Financial Statements Note 12. (continued) Preferred Stock 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. 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 Note 13. Transactions with Related Parties 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 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 its 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. 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 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, Note 14. Income Taxes 1999 $ 47,774 11,722 59,496 530 132 662 $ 60,158 1998 $ 34,281 8,403 42,684 3,508 872 4,380 $ 47,064 1997 $ 19,812 4,811 24,623 (12,889) (3,202) (16,091) $ 8,532 The provision for (benefit from) income taxes consisted of the following (dollars in thousands): Years Ended December 31, Currently payable – Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total currently payable ........................................................................ Deferred, net – Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total currently payable Provision for income taxes ........................................................................ ........................................................................ 44
Slide 42: UNITED STATIONERS INC. AND SUBSIDIARIES 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): Years Ended December 31, 1999 % of Pre-tax Income 35.0% 5.4 1.5 41.9% 1998 % of Pre-tax Income 35.0% 5.4 2.0 42.4% 1997 % of Pre-tax Income 35.0% 6.3 9.7 51.0% Amount Tax provision based on the federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . State and local income taxes – net of federal income tax benefit . . . . . . . . . . . . . . Non-deductible and other . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . $ 50,248 7,710 2,200 $ 60,158 Amount $ 38,846 5,993 2,225 $ 47,064 Amount $ 5,852 1,053 1,627 $ 8,532 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): As of December 31, Assets Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory reserves and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for stock option compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total .............................................................................. 1999 Liabilities $ — — 18,089 37,557 — — Assets $ 24,254 6,754 — — 3,902 6,672 $ 41,582 $ 24,384 6,354 — — 1,688 6,412 $ 38,838 1998 Liabilities $ — — 17,201 38,315 — — $ 55,646 $ 55,516 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. Note 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): 1999 Cash paid during the year for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discount on the sale of accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,449 8,919 54,520 1998 $ 35,464 7,128 26,439 1997 $ 49,279 — 13,663 45
Slide 43: Notes to UNITED STATIONERS INC. AND SUBSIDIARIES Consolidated Financial Statements Note 16. (continued) Fair Value of Financial Instruments 1999 Carrying Amount $ 18,993 9,567 100,000 100,000 127,360 — Fair Value $ 18,993 9,567 107,640 92,220 127,360 — Carrying Amount $ 19,038 7,709 100,000 100,000 107,675 — 1998 Fair Value $ 19,038 7,709 111,500 99,750 107,675 463 The estimated fair value of the Company’s financial instruments is as follows (dollars in thousands): As of December 31, Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current maturities of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt: 12.75% Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.375% Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate collar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The fair value of the Notes and interest rate collar are based on quoted market prices and quotes from counterparties, respectively. Note 17. Summarized Financial Data for Guarantor Subsidiaries 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. 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 As of December 31, Balance Sheet Data: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, Income Statement Data: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 $ 808,631 79,665 28,260 13,046 1999 $ 247,413 364,551 99,679 96,275 1998 $ 423,297 47,756 17,254 9,799 1998 $ 175,745 293,914 90,498 90,560 1997 $ 97,275 18,014 7,976 4,190 46
Slide 44: Directors Frederick B. Hegi, Jr. (e) (g) Officers Randall W. Larrimore President, Chief Executive Officer and Interim Chief Financial Officer Stockholder Information Offer of 10-K The Annual Report on Form 10-K filed with the Securities and Exchange Commission for 1999 is available without charge to any stockholder upon request to: Kathleen Dvorak Vice President, Investor Relations United Stationers Inc. 2200 East Golf Road Des Plaines, IL 60016-1267 Telephone (847) 699-5000, Ext. 2321 Fax (847) 699-4716 Founding Partner of Wingate Partners, Chairman, President and CEO, Kevco, Inc., Chairman, Loomis, Fargo & Co. and Chairman of the Board of the Company Steven R. Schwarz Executive Vice President and President, United Supply Division Randall W. Larrimore (e) President, Chief Executive Officer and Interim Chief Financial Officer Kathleen S. Dvorak Vice President, Investor Relations and Assistant Secretary Daniel J. Good Design: Hirsch O’Connor Design, Chicago, Ill. Photography: Paradise Photographic, Elk Grove Village, Ill. Printing: Triangle/Expercolor, Skokie, Ill. (g) Chairman, Good Capital Co., Inc. and Chairman, COM2001.com Tom Helton Vice President, Human Resources Ilene S. Gordon Roy W. Haley (a) (h) Stock Market Listing Nasdaq National Market System Trading Symbol: USTR Included in the S&P SmallCap 600 Index President, Pechiney Plastic Packaging (a) (h) Susan Maloney Meyer Vice President, General Counsel and Secretary Chairman and Chief Executive Officer, WESCO International, Inc. James A. Pribel Treasurer Annual Meeting The regular annual meeting of stockholders is scheduled to be held at 2:00 p.m. on May 10, 2000 at: United Stationers Inc. 2200 East Golf Road Des Plaines, IL 60016-1267 Max D. Hopper (a) Principal and Chief Executive Officer, Max D. Hopper Associates Ergin Uskup Vice President, Management Information Systems and Chief Information Officer James A. Johnson Benson P. Shapiro (h) Principal, Wingate Partners (e) (g) Transfer Agent and Registrar Communications regarding stock transfer requirements, lost stock certificates or change of address should be directed to: BankBoston, N.A. c/o EquiServe P.O. Box 8040 Boston, MA 02266-8040 Telephone (781) 575-3400 E-mail www.equiserve.com Consultant, Speaker; Malcolm P. McNair Professor of Marketing at Harvard Business School until 1997 (a) Audit Committee (e) Executive Committee (g) Governance Committee (h) Human Resources Committee Printed on Recycled Paper
Slide 45: 2200 East Golf Road Des Plaines, Illinois 60016 (847) 699 -5000 www.unitedstationers.com

   
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