-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OOuAKaReJW8Ptt2CUCW6IEB6LeIPH0Ji1MacHf3J728P68vlVcP/kPtQWb6GeP+R WYjrQTXXYXtcXZxbR6J3mg== 0000912057-97-010099.txt : 19970327 0000912057-97-010099.hdr.sgml : 19970327 ACCESSION NUMBER: 0000912057-97-010099 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATIONERS INC CENTRAL INDEX KEY: 0000355999 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 363141189 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10653 FILM NUMBER: 97563013 BUSINESS ADDRESS: STREET 1: 2200 E GOLF RD CITY: DES PLAINES STATE: IL ZIP: 60016-1267 BUSINESS PHONE: 7086995000 MAIL ADDRESS: STREET 1: 2200 E GOLF ROAD STREET 2: 2200 E GOLF ROAD CITY: DES PLAINES STATE: IL ZIP: 600161267 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATIONERS SUPPLY CO CENTRAL INDEX KEY: 0000945633 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 362431718 STATE OF INCORPORATION: DE FISCAL YEAR END: 0830 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-59811 FILM NUMBER: 97563014 BUSINESS ADDRESS: STREET 1: 2200 E GOLF RD CITY: DES PLAINES STATE: IL ZIP: 60016-1267 BUSINESS PHONE: 7086995000 MAIL ADDRESS: STREET 1: 2200 E GOLF ROAD STREET 2: 2200 E GOLF ROAD CITY: DES PLAINES STATE: IL ZIP: 600161267 10-K405 1 10-K405 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from __________ to ____________ Commission file numbers: United Stationers Inc.: 0-10653 United Stationers Supply Co.: 33-59811 UNITED STATIONERS INC. UNITED STATIONERS SUPPLY CO. (Exact name of Registrant as specified in its charter) UNITED STATIONERS INC.: DELAWARE UNITED STATIONERS INC.: 36-3141189 UNITED STATIONERS SUPPLY CO.: ILLINOIS UNITED STATIONERS SUPPLY CO.: 36-2431718 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2200 EAST GOLF ROAD DES PLAINES, ILLINOIS 60016-1267 (847) 699-5000 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrants' Principal Executive Offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered NONE N/A ------------------- --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: United Stationers Inc.: Common Stock $0.10 par value (Title of Class) INDICATE BY CHECK MARK WHETHER EACH REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. UNITED STATIONERS INC.: YES ( X ) NO ( ) UNITED STATIONERS SUPPLY CO.: YES ( X ) NO ( ) INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ( X ) AGGREGATE MARKET VALUE OF THE VOTING STOCK (WHICH CONSISTS SOLELY OF SHARES OF COMMON STOCK) HELD BY NON-AFFILIATES OF UNITED STATIONERS INC. AS OF MARCH 11, 1997, BASED ON THE LAST SALE PRICE OF THE COMMON STOCK AS QUOTED BY THE NASDAQ NATIONAL MARKET SYSTEM ON SUCH DATE: $61,807,011. UNITED STATIONERS SUPPLY CO. HAS NO SHARES OF VOTING STOCK OUTSTANDING HELD BY NON-AFFILIATES. ON MARCH 11, 1997, UNITED STATIONERS INC. HAD OUTSTANDING 11,446,306 SHARES OF COMMON STOCK, PAR VALUE $0.10 PER SHARE, AND 758,994 SHARES OF NONVOTING COMMON STOCK, $0.01 PAR VALUE PER SHARE. ON MARCH 11, 1997, UNITED STATIONERS SUPPLY CO. HAD 880,000 SHARES OF COMMON STOCK, $1.00 PAR VALUE PER SHARE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE: PART OF FORM 10-K Part III Portions of United Stationers Inc.'s definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders of United Stationers Inc., to be filed within 120 days of the fiscal year end of United Stationers Inc. - -------------------------------------------------------------------------------- UNITED STATIONERS INC. AND SUBSIDIARIES UNITED STATIONERS SUPPLY CO. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 CONTENTS AND CROSS REFERENCE SHEET FURNISHED PURSUANT TO GENERAL INSTRUCTION G(4) OF FORM 10-K FORM 10-K FORM 10-K FORM 10-K PART NO. ITEM NO. DESCRIPTION PAGE NO. - --------- --------- ----------- --------- I Explanatory Note 1 1 Business 1 General 1 Products 1-2 Customers 2 Marketing and Customer Support 3 Distribution 4 Purchasing and Merchandising 4 Competition 4-5 Employees 5 2 Properties 5 3 Legal Proceedings 6 4 Submission of Matters to a Vote of Security Holders 6 II 5 Market for Registrant's Common Equity and Related Stockholder Matters 6 Quarterly Stock Price Data 7 6 Selected Consolidated Financial Data 7-10 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18 8 Financial Statements and Supplementary Data 18-54 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55 III 10 Directors and Executive Officers of the Registrant 55-57 11 Executive Compensation 58 12 Security Ownership of Certain Beneficial Owners and Management 58 13 Certain Relationships and Related Transactions 58 IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 58-64 Signatures 65 PART I EXPLANATORY NOTE THIS INTEGRATED FORM 10-K IS FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, FOR EACH OF UNITED STATIONERS INC., A DELAWARE CORPORATION, AND ITS WHOLLY OWNED SUBSIDIARY, UNITED STATIONERS SUPPLY CO., AN ILLINOIS CORPORATION (COLLECTIVELY, THE "COMPANY"). UNITED STATIONERS INC. IS A HOLDING COMPANY WITH NO OPERATIONS SEPARATE FROM ITS OPERATING SUBSIDIARY, UNITED STATIONERS SUPPLY CO. AND ITS SUBSIDIARIES. NO SEPARATE FINANCIAL INFORMATION FOR UNITED STATIONERS SUPPLY CO. AND ITS SUBSIDIARIES HAS BEEN PROVIDED HEREIN BECAUSE MANAGEMENT FOR THE COMPANY BELIEVES SUCH INFORMATION WOULD NOT BE MEANINGFUL BECAUSE (i) UNITED STATIONERS SUPPLY CO. IS THE ONLY DIRECT SUBSIDIARY OF UNITED STATIONERS INC., WHICH HAS NO OPERATIONS OTHER THAN THOSE OF UNITED STATIONERS SUPPLY CO. AND (ii) ALL ASSETS AND LIABILITIES OF UNITED STATIONERS INC. ARE RECORDED ON THE BOOKS OF UNITED STATIONERS SUPPLY CO. THERE IS NO MATERIAL DIFFERENCE BETWEEN UNITED STATIONERS INC. AND UNITED STATIONERS SUPPLY CO. FOR THE DISCLOSURES REQUIRED BY THE INSTRUCTIONS TO FORM 10-K AND THEREFORE, UNLESS OTHERWISE INDICATED, THE RESPONSES SET FORTH HEREIN APPLY TO EACH OF UNITED STATIONERS INC. AND UNITED STATIONERS SUPPLY CO. ITEM 1. BUSINESS GENERAL On March 30, 1995, Associated Holdings, Inc., ("Associated"), was merged with and into United Stationers Inc., ("United"), with United surviving (the "Merger"). Immediately thereafter, Associated Stationers, Inc. ("ASI"), the wholly owned subsidiary of Associated, was merged with and into United Stationers Supply Co. ("USSC"), the wholly owned subsidiary of United, with USSC surviving. Although United was the surviving corporation in the Merger, the transaction was treated as a reverse acquisition for accounting purposes with Associated as the acquiring corporation. The terms "Associated" and "United" will be used to refer to either the respective pre-Merger corporations or specific aspects of the post-Merger Company's business. United is the parent company of its direct wholly owned subsidiary, USSC. Except where the context clearly indicates otherwise, including references to the capital structure of United Stationers Inc., the term "Company" hereinafter used includes United Stationers Inc. together with its subsidiary On October 31, 1996, USSC acquired all of the capital stock of Lagasse Bros., Inc. ("Lagasse"), an $80 million wholesaler of janitorial and sanitary supplies. Lagasse operates as a subsidiary of USSC. The Company is the largest general line business products wholesaler in the United States with 1996 net sales of $2.3 billion. The Company sells its products through a single national distribution network to more than 15,000 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 41 distribution centers and 14 Lagasse distribution centers. PRODUCTS The Company markets the broadest product line in the industry, including traditional office products, computer supplies, office furniture, and facilities and maintenance supplies. As part of the Company's business strategy to acquire incremental sales and increase market share through complementary product offerings, the Company began to focus on specialty product segments in 1991 and has expanded steadily upon this concept since then. The Company's product offerings, comprised of more than 30,000 items, may be divided into four primary categories: 1 TRADITIONAL OFFICE PRODUCTS. The Company's core business continues to be traditional office products, which include both brand-name products and the Company's private brand products. Traditional office products include writing instruments, paper products, organizers and calendars and various office accessories. Traditional office products constituted the majority of the Company's 1996 net sales. COMPUTERS AND RELATED SUPPLIES. The Company sells brand name computer supplies, peripherals and hardware to computer resellers and office products dealers. Such office technology constituted approximately 25% of the Company's 1996 net sales. OFFICE FURNITURE. The Company's sale of office furniture including leather chairs, wooden and steel desks and computer furniture has enabled it to become the nation's largest office furniture wholesaler, with the Company currently offering nearly 3,000 furniture items from 70 different manufacturers. Office furniture constituted approximately 14% of the Company's 1996 net sales. The Company's "Pro-Image" program enables resellers with no previous expertise to provide high-end furniture and office design services to end-users. The Company offers national delivery and product "set-up" capabilities to resellers. OTHER PRODUCTS. The Company's newest product categories encompass the facilities management supplies market, which includes janitorial and sanitation supplies, specialty mailroom and warehouse items, kitchen and cafeteria items, first aid products and ergonomic products designed to enhance worker productivity, comfort and safety. Additionally, the Company offers its "Signature Image" program, which provides resellers with access into the advertising specialties market (such as imprinted and logo items). CUSTOMERS The Company sells exclusively to resellers of business products. Its 15,000 customers include commercial, contract and retail office products dealers; members of affiliated groups; members of buying cooperatives; mega-dealers linked through common ownership; contract and retail office furniture dealers, office products superstores; mass merchandisers; computer products resellers; mail order companies; and sanitary supply distributors. No single reseller accounted for more than 6% of the Company's net sales in 1996. Commercial dealers and contract stationers are the most significant reseller channel for office products distribution and typically serve large businesses, institutions and government agencies. Through industry consolidation, the number of such dealers has decreased, with the remaining dealers getting larger. Net sales to these commercial dealers and contract stationers as a group are growing rapidly. The number of retail dealers has been declining for some time as the result of individual retail dealers' inability to compete successfully with the growing number of superstores and, more recently, as a result of dealerships being acquired and brought under an umbrella of common ownership. However, many retail office products dealers have adapted to this highly competitive environment. Many retail dealers, commercial dealers and contract stationers have joined forces in marketing or buying groups in order to increase purchasing leverage. The Company believes it is the leading wholesale source for many of these groups, providing not only merchandise but also special programs that enable these dealers to take advantage of their combined strengths. While the Company maintains and builds its business with commercial dealers, contract stationers (including the contract stationer divisions of national office product superstores) and retail dealers, it has also initiated relationships with most major office products superstore chains. In addition, the Company supplies inventory and other fulfillment services to the retail operations of certain superstores, including their direct-to-business delivery programs. 2 MARKETING AND CUSTOMER SUPPORT Substantially all of the Company's 30,000 products are sold through its comprehensive office products catalogs and flyers. These materials include general line catalogs, promotional pieces and specialty catalogs for the office products, office furniture, facilities management supplies and other specialty markets. The Company produces numerous catalogs for placement with dealers' end- user customers, including the following annual catalogs: General Line Catalog; Office Furniture Catalog featuring furniture and accessories; Universal Catalog promoting the Company's private-brand merchandise; Computer Products Catalog offering hardware, supplies, accessories and furniture; Facilities and Maintenance Supplies Catalog featuring janitorial, maintenance, food service, warehouse and mailroom supplies and a Lagasse catalog offering janitorial and sanitary supplies. In addition, the Company produces the following quarterly promotional catalogs: Action 2000 and Office Saver, each featuring over 1,000 high-volume commodity items, and Computer Concepts, featuring computer supplies, peripherals, accessories and furniture. The Company also produces separate 8- page quarterly flyers covering general office supplies, office furniture and Universal-TM-products. Because commercial dealers, contract stationers and retail dealers typically distribute only one wholesaler's catalogs in order to streamline and concentrate order entry, the Company attempts to maximize the distribution of its catalogs by offering advertising credits to resellers, which can be used to offset the cost of catalogs. The Company also offers an electronic catalog available on CD-Rom and through the Company's web site. This catalog features 24,000 business products. In addition to marketing its products and services through the use of its catalogs, the Company employs a sales force of approximately 160 salespersons. The sales force is responsible for sales and service to resellers with which the Company has an existing relationship, as well as for establishing new relationships with additional resellers. The Company supplements the efforts of its sales force through telemarketing. The Company concentrates its marketing efforts on providing value-added services to resellers. The Company distributes products that are generally available at similar prices from multiple sources, and most of its customers purchase their products from more than one source. As a result, the Company seeks to differentiate itself from its competitors through a broader product offering, a higher degree of product availability, a variety of high quality customer services and prompt distribution capabilities. In addition to emphasizing its broad product line, extensive inventory, computer integration and national distribution capabilities, the Company's marketing programs have relied upon two additional major components. First, the Company produces an extensive array of catalogs for commercial dealers, contract stationers and retail dealers that are usually custom imprinted with each reseller's name and sold to these resellers who, in turn, distribute the catalogs to their customers. Second, the Company provides its resellers with a variety of dealer support and marketing services, including business management systems, promotional programs and pricing services. These services are designed to aid resellers in differentiating themselves from their competitors by addressing the steps in the end-user's procurement process. To assist its resellers with pricing, the Company offers matrix pricing software. Traditionally, many resellers have priced products on a discount from the manufacturer's suggested retail price, but recently pricing has shifted toward a net pricing approach, whereby resellers sell certain products at significant discounts, assuming that it can recapture the discounts through the sale of other higher margin products. The Company's matrix pricing program provides resellers with a resource to assist them in identifying the optimum pricing mix between high and low margin items and, as a result, enables resellers to more efficiently manage their gross margins. The Company offers to its resellers a variety of electronic order entry systems and business management and marketing programs which enhance the resellers' ability to manage their businesses profitably. For instance, the Company maintains EDI systems that link the Company to selected resellers, and interactive order systems that link the Company to selected resellers and such resellers to the ultimate end-user. In addition, the Company's electronic order entry systems allow the reseller to seamlessly forward its customers' orders to the Company, resulting in the delivery of pre-sold products to the reseller or directly to its customers. The Company estimates that in 1996, approximately 90% of its orders were received electronically. 3 DISTRIBUTION The Company has a network of 41 regional distribution centers located in 36 metropolitan areas in 25 states, most of which carry the Company's full line of inventory. In addition, the Company serves sanitary supply distributors through 14 Lagasse distribution centers. The Company supplements its regional distribution centers with 24 local distribution points throughout the United States that serve as reshipment points for orders filled at the regional distribution centers. The Company utilizes more than 350 trucks, substantially all of which are contracted for by the Company, to enable direct delivery from the regional distribution centers and local distribution points to resellers. The Company's distribution capabilities are augmented by its proprietary, computer-driven system. If a reseller places an order for an item that is out of stock at the Company location which usually serves the particular reseller, the Company's system will automatically search for the item at alternative distribution centers. If the item is available at an alternative location, the system will automatically forward the order to that alternate location, which will then coordinate shipping with the primary facility and, for the majority of resellers, provide a single on-time delivery. The system effectively provides the Company with added inventory support, which enables it to provide higher service levels to the reseller, to reduce back orders and to minimize time spent searching for merchandise substitutes, all of which contribute to the Company's high order fill rate and efficient levels of inventory balances. Another service offered by the Company to resellers is its "wrap and label" program, which allows resellers the option to receive orders in accordance with the specifications of particular end-users. For example, when a reseller receives orders from a number of separate end-users, the Company groups and wraps the items individually by end-user so that the reseller need only deliver the package. The "wrap and label" program is attractive to resellers because it eliminates the need to break down case shipments and to repackage the orders before delivering them to the end-user. PURCHASING AND MERCHANDISING As the largest national business products wholesaler in the United States, the Company has substantial purchasing power and can realize significant economies of scale. The Company obtains products from over 500 manufacturers. For many of its manufacturers, the Company believes that it is a significant customer. In 1996, no supplier accounted for more than 11% of the Company's aggregate purchases. As a centralized corporate function, the Company's merchandising department interviews and selects suppliers and products for inclusion in the catalogs. Selection is based upon end-user acceptance and demand for the product and the manufacturer's total service, price and product quality offering. COMPETITION The Company competes with business products manufacturers and with other national, regional and specialty wholesalers of office products, office furniture, computer supplies and facility management supplies. Competition between the Company and manufacturers is based primarily upon net pricing, minimum order quantity and product availability. Although manufacturers may provide lower prices to resellers than the Company does, the Company's marketing and catalog programs, combined with speed of delivery and its ability to offer resellers a broad line of business products from multiple manufacturers on a "one-stop shop" basis and with lower minimum order quantities, are important factors in enabling the Company to compete effectively. See "Marketing and Customer Support" and "Distribution." Manufacturers typically sell their products through a variety of distribution channels, including wholesalers and resellers. 4 Competition between the Company and other wholesalers is based primarily on net pricing to resellers, breadth of product lines, availability of products, speed of delivery to resellers, order fill rates and the quality of its marketing and other services. The Company believes it is competitive in each of these areas. Most wholesale distributors of business products conduct operations regionally and locally, sometimes with limited product lines such as writing instruments or computer products. Only one other national wholesaler carries a full line of office products. Consolidation has occurred in recent years at all levels of the business products industry. Consolidation of commercial dealers and contract stationers has resulted in an increased ability of those resellers to buy goods directly from manufacturers. In addition, over the last decade, office products superstores (which largely buy directly from manufacturers) have entered virtually every major metropolitan market. Increased competition in the business products industry, together with increased advertising, has heightened price awareness among end-users. As a result, purchasers of commodity type office products have become extremely price sensitive, and therefore the Company has increased its efforts to market to resellers the continuing advantages of its competitive strengths (as compared to those of manufacturers and other wholesalers), such as marketing and catalog programs, speed of delivery, and the ability to offer resellers a "one-stop shop" for a broad line of business products from multiple manufacturers with lower minimum order quantities. In addition, such heightened price awareness has led to margin pressure on commodity office products. In the event that such trend continues, the Company's profit margins could be adversely affected. EMPLOYEES At December 31, 1996, the Company employed approximately 4,900 persons. The Company considers its relationship with its employees to be good. Approximately 900 of the shipping, warehouse and maintenance employees at certain of the Chicago, Detroit, Philadelphia, Baltimore, Los Angeles, Minneapolis and New York City facilities are covered by collective bargaining agreements. The agreements expire at various times during the next three years. ITEM 2. PROPERTIES The Company considers its properties to be suitable and adequate for their intended uses. These properties consist of the following: EXECUTIVE OFFICES. The Company's office facility in Des Plaines, Illinois has approximately 135,800 square feet of office and storage space. In September 1993, approximately 47,000 square feet of office space located in Mt. Prospect, Illinois was leased by the Company. This lease expires in September of 1999 with an option to renew for two five-year terms. USSC REGIONAL DISTRIBUTION CENTERS. The Company presently operates 41 distribution centers in 25 states. These centers represent, in total, approximately 7.1 million square feet, of which approximately 4.3 million is owned and the balance is leased. LOCAL DISTRIBUTION POINTS. The Company also operates 24 local distribution points. Two are leased by the Company; the other local distribution points are operated through cross-docking arrangements with third party distribution companies. LAGASSE DISTRIBUTION CENTERS. Lagasse operates 14 leased distribution centers, specifically serving janitorial and sanitary supply distributors. These centers represent, in total, approximately 400,000 square feet. Its New Orleans distribution center also includes 22,000 square feet of executive office space. 5 ITEM 3. LEGAL PROCEEDINGS The Company is involved in legal proceedings arising in the ordinary course of its business. The Company is not involved in any legal proceeding that it believes will result, individually or in the aggregate, in a material adverse effect upon its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders through the solicitation of proxies in the fourth quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS QUARTERLY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(UNAUDITED) THE COMPANY/ASSOCIATED
Income Income (Loss) (Loss) Per Share Before Net Before Net Income Net Gross Extraordi- Income Extraordinary (Loss) Sales Profit (1) nary Item (Loss) Item (2)(5) Per Share (2)(5) ------------ ---------- ---------- ------ ------------- ---------------- Year Ended DECEMBER 31, 1996 First Quarter $ 586,881 $102,526 $ 8,209 $ 8,209 $0.51 $0.51 Second Quarter 535,690 87,212 5,273 5,273 0.32 0.32 Third Quarter 576,254 98,207 8,781 8,781 0.56 0.56 Fourth Quarter 599,345 103,016 9,730 9,730 0.63 0.63 ---------- -------- ------ ------ Totals $2,298,170 $390,961 $31,993 $31,993 2.03 2.03 ---------- -------- ------ ------ ---------- -------- ------ ------ Year Ended DECEMBER 31, 1995 First Quarter (3) $ 134,997 $ 24,978 ($4,233)(4) ($5,682) ($0.72) ($0.94) Second Quarter 529,429 90,563 1,524 1,524 0.07 0.07 Third Quarter 537,624 93,818 4,173 4,173 0.27 0.27 Fourth Quarter 549,412 95,154 4,779 4,779 0.29 0.29 ---------- -------- ------ ------ Totals $1,751,462 $304,513 $6,243 $4,794 0.33 0.22 ---------- -------- ------ ------ ---------- -------- ------ ------
(1) Gross profit is net of delivery and occupancy costs. See Note 3 (Reclassification) to the Consolidated Financial Statements of the Company included elsewhere herein. (2) Historical earnings per share amounts have been restated to reflect the share conversion resulting from the Merger and the 100% stock dividend effective November 9, 1995. Earnings per share are net of preferred stock dividends. (3) Reflects the results of Associated only. (4) The extraordinary item reflects the write-off of financing costs and original issue discount relating to the retired debt which was being amortized over the life of the original debt. (5) As a result of changes in the number of common and common equivalent shares during the year, the sum of four quarters' earnings per share will not equal earnings per share for the total year. 6 QUARTERLY STOCK PRICE DATA The 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 per share for the common Stock as reported by the NASDAQ National Market System. All stock price information has been restated to reflect the 100% stock dividend effective November 9, 1995. High Low 1995 First Quarter * * Second Quarter $9 5/16 $ 8 9/16 Third Quarter $15 1/2 $ 8 11/16 Fourth Quarter $27 3/4 $13 3/4 1996 First Quarter $30 1/4 $21 1/2 Second Quarter $24 1/2 $19 1/2 Third Quarter $24 1/2 $17 1/2 Fourth Quarter $23 $19 1/2 * Due to the significant changes in the Company's capital structure resulting from the Merger, stock price information for the period prior to the Merger has not been included as it is not comparable to the stock price information since the Merger. On February 28, 1997, there were approximately 1,020 holders of record of common stock. The Company does not currently intend to pay any cash dividends on the common stock. Furthermore, as a holding company, the ability of United to pay dividends in the future is dependent upon the receipt of dividends or other payments from its operating subsidiary, USSC. The payment of dividends by USSC is subject to certain restrictions imposed by the Company's debt agreements. See Note 5 to the Consolidated Financial Statements of the Company included elsewhere herein. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Set forth below and on the following pages is selected historical consolidated financial data for the Company and its predecessors. Although United was the surviving corporation in the Merger, the Acquisition was treated as a reverse acquisition for accounting purposes, with Associated as the acquiring corporation. Therefore, the income statement and operating and other data for the year ended December 31, 1995 reflect the financial information of Associated only for the three months ended March 30, 1995, and the results of the Company for the nine months ended December 31, 1995. The balance sheet data at December 31, 1996 and 1995 reflects the consolidated balances of the Company, including various Merger-related adjustments. Income statement data for all periods presented reflects a reclassification of delivery and occupancy costs to cost of goods sold from operating expenses. THE COMPANY/ASSOCIATED The selected consolidated financial data of Associated's predecessor (the wholesale division of Boise Cascade Office Products Corporation "BCOP") set forth below for the one-month period ended January 31, 1992 (when Associated purchased the wholesale division of BCOP (the "Associated Transaction")) are derived from the unaudited financial statements of Associated's predecessor for such period. Associated accounted for the Associated Transaction using the purchase method of accounting. There are material operational and accounting differences between Associated's predecessor and Associated resulting from the Associated Transaction. Accordingly, the historical financial data of Associated's predecessor may not be comparable in all material respects with data of Associated. 7 The selected consolidated financial data of Associated set forth below for the period from January 31, 1992 to December 31, 1992 and for the years ended December 31, 1993 and 1994 has been derived from the Consolidated Financial Statements of Associated which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data of the Company for the years ended December 31, 1996 and 1995 (which for Income Statement and Operating and Other Data includes Associated only for the three months ended March 30, 1995 and the results of the Company for the nine months ended December 31, 1995) has been derived from the Consolidated Financial Statements of the Company which have been audited by Ernst & Young LLP, independent auditors. All selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Historical Results of Operations of the Company/Associated," "Liquidity and Capital Resources of the Company/Associated" and the Consolidated Financial Statements of the Company included elsewhere in this Form 10-K.
PREDECES- THE COMPANY SOR(1)(2) ----------------------------------------------------------------------- ---------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JAN 31 TO JAN. 1 TO DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, JAN. 31, 1996 1995 1994 1993 1992 1992 (3) ---------- ---------- ---------- ---------- --------- --------- (dollars in thousands, except per share data) Income Statement Data: Net sales. . . . . . . . . . . . . $2,298,170 $1,751,462 $470,185 $455,731 $359,779 $39,016 Cost of goods sold . . . . . . . . 1,907,209 1,446,949 382,299 375,226 295,668 31,612 ---------- ---------- -------- -------- -------- ------- Gross profit. . . . . . . . . . 390,961 304,513 87,886 80,505 64,111 7,404 Operating expenses . . . . . . . . 277,957 246,956 (4) 69,765 69,527 53,758 5,985 ---------- ---------- -------- -------- -------- ------- Income from operations. . . . . 113,004 57,557 18,121 10,978 10,353 $ 1,419 ------- ------- Interest expense, net. . . . . . . 57,456 46,186 7,725 7,235 5,626 ---------- ---------- -------- -------- -------- Income before income taxes and extraordinary item . . . 55,548 11,371 10,396 3,743 4,727 Income taxes . . . . . . . . . . . 23,555 5,128 3,993 781 1,777 ---------- ---------- -------- -------- -------- Income before extraordinary item . . . . . . . . . . . . 31,993 6,243 $ 6,403 2,962 2,950 Extraordinary item - loss on early retirement of debt, net of tax benefit of $967 . . . - - (1,449) - - - - - - ---------- ---------- -------- -------- -------- Net income . . . . . . . . . . . . $ 31,993 $ 4,794 $ 6,403 $ 2,962 $ 2,950 ---------- ---------- -------- -------- -------- ---------- ---------- -------- -------- -------- Net income attributable to common stockholders . . . . . . $ 30,249 $ 2,796 $ 4,210 $ 915 $ 1,501 ---------- ---------- -------- -------- -------- ---------- ---------- -------- -------- -------- Net income per common and common equivalent share Income before extraordinary item. . . . $2.03 $0.33 $0.51 $0.11 $0.19 Extraordinary item . . . . . - - (0.11) - - - - - - ----- ----- ----- ----- ---- Net income . . . . . . . . . $2.03 $0.22 $0.51 $0.11 $0.19 ----- ----- ----- ----- ---- ----- ----- ----- ----- ---- Cash dividends declared per common share. . . . . . . . . . - - - - - - - - - - Operating and Other Data: EBITDA (5) . . . . . . . . . . . . $ 139,046 $ 81,241 $ 23,505 $ 16,481 $ 14,875 $ 1,661 EBITDA margin (6). . . . . . . . . 6.1% 4.6% (7) 5.0% 3.6% 4.1% 4.3% Depreciation and amortization (8). . . . . . . . $ 26,042 $ 23,684 $ 5,384 $ 5,503 $ 4,522 $ 242 Capital expenditures . . . . . . . (2,886)(9) 8,017 554 3,273 4,289 (36)
8
THE COMPANY ---------------------------------------------------------------------- AT DECEMBER 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (dollars in thousands) BALANCE SHEET DATA: Working capital. . . . . . . . . . . . . . . . . . $ 404,973 $ 355,465 $ 56,454 $ 57,302 $ 46,396 Total assets . . . . . . . . . . . . . . . . . . . 1,109,867 1,001,383 192,479 190,979 179,069 Total debt and capital leases (10) . . . . . . . . 600,002 551,990 64,623 86,350 78,297 Redeemable preferred stock . . . . . . . . . . . . 19,785 18,041 23,189 20,996 18,949 Redeemable warrants. . . . . . . . . . . . . . . . 23,812 39,692 1,650 1,435 1,435 Total stockholders' equity . . . . . . . . . . . . 75,820 30,024 24,775 11,422 10,466
(1) The capital structure and accounting basis of the assets and liabilities of Associated's predecessor differ from those of Associated (i.e. the Company). Accordingly, certain financial information for the period before January 31, 1992 is not comparable to that for periods after January 31, 1992 and therefore is not presented in this table. (2) Associated's predecessor operated as a segment of a company which did not allocate income tax or interest expense to the predecessor. Accordingly, actual operating results for Associated's predecessor reflect only income from operations before interest expense and income taxes. (3) Derived from the unaudited financial statements of Associated's predecessor for the one month ended January 31, 1992. (4) Includes a restructuring charge of $9.8 million. (5) EBITDA is defined as earnings before interest, taxes, depreciation and amortization and extraordinary item and is presented because it is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance and to determine a company's ability to service and incur debt. EBITDA should not be considered in isolation from or as a substitute for net income, cash flows from operating activities or other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. (6) EBITDA margin represents EBITDA as a percent of net sales. (7) EBITDA margin would have been 5.2% if adjusted to exclude the restructuring charge. (8) Excludes amortization of deferred financing costs. (9) Includes $11.1 million of proceeds from the sale of property, plant and equipment. (10) Total debt and capital leases include current maturities. UNITED The selected consolidated financial data of United (a predecessor of the Company) set forth below for the seven months ended March 30, 1995 (at which time United and Associated merged to create the Company) has been derived from the Consolidated Financial Statements of United which have been audited by Ernst & Young LLP, independent auditors. The selected financial data at and for the seven-month period ended March 31, 1994 is unaudited and in the opinion of management reflects all adjustments considered necessary for a fair presentation of such data. The selected consolidated financial data of United for each of the three fiscal years ended August 31, 1994, 1993 and 1992 have been derived from the Consolidated Financial Statements of United which have been audited by Arthur Andersen LLP, independent public accountants. All selected consolidated financial data set forth 9 below should be read in conjunction with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Historical Results of Operations of United" and "Historical Liquidity and Capital Resources of United" and the Consolidated Financial Statements of United, together with the related notes thereto, included elsewhere herein.
SEVEN MONTHS ENDED YEAR ENDED AUGUST 31, ------------------------ ---------------------------------------- MARCH 30, MARCH 31, --------- --------- 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) INCOME STATEMENT DATA: Net sales. . . . . . . . . . . . . . . . . . . . . $ 980,575 $ 871,585 $1,473,024 $1,470,115 $1,094,275 Cost of sales. . . . . . . . . . . . . . . . . . . 814,780 717,546 1,220,245 1,197,664 887,418 --------- --------- ---------- ---------- ---------- Gross profit on sales. . . . . . . . . . . . . . . 165,795 154,039 252,779 272,451 206,857 Operating expenses . . . . . . . . . . . . . . . . 133,098 128,594 216,485 226,337 180,455 Merger-related costs . . . . . . . . . . . . . . . 27,780(1) - - - - - - - - --------- --------- ---------- ---------- ---------- Income from operations . . . . . . . . . . . . . . 4,917 25,445 36,294 46,114 26,402 Interest expense, net. . . . . . . . . . . . . . . 7,500 5,837 10,461 9,550 6,503 Other income, net. . . . . . . . . . . . . . . . . 41 117 225 355 364 --------- --------- ---------- ---------- ---------- Income (loss) before income taxes. . . . . . . . . (2,542) 19,725 26,058 36,919 20,263 Income taxes.. . . . . . . . . . . . . . . . . . . 4,692 8,185 10,309 15,559 8,899 --------- --------- ---------- ---------- ---------- Net income (loss). . . . . . . . . . . . . . . . . $ (7,234) $ 11,540 $ 15,749 $ 21,360 $ 11,364 --------- --------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- Net income (loss) per common share . . . . . . . . $ (0.39) $ 0.62 $ 0.85 $ 1.15 $ 0.71 Cash dividends declared per share. . . . . . . . . 0.30 0.30 0.40 0.40 0.40 OPERATING AND OTHER DATA: EBITDA(2). . . . . . . . . . . . . . . . . . . . . 17,553 37,665 57,755 67,712 46,645 EBITDA margin(3) . . . . . . . . . . . . . . . . . 1.8% 4.3% 3.9% 4.6% 4.3% Depreciation and amortization. . . . . . . . . . . $ 12,595 $ 12,103 $ 21,236 $ 21,243 $ 19,879 Net capital expenditures . . . . . . . . . . . . . 7,764 4,287 10,499 29,958 8,291 BALANCE SHEET DATA (AT PERIOD END): Working capital. . . . . . . . . . . . . . . . . . 257,600 297,099 239,827 216,074 214,611 Total assets . . . . . . . . . . . . . . . . . . . 711,839 608,728 618,550 634,786 601,465 Total debt and capital leases(4) . . . . . . . . . 233,406 227,626 155,803 150,251 150,728 Stockholders' investment.. . . . . . . . . . . . . 233,125 243,636 246,010 237,697 223,387
(1) In connection with the Merger, United incurred approximately $27.8 million of Merger-related costs, consisting of severance payments under employment contracts ($9.6 million); insurance benefits under employment contracts ($7.4 million); legal, accounting and other professional services fees ($5.2 million); retirement of stock options ($3.0 million); and fees for letters of credit related to employment contracts and other costs ($2.6 million). (2) EBITDA is defined as earnings before interest, taxes, depreciation and amortization and is presented because it is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance and to determine a company's ability to service and incur debt. EBITDA should not be considered in isolation from or as a substitute for net income, cash flows from operating activities or other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. (3) EBITDA margin represents EBITDA as a percentage of net sales. (4) Total debt and capital leases include current maturities. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Form 10-K. Certain information presented in this Form 10-K includes forward-looking statements regarding the Company's future results of operations. The Company is confident that its expectations are based on reasonable assumptions given its knowledge of its operations and business. However, there can be no assurance that the Company's actual results will not differ materially from its expectations. The matters referred to in forward-looking statements may be affected by the risks and uncertainties involved in the Company's business including, among others, competition with business products manufacturers and other wholesalers, consolidation of the business products industry, the ability to maintain gross profit margins, the ability to achieve future cost savings, changing end-user demands, changes in manufacturer pricing, service interruptions and availability of liquidity and capital resources. OVERVIEW On March 30, 1995, Associated merged with and into United. Although the Company was the surviving corporation in the Merger, the transaction was treated as a reverse acquisition for accounting purposes, with Associated as the acquiring corporation. Therefore, the results of operations for the year ended December 31, 1995 reflects the financial information of Associated only for the three months ended March 30, 1995 and the results of the Company for the nine months ended December 31, 1995. As a result of the Merger, the results of operations of the Company for the year ended December 31, 1995 are not comparable to those of previous and subsequent periods. To facilitate a meaningful comparison, the following supplemental discussion and analysis is based on certain components of the combined historical results of operations without any pro forma adjustments for Associated and United for the year ended December 31, 1994 and on the pro forma results of operations for the Company for the year ended December 31, 1995. The pro forma and combined historical results of operations do not purport to be indicative of the results that would have been obtained had such transactions been completed for the periods presented or that may be obtained in the future. GENERAL INFORMATION GROSS PROFIT MARGINS. In recent years, a number of factors have adversely affected gross profit margins in the office products industry, including those of the Company. These factors reflect the increasingly competitive nature of the industry. Competitive pressures have increased due in part to the growth of large resellers such as national office products superstores that have heightened price awareness at the end-user level. The increasing price sensitivity of end-users has contributed to the decline in industrywide gross profit margins. These pressures are expected to continue in the future. The Company's gross profit margins vary across product categories, so that material changes in its product mix can impact the Company's overall margin. For example, the gross profit margin on the Company's sales of commodity products, such as copier paper and laser printer toner--product categories that have grown over the past few years--tend to be lower than the gross profit margins on most other product categories. While the recent increase in sales of these types of products have adversely affected the Company's overall gross profit margin, they have contributed to higher operating income. The Company expects such sales to increase as a percentage of revenues in the future. 11 RESTRUCTURING CHARGE. The historical results for the twelve months ended December 31, 1995 include a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9 million). The restructuring charge included severance costs totaling $1.8 million. The Company's consolidation plan specified that 330 distribution, sales and corporate positions, 180 of which related to pre- Merger Associated, were to be eliminated substantially within one year following the Merger. The Company has achieved its target, with the related termination costs of approximately $1.8 million charged against the reserve. The restructuring charge also included distribution center closing costs totaling $6.7 million and stockkeeping unit reduction costs totaling $1.3 million. The consolidation plan called for the closing of eight redundant distribution centers, six of which related to pre-Merger Associated, and the elimination of overlapping inventory items from the Company's catalogs substantially within the one-year period following the Merger. Estimated distribution center closing costs included (i) the net occupancy costs of leased facilities after they are vacated until expiration of leases and (ii) the losses on the sale of owned facilities and the facilities' furniture, fixtures, and equipment. Estimated stockkeeping unit reduction costs included losses on the sale of inventory items which have been discontinued solely as a result of the Acquisition. As of December 31, 1996, five of the six redundant pre-Merger Associated distribution centers have been closed with $5.5 million charged against the reserve and $2.0 million related to stockkeeping unit reduction costs have also been charged against the reserve. As of December 31, 1996, the Company's consolidation plan has been substantially completed. Seven of the eight redundant distribution centers have been closed. The restructuring reserve balance at December 31, 1996 of $0.5 million is expected to be adequate to cover the remaining estimated expenditures related to integration and transition costs. See Note 4 to the Consolidated Financial Statements of the Company included elsewhere herein. EMPLOYEE STOCK OPTIONS. In September 1995, the Board of Directors approved an amendment to the Company's employee stock option plan (the "Plan") that allows for the issuance of employee stock options to key management employees of the Company exercisable for up to approximately 2.2 million additional shares of Common Stock. The Plan was designed to build increased employee commitment through participation in the growth and performance of the Company. Subsequently, employee stock options exercisable for an aggregate of approximately 2.2 million shares of Common Stock were granted to key management employees. Some of the employee stock options were granted at an exercise price below the then fair market value of the Common Stock. The exercise price of certain options increases by $0.625 on a quarterly basis effective April 1, 1996. The employee stock options granted under the Plan do not vest to the employee until the occurrence of an event (a "Vesting Event") that causes the present non-public equity investors to have received at least a full return of their investment (at cost) in cash, fully tradable marketable securities or the equivalent. A Vesting Event will cause the Company to recognize compensation expense based upon the difference between the fair market value of the Common Stock and the exercise prices of the employee stock options. Based upon a stock price of $19.50 and options outstanding as of December 31, 1996, the Company would recognize a nonrecurring noncash charge of $18.4 million in compensation expense ($10.6 million net of tax benefit of $7.8 million), if a Vesting Event were to occur. Each $1.00 change in the fair market value of Common Stock could result in a maximum adjustment to such compensation expense of approximately $2.5 million ($1.4 million net of tax effect of $1.1 million). CHANGE IN ACCOUNTING METHOD. Effective January 1, 1995, Associated changed its method of accounting for the cost of inventory from the FIFO method to the LIFO method. Associated made this change in contemplation of its acquisition of United (accounted for as a reverse acquisition) so that its method would conform to that of United. Associated believed that the LIFO method provides a better matching of current costs and current revenues, and that earnings reported under the LIFO method are more easily compared to that of other companies in the wholesale industry where the LIFO method is common. In 1995, this change resulted in the reduction of pre-tax income of the Company of approximately $8.8 million ($5.3 million net of tax benefit of $3.5 million). See Note 3 (Inventories) to the Consolidated Financial Statements of the Company included elsewhere herein. RECLASSIFICATION OF DELIVERY AND OCCUPANCY COSTS. During the fourth quarter of 1996, the Company reclassified its delivery and occupancy costs from operating expenses to cost of goods sold to conform the Company's presentation to others in the business products industry. See Note 3 (Reclassification) to the Consolidated Financial Statements included elsewhere herein. 12 ACTUAL, PRO FORMA AND COMBINED RESULTS OF OPERATIONS The following table of summary actual, pro forma (see Note 4 to the Consolidated Financial Statements of the Company included elsewhere herein) and combined historical financial data is intended for informational purposes only and is not necessarily indicative of either financial position or results of operations in the future, or that would have occurred had the events described in the first paragraph under "Overview" occurred on January 1, 1995. The following information should be read in conjunction with, and is qualified in its entirety by, the historical Consolidated Financial Statements of the Company and its predecessors, including the related notes thereto, included elsewhere herein. The following table also presents unaudited summary combined historical financial data for Associated and United for the year ended December 31, 1994. This data has not been prepared in accordance with generally accepted accounting principles, which do not allow for the combination of financial data for entities that are not under common ownership. Nevertheless, management believes that this combined historical financial data, when read in conjunction with the separate historical financial statements of Associated and United prepared in accordance with generally accepted accounting principles and included elsewhere herein, may be helpful in understanding the past operations of the companies that were combined in the Merger. This combined historical financial data for 1994 represents a combination of the historical financial data for Associated and United for the periods indicated without any pro forma adjustments, and is supplemental to the historical financial data of Associated and United included elsewhere herein.
ACTUAL PRO FORMA COMBINED --------------------- --------------------- --------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- --------------------- (dollars in thousands) Net sales $2,298,170 100.0% $2,201,860 100.0% $1,990,363 100.0% Gross profit 390,961 17.0 381,270 17.3 344,542 17.3 Operating expenses 277,957 12.1 299,861 13.6 285,500 14.3 Income from operations 113,004 4.9 81,409 3.7 59,042 3.0
COMPARISON OF ACTUAL RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND PRO FORMA RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales increased 4.4% to $2,298.2 million for 1996 from $2,201.9 million for 1995. This increase is primarily the result of higher unit sales in all product categories. In addition, our Micro United division continues to report strong growth resulting from the underlying strength in the marketplace. The Company's year-long focus on improving the consistency and reliability of its service has led to increased sales and higher customer and consumer satisfaction. The Company's core strengths, coupled with the strategic initiatives already under way, position it to deliver continued growth in both sales and earnings. GROSS MARGIN. Gross margin declined to 17.0% in 1996 from 17.3% in 1995. This decrease reflects a shift in our product mix, the continuing consolidation of our dealer base and deflation across our product mix. OPERATING EXPENSES. Operating expenses decreased as a percent of net sales to 12.1% in 1996, compared with 13.6% in 1995. This decrease is primarily due to the realization of merger synergies, cost containment, productivity improvements and leveraging of fixed expenses. The Company's operating efficiency allows it to join forces with its customers to produce high levels of customer and consumer satisfaction. The Company's management believes there is further room for improvement, primarily through warehouse and systems efficiencies. INCOME FROM OPERATIONS. Income from operations as a percent of net sales increased to 4.9% in 1996 from 3.7% in 1995. 13 COMPARISON OF PRO FORMA RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND COMBINED RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 NET SALES. Net sales were $2,201.9 million for 1995, a 10.6% increase over net sales of $1,990.4 million in 1994. The increase in net sales was primarily the result of changes in unit volume rather than changes in prices. Sales grew in all geographic regions. In addition, the sales growth was attributable to an increase in the sale of computer-related products through the Company's Micro United division. GROSS MARGIN. Gross profit as a percent of net sales was 17.3% in 1995 and 1994. The gross profit margin in 1995 reflects a shift in product mix and a larger LIFO charge due to Associated's change in its method of accounting for inventory from the FIFO method to the LIFO method. Also, gross profit was adversely affected in 1995 by higher sales of computer-related products and commodity items which typically carry lower gross profit margins, offset by lower freight and occupancy costs. OPERATING EXPENSES. Operating expenses as a percent of net sales decreased to 13.6% in 1995 from 14.3% in 1994. The decrease in operating expenses as a percent of net sales was primarily due to increased operating efficiencies, improved productivity and increased economies of scale as a result of a higher sales base. INCOME FROM OPERATIONS. Income from operations as a percent of net sales was 3.7% in 1995 compared with 3.0% in 1994. HISTORICAL RESULTS OF OPERATIONS COMPARISON OF HISTORICAL FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995 NET SALES. Net sales increased 31.2% to $2,298.2 million for 1996 from $1,751.5 million for 1995. This increase was primarily the result of the Merger for a full twelve months in 1996. Sales in 1995 include only nine months of United's sales. GROSS MARGIN. Gross margin declined to 17.0% in 1996 from 17.4% in 1995. This decrease reflects a shift in our product mix, the continuing consolidation of our dealer base and deflation across our product mix. OPERATING EXPENSES. Operating expenses decreased as a percent of net sales to 12.1% in 1996, compared with 14.1% in 1995. The results for 1995 include the impact of a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9 million). The decline in the operating expense ratio before the restructuring charge (12.1% in 1996 versus 13.5% in 1995) was primarily due to the realization of merger synergies, cost containment, productivity improvements and leveraging of fixed expenses. INCOME FROM OPERATIONS. Income from operations as a percent of net sales increased to 4.9% in 1996 from 3.3% in 1995. INTEREST EXPENSE. Interest expense as a percent of net sales was 2.5% in 1996, compared with 2.6% in 1995. This reduction reflects the leveraging of fixed interest costs against higher sales, partially offset by funding required to acquire Lagasse Bros., Inc. (see Note 1 to the Consolidated Financial Statements of the Company included elsewhere herein). INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income taxes and extraordinary item as a percent of net sales increased to 2.4% in 1996 from 0.7% in 1995. NET INCOME. Net income as a percent of net sales increased to 1.4% in 1996 from 0.3% in 1995 resulting from the aforementioned reasons. Net income in 1995 includes an extraordinary item, loss on the early retirement of debt related to the Merger of $2.4 million ($1.4 million net of tax benefit of $1.0 million) or 0.1% of net sales. 14 FOURTH QUARTER RESULTS. Certain expense and cost of sale estimates are recorded throughout the year including inventory shrinkage, required LIFO reserve, manufacturers' allowances, advertising costs and various expense items. During the fourth quarter of 1996, the Company recorded approximately $3.0 million of additional net income relating to the refinement of estimates recorded in the prior three quarters. COMPARISON OF HISTORICAL FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994 NET SALES. Net sales were $1,751.5 million for 1995 compared with $470.2 million in 1994. The increase is primarily the result of the Merger. Sales in 1995 include nine months of United's sales. GROSS MARGIN. Gross profit as a percent of net sales decreased to 17.4% in 1995 from 18.7% in 1994. The lower gross profit margin reflects a shift in product mix, the Acquisition and the change in the method of accounting for inventory from the FIFO method to the LIFO method. See Note 3 (Inventories) to the Consolidated Financial Statements of the Company included elsewhere herein. OPERATING EXPENSES. Operating expenses as a percent of net sales decreased to 14.1% in 1995 from 14.8% in 1994. The actual results for 1995 include the impact of a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9 million) in the first quarter of 1995. Operating expenses before the restructuring charge were 13.5% in 1995. The decrease in operating expenses as a percent of net sales before the restructuring charge was primarily due to increased operating efficiencies and improved productivity, partially offset by Merger-related compensation expense relating to an increase in the value of employee stock options of approximately $1.5 million ($0.9 million net of tax benefit of $0.6 million). INCOME FROM OPERATIONS. Income from operations as a percent of net sales was 3.3% in 1995 (after the restructuring charge) compared with 3.9% in 1994. Before such restructuring charge, income from operations in 1995 was 3.9%. INTEREST EXPENSE. Interest expense as a percent of net sales was 2.6% in 1995 compared to 1.7% in 1994. The increase reflects additional debt needed to consummate the Merger and higher interest rates in 1995. INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income before income taxes and extraordinary item as a percent of net sales was 0.7% in 1995 compared with 2.2% in 1994. INCOME BEFORE EXTRAORDINARY ITEM. Income before extraordinary item was $6.2 million in 1995 compared with $6.4 million in 1994. An extraordinary item, the loss on early retirement of debt related to the Merger of $2.4 million ($1.4 million net of tax benefit of $1.0 million), was recognized in the first quarter of 1995. NET INCOME. Net income was $4.8 million in 1995 compared with $6.4 million in 1994. Excluding the extraordinary item, net income would have been $6.2 million. FOURTH QUARTER RESULTS. Certain interim expense and inventory estimates are recorded throughout the year relating to shrinkage, inflation and product mix. The results of the year-end close and physical inventory reflected a favorable adjustment with respect to such estimates, resulting in approximately $0.9 million of additional net income, which is reflected in the fourth quarter of 1995. HISTORICAL RESULTS OF OPERATIONS OF UNITED COMPARISON OF THE SEVEN MONTHS ENDED MARCH 30, 1995 AND 1994 NET SALES. Net sales were $980.6 million in the seven months ended March 30, 1995, a 12.5% increase from net sales of $871.6 million in the comparable period in 1994. The primary reason for the increase is growth in unit volume. 15 GROSS PROFIT ON SALES. Gross profit as a percent of net sales was 16.9% for the seven months ended March 30, 1995, compared with 17.7% in the comparable period in 1994. This lower gross profit margin is primarily the result of a shift in the sale of computer related products that have lower gross profit margins and is consistent with the gross profit margins achieved in the latter half of United's fiscal year ended August 31, 1994. OPERATING EXPENSES. Operating expenses as a percent of net sales increased to 16.4% in the seven-month period ended March 30, 1995 from 14.8% in the comparable period in 1994. The increase is primarily attributable to $27.8 million ($18.5 million net of tax benefit of $9.3 million) of non-recurring Merger-related costs consisting of severance payments under employment contracts; insurance benefits under employment contracts; legal, accounting and other professional services fees; the repurchase of stock options; and fees for letters of credit related to employment contracts and other costs. Operating expenses as a percent of net sales prior to the Merger-related costs were 13.6% for the seven-month period ended March 30, 1995. This decline from the comparable period in 1994 is due to a reduction in payroll expense. INCOME FROM OPERATIONS Income from operations as a percent of net sales was 0.5% in the seven-month period ended March 30, 1995, compared with 2.9% in the comparable period in 1994. The decrease was attributable to the Merger-related costs discussed under "Operating Expenses" above. Income from operations as a percent of net sales was 3.3% in the seven-month period ended March 30, 1995, excluding the Merger-related costs. INTEREST EXPENSE. Interest expense was $7.6 million for the seven-month period ended March 30, 1995, compared with $6.1 million for the same period in 1994. The increase was due to higher interest expense from increased debt to meet working capital and other capital expenditure needs and higher interest rates on borrowings. INCOME (LOSS) BEFORE INCOME TAXES. Income (loss) before income taxes as a percent of net sales was a loss of 0.3% in the seven-month period ended March 30, 1995, compared to income of 2.3% in the comparable period of 1994. The decrease in income before income taxes was attributable to the factors stated above. INCOME TAXES. The effective tax rate for the seven-month period ended March 30, 1995 was (184.6%), compared with 41.5% for the seven-month period ended March 31, 1994. The increase is primarily due to non-deductible Merger-related costs and non-deductible amortization of goodwill. NET INCOME (LOSS). Net income (loss) was a loss of $7.2 million for the seven- month period ended March 30, 1995, compared with income of $11.5 million for the same period in 1994. The loss was primarily due to $27.8 million ($18.5 million net of tax benefit of $9.3 million) of non-recurring Merger-related costs discussed under "Operating Expenses" above. Net income (loss) per share was a loss of $0.39 in the seven-month period ended March 30, 1995, compared with income of $0.62 for the same period in 1994. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY/ASSOCIATED As of December 31, 1996, the credit facilities under the Amended and Restated Credit Agreement (the "Credit Agreement") consisted of $209.1 million of term loan borrowings (the "Term Loan Facilities"), and up to $325.0 million of revolving loan borrowings (the "Revolving Credit Facility"). This agreement was amended to provide funding for the acquisition of Lagasse Bros., Inc., to extend the maturities, to adjust the pricing and to revise certain covenants. In addition, the Company has $150.0 million of 12-3/4% Senior Subordinated Notes due 2005. The Term Loan Facilities consist of a $144.4 million Tranche A term loan facility (the "Tranche A Facility") and a $64.7 million Tranche B term loan facility (the "Tranche B Facility). Quarterly payments under the Tranche A facility range from $5.63 million at December 31, 1996 to $8.30 million at September 30, 2001. Quarterly payments under the Tranche B Facility range from $0.25 million at December 31, 1996 to $6.64 million at September 30, 2003. On March 31, 1997, principal payments of $15.9 million and $7.4 million are required to be paid from Excess Cash Flow (as defined) at December 31, 1996 for the Tranche A and Tranche B Facilities, respectively. 16 The Revolving Credit Facility is limited to the lesser of $325.0 million or a borrowing base equal to: 80% of Eligible Receivables (as defined); plus 50% of Eligible Inventory (as defined) (provided that no more than 60% or, during certain periods 65%, of the Borrowing Base may be attributable to Eligible Inventory); plus the aggregate amount of cover for Letter of Credit Liabilities (as defined). In addition, for each fiscal year, the Company must repay revolving loans so that for a period of 30 consecutive days in each fiscal year the aggregate revolving loans do not exceed $250.0 million. The Revolving Credit Facility matures on October 31, 2001. The Term Loan Facilities and the Revolving Credit Facility are secured by first priority pledges of the stock of USSC, all of the stock of the domestic direct and indirect subsidiaries of USSC, certain of the stock of all of the foreign direct and indirect subsidiaries of USSC and security interests in, and liens upon, all accounts receivable, inventory, contract rights and other certain personal and certain real property of USSC and its domestic subsidiaries. The loans outstanding under the Term Loan Facilities and the Revolving Credit Facility bear interest as determined within a set range with the rate based on the ratio of total debt (excluding any undrawn amounts under any letters of credit) to EBITDA. The Tranche A Facility and the Revolving Credit Facility bear interest at prime plus 0.25% to 1.25% or, at the Company's option, LIBOR plus 1.50% to 2.50%. The Tranche B Facility bears interest at prime plus 1.25% to 1.75% or, at the Company's option, LIBOR plus 2.50% to 3.00%. The Credit Agreement contains representations and warranties, affirmative and negative covenants and events of default customary for financings of this type. As of December 31, 1996 the Company was in compliance with all covenants contained in the Credit Agreement. The Credit Agreement permits capital expenditures for the Company of up to $15.0 million for its fiscal year ending December 31, 1997, plus $6.2 million of unused capital expenditures, approximately $7.8 million of unused Excess Cash Flow (as defined), and $11.1 million of proceeds from the disposition of certain property, plant and equipment from the Company's fiscal year ended December 31, 1996. Capital expenditures will be financed from internally generated funds and available borrowings under the Credit Agreement. The Company expects gross capital expenditures to be approximately $14.0 million to $18.0 million in 1997. Management believes that the Company's cash on hand, anticipated funds generated from operations and available borrowings under the Credit Agreement, will be sufficient to meet the short-term (less than twelve months) and long-term operating and capital needs of the Company as well as to service its debt in accordance with its terms. There is, however, no assurance that this will be accomplished. United is a holding company and, as a result, its primary source of funds is cash generated from operating activities of its operating subsidiary, USSC, and bank borrowings by USSC. The Credit Agreement and the indenture governing the Notes contain restrictions on the ability of USSC to transfer cash to United. The statements of cash flows for the Company for the periods indicated is summarized below:
THE COMPANY ------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------- 1996 1995 1994 ---- ---- ---- (dollars in thousands) Net cash provided by operating activities $ 1,609 $ 26,329 $ 14,088 Net cash used in investing activities (49,871) (266,291) (554) Net cash provided by (used in) financing activities 47,221 249,773 (12,676)
Net cash provided by operating activities for 1996 declined to $1.6 million from $26.3 in 1995. This reduction was due to an increased investment in inventory and a decrease in accrued liabilities offset by higher net income and an increase in accounts payable. The increase in net cash provided by operating activities of $26.3 million in 1995 from $14.1 million in 1994 was primarily the result of the Merger. 17 Net cash used in investing activities during 1996 was $49.9 million compared with $266.3 million in 1995. The decrease is due to the Merger in 1995 offset by the acquisition of Lagasse Bros., Inc. on October 31, 1996. Also, the Company collected $11.1 million in 1996 from the successful sale of closed facilities and related equipment. The increase in net cash used in investing activities of $266.3 million in 1995 from $0.6 million in 1994 was primarily the result of the Merger. Net cash provided by financing activities in 1996 was $47.2 million compared with $249.8 million in 1995. The decrease was due to the financing of the Merger in 1995 offset by additional borrowings to finance the purchase of Lagasse Bros., Inc. The increase in net cash provided by financing activities of $249.8 million in 1995 from net cash used of $12.7 million in 1994 was also primarily the result of the Merger. INFLATION/DEFLATION AND CHANGING PRICES Inflation can have an impact on the Company's earnings. During inflationary times, the Company generally seeks to increase prices to its customers creating incremental gross profit resulting from the sale of inventory purchased at lower prices. Alternatively, significant deflation may adversely affect the Company's profitability. SEASONALITY Although the Company's sales are generally relatively level throughout the year, the Company's sales vary to the extent of seasonal differences in the buying patterns of end-users who purchase office products. In particular, the Company's sales are generally higher than average during the months of January through March when many businesses begin operating under new annual budgets. The Company experiences seasonality in terms of its working capital needs, with highest requirements in December through February reflecting a build up in inventory prior to and during the peak sales period. The Company believes that its current availability under the Revolving Credit Facility is sufficient to satisfy such seasonal capital needs for the foreseeable future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Set forth on the following pages are the financial statements of (i) the Company for the years ended December 31, 1996, 1995 and 1994 and (ii) pre-Merger United for the seven months ended March 30, 1995, March 31, 1994 and the twelve months ended August 31, 1994, 1993 and 1992. Although United was the surviving corporation in the Merger, the Acquisition was treated as a reverse acquisition for accounting purposes, with Associated as the acquiring corporation. Therefore, the statements of income and cash flows for the year ended December 31, 1995 reflect the results of Associated only for the three months ended March 30, 1995, and the results of the Company for the nine months ended December 31, 1995. The financial statements of the Company for the year ended December 31, 1994 reflect the financial position, results of operations and cash flows of Associated only. The financial statements of pre-Merger United are included because United is considered a significant predecessor for accounting purposes. 18 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, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years then ended. Our audits also included the financial statement schedules for 1996 and 1995 listed in the index at Item 14(A). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Stationers Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules for 1996 and 1995, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 3 to the consolidated financial statements, in 1995, the Company changed its method of valuing inventory from the first-in, first-out (FIFO) method to the last-in, first-out (LIFO) method. /s/ERNST & YOUNG LLP Chicago, Illinois January 28, 1997 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF ASSOCIATED HOLDINGS, INC. We have audited the accompanying consolidated balance sheets of ASSOCIATED HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARY as of December 31, 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended. 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 audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Associated Holdings, Inc. and subsidiary as of December 31, 1994, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements for 1994 and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ARTHUR ANDERSEN LLP Chicago, Illinois January 23, 1995 20 UNITED STATIONERS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except share data)
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1996 1995 1994 ---- ---- ---- NET SALES $ 2,298,170 $ 1,751,462 $ 470,185 COST OF GOODS SOLD 1,907,209 1,446,949 382,299 ----------- ----------- ---------- Gross profit 390,961 304,513 87,886 OPERATING EXPENSES: Warehousing, marketing and administrative expenses 277,957 237,197 69,765 Restructuring charge - - 9,759 - - ----------- ----------- ---------- Total operating expenses 277,957 246,956 69,765 ----------- ----------- ---------- Income from operations 113,004 57,557 18,121 INTEREST EXPENSE 57,456 46,186 7,725 ----------- ----------- ---------- Income before income taxes and extraordinary item 55,548 11,371 10,396 INCOME TAXES 23,555 5,128 3,993 ----------- ----------- ---------- Income before extraordinary item 31,993 6,243 6,403 EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT OF DEBT, NET OF TAX BENEFIT OF $967 - - (1,449) - - ----------- ----------- ---------- NET INCOME 31,993 4,794 6,403 PREFERRED STOCK DIVIDENDS ISSUED AND ACCRUED 1,744 1,998 2,193 ----------- ----------- ---------- NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 30,249 $ 2,796 $ 4,210 ----------- ----------- ---------- ----------- ----------- ---------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Income before extraordinary item $ 2.03 $ 0.33 $ 0.51 Extraordinary item - - (0.11) - - Net income $ 2.03 $ 0.22 $ 0.51 ----------- ----------- ---------- ----------- ----------- ---------- AVERAGE NUMBER OF COMMON SHARES 14,923,477 12,913,229 8,308,780 ----------- ----------- ---------- ----------- ----------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 UNITED STATIONERS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
DECEMBER 31, ------------------------------ 1996 1995 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 10,619 $ 11,660 Accounts receivable, less allowance for doubtful accounts of $6,318 in 1996 and $7,315 in 1995 291,401 265,827 Inventories 463,239 381,618 Other 25,221 30,903 ---------- ---------- TOTAL CURRENT ASSETS 790,480 690,008 PROPERTY, PLANT AND EQUIPMENT, AT COST Land 21,878 24,856 Buildings 97,029 105,136 Fixtures and equipment 102,092 96,467 Leasehold improvements 1,040 1,634 Assets under capital lease 3,002 3,002 ---------- ---------- Total property, plant and equipment 225,041 231,095 Less - accumulated depreciation and amortization 51,266 31,114 ---------- ---------- NET PROPERTY, PLANT AND EQUIPMENT 173,775 199,981 GOODWILL 115,449 77,786 OTHER 30,163 33,608 ---------- ---------- TOTAL ASSETS $1,109,867 $1,001,383 ---------- ---------- ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 22 UNITED STATIONERS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
DECEMBER 31, ------------------------------ 1996 1995 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt and capital lease $ 46,923 $ 23,886 Accounts payable 238,124 194,567 Accrued expenses 93,789 107,622 Accrued income taxes 6,671 8,468 ---------- ---------- TOTAL CURRENT LIABILITIES 385,507 334,543 DEFERRED INCOME TAXES 36,828 34,380 LONG-TERM DEBT 552,613 526,198 OTHER LONG-TERM LIABILITIES 15,502 18,505 REDEEMABLE PREFERRED STOCK Preferred Stock Series A, $0.01 par value; 15,000 authorized; 5,000 issued and outstanding; 3,086 and 2,437, respectively, accrued 8,086 7,437 Preferred Stock Series C, $0.01 par value; 15,000 authorized; 11,699 and 10,604, respectively, issued and outstanding 11,699 10,604 ---------- ---------- TOTAL REDEEMABLE PREFERRED STOCK 19,785 18,041 REDEEMABLE WARRANTS 23,812 39,692 STOCKHOLDERS' EQUITY Common Stock (voting), $0.10 par value; 40,000,000 authorized; 11,446,306 issued and outstanding 1,145 1,145 Common Stock (nonvoting), $0.01 par value; 5,000,000 authorized; 758,994 issued and outstanding 8 8 Capital in excess of par value 44,418 28,871 Retained earnings 30,249 - - ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 75,820 30,024 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,109,867 $1,001,383 ---------- ---------- ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 23 UNITED STATIONERS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Number of Redeemable Preferred Stock Common -------------------------------------------------- Redeemable Shares A B C Total Warrants (Voting) ----- ----- ----- ----- -------- -------- DECEMBER 31, 1993 $6,138 $ 5,943 $ 8,915 $20,996 $ 1,435 896,258 Net income - - - - - - - - - - - - Preferred stock dividends 650 617 926 2,193 - - - - Other - - - - - - - - - - - - Issuance of common shares - - - - - - - - - - 58,653 Common shares accrued - - - - - - - - - - 5,435 Warrants accrued - - - - - - - - 215 - - ------ ------- ------- ------- ------- ---------- DECEMBER 31, 1994 6,788 6,560 9,841 23,189 1,650 960,346 Net income - - - - - - - - - - - - Preferred stock dividends 649 332 763 1,744 - - - - Repurchase of Series B preferred stock - - (6,892) - - (6,892) - - - - Cash dividends - - - - - - - - - - - - Accretion of warrants to fair market value - - - - - - - - 37,275 - - Issuance of warrants from option grant - - - - - - - - 2,900 - - Nonvoting common stock issued for services related to financing the Acquisition issued in exchange for common stock, warrants and options - - - - - - - - (460) (109,159) Increase in value of stock option grants - - - - - - - - - - - - Common stock issued: Acquisition - - - - - - - - - - 4,831,873 Exercise of warrants - - - - - - - - (1,673) 58,977 100% stock dividend - - - - - - - - - - 5,683,463 Stock option exercises - - - - - - - - - - 20,806 Other - - - - - - - - - - - - ------ ------- ------- ------- ------- ---------- DECEMBER 31, 1995 $7,437 $ - - $10,604 $18,041 $39,692 11,446,306 ------ ------- ------- ------- ------- ---------- ------ ------- ------- ------- ------- ---------- Number of Total Common Common Common Capital in Stock- Stock Shares Stock Excess Retained holders' (Voting) (Nonvoting) (Nonvoting) of par Earnings Equity -------- ----------- ----------- ------ -------- ------ DECEMBER 31, 1993 $ 9 - - $ - - $ 8,997 $ 2,416 $11,422 Net income - - - - - - - - 6,403 6,403 Preferred stock dividends - - - - - - - - (2,193) (2,193) Other - - - - - - 51 - - 51 Issuance of common shares 1 - - - - 8,999 - - 9,000 Common shares accrued - - - - - - 63 - - 63 Warrants accrued - - - - - - 29 - - 29 ------ ------- ----- -------- ------- ------- DECEMBER 31, 1994 10 - - - - 18,139 6,626 24,775 Net income - - - - - - - - 4,794 4,794 Preferred stock dividends issued or accrued - - - - - - (1,744) (1,744) Repurchase of Series B preferred stock - - - - - - - - - - - - Cash dividends - - - - - - - - (254) (254) Accretion of warrants to fair market value - - - - - - (28,538) (8,737) (37,275) Issuance of warrants from option grant - - - - - - (2,900) - - (2,900) Nonvoting common stock issued for services related to financing the Acquisition issued in exchange for common stock, warrants and options (11) 139,474 1 2,749 - - 2,739 Increase in value of stock option grants - - - - - - 2,407 - - 2,407 Common stock issued: Acquisition 563 215,614 3 35,223 - - 35,789 Exercise of warrants 6 - - - - 1,673 - - 1,679 100% stock dividend 575 403,906 4 - - (579) - - Stock option exercises 2 - - - - 28 - - 30 Other - - - - - - 90 (106) (16) ------ ------- ----- -------- ------- ------- DECEMBER 31, 1995 $1,145 758,994 $ 8 $ 28,871 $ - - $30,024 ------ ------- ----- -------- ------- ------- ------ ------- ----- -------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 24 UNITED STATIONERS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Number of Redeemable Preferred Stock Common -------------------------------------------------- Redeemable Shares A B C Total Warrants (Voting) ----- ----- ----- ----- -------- -------- DECEMBER 31, 1995 $7,437 $ - - $10,604 $18,041 $39,692 11,446,306 Net Income - - - - - - - - - - - - Preferred stock dividends issued or accrued 649 - - 1,095 1,744 - - - - Reduction of warrants to fair market value - - - - - - - - (15,880) - - Decrease in value of stock option grants - - - - - - - - - - - - Other - - - - - - - - - - - - ------ ------ ------- ------- ------- ---------- DECEMBER 31, 1996 $8,086 $ - - $11,699 $19,785 $23,812 11,446,306 ------ ------ ------- ------- ------- ---------- ------ ------ ------- ------- ------- ---------- Number of Total Common Common Common Capital in Stock- Stock Shares Stock Excess Retained holders' (Voting) (Nonvoting) (Nonvoting) of par Earnings Equity -------- ----------- ----------- ------ -------- ------ DECEMBER 31, 1995 $1,145 758,994 $ 8 $28,871 $ - - $30,024 Net Income - - - - - - - - 31,993 31,993 Preferred stock dividends issued or accrued - - - - - - - - (1,744) (1,744) Reduction of warrants to fair market value - - - - 15,880 - - 15,880 Decrease in value of stock option grants - - - - - - (339) - - (339) Other - - - - - - 6 - - 6 ------ ------- ---- ------- ------- ------- DECEMBER 31, 1996 $1,145 758,994 $ 8 $44,418 $30,249 $75,820 ------ ------- ---- ------- ------- ------- ------ ------- ---- ------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 25 UNITED STATIONERS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 31,993 $ 4,794 $ 6,403 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 22,766 19,708 4,869 Amortization 8,609 10,564 1,487 Deferred income taxes 5,299 (163) - - Compensation expense on stock option grants (339) 2,407 - - Other 1,584 301 307 Changes in operating assets and liabilities, net of acquisitions: Increase in accounts receivable (15,379) (32,330) (128) (Increase) decrease in inventory (71,282) 31,656 (5,579) Decrease (increase) in other assets 1,814 2,765 (598) Increase (decrease) in accounts payable 36,352 (5,104) 3,806 (Decease) increase in accrued liabilities (17,185) (3,474) 2,260 (Decrease) increase in other liabilities (2,623) (4,795) 1,261 --------- --------- -------- Net cash provided by operating activities 1,609 26,329 14,088 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions: United Stationers Inc., net of cash acquired of $14,500 - - (258,438) - - Lagasse Bros., Inc. (51,896) - - - - Capital expenditures (8,190) (8,086) (625) Proceeds from disposition of property, plant & equipment 11,076 69 71 Other (861) 164 - - --------- --------- -------- Net cash used in investing activities (49,871) (266,291) (554) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolver 22,000 (3,608) (7,900) Retirements and principal payments of debt (30,861) (412,342) (4,827) Borrowings under financing agreements 57,933 686,854 - - Financing costs (1,851) (25,290) - - Issuance of common stock - - 12,006 - - Retirement of Series B Preferred Stock - - (6,892) - - Cash dividend - - (254) - - Other - - (701) 51 --------- --------- -------- Net cash provided by (used in) financing activities 47,221 249,773 (12,676) --------- --------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,041) 9,811 858 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,660 1,849 991 --------- --------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,619 $ 11,660 $ 1,849 --------- --------- -------- --------- --------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 26 UNITED STATIONERS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND PURCHASE ACCOUNTING On March 30, 1995, Associated Holdings, Inc. ("Associated") purchased 92.5% of the then outstanding shares of the common stock, $0.10 par value ("Common Stock") of United Stationers Inc. ("United") for approximately $266.6 million in the aggregate pursuant to a tender offer (the "Offer"). Immediately thereafter, Associated merged with and into United (the "Merger" and, collectively with the Offer, the "Acquisition"), and Associated Stationers, Inc. ("ASI"), a wholly owned subsidiary of Associated merged with and into United Stationers Supply Co. ("USSC"), a wholly owned subsidiary of United, with United and USSC continuing as the respective surviving corporations. United, as the surviving corporation following the Merger, is referred to herein as the "Company." As a result of share conversions in the Merger, immediately after the Merger, (i) the former holders of common stock and common stock equivalents of Associated owned shares of Common Stock and warrants or options to purchase shares of Common Stock constituting in the aggregate approximately 80% of the shares of Common Stock on a fully diluted basis, and (ii) holders of pre-Merger United common stock owned in the aggregate approximately 20% of the shares of Common Stock on a fully diluted basis. Although United was the surviving corporation in the Merger, the transaction was treated as a reverse acquisition for accounting purposes with Associated as the acquiring corporation. The financial information for the year ended December 31, 1995 includes Associated only for the three months ended March 30, 1995 and the results of the Company for the nine months ended December 31, 1995. Financial information prior to 1995 reflects that of Associated only. All common and common equivalent shares have been adjusted to reflect the 100% stock dividend effective November 9, 1995. The Acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition with the excess of cost over fair value allocated to goodwill. The purchase price allocation to property, plant and equipment is amortized over the estimated useful lives ranging from 3 to 40 years. Goodwill is amortized over 40 years. The total purchase price of United by Associated and its allocation to assets and liabilities acquired are as follows (dollars in thousands): Purchase price: Price of United shares purchased by Associated $ 266,629 Fair value of United shares not acquired in the Offer 21,618 Transaction costs 6,309 --------- Total purchase price $ 294,556 --------- --------- Allocation of purchase price: Current assets $ 542,993 Property, plant and equipment 151,012 Goodwill 74,503 Other assets 7,699 Liabilities assumed (481,651) --------- Total purchase price $ 294,556 --------- --------- 27 Immediately following the Merger, the number of outstanding shares of Common Stock was 11,996,154 (or 13,947,440 on a fully diluted basis), of which (i) the former holders of Class A Common Stock, $0.01 par value, and Class B Common Stock, $0.01 par value, of Associated (collectively "Associated Common Stock") and warrants or options to purchase Associated Common Stock in the aggregate owned 9,206,666 shares constituting approximately 76.7% of the outstanding shares of Common Stock and outstanding warrants or options for 1,951,286 shares (collectively 80.0% on a fully diluted basis) and (ii) pre-Merger holders of shares of Common Stock (other than Associated-owned and treasury shares) in the aggregate owned 2,789,488 shares of Common Stock constituting approximately 23.3% of the outstanding shares (or 20.0% on a fully diluted basis). As used in this paragraph, the term "Common Stock" includes shares of Nonvoting Common Stock, $0.01 par value, of the Company, which are immediately convertible into Voting Common Stock. On October 31, 1996, the Company acquired all of the capital stock of Lagasse Bros., Inc. ("Lagasse") for approximately $51.9 million. The acquisition was financed primarily through senior debt . The Lagasse acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition with the excess of cost over fair value of approximately $39.0 million allocated to goodwill. The financial information for the year ended December 31, 1996 includes the results of Lagasse for two months ended December 31, 1996. The actual and pro forma effects of this acquisition are not material. 2. OPERATIONS The Company is a national wholesale distributor of business products. The Company offers approximately 30,000 items from more than 500 manufacturers. This includes a broad spectrum of office products, computer supplies, office furniture and facilities management supplies. The Company primarily serves commercial and contract office products dealers. Its customers include more than 15,000 resellers -- such as computer products resellers, office furniture dealers, mass merchandisers, sanitary supply distributors, warehouse clubs, mail order houses and office products superstores. The Company has a distribution network of 41 Regional Distribution Centers. Through its integrated computer system, the Company provides a high level of customer service and overnight delivery. In addition, the Company has 14 Lagasse Distribution Centers, specifically serving janitorial and sanitary supply distributors. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue is recognized when a product is shipped and title is transferred to the customer in the period the sale is reported. CASH AND CASH EQUIVALENTS Investments in low-risk instruments that have original maturities of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost which approximates market value. 28 INVENTORIES Inventories constituting approximately 94% of total inventories at December 31, 1996 and 1995 have been valued under the last-in, first-out (LIFO) method. Prior to 1995, all inventories were valued under the first-in, first-out (FIFO) method. Effective January 1, 1995, Associated changed its method of accounting for the cost of inventory from the FIFO method to the LIFO method. Associated made this change in contemplation of its acquisition of United (accounted for as a reverse acquisition) so that its method would conform to that of United. Associated believed that the LIFO method provided a better matching of current costs and current revenues and that earnings reported under the LIFO method were more easily compared to that of other companies in the wholesale industry where the LIFO method is common. This change resulted in a charge to pre-tax income of the Company of approximately $8.8 million ($5.3 million net of tax benefit of $3.5 million) or $0.37 per common and common equivalent share for the year ended December 31, 1995. The cumulative effect of this accounting change for years prior to 1995 is not determinable, nor are the pro forma effects of retroactive application of the LIFO method to prior years. Inventory valued under the FIFO and LIFO accounting methods are recorded at the lower of cost or market. If the lower of FIFO cost or market method of inventory accounting had been used by the Company for all inventories, merchandise inventories would have been approximately $4.8 million and $8.8 million higher than reported at December 31, 1996 and 1995, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Depreciation and amortization are determined by using the straight-line method over the estimated useful lives of the assets. The estimated useful life assigned to fixtures and equipment is from two to ten years; the estimated useful life assigned to buildings does not exceed 40 years; leasehold improvements and assets under capital leases are amortized over the lesser of their useful lives or the term of the applicable lease. GOODWILL Goodwill represents the excess cost over the value of net assets of businesses acquired and is amortized on a straight-line basis over 40 years. The Company continually evaluates whether events or circumstances have occurred indicating that the remaining estimated useful life of goodwill may not be appropriate. When factors indicate that goodwill should be evaluated for possible impairment, the Company will use an estimate of undiscounted future operating income compared to the carrying value of goodwill to determine if a write-off is necessary. The cumulative amount of goodwill amortized at December 31, 1996 and 1995 is $4,047,000 and $1,953,000, respectively. SOFTWARE CAPITALIZATION The Company capitalizes major internal and external systems development costs determined to have benefits for future periods. Amortization is recognized over the periods in which the benefits are realized, generally not to exceed three years. INCOME TAXES Income taxes are accounted for using the liability method under which deferred income taxes are recognized for the estimated tax consequences for temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Provision has not been made for deferred U.S. income taxes on the undistributed earnings of the Company's foreign subsidiaries since these earnings are intended to be permanently invested. 29 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on net income after preferred stock dividend requirements. Primary and fully diluted earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the period. Stock options and warrants are considered to be common equivalent shares. FOREIGN CURRENCY TRANSLATION The functional currency for the Company's foreign operations is the local currency. RECLASSIFICATION Certain amounts from prior periods have been reclassified to conform to the 1996 basis of presentation. During the fourth quarter of 1996, the Company reclassified certain delivery and occupancy costs from operating expenses to cost of goods sold to conform the Company's presentation to others in the business products industry. The following table sets forth the impact of the reclassification for the years presented in the Consolidated Statements of Income:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1995 (1) 1994 (2) ---- ------- ------- Gross Margin as a Percent of Net Sales: Gross margin prior to reclassification 21.0% 21.8% 24.0% Gross margin as reported 17.0% 17.4% 18.7% Operating Expenses as a Percent of Net Sales: Operating expense ratio prior to reclassification 16.1% 17.9% (3) 20.1% Operating expense ratio as reported 12.1% 13.5% (3) 14.8%
(1) Includes Associated only for the three months ended March 30, 1995 and the results of the Company for the nine months ended December 31, 1995. (2) Reflects the results of Associated only. (3) Excludes a restructuring charge of $9.8 million. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates. NEW ACCOUNTING PRONOUNCEMENTS During 1996, the Company adopted the supplemental disclosure requirement of Financial Accounting Standards Board Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." SFAS No. 123 encourages but does not require adoption of a fair value method of accounting for stock options. For those entities which do not elect to adopt the fair value method, the new standard requires supplemental disclosure regarding the pro forma effects of that method. The Company has chosen to continue to account for stock-based compensation using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25). "Accounting for Stocks Issued to Employees," and related Interpretations. Adoption of SFAS No. 123 will have no impact on the financial position or results of operations of the Company. 30 During 1996, the Company adopted Financial Accounting Standards Board Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that an impairment loss be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed. The effect of adoption was not material. 4. BUSINESS COMBINATION AND RESTRUCTURING CHARGE The following summarized unaudited pro forma operating data for the years ended December 31, 1995 and 1994 is presented giving effect to the Acquisition as if it had been consummated at the beginning of the respective periods and, therefore, reflects the results of United and Associated on a consolidated basis. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the combination been in effect on the dates indicated, or which may result in the future. The pro forma results exclude one-time nonrecurring charges or credits directly attributable to the transaction (dollars in thousands, except share data): PRO FORMA TWELVE MONTHS ------------------------- ENDED DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- Net sales $2,201,860 $1,990,363 Income before income taxes 22,737 4,237 Net income 13,063 2,581 Net income per primary and fully diluted common and common equivalent share $0.80 $0.07 The pro forma income statement adjustments consist of (i) increased depreciation expense resulting from the write-up of certain fixed assets to fair value, (ii) additional incremental goodwill amortization, (iii) additional incremental interest expense due to debt issued, net of debt retired, and (iv) reduction in preferred stock dividends due to the repurchase of the Series B preferred stock. The historical results for the twelve months ended December 31, 1995 included a restructuring charge of $9.8 million ($5.9 million net of tax benefit of $3.9 million). The restructuring charge included severance costs totaling $1.8 million. The Company's consolidation plan specified that 330 distribution, sales and corporate positions, 180 of which related to pre-Merger Associated, were to be eliminated substantially within one year following the Merger. The Company has achieved its target, with the related termination costs of approximately $1.8 million charged against the reserve. The restructuring charge also included distribution center closing costs totaling $6.7 million and stockkeeping unit reduction costs totaling $1.3 million. The consolidation plan called for the closing of eight redundant distribution centers, six of which related to pre-Merger Associated, and the elimination of overlapping inventory items from the Company's catalogs substantially within the one-year period following the Merger. Estimated distribution center closing costs included (i) the net occupancy costs of leased facilities after they are vacated until expiration of leases and (ii) the losses on the sale of owned facilities and the facilities' furniture, fixtures, and equipment. Estimated stockkeeping unit reduction costs included losses on the sale of inventory items which have been discontinued solely as a result of the Acquisition. As of December 31, 1996, five of the six redundant pre-Merger Associated distribution centers have been closed with $5.5 million charged against the reserve and $2.0 million related to stockkeeping unit reduction costs have also been charged against the reserve. As of December 31, 1996, the Company's consolidation plan has been substantially completed. Seven of the eight redundant distribution centers have been closed. The restructuring reserve balance at December 31, 1996 of $0.5 million is expected to be adequate to cover the remaining estimated expenditures related to integration and transition costs. 31 The historical results for 1995 also included an extraordinary charge of approximately $2.4 million ($1.4 million net of tax benefit of $1.0 million) of financing costs and original issue discount relating to the debt retired. In addition, the historical results for 1995 included compensation expense relating to an increase in the value of employee stock options of approximately $1.5 million ($0.9 million net of tax benefit of $0.6 million) as a result of the Acquisition and Merger. The pro forma twelve months ended December 31, 1995 do not include the extraordinary write-off. 5. LONG-TERM DEBT Long-term debt consists of the following amounts (dollars in thousands):
1996 1995 ---- ---- Revolver $207,000 $185,000 Term Loans Tranche A, due in installments until September 30, 2001 144,374 - - Tranche B, due in installments until September 30, 2003 64,750 - - Tranche A, due in installments until March 31, 2000 - - 110,053 Tranche B, due in installments until March 31, 2002 - - 71,837 Senior Subordinated Notes 150,000 150,000 Mortgage at 9.4%, due in installments until 1999 2,071 2,174 Industrial development bonds, at market interest rates, maturing at various dates through 2011 14,300 14,300 Industrial development bonds, at 66% to 79% of prime, maturing at various dates through 2004 15,500 15,500 Other long-term debt 175 313 -------- -------- 598,170 549,177 Less - current maturities (45,557) (22,979) -------- -------- $552,613 $526,198 -------- -------- -------- --------
The prevailing prime interest rate at the end of 1996 and 1995 was 8.25% and 8.5%, respectively. As of December 31, 1996, the credit facilities under the Amended and Restated Credit Agreement (the "Credit Agreement") consisted of $209.1 million of term loan borrowings (the "Term Loan Facilities"), and up to $325.0 million of revolving loan borrowings (the "Revolving Credit Facility"). This agreement was amended to provide funding for the acquisition of Lagasse Bros., Inc., to extend the maturities, adjust the pricing and to revise certain covenants. In addition, the Company has $150.0 million of 12-3/4% Senior Subordinated Notes due 2005 (the "Notes"). The Term Loan Facilities consist of a $144.4 million Tranche A term loan facility (the "Tranche A Facility") and a $64.7 million Tranche B term loan facility (the "Tranche B Facility). Quarterly payments under the Tranche A facility range from $5.63 million at December 31, 1996 to $8.30 million at September 30, 2001. Quarterly payments under the Tranche B Facility range from $0.25 million at December 31, 1996 to $6.64 million at September 30, 2003. On March 31, 1997, principal payments of $15.9 million and $7.4 million are required to be paid from Excess Cash Flow (as defined in the Credit Agreement) at December 31, 1996 for the Tranche A and Tranche B Facilities, respectively. The Revolving Credit Facility is limited to the lesser of $325.0 million or a borrowing base equal to: 80% of Eligible Receivables (as defined in the Credit Agreement); plus 50% of Eligible Inventory (as defined in the Credit Agreement) (provided that no more than 60% or, during certain periods 65%, of the Borrowing Base may be attributable to Eligible Inventory); plus the aggregate amount of cover for Letter of Credit Liabilities (as defined in the Credit Agreement). In addition, for each fiscal year, the Company must repay revolving loans so that for a period of 30 consecutive days in each fiscal year the aggregate revolving loans do not exceed $250.0 million. The Revolving Credit Facility matures on October 31, 2001. 32 The Term Loan Facilities and the Revolving Credit Facility are secured by first priority pledges of the stock of USSC, all of the stock of the domestic direct and indirect subsidiaries of USSC, certain of the stock of all of the foreign direct and indirect subsidiaries of USSC and security interests in, and liens upon, all accounts receivable, inventory, contract rights and other certain personal and certain real property of USSC and its domestic subsidiaries. The loans outstanding under the Term Loan Facilities and the Revolving Credit Facility bear interest as determined within a set range with the rate based on the ratio of total debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Tranche A Facility and the Revolving Credit Facility bear interest, at prime plus 0.25% to 1.25% or, at the Company's option, LIBOR plus 1.50% to 2.50%. The Tranche B Facility bears interest at prime plus 1.25% to 1.75% or, at the Company's option, LIBOR plus 2.50% to 3.00%. The Credit Agreement contains representations and warranties, affirmative and negative covenants and events of default customary for financings of this type. As of December 31, 1996, the Company was in compliance with all covenants contained in the Credit Agreement. The Company is exposed to market risk for changes in interest rates. The Company may enter into interest rate protection agreements, including collar agreements, to reduce the impact of fluctuations in interest rates on a portion of its variable rate debt. Such agreements generally require the Company to pay to or entitle the Company to receive from the other party the amount, if any, by which the Company's interest payments fluctuate beyond the rates specified in the agreements. The Company is subject to the credit risk that the other party may fail to perform under such agreements. The Company's allocated cost of such agreements is amortized to interest expense over the term of the agreements, and the unamortized cost is included in other assets. Payments received or made as a result of the agreements, if any, are recorded as an addition or a reduction to interest expense. At December 31, 1996, the Company had agreements which collar $200.0 million of the Company's borrowings under the Credit Facilities at interest rates between 8.0% and 6.0%, which expire in April 1998. For the years ended December 31, 1996 and 1995, the Company recorded $0.9 million and $0.1 million, respectively, to interest expense resulting from interest rate fluctuations beyond the rates specified in the collar agreements. The right of United to participate in any distribution of earnings or assets of USSC is subject to the prior claims of the creditors of USSC. In addition, the Credit Agreement contains certain restrictive covenants, including covenants that restrict or prohibit USSC's ability to pay dividends and make other distributions to United. Debt maturities for the years subsequent to December 31, 1996 are as follows (dollars in thousands): Year Amount - ---- ------ 1997 $45,557 1998 26,609 1999 32,724 2000 34,717 2001 242,996 Later Years 215,567 - -------------------------------------------------- $598,170 - -------------------------------------------------- - -------------------------------------------------- At December 31, 1996 and 1995, the Company had available letters of credit of $55.3 million and $56.0 million, respectively, of which $52.8 million and $56.0 million, respectively, were outstanding. 33 6. LEASES The Company has entered into several non-cancelable long-term leases for property and equipment. Future minimum lease payments for non-cancelable leases in effect at December 31, 1996 having initial remaining terms of more than one year are as follows (dollars in thousands): Capital Operating Year Lease Leases (1) - ---- ----- --------- 1997 $1,479 $18,191 1998 487 15,452 1999 - - 13,000 2000 - - 10,285 2001 - - 8,185 Later years - - 21,660 - ------------------------------------------------------------ ------- Total minimum lease payments 1,966 $86,773 ------- ------- Less amount representing interest 134 - ------------------------------------------------------------ Present value of net minimum lease payments (including current portion of $1,366) $1,832 - ------------------------------------------------------------ - ------------------------------------------------------------ (1) Operating leases are net of immaterial sublease income. Rental expense for all operating leases was approximately $18.8 million, $14.2 million and $3.0 million in 1996, 1995 and 1994, respectively. 7. PENSION PLANS AND DEFINED CONTRIBUTION PLAN PENSION PLANS In connection with the Merger and Acquisition, the Company assumed the pension plans of United. Associated did not have a pension plan. Former Associated employees entered the pension plans on July 1, 1996. As of this date, the Company has pension plans covering substantially all of its employees. Non- contributory plans covering non-union employees provide pension benefits that are based on years of credited service and a percentage of annual compensation. Non-contributory plans covering union members generally provide benefits of stated amounts based on years of service. The Company funds the plans in accordance with current tax laws. The following table sets forth the plans' funded status at December 31, 1996 and 1995 (dollars in thousands): 1996 1995 - ------------------------------------------------------------------------------ Actuarial Present Value of Benefit Obligation Vested benefits $19,015 $ 18,776 Non-vested benefits 1,431 1,996 - ------------------------------------------------------------------------------ Accumulated benefit obligation 20,446 20,772 Effect of projected future compensation levels 3,110 2,861 - ------------------------------------------------------------------------------ Projected benefit obligation 23,556 23,633 Plan assets at fair value 28,373 26,713 - ------------------------------------------------------------------------------ Plan assets in excess of projected benefit obligation 4,817 3,080 Unrecognized prior service cost 720 - - Unrecognized net gain due to past experience different from assumptions (4,348) (507) - ------------------------------------------------------------------------------ Prepaid pension asset recognized in the Consolidated Balance Sheets $1,189 $ 2,573 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 34 The plans' assets consist of corporate and government debt securities and equity securities. Net periodic pension cost for 1996 and 1995 for pension and supplemental benefit plans includes the following components (dollars in thousands): 1996 1995 - ------------------------------------------------------------------------------ Service cost-benefit earned during the period $1,884 $ 1,142 Interest cost on projected benefit obligation 1,652 1,157 Actual return on assets (3,468) (2,711) Net amortization and deferral 1,495 1,382 - ------------------------------------------------------------------------------ Net periodic pension cost $1,563 $ 970 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ The assumptions used in accounting for the Company's defined benefit plans for the two years presented are set forth below: 1996 1995 - ------------------------------------------------------------------------------ Assumed discount rate 7.5% 7.25% Rates of compensation increase 0.0%-5.5% 0.0%-5.5% Expected long-term rate of return on plan assets 7.5% 7.5% - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ DEFINED CONTRIBUTION The Company has a defined contribution plan in which all salaried employees and certain hourly paid employees of the Company are eligible to participate following completion of six consecutive months of employment. The plan permits employees to have contributions made as 401(k) salary deferrals on their behalf, or as voluntary after-tax contributions, and provides for Company contributions, or contributions matching employee salary deferral contributions, at the discretion of the Board of Directors. The Company has no present intention to make Company contributions other than matching contributions. Company contributions for matching of employee contributions were approximately $0.9 million, $0.6 million and $0.3 million in 1996, 1995 and 1994, respectively. 8. POSTRETIREMENT BENEFITS In connection with the Merger, the Company assumed the postretirement plan of United on March 30, 1995. Associated did not have a postretirement plan. The plan is unfunded and provides health care benefits to substantially all retired non-union employees and their dependents. Eligibility requirements are based on the individual's age (minimum age of 55), years of service and hire date. The benefits are subject to retiree contributions, deductibles, co-payment provisions and other limitations. Retirees pay one-half of the projected plan costs. The following table sets forth the amounts recognized in the Company's Consolidated Balance Sheets as of December 31, 1996 and 1995 (dollars in thousands): 1996 1995 - ------------------------------------------------------------------------------ Retirees $ (877) $ (762) Other fully eligible plan participants (632) (697) Other active plan participants (1,588) (1,362) - ------------------------------------------------------------------------------ Total APBO (3,097) (2,821) Unrecognized net (gain)/loss (1) 76 - ------------------------------------------------------------------------------ Accrued postretirement benefit obligation $(3,098) $(2,745) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ The cost of postretirement health care benefits for the year ended December 31, 1996 and 1995 were as follows (dollars in thousands): 1996 1995 - ------------------------------------------------------------------------------ Service cost $239 $161 Interest on accumulated benefit obligation 204 109 - ------------------------------------------------------------------------------ Net postretirement benefit cost $443 $270 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 35 The assumptions used in accounting for the Company's postretirement plan for the two years presented are set forth below (dollars in thousands): 1996 1995 - ------------------------------------------------------------------------------ Assumed average heath care cost trend rate 3.0% 3.0% Assumed discount rate 7.5% 7.5% Impact of 1% increase in health care costs on: Accumulated benefit obligation $450 $396 Annual service and interest cost $ 79 $ 46 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 9. STOCK OPTION PLAN The Management Equity Plan (the "Plan"), as amended, is administered by the Board of Directors, although the Plan provides that the Board of Directors of the Company may designate an option committee to administer the Plan. In September 1995, the Company's Board of Directors approved an amendment to the Plan which provided for the issuance of options to key management employees of the Company exercisable for up to 2.2 million additional shares of its Common Stock. Subsequently, approximately 2.2 million options were granted during 1995 and 1996 to management employees. Some of the options were granted at an option price below market value and the option price of certain options increases by $0.625 on a quarterly basis effective April 1, 1996. The stock options granted under the Plan do not vest to the employee until the occurrence of an event (a "Vesting Event") that causes the present non-public equity investors to have received at least a full return of their investment (at cost) in cash, fully tradable marketable securities or the equivalent. A Vesting Event will cause the Company to recognize compensation expense based upon the difference between the fair market value of the Common Stock and the exercise prices of the stock options. If a Vesting Event were to occur, based upon a stock price of $19.50, the Company would recognize a nonrecurring noncash charge of $18.4 million in compensation expense ($10.6 million net of tax benefit of $7.8 million). Each $1.00 change in the fair market value of Common Stock price could result in a maximum adjustment to such compensation expense of approximately $2.5 million ($1.4 million net of tax effect of $1.1 million). An optionee under the Plan must pay the full option price upon exercise of an option (i) in cash, (ii) with the consent of the Board of Directors of the Company, by delivering shares of Common Stock already owned by such optionee (including shares to be received upon exercise of the option) and having a fair market value at least equal to the exercise price or (iii) in any combination of the foregoing. The Company may require the optionee to satisfy federal tax withholding obligations with respect to the exercise of options by (i) additional withholding from the employee's salary, (ii) requiring the optionee pay in cash or (iii) reducing the number of shares of Common Stock to be issued (except in the case of incentive options). The following table summarizes the transactions of the Plan for the last three years:
Management Equity Plan Weighted Average Weighted Average Weighted Average (excluding restricted stock) 1996 Exercise Prices 1995 Exercise Prices 1994 Exercise Prices - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of the period 2,030,996 $10.73 217,309 $ 1.45 367,160 $1.45 - ----------------------------------------------------------------------------------------------------------------------------------- Granted 650,772 $ 7.95 1,854,649 $11.65 28,694 $1.45 - ----------------------------------------------------------------------------------------------------------------------------------- Exercised - - - - (20,804) $ 1.45 - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Canceled (184,000) $ 7.64 (20,158) $ 1.45 (178,545) $1.45 - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at end of the period 2,497,768 $11.61 2,030,996 $10.73 217,309 $1.45 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
36 The following table summarizes information concerning outstanding options of the Plan at December 31, 1996: Remaining Exercise Number Contractual Prices Outstanding Life (years) - ------------------------------------------------- $ 1 45 385,120 5.09 - ------------------------------------------------- $ 5.12 207,148 5.74 - ------------------------------------------------- $14.38 1,905,500 5.74 - ------------------------------------------------- 2,497,768 - ------------------------------------------------- - ------------------------------------------------- All share and per share data have been restated to reflect the 100% stock dividend effective November 9, 1995 and the conversion of Associated common stock as a result of the Merger. During 1996, the Company adopted the supplemental disclosure requirements of SFAS No. 123. Accordingly, the Company is required to disclose pro forma net income and earnings per share as if the fair value-based accounting method in SFAS No. 123 had been used to account for stock-based compensation cost. The Company's stock options granted under the Plan are considered "all or nothing" awards since the options do not vest to the employee until the occurrence of a Vesting Event. The fair value of "all or nothing" awards are measured at the grant date; however, amortization of compensation expense only begins when it is probable that the awards will vest and be earned. Presently, the Company believes that it is less than likely that a Vesting Event will occur. Therefore, there is no compensation expense for pro forma purposes and pro forma net income and earnings per share are the same as that recorded on the face of the income statement. 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 1996 and 1995 were as follows: 1996 1995 - ------------------------------------------------------------------------------ Fair value of options granted $17.67 $ 9.33 Exercise price $ 8.59 $11.65 Expected stock price volatility 80.7% 102.2% Expected dividend yield 0.0% 0.0% Risk-free interest rate 5.2% 5.9% Expected life of options 2 years 3 years 10. REDEEMABLE PREFERRED STOCK At December 31, 1996 and 1995, the Company had 1,500,000 authorized shares of $0.01 par value preferred stock, of which 15,000 shares were designated as Series A preferred stock, 15,000 shares were designated as Series B preferred stock, 15,000 shares were designated as Series C preferred stock, and 1,455,000 shares remained undesignated. Series B and C preferred stock are junior in relation to the Series A preferred stock. All preferred stock issued at the date of inception was valued at the amount of cash paid or assets received for the stock at $1,000 per share. On July 28, 1995, the Company repurchased all 6,892 shares of Series B preferred stock issued and outstanding for $7.0 million, including accrued and unpaid dividends thereon. All outstanding shares of preferred stock are senior in preference to the Common Stock of United. Series A preferred stock must be redeemed by the Company on or before July 31, 2006. Dividends are cumulative at a rate of 10% per annum, payable quarterly. In the event that the Company does not pay dividends in cash, the dividend rate increases to 13% per annum and is payable in stock. During each of the years ended December 31, 1996, 1995, and 1994, 649 shares of Series A preferred stock were accrued but not issued. As of December 31, 1996 and 1995, 3,086 and 2,437 shares, respectively, of Series A preferred stock have been accrued as dividends but not issued. 37 Series C preferred stock is redeemable in four consecutive quarterly installments commencing on April 30, 2001. Dividends are cumulative at a rate of 9% per annum, payable quarterly. In the event that the Company does not pay dividends in cash, the dividend rate increases to 10% per annum and is payable in stock. During the year ended December 31, 1996, noncash dividends were declared and issued for Series C preferred stock in the amount of 1,095 shares. During the year ended December 31, 1995, noncash dividends were declared and issued for both Series B and C preferred stock in the amount of 332 and 763 shares, respectively. In addition, during 1995 a cash dividend of approximately $254,000 was paid to Series C preferred stockholders in connection with the repurchase of Series B preferred stock. During the year ended December 31, 1994, non-cash dividends were declared and issued for both Series B and C preferred stock in the amount of 617 and 926 shares, respectively. All series of preferred stock may be redeemed at the option of the Company at any time. All series of preferred stock have a redemption and liquidation value of $1,000 per share plus the aggregate of accrued and unpaid dividends on such shares to date. Required redemption of preferred stock for the five years following the year ended December 31, 1996 is $14.0 million in 2001 for the Series C preferred stock. 11. REDEEMABLE WARRANTS The Company had 1,227,438 and 1,430,468 warrants ("Lender Warrants") outstanding as of December 31, 1996 and 1995, respectively, which allow holders thereof to buy shares of Common Stock at an exercise price of $0.10 per share. Outstanding Lender Warrants as of December 31, 1996 and 1995 were valued at $19.50 and $27.75 per warrant, respectively. During 1996, 203,030 warrants were contributed back to the Company and terminated in connection with anti-dilution agreements. The exercise period for Lender Warrants expires January 31, 2002. During 1995, 117,954 warrants were exercised, 284,484 warrants were issued or accrued resulting from anti-dilution agreements and 47,153 were contributed back to the Company and terminated in connection with fees paid by the Company relating to the issuance of the Notes. The Lender Warrants contain certain put rights which allow the holders thereof to put the warrants to the Company. The purchase price payable upon the exercise of the put rights is the greater of the then fair market value or equity value of the warrants, as defined, less the applicable exercise price of the warrants. Payment of the Lender Warrants can only occur after repayment of all debt outstanding under the Credit Agreement or with the consent of the lenders and/or agent under the Credit Agreement. 12. TRANSACTIONS WITH RELATED PARTIES The Company has management advisory service agreements with three investor groups. These investor groups provide certain advisory services to the Company in connection with the Acquisition as defined below. Pursuant to an agreement, Wingate Partners, L.P. ("Wingate Partners") had agreed to provide certain oversight and monitoring services to the Company in exchange for an annual fee of up to $725,000, payment (but not accrual) of which is subject to restrictions under the Credit Agreement related to certain Company performance criteria. At the Merger, the Company paid aggregate fees to Wingate Partners of $2.3 million for services rendered in connection with the Acquisition. Wingate Partners earned an aggregate of $725,000, $603,000 and $350,000 with respect to each of the fiscal years ended 1996, 1995 and 1994, respectively, for such oversight and monitoring services. Under the agreement, the Company is obligated to reimburse Wingate Partners for its out-of-pocket expenses and indemnify Wingate Partners and its affiliates from loss in connection with these services. The agreement expires on January 31, 2002, provided that the agreement continues in effect on a year-to-year basis thereafter unless terminated in writing by one of the parties at least 180 days before the expiration of the primary term or any subsequent yearly term. 38 Pursuant to an agreement, Cumberland Capital Corporation ("Cumberland") has agreed to provide certain oversight and monitoring services to the Company in exchange for (i) an annual fee of up to $137,500, payment (but not accrual) of which is subject to restrictions under the Credit Agreement related to certain Company performance criteria and (ii) previously issued shares of Associated Common Stock that converted in the Merger into 154,126 shares. Subject to certain exceptions, the issuance of such shares is subject to rescission if the agreement is terminated before January 31, 2002. At the Merger, the Company paid aggregate fees to Cumberland of $100,000 for services rendered in connection with the Acquisition. Pursuant to the agreement, Cumberland earned an aggregate of $137,500, $129,000 and $75,000 with respect to the fiscal years ended 1996, 1995 and 1994, respectively, for such oversight and monitoring services. The Company is also obligated to reimburse Cumberland for its out-of- pocket expenses and indemnify Cumberland and its affiliates from loss in connection with these services. The agreement expires on January 31, 2002, provided that the agreement continues in effect on a year-to-year basis thereafter unless terminated in writing by one of the parties at least 180 days before the expiration of the primary term or any subsequent yearly term. Pursuant to an agreement, Good Capital Co., Inc. ("Good Capital") has an agreement to provide certain oversight and monitoring services to the Company in exchange for (i) an annual fee of up to $137,500, payment (but not accrual) of which is subject to restrictions under the Credit Agreement related to certain Company performance criteria and (ii) previously issued shares of Associated Common Stock that converted in the Merger into 154,126 shares. Subject to certain exceptions, the issuance of such shares is subject to rescission if the agreement is terminated before January 31, 2002. At the Merger, the Company paid aggregate fees to Good Capital of $100,000 for services rendered in connection with the Acquisition. Pursuant to the agreement, Good Capital earned an aggregate of $137,500, $129,000 and $75,000 in each of the fiscal years ended 1996, 1995 and 1994, respectively, for such oversight and monitoring services. The Company is also obligated to reimburse Good Capital for its out-of-pocket expenses and indemnify Good Capital and its affiliates from loss in connection with these services. The agreement expires on January 31, 2002, provided that the agreement continues in effect thereafter on a year-to-year basis unless terminated in writing by one of the parties at least 180 days before the expiration of the primary term or any subsequent yearly term. 13. INCOME TAXES The provision for (benefit from) income taxes consists of the following (dollars in thousands): Year Ended December 31, --------------------------- 1996 1995 1994 ------- ------ ------ Currently payable - Federal $14,724 $4,172 $3,090 State 3,532 1,119 903 ------- ------ ------ Total currently payable 18,256 5,291 3,993 Deferred, net - Federal 4,614 (142) (24) State 685 (21) 24 ------- ------ ------ Total deferred, net 5,299 (163) - - ------- ------ ------ Provision for income taxes $23,555 $5,128 $3,993 ------- ------ ------ ------- ------ ------ 39 The Company's effective income tax rates for the years ended December 31, 1996, 1995 and 1994 varied from the statutory Federal income tax rate as set forth in the following table (dollars in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- --------------------- % of % of % of Pre-tax Pre-tax Pre-tax Amount Income Amount Income Amount Income ------ ------ ------- ------ ------ ------ Tax provision based on the federal statutory rate $19,442 35.0% $3,980 35.0% $3,535 34.0% State and local income taxes - net of federal income tax benefit 3,000 5.4 705 6.2 607 5.8 Non-deductible and other 1,113 2.0 443 3.9 (149) (1.4) ------- ---- ------ ---- ------ ---- Provision for income taxes $23,555 42.4% $5,128 45.1% $3,993 38.4% ------- ---- ------ ---- ------ ---- ------- ---- ------ ---- ------ ----
The deferred tax assets and liabilities result from timing differences in the recognition of certain income and expense items for financial and tax accounting purposes. The sources of these differences and the related tax effects were as follows (dollars in thousands):
DECEMBER 31, ------------------------------------------------------------------- 1996 1995 --------------------------- --------------------------- Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Accrued expenses $17,882 $ - - $20,351 $ - - Allowance for doubtful accounts 11,036 - - 10,645 - - Inventory reserves and adjustments - - 13,795 - - 14,756 Depreciation and amortization - - 43,798 - - 42,300 Reserve for restructuring charges and other 6,915 - - 13,970 331 ------- ------- ------- ------- Total $35,833 $57,593 $44,966 $57,387 ------- ------- ------- ------- ------- ------- ------- -------
In the Consolidated Balance Sheets, these deferred assets and liabilities are classified on a net basis as current and non-current based on the classification of the related asset or liability or the expected reversal date of the temporary difference. 14. SUPPLEMENTAL CASH FLOW INFORMATION In addition to the information provided in the Consolidated Statements of Cash Flows, the following are supplemental disclosures of cash flow information for the years ended December 31, 1996, 1995 and 1994 (dollars in thousands): 1996 1995 1994 ---- ---- ---- Cash paid during the year for: Interest $52,871 $36,120 $6,588 Income taxes 17,482 8,171 2,118 40 The following are supplemental disclosures of noncash investing and financing activities for the years ended December 31, 1996, 1995 and 1994 (dollars in thousands): - On May 3, 1995, the Company issued stock valued at $2,406 in exchange for services related to the issuance of the Notes. - On March 30, 1995, the Company issued stock valued at $2,162 in exchange for services related to financing the Acquisition. - In 1994, the Company issued $9,000 of common stock to retire a $9,000 deferred obligation related to a transition services agreement. - In 1994, the Company accrued $244 for warrants which had an exercise price less than the fair market value of the common stock. - In 1994, the Company accrued $63 for common stock shares to be issued at less than fair market value. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of the Company's financial instruments are as follows (dollars in thousands):
December 31, 1996 December 31, 1995 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------- Cash and cash equivalents $10,619 $10,619 $11,660 $11,660 Current maturities of long-term obligations and capital lease 46,923 46,923 23,886 23,886 Long-term debt and capital lease: Notes 150,000 168,000 150,000 163,875 All other 403,079 403,079 376,198 376,198 Interest rate collar - - 1,200 - - 3,900
The fair value of the Notes and interest rate collar are based on quoted market prices and quotes from counterparties, respectively. 41 UNITED STATIONERS INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
Balance At Additions Balance Beginning Charged to At End of Period Expenses Other (3) Deductions of Period ---------- ---------- -------- ---------- --------- Reserve for Doubtful Accounts: Year Ended: December 31, 1996 $7,315 $7,791 $ - - $8,788 (A) $6,318 December 31, 1995 (1) 3,496 5,169 4,776 6,126 (A) 7,315 December 31, 1994 (2) 3,544 1,528 1,576 (A) 3,496 Sales Returns: Year Ended: December 31, 1996 $8,973 $49,183 $ - - $49,993 (B) $8,163 December 31, 1995 (1) 540 60,598 12,051 64,216 (B) 8,973 December 31, 1994 (2) 514 42,792 42,766 (B) 540
(1) Reflects the results of Associated only for the three months ended March 30, 1995 and the Company for the nine months ended December 31, 1995. (2) Reflects the results of Associated only. (3) Reflects the liability assumed as a result of the Merger. (A) Accounts determined to be uncollectible and charged against reserves, net of collections on accounts previously written off. (B) Credit memos issued for sales returns. 42 REPORT OF INDEPENDENT AUDITORS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNITED STATIONERS INC. We have audited the accompanying consolidated statements of operations, changes in stockholders' investment and cash flows of United Stationers Inc. and Subsidiary for the seven months ended March 30, 1995. Our audit also included the financial statement schedule as of March 30, 1995 and for the seven months then ended listed in the index at Item 14(A). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of United Stationers Inc. and Subisidiary for the seven months ended March 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ERNST & YOUNG LLP Chicago, Illinois June 27, 1995 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNITED STATIONERS INC. We have audited the accompanying consolidated statement of operations, changes in stockholders' investment and cash flows of UNITED STATIONERS INC. (a Delaware Corporation) AND SUBSIDIARIES for the year ended August 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of United Stationers Inc. and Subsidiaries for the year ended August 31, 1994, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements for 1994 and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP Chicago, Illinois, October 6, 1994. 44 UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
For the SEVEN MONTHS ENDED Year Ended ------------------------------ ---------- (UNAUDITED) MARCH 30, March 31, August 31, 1995 1994 1994 - ----------------------------------------------------------------------------------------------------------------------------- NET SALES $980,575 $871,585 $1,473,024 COST OF SALES 814,780 717,546 1,220,245 - ----------------------------------------------------------------------------------------------------------------------------- Gross profit on sales 165,795 154,039 252,779 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSE: Warehousing, marketing and administrative expenses 133,098 128,594 216,485 Merger-related costs 27,780 - - - - - ----------------------------------------------------------------------------------------------------------------------------- Total operating expenses 160,878 128,594 216,485 - ----------------------------------------------------------------------------------------------------------------------------- Income from operations 4,917 25,445 36,294 - ----------------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest expense (7,640) (6,095) (10,722) Interest income 140 258 261 Other, net 41 117 225 - ----------------------------------------------------------------------------------------------------------------------------- Total other income (expense) (7,459) (5,720) (10,236) - ----------------------------------------------------------------------------------------------------------------------------- Income (Loss) before income taxes (2,542) 19,725 26,058 INCOME TAXES 4,692 8,185 10,309 - ----------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(7,234) $11,540 $15,749 - ----------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,593,614 18,585,451 18,587,282 - ----------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER COMMON SHARE $(0.39) $0.62 $0.85 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 45 UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Number of Capital in Total Common Common Excess of Retained Treasury Stockholders' Shares Stock Par Value Earnings Stock Investment - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1993 18,586,627 $1,859 $91,687 $144,292 $(141) $237,697 Net Income - - - - - - 15,749 - - 15,749 Issuance of common shares 5,427 - - 42 - - - - 42 Cash dividends - $0.40 per share on common stock - - - - - - (7,593) - - (7,593) Disposition of treasury stock - - - - - - - - 115 115 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1994 18,592,054 $1,859 $91,729 $152,448 $ (26) $246,010 Net Loss - - - - - - (7,234) - - (7,234) Issuance of common shares 18,875 2 183 - - - - 185 Cash dividends - $0.30 per share on common stock - - - - - - (5,719) - - (5,719) Acquisition of treasury stock - - - - - - - - (117) (117) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 30, 1995 18,610,929 $1,861 $91,912 $139,495 $(143) $233,125 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 46 UNITED STATIONERS INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
For the Seven Months Ended Year Ended ------------------------------ ---------- (Unaudited) March 30, March 31, August 31, FOR THE PERIOD ENDED 1995 1994 1994 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ (7,234) $ 11,540 $ 15,749 Loss on sale of fixed assets 200 494 579 Depreciation and amortization 12,595 12,103 21,236 (Decrease)/increase in deferred taxes (3,933) 1,298 2,943 Increase/(decrease) in accounts payable 24,429 (64,918) (28,581) Increase/(decrease) in accrued liabilities 17,260 (14,407) (7,522) (Increase)/decrease in accounts receivable (1,107) 8,062 831 (Increase)/decrease in inventories (80,947) (7,818) 3,966 (Increase)/decrease in prepaid expenses (7,475) (752) 914 Increase in other assets (1,341) (1,359) (2,007) - ----------------------------------------------------------------------------------------------------------------------------- Total Adjustments (40,319) (67,297) (7,641) - ----------------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (47,553) (55,757) 8,108 Cash Flows from Investing Activities: Acquisition of property, plant and equipment (7,799) (4,487) (10,719) Proceeds from disposition of property, plant & equipment 35 200 220 - ----------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (7,764) (4,287) (10,499) - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase/(decrease) in short-term debt 5,660 33 (2,855) Payments on long-term obligations (4,541) (1,269) (1,533) Additions to long-term obligations 67,444 69,348 13,246 Issuance of common shares 185 25 42 Payment of dividends (5,719) (5,738) (7,593) (Acquisition)/disposition of treasury stock (117) 115 115 - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 62,912 62,514 1,422 - ----------------------------------------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents 7,595 2,470 (969) Cash and Cash Equivalents at the beginning of the year 6,920 7,889 7,889 - ----------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 14,515 $ 10,359 $ 6,920 - ----------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) $ 6,851 $ 5,943 $ 10,199 Income taxes 9,257 6,054 6,229 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 47 UNITED STATIONERS INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUBSEQUENT EVENT On March 30, 1995, Associated Holdings, Inc. ("Associated") purchased 92.5% of the then outstanding shares of the common stock, $0.10 par value ("Common Stock") of United Stationers Inc. ("United") for approximately $266.6 million in the aggregate pursuant to a tender offer (the "Tender Offer"). Immediately thereafter, Associated merged with and into United (the "Merger" and, collectively with the Tender Offer, the "Acquisition"), and Associated Stationers, Inc., a wholly-owned subsidiary of Associated ("ASI") merged with and into United Stationers Supply Co., a wholly-owned subsidiary of United ("USSC"), with United and USSC continuing as the respective surviving corporations. United, as the surviving corporation following the Merger, is referred to herein as the "Company." As a result of share conversions in the Merger, immediately after the Merger, (i) the former holders of common stock and common stock equivalents of Associated owned shares of Common Stock and warrants or options to purchase shares of Common Stock constituting in the aggregate approximately 80% of the shares of Common Stock on a fully diluted basis, and (ii) holders of pre-Merger United common stock owned in the aggregate approximately 20% of the shares of Common Stock on a fully diluted basis. Although United was the surviving corporation in the Merger, the transaction was treated as a reverse acquisition for accounting purposes with Associated as the acquiring corporation. Immediately following the Merger, the number of outstanding Shares was 5,998,177 (or 6,973,720 on a fully diluted basis), of which (i) the former holders of Class A Common Stock, $0.01 par value, and Class B Common Stock, $0.01 par value, of Associated ("Associated Common Stock") and warrants or options to purchase Associated Common Stock in the aggregate owned 4,603,373 Shares constituting approximately 76.8% of the outstanding Shares and outstanding warrants or options for 975,603 Shares (collectively 80.0% on a fully diluted basis) and (ii) pre-Merger holders of Shares (other than Associated-owned Shares and treasury Shares) in the aggregate owned 1,394,744 Shares constituting approximately 23.2% of the outstanding Shares (or 20.0% on a fully diluted basis). As used in this paragraph, the term "Shares" includes shares of Nonvoting Common Stock, $0.01 par value, of the Company, which are immediately convertible into Shares for no additional consideration. To finance the Offer, refinance existing debt of ASI, the Company and USSC, repurchase stock options and pay related fees and expenses, Associated, ASI, USSC and the Company entered into (i) new credit facilities ("New Credit Facilities") with a group of banks and financial institutions providing for term loan borrowings of $200.0 million and revolving loan borrowings of up to $300.0 million and (ii) a senior subordinated bridge loan facility in the aggregate principal amount of $130.0 million (the "Subordinated Bridge Facility"). In addition, simultaneously with the consummation of the Offer, Associated obtained $12.0 million from the sale of additional shares of Associated Common Stock, which proceeds were used to finance the purchase of a portion of the Shares pursuant to the Offer. On May 3, 1995, USSC completed the issuance of $150.0 million of 12 3/4% Senior Subordinated Notes (the "Notes") due 2005. The net proceeds of the Notes (after discount and fees of approximately $5.5 million) were used to pay certain expenses, to repay the $130.0 million Subordinated Bridge Facility (together with $1.6 million in accrued and unpaid interest thereon), to repay a portion of the Tranche A and Tranche B term loans (totaling approximately $6.5 million) and provide working capital. The Company expects to repurchase the Series B Preferred Stock, together with accrued and unpaid dividends thereon (approximately $7.0 million). The New Credit Facilities contain certain financial covenants covering the Company and its subsidiaries on a consolidated basis, including, without limitation, covenants relating to tangible net worth, capitalization, fixed charge coverage, capital expenditures and payment of dividends by the Company. 48 Effective for 1995, the Company changed its fiscal year from a year end of August 31 to December 31. The financial statements included herein represent the final financial statements of the Company through the date of the consummation of the Merger. Future financial statements of the Company will reflect Associated and its acquisition of the Company, and will be on the basis of a December 31 fiscal year end. As part of the Merger, the Company incurred approximately $27.8 million of merger-related costs. The amount consisted of severance payments under employment contracts ($9.6 million); insurance benefits under employment contracts($7.4 million); legal, accounting and other professional services fees ($5.2 million); retirement of stock options ($3.0 million); and fees for letters of credit related to employment contracts and other costs ($2.6 million). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of United Stationers Inc. and its wholly owned subsidiaries ("the Company"). Investments in 20% to 50% owned companies are accounted for by the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform with current-year presentations. REVENUE RECOGNITION Sales and provisions for estimated sales returns and allowances are recorded at the time of shipment. CASH AND CASH EQUIVALENTS Investments in low-risk instruments which have an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost which approximates market value. The Company's cash equivalent policy conforms to the requirements of Financial Accounting Standard No. 95. INVENTORIES Inventories constituting approximately 82% of total inventories at March 30, 1995, August 31, 1994 and August 31, 1993 have been valued under the last-in, first-out (LIFO) method with the remainder of the inventory valued under the first-in, first-out (FIFO) method. Inventory valued under the FIFO and LIFO accounting methods are recorded at the lower of cost or market. In 1994, liquidations of certain LIFO inventories had the effect of increasing net earnings by $830,000 or $0.04 per share. DEPRECIATION AND AMORTIZATION Depreciation and amortization are determined by using the straight-line method over the estimated useful lives of the assets. The estimated useful life assigned to fixtures and equipment is from two to 10 years; the estimated useful life assigned to buildings does not exceed 40 years; leasehold improvements and assets under capital leases are amortized over the lesser of their useful lives or the term of the applicable lease. Goodwill reflecting the excess of cost over the value of net assets of businesses acquired is being amortized on a straight-line basis over 40 years. 49 SOFTWARE CAPITALIZATION The Company capitalizes major internal and external systems development costs determined to have benefits for future periods. Amortization expense is recognized over the periods in which the benefits are realized, generally not to exceed three years. Amortization expense was $1,795,000 and$2,376,000 in 1995 and 1994, respectively. FOREIGN CURRENCY TRANSLATION All assets and liabilities of the Company's foreign operations are translated at current exchange rates. Revenues and expenses are translated at average exchange rates for the year in accordance with Statement of Financial Accounting Standard No. 52. The amounts for all years presented were immaterial. EARNINGS PER SHARE Earnings per share and the effect on earnings per share of potentially dilutive stock options are computed by the treasury stock method. This computation takes into account the weighted average number of shares outstanding during each year, outstanding stock options and their exercise prices, and the market price of the stock throughout the year. The exercise of outstanding stock options would not result in a material dilution of earnings per share. RECLASSIFICATION The Consolidated Statements of Operations reflect a reclassification of certain delivery and occupany costs from operating expense to cost of goods sold to conform the Company's presentation to the presentation used by others in the busienss products industry. The following table sets forth the impact of the reclassification for the years presented in the Consolidated Statements of Operations:
Seven Months Ended For the Year Ended ----------------------- ------------------ March 30, March 31, August 31, 1995 1994 1994 ---- ---- ---- Gross Margin as a Percent of Net Sales: Gross margin prior to reclassification 21.1% 22.5% 21.9% Gross margin as reported herein 16.9% 17.7% 17.2% Operating Expenses as a Percent of Net Sales: Operating expense ratio prior to reclassification 20.6% (1) 19.6% 19.4% Operating expense ratio as reported herein 16.4% (1) 14.8% 14.7%
(1) Includes $27.8 million nonrecurring Merger-related costs. 3. PENSION PLANS AND POSTRETIREMENT BENEFITS The Company has pension plans in effect for substantially all employees. Non- contributory plans covering non-union employees provide pension benefits that are based on years of credited service and a percentage of annual compensation. Non-contributory plans covering union members generally provide benefits of stated amounts based on years of service. The Company funds the plans in accordance with current tax laws. The Company also has a non-contributory, non-qualified plan ("Supplemental Benefit Plan") in effect for certain executives. The Company has not funded this plan. 50 Net periodic pension cost for 1995 and 1994 for pension and supplemental benefits plans includes the following components (in thousands of dollars): - --------------------------------------------------------------------------- 1995 1994 - --------------------------------------------------------------------------- Service cost - benefits earned during the period $1,084 $1,863 Interest cost on projected benefits obligation 909 1,436 Actual return on assets (780) 263 Net Amortization and Deferral 494 (1,807) - ---------------------------------------------------------------------------- Net periodic pension cost $1,707 $1,755 - --------------------------------------------------------------------------- The projected benefit obligations for 1995 and 1994 were determined using an assumed discount rate of 7.5%. The assumed rate of compensation increase ranged from 0% to 5.5%, andthe expected long-term rate of return on assets used in determining net periodic pension cost was 7.5%. The Company provides an unfunded health care plan to substantially all retired non-union employees and their dependents. Eligibility requirements are based on the individual's age (minimum age of 55), years of service and hire date. The benefits are subject to retiree contributions, deductibles, co-payment provisions and other limitations. During the first quarter of 1994, the Company adopted Statement of Financial Accounting Standard No. 106 (SFAS 106), "Employer's Accounting for Postretirement Benefits Other Than Pensions." SFAS 106 requires companies to accrue the expected cost of postretirement health care and life insurance benefits throughout the employee's active service period. Previously, postretirement health care costs were recognized as claims were paid. The Company elected to amortize the unfunded Accumulated Postretirement Benefit Obligation (APBO) over 20 years. The assumed health care average cost trend rate used in measuring the APBO at March 30, 1995 was 11.0% in 1995 and 3% in 1996 and beyond. Beginning in 1996, retirees will pay the difference between actual plan costs and the portion of cost paid by the Company which is limited to a cost trend rate of 3%. The assumed discount rate was 7.75%. A 1% increase in the care cost trend rate would increase the APBO as of March 30, 1995 by approximately $339,000 and the sum of the 1995 annual service cost and interest cost by approximately $35,000. The cost of postretirement health care benefits for the seven months ended March 30, 1995 and the year ended August 31, 1994 are as follows (in thousands of dollars): 1995 1994 - --------------------------------------------------------------------------- Service cost $ 109 $ 246 Interest on accumulated benefits obligation 106 146 Amortization of transition obligation 58 100 - --------------------------------------------------------------------------- Net postretirement benefit cost $ 273 $ 492 - --------------------------------------------------------------------------- The Company has a qualified Profit Sharing Plan in which all salaried employees and certain hourly paid employees of the Company are eligible to participate upon completion of six consecutive months of employment. The Profit Sharing Plan provides for annual contributions by the Company in an amount determined by the Board of Directors. The Plan also permits employees to have contributions made as 401(k) salary deferrals on their behalf and to make after-tax voluntary contributions. The Plan provides that the Company may match employee contributions as 401(k) salary deferrals. Company contributions to the Plan for both profit sharing and matching of employee contributions were approximately $0.8 million in 1995 and $0.5 million in 1994. 51 4. STOCK INCENTIVE PLANS As a result of the change in control of the Company, the Company paid out approximately $3.0 million to option holders representing the difference between the tender offer price of the stock ($15.50 per share) and the option exercise price. The amount was included in merger-related costs in 1995. Under the Directors' Stock Option Plan, the Company granted options for 7,500 shares at a price of $13.75 per share in 1995 and 7,500 shares at a price of $15.25 per share in 1994. The Directors' Option Plan provides for the granting of options covering up to 100,000 shares of the Company's common stock, subject to anti-dilution adjustments. Options are exercisable at any time after they are granted, but for not more than ten years after the option's grant. As of the period ended 1995 and 1994, 0 and 41,000 options were outstanding, respectively. During fiscal 1995, options for a total of 100,000 shares at $10.50 were granted to certain officers. The grant was approved at the 1995 Annual Meeting held in January. Under the Company's 1981 Stock Incentive Award Plan, options outstanding had an exercisable life of either five, six or ten years from the date of grant. The Company granted certain officers 15,000 and 16,700 shares of restricted stock in 1992 and 1991, respectively. There have been no restricted stock grants since 1992. The grants of restricted shares resulted in deferred compensation expense of $699,000 of which $16,000, $39,000, $132,000 and $185,000 was recognized in 1995, 1994, 1993 and 1992, respectively. The unrecognized portion of deferred compensation was $0, $16,000 and $55,000 as of March 30, 1995, August 31, 1994 and August 31, 1993, respectively. Under the terms of the grant, the stock does not vest to the employee until completion of three years of employment after the date of grant. The 1981 Stock Incentive Award Plan was terminated by the Company's Board of Directors on March 30, 1995. In 1989, the Board of Directors terminated the 1985 Non-qualified Stock Option Plan so that no further stock options would be issued under this plan. The termination of the plan did not affect the options previously granted and outstanding. No option could have been exercised more than ten years after its grant. The following table summarizes the transactions of the 1981 and 1985 Option Plans for 1995 and 1994:
1981 Stock Incentive Award Plan Option Price Option Price (excluding restricted stock) 1995 Range 1994 Range - -------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of the period 1,135,060 $8.64-$19.39 891,350 $8.64-$19.39 Granted 100,000 $10.50 401,050 $10.00-$16.25 Exercised (22,860) $8.64-$9.29 (3,520) $ 8.64-$13.75 Canceled(1) (1,212,200) $8.64-$19.39 (153,820) $ 8.64-$19.39 ----------- --------- Options outstanding at end of the period - - 1,135,060 - -------------------------------------------------------------------------------------------------------------- 1985 Non-qualified Stock Option Price Option Price Option Plan 1995 Range 1994 Range - -------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of the period 109,500 $14.78-$18.09 109,500 $14.78-$18.09 Granted - - - - - - - - Exercised - - - - - - - - Canceled(1) (109,500) $14.78-$18.09 - - - - --------- ------------ Options outstanding at end of the period - - 109,500 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
1 As a result in change in control of the Company, the Company paid out to option holders the difference between the tender offer price of the stock ($15.50 per share) and the option exercise price. The total amount was included in merger-related costs in 1995. 52 5. LEASES The Company has entered into several non-cancelable long-term leases on property and equipment. Rental expense for all operating leases was approximately $7,731,000 and $13,549,000 in 1995 and 1994, respectively. 6. INCOME TAXES The Company provides for income taxes at statutory rates based on income reported for financial statement purposes. A summary of income tax expense is shown below (in thousands of dollars): - ------------------------------------------------------------------------------- 1995 1994 - ------------------------------------------------------------------------------- Taxes currently payable Federal $14,122 $7,059 Other tax credits - - (5) State 2,584 1,591 Prepaid and deferred taxes (12,014) 1,664 - ------------------------------------------------------------------------------- $ 4,692 $10,309 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The table below records the differences between the statutory income tax rate and the Company's effective income tax rate: - ------------------------------------------------------------------------------- 1995 1994 - ------------------------------------------------------------------------------- Statutory Federal income tax 35.0% 35.0% State income taxes, net of the Federal income tax benefit (4.9) 4.8 Losses from foreign subsidiaries - - 1.9 Liquidation of a foreign subsidiary - - (3.9) Non-deductible goodwill amortization (9.0) 1.5 Non-deductible merger-related expenses (208.3) - - Other, net 2.6 .3 - ------------------------------------------------------------------------------- Effective income tax rate (184.6)% 39.6% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 53 UNITED STATIONERS INC. AND SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS) BALANCE AT ADDITIONS BALANCE BEGINNING CHARGED TO AT END OF PERIOD EXPENSES DEDUCTIONS OF PERIOD --------- -------- ---------- --------- Reserve for Doubtful Accounts: Period ended: March 30, 1995* $ 4,010 $ 2,510 $1,745 (A) $ 4,775 August 31, 1994 3,964 5,750 5,704 (A) 4,010 Sales Returns, Rebates and Allowances Period ended: March 30, 1995* $31,293 $43,523 $48,371 (B) $26,445 August 31, 1994 25,552 67,970 62,229 (B) 31,293 * Reflects the transition period of September 1, 1994 through March 30, 1995 (A) Accounts determined to be uncollectible and charged against reserves, net of collections on accounts previously written off. (B) Credit memos issued for sales returns, rebates and allowances. 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Registrant had no disagreements on accounting and financial disclosure of the type referred to in Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information with respect to those individuals who are currently serving as members of the Board of Directors or as executive officers of the Company on February 1, 1997: Name Age Position - -------------------------------------------------------------------------------- Frederick B Hegi, Jr.. . . 53 Director, Chairman of the Board, President and Chief Executive Officer Michael D. Rowsey. . . . . 44 Director and Executive Vice President Daniel H. Bushell. . . . . 45 Executive Vice President, Chief Financial Officer and Assistant Secretary Steven R. Schwarz. . . . . 43 Executive Vice President Robert H. Cornell. . . . . 57 Vice President, Human Resources Otis H. Halleen. . . . . . 62 Vice President, Secretary and General Counsel James A. Pribel. . . . . . 43 Treasurer Albert Shaw. . . . . . . . 47 Vice President, Operations Ergin Uskup. . . . . . . . 59 Vice President, Management Information Systems and Chief Information Officer Gary G. Miller . . . . . . 46 Director and Assistant Secretary Thomas W. Sturgess . . . . 46 Director James T. Callier, Jr.. . . 61 Director Daniel J. Good . . . . . . 56 Director Jeffrey K. Hewson. . . . . 53 Director James A. Johnson . . . . . 42 Director Joel D. Spungin. . . . . . 59 Director Set forth below is a description of the backgrounds of the directors and executive officers of the Company. There is no family relationship between any directors or executive officers of the Company. Officers of the Company are elected by the Board of Directors and hold office until their respective successors are duly elected and qualified. FREDERICK B. HEGI, JR. assumed the position of Chairman of the Board, President and Chief Executive Officer on an interim basis on November 18, 1996 as a result of the resignation of Thomas W. Sturgess. Mr. Hegi was elected to the Board of Directors upon consummation of the Merger. Prior to the Merger, he had been a director of Associated since 1992. Mr. Hegi is a general partner of various Wingate entities, including the indirect general partner of each of Wingate Partners and Wingate II. Since May 1982, Mr. Hegi has served as President of Valley View Capital Corporation, a private investment firm. Mr. Hegi also serves as Chairman of the Executive Committee of the Board of LoomisFargo & Co., a provider of armored car and related services ("Loomis"). Mr. Hegi also serves as Chairman of ITCO Holding Company, Inc., the parent corporation of ITCO Tire Company, a tire distributor, Tahoka First Bancorp, Inc., a bank holding company, and Cedar Creek Bancshares, Inc., a bank holding company, Lone Star Technologies, Inc., a diversified company engaged in the manufacturing of steel pipe, Cattle Resources, Inc., a manufacturer of animal feeds and operator of commercial cattle feedlots. 55 MICHAEL D. ROWSEY was elected to the Board of Directors upon consummation of the Merger and became Executive Vice President of the Company upon consummation of the Merger with primary responsibility for field operations. Prior to the Merger, Mr. Rowsey had been a director of Associated since 1992 and President and Chief Operating Officer of Associated since January 1992. From 1979 to January 1992, Mr. Rowsey served in various capacities with Boise Cascade Office Products Corp., most recently as the North Regional Manager. DANIEL H. BUSHELL became Executive Vice President and Chief Financial Officer of the Company upon consummation of the Merger. Mr. Bushell has served as Assistant Secretary of the Company since January 1996, and served as Secretary of the Company from June 1995 through such date. Mr. Bushell also served as Assistant Secretary of the Company from the consummation of the Merger until June 1995. Prior thereto, Mr. Bushell had been Chief Administrative and Chief Financial Officer of Associated and ASI since January 1992. From 1978 to January 1992, Mr. Bushell served in various capacities with ACE Hardware Corporation, most recently as Vice President of Finance. STEVEN R. SCHWARZ became Executive Vice President of the Company upon consummation of the Merger with primary responsibility for marketing and merchandising. Prior thereto, he was Senior Vice President, Marketing of United since June 1992 and had previously been Senior Vice President, General Manager, Micro United since 1990 and Vice President, General Manager, Micro United since September 1989. He had held a staff position in the same capacity since February 1987. ROBERT H. CORNELL became Vice President, Human Resources of the Company upon consummation of the Merger. Prior thereto, he was Vice President, Human Resources of United since February 1988, and since 1987 had been Vice President, Human Resources for USG Interiors Inc., a subsidiary of USG Corporation. OTIS H. HALLEEN became Vice President, Secretary and General Counsel of the Company as of January 30, 1996. Since November 1, 1995 he has served as Vice President, Secretary and General Counsel at USSC. From 1986 through March 1995 he had been Vice President, Secretary and General Counsel of United. JAMES A. PRIBEL became Treasurer of the Company upon consummation of the Merger. Prior thereto, he was Treasurer of United since 1992. Prior thereto he had been Assistant Treasurer of USSC since 1984 and had served in various positions since joining USSC in 1978. ALBERT SHAW became Vice President, Operations of the Company shortly after consummation of the Merger. Prior thereto, he was Vice President, Midwest Region of USSC since March 1994. He had been a Vice President of USSC since 1992 and prior to that had served in various management positions since joining USSC in 1974. ERGIN USKUP became Vice President, Management Information Systems and Chief Information Officer of the Company upon consummation of the Merger. Prior thereto, he was Vice President, Management Information Systems and Chief Information Officer of United since February 1994, and since 1987 had been Vice President, Corporate Information Services for Baxter International Inc., a global manufacturer and distributor of health care products. GARY G. MILLER was elected to the Board of Directors upon consummation of the Merger and became Assistant Secretary of the Company on June 27, 1995. Mr. Miller served as Vice President and Secretary of the Company from consummation of the Merger until June 27, 1995. Prior thereto, Mr. Miller had been a director of Associated since 1992 and Vice President and Secretary of Associated since January 1992. Mr. Miller also currently serves as President of Cumberland Capital, a private investment firm which is located in Fort Worth, Texas. In addition, from 1977 to December 1993, Mr. Miller served as Executive Vice President, Chief Financial Officer and a director of AFG Industries, Inc., and its parent company, Clarity Holdings Corp. He is Chairman of the Board of both CFData Corp., a nationwide provider of check collection and check verification services, and Fore Star Golf, Inc., which was formed in 1993 to own and operate golf course facilities. 56 THOMAS W. STURGESS became President and Chief Executive Officer of the Company on May 31, 1995 and Chairman of the Board of the Company upon consummation of the Merger. On November 18, 1996, Mr. Sturgess resigned as Chairman of the Board, President and Chief Executive Officer of the Company. Prior to the Merger, Mr. Sturgess served as Chairman of the Board and Chief Executive Officer of Associated since January 1992 and had been Chairman of the Board and Chief Executive Officer of ASI since December 1994. Since 1987, Mr. Sturgess has served as a general partner of various Wingate entities, including the indirect general partner of each of Wingate Partners and a special limited partner of Wingate II. Mr. Sturgess has not actively participated in the management of Wingate Partners or the Wingate entities since December 31, 1995. JAMES T. CALLIER, JR. was elected to the Board of Directors upon consummation of the Merger. Prior to the Merger, he had been a director of Associated since 1992. Mr. Callier is a general partner of Wingate Partners, and has served as President of Callier Consulting, Inc., an operating management firm, since 1985. Mr. Callier currently serves as Chairman of the Board of Century Products, a manufacturer of baby seats and other juvenile products ("Century Products"), as a director of Redman Building Products, Inc., a manufacturer of aluminum and vinyl windows, as a Director of Loomis, and as an advisory director of Wingate II. DANIEL J. GOOD was elected to the Board of Directors upon consummation of the Merger. Prior to the Merger, he had been a director of Associated since 1992. Mr. Good is Chairman of Good Capital Co., Inc., an investment firm in Lake Forest, Illinois. Until June 1995, Mr. Good was Vice Chairman of Golden Cat Corp., the largest producer of cat litter in the United States, and prior thereto he was Managing Director of Merchant Banking for Shearson Lehman Bros., President of A.G. Becker Paribas, Inc. JEFFREY K. HEWSON was elected to the Board of Directors in 1991. Mr. Hewson served as President and Chief Executive Officer of the Company from consummation of the Merger until May 31, 1995. Prior thereto, he was President and Chief Operating Officer of United since April 1991. He had been Executive Vice President of United since March 1990. Prior to that, he had been President of ACCO International's U.S. Division since 1989 and President of its Canadian Division since 1987. ACCO International is a manufacturer of traditional office products and a subsidiary of American Brands, Inc., which is a global consumer products holding company. Mr. Hewson currently serves as President and Chief Executive Officer of Beckley Cardy Group, a distributor of supplies, furniture and equipment to the educational market. JAMES A. JOHNSON was elected to the Board of Directors upon consummation of the Merger. Prior to the Merger, he had been a director of Associated since 1992. Mr. Johnson is a general partner of various Wingate entities, including the indirect general partner of Wingate II. From 1980 until he joined Wingate Partners in 1990, Mr. Johnson served as a Principal of Booz-Allen & Hamilton, an international management consulting firm. Mr. Johnson currently serves as a director of Century Products, and Chairman of the Board of Directors of Redman Building Products. JOEL D. SPUNGIN has served as a member of the Board of Directors since 1972 and prior to the consummation of the Merger was Chairman of the Board of Directors and Chief Executive Officer of United since August 1988. From October 1989 until April 1991, he was also President of United. Prior to that, since March 1987, Mr. Spungin was Vice Chairman of the Board and Chief Executive Officer of United. Previously, since August 1981, Mr. Spungin was President and Chief Operating Officer of United. He also serves as a general partner of DMS Enterprises, L.P., a management advisory and investment partnership, and as a director of AAR Corp., an aviation and aerospace company, and Home Products International, Inc., a manufacturer of home improvement products. Messrs. Sturgess, Rowsey, Miller, Callier, Good, Hegi and Johnson were elected to the Board of Directors pursuant to a voting trust. The Charter provides that the Board of Directors shall be divided into three classes, each class as nearly equal in number as possible, and each term consisting of three years. The directors currently in each class are as follows: Class I (having terms expiring in 1999)--Messrs. Good, Johnson and Hewson; Class II (having terms expiring in 1997)--Messrs. Hegi, Rowsey, Miller and Sturgess (who will not be standing for re-election) and Class III (having terms expiring in 1998)--Messrs. Callier and Spungin. 57 ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference, pursuant to General Instruction G(3) to Form 10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 14, 1997, to be filed within 120 days after the end of the Registrant's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference, pursuant to General Instruction G(3) to Form 10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 14, 1997, to be filed within 120 days after the end of the Registrant's fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference, pursuant to General Instruction G(3) to Form 10-K, from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 14, 1997, to be filed within 120 days after the end of the Registrant's fiscal year. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (A) The following financial statements, schedules and exhibits are filed as part of this report: PAGE NO. -------- (1) Financial Statements of the Company Report of Independent Auditors 19 Report of Independent Public Accountants 20 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 21 Consolidated Balance Sheets as of December 31, 1996 and 1995 22-23 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 24-25 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 26 Notes to Consolidated Financial Statements 27-41 Financial Statement Schedule II. Valuation and Qualifying Accounts. . . . . . . . . . . 42 All other financial statements and schedules not listed have been omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto. (2) Financial Statements of United Report of Independent Auditors . . . . . . . . . . . . . . 43 Report of Independent Public Accountants . . . . . . . . . 44 Consolidated Statements of Operations for the seven months ended March 30, 1995 and March 31, 1994 (unaudited), and for the year ended August 31, 1994 . . . 45 Consolidated Statements of Changes in Stockholders' Investment for the seven months ended March 30, 1995, and for the year ended August 31, 1994. . . . . . . . . . 46 Consolidated Statements of Cash Flows for the for the seven months ended March 30, 1995 and March 31, 1994 (unaudited), and for the year ended August 31, 1994 . . . 47 58 Notes to Consolidated Financial Statements . . . . . . . . 48-53 Financial Statement Schedule . . . . . . . . . . . . . . . II. Valuation and Qualifying Accounts . . . . . . . . . . 54 All other financial statements and schedules not listed have been omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K) EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.1 Charter (Exhibit 3(a) to the Company's Annual Report on Form 10-K dated November 19, 1987)(3). 4.2 Certificate of Ownership and Merger merging Associated into United(2). 4.3 Restated Bylaws(1). 9.1 Voting Trust Agreement, dated as of January 31, 1992, among the Company, the stockholders party thereto and Messrs. Sturgess, Hegi, Miller, Good and Johnson, as voting trustees(1). 9.2 First Amendment to Voting Trust Agreement, dated as of March 30, 1995, among the Company, the stockholders party thereto and Messrs. Sturgess, Hegi, Miller, Good and Johnson, as voting trustees(1). 10.1 Credit Agreement, dated as of March 30, 1995, among USSC, the Company, certain Lenders named therein and Chase Bank, as Agent and Lender (Exhibit 4.A.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995)(3). 10.2 Waiver and Amendment No. 1, dated as of April 13, 1995, among USSC, the Company, each of the lenders party thereto and Chase Bank(1). 10.3 Waiver and Amendment No. 2, dated as of December 21, 1995, among the Company, United, each of the lenders party thereto and Chase Bank(4). 10.4 Assumption Agreement, dated as of March 30, 1995, among USSC, the Company and Chase Bank, as agent (included in Exhibit 10.1, Exhibit F). 10.5 Form of Revolving Credit Note, issuable under the Credit Agreement (included in Exhibit 10.1, Exhibit A-I). 10.6 Form of Tranche A Term Loan Note, issuable under the Credit Agreement (included in Exhibit 10.1, Exhibit A-2). 10.7 Form of Tranche B Term Loan Note, issuable under the Credit Agreement (included in Exhibit 10.1, Exhibit A-3). 10.8 Security Agreement, dated as of March 30, 1995, between USSC and Chase Bank, as agent (included in Exhibit 10.1, Exhibit C). 10.9 Form of Indenture of Mortgage, Assignment of Rents, Security Agreement and Fixture Filing, dated as of March 30, 1995, by USSC in favor of Chase Bank (included in Exhibit 10.1, Exhibit E). 10.10 Registration Rights Agreement, dated as of April 26, 1995, among the Company, USSC and the Initial Purchaser(1). 10.11 Purchase Agreement, dated April 26, 1995, among the Company, USSC, and the Initial Purchaser(1). 10.12 Registration Rights Agreement, dated as of January 31, 1992, between the Company and CMIHI (included in Exhibit 10.15, Annex 2). 10.13 Amendment No. 1 to Registration Rights Agreement, dated as of March 30, 1995, among the Company, CMIHI and certain other holders of Lender Warrants(1). 10.14 Amended and Restated Registration Rights Agreement, dated as of March 30, 1995, among the Company, Wingate Partners, Cumberland, Good Capital Co., Inc. and certain other Company stockholders(1). 10.15 Warrant Agreement, dated as of January 31, 1992, among the Company, USSC and CMIHI(1). 59 10.16 Amendment No. 1 to Warrant Agreement, dated as of October 27, 1992, among the Company, USSC, CMIHI and the other parties thereto(1). 10.17 Letter Agreement dated as of February 10, 1995, amending certain provisions of the Warrant Agreement, among the Company, USSC, CMIHI and the other parties thereto(4). 10.18 Amendment No. 2 to Warrant Agreement, dated as of March 30, 1995, among the Company, USSC, CMIHI and the other parties thereto(1). 10.19 Amendment No. 3 to Warrant Agreement, dated as of July 28, 1995, among the Company, USSC, CMIHI and the other parties thereto(4). 10.20 Exhibit intentionally omitted. 10.21 Warrant Agreement, dated as of January 31, 1992, between the Company and Boise Cascade Corporation(1). 10.22 Amendment No. 1 to Warrant Agreement, dated as of March 30, 1995, between the Company and Boise Cascade Corporation(1). 10.23 Indenture, dated as of May 3, 1995, among USSC, the Company and The Bank of New York(1). 10.24 First Supplemental Indenture, dated as of July 28, 1995, among USSC, the Company, and the Bank of New York(1). 10.25 Investment Banking Fee and Management Agreements, dated as of January 31, 1992, among the Company, USSC and each of Wingate Partners, Cumberland and Good Capital Co., Inc.(1). 10.26 Amendment No. 1 to Investment Banking Fee and Management Agreements, dated as of March 30, 1995, among USSC, the Company and each of Wingate Partners, Cumberland and Good Capital Co., Inc.(1). 10.27 1992 Management Stock Option Plan, dated as of January 31, 1992(1). 10.28 Amendment No. 1 to 1992 Management Stock Option Plan, dated as of March 30, 1995(1). 10.29 Amendment No. 2 to 1992 Management Stock Option Plan, dated as of September 27, 1995(4). 10.30 Letter agreements, dated January 31, 1992, between the Company (as successor-in-interest to Associated) and each of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller, Daniel J. Schleppe, Duane J. Ratay and Daniel H. Bushell regarding grants of stock options(1). 10.31 Amendment to Stock Option Grants, dated as of March 30, 1995, between the Company and each of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller, Daniel J. Schleppe, Duane J. Ratay and Daniel H. Bushell(1). 10.32 Forms of Stock Option Agreements, dated October 2, 1995, granting options to certain management employees, subject to stockholder approval of Amendment No. 2 to Stock Option Plan(4). 10.33 Forms of Amendments to Stock Option Grants, dated September 29, 1995, between the Company and each of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller, Daniel J. Schleppe and Daniel H. Bushell(4). 10.34 Stock Option Agreements, dated as of January 1, 1996, between the Company and Thomas W. Sturgess, granting options subject to stockholder approval of Amendment No. 2 to Stock Option Plan(4). 10.35 Executive Stock Purchase Agreements, dated as of January 31, 1992, among the Company, Wingate Partners, ASI Partners, L.P. and each of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller and Daniel J. Schleppe(1). 10.36 First Amendments to Executive Stock Purchase Agreements, dated as of March 30, 1995, among the Company, Wingate Partners, ASI Partners, L.P. and each of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller and Daniel J. Schleppe(1). 10.37 Management Incentive Plan for period 4/1/95 through 12/31.95(4). 10.38 Management Incentive Plan for 1996(4). 10.39 Management Incentive Plan for 1997 * 60 10.40 1997 Special Bonus Plan * 10.41 Intentionally Omitted 10.42 Intentionally Omitted 10.43 Intentionally Omitted 10.44 Intentionally Omitted 10.45 Profit Sharing PluSavings Plan (Exhibit 10(a)(i)(F)(2)(f) to the Company's Report on Form 10-K dated November 20, 1989(3). 10.45.1 United Stationers 401(k) Savings Plan, restated as of March 1, 1996* 10.46 United Stationers Supply Co. Pension Plan as amended (See the Company's Reports on Form 10-K for the fiscal years ended August 31, 1985, 1986, 1987 and 1989(3). 10.47 Amendment to Pension Plan adopted February 10, 1995(2). 10.48 One Time Merger Integration Bonus Plan(4). 10.49 Employment Agreements, dated as of January 31, 1992, among the Company, USSC and each of Michael D. Rowsey, Robert W. Eberspacher, Lawrence E. Miller, Daniel J. Shleppe, Duane J. Ratay and Daniel H. Bushell(1). 10.50 Amended and Restated Employment and Consulting Agreement dated April 15, 1993 among the Company, USSC and Joel D. Spungin (Exhibit 10(b) to the Company's Report on Form 10-K dated November 22, 1993(3). 10.51 Amendment dated February 13, 1995 to the Amended and Restated Employment and Consulting Agreement among the Company, USSC and Joel D. Spungin(2). 10.52 Intentionally Omitted 10.53 Intentionally Omitted 10.54 Intentionally Omitted 10.55 Intentionally Omitted 10.56 Intentionally Omitted 10.57 Intentionally Omitted 10.58 Employment and Consulting Agreement dated March 1, 1990 between the Company, USSC and Jeffrey K. Hewson (Exhibit 10(1) to the Company's Report on Form 10-K dated November 20, 1990)(3). 10.59 Amendment dated April 10, 1991 of Employment and Consulting Agreement between the Company, USSC and Jeffrey K. Hewson (Exhibit 10(1)(I) to the Company's Report on Form 10-K dated November 25, 1991)(3). 10.60 Amendment dated September 1, 1994 of Hewson Employment and Consulting Agreement (Exhibit 10(e)(ii) to the Company's Report on Form 10-K dated November 23, 1994)(3). 10.61 Amendment to Employment and Consulting Agreement dated February 13, 1995 between the Company, USSC and Jeffrey K. Hewson(2). 10.62 Amendment dated May 25, 1995 to Employment and Consulting Agreement between the Company, USSC and Jeffrey K. Hewson(4). 10.63 Severance Agreement between the Company, USSC and James A. Pribel dated February 13, 1995(2). 10.64 Letter Agreement dated February 13, 1995 between the Company and Ergin Uskup(2). 10.65 Amendment dated August 30, 1995 to Employment and Consulting Agreement between the Company, USSC and Steven R. Schwarz(4). 10.66 Amendment dated August 30, 1995 to Employment and Consulting Agreement between the Company, USSC and Ted S. Rzeszuto(4). 10.67 Employment Agreements dated October 1, 1995 between USSC and each of Daniel H. Bushell, Michael D. Rowsey, Steven R. Schwarz, Robert H. Cornell, Ted S. Rzeszuto, and Al Shaw(4). 10.68 Employment Agreement dated November 1, 1995 between USSC and Otis H. Halleen(4). 10.69 Employment Agreement dated as of January 1, 1996 between the Company, USSC and Thomas W. Sturgess(4). 61 10.70 Deferred Compensation Plan. (Exhibit 10(f) to the Company's Annual Report on Form 10-K dated October 6, 1994)(3). 10.71 Consulting Agreement dated October 1,1995 between the Company and Jeffrey K. Hewson(4). 10.72 Letter Agreement dated November 29, 1995 granting shares of restricted stock to Joel D. Spungin(4). 10.73 Option Agreement dated November 29, 1995 between the Company and Jeffrey K. Hewson(4). 10.74 Lease Agreement dated as of March 4, 1988 between Crow-Alameda Limited Partnership and Stationers Distributing Company, Inc., as amended(1). 10.75 Industrial Real Estate Lease, dated as of May 17, 1993, among Majestic Realty Co. and Patrician Associates, Inc., as landlord, and United Stationers Supply Co., as tenant(1). 10.76 Standard Industrial Lease, dated as of March 15, 1991, between Shelley B. and Barbara Detrik and Lynn Edwards Corp.(1). 10.77 Lease Agreement, dated as of January 12, 1993, as amended, among Stationers Antelope Joint Venture, AVP Trust, Adon V. Panattoni and Yolanda M. Panattoni, as landlord, and United Stationers Supply Co., as tenant(1). 10.78 Lease dated as of February 1, 1993, between CMD Florida Four Limited Partnership and United Stationers Supply Co., as amended(1). 10.79 Standard Industrial Lease, dated March 2, 1992, between Carol Point Builders I and Associated Stationers, Inc.(1). 10.79.1 First Amendment to Industrial Lease dated January 23, 1997 between ERI-CA, Inc. as successor to Carol Poaint Builders I and USSC as successor to Associated Stationers, Inc.* 10.80 Lease, dated March 22, 1973, between National Boulevard Bank of Chicago, a trustee under Trust Agreement dated March 15, 1973 and known as Trust No. 4722, and United Supply Co., as amended(1). 10.81 Lease Agreement, dated July 20, 1993, between OTR, acting as the duly authorized nominee of the Board of the State Teachers Retirement System of Ohio, and United Stationers Supply Co., as amended(1). 10.82 Lease Agreement, dated as of December 20, 1988, between Corporate Property Associates 8, L.P., and Stationers Distributing Company, Inc., as amended(1). 10.83 Industrial Lease, dated as of February 22, 1988, between Northtown Devco and Stationers Distributing Company, as amended(1). 10.84 Lease, dated as of April 17, 1989, between Isaac Heller and United Stationers Supply Co., as amended(1). 10.85 Lease Agreement, dated as of May 10, 1984, between Westbelt Business Park Joint Venture and Boise Cascade Corporation, as amended(1). 10.86 Lease, dated as of January 19, 1981, between Propco, Inc. and Crown Zellerbach Corporation, as amended(1). 10.87 Lease Agreement, dated as of August 17, 1981, between Gulf United Corporation and Crown Zellerbach Corporation, as amended(1). 10.88 Lease Agreement, dated as of March 31, 1978, among Gillich O. Traughber and J. T. Cruin, Joint Venturers, and Boise Cascade Corporation, as amended(1). 10.89 Lease Agreement, dated November 7, 1988, between Dalware II Associates and Stationers Distributing Company, Inc., as amended(1). 10.90 Lease Agreement, dated November 7, 1988, between Central East Dallas Development Limited Partnership and Stationers Distributing Company, Inc., as amended(1). 10.91 Lease Agreement, dated as of March 17, 1989, between Special Asset Management Company of Texas, Inc., and Stationers Distributing Company, Inc., as amended(1). 10.92 Sublease, dated January 9, 1992, between Shadrall Associates and Stationers Distributing Company, Inc.(1). 10.93 Industrial Lease, dated as of June 12, 1989, between Stationers Distributing Company, Inc. and Dual Asset Fund V, as amended(1). 62 10.94 Lease Agreement, dated as of July, 1994, between Bettilyon Mortgage Loan Company and United Stationers Supply Co.(1). 10.95 Agreement of Lease, dated as of January 5, 1994, between the Estate of James Campbell, deceased, and United Stationers Supply Co.(1). 10.96 Lease Agreement dated January 5, 1996 between Robinson Properties, L.P. and USSC(4). 10.97 Real Estate Agreement dated January 9, 1996 between USSC as seller and Seid Street, Ltd. as purchaser (4). 10.98 Real Estate Agreement dated October 19, 1995 between USSC as seller and Boise Cascade Office Products Corporation as purchaser(4). 10.99 Agreement for Data Processing Services, dated January 31, 1992, between USSC (as successor-in-interest to ASI) and Affiliated Computer Services, Inc.(1). 10.99.1 Stock Purchase Agreement between United Stationers Supply Co. ("Purchaser") and Lagasse Bros., Inc. ("Company") and Kevin C. Lagasse, Cynthia Lagasse, David C. Lagasse, Linette Lagasse Abadie, Clinton G. Lagasse, Raymond J. Lagasse and Rickey Lagasse being all of the shareholders of the Company (the "Shareholders")(Exhibit 99.1 to Registrant's Report on Form 8-K filed November 5, 1996)(3) 10.99.2 Amended and Restated Credit Agreement dated October 31, 1996 (amending and restating the Credit Agreement dated as of March 30, 1995)(Exhibit 99.2 to Registrant's Report on Form 8-K filed November 5, 1996)(3) 10.100 Amended and Restated First Amendment to Agreement for Data Processing Services, dated as of August 29, 1995, between USSC and Affiliated Computer Services, Inc.(1). 10.101 Intentionally omitted 10.102 Intentionally omitted 10.103 US Employee Benefits Trust Agreement dated March 21, 1995 between the Company and American National Bank and Trust Company of Chicago as Trustee(2). 10.104 USI Bonus Benefits Trust Agreement dated March 21, 1995 between the Company and American National Bank and Trust Company of Chicago as Trustee(2). 10.105 Certificate of Insurance covering directors' and officers' liability insurance effective November 1, 1994 through November 1, 1995 (Exhibit 10.57 to the Company's Report on Form 10-K dated June 27, 1995)(3). 10.106 Certificate of Insurance covering directors' and officers' liability insurance effective March 30, 1995 through March 30, 1996 (Exhibit 10.81 to the Company's Form S-3 (No. 33-62739), as amended)(3). 10.107 Amendment to Medical Plan Document for the Company(2). 10.108 The Company Severance Plan, adopted February 10, 1995(2). 10.109 Securities Purchase Agreement, dated as of July 28, 1995, among the Company, Boise Cascade, Wingate Partners, Wingate II, Wingate Affiliates, Wingate Affiliates II, ASI Partners III, L.P., the Julie Good Mora Grantor Trust and the Laura Good Stathos Grantor Trust(2). 10.110 Amendment dated February 23, 1996 to Option Agreements between the Company and Thomas W. Sturgess (Exhibit 10.110 to the Company's report on Form 10-K dated March 28, 1996). 10.111 Amendment No. 3 to United Stationers Inc. Management Equity Plan, dated as of September 27, 1995 (Exhibit 10.111 to the Company's report on Form 10-K dated March 28, 1996). 10.112 Amendment No. 2 dated March 5, 1996 to Stock Option Agreements between the Company and Thomas W. Sturgess (Exhibit 10.112 to the Company's report on Form 10-K dated March 28, 1996). 10.113 Amendment to Employment Agreement dated March 5, 1996 between the Company, USSC and Thomas W. Sturgess (Exhibit 10.113 to the Company's report on Form 10-K dated March 28, 1996). 63 10.114 Agreement dated November 18, 1996 between Thomas W. Sturgess, the Company and USSC.* 10.115 Lease Agreement commencing March 1, 1997 between Amber Jack Limited Partnership and USSC.* 10.116 Lease Agreement dated September 20, 1996 between Davis Partnership and USSC.* 21 Subsidiaries of the Company.* 23.1 Consent of Ernst & Young LLP, Independent Auditors.* 23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.* 23.3 Consent of Arthur Andersen LLP, Independent Public Accountants.* 24.1 Powers of Attorney of directors and executive officers of the Registrant. (Included on Page II-8 of Registration Statement on Form S-2)(4). 27.1 Financial Data Schedule for the Company (EDGAR filing only).* 27.2 Financial Data Schedule for USSC (EDGAR filing only).* * Filed herewith. (1) Incorporated by reference to the Company's Form S-1 (No. 33- 59811), as amended, initially filed with the Commission on June 12, 1995. (2) Incorporated by reference to the Company's Schedule 14D-9 dated February 21, 1995. (3) Incorporated by reference to other prior filings of the Company as indicated. (4) Incorporated by reference to the Company's Form S-2 (No. 333- 01089) as filed with the Commission on February 20, 1996. B) Reports on Form 8-K were filed by the Registrant on October 21, 1996, November 5, 1996, and November 19, 1996 For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 No. 3332453 (filed December 6, 1989). Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED STATIONERS INC. BY: /s/Daniel H. Bushell ---------------------------- Daniel H. Bushell Executive Vice President, Chief Financial Officer and Assistant Secretary (principal accounting officer) Dated: Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE CAPACITY DATE --------- -------- ---- /s/Frederick B. Hegi, Jr. Chairman of the Board of Directors, - ----------------------------- President and Chief Executive Officer Frederick B. Hegi, Jr. /s/Michael D. Rowsey Executive Vice President - ------------------------- and a Director Michael D. Rowsey /s/JAMES T. CALLIER, JR. Director - ------------------------- James T. Callier, Jr. /s/Daniel J. Good Director - ------------------------- Daniel J. Good /s/Jeffrey K. Hewson Director - ------------------------- Jeffrey K. Hewson /s/James A. Johnson Director - ------------------------- James A. Johnson /s/Gary G. Miller Director - ------------------------- Gary G. Miller /S/JOEL D. SPUNGIN Director - ------------------------- Joel D. Spungin /s/Thomas W. Sturgess Director - ------------------------- Thomas W. Sturgess 65 EX-10.39 2 MIP Exhibit 10.39 [Logo] - ------------------------------------------------------------------------------- 1997 MANAGEMENT INCENTIVE PLAN EFFECTIVE 1/1/97 - ------------------------------------------------------------------------------- PURPOSE It is deemed desirable and in the best interests of the Stockholders and Corporation that a portion of total compensation be made available to key employees, in the form of incentive opportunity, when they discharge their responsibilities in a manner which makes a measurable contribution to the Corporation. This is a general summary description of the Plan and is provided as an information communication to Plan participants. A detailed Plan document is available through the Vice President, Human Resources and upon request, any participant may review the full text. January, 1997 MANAGEMENT INCENTIVE PLAN - JANUARY, 1997 PAGE 1 - -------------------------------------------------------------------------------- CONCEPT Participants are eligible to earn an annual incentive award based on attainment of pre-approved Corporate, Area, Region, Division, or Safety goals. Participants are assigned a target incentive award stated as a percent of base salary. The target incentive award, or a greater or lesser amount as based on a preset schedule, will be calculated at year-end based on the attainment of predetermined goals. The plan year shall be January 1, 1997 - December 31, 1997. ELIGIBILITY Eligibility for participation in the Plan will be limited to those key employees who, by the nature and scope of their position, regularly and directly make or influence policy or operating decisions which impact the profitability and earnings results of the Company. However, employees participating in a sales incentive, or commission arrangement, or those covered by a consulting agreement, shall be excluded from participation in this Plan. PARTICIPATION Participation in the Plan shall be determined annually and approved by the Board of Directors. The Board shall base its approval upon the recommendations of the Compensation Committee of the Board of Directors. Employees approved for participation shall be notified of their selection as soon after approval as practicable. PARTIAL PLAN YEAR PARTICIPATION The Board may allow an individual who becomes eligible during the Plan year to participate in the Plan. In such case, the participant's final award shall be prorated based on the number of full months of participation during the pertinent Plan year. A participant whose incentive category level is changed during the Plan year shall receive a bonus based on the number of months spent in each incentive category during the Plan year. The proration shall be determined by multiplying the final award for a full year of participation at each incentive category level by a fraction; the numerator of which shall be the number of months spent at the incentive category level and the denominator of which shall be twelve (12). The participant's final award shall be the sum of the prorated awards calculated for the time spent at each incentive category level, with consideration to changes in base salary, when appropriate. GOALS TARGET INCENTIVE - At the beginning of each Plan year, the Board shall establish the target incentive levels for participants. The target incentive (expressed as a percent of salary) will vary according to the participant's duties and responsibilities. PERFORMANCE GOALS - The Board shall establish, at the beginning of each Plan year, a planned level of performance at which participant bonus awards shall be earned. The Board also shall establish a range of performance levels at which the maximum and minimum incentive awards shall be earned. ADJUSTMENT OF PERFORMANCE TARGETS - The Board shall have the right to adjust the performance goals (either up or down) during the Plan year if it determines that external changes or other unanticipated business conditions have materially affected the fairness of the goals and unduly influenced the Company's ability to meet them. At the end of each Plan year, final awards shall be computed for each participant. Participants must be actively employed by the Company on the last day of the Plan year to receive an award for that Plan year. Final award amounts, may be adjusted (either up or down) based on the Board's assessment of Company performance results. Further, the Board shall have the right to adjust the performance goals and the final award amounts in the event of a Plan year consisting of less than twelve (12) months. MANAGEMENT INCENTIVE PLAN - JANUARY, 1997 PAGE 2 - -------------------------------------------------------------------------------- HOW THE PLAN WORKS 1. TARGET INCENTIVE - Target incentives are based on level of responsibility, expressed as a percent of annual salary and represent a reasonable and competitive incentive opportunity for the achievement of an Earnings Per Share (EPS) goal pre-bonus for Corporate and EBIT goals for Area, Region or Division. January 1, 1997 base salary is used for calculations under this plan, along with promotional adjustments or other salary changes that occur during the Plan year. Such changes will be made on pro-rata basis, using whole months. Participant target incentives are: TARGET INCENTIVE EXPRESSED PARTICIPANT INCENTIVE CATEGORY AS A % OF BASE SALARY ------------------------------ --------------------- Executive Vice Presidents 60.0% RVP's, Corp. Officers & Executive Committee Members 40.0% Other Officers / Staff Directors / Area Managers 33.0% Other Participants 20.0%, 15.0%, 10.0% The Chairman and Chief Executive Officer shall participate in this Plan, receiving incentive awards, as determined by the Board of Directors. 2. WEIGHTING OF TARGET INCENTIVE - The Plan contains an EPS goal to reward Corporate performance, EBIT goals to reward Area, Region or Division performance, and Safety goals to reward safety performance. Participant's target incentives are weighted as follows:
WEIGHTING BY ORGANIZATION LEVEL PARTICIPANTS CORPORATE AREA REGION DIVISION* SAFETY PERFORMANCE** ----------------------------------------------------------------------------------- Officers 100% Corporate Staff 100% Area Managers 50% 25% 25% Region Staff 100% Division Managers & Staff 25% 50% 25%
3. POSSIBLE PAYOUTS (BASED ON PERFORMANCE) FOR CORPORATE, AREA, REGION OR DIVISION PERFORMANCE a) Corporate Performance will be calculated on Earnings Per Share (EPS) using the following scale: EPS PAYOUT AS PERCENT OF LEVEL OF PERFORMANCE PERFORMANCE TARGET BONUS OPPORTUNITY -------------------- ----------- ------------------------ Maximum 109% 150% Target 100% 100% Minimum 96% 50% b) Area, Region and Division performance will be calculated on the following scale. Bonuses earned under this scale will be limited to the lesser of Corporate performance or actual Area, Region or Division performance achieved. However, a "pool" will be established equal to field bonuses at the Corporate rate less field bonuses paid, to be shared among the field locations that performed at a rate higher than the Corporate rate. EBIT PAYOUT AS PERCENT OF LEVEL OF PERFORMANCE PERCENT OF PROFIT PLAN TARGET BONUS OPPORTUNITY -------------------- ---------------------- ------------------------ Maximum 110% 150% Target 100% 100% Minimum 70% 50% * TWO FACILITIES IN ONE LOCATION ARE MEASURED SEPARATELY, I.E., MINNEAPOLIS: BROOKLYN PARK & EAGAN, ETC. ** SAFETY TARGETS ARE PROVIDED THROUGH SEPARATE CORRESPONDENCE MANAGEMENT INCENTIVE PLAN - JANUARY, 1997 PAGE 3 - -------------------------------------------------------------------------------- HOW THE PLAN WORKS (CONTINUED) c) Discretionary Award - A Discretionary bonus will be set aside for the use of the Compensation Committee of the Board of Directors to reward extraordinary performance at the Area, Region and Division level(s). Such discretionary bonus will be over and above any other bonus entitlements. GENERAL PROVISIONS OTHER 1. The Compensation Committee shall review performance against goals at the conclusion of the plan and shall approve awards for individuals eligible to participate in this plan. 2. The judgment of the Compensation Committee in construing this plan or any provision thereof, or in making any decision hereunder, shall be final and binding upon all participants and their beneficiaries, heirs, executors, personal representatives and assigns. 3. Except as expressly provided in point 6 below, nothing herein contained shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the Officers and the Board of Directors to change the duties or the character of employment of any employee of the Company or to remove the individual from the employment of the Company at any time, all of which rights and powers are expressly reserved. 4. Except as expressly provided in point 6 below, no award will be paid an individual who is not a regular full time employee in good standing when the plan concludes, except an award may be considered in the event of retirement or death of a participant during the plan year, at the discretion of the Compensation Committee. 5. Except as expressly provided in point 6 below, the awards to participants shall become a liability of the Company when the plan concludes, and all payments to be made hereunder will be made as soon as practicable thereafter. 6. In the event the involuntary termination of a participant occurs prior to the conclusion of this plan, he or she may be entitled to payment of a reduced award for the year at the discretion of the Compensation Committee. Such award shall be paid to such employee as soon as practicable after awards have been approved. For purposes of understanding "involuntary termination" shall mean actual or express termination of employment by the Company for its convenience, or any of its subsidiaries, provided, however, that in no event shall it include a termination based upon (a) any willful and continued failure to substantially perform assigned duties (other than as a result of incapacity) after demand giving specifics has been made for such performance, or (b) any willful misconduct which is materially injurious to the Company or any of its subsidiaries. As used here, the word "willful" means any act done or omitted to be done not in good faith and without reasonable belief that such action or omission was in the best interest of the Company. EX-10.40 3 SPECIAL BONUS PLAN Exhibit 10.40 [LOGO] December 17, 1996 UNITED STATIONERS SUPPLY CO. 1997 SPECIAL BONUS PLAN This is a special bonus plan aimed at encouraging and rewarding participants for creating the operational foundation such that a "Liquidity Event", as defined herein, can be achieved. This Plan is effective immediately. PARTICIPANTS AND AWARD VALUE The participants, and the amount of their awards, are as approved by the Board of Directors at the time of adoption of this Plan. The total number of participants is 177. PAYMENT OF AWARDS Fifty percent of the bonus will be payable in cash on the first anniversary of a Liquidity Event, and fifty percent will be payable on the second anniversary of such Liquidity Event. Except as provided in point 3 below, no award or portion of an award will be earned by or paid to an individual who is not a regular full time employee of the Company when the payment is due. OTHER 1. The judgment of the Compensation Committee in construing this plan or any provision thereof, or in making any decision hereunder, shall be final and binding upon all participants and their beneficiaries, heirs, executors, personal representatives and assigns. 2. Nothing herein shall limit or affect in any manner the normal powers of management to change the duties or the character of employment of any participant or to remove the individual from the employment of the Company at any time, all of which rights and powers are expressly reserved. 3. If a participant retires, becomes permanently disabled, or is involuntarily terminated by the Company, other than "For Cause", after a Liquidity Event but before the bonus is payable under this Plan, he or she will continue to be entitled to payment of the unpaid portion of the bonus at the time payment otherwise would have been payable. If a participant dies after a Liquidity Event but before the bonus is payable, the participant's estate will be entitled to payment of the unpaid portion of the bonus as soon as practicable after the participant's death. DEFINITIONS "LIQUIDITY EVENT" shall mean the occurrence of a transaction or group of transactions that cause the Sponsor Holders (as defined below) to realize a return of Liquid Proceeds (as defined below) at least equal to their Investment (as defined below). (a) "SPONSOR HOLDERS" shall mean, collectively, Wingate Partners, L.P., Wingate Partners II, L.P., Wingate Affiliates, L.P., Wingate Affiliates II, L.P., and their affiliates. (b) "LIQUID PROCEEDS" shall mean (i) currency of the United States; (ii) negotiable instruments drawn on a bank with at least $10 billion in assets and payable in U.S. currency; (iii) obligations issued or assumed by the United States of America or any agency or instrumentality thereof; or (iv) shares of stock or other securities that are registered under the Securities Exchange Act of 1933, are traded on the New York Stock Exchange, the American Stock Exchange or one approved for quotation on the NASDAQ National Market System, and can be sold on such market by the holder without significant discount from the average of the bid and asked prices for such shares or other securities at such time. (c) "INVESTMENT" shall mean the purchase price for the shares of stock of United Stationers Inc., purchased by the Sponsor Holders in connection with the acquisition of United Stationers Inc. as of March 30, 1995. For purposes of determining whether a Liquidity Event has occurred, the good faith determination of the Board of Directors of United Stationers Inc. shall be conclusive. "FOR CAUSE" termination shall mean termination of employment by the Company based upon (a) any continued failure to substantially perform assigned duties (other than as a result of incapacity) after demand giving specifics has been made for such performance; (b) theft or embezzlement, or attempted theft or embezzlement, of money or property or assets of the Company or any of its affiliates; (c) use of illegal drugs; (d) breach of any fiduciary duty owed to the Company, including, without limitation, engaging in directly competitive acts while employed by the Company or (e) any other misconduct which is materially injurious to the Company or any of its subsidiaries or affiliates. EX-10.451 4 401(K) SAVING PLAN UNITED STATIONERS 401(K) SAVINGS PLAN RESTATED AS OF MARCH 1, 1996 TABLE OF CONTENTS PAGE ---- ARTICLE I Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II Definitions and Construction . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Principal Entities. . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Determination of Benefits . . . . . . . . . . . . . . . . . . . 3 2.4 Other Definitions . . . . . . . . . . . . . . . . . . . . . . . 7 2.5 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III Participation and Service. . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.3 Participation and Service Upon Reemployment . . . . . . . . . . 8 3.4 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.5 Controlled Groups . . . . . . . . . . . . . . . . . . . . . . . 10 3.6 Affiliated Service Groups . . . . . . . . . . . . . . . . . . . 10 3.7 Leased Employees. . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE IV Contributions and Forfeitures. . . . . . . . . . . . . . . . . . . . . . . . 10 4.1 Employer Contributions. . . . . . . . . . . . . . . . . . . . . 10 4.2 Contributions by Participants . . . . . . . . . . . . . . . . . 11 4.3 Disposition of Forfeitures. . . . . . . . . . . . . . . . . . . 12 4.4 Participant Salary Deferral . . . . . . . . . . . . . . . . . . 13 4.5 Special Rules for Owner-Employees . . . . . . . . . . . . . . . 16 ARTICLE V Allocations to Participants' Accounts. . . . . . . . . . . . . . . . . . . . 16 5.1 Individual Accounts . . . . . . . . . . . . . . . . . . . . . . 16 5.2 Account Adjustments . . . . . . . . . . . . . . . . . . . . . . 17 5.3 Maximum Additions . . . . . . . . . . . . . . . . . . . . . . . 19 5.4 Nondiscrimination Requirements. . . . . . . . . . . . . . . . . 20 5.5 Rollover Contributions. . . . . . . . . . . . . . . . . . . . . 30 ARTICLE VI Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.1 Retirement or Disability. . . . . . . . . . . . . . . . . . . . 31 6.2 Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.3 Termination for Other Reasons . . . . . . . . . . . . . . . . . 31 1 PAGE ---- 6.4 Payment of Benefits . . . . . . . . . . . . . . . . . . . . . . 32 6.5 Distribution of Unallocated Employee Contributions and Salary Deferral Contributions. . . . . . . . . . . . . . . . . . . . . 39 6.6 Designation of Beneficiary. . . . . . . . . . . . . . . . . . . 39 6.7 Optional Direct Transfer of Eligible Rollover Distributions . . 41 6.8 Loans to Participants . . . . . . . . . . . . . . . . . . . . . 42 6.9 Cash-Out Procedure. . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE VII Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.1 Appointment of Trustee. . . . . . . . . . . . . . . . . . . . . 44 7.2 Assets of the Trust . . . . . . . . . . . . . . . . . . . . . . 44 7.3 Earmarked Investments . . . . . . . . . . . . . . . . . . . . . 44 7.4 Reversion of Employer Contributions . . . . . . . . . . . . . . 45 ARTICLE VIII Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.1 Allocation of Responsibility Among Fiduciaries for Plan and Trust Administration . . . . . . . . . 45 8.2 Appointment of Committee. . . . . . . . . . . . . . . . . . . . 46 8.3 Claims Procedure. . . . . . . . . . . . . . . . . . . . . . . . 46 8.4 Records and Reports . . . . . . . . . . . . . . . . . . . . . . 46 8.5 Other Committee Powers and Duties . . . . . . . . . . . . . . . 46 8.6 Rules and Decisions . . . . . . . . . . . . . . . . . . . . . . 47 8.7 Committee Procedures. . . . . . . . . . . . . . . . . . . . . . 47 8.8 Authorization of Benefit Payments . . . . . . . . . . . . . . . 47 8.9 Application and Forms for Benefits. . . . . . . . . . . . . . . 47 8.10 Facility of Payment . . . . . . . . . . . . . . . . . . . . . . 47 8.11 Indemnification of the Committee. . . . . . . . . . . . . . . . 48 ARTICLE IX Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 9.1 Nonguarantee of Employment. . . . . . . . . . . . . . . . . . . 48 9.2 Rights to Trust Assets. . . . . . . . . . . . . . . . . . . . . 48 9.3 Nonalienation of Benefits . . . . . . . . . . . . . . . . . . . 48 9.4 Nonforfeitability of Benefits . . . . . . . . . . . . . . . . . 48 9.5 Discontinuance of Employer Contributions. . . . . . . . . . . . 48 ARTICLE X Amendments and Action by Employers . . . . . . . . . . . . . . . . . . . . . 49 10.1 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . 49 10.2 Action by Employers . . . . . . . . . . . . . . . . . . . . . . 49 2 PAGE ---- ARTICLE XI Successor Employer and Merger or Consolidation of Plans. . . . . . . . . . . 49 11.1 Successor Employer. . . . . . . . . . . . . . . . . . . . . . . 49 11.2 Conditions Applicable to Mergers or Consolidations of Plans . . 49 ARTICLE XII Plan Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 12.1 Right to Terminate. . . . . . . . . . . . . . . . . . . . . . . 50 12.2 Partial Termination . . . . . . . . . . . . . . . . . . . . . . 50 12.3 Liquidation of the Trust Fund . . . . . . . . . . . . . . . . . 50 12.4 Manner of Distribution. . . . . . . . . . . . . . . . . . . . . 50 ARTICLE XIII Plan Adoption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 13.1 Adoption Procedure. . . . . . . . . . . . . . . . . . . . . . . 51 13.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 13.3 Withdrawal. . . . . . . . . . . . . . . . . . . . . . . . . . . 51 13.4 Transferred Assets. . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE XIV Top-Heavy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 14.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 14.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 51 14.3 Minimum Allocation Requirements . . . . . . . . . . . . . . . . 54 14.4 Special 415 Limitations . . . . . . . . . . . . . . . . . . . . 55 3 PURPOSE In order to provide retirement benefits for eligible employees, United Stationers Supply Co. and Utility Stationery Stores, Inc. created the United Stationers Supply Co. Profit Sharing Plan and Trust, which was embodied in a trust agreement executed on January 2, 1939, and amended from time to time thereafter and subsequently renamed as the United Stationers Inc. Profit Sharing PluSavings Plan ("USI Plan"). Effective June 24, 1992, Stationers Distributing Company, Incorporated was merged into United Stationers Supply Co. Stationers Distributing Company, Incorporated maintained the Stationers Distributing Company, Incorporated Profit Sharing Retirement and Tax Sheltered Savings Plan ("Distributing Plan"). After the merger of Stationers Distributing Company, Incorporated into United Stationers Supply Co., United Stationers Supply Co. deemed it desirable to merge the Distributing Plan into the USI Plan. The USI Plan and the Distributing Plan were merged effective December 31, 1992. The USI Plan was amended and restated effective January 1, 1993, to continue the retirement programs previously maintained by the respective USI Plan and the Distributing Plan prior to their merger. Effective March 30, 1995, Associated Stationers, Inc. was merged into United Stationers Inc. ("Company"), the parent corporation of United Stationers Supply Co. Associated Stationers, Inc. previously maintained the Associated Stationers, Inc. Profit Sharing and Savings Plan ("Plan"). The Plan was originally established effective April 1, 1992 by Associated Stationers, Inc. for the benefit of its eligible employees and has been amended from time to time thereafter. After the merger of Associated Stationers, Inc. into United Stationers, Inc. ("Company"), the Company deemed it desirable to merge the USI Plan into this Plan effective March 1, 1996. This Plan is herein amended and restated effective March 1, 1996 ("Effective Date"), and renamed as the United Stationers 401(K) Savings Plan. The Plan, as restated, represents a continuation of the retirement programs previously maintained by the USI Plan and the Plan prior to their merger. It is intended that on or about March 1, 1996, the assets of the USI Plan and this Plan will be combined to form the assets of this Plan following the merger. The sum of the participant account balances in the USI Plan and this Plan shall equal the fair market value (determined as of the date of the merger) of the entire plan assets. Immediately after the merger, each participant in this Plan shall have an account balance equal to the account balance the participant had in this Plan or the USI Plan immediately prior to the merger. The Plan and the trust established pursuant to the Plan are intended to meet the requirements of sections 401(a) and 501(a) of the Internal Revenue Code of 1986, as amended (the "Code") and the Employee Retirement Income Security Act of 1974, as amended. The provisions of this Plan shall apply only to a participant who terminates employment on or after the Effective Date. The provisions of this Plan as herein amended and restated shall not be construed to alter in any way the rights of any former participant (or any former participant's beneficiaries) who has retired or died, or who has terminated employment before the Effective Date. A former participant's eligibility for benefits, and the amount of benefits, if any, payable to or on behalf of a former participant shall be determined in accordance with the provisions of the respective plan in effect on the date the participant's employment terminated. DEFINITIONS AND CONSTRUCTION DEFINITIONS: Where the following words and phrases appear in this Plan, they shall have the respective meanings set forth in this Article, unless the context clearly indicates to the contrary. PRINCIPAL ENTITIES: (a) BENEFICIARY: A person or persons designated by a Participant in accordance with the provisions of Section 6.6 DESIGNATION OF BENEFICIARY to receive any death benefit which shall be payable under the Plan. (b) COMMITTEE: The persons appointed pursuant to Article VIII ADMINISTRATION to administer the Plan in accordance with said Article. (c) COMPANY: United Stationers Inc., a Delaware corporation, with its principal place of business in Des Plaines, Illinois, or its successor or successors. (d) DISTRIBUTING PLAN: The Stationers Distributing, Incorporated Profit Sharing Retirement and Tax Sheltered Savings Plan prior to its merger into the USI Plan on June 24, 1992. (e) EMPLOYEE: Any person who is receiving remuneration on a salary or commission basis for personal services rendered to the Employers (or who would be receiving such remuneration except for an Authorized Leave of Absence). Notwithstanding anything herein to the contrary, no leased employee within the meaning of section 414(n) of the Code with respect to any Employer shall be considered an Employee. (f) EMPLOYERS: The Company and such subsidiary or affiliated corporations of the Company, including, without limitation, United Stationers Supply Co., which adopt the Plan with the Company's consent. (g) FIDUCIARIES: The Employers, the Committee and the Trustee but only with respect to the specific responsibilities of each for Plan and Trust administration, all as described in Section 8.1 ALLOCATION OF RESPONSIBILITY AMONG FIDUCIARIES FOR PLAN AND TRUST ADMINISTRATION. (h) FORMER PARTICIPANT: A Participant whose employment with the Employers has terminated but who has a vested Account balance under the Plan which has not been paid in full, and therefore, is continuing to participate in the allocation of Trust Fund Income. (i) PARTICIPANT: An Employee participating in the Plan in accordance with the provisions of Section 3.1 PARTICIPATION. 2 (j) PLAN: UNITED STATIONERS INC. 401(K) SAVINGS PLAN, the Plan set forth herein, as amended from time to time, formerly known as the Associated Stationers, Inc. Profit Sharing and Savings Plan, prior to this amendment and restatement of the Plan. (k) TRUST (OR TRUST FUND): The fund, maintained in accordance with the terms of the trust agreement entered into between the Company and the Trustee, as from time to time amended, which constitutes a part of this Plan. TRUSTEE: The corporation or individuals appointed by the Board of Directors to administer the Trust. (m) USI PLAN: The United Stationers Inc. Profit Sharing Plus Savings Plan prior to its merger into this Plan on the Effective Date. DETERMINATION OF BENEFITS: (a) ACCOUNT(S): The separate account or accounts which are maintained for each Participant. (b) ADDITIONS: With respect to each Limitation Year, defined at Section 5.3 MAXIMUM ADDITIONS, the total of the Employer Contributions and forfeitures allocated to a Participant's Employer Contribution Account, Basic Employer Contribution Account and Matching Employer Contribution Account determined without regard to rollover contributions and direct transfer contributions, if any, the Employee Contributions which are allocated to the Participant's Employee Contribution Account, and the Salary Deferral Contributions which are allocated to the Participant's Salary Deferral Contribution Account, but excluding Salary Deferral Contributions attributable to Excess Deferrals, as defined in Section 5.4(a)(v), which are distributed no later than the first April 15 following the close of the Participant's taxable year, and including amounts allocated to an individual medical account, as defined in section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer, and amounts derived from contributions which are attributable to post-retirement medical benefits, allocated to the separate account of a key employee, as defined in section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in section 419(e) of the Code, maintained by the Employer. (c) AUTHORIZED LEAVE OF ABSENCE: Any absence authorized in writing by an Employer under the Employer's standard personnel practices provided that all persons under similar circumstances must be treated alike in the granting of such Authorized Leaves of Absence and provided further that the Employee returns or retires within the period of authorized absence. An absence due to service in the Armed Forces of the United States shall be considered an Authorized Leave of Absence provided that the absence is caused 3 by war or other emergency, or provided that the Employee is required to serve under the laws of conscription in time of peace, and further provided that the Employee returns to employment with the Employers within the period provided by law. (d) BASE CONTRIBUTION RATE: The rate at which Basic Contributions and Additional Pro-rata Contributions are allocated to Participant Accounts for the Year with respect to Compensation at or below the Integration Level. (e) BASIC EMPLOYER CONTRIBUTIONS: Contributions of the Employers as described in Section 5.2(b)(i). (f) BASIC EMPLOYER CONTRIBUTION ACCOUNT: The separate account which shall be maintained by the Committee for each Participant to reflect the aggregate of all Basic Employer Contributions made on behalf of such Participant under this Plan on or after the Effective Date and the Participants' Qualified Nonelective Contribution Account and Qualified Matching Contribution Account balances under this Plan or the Participant's Post-1986 Basic Employer Contribution Account balance under the USI Plan immediately prior to the Effective Date, together with any earnings and losses thereon. (g) COMPENSATION: Total gross pay less compensation attributable to the following items: relocation allowances, imputed life insurance, awards and prizes, non-qualified stock options, referral awards, other pay classified under special pay number 21 as of the date hereof, car loans, officer perks, disability non-taxable (year end), severance pay, car allowances, and relocation-interest and taxes gross-up. The annual Compensation of each Participant taken into account under the Plan for any Plan Year shall not exceed $150,000, as adjusted for changes in the cost of living as provided in section 401(a)(17) of the Code. In determining the Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted annual Compensation Limit as defined in section 401(a)(17) of the Code is exceeded, the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined prior to the application of this limitation. (h) DISABILITY: A physical or mental condition which, in the judgment of the Committee, based upon medical reports and other evidence satisfactory to the Committee, presumably permanently prevents an Employee from satisfactorily performing the Employee's usual duties for the Employers or the duties of such other position or job which the Employers make available to the Employee and for which such Employee is 4 qualified by reason of training, education or experience. (i) DISTRIBUTING PLAN ACCOUNT: The separate account which shall be maintained by the Committee for a Participant to reflect the monetary value of the Participant's individual interest in the Trust attributable to Elective Deferrals, Matching Company Contributions and Optional Company Contributions made to the Distributing Plan on the Participant's behalf, and any earnings or losses thereon. (j) DISTRIBUTING SALARY DEFERRAL CONTRIBUTION SUBACCOUNT: The separate subaccount which shall be maintained by the Committee for a Participant to reflect the monetary value of the Participant's individual interest in the Trust attributable to Elective Deferrals made to the Distributing Plan on the Participant's behalf, and any earnings or losses thereon. (k) EMPLOYEE CONTRIBUTIONS: Contributions by the Participant as described in Section 4.2 CONTRIBUTIONS BY PARTICIPANTS. (l) EMPLOYEE CONTRIBUTION ACCOUNT: The separate account which shall be maintained by the Committee for each Participant who elects to make Employee Contributions pursuant to Section 4.2 CONTRIBUTIONS BY PARTICIPANTS or Rollover Contributions pursuant to Section 5.5 ROLLOVER CONTRIBUTIONS or who had an Employee Contribution Account Balance under the USI Plan or an After-Tax Deposit Account or a Rollover Deposit Account balance under this Plan immediately prior to the Effective Date, to reflect the aggregate of such Participant's Employee Contributions under this Plan on or after the Effective Date and the Participant's After-Tax Deposit Account and Rollover Deposit Account Balance under this Plan or the Participant's Employee Contribution Account balance under the USI Plan immediately prior to the Effective Date, together with any earnings and losses thereon. A separate account may be maintained for Employee Contributions made under the USI Plan on or before January 1, 1987. (m) EMPLOYER CONTRIBUTIONS: Contributions of the Employer as described in Section 4.1 EMPLOYEE CONTRIBUTIONS. (n) EMPLOYER CONTRIBUTION ACCOUNT: The separate account which shall be maintained by the Committee for each Participant to reflect the aggregate of all Employer Contributions other than Basic Employer Contributions and Matching Employer Contributions made on behalf of such Participant on or after the Effective Date and the Participant's Company Basic Deposit Account balance under this Plan or Employer Contribution Account balance under the USI Plan immediately prior to the Effective Date, together with any earnings and losses thereon. (o) EXCESS COMPENSATION: The portion, if any, of a Participant's Compensation that exceeds eighty-five percent (85%) of the Taxable Wage Base (sometimes referred to herein as 5 the "Integration Level"). (p) FORFEITURE: The portion of a Participant's Employer Contribution Account and Matching Employer Contribution Account which is forfeited because of termination of employment before full vesting. (q) INCOME: The net gain or loss of the Trust Fund from investments, as reflected by interest payments, dividends, realized and unrealized gains and losses on securities, other investment transactions and expenses paid from the Trust Fund. In determining the Income of the Trust Fund as of any date, assets shall be valued on the basis of their then fair market value. (r) INTEGRATION RATE: The greater of 5.4% or the percentage equal to the portion of the rate of tax under section 3111(a) of the Code attributable to old age insurance applicable as of the first day of the Year multiplied by the fraction 5.4/5.7. (s) MATCHING EMPLOYER CONTRIBUTIONS: Employer Contributions which match (at percentages to be determined by the Employers) all or a portion of the Salary Deferral Contributions made. (t) MATCHING EMPLOYER CONTRIBUTION ACCOUNT: The separate account which shall be maintained by the Committee for each Participant to reflect the aggregate of all Matching Employer Contributions made on behalf of such Participant under this Plan on or after the Effective Date and the Participant's Company Matching Employer Contribution Account balance under the USI Plan or Company Matching Deposit Account balance under this Plan immediately prior to the Effective Date together with any earnings and losses thereon. (u) NORMAL RETIREMENT AGE: Age sixty-five (65). PARTICIPATION: The period commencing as of the date the Employee became a Participant and ending on the date employment with the Employers terminated, except that, with respect to a Former Participant, limited Participation in the Trust Fund Income continues until the Former Participant's vested Account balance is distributed. (w) PRE-1987 EMPLOYEE CONTRIBUTION ACCOUNT: The separate account maintained to reflect Employee Contributions made under the USI Plan prior to January 1, 1987. (x) SALARY DEFERRAL CONTRIBUTIONS: Contributions described in Section 4.4 PARTICIPANT SALARY DEFERRAL. (y) SALARY DEFERRAL CONTRIBUTION ACCOUNT: The separate account which shall be maintained 6 by the Committee for each Participant to reflect all Salary Deferral Contributions made on behalf of such Participant under this Plan on or after the Effective Date and the Participant's Before-Tax Deposit Account balance under this Plan or the Participant's Salary Deferral Contribution Account balance under the USI Plan immediately prior to the Effective Date, together with any earnings and losses thereon. (z) SERVICE: A Participant's period of employment with the Employers determined in accordance with Section 3.2 SERVICE. (aa) TAXABLE WAGE BASE: The maximum amount of earnings for a Participant which may as of the first day of the Year be considered wages for any Year under section 3121(a)(1) of the Code. OTHER DEFINITIONS: (a) ALLOCATION DATE: December 31 of each year and such other dates as may be established by the Company. (b) CONTRIBUTION DATE: Such dates as selected by the Company for the making of contributions accrued under the Plan which are within a reasonable time following the fifteenth (15th) and last day of each month of the Year and any such other date or dates as shall be determined by the Board of Directors of the Company. EFFECTIVE DATE: The merger of the Plan with the USI Plan and the provisions of this amended and restated Plan are effective on March 1, 1996. (d) ERISA: The Employee Retirement Income Security Act of 1974, as amended from time to time. (e) VALUATION DATE: Each day of the Year or such other date or dates as may be established by the Company to assure proper administration of the Plan. In no event shall there be less than one (1) Valuation Date within any twelve (12) consecutive month period. The Company may direct a special Valuation Date in order to avoid prejudice either to continuing Participants or to terminating Participants. Such special Valuation Date shall be deemed equivalent to a regular Valuation Date. Adjustments hereunder shall apply uniformly to all accounts hereunder. YEAR: The twelve (12) month period commencing on January 1 and ending on December 31. II.5 CONSTRUCTION: The singular, where appearing in the Plan, may include the plural, and the masculine gender shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. Any headings used herein are included for ease of reference only, and 7 are not to be construed so as to alter any term of the Plan. PARTICIPATION AND SERVICE PARTICIPATION: Each Employee who was a Participant in the Plan or the USI Plan on February 29, 1996, shall continue to participate in the Plan on March 1, 1996. Each other Employee shall become a Participant on the first day of the month after the Employee has completed a consecutive six (6) month period of employment with the Employers. Notwithstanding the foregoing provisions of this Section, any Employee who is a member of a unit of Employees which is covered by a collective bargaining agreement to which an Employer is a party, shall not be a Participant unless such bargaining agreement provides for such unit's participation; and any otherwise eligible Employee or participant in a unit of Employees which is not covered by a collective bargaining agreement to which an Employer is a party, but which subsequently becomes so covered, shall continue to be eligible to participate hereunder until and unless such unit is excluded from Participation pursuant to collective bargaining. If a Participant ceases to be eligible to participate in the Plan for any reason the Participant shall not be eligible to share in any Employer Contributions made as of any date after the Participant's eligibility ceases, but for all other purposes the Participant's Accounts shall be held, administered and distributed as provided in the Plan. After a termination of employment, a rehired Employee's subsequent Participation in the Plan shall be subject to the provisions of Section 3.3 PARTICIPATION AND SERVICE UPON REEMPLOYMENT. SERVICE: A Participant's eligibility for benefits under the Plan shall be determined by the Participant's period of Service. Subject to the reemployment provisions of Section 3.3 PARTICIPATION AND SERVICE UPON REEMPLOYMENT, a Participant's last period of continuous employment with the Employers shall be recognized as Service hereunder. Service shall be deemed to include years and fractional years of employment. Periods of temporary illness or disability and Authorized Leaves of Absence shall not be deemed as breaking continuity of employment and shall be counted as periods of Service. Notwithstanding the foregoing, in the case of an Employee who is absent from employment for maternity or paternity reasons, an absence during the twelve (12) month consecutive period beginning on the first anniversary of the first date of such absence shall not constitute a break in employment for purposes of determining the Employee's Service. For this purpose, an absence from employment for maternity or paternity reasons, means an absence (a) by reason of the pregnancy of the Employee, (b) by reason of the birth of a child of the Employee, (c) by reason of the placement of a child with the Employee in connection with the adoption of such child by the Employee, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. Anything herein to the contrary notwithstanding, during the continuance of any Authorized Leaves of Absence or periods of temporary illness or disability the Employee's interest in the Trust shall nevertheless be held for the Employee's benefit and the Employee shall continue as a Participant in the Plan as if the Employee were in the active employment of the Employer and Employer Contributions shall be allocated to the Accounts of such Participant. 8 III.2 PARTICIPATION AND SERVICE UPON REEMPLOYMENT: Except for the continuing participation in Trust Fund Income of a Former Participant, Participation in the Plan shall cease upon termination of employment with the Employers. Termination of employment may have resulted from retirement, death, voluntary or involuntary termination of employment, unauthorized absence, or by failure to return to active employment with the Employers or to retire by the date on which an Authorized Leave of Absence expired. Upon reemployment of any person who had previously been employed by the Employers the following rules shall apply in determining Participation in the Plan and Service under Section 3.2 SERVICE: (a) REEMPLOYMENT WITHIN ONE (1) YEAR: If an Employee is rehired within the one (1) year period following the date of the Employee's termination of employment, the Employee shall participate in the Plan as of the first day of the month following the date of reemployment or, if later, the date the Employee would have initially participated in the Plan under the provisions of Section 3.1 PARTICIPATION had the Employee not terminated employment. Reemployment within such one (1) year period shall result in no break in employment and the period after the Employee's termination of employment shall be counted as a period of Service. In addition, if such Employee was a Participant during the Employee's prior period of employment, the Employee may also be entitled to a beginning Employer Contribution Account as provided in Section 4.3 DISPOSITION OF FORFEITURES. (b) REEMPLOYMENT AFTER ONE (1) YEAR: If an Employee is rehired more than one (1) year after the Employee's termination of employment, the Employee shall participate in the Plan as of the date the Employee meets the eligibility requirements for Participation under the provisions of Section 3.1 PARTICIPATION. If the reemployed Employee was a Participant in the Plan when the Employee's prior period of employment terminated, any Service attributable to the Employee's prior period of employment shall be reinstated as of the date of the Employee's reparticipation. If the reemployed Employee was not a Participant in the Plan during the Employee's prior period of employment, any Service attributable to the Employee's prior period of employment shall be cancelled and the Employee shall receive no Service credit for the period of termination of employment as of the date that the length of the Employee's period of employment equalled the greater of five (5) consecutive years of breaks in employment or the length of the Employee's prior period of employment. TRANSFERS: (a) A Participant shall receive Service for employment by an Employer, whether or not such employment provided eligibility for inclusion in the Plan, or by any corporation which is 9 a member of the controlled group of corporations of which the Employer is a part or by any trades or businesses (whether or not incorporated) which are under common control (as provided in sections 414(b), (c) or (o) of the Code) or constitute an affiliated service group (as defined in Section 414(m) of the Code). Notwithstanding the previous sentence, all such employment shall be determined in accordance with the reemployment provisions of Section 3.3 PARTICIPATION AND SERVICE UPON REEMPLOYMENT. (a) (b) If a Participant is transferred to employment with a member of the controlled group of which the Employer is a part to a position which is not eligible for participation in the Plan, the Participant's Participation under the Plan shall be suspended, provided, however, that during the period of employment in such ineligible position: (i) subject to the reemployment provisions of Section 3.3 PARTICIPATION AND SERVICE UPON REEMPLOYMENT, Service for vesting purposes shall continue to accrue, (ii) the Participant's Employer Contribution Account, Basic Employer Contribution Account and Matching Employer Contribution Account shall receive no Employer Contributions under Sections 5.2(b), (iii) the Participant shall continue to participate in Income allocations pursuant to Section 5.2(a) and (iv) the provisions of Article VI BENEFITS shall continue to apply. (c) In the event of transfer as described in the foregoing subparagraph (b) to eligible employment by an Employer without a break in employment, the prior period of employment shall be recognized in determining eligibility to participate in the Plan in accordance with Section 3.1 PARTICIPATION. (d) Transfer between Employers shall not interrupt Service under the Plan. CONTROLLED GROUPS: For the purposes of determining Service for eligibility, vesting and compliance with certain top-heavy rules, all employees of all corporations which are members of a controlled group of corporations (as defined in section 414(b) of the Code) and all employees of all trades or businesses (whether or not incorporated) which are under common control (as defined in section 414(c) of the Code) and all employees of any other entity required to be aggregated pursuant to regulations under section 414(o) of the Code will be treated as employed by a single employer. AFFILIATED SERVICE GROUPS: For the purpose of determining Service for eligibility, vesting and compliance with certain top-heavy rules, all employees of all members of an affiliated service group (as defined in section 414(m) of the Code) will be treated as employed by a single employer. LEASED EMPLOYEES: For the purpose of determining Service for eligibility, vesting, and compliance with certain top-heavy rules, all leased employees (as defined in section 414(n) of the Code) providing services to the Employers will be treated as employed by the Employers. A leased 10 employee will not be treated as employed by the Employers under this Section if leased employees constitute less than twenty percent (20%) of the Employers' non-highly compensated work force within the meaning of section 414(n)(5)(C)(ii) of the Code, and the leased employee is covered by a plan described in section 414(n)(5) of the Code. CONTRIBUTIONS AND FORFEITURES EMPLOYER CONTRIBUTIONS: The Employers may make a contribution to the Plan for each contribution period in an amount equal to the sum of the "Basic Contribution", "Excess Contribution", "Additional Pro-rata Contribution", and "Matching Employer Contribution" as herein defined. For each contribution period the Board of Directors of the Company may determine an amount that may be contributed to the Plan to be allocated to the Accounts of Participants on the basis of total Compensation for the contribution period and pursuant to subsection 5.2(b)(i) (the "Basic Contribution") and pursuant to subsection 5.2(b)(iii) (the "Additional Pro-rata Contribution") and an amount that may be contributed to the Plan to be allocated to the Accounts of Participants on the basis of Excess Compensation for the contribution period pursuant to subsection 5.2(b)(ii) (the "Excess Contribution"); provided, however, that the Employers' Excess Contributions for a Year shall not exceed the lesser of the Integration Rate or Base Contribution Rate times all eligible Participants' Excess Compensation during the Year. In addition, for each contribution period the Board of Directors of the Company may determine an amount that may be contributed to the Plan as Matching Employer Contributions. The amount, if any, contributed as Matching Employer Contributions shall equal a percentage, determined by the Board of Directors of the Company, of all or a portion, determined by the Board of Directors of the Company, of Salary Deferral Contributions made during the contribution period. All Salary Deferral Contributions for a Year shall be paid to the Trustee in no event later than the earlier of (a) ninety (90) days following the date of the salary deferral with respect to which the Salary Deferral Contribution is made or (b) not later than the time prescribed by law for the filing of a Federal income tax return, including any extensions which have been granted for such filing. All other contributions of the Employers for a Year shall be paid to the Trustee, and payment shall be made not later than the time prescribed by law for the filing of a Federal income tax return, including any extensions which have been granted for such filing. CONTRIBUTIONS BY PARTICIPANTS: (a) Each Participant may elect to contribute to the Trust Fund in each Year while a Participant an amount equal to between one percent (1%) and ten percent (10%) of the Participant's Compensation. A Participant may commence or resume making Employee Contributions by filing a written notice with the Committee at least thirty (30) days prior to the date such Employee Contributions are to commence or resume. In addition, a Participant may contribute in any Year an amount which, together with all other Employee Contributions made by that Participant in prior Years, will cause the 11 Participant's total Employee Contributions not to exceed ten percent (10%) of the Compensation received by the Participant for all Years that the Participant has been a Participant in the Plan. All Employee Contributions are subject to the continuing approval of the Committee and may be revoked or suspended at any time if the Company determines that such revocation or suspension is necessary to ensure that (a) a Participant's Annual Additions for any Year will not exceed the limitations of Section 5.3 MAXIMUM ADDITIONS or (b) violate the nondiscrimination tests of Section 401(m) of the Code. Any revocation or suspension of Employee Contributions made by an Employer pursuant to this subsection in order to ensure compliance with the nondiscrimination tests of Section 401(m) of the Code shall be made pursuant to the provisions of Section 5.4 NONDISCRIMINATION REQUIREMENTS. (a) (b) A Participant who elects to contribute may make voluntary Employee Contributions: (i) by payroll deductions. The Employer shall deduct each Participant's Employee Contribution, in integral percentages, from the Participant's Compensation for each pay period as authorized by the Participant in writing on a form approved by the Employer; or (ii) by a series of quarterly cash payments as specified by the Participant in writing on a form approved by the Employer; or (iii) by an annual lump-sum contribution in each Year while a Participant. A lump-sum contribution shall be made in cash as specified by the Participant in writing on a form approved by the Employer. As soon as practicable, the Employer shall pay the amounts received to the Trustee to be held and administered in trust pursuant to the Trust. (c) The Employer shall direct the Committee to establish and maintain an Employee Contribution Account in the name of each Participant who elects to make Employee Contributions. (d) A Participant may change the amount or percentage of the Participant's Employee Contributions with respect to any future Employee Contributions by filing another authorization form with the Committee to be effective on the first day of any subsequent month. (e) A Participant may elect to discontinue Employee Contributions as of any pay period during the Year. Such notification must be submitted to the Committee, in a form approved by the Employer, prior to the date upon which the payroll preparation commences for the pay period. In the event of such a discontinuance, a Participant may 12 resume making Employee Contributions as of the first day of any subsequent month by filing written notice with the Committee. (f) A Participant may elect in writing to withdraw the entire value of the Participant's Employee Contribution Account, or any portion of the Participant's Employee Contribution Account but not less than five hundred dollars ($500). Such request must be submitted at least ninety (90) days prior to the Valuation Date immediately preceding the withdrawal and must be in a form approved by the Employer. In the event of such withdrawal, the Participant shall not be allowed to make any Employee Contributions until the first day of any subsequent month after the Participant has filed a written notice with the Committee and at least thirty (30) days has elapsed since the date of withdrawal. The value of the Employee Contribution Account for purposes of this subsection (f), shall be determined as of the Valuation Date immediately preceding the date of the withdrawal. DISPOSITION OF FORFEITURES: Upon termination of employment, a Participant's Forfeiture, if any, shall be utilized as provided in Section 5.2(c) as of the Contribution Date following the date of the Participant's termination of employment. If the Participant returns to the employ of an Employer before five (5) consecutive one (1) year periods of absence, the Participant shall have the right to repay the entire amount distributed to the Participant upon the Participant's return to the employ of an Employer, provided such repayment is prior to the earlier of the Participant's incurring five (5) consecutive one (1) year periods of absence or five (5) years after the date of such Participant's reemployment. Upon such repayment, the amount of the Forfeiture shall be reinstated in full, unadjusted by any gains or losses, in the Participant's new Employer Contribution Account. Such restoration shall be made out of the current year's Forfeitures and, if they are insufficient, out of the Employer Contributions and, if they are insufficient, out of the current Year's earnings. PARTICIPANT SALARY DEFERRAL: (a) A Participant may, pursuant to a uniform and nondiscriminatory procedure established by the Committee, elect to enter into a written salary deferral agreement with the Employer. The terms of any such salary deferral agreement shall provide that the Participant agrees to accept a deferral in salary from the Employer equal to a stated percentage or amount of the Participant's Compensation not to exceed sixteen percent (16%) of such Compensation. In consideration of such agreement, the Employer will make a Salary Deferral Contribution to the Participant's Salary Deferral Contribution Account on behalf of the Participant for such Year in an amount equal to the total amount by which the Participant's salary from the Employer was deferred during the Year pursuant to the salary deferral agreement. 13 (b) Amounts credited to a Participant's Salary Deferral Contribution Account shall be one hundred percent (100%) vested and nonforfeitable at all times. (c) Further, salary deferral agreements shall be governed by the following provisions: (i) An Employer may amend or revoke its salary deferral agreement with any Participant at any time, if the Company determines that such revocation or amendment is necessary to ensure that (A) a Participant's Annual Additions for any Year will not exceed the limitations of Section 5.3 MAXIMUM ADDITIONS, (B) the nondiscrimination tests of section 401(k) of the Code are met for such Year, or (C) no more than seven thousand dollars ($7,000), as adjusted by the Secretary of Treasury, is deferred by any individual for the individual's taxable year. Any amendment or revocation of salary deferral agreements made by the Employers pursuant to this subsection in order to ensure compliance with the nondiscrimination tests of section 401(k) of the Code shall be made pursuant to the provisions of Section 5.4 NONDISCRIMINATION REQUIREMENTS. (ii) Except as provided in the salary deferral agreement itself, a salary deferral agreement applicable to any given Year, once made, may be revoked or amended prospectively by the Participant in accordance with uniform and nondiscriminatory procedures established by the Committee. Withdrawals from the Participant's Salary Deferral Contribution Account or Distributing Salary Deferral Contribution Subaccount shall be governed by the following rules: (i) No amounts may be withdrawn by a Participant from the Participant's Salary Deferral Contribution Account or Distributing Salary Deferral Contribution Subaccount prior to termination of employment with the Employers, unless the Participant has either attained age fifty-nine and one-half (59-1/2) or is able to demonstrate financial hardship. Pursuant to uniform and nondiscriminatory procedures established by the Committee, a Participant who has either attained age fifty-nine and one-half (59-1/2) or is able to demonstrate financial hardship may elect to withdraw up to an amount not less than five hundred ($500.00) and not more than the aggregate of the Salary Deferral Contributions under this Plan, the Elective Deferral under the Distributing Plan and the Before-Tax Deposits under the Plan prior to June 24, 1992 and the Salary Deferral Contributions under the USI Plan prior to the Effective Date made by the Participant, less the aggregate of such amounts previously 14 withdrawn by the Participant. A Participant's withdrawal request will require the consent of the Committee. Committee consent for withdrawal because of financial hardship shall be given only if, under uniform and nondiscriminatory procedures, the Committee determines that the requirements of subparagraph (ii) are met. In determining whether the requirements of subparagraph (ii) are met, the Committee may rely upon the Participant's written representations if such reliance is reasonable. Any request for withdrawal pursuant to this subparagraph (i) shall be made to the Committee in writing. Any Participant who makes or has made withdrawals from the Participant's Salary Deferral Contribution Account or Distributing Salary Deferral Contribution Subaccount shall continue as a Participant in the Plan but will not be allowed to have Salary Deferral Contributions made on the Participant's behalf for twelve (12) months from the date of withdrawal. (ii) For the purposes of subparagraph (i) of this subsection (d), a withdrawal is on account of financial hardship if the withdrawal is made on account of an immediate and heavy financial need of the Participant and is necessary to satisfy the immediate and heavy financial need. (A) A withdrawal is deemed made on account of an immediate and heavy financial need of the Participant if the withdrawal is on account of: (1) Medical expenses described in section 213(d) of the Code incurred by or necessary for the Participant, the Participant's spouse, or any dependents of the Participant; Purchase (excluding mortgage payments) of a principal residence for the Participant; (3) Payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant or the Participant's spouse, children, or dependents; or (4) Payments to prevent the eviction of the Participant from the Participant's principal residence or the foreclosure on the mortgage of the Participant's principal residence. (B) A withdrawal is deemed necessary to satisfy an immediate and 15 heavy financial need if all of the following requirements are met: (1) The withdrawal is not in excess of the amount of the immediate and heavy financial need of the Participant (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution); (2) The Participant has obtained all distributions, other than hardship withdrawals, and all nontaxable loans currently available under all plans maintained by the Employers; (3) The Plan and all other plans of the Employers will not permit any Salary Deferral Contributions or Employee Contributions on behalf of the Participant for twelve (12) months after receipt of the withdrawal by the Participant; and (4) The Plan and all other plans of the Employers will not permit any Salary Deferral Contributions for the Participant's taxable year immediately following the taxable year of the withdrawal in excess of the applicable limit under section 402(g) for such next taxable year less the amount of such Participant's Salary Deferral Contributions for the taxable year of the withdrawal. SPECIAL RULES FOR OWNER-EMPLOYEES: (a) Where the Plan provides contributions for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the plan or plans established for the other trades or businesses must satisfy sections 401(a) and 401(d) of the Code for employees of this and all other controlled trades or businesses. (b) Where the Plan provides contributions for one or more Owner-Employees who control one or more other trades or businesses, the employees of the other trades or businesses must be included in a plan which satisfies sections 401(a) and 401(d) of the Code, and which provides contributions or benefits not less favorable than those provided to Owner-Employees under this Plan. 16 (c) For purposes of this Section 4.5, one or more Owner-Employees will be considered to control a trade or business if one or more Owner- Employees (i) own the entire interest in an unincorporated trade or business, or (ii) own more than fifty percent (50%) of either the capital interest or the profits interest in a partnership. For purposes of the preceding sentence, one or more Owner-Employees shall be treated as owning an interest in a partnership which is owned, directly or indirectly, by a partnership which one or more such Owner- Employees are considered to control for purposes of this subsection (c). ALLOCATIONS TO PARTICIPANTS' ACCOUNTS INDIVIDUAL ACCOUNTS: The Committee shall create and maintain adequate records to disclose the interest in the Trust of each Participant, Former Participant, and Beneficiary. Such records shall be in the form of individual Accounts, and credits and charges shall be made to such Accounts in the manner herein described. A Participant shall have as many as seven (7) separate Accounts, an Employer Contribution Account, a Basic Employer Contribution Account, an Employee Contribution Account, an Employee Contribution Account for Pre-1987 Employee Contributions, a Salary Deferral Contribution Account, a Matching Employer Contribution Account and a Distributing Plan Account. The amount, if any, in a Participant's Employee Contribution Account, Basic Employer Contribution Account, Salary Deferral Contribution Account and Distributing Plan Account shall be one hundred percent (100%) vested and nonforfeitable at all times. The maintenance of individual Accounts is only for accounting purposes, and a segregation of the assets of the Trust Fund to each Account shall not be required. Distributions made from an Account shall be charged to the Account as of the date paid. ACCOUNT ADJUSTMENTS: The Accounts of Participants, Former Participants and Beneficiaries shall be adjusted in accordance with the following: (a) INCOME: As of each Valuation Date, the Income of the Trust Fund since the last Valuation Date shall be allocated among the Accounts of Participants, Former Participants and Beneficiaries by adjusting the stated value of each Account to reflect its actual value as of the current Valuation Date. The Company shall establish a reasonable accounting method which shall carry out the intent of the preceding sentence. As of each Valuation Date, the Trustee shall value the Trust Fund excluding earmarked investments. The Trustee shall determine the fair market value of assets of the Trust in compliance with this Section and the principles of Section 3(26) of ERISA and regulations issued pursuant thereto. Earmarked investments shall be valued separately, at the same time and by the same method as hereinabove provided. All gains and losses on investments earmarked to a Participant's Account shall be credited to that Account. The value of an Account for all purposes of the Plan shall be its value as last determined under this Section on or before the date in question, increased by contributions thereafter 17 credited to the Account and decreased by amounts thereafter withdrawn or distributed from the Account. (b) EMPLOYER CONTRIBUTIONS: As of each Allocation Date, the Employer Contributions for the contribution period shall be allocated among those Participants who were in the employ of an Employer on the Allocation Date (or if necessary for the Plan to meet the requirements of Section 410(b) of the Code, such Participants with the highest number of Hours of Service with the number of Participants as required to meet the requirements of Section 410(b) of the Code, whether or not such Participants are employed as of the Allocation Date) (hereinafter referred to as "eligible Participant"). Such allocation shall be made in accordance with the following: (i) BASIC ALLOCATION: First, each Employer's Basic Contribution for the contribution period, if any, shall be allocated to the Basic Employer Contribution Accounts of all eligible Participants who were employed by such Employer according to the ratio that each eligible Participant's Compensation for the contribution period bears to the total Compensation of all eligible Participants during the contribution period. (ii) EXCESS ALLOCATION: Second, each Employer's Excess Contribution for the contribution period, if any, shall be allocated to the Employer Contribution Accounts of all eligible Participants who were employed by such Employer and who earned Excess Compensation. Such allocation shall be made on a pro-rata basis according to the ratio that each eligible Participant's Excess Compensation bears to the total Excess Compensation for the contribution period of all eligible Participants during the contribution period. However, the portion of the Employer Contributions to be allocated pursuant to the subparagraph shall not exceed the Integration Rate times all eligible Participants' Excess Compensation during the Year. If, after the above allocations are made, the rate at which such allocation of Employer Contributions is made with respect to each Participant's Excess Compensation exceeds the Base Contribution Rate, Employer Contributions to be allocated pursuant to this subparagraph shall be reduced (and, at the Employers' election, the Base Contribution under subparagraph (i) above or the Additional Pro-rata Contribution under subparagraph (iii) below shall be increased) until the rate of allocation under this subparagraph equals the Base Contribution Rate. (ii) V(x) ADDITIONAL PRO-RATA ALLOCATION: Third, each Employer's Additional Pro-rata Contribution for the contribution period, if any, shall be allocated to the Employer Contribution Accounts of all eligible 18 Participants who were employed by such Employer according to the ratio that each eligible Participant's Compensation for the contribution period bears to the total Compensation of all eligible Participants during the contribution period. (ii) V(xi) MATCHING EMPLOYER ALLOCATION: Fourth, each Employer's Matching Employer Contribution for the contribution period, if any, shall be allocated to the Matching Employer Contribution Accounts of all eligible Participants who made Salary Deferral Contributions for the contribution period and were employed by such Employer in accordance with uniform and nondiscriminatory procedures established by the Committee and in a manner proportionate to all or a portion of the Salary Deferral Contributions made for such contribution period as determined by the Board of Directors of the Company. (c) FORFEITURES: As of the end of each Year, Forfeitures which have become available for distribution under Section 4.3 DISPOSITION OF FORFEITURES during such Year shall first be utilized to restore any Forfeitures required to be reinstated pursuant to Section 4.3 and any remaining Forfeitures will be used to reduce the Employer Contributions to the Plan. (d) ALLOCATION OF EMPLOYEE CONTRIBUTIONS: As of each Contribution Date, after the allocation of Income, Employee Contributions made to the Plan by each Participant shall be credited to the Participant's Employee Contribution Account. (e) ALLOCATION OF SALARY DEFERRAL CONTRIBUTIONS: As of each Contribution Date, after the allocation of Income, Salary Deferral Contributions made to the Plan on behalf of each Participant shall be credited to the Participant's Salary Deferral Contribution Account. MAXIMUM ADDITIONS: The "Limitation Year" referred to in this Section 5.3 shall be the twelve (12) month period beginning on January 1 and ending on December 31. (a) The sum of the Additions to a Participant's Accounts in any Year shall not exceed the lesser of (A) thirty thousand dollars ($30,000), or such other amount as may be established by the Secretary of the Treasury pursuant to section 415 of the Code, or (B) twenty-five percent (25%) of the Participant's compensation as defined under section 415 of the Code during the Year. The compensation limitation referred to in (B) shall not apply to any contribution for medical benefits (within the meaning of section 401(h) or section 419A(f)(2) of the Code) which is otherwise treated as an Addition under section 415(l)(1) or section 419A(d)(2) of the Code. (b) In the event that such Additions to a Participant's Accounts in any Year are in excess of the maximum limits, and if sufficient correction has not been made under any other plan 19 in which the Participant participates, then to the extent necessary to bring the Additions within the required limits, first, the Participant's own Employee Contributions will be returned to the Participant and, second, the Salary Deferral Contributions will be returned to the Participant. If the Additions to such Participant's Accounts shall continue in excess of the maximum limits, the Employer Contribution otherwise allocable to the Participant shall be allocated to a suspense account which shall not share in the allocation of Income under Section 5.2(a). Amounts in such a suspense account will be used to reduce the next Employer Contribution as provided by Internal Revenue Service Regulation 1.415-6(b)(6). (c) For purposes of this Section, all defined benefit plans maintained by the Employers, whether or not terminated, shall be considered as one defined benefit plan and all defined contribution plans maintained by the Employers, whether or not terminated, shall be considered as one defined contribution plan if a Participant is a participant in both plans. (d) In the event that any Participant under this Plan is also a participant in any defined benefit plan maintained by the Employers, then for any year, the sum of the "Defined Benefit Plan Fraction" for such year and the "Defined Contribution Plan Fraction" for such year shall not exceed 1.0. The "Defined Benefit Plan Fraction" for any year is a fraction, the numerator of which is the projected annual benefit of the Participant under all defined benefit plans under which the Participant has or may have a right to receive benefits (determined as of the close of the Limitation Year) and the denominator of which is the lesser of the maximum dollar limit allowable for such Limitation Year times 1.25, or the percentage of compensation limit (one hundred percent (100%) of the average compensation paid during the Employee's highest three consecutive years of Participation) times 1.4. Notwithstanding the foregoing, if the Participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of section 415 of the Code for all Limitation Years before January 1, 1987. The "Defined Contribution Plan Fraction" for any year is a fraction, the numerator of which is the sum of the Annual Additions to the Participant's Account as of the close of that Limitation Year and the denominator of which is the lesser of the sum of the maximum dollar amount of Annual Additions to such Account which could have been made under section 415(c) of the Code for such year, and for each prior Limitation Year of service with the Employer, times 1.25, or the percentage of compensation limit for such year times 1.4. If it is determined that, as a result of this 20 limitation, there must be a reduction in the Participant's combined benefits, then the Employer shall make any necessary reduction under the defined benefit plan. (e) Notwithstanding anything herein to the contrary, no allocation shall be made to any Participant's Account for any Limitation Year in excess of the limitations of section 415 of the Code, which limitations, as amended from time-to-time, are incorporate herein by reference. NONDISCRIMINATION REQUIREMENTS: (a) For purposes of this Section, the terms listed below shall have the meanings indicated: (i) ADP: A fraction, the numerator of which is the amount of the Salary Deferral Contributions actually paid on behalf of that Participant to the Participant's Salary Deferral Contribution Account (including Excess Deferrals of Highly Compensated Employees, but excluding (A) Excess Deferrals of nonhighly compensated employees that arise solely from Elective Deferrals made under the Plan or other plans of the Employer and (B) Elective Deferrals that are taken into account in the Contribution Percentage provided the ADP Requirement is satisfied both with and without exclusion of such Elective Deferrals) for the Year and, to that extent so elected by the Employer, the Basic Employer Contribution made to the Participant's Basic Employer Contribution Account for the Year and the denominator of which is the Participant's Compensation for the Year. The ADP for any group of Participants is equivalent to the average of the ADPs of all Participants in that group. If two or more plans which include cash or deferred arrangements are considered one plan for purposes of the nondiscrimination requirements of section 401(a)(4) of the Code or the eligibility requirements of section 410(b) of the Code, the cash or deferred arrangements included in such plans shall be treated as one plan for purposes of determining the ADP. In the event any Highly Compensated Employee participates under two or more cash or deferred arrangements of the Employer, all such cash or deferred arrangements shall be treated as one cash or deferred arrangement for purposes of determining the ADP with respect to such Employee. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under section 401(k) of the Code. (ii) COMPENSATION: Any definition of compensation as determined under section 414(s) of the Code selected by the Employer and consistently 21 taken into account with respect to all Employees to determine compliance with the requirements of this Section for the applicable determination period. (iii) ELECTIVE DEFERRAL: With respect to a Participant, the sum of (A) any employer contribution under a qualified cash or deferred arrangement (as defined in section 401(k) of the Code) to the extent not includable in gross income for the taxable year under section 402(e)(3) of the Code (determined without regard to section 402(g) of the Code); (B) any employer contribution to the extent not includable in gross income for the taxable year under section 402(h)(1)(B) of the Code (determined without regard to section 402(g) of the Code); and (C) any employer contribution to purchase an annuity contract under section 403(b) of the Code under a salary reduction agreement (within the meaning of section 3121(a)(5)(D) of the Code). Elective Deferrals shall not include any deferrals properly distributed as excess annual additions. (iv) EXCESS CONTRIBUTIONS: With respect to any Year, the excess of: (A) the aggregate amount of Salary Deferral Contributions and, to the extent elected by the Employer, Basic Employer Contributions actually paid over to the Trust on behalf of Highly Compensated Employees who are Participants for such Year, over (B) the maximum amount of such contributions permitted as determined under subsection (b) of this Section (determined by reducing Salary Deferral Contributions made on behalf of Highly Compensated Employees who are Participants in the order of ADP beginning with the highest ADP). (v) EXCESS DEFERRAL: The amount of a Participant's Elective Deferrals in excess of seven thousand dollars ($7,000), as adjusted by the Secretary of the Treasury, for a calendar year. Excess Deferrals, together with any income allocable to such deferrals, may be distributed from the Plan pursuant to a uniform and nondiscriminatory procedure established by the Employer. A Participant may assign to the Plan any Excess Deferrals made during the taxable year of the Participant by notifying the Plan Administrator on or before March 1 following the close of the year in which the Excess Deferrals were made of the amount of Excess Deferrals to be assigned to the Plan. A Participant is deemed to notify the Plan Administrator of any Excess Deferrals that arise by taking into account only those Excess Deferrals made to the Plan and any other plans of the Employer. (vi) FAMILY: With respect to any Employee, such Employee's spouse and 22 lineal ascendants or descendants and the spouses of such lineal ascendants or descendants. A Family member who is excluded for purposes of determining the number of Employees in the Top-Paid Group shall, however, be aggregated with a Highly Compensated Employee who is either a five percent (5%) owner or who is in the group consisting of the ten (10) Highly Compensated Employees paid the greatest Compensation during the Year as described herein in the definition of Highly Compensated Employee. (vii) HIGHLY COMPENSATED EMPLOYEE: Any Employee who: (A) During the Year or the preceding Year was at any time an owner (or one considered to own within the meaning of section 318 of the Code) of more than a five percent (5%) interest in the Employer; (B) During the preceding Year (1) received Compensation from the Employer in excess of seventy-five thousand dollars ($75,000) (as adjusted from time to time); (2) was at any time an Officer, as hereinafter defined; or (3) received Compensation from the Employer in excess of fifty thousand dollars ($50,000) (as adjusted from time to time) and was among the Top-Paid Group of Employees for such Year; or (C) During the Year was among the one hundred (100) most highly compensated Employees and (1) received Compensation from the Employer in excess of seventy- five thousand dollars ($75,000) (as adjusted from time to time); (2) was an Officer, as hereinafter defined; or (3) received Compensation from the Employer in excess of fifty thousand dollars ($50,000) (as adjusted from time to time) and was among the Top-Paid Group of employees during such year. (D) If the Employer elects, "Highly Compensated Employee" may be defined as any Employee who during the Year or the preceding Year (1) was at any time an owner (or one considered to own within the meaning of section 318 of the Code) of more than a five percent (5%) interest in the Employer; (2) was at any time an Officer as hereinafter defined; or (3) received Compensation from the Employer in excess of fifty thousand dollars ($50,000) (as adjusted from time to time). 23 In the determination of a Highly Compensated Employee, the following rules shall apply: (A) An Employee who is a member of the Family of either a five percent (5%) owner, as described above, or of a Highly Compensated Employee in the group consisting of the ten (10) Highly Compensated Employees paid the greatest Compensation during the Year and such Highly Compensated Employee who is either a five percent (5%) owner or who is in the group consisting of the ten (10) Highly Compensated Employees paid the greatest Compensation during the Year shall be considered as a single Highly Compensated Employee hereunder. (B) A former Employee shall be treated as a Highly Compensated Employee if such former Employee was Highly Compensated when (A) such Employee separated from service, or (B) at any time after the Employee attained age fifty-five (55). (viii) LOWER PAID EMPLOYEES: Employees who are eligible to participate in the Plan who are not Highly Compensated Employees. (ix) OFFICER: An individual who at any time during the Year, or during the preceding Year, was at any time an individual having the authority of an officer of the Employer and received Compensation for the Year greater than fifty percent (50%) of the dollar limit under section 415(b)(1)(A) of the Code for the calendar year in which such Year ends (however, no more than the fifty (50) Employees (or, if lesser, the greater of three (3) Employees or ten percent (10%) of all Employees)) who earned the highest annual Compensation during the Year, or the preceding Year, shall be treated as Officers; provided that the highest paid officer of the Company for any such Year shall be treated as described in this subparagraph if for any Year no officer of the Employer otherwise meets the requirements of an Officer described herein. TOP-PAID GROUP: For any Year an Employee is in the Top-Paid Group if such Employee is in the group consisting of the top twenty percent (20%) of the Employees when determined on the basis of Compensation paid for such Year. For purposes of determining the number of Employees in the Top-Paid Group, the following Employees shall be excluded: (A) Employees who have not completed six (6) months of service; 24 (B) Employees who normally work less than seventeen and one-half (17-1/2) hours per week; (C) Employees who normally work during not more than six (6) months during any Year; (D) Except to the extent provided in regulations, Employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between Employee representatives and the Employer; and (E) Employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2) of the Code) from the Employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3) of the Code). (b) NONDISCRIMINATION TEST FOR SALARY DEFERRAL CONTRIBUTIONS: In no event may the ADP of the Highly Compensated Employees who are eligible to participate in the Plan exceed in any Year (i) 2 times the ADP of the Lower Paid Employees who are Participants if the Lower Paid Employees' ADP is less than or equal to two percent (2%); (ii) the ADP of the Lower Paid Employees plus two percent (2%) (or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly Compensation Employee) if the Lower Paid Employees' ADP is greater than two percent (2%) but less than eight percent (8%); or (iii) 1.25 times the ADP of the Lower Paid Employees if the Lower Paid Employees' ADP is eight percent (8%) or more ("ADP Requirement"). In the event Excess Contributions exist after the determination of the ADP Requirement, the amount, if any, of such Excess Contributions for such Year shall generally be distributed together with any income allocable to such contributions within two and one-half (2-1/2) months after the end of the Year, to Participants on whose behalf such Excess Contributions were made for such Year, but in no event shall such Excess Contributions and income be distributed later than the end of the Year following the Year in which such Excess Contributions were made. Excess Contributions of Participants who are members of a Family and are treated as a single Highly Compensated Employee shall be allocated among such Participants in the same proportion as the portion of the numerator of the ADP attributable to each Family member bears to the entire numerator of the ADP determined by treating such Family members as a single Highly Compensated Employee. 25 Distribution of Excess Contributions, if any, for any Year shall be made to Highly Compensated Employees who are Participants by leveling the highest ADP in accordance with Treas. Reg. Section 1.401(k)- l(f)(2) and subsection (c) until the nondiscrimination test set forth in the first sentence of this subsection is met. Notwithstanding the foregoing, the Employer may amend or revoke its salary deferral agreements with Highly Compensated Employees who are Participants pursuant to Section 4.4 PARTICIPANT SALARY DEFERRAL to the extent necessary to ensure compliance with the ADP Requirement including, but not by way of limitation, to recharacterize as Employee Contributions to be added to the Employee Contribution Account of any such Participant, the amount of any Excess Contributions necessary to ensure such compliance. (c) LEVELING METHOD. The amount of Excess Contributions or Excess Aggregate Contributions for a Highly Compensated Employee for a Year is to be determined by the following leveling method, under which the ADP or Contribution Percentage, respectively, of the Highly Compensated Employee with the highest ADP or Contribution Percentage, respectively, is reduced to the extent required to: (i) Enable the arrangement to satisfy the ADP test or Contribution Percentage test, respectively, or (ii) Cause such Highly Compensated Employee's ADP or Contribution Percentage, respectively, to equal the ratio of the Highly Compensated Employee with the next highest ADP or Contribution Percentage, respectively. This process must be repeated until the Plan satisfies the ADP and Contribution Percentage tests. For each Highly Compensated Employee, the amount of Excess Contributions is equal to the total Salary Deferral Contributions and, to the extent elected by the Employer, the Basic Employer Contributions made on behalf of the Highly Compensated Employee (determined prior to the application of this subsection (c)) minus the amount determined by multiplying the Highly Compensated Employee's ADP (determined after application of this subparagraph) by the Participant's Compensation used in determining such ratio. For each Highly Compensated Employee, the amount of Excess Aggregate Contributions is equal to the total Employee Contributions, Matching Employer Contributions and, to the extent not treated by the Employer as included in the ADP, Basic Employer Contributions on behalf of the Highly Compensated Employee (determined prior to the application of this subsection) minus the amount determined by multiplying the Highly Compensated Employee's Contribution Percentage (determined after application of this subparagraph) by the Participant's Compensation used in determining such ratio. 26 (d) INCOME ALLOCABLE TO EXCESS DEFERRALS, EXCESS CONTRIBUTIONS AND EXCESS AGGREGATE CONTRIBUTIONS. (i) INCOME ALLOCABLE TO EXCESS DEFERRALS. The income allocable to Excess Deferrals is equal to the allocable gain or loss for the taxable year of the respective Participant. Income allocable to Excess Deferrals shall be computed by either (i) (A) using a reasonable method which does not discriminate in favor of Highly Compensated Employees, is used consistently for all Participants and for all corrective distributions under the Plan for the taxable year, and is used by the Plan for allocating income among the accounts of Participants; or (B) multiplying the income for the taxable year which is allocable either to Salary Deferral Contributions or Basic Employer Contributions elected by the Employer to be included in the numerator of the ADP, by a fraction - (1) the numerator of which is the Excess Deferrals by the Participant for the taxable year, and (2) the denominator of which is equal to the sum of (I) as of the beginning of the taxable year, the Participant's Salary Deferral Contribution Account, plus (II) for the taxable year, the Participant's Salary Deferral Contributions. (ii) INCOME ALLOCABLE TO EXCESS CONTRIBUTIONS. The income allocable to Excess Contributions is equal to the allocable gain or loss for the Year. Income allocable to Excess Contributions shall be computed by either (A) using a reasonable method which does not discriminate in favor of Highly Compensated Employees, is used consistently for all Participants and for all corrective distributions under the Plan for the Year, and is used by the Plan for allocating income among the accounts of Participants; or (B) multiplying the income for the Year which is allocable to Salary 27 Deferral Contributions and Basic Employer Contributions to the extent elected by the Employer to be included in the numerator of the ADP, by a fraction - (1) the numerator of which is the Excess Contributions for the Participant for the Year, and (2) the denominator of which is equal to the sum of (I) as of the beginning of the Year, the Participant's Salary Deferral Contribution Account and that portion of the Participant's Basic Employer Contribution Account attributable to Basic Employer Contributions elected by the Employer to be included in the numerator of the ADP, plus (II) for the Year, the Participant's Salary Deferral Contributions, and Basic Employer Contributions elected by the Employer to be included in the numerator of the ADP. (iii) INCOME ALLOCABLE TO EXCESS AGGREGATE CONTRIBUTIONS. The income allocable to Excess Aggregate Contributions is equal to the allocable gain or loss for the Year. Income allocable to Excess Aggregate Contributions shall be computed by either (A) using a reasonable method which does not discriminate in favor of Highly Compensated Employees, is used consistently for all Participants and for all corrective distributions under the Plan for the Year, and is used by the Plan for allocating income among the accounts of Participants; or (B) multiplying the income for the Year which is allocable to Employee Contributions, Matching Employer Contributions and Basic Employer Contributions to the extent not elected by the Employer to be included in the numerator of the ADP, by a fraction - (1) the numerator of which is the Excess Aggregate 28 Contributions for the Participant for the Year, and (2) the denominator of which is equal to the sum of (I) as of the beginning of the Year, the Employee Contribution Account, Matching Employer Contribution Account and that portion of the Participant's Basic Employer Contribution Account attributable to Basic Employer Contributions not elected by the Employer to be included in the numerator of the ADP, plus (II) for the Year, the Participant's Employee Contributions, Matching Employer Contributions and Basic Employer Contributions to the extent not elected by the Employer to be included in the numerator of the ADP. (e) NONDISCRIMINATION TEST FOR EMPLOYEE CONTRIBUTIONS AND MATCHING EMPLOYER CONTRIBUTIONS: In no event may the Contribution Percentage of the Highly Compensated Employees who are eligible to participate in the Plan exceed (i) 2 times the Contribution Percentage of the Lower Paid Employees if the Lower Paid Employees' Contribution Percentage is less than or equal to two percent (2%); (ii) the Contribution Percentage of the Lower Paid Employees plus two percent (2%) (or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly Compensation Employee) if the Lower Paid Employees' Contribution Percentage is greater than two percent (2%) but less than eight percent (8%); or (iii) 1.25 times the Contribution Percentage of the Lower Paid Employees if the Lower Paid Employees' Contribution Percentage is eight percent (8%) or more. The determination of the amount of Excess Aggregate Contributions with respect to the Plan shall be made after (i) first determining the Excess Deferrals and (ii) then determining the Excess Contributions. The amount, if any, of such Excess Aggregate Contributions for such Year shall generally be distributed or if forfeitable, forfeited together with any income allocable to such contributions within two and one-half (2-1/2) months after the end of the Year to Participants on whose behalf Excess Aggregate Contributions were allocated for such Year, but in no event shall such Excess Aggregate Contributions and income be distributed or if forfeitable, forfeited later than the end of 29 the Year following the Year in which such Excess Aggregate Contributions were made. Excess Aggregate Contributions of Participants who are members of a Family and are treated as a single Highly Compensated Employee shall be allocated among such Participants in the same proportion as the portion of the numerator of the Contribution Percentage attributable to each Family member bears to the entire numerator of the Contribution Percentage determined by treating such Family members as a single Highly Compensated Employee. Distribution of Excess Aggregate Contributions, if any, for any Year shall be made to Highly Compensated Employees who are Participants by leveling the highest Contribution Percentage in accordance with Treas. Reg. Section 1.401(m)-l(e)(2) until the nondiscrimination test set forth in the first sentence of this subsection (e) is met; provided, however, that forfeitures of Excess Aggregate Contributions, if any, shall not be allocated to Participants whose contributions are reduced under this Section. To the extent required by law, if the sum of the ADP and the Contribution Percentage for Highly Compensated Employees exceeds the Aggregate Limit, then the Contribution Percentage of Highly Compensated Employees will be reduced in the manner described in subsection (c) so that the Aggregate Limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage is reduced shall be treated as an Excess Aggregate Contribution. This paragraph does not apply if the sum of the ADP and the Contribution Percentage of the Highly Compensated Employee does not exceed 1.25 times the ADP and the Contribution Percentage of the Lower Paid Employees. For purposes of this paragraph, "Aggregate Limit" shall mean the greater of (i) the sum of (A) 125% of the greater of the ADP or the Contribution Percentage of the Lower Paid Employees and (B) two (2) percentage points plus the lesser of the ADP or the Contribution Percentage of the Lower Paid Employees, but in no event greater than twice the lesser of the ADP or the Contribution Percentage of the Lower Paid Employees; or (ii) the sum of (A) 125% of the lesser of the ADP or the Contribution Percentage of the Lower Paid Employees and (B) two (2) percentage points plus the greater of the ADP or the Contribution Percentage of the Lower Paid Employees, but in no event greater than twice the greater of the ADP or the Contribution Percentage of the Lower Paid Employees. For purposes of this Section 5.4(e), the terms listed below shall have the meanings indicated: (i) CONTRIBUTION PERCENTAGE: A fraction, the numerator of which is the amount of the contributions actually paid on behalf of that Participant, in the aggregate, to the Participant's Matching Employer Contribution Account (excluding contributions paid to the Participant's Matching Employer Contribution Account that are forfeited either to correct 30 Excess Aggregate Contributions or because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions), Employee Contribution Account, and, to the extent not treated by the Employer as included in the ADP, Basic Employer Contribution Account and the denominator of which is the Participant's Compensation for the Year. The Contribution Percentage for any group of Participants is equivalent to the average of the Contribution Percentages of all Participants in that group. If two or more plans of the Employer to which matching contributions or employee voluntary contributions are made are treated as one plan for purposes of the eligibility requirements of section 410(b) of the Code, such plans shall be treated as one plan for purposes of determining the Contribution Percentage. In the event a Highly Compensated Employee participates in two or more plans of the Employer to which such contributions are made, all such contributions shall be aggregated for purposes of determining the Contribution Percentage. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under section 401(m) of the Code. (ii) EXCESS AGGREGATE CONTRIBUTIONS: With respect to any Year, the excess of (A) the aggregate amount of Matching Employer Contributions, Employee Contributions and Basic Employer Contributions not treated by the Employer as included in the ADP actually made on behalf of Highly Compensated Employees who are Participants for such Year, over (B) the maximum amount of such contributions permitted as determined under subsection (e) of this Section (determined by reducing Excess Aggregate Contributions made on behalf of Highly Compensated Employees who are Participants in order of Contribution Percentage, beginning with the highest Contribution Percentage, as set forth in subsection (c)). ROLLOVER CONTRIBUTIONS. (a) Anything herein contained to the contrary notwithstanding, the Committee may authorize an Employee to transfer to the Trust, to be held as part of the Employee's Employee Contribution Account, cash received by the Employee in one or more distributions together constituting, under the Code, a lump sum distribution from or under another qualified trust, qualified plan, an employee annuity or custodian account, or an amount paid or distributed out of an individual retirement account, individual retirement annuity or retirement bond consisting of a prior rollover contribution from a qualified trust or annuity plan. The amount so transferred to this Trust is a "Rollover 31 Contribution." The Trustee may also authorize the acceptance of a direct payment on behalf of an Employee from a plan or trust for which the Internal Revenue Service has issued a favorable determination letter. The amount so transferred by a direct payment from the plan or trust to this Trust is a "Direct Transfer Contribution." The interest of a Participant with respect to a Rollover Contribution and a Direct Transfer Contribution to the Trust, together with the earnings thereon, shall be fully vested, and assets attributable thereto shall be held, invested, and distributed pursuant to the terms of the Plan governing the Participant's Employee Contribution Account; provided, however, that the interest of a Participant with respect to Rollover Contributions and Direct Transfer Contributions shall be segregated for accounting and reporting purposes. An Employee making a Rollover Contribution or on whose behalf a Direct Transfer Contribution is made, if otherwise not eligible to become a Participant, shall be deemed a Participant to the extent of the Employee's Rollover Contribution and Direct Transfer Contribution only and not for any other purpose until the Employee otherwise is eligible to be and becomes a Participant for all purposes hereunder. (b) A Participant may, pursuant to a uniform and nondiscriminatory procedure established by the Committee, withdraw any part of such Participant's Employee Contribution Account attributable to Rollover Contributions or Direct Transfer Contributions, as adjusted by any investment gains or losses, but not including any amounts directly transferred to the Plan from the Distributing Plan pursuant to subsection (b) of this Section. BENEFITS RETIREMENT OR DISABILITY: If a Participant's employment with the Employers is terminated at or after the date upon which the Participant attains Normal Retirement Age, or if the Participant's employment is terminated at an earlier age because of Disability, the Participant shall be vested in, and entitled to receive, the entire amount in each of the Participant's Accounts in accordance with Section 6.4 PAYMENT OF BENEFITS. DEATH: In the event that the termination of employment of a Participant is caused by the Participant's death, the Participant's Beneficiary shall be vested in and paid the entire amount in each of the Participant's Accounts in accordance with Section 6.4 PAYMENT OF BENEFITS. TERMINATION FOR OTHER REASONS: If a Participant's employment with the Employers is terminated before Normal Retirement Age for any reason other than Disability or death, the Participant shall be entitled to: (a) The entire amount, if any, credited to the Participant's Employee Contribution Account, Salary Deferral Contribution Account, Basic Employer Contribution Account and Distributing Plan Account; plus 32 The Participant shall be vested in, and entitled to receive, an amount equal to a percentage of the balance of the Participant's Employer Contribution Account, if any, and Matching Employer Contribution Account, if any. Such percentage shall be determined in accordance with the following schedule: VESTED FORFEITED YEARS OF SERVICE PERCENTAGE PERCENTAGE ---------------- ---------- ---------- less than 1 0 100 1 but less than 2 20 80 2 but less than 3 40 60 3 but less than 4 60 40 4 but less than 5 80 20 5 or more 100 0 ; provided that a Participant who was a Participant in the Plan prior to March 1, 1996 shall be vested in and entitled to receive, the amount credited to the Participant's Employer Contribution Account, attributable to the Participant's Company Basic Deposit Account as of February 28, 1996, if any, and Company Matching Deposit Account, if any, after having made Salary Deferral Contributions (referred to as Before-Tax Deposits prior to March 1, 1996) and/or Employee Contributions (referred to as After-Tax Deposits prior to March 1, 1996) under this Plan for an aggregate period of thirty-six (36) consecutive months. Payment of benefits due under this Section shall be made in accordance with Section 6.4 PAYMENT OF BENEFITS. (c) Notwithstanding anything herein to the contrary, if the Plan's vesting schedule is amended, or if the Plan is amended in any way that directly or indirectly affects the computation of the participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least three (3) Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have such Participant's vested interest in such Participant's Employer Contribution Account and Matching Employer Contribution Account computed under the Plan without regard to such amendment or change. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: 33 (i) Sixty (60) days after the amendment is adopted; (ii) Sixty (60) days after the amendment becomes effective; or (iii) Sixty (60) days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. PAYMENT OF BENEFITS: ACCOUNTS OTHER THAN DISTRIBUTING PLAN ACCOUNTS: The Committee shall direct the Trustee to distribute the amounts due from the Accounts other than the Distributing Plan Account of a Participant, if so directed by the Participant, as soon as practicable after the Participant's termination of employment, as of the Valuation Date coincident with or next following the Participant,s termination of employment in any one of the following methods selected by the Participant: (i) One (1) single lump sum; (ii) Periodic payments of substantially equal amounts for the lesser of a specified number of years not in excess of ten (10) or, over a period not exceeding such Participant's normal life expectancy or the joint normal life expectancy of the Participant and the Participant's Beneficiary, and such payments shall be made not less frequently than annually, in which event the unpaid balance at the end of each Year shall receive an Income allocation. (b) DISTRIBUTING PLAN ACCOUNTS: The Committee shall direct the Trustee to distribute the amounts due from the Participant's Distributing Plan Account, if so directed by the Participant, as soon as practicable after the Participant's termination of employment, as of the Valuation Date coincident with or next following the Participant's termination of employment as follows: (i) (A) The amount to which a Participant is entitled after such Participant's termination of employment shall be payable by the Trustee in the form of a Qualified Joint and Survivor Annuity for the benefit of the Participant and the Participant's Qualified Spouse. If a Participant has no Qualified Spouse, the amount to which such Participant is entitled after the Participant's termination of employment shall be payable by the Trustee in the form of a Life Annuity for the benefit of the Participant. (A) The amount to which a surviving Qualified Spouse is entitled, if 34 the Participant had a vested Account balance at the Participant's death and had not yet commenced receiving benefits under the Plan, shall be payable by the Trustee in the form of a Qualified Preretirement Survivor Annuity for the benefit of the Qualified Spouse. (B) Notwithstanding anything herein to the contrary, however, if a Participant has made an election pursuant to subparagraphs (iii) or (iv) of this subsection (b), whichever is applicable, and the election made by the Participant is still in effect, the Participant's nonforfeitable Account balance may be distributed by the Trustee pursuant to subparagraph (ix) of this subsection (b) or subsections (d) or (f) of this Section. For purposes of this subsection (b) and subsection (b) of Section 6.6 DESIGNATION OF BENEFICIARY the following terms shall have the meanings indicated: (A) "Qualified Spouse": (1) For purposes of the Qualified Joint and Survivor Annuity and the Life Annuity, a Participant's legal spouse as of the Participant's Annuity Starting Date. (2) For purposes of the Qualified Preretirement Survivor Annuity, a Participant's legal spouse throughout the one (1) year period ending at the Participant's death. (B) "Qualified Joint and Survivor Annuity": An immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's Qualified Spouse which is fifty percent (50%) of the amount of the annuity which is payable during the joint lives of the Participant and the Participant's Qualified Spouse and which is the actuarial equivalent of the Participant's Account balance. (C) "Qualified Preretirement Survivor Annuity": An annuity for the life of the surviving Qualified Spouse of a Participant who dies prior to the Participant's Annuity Starting Date, the actuarial equivalent of which is fifty percent (50%) of the Participant's Account balance as of the date of the 35 Participant's death. (D) "Annuity Starting Date": The first day of the first period for which an amount is paid as an annuity or in any other form. (E) "Applicable Election Period": (1) with respect to a Qualified Preretirement Survivor Annuity, the period which begins on the earlier of: (A) the first day of the Plan Year in which the Participant attains age thirty-five (35); or (B) the date the Participant terminates employment; and ends on the date of the Participant's death; and with respect to a Qualified Joint and Survivor Annuity or a Life Annuity, the ninety (90) day period ending on the Annuity Starting Date. (F) "Life Annuity": An annuity for the life of the Participant which is the actuarial equivalent of the Participant's Account balance. (G) "Joint and Survivor Annuity": An annuity for the life of the Participant with a survivor annuity for the life of the Participant's Qualified Spouse or alternate beneficiary which is either fifty percent (50%), sixty-six and two-thirds percent (66-2/3%), or one hundred percent (100%) of the amount of the annuity which is payable during the joint lives of the Participant and the Participant,s Qualified Spouse or alternate beneficiary and which is the actuarial equivalent of the Participant's Account balance. The actual percentage of the survivor benefit will be elected by the Participant. (iii) A Participant who has a Qualified Spouse may elect in writing to waive the Qualified Joint and Survivor Annuity or Qualified Preretirement 36 Survivor Annuity at any time during the Applicable Election Period (provided, however, that a Participant may elect in writing to waive the Qualified Preretirement Survivor Annuity at any time prior to the Applicable Election Period, if such election becomes invalid on the first day of the Year in which the Participant attains age thirty-five (35)). Such election must be consented to by the Participant's Qualified Spouse. The election and the Qualified Spouse's consent thereto must designate specific Beneficiary(ies) including any class of Beneficiaries or any contingent Beneficiaries, and, with respect to a Qualified Joint and Survivor Annuity, the form of benefits that the designated Beneficiary(ies) shall receive, which designations may not be changed without spousal consent unless the Qualified Spouse expressly permits designations by the Participant without any further spousal consent. Such Qualified Spouse's consent must acknowledge the effect of such election and be witnessed by a Plan representative or a notary public. Such consent shall not be required if it is established to the satisfaction of the Plan Administrator that the required consent cannot be obtained because there is no Qualified Spouse, the Qualified Spouse cannot be located, or other circumstances that may be prescribed by Treasury regulations. The election made by the Participant and consented to by the Participant's Qualified Spouse may be revoked by the Participant in writing without the consent of the Qualified Spouse at any time during the Applicable Election Period. Any new election must comply with the requirements of this subparagraph (iii). A former Qualified Spouse's waiver shall not be binding on the Qualified Spouse. A Participant without a Qualified Spouse may elect to waive the Life Annuity at any time during the Applicable Election Period. The election made by the Participant may be revoked by the Participant in writing at any time during the Applicable Election Period. Any new election must comply with the requirements of this Section 6.4(b). (v) With regard to the election to waive a Qualified Joint and Survivor Annuity, the Plan Administrator shall no less than thirty (30) days and no more than ninety (90) days prior to the Annuity Starting Date provide the Participant a written explanation of: (A) The terms and conditions of the Qualified Joint and Survivor Annuity; (B) The Participant's right to make, and the effect of, an election to waive the Qualified Joint and Survivor Annuity; 37 (C) The right of the Participant's Qualified Spouse to consent to any election to waive the Qualified Joint and Survivor Annuity, and (D) The right of the Participant to revoke such election, and the effect of such revocation. (vi) With regard to the election to waive a Qualified Preretirement Survivor Annuity, the Plan Administrator shall supply comparable notice and information to that described in subparagraph (v) of this subsection (b) within the period beginning on the first day of the Year in which the Participant attains age thirty-two (32) and ending with the close of the Year preceding the Year in which the Participant attains age thirty-five (35). If the Participant enters the Plan after the first day of the Year in which the Participant attained age thirty-two (32), the Plan Administrator shall provide notice no later than the end of the one (1) year period after the entry of the Participant into the Plan. In the case of a Participant's termination of employment before the Participant attains age thirty-two (32), the Plan Administrator shall provide notice at the time of the Participant's termination of employment or within one (1) year prior to or after the Participant's termination of employment. (vii) With regard to the election to waive a Life Annuity, the Plan Administrator shall no less than thirty (30) days and no more than ninety (90) days prior to the Annuity Starting Date provide the Participant a written explanation of: (A) The terms and conditions of the Life Annuity; (B) The Participant's right to make, and the effect of, an election to waive the Life Annuity; and The right of the Participant to revoke such election and the effect of such revocation. (viii) The annuities provided under this subsection (b) shall commence within a reasonable time after the Participant's retirement or after attainment of (A) age fifty-five (55) and five (5) Years of Service or (B) Normal Retirement Age, as elected by the Participant, or within a reasonable period of time after the Participant's death if so directed by the Participant's surviving Qualified Spouse. In no event shall an Annuity Starting Date be later than sixty (60) days after the close of the Year 38 during which the later of the Normal Retirement Age of the Participant or the date of the Participant's termination of employment occurs, unless specifically authorized by the Participant. (ix) (A) For a Participant who makes a qualified election pursuant to subparagraphs (iii) or (iv) of this subsection (b), whichever is applicable, which qualified election is still in effect, the amount of the Participant's Trust Account balance to which the Participant is entitled after termination of employment shall be paid by the Trustee to such Participant in one of the following optional methods of payment, in the actuarial equivalent of the Participant's Trust Account balance attributable to the Participant's Distributing Plan Account: (1) One (1) single lump sum payable after termination of employment for reasons other than death, Disability or retirement; or (2) Installments commencing after termination of employment for reasons other than death, Disability or retirement, over a period not to exceed the Participant's life expectancy or the combined life expectancy of the Participant and such Participant's designated Beneficiary, or a period certain and continuous not to exceed the Participant's life expectancy or the combined life expectancy of the Participant and such Participant's designated Beneficiary; or (3) An annuity for the Participant's life commencing on the Annuity Starting Date and payable until the Participant's death; or (4) An annuity for the Participant's life with one hundred twenty (120) monthly payments guaranteed; or (5) A Joint and Survivor Annuity for the life of the Participant and the Participant's Qualified Spouse or alternate beneficiary; or A full cash refund annuity for the Participant's life. (c) Unless a Participant elects otherwise in writing, payment of benefits under this Plan shall 39 be made or commence within sixty (60) days after the latest to occur of (i) the end of the Year of the Participant's sixty-fifth (65th) birthday, or (i) the end of the Year in which the Participant's employment terminates. (d) Distributions to a Participant must commence no later than the first day of April following the calendar year in which such Participant attains age 70-1/2. The distributions required herein may be made over the life of the Participant (or lives of the Participant and the Participant's beneficiary) or over a period not exceeding the life expectancy of the Participant (or the life expectancies of the Participant and the Participant's beneficiary) and shall be determined and made in accordance with section 401(a)(9) of the Code, including for lifetime distributions the minimum distribution incidental benefit requirement of section 1.401(a)(9)-2 of the regulations. Life expectancies will not be recalculated unless the Participant elects otherwise. (e) If a Participant has, prior to January 1, 1984, made a designation and election under either the Distributing Plan or the USI Plan to have the Participant's nonforfeitable Account balances paid in an alternative method acceptable under section 401(a) of the Code as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982, by an instrument in writing executed by such Participant and filed with the Trustee, the provisions of subsection (d) shall not apply. Any such written designation and election shall be binding upon the Trustee and the Employer, to the extent permitted by law. (f) Subject to the Qualified Preretirement Survivor Annuity requirements with respect to Distributing Plan Accounts set forth above, upon the death of the Participant, the following distribution provisions will become effective: (i) If the Participant dies after distribution of the Participant's interest has commenced, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death without regard to any acceleration of distributions because of the minimum distribution incidental benefit requirement of section 1.4(a)(9)-2 of the regulations. (ii) If the Participant dies before distribution of the Participant's interest commences, the Participant's entire interest will be distributed no later than five (5) years after the Participant's death except to the extent that: (A) If any portion of the Participant's interest is payable to a designated Beneficiary, distributions may be made in substantially equal installments over the life expectancy of the designated Beneficiary, commencing no later than one (1) year 40 after the Participant's death. (B) If the designated Beneficiary is the surviving spouse of the Participant, distributions shall not be required to commence earlier than the later of December 31 of the calendar year immediately following the calendar year of the Participant's death or December 31 of the calendar year in which the Participant would have attained age 70-1/2. If the spouse dies before payments begin, subsequent distributions shall be made as if the spouse had been the Participant. (g) The amount to which a designated Beneficiary is entitled pursuant to Section 6.6 DESIGNATION OF BENEFICIARY after a Participant's death shall be paid by the Trustee at the direction of the Committee in the manner selected by the Participant or the Participant's Beneficiary(ies), as applicable, with payments to commence (if elected) within a reasonable time after the Participant's death. DISTRIBUTION OF UNALLOCATED EMPLOYEE CONTRIBUTIONS AND SALARY DEFERRAL CONTRIBUTIONS: If on the date of termination of a Participant's employment, the Employer shall be holding contributions made or designated by the Participant but not yet allocated to the Participant's Employee Contribution Account or Salary Deferral Contribution Account, the Employer shall pay such amounts either directly to the Participant (or the Participant's Beneficiary, as the case may be) or to the Trustee, to be distributed by the Trustee in accordance with the method of distribution determined under Section 6.4 PAYMENT OF BENEFITS. 41 DESIGNATION OF BENEFICIARY: (a) ACCOUNTS OTHER THAN DISTRIBUTING PLAN ACCOUNTS: (i) If a Participant is married on the date of the Participant's death, the Beneficiary of such Participant shall be the Participant's Eligible Spouse, as herein defined, unless the Participant's Eligible Spouse consents in writing not to be said Beneficiary and such written consent acknowledges the effect of the consent and is witnessed by either a representative of the Plan or a notary public. The provisions of the preceding sentence shall not apply if it is established to the satisfaction of the Plan Administrator either that the Eligible Spouse cannot be located or that other circumstances set forth in Income Tax Regulations which preclude the necessity of the Eligible Spouse's consent are present with respect to the Participant. Such consent shall be valid only with respect to the Eligible Spouse who signs the consent. Any spousal consent necessary under this provision shall not be effective unless the Participant's Beneficiary designation designates a specific Beneficiary(ies) or any contingent Beneficiary(ies), which designations may not be changed without spousal consent unless the spouse expressly permits designations by the Participant without any further spousal consent. The "Eligible Spouse" of a Participant covered by this paragraph is the husband or wife to whom the Participant had been married for at least one (1) year as of the date of the Participant's death. (b) DISTRIBUTING PLAN ACCOUNTS: (i) An amount equal to fifty percent (50%) of the nonforfeitable balance of the Distributing Plan Account of such Participant shall be payable on the death of such Participant to such Participant's surviving Qualified Spouse pursuant to Section 6.4(b)(i) or, if there is no surviving Qualified Spouse, or if an election has been made pursuant to Section 6.4(b)(iii) and if a Beneficiary designation pursuant to subparagraph (ii) below is made, to the Participant's designated Beneficiary. The remaining fifty percent (50%) of the Participant's nonforfeitable Account balance shall be payable on the death of the Participant to the Participant's designated Beneficiary. (ii) Subject to the provisions of Section 6.4(b)(i) regarding automatic annuities for Qualified Spouses, each Participant shall, and from time to time, have the right to name and to change the beneficiary or beneficiaries to whom payment of the sum owing in the event of such 42 Participant's death shall be made. However, a Participant's Distributing Plan Account balance shall be paid to the Beneficiary the Participant has designated only if the Participant's Qualified Spouse waives pursuant to Section 6.4(b)(iii), any right to a benefit from the Plan, except as provided in any Beneficiary designation executed by the Participant. (c) GENERAL RULES REGARDING BENEFICIARY DESIGNATIONS. If a Participant shall fail to designate a Beneficiary, if such designation shall for any reason be illegal or ineffective, or if no surviving Qualified Spouse, Eligible Spouse or Beneficiary shall survive the Participant, the Participant's death benefits shall be paid: (i) to the Participant's surviving spouse; or (ii) if there is no surviving spouse, to the estate of the Participant. Except as otherwise provided above in this Section, each Participant shall have the right to designate, by giving a written designation to the Plan Administrator, a person or persons or entity to receive any death benefit which may become payable upon the death of such Participant. A Participant may, with consent of the Participant's Qualified Spouse or Eligible Spouse, change such Beneficiary designation from time to time upon written notice to the Committee, and the last designation received by the Committee prior to the death of the Participant shall be effective and shall revoke all prior designations. The Plan Administrator may determine the identity of the distributees and in so doing may act and rely upon any information it may deem reliable upon reasonable inquiry, and upon any affidavit, certificate, or other paper believed by it to be genuine, and upon any evidence believed by it sufficient. OPTIONAL DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS: Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. For purposes of this Section, the following definitions shall apply: ELIGIBLE ROLLOVER DISTRIBUTION: An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: (i) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's 43 designated beneficiary, or for a specified period of ten (10) years or more; (ii) any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and (iii) the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) ELIGIBLE RETIREMENT PLAN: An Eligible Retirement Plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code or a qualified trust described in section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (c) DISTRIBUTEE: A Distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are Distributees with regard to the interest of the spouse or former spouse. (d) DIRECT ROLLOVER: A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. LOANS TO PARTICIPANTS: The Trustee may, at the Committee's direction, administer a Participant loan program, whereby upon the application of any Participant who is an active employee or a party-in-interest as defined in ERISA Section 3(14) who is not an Owner-Employee, a family member of an Owner-Employee, or a Shareholder-Employee of the Employer or a family member of a Shareholder-Employee (an "Eligible Individual"), the Trustee, in accordance with a uniform, nondiscriminatory policy, may make a loan or loans to such Eligible Individual. The total amount of a loan to any Eligible Individual shall not exceed the lesser of (i) fifty thousand dollars ($50,000), or (ii) one-half (1/2) of the nonforfeitable value of the Participant's Accounts excluding the Participant's Distributing Plan Account under the Plan as of the date on which the loan is approved. The Committee may not grant a loan in an amount in excess of fifty thousand dollars ($50,000), reduced by the excess, if any, of (i) the highest outstanding balance of loans from the Plan during the one (1) year period ending on the day before the date on which such loan is made over (ii) the outstanding balance of loans from the Plan on the date on which such loan is made. All loans shall be subject to the approval of the Committee which shall follow a uniform, nondiscriminatory policy. In addition to such rules and regulations as the Committee may adopt, all loans shall comply 44 with the following terms and conditions: An application for a loan by an Eligible Individual shall be made in writing to the Committee whose action thereon shall be final. The Committee shall specify the form of the application and any supporting data required. (b) The period of repayment for any loan shall be five (5) years from the date the loan is made. Any loan used to acquire a dwelling unit which within a reasonable time will be used as the principal residence of the Participant does not have to be repaid within five (5) years, but shall be paid in a time agreed by the Committee and the Eligible Individual. Loans shall be repayable in substantially equal installments. In no event shall the substantially equal installments be made less frequently than quarterly. To the extent permitted by law, repayment shall be through payroll deductions for all periods while the Eligible Individual is on an Employer's payroll. (c) Each loan shall bear interest at a rate which is reasonable within the meaning of section 4975(d)(1) of the Code, provided that such rate does not violate any applicable usury laws. (d) Each loan shall be supported by collateral which is the Eligible Individual's entire interest in the Trust or if so determined by the Committee, the Eligible Individual's interest in the Eligible Individual's Employer Contribution Account, Matching Employer Contribution Account and Employee Contribution Account. A loan shall also be supported by the Eligible Individual's promissory note for the amount of the loan, including interest, payable to the order of the Trustee. The promissory note shall require that the unpaid principal and interest will (at the Committee's option) become due and payable if a loan payment is not made within thirty (30) days after the due date of any installment. (e) At the time the balance of an Eligible Individual's Accounts is in excess of $3,500 and is used as security for a loan, if the requirements of section 401(a)(11) of the Code apply to any part of such balance which is loaned to the Eligible Individual, the Eligible Individual's spouse must consent in writing to the loan and the possible reduction in the Accounts of the Participant to satisfy the loan. Such consent must be made within the ninety (90) day period which ends on the date on which the loan is to be so secured. The spouse's written consent must be witnessed by a representative of the Plan or a notary public. The provisions of the preceding sentences shall not apply if it is established to the satisfaction of the Committee either that the spouse cannot be located or that other circumstances set forth in regulations issued by the Secretary of the Treasury which preclude the necessity of the spouse's consent are present with respect to the Eligible Individual. Further spousal consent is not required regardless of whether the Eligible Individual subsequently has a change in spouse or change in marital status. Any 45 renegotiation, extension, renewal, or other revision of a loan shall be treated as a new loan requiring the obtaining of a new consent of the spouse in accordance with this subsection (e). CASH-OUT PROCEDURE. If at the time of a Participant's termination of employment the Participant's nonforfeitable Account balance shall be in an amount not in excess of $3,500.00 or such other amount to be prescribed in regulations by the Secretary of the Treasury or the Secretary's delegate, the Trustee shall pay such amount to the Participant as soon as practicable after the Participant's termination of employment, as of the Valuation Date coincident with or next following the Participant's termination of employment. For purposes of this Section, if the value of the Participant's nonforfeitable Account balance is zero, the Participant shall be deemed to have received a distribution of such nonforfeitable Account balance. If such amount is in excess of $3,500.00 and the Account balance is immediately distributable, the Participant, and the Participant's Qualified Spouse if the Participant is entitled to a distribution from a Distributing Plan Account and payment is to be made in a form other than a Qualified Joint and Survivor Annuity, must consent to any distribution of such Account balance. The consent of the Participant, and the Participant's Qualified Spouse if the Participant is entitled to a distribution from a Distributing Plan Account and payment is to be made in a form other than a Qualified Joint and Survivor Annuity, shall be obtained in writing within the ninety (90) day period ending on the annuity starting date. The annuity starting date is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant, and the Participant's Qualified Spouse if the Participant is entitled to a distribution from a Distributing Plan Account and payment is to be made in a form other than a Qualified Joint and Survivor Annuity, of the right to defer any distribution until the Participant's Account balance is no longer immediately distributable. Such notification shall include a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of section 417(a)(3) of the Code, and shall be provided no less than thirty (30) days and no more than ninety (90) days prior to the annuity starting date. The consent of the Participant, and the Participant's Qualified Spouse if the Participant is entitled to a distribution from a Distributing Plan Account and payment is to be made in a form other than a Qualified Joint and Survivor Annuity, shall not be required to the extent that a distribution is required to satisfy section 401(a)(9) or section 415 of the Code. In addition, upon termination of the Plan the Participant's Account balance may be distributed to the Participant, provided the Employer does not maintain or establish a successor plan (as defined under regulations under section 401(k) of the Code), or transferred to another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7) of the Code) within the same controlled group if the Participant does not consent to an immediate distribution. An Account balance is immediately distributable to the Participant before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or age sixty-two (62) (or any such other times as may be prescribed by law or by regulations promulgated by the Secretary of the Treasury). Such payment shall satisfy all obligations of the Trust to such Participant. 46 Upon a distribution or deemed distribution made to a Participant pursuant to this Section, the nonvested portion of such Participant's Employer Contribution Account, if any, and Matching Employer Contribution Account, if any, will be forfeited and shall be allocated along with Forfeitures at the time and in the manner specified in Section 4.3 DISPOSITION OF FORFEITURES. TRUST FUND APPOINTMENT OF TRUSTEE: A trustee shall be appointed by the Company to administer the Trust Fund. The Trustee shall serve at the pleasure of the Company, and shall have the rights, powers and duties set forth in the Trust Agreement. All assets of the Trust Fund shall be held, invested and reinvested by the Trustee. ASSETS OF THE TRUST: All contributions under this Plan shall be paid to the Trustee and, except as provided in Section 7.4 REVERSION OF EMPLOYER CONTRIBUTIONS, all assets of the Trust Fund, including income from investments and from all other sources, shall be retained for the exclusive benefit of Participants, Former Participants, and Beneficiaries, and shall be used to pay benefits to such persons, or to pay expenses of administration of the Plan and trust to the extent not paid by the Company. All contributions made by an Employer are expressly conditioned upon the continued qualification of the Plan under section 401 of the Code, and upon the deductibility of the contributions under section 404 of the Code. EARMARKED INVESTMENTS: At such times as the Employer shall designate, and if so permitted by the Employer, in the Employer's sole discretion exercised in a uniform, nondiscriminatory manner, every Participant under the Plan may request, in writing and on the form provided by the Employer that the total amount standing to the Participant's credit in the Participant's Account or any uniform lesser amount as determined by the Employer, be invested in any form of investment permitted by the Employer and selected by the Participant; provided, however, that if any Participant is permitted to earmark such Participant's Account or any portion thereof in any particular form or type of investment, all Participants shall have the same right of direction. REVERSION OF EMPLOYER CONTRIBUTIONS: At no time shall any part of the corpus or income of the Trust Fund be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries. Notwithstanding the above, in the case of a contribution which is made by the Employer by a mistake of fact, such contribution may be returned to the Employer within one (1) year after the payment of the contribution to the Trust Fund. If a contribution is conditioned on initial qualification of the Plan under section 501 of the Code, and if the Plan does not qualify, then such contribution may be returned to the Employer within one (1) year after the date of denial of initial qualification of the Plan (provided the application for qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted or such later date as the Secretary of the Treasury may prescribe). If a contribution is conditioned upon the deductibility of the contribution under section 404 of the 47 Code, then, to the extent the deduction is disallowed, such a contribution may be returned to the Employer within one (1) year after the disallowance of the deduction. ADMINISTRATION ALLOCATION OF RESPONSIBILITY AMONG FIDUCIARIES FOR PLAN AND TRUST ADMINISTRATION: The Fiduciaries shall have only those specific powers, duties, responsibilities and obligations as are specifically given them under this Plan or the Trust. The Employers shall have the sole responsibility for making the contributions provided for under Section 4.1 EMPLOYER CONTRIBUTIONS. The Company shall have the sole authority to appoint and remove the Trustee, members of the Committee and any investment manager which may be provided for under the Trust, and to amend or terminate, in whole or in part, this Plan or the Trust. The Committee shall have sole responsibility for the administration of this Plan, which responsibility is specifically described in this Plan and the Trust. The Trustee shall have such responsibility for the administration of the Trust as specifically provided in the Trust. Each Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan or the Trust, as the case may be, authorizing or providing for such direction, information or action. Furthermore, each Fiduciary may rely upon any such direction, information or action of another Fiduciary as being proper under this Plan or the Trust, and is not required under this Plan or the Trust to inquire into the propriety of any such direction, information or action. It is intended under this Plan and the Trust that each Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under this Plan and the Trust and shall not be responsible for any act or failure to act of another Fiduciary. No Fiduciary guarantees the Trust Fund in any manner against investment loss or depreciation in asset value. APPOINTMENT OF COMMITTEE: The Plan shall be administered by a Profit Sharing Committee consisting of at least three (3) persons who shall be appointed by and serve at the pleasure of the Board of Directors of the Company. All usual and reasonable expenses of the Committee may be paid in whole or in part by the Employers, and any expenses not paid by the Employers shall be paid by the Trustee out of the principal or income of the Trust Fund. Any members of the Committee who are Employees shall not receive compensation with respect to their services for the Committee. CLAIMS PROCEDURE: The Committee shall make all determinations as to the right of any person to a benefit. Any denial by the Committee of the claim for benefits under the Plan by a Participant or Beneficiary shall be stated in writing by the Committee and delivered or mailed to the Participant or Beneficiary; and such notice shall set forth the specific reasons for the denial, written to the best of the Committee's ability in a manner that may be understood without legal counsel. In addition, the Committee shall afford a reasonable opportunity to any Participant or Beneficiary whose claim for benefits has been denied for a review of the decision denying the claim. 48 RECORDS AND REPORTS: The Committee shall exercise such authority and responsibility as it deems appropriate in order to comply with ERISA and governmental regulations issued thereunder relating to records of Participants' Service, Account balances and the percentage of such Account balances which are nonforfeitable under the Plan; notifications to Participants; annual registration with the Internal Revenue Service; and annual reports to the Department of Labor. OTHER COMMITTEE POWERS AND DUTIES: The Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any benefits hereunder; (b) to prescribe procedures to be followed by Participants or Beneficiaries filing applications for benefits; (c) to prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan; (d) to receive from the Employers and from Participants such information as shall be necessary for the proper administration of the Plan; (e) to furnish the Employers, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (f) to receive, review and keep on file (as it deems convenient or proper) reports of benefit payments by the Trustee and reports of disbursements for expenses directed by the Committee; (g) to appoint, or employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal counsel. The Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. RULES AND DECISIONS: The Committee may adopt such rules as it deems necessary, desirable or appropriate. All rules and decisions of the Committee shall be uniformly and consistently applied to all Participants in similar circumstances. When making a determination or calculation, the Committee shall be entitled to rely upon information furnished by a Participant or Beneficiary, the Employers, the legal counsel of the Company or the Trustee. 49 COMMITTEE PROCEDURES: The Committee may act at a meeting or in writing without a meeting. The Committee shall elect one of its members as chairman, appoint a secretary, who may or may not be a Committee member, and advise the Trustee of such actions in writing. The secretary shall keep a record of all meetings and forward all necessary communications to the Employers or the Trustee. The Committee may adopt such bylaws and regulations as it deems desirable for the conduct of its affairs. All decisions of the Committee shall be made by the vote of the majority including actions in writing taken without a meeting. A dissenting Committee member who, within a reasonable time after such Committee member has knowledge of any action or failure to act by the majority, registers a dissent in writing delivered to the other Committee members, the Company and the Trustee shall not be responsible for any such action or failure to act. AUTHORIZATION OF BENEFIT PAYMENTS: The Committee shall issue directions to the Trustee concerning all benefits which are to be paid from the Trust Fund pursuant to the provisions of this Plan, and warrants that all such directions are in accordance with this Plan. APPLICATION AND FORMS FOR BENEFITS: The Committee may require a Participant to complete and file with the Committee an application for a benefit and all other forms approved by the Committee, and to furnish all pertinent information requested by the Committee. The Committee may rely upon all such information so furnished it, including the Participant's current mailing address. FACILITY OF PAYMENT: Whenever, in the Committee's opinion, a person is entitled to receive any payment of a benefit or installment thereof, hereunder is under a legal disability or is incapacitated in any way so as to be unable to manage the person's financial affairs, the Committee may direct the Trustee to make payments to such person or to the person's legal representative or to a relative or friend of such person for the person's benefit, or the Committee may direct the Trustee to apply the payment for the benefit of such person in such a manner as the Committee considers advisable. Any payment of a benefit or installment thereof in accordance with the provisions of this Section shall be a complete discharge of any liability for the making of such payment under the provisions of the Plan. INDEMNIFICATION OF THE COMMITTEE: The Committee and the individual members thereof shall be indemnified by the Employers and not from the Trust Fund against any and all liabilities arising by reason of any act or failure to act made in good faith pursuant to the provisions of the Plan, including expenses reasonably incurred in the defense of any claim relating thereto. MISCELLANEOUS NONGUARANTEE OF EMPLOYMENT: Nothing contained in this Plan shall be construed as a contract of employment between an Employer and any Employee, or as a right of any Employee to be continued in the employment of an Employer, or as a limitation of the right of an Employer to discharge any of its Employees, with or without cause. 50 RIGHTS TO TRUST ASSETS: No Employee or Beneficiary shall have any right to, or interest in, any assets of the Trust Fund upon termination of employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Employee or Beneficiary out of the assets of the Trust Fund. All payments of benefits as provided for in this Plan shall be made solely out of the assets of the Trust Fund and none of the Fiduciaries shall be liable therefor in any manner. NONALIENATION OF BENEFITS: Except to the extent provided in Section 6.6, benefits payable under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any relative of the Employee, prior to actually being received by the person entitled to the benefit under the terms of the Plan; and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to benefits payable hereunder shall be void. The Trust Fund shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder. The preceding sentence shall not apply with respect to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a qualified domestic relations order as defined in section 414(p) of the Code. NONFORFEITABILITY OF BENEFITS: Subject only to the specific provisions of this Plan, nothing shall be deemed to divest a Participant of the right to the nonforfeitable benefit to which the Participant becomes entitled in accordance with the provisions of this Plan. DISCONTINUANCE OF EMPLOYER CONTRIBUTIONS: In the event of a permanent discontinuance of contributions to the Plan by an Employer, the Accounts of all Participants employed by such Employer shall, as of the date of such discontinuance, become one hundred percent (100%) vested and nonforfeitable. AMENDMENTS AND ACTION BY EMPLOYERS AMENDMENTS: The Company reserves the right to make from time to time any amendment or amendments to this Plan. Notwithstanding anything herein to the contrary, the Plan may not be amended to the extent the amendment will have the effect of decreasing the accrued benefit of a Participant in violation of section 411(d)(6) of the Code. ACTION BY EMPLOYERS: Any action by an Employer under this Plan may be by resolution of its Board of Directors, or by any person or persons duly authorized by resolution of said Board to take such action. 51 SUCCESSOR EMPLOYER AND MERGER OR CONSOLIDATION OF PLANS SUCCESSOR EMPLOYER: In the event of the dissolution, merger, consolidation or reorganization of any Employer, provision may be made by which the Plan as applied to such Employer will be continued by the successor; and, in that event, the successor shall be substituted for such Employer under the Plan. The substitution of the successor for such Employer shall constitute an assumption of the Employer's Plan liabilities by the successor and, if such Employer is the Company, the successor shall have all of the powers, duties and responsibilities of the Company under the Plan. CONDITIONS APPLICABLE TO MERGERS OR CONSOLIDATIONS OF PLANS: In the event of any merger or consolidation of the Plan as applied to any Employer or to all Employers with, or transfer in whole or in part of the assets and liabilities of the Trust Fund to another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of this Plan, the assets of the Trust Fund applicable to such Participants shall be merged or consolidated with or transferred to the other trust fund only if: (a) each Participant would (if either this Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit the Participant would have been entitled to receive immediately before the merger, consolidation or transfer (if this Plan had then terminated); (b) resolutions of the Boards of Directors of the Employers under this Plan, and of any new or successor Employer of the affected Participants, shall authorize such transfer of assets; and, in the case of the new or successor Employer of the affected Participants, its resolutions shall include an assumption of liabilities with respect to such Participants' inclusion in the new employer's plan, and (c) such other plan and trust are qualified under sections 401(a) and 501(a) of the Code. PLAN TERMINATION RIGHT TO TERMINATE: An Employer may at any time terminate the Plan with respect to the Employees employed by said Employer. If the Plan is terminated by fewer than all Employers, the Plan shall continue in effect for Employees of the remaining Employers. In the event of the dissolution, merger, consolidation or reorganization of an Employer, the Plan shall be terminated with respect to the Employees of such Employer, unless the Plan is continued by a successor to such Employer in accordance with Section 11.1 SUCCESSOR EMPLOYER. 52 PARTIAL TERMINATION: Upon termination of the Plan with respect to one or more but not all of the Employers, or upon termination of the Plan by an Employer with respect to a group of Participants, the Trustee shall allocate and segregate for the benefit of such group of Participants, or of the Employees then or theretofore employed by the Employer with respect to which the Plan is being terminated, the proportionate interest of such Participants in the Trust Fund. The funds so allocated and segregated shall be used by the Trustee to pay benefits to or on behalf of Participants in accordance with Section 12.3 LIQUIDATION OF THE TRUST FUND. LIQUIDATION OF THE TRUST FUND: Upon termination of the Plan, the Accounts of all Participants affected thereby shall become fully vested, and the Committee shall direct the Trustee: (a) to continue to administer the Trust Fund and pay Account balances in accordance with Section 6.4 PAYMENT OF BENEFITS, to Participants affected by the termination upon their termination of employment or to their Beneficiaries upon such a Participant's death, until the Trust Fund has been liquidated, or (b) to distribute the assets remaining in the Trust Fund, after payment of any expenses properly chargeable thereto, to Participants, Former Participants and Beneficiaries in proportion to their respective Account balances. In case the Committee directs liquidation of the Trust Fund pursuant to (a) above, the expenses of administering the Plan and Trust, if not paid by the Employer, shall be paid from the Trust Fund. MANNER OF DISTRIBUTION: To the extent that no discrimination in value results, any distribution after termination of the Plan may be made, in whole or in part, in cash, in securities or other assets in kind as the Committee (in its discretion) may determine. All noncash distributions shall be valued at fair market value at the date of distribution. PLAN ADOPTION ADOPTION PROCEDURE: With the written consent of the Company, any company which is a subsidiary or affiliate of an Employer may adopt the Plan for its eligible Employees by appropriate resolution, which shall specify the effective date of such adoption and which may contain such changes and variations in Plan terms as the Company approves. Each subsidiary or affiliated company upon becoming an Employer shall appoint and designate one of its officers, by resolution of its Board of Directors, to take such action and to furnish and supply to the Committee and the Trustee such data and information as may be necessary or required to administer the Plan; and the Committee and the Trustee shall be entitled to accept and rely upon all matters and facts furnished them, or either of them, by such officer and to act thereon without incurring any liability for so doing. 53 EXPENSES: Each participating Employer shall pay such proportionate part of the expenses incurred in the administration of the Plan as hereinabove provided in Section 8.2 APPOINTMENT OF COMMITTEE as the Company shall determine. WITHDRAWAL: A participating Employer may withdraw from the Plan by giving sixty (60) days' written notice of its intention to the Company, unless a shorter notice shall be agreed to by the Company; provided, however, that such withdrawal shall be subject to the provisions of Article XII PLAN TERMINATION. TRANSFERRED ASSETS: If an Employer adopting the Plan already maintains a thrift or profit sharing plan covering employees who will be covered by this Plan, it may, with the consent of the Company, provide in its resolution adopting this Plan for the merger, restatement and continuation, without discontinuance or termination, of its plan by this Plan. In such case, the account balances of employees in such previous plan shall be valued as of the date the Employer adopts this Plan and such account balances shall be transferred to the Trust Fund and shall constitute initial Account balances under this Plan for the Participants to whom they pertain. TOP-HEAVY PROVISIONS GENERAL: Notwithstanding anything herein to the contrary, the following provisions shall apply with respect to any Year in which the Plan is deemed to be Top Heavy. DEFINITIONS: (a) KEY EMPLOYEE: Any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was: (i) an officer of the Employer if such individual's annual Compensation exceeds fifty percent (50%) of the dollar limitation under section 415(b) of the Code for the calendar year in which any such Year ends, (ii) an owner (or considered an owner under section 318 of the Code) of one of the ten (10) largest interests in the Employer if such individual's Compensation exceeds one hundred percent (100%) of such dollar limitation under section 415(c)(1)(A) of the Code, (iii) an owner of more than a five percent (5%) interest in the Employer, or (iv) an owner of more than a one percent (1%) interest in the Employer who has annual Compensation of more than one hundred fifty thousand dollars ($150,000). 54 An officer is defined as an actual officer of the Employer, provided that not more than the greater of three (3) Employees or ten percent (10%) of the Employees (but in no event more than fifty (50) Employees) shall be considered as officers in determining whether a plan is Top Heavy. The determination period is the Year containing the Determination Date and the four (4) preceding Years. The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code, and the regulations thereunder. (b) NON-KEY EMPLOYEE: Any Employee who is not included in the definition of Key Employee. (c) TOP-HEAVY PLAN: This Plan is Top Heavy if any of the following conditions exists: (i) If the Top-Heavy Ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (ii) If this Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds sixty percent (60%). If this Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio of the Permissive Aggregation Group exceeds sixty (60%). (d) TOP-HEAVY RATIO: (i) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer has not maintained any defined benefit plan which during the five (5) year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the Account balances of all Key Employees as of the Determination Date(s) (including any part of any Account balance distributed in the five (5) year period ending on the Determination Date(s)), and the denominator of which is the sum of all Account balances (including any part of any Account balance distributed in the five (5) year period ending on the Determination Date(s)), of all Participants as of the Determination Date(s), both computed in 55 accordance with section 416 of the Code, and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are adjusted to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under section 416 of the Code, and the regulations thereunder. (ii) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more defined benefit plans which during the five (5) year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the Account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with subparagraph (i) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s)), and the denominator of which is the sum of the Account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with subparagraph (i) above, and the present value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in accordance with section 416 of the Code, and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are adjusted for any distribution of an accrued benefit made in the five (5) year period ending on the Determination Date. (iii) For purposes of subparagraphs (i) and (ii) above, the value of Account balances and the present value of accrued benefits will be determined as of the most recent Determination Date, except as provided in section 416 of the Code, and the regulations thereunder for the first and second Years of a defined benefit plan. The Account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been employed (as defined by section 416(g) of the Code) by the Company maintaining the Plan at any time during the five (5) year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with section 416 of the Code, and the regulations thereunder. When aggregating plans, the value of Account balances and accrued benefits will be 56 calculated with reference to the Determination Date that falls within the same calendar year. (e) PERMISSIVE AGGREGATION GROUP: The required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of section 401(a)(4) and 410 of the Code. (f) REQUIRED AGGREGATION GROUP: (i) Each qualified plan of the Employer in which at least one Key Employee participates, and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of sections 401(a)(4) and 410 of the Code. (g) DETERMINATION DATE: For any Year subsequent to the first Year, the last day of the preceding Year. MINIMUM ALLOCATION REQUIREMENTS: (a) Except as otherwise provided in subsections (c) and (d) below, the Employer Contributions (excluding Salary Deferral Contributions and Matching Employer Contributions) and forfeitures for the Year allocated on behalf of any Participant who is not a Key Employee shall not be less than the lesser of three percent (3%) of such Participant's Compensation or, in the case where the Employer has no defined benefit plan which designates this Plan to satisfy section 401 of the Code, the largest percentage of Employer Contributions (including Salary Deferral Contributions and Matching Employer Contributions) and forfeitures, as a percentage of the first two hundred thousand dollars ($200,000) of the Key Employee's Compensation, allocated on behalf of any Key Employee for that year. The minimum allocation is determined without regard to any Social Security contribution. This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the Year because of (i) the Participant's failure to complete 1,000 hours of service (or any equivalent provided in the Plan), (ii) the Participant's failure to make mandatory contributions to the Plan, or (iii) Compensation less than a stated amount. For purposes of computing the minimum allocation, Compensation means the amount reported on the Participant's Internal Revenue Service Form W-2, Wage and Tax Statement (or in the event such reporting form is at some future time change modified or amended, such successor corresponding form) for the Year. Notwithstanding the foregoing, for Years beginning after December 31, 1988, in determining if an individual is a Key Employee, 57 Compensation shall include amounts which are contributed by the Employer pursuant to a salary reduction agreement or salary deferral agreement which are not included in the gross income of the Participant under sections 125, 402(a)(8), 402(h) or 403(b) of the Code. (c) The provision of subsection (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Year. (d) The provision in (a) above shall not apply to any Participant to the extent the Participant is covered under any other plan or plans of the Company and the Company has provided that the minimum allocation or benefit requirement applicable to Top-Heavy plans will be met in the other plan or plans. (e) The minimum allocation required (to the extent required to be nonforfeitable under section 416(b) of the Code) may not be forfeited under section 411(a)(3)(B) or 411(a)(3)(D) of the Code. SPECIAL 415 LIMITATIONS: In any Year in which the Plan is deemed to be a Top- Heavy Plan, the number 1.25 shall be replaced by the number 1.0 to the extent required under section 416(h) of the Code and regulations issued thereunder; provided, however, that such adjustment will not occur where benefits for Key Employees do not exceed ninety percent (90%) of total benefits and additional benefits are provided for Non-Key Employees in accordance with the provisions of section 416(h)(2)(A) and (B) of the Code. IN WITNESS WHEREOF, the Company has caused this Plan to be executed as of this __ day of _________, 1996. ATTEST: UNITED STATIONERS INC. By: Its: 58 EX-10.791 5 FIRST AMEND TO INDUSTRIAL LEASE EXHIBIT 10.79.1 FIRST AMENDMENT TO INDUSTRIAL LEASE THIS FIRST AMENDMENT TO INDUSTRIAL LEASE (this "First Amendment") is entered into as of the 23rd day of January, 1997 by and between ERI-CP, INC., a Delaware corporation (successor-in-interest to Carol Point Builders I General Partnership, a California general partnership) ("Landlord") and UNITED STATIONERS SUPPLY CO., an Illinois corporation (successor-in-interest to Associated Stationers, Inc. ["Original Tenant"]) ("Tenant"). R E C I T A L S: WHEREAS, Landlord's predecessor-in-interest and Original Tenant entered into that certain Industrial Lease undated (said Industrial Lease is hereinafter referred to as the "Lease") for certain premises containing approximately 139,444 rentable square feet located at 898 Carol Court, Carol Stream, Illinois (the "Demised Premises"). WHEREAS, Original Tenant subsequently was merged with and into Tenant and in connection therewith, Tenant assumed all of the obligations and rights of tenant in the Lease. WHEREAS, Landlord and Tenant desire to amend the Lease to extend the term (the "Term") of the Lease and to otherwise amend the Lease as provided below. NOW, THEREFORE, for and in consideration of the recitals hereinabove set forth and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. INCORPORATION OF RECITALS AND TERMS. The foregoing recitals are hereby incorporated in and made a part of this First Amendment. Unless otherwise defined in this First Amendment to the contrary, all capitalized terms used herein shall have the respective meanings as are ascribed to the terms in the Lease. 2. MERGER AND ASSIGNMENT. Tenant has informed Landlord that Original Tenant merged into and with Tenant (the "Merger") effective as of March 30, 1995. Tenant represents and warrants to Landlord that pursuant to such Merger, Tenant has heretofore assumed all obligations and liabilities of Original Tenant thereunder effective as of said date. 3. EXTENSION OF TERM. Landlord and Tenant hereby agree to extend the Term of the Lease for an additional five (5) year period, commencing on June 1, 1997 and ending on May 31, 2002 (sometimes herein referred to as the "Extended Term"). 4. FIXED RENT. Effective as of June 1, 1997, Fixed Rent payable under the Lease during the Term of the Lease shall be as follows: Monthly Installment Period Annual Fixed Rent of Fixed Rent ------ ----------------- ------------- June 1, 1997 - May 31, 1999 $594,031.44 $49,502.62 June 1, 1999 - May 31, 2002 634,470.24 52,872.52 5. CONDITION OF THE DEMISED PREMISES. Landlord shall not be required to provide any alterations or modifications to the Demised Premises. Tenant is currently in possession of the Demised Premises and accepts the Demised Premises in its "As-Is" condition. Tenant at Tenant's expense, (subject to the application of the "Tenant Allowance" [as such term is defined in the form of Work Letter attached hereto as Exhibit A]) may install a washroom, a conference room and perform certain other work in the Demised Premises all as shall be more particularly set forth in the Working Plans (as defined in the Work Letter) as Tenant's Work (as defined in the Work Letter). Tenant shall not undertake any construction nor shall Tenant install any equipment, trade fixtures or personal property without first executing and delivering to Landlord a counterpart copy of the Work Letter and thereafter obtaining Landlord's written approval of the Working Plans, which Working Plans shall be submitted to Landlord in a timely fashion in accordance with the provisions of Paragraph 3 of the Work Letter. Thereafter no material changes will be made in the Working Plans without the prior written consent of Landlord. Tenant shall not commence any work until among other things, Tenant delivers to Landlord the insurance and any bond required under the terms of the Work Letter. 6. ADDITIONAL AMENDMENTS TO LEASE. (a) Article A-l(n) and (o) of the Lease are hereby deleted in their entirety and the following substituted therefor: "(n) Landlord's Address: ERI-CP, INC. c/o LaSalle Advisors Limited 200 East Randolph Chicago, Illinois 60601 (o) Tenant's Address: United Stationers Supply Co. 2200 East Golf Road Des Plaines, Illinois 60016 Attention: President" (b) The following words are added after the word, "instance", at the end of the first sentence of Article N-l of the Lease: "which consent shall not be unreasonably withheld or delayed." (c) As a condition to and in consideration of Landlord's covenants hereunder, Tenant expressly agrees that Paragraph 4 of Rider No. One to the Lease is hereby deleted in its entirety; it being the express intent of the parties that Tenant shall have no further rights to extend the Term of the Lease following the expiration of the Extended Term. (d) The "Right of First Notification" provision appearing at the end of Rider No. One of the Lease is hereby deleted in its entirety and the following substituted therefor: "RIGHT OF FIRST OFFER. If at any time during the Extended Term, that certain space contiguous to the Demised Premises depicted on Exhibit B hereto and containing approximately 135,508 square feet (the "Option Space") becomes available for leasing, and if no Event of Default by Tenant exists under the Lease, then Landlord shall not lease such Option Space to any third party without first giving Tenant (i) notice of the availability of such space which shall include the proposed term and rental rate (including escalations, if any), abatements and allowances, if any, and other economic concessions that Landlord would agree to with respect to such Option Space (the "Offered Terms"), and (ii) three (3) business days after the date of such notice in which to commit in writing to lease such Option Space on the Offered Terms for the remainder of Term, taking into account any modifications in such Offered Terms required by the fact that the remaining Term may be longer or shorter than that proposed by Landlord, and otherwise on the terms, covenants and conditions contained in the Lease. Landlord and Tenant expressly agree that the Offered Terms, in any event, shall limit Landlord's liability for the payment of a brokerage commission to any Tenant's broker to the payment of the then-current market expansion commission (i.e., a commission equal to 50% of the then market commission payable to outside brokers in connection with new leases of space in the Building). If Tenant fails, refuses or is otherwise unable to commit to such a lease within the three (3) business day period, Landlord shall have the right to lease the Option Space to any third party or parties on such terms as are acceptable to Landlord." 7. BROKERS. Tenant represents and warrants to Landlord that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker, other than LaSalle Partners and Grubb & Ellis (the fees of which shall be payable by Landlord) in the negotiation or making of this First Amendment and Tenant agrees to indemnify and hold harmless Landlord from any and all claims, liability, costs and expenses (including attorneys' fees) incurred as a result of any inaccuracy in the foregoing representation and warranty. 8. FULL FORCE AND EFFECT: INCONSISTENCY. Except as otherwise expressly set forth in this First Amendment, all provisions of the Lease shall remain in full force and effect. In the event of any inconsistency between the terms of the Lease and the terms of this First Amendment, the terms of this First Amendment shall control. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the day and year first above written. LANDLORD: ERI-CP, INC., a Delaware corporation By: LaSalle Advisors Limited, its duly authorized agent By: Name: K. C. Woodrow Title: Managing Director TENANT: UNITED STATIONERS SUPPLY CO., an Illinois corporation By: Name: Daniel H. Bushell Title: Executive Vice President and Chief Financial Officer EXHIBIT A UNITED STATIONERS SUPPLY CO. WORK LETTER 1. DEFINITIONS. Terms which are defined in the Lease shall have the same meanings when used in this Work Letter. In addition, the following terms shall have the following meanings: (a) "Space Plans" means plans, drawings, and specifications showing the intended design, character, and finishes of the Tenant's Work in the Demised Premises, including partition and door locations and storefront signs. (b) "Systems Plans" means drawings, plans and specifications for the mechanical, sprinkler, heating, air conditioning, electrical and plumbing systems to be installed by Tenant's contractors in the Demised Premises. (c) "Tenant Improvement Plans" means the Space Plans and the Working Plans. (d) "Tenant's Work" means the work described in Paragraph 4 below. (e) "Working Plans" means the final working plans and specifications prepared by or for Tenant (including, without limitation, the Systems Plans) for the work to be performed by Tenant in the Demised Premises, which Working Plans shall contain sufficient detail and shall be otherwise suitable in all respects for submission to the building department of the Village of Carol Stream to obtain a building permit. Working Plans shall be consistent with the Space Plans approved by Landlord. (f) "Tenant's Contractors" means any contractor hired by Tenant and any subcontractor hired by such contractor. 2 INTENTIONALLY OMITTED. 3. PREPARATION AND APPROVAL OF TENANT IMPROVEMENT PLANS. (a) Tenant hereby agrees to cause to be prepared by a registered architect or a space planner, and submitted to Landlord for Landlord's review and approval, the (i) Space Plans, and (ii) the Working Plans. A-1 (b) Within fifteen (15) business days after Landlord has received the Space Plans and within twenty (20) business days after Landlord has received the Working Plans, Landlord shall notify Tenant of Landlord's approval or disapproval thereof, and in the event of disapproval, Landlord shall specify the reasons for such disapproval. Tenant shall cause the Space Plans or the Working Plans, as the case may be, to be revised and resubmitted to Landlord for Landlord's review and approval within five (5) days after Landlord notifies Tenant of disapproval thereof. (c) Neither review nor approval by Landlord of the Space Plans or the Working Plans shall constitute a representation or warranty by Landlord that any of such plans either (i) are complete or suitable for their intended purpose, or (ii) comply with applicable laws, ordinances, codes and regulations, it being expressly agreed by Tenant that Landlord assumes no responsibility or liability whatsoever to Tenant or to any other person or entity for such completeness, suitability, or compliance. (d) Once approved by Landlord, Tenant shall not make any material changes, modifications or additions to the Tenant Improvement Plans without the prior written consent of Landlord. 4. TENANT'S WORK. (a) Tenant, at its sole cost and expense (but subject to the application of the Tenant Allowance described in Paragraph 9 below) shall perform all work in accordance with the Tenant Improvement Plans approved by Landlord. (b) All Tenant's Work shall be performed by contractors and suppliers as are reasonably approved, in advance, in writing, by Landlord. (c) Tenant hereby agrees to deliver to Landlord, within three (3) days following the execution of the general contract for the Tenant's Work, a true correct and complete copy of such general contract together with a total project budget outlining the aggregate cost of all Tenant's Work to be performed in the Demised Premises, all fees payable to Tenant's contractor for overhead, general conditions and profit and all other hard and soft costs associated with preparing the Demised Premises for Tenant's occupation thereof (other than Tenant's furniture installation, phone installation and equipment installation) (all of such costs are herein collectively referred to as "Tenant's Project Cost"). 5. PROCEDURE AND SCHEDULES FOR THE CONSTRUCTION OF TENANT'S WORK. (a) General Requirements. At least five (5) days prior to the commencement of Tenant's Work hereunder, Tenant shall submit to Landlord the following: A-2 (i) All required building and other permits. (ii) A construction schedule setting forth, in detail, the construction sequence of the various trades, furnishing and move-in activities, which shall set forth, among other things, the estimated date of completion of Tenant's Work. (iii) Evidence that appropriate public utility companies have been notified as necessary to provide service for construction and occupancy purposes. (iv) Tenant's general contractor's sworn statement in form satisfactory to Landlord identifying by trade the names, addresses and telephone numbers of each subcontractor and supplier. (v) In addition to the foregoing, Tenant shall not permit Tenant's Contractors to commence any work until Tenant has received evidence of the following insurance covering Tenant's Contractors' performance of the work: (1) Workers' Compensation Insurance in compliance with law and Employer's Liability Insurance in the minimum amount of Five Hundred Thousand Dollars ($500,000.00) and as required under any applicable employee benefit act or statute, as will protect Tenant's Contractors from any and all liability under such acts. (2) Commercial General Liability Insurance including premises/operations liability, independent contractors' liability, products and completed operations liability (to be maintained in effect for two (2) years following completion and acceptance of such contract work), contractual liability and broad form property damage liability in a minimum amount of One Million Dollars ($1,000,000) per occurrence, combined single limit of bodily injury, personal injury or property damage with annual aggregate of One Million Dollars ($1,000,000) for all such occurrences. (3) Commercial Automobile Liability Insurance covering the ownership, operation, maintenance, use, loading and unloading of any owned, non-owned and hired automobile in the amount of One Million Dollars ($1,000,000) per occurrence of bodily injury or property damage. (4) Umbrella Liability Insurance providing limits in excess of those limits indicated in 5.(a)(v)(1), (2) and (3) (except Worker's Compensation Insurance) in the amount of Five Million Dollars ($5,000,000) per occurrence, combined single limit for bodily injury, personal injury and property damage. A-3 (5) Builder's Risk Insurance, written on a completed value form, insuring against risks of direct physical loss or damage excluding only standard perils, covering Tenant's Work and all other improvements to the Demised Premises and all furniture, trade fixtures, equipment, merchandise and all other items of Tenant's property in the Demised Premises, in an amount not less than the actual replacement cost of the work, and shall not include a co- insurance provision of less than one hundred percent (100%). Tenant shall furnish the insurance to be provided by Tenant under Article F of the Lease prior to the commencement of Tenant's Work, and shall furnish to Landlord certificates evidencing the coverages required by this Paragraph, which certificates shall state that such insurance coverage may not be changed or canceled without at least thirty (30) days' prior written notice to Landlord and shall name as additional named insured parties (i) Landlord, (ii) the holder of each mortgage encumbering the Demised Premises of which Landlord shall have notified Tenant, and (iii) such other persons as Landlord may from time to time designate. All insurance shall otherwise be in form and substance satisfactory to Landlord. (b) COMMENCEMENT OF CONSTRUCTION. Tenant shall commence construction of Tenant's Work promptly following the approval of the Working Plans and Tenant's receipt of Landlord's written notice to proceed with such work. 6. REQUIREMENTS DURING PERFORMANCE OF TENANT'S WORK. Tenant shall fully perform and comply with each of the following covenants, conditions and requirements: (a) Tenant and Tenant's agents, contractors, workmen, mechanics, suppliers and invitees shall work in harmony and not interfere with Landlord and Landlord's contractors in doing work for other tenants and occupants of the Building. (b) Tenant shall require all entities performing work on behalf of Tenant to provide protection for existing improvements to an extent that is reasonably satisfactory to Landlord and shall allow Landlord or its agent access to the Demised Premises, for inspection purposes, at all times during the period when Tenant is undertaking construction activities thereon. In the event any entity performing work on behalf of Tenant causes any damage to the property of Landlord or others, Tenant shall cause such damage to be repaired at Tenant's expense and if Tenant fails to cause such damage to be repaired promptly upon Landlord's demand therefor, Landlord, in addition to any other rights or remedies available to Landlord under the Lease or at law or equity, may cause such damage to be repaired, in which event Tenant, upon Landlord's demand, shall promptly pay to Landlord the cost of such repairs. (c) All contractors and subcontractors shall use only those entrances designated by Landlord for ingress and egress of personnel and the delivery and removal of equipment and material through or across any common areas shall only be permitted with the written approval of Landlord and during hours determined by Landlord. Construction equipment A-4 and materials are to be located in confined areas approved by Landlord and truck traffic is to be routed to and from the Building as directed by Landlord so as not to burden the operation of the Building. Landlord shall have the right to order any contractor or subcontractor who violates the above requirements to cease work and to immediately remove it, its equipment, and its employees from the Buildings. (d) Tenant shall be responsible for providing trash removal service. Tenant shall cause each entity employed by it to perform work on the Demised Premises to abide by the provisions of this Work Letter as to the storage of trash and shall cause Tenant's general contractor to leave the Demised Premises in a clean and safe condition at the end of each day. Should Landlord deem it necessary to remove Tenant's trash because of accumulation, an additional charge to Tenant will be on a time and material basis. (e) Tenant agrees that all services and work performed on the Demised Premises by, on behalf of, or for the account of Tenant, shall be done in a first-class workmanlike manner using only good grades of material and shall be performed only by bondable licensed contractors, covered by a collective bargaining agreement with the appropriate trade union. (f) Tenant agrees to protect, indemnify, defend and hold Landlord harmless from and against any and all losses, damages, liabilities, claims, liens, costs, and expenses, including reasonable attorney's fees of whatever nature, including those to the person and property of Tenant, its employees, agents, invitees, licensees and others arising out of or in connection with the performance of Tenant's Work by Tenant or Tenant's contractors in or about the Demised Premises, the Building, and the cost of any repairs to the Demised Premises, necessitated by activities of Tenant or Tenant's Contractors. (g) Following any material default by Tenant hereunder, Landlord shall have the right (but not the obligation) to perform on behalf of and for the account of Tenant, subject to reimbursement by Tenant, any of Tenant's Work which Landlord determines shall be so performed, provided that Landlord notifies Tenant at the time Landlord approves the Tenant Improvement Plans of any such work to be performed by Landlord. The cost to Landlord of any Tenant's Work performed or supplied to Tenant by Landlord shall become due and payable within five (5) business days after Tenant has been invoiced for same by Landlord. 8. COMPLETION DELIVERIES. Within five (5) business days after the substantial completion of the Tenant's Work, Tenant shall deliver to Landlord the following (collectively, the "Closing Deliveries"): (a) An Architect's Certificate, in form and substance satisfactory to Landlord, certifying that the Tenant's Work is in place and has been performed in accordance with the approved Working Plans; A-5 (b) A detailed breakdown, in a form and substance satisfactory to Landlord, of the final and total costs of Tenant's Work prepared by Tenant and its Contractor(s), together with receipted invoices showing payment thereof; subject to any punch list matters; (c) Original waivers of lien and contractor's affidavits in such form as may be required by Landlord, from all parties performing labor or supplying materials in connection with Tenant's Work and sworn statements and long form affidavits and waivers from Tenant's architect, engineer and contractors and any other party with whom Tenant contracted directly for labor or materials furnished Tenant in or for the Demised Premises; (d) Copies of all warranties for workmanship, materials and equipment received by Tenant from manufacturers and/or installers in connection with Tenant's Work; (e) "As-built" drawings of all improvements, certified by the appropriate architect or engineer, and information regarding any special requirements for cleaning the improvements completed on behalf of Tenant; (f) Information with regard to any special security systems installed by Tenant; (g) An Estoppel Certificate in the form and substance reasonably satisfactory to the parties; (h) Such other supporting documentation as Landlord may reasonably require. 9. TENANT ALLOWANCE. (a) Provided that Tenant has obtained Landlord's approval of the Tenant Improvement Plans as provided above and has completed Tenant's Work prior to July 1, 1997 ("Tenant's Work Completion Date"), Tenant shall be entitled to an allowance (the "Tenant Allowance") to be applied toward Tenant's costs incurred in the performance of the Tenant's Work in an amount up to $20,000.00. (b) Landlord shall disburse the Tenant Allowance to Tenant within thirty (30) days of Landlord's receipt of all of the Closing Deliveries described in Paragraph 8 above. Notwithstanding the foregoing, Landlord shall reimburse Tenant out of the Tenant Allowance for costs incurred by Tenant for the preparation of the Tenant Improvement Plans within thirty (30) days following Landlord's receipt from Tenant of paid invoices evidencing to Landlord's reasonable satisfaction such costs. (c) Notwithstanding anything contained herein to the contrary, provided that the "hard costs" of Tenant's Work shall not be less than $10,000.00, if Tenant does not timely use the entire amount of the Tenant Allowance for the purposes stated above, then any excess thereof (not to exceed $10,000.00) shall be applied and credited to Fixed Rent first becoming due after Tenant's Work Completion Date. A-6 10. MISCELLANEOUS. (a) Tenant hereby appoints Otis H. Halleen as Tenant's representative in connection with the matters set forth in this Work Letter and such person has and shall have full authority and responsibility to act on behalf of Tenant and to make all decisions and determinations as may be necessary or desirable in connection with preparing the Demised Premises for the operation of Tenant's business therein. Tenant shall inform Landlord in writing of any change in Tenant's representative. (b) Tenant's obligation to pay Fixed Rent and Additional Rent with respect to the Demised Premises during the Extended Term shall commence on June 1, 1997 irrespective of the status of completion of the Tenant's Work. (c) This Work Letter shall not be deemed applicable to any additional space added to the original Demised Premises at any time or from time to time or to any portion of the original Demised Premises or any additions thereto in the event of a renewal or extension of the initial term of the Lease unless expressly so provided in the Lease or any amendment or supplement thereto signed by both Landlord and Tenant. (d) The failure by Tenant to pay any monies due Landlord pursuant to this Work Letter within the time period herein stated shall deemed an Event of Default under the terms of the Lease for which Landlord shall be entitled to exercise all remedies available to Landlord for nonpayment of rent. All late payments shall be subject to a service charge pursuant to Articles Q-16 and Q-17 of the Lease. (e) This Work Letter is expressly made a part of the Lease and is subject to each and every term and condition thereof, including, without limitation, the limitations on liability set forth therein. (f) Tenant shall be solely responsible to determine at the site all dimensions of the Demised Premises and the Building in which the Demised Premises are located which affect any work to be performed by Tenant hereunder. A-7 IN WITNESS WHEREOF, the parties have executed this Work Letter as of the 23rd day of January, 1997. LANDLORD: ERI-CP, INC., a Delaware corporation By: LaSalle Advisors Limited, its duly authorized agent By: Name: K. C. Woodrow Title: Managing Director TENANT: UNITED STATIONERS SUPPLY CO., an Illinois corporation By: Name: Executive Vice President and Title: Chief Financial Officer A-8 EX-10.114 6 AGREEMENT EXHIBIT 10.114 AGREEMENT This AGREEMENT (the "Agreement"), made and entered into as of the 18th day of November, 1996, by and between THOMAS W. STURGESS ("Sturgess") and UNITED STATIONERS SUPPLY CO., an Illinois corporation (sometimes hereinafter referred to as "Supply") and UNITED STATIONERS INC., a Delaware corporation (sometimes hereinafter referred to as "Parent" and, together with Supply, sometimes hereinafter collectively referred to as the "Company"). WITNESSETH WHEREAS, the Company and Sturgess are parties to that certain Employment Agreement dated as of January 1, 1996, (the "Employment Agreement"); WHEREAS, Company and Sturgess desire to terminate Sturgess's employment with Company under the Employment Agreement upon the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual premises herein contained and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. RESIGNATION; TERMINATION OF EMPLOYMENT; SERVICES AS DIRECTOR. Sturgess acknowledges that as of November 18, 1996, he has resigned as (i) an officer (including the offices of President, Chairman of the Board and Chief Executive Officer of Parent) and employee of Company, (ii) an officer, director and employee of all subsidiaries of Parent (including Supply). whether or not wholly owned by Company and whether owned directly or indirectly by Company (collectively, the "Subsidiaries") and (iii) a member of any committees on which he may have served for any of the Subsidiaries. The Employment Agreement and any other understandings or agreements between the Company or any Subsidiary are hereby terminated and of no further force and effect, except as otherwise expressly set forth herein. Sturgess shall continue to serve as a member of the Board of Directors of Parent until his successor is elected and duly qualified or until removed in accordance with the bylaws of the Company. Unless mutually agreed or unless requested by an appropriate officer of the Company, Sturgess agrees not to take or attempt to take any further action on behalf of or purportedly on behalf of the Company or any Subsidiary, except in his capacity as a member of the Board of Directors of the Company. 2. BENEFITS. In consideration of his covenants herein contained, Sturgess will receive the following payments, all of which will be subject to applicable federal and state withholding taxes: a. SALARY. The Company agrees to pay to Sturgess his current base salary at the annual rate of $495,000, in accordance with the Company's normal payment schedule for senior executives, through December 31, 1996. b. BONUS. The Company agrees to pay to Sturgess the bonus Sturgess would have received in respect of fiscal year 1996 under Section 2(c) of the Employment Agreement if Sturgess had continued as an employee of the Company under the Employment Agreement through December 31, 1996. c. ACCRUED VACATION. The Company agrees to pay to Sturgess in accordance with the Company's customary policies for his earned unused vacation time through the date hereof. Such payment will be made by the Company to Sturgess within 10 days of the date hereof. d. OTHER BENEFITS. Sturgess will be permitted to participate in the Company's medical and dental plans in which Sturgess currently participates to the extent such plans remain in effect (and in any plan which replaces any such plan which is discontinued) at regular rates until December 31, 1999, provided Sturgess is eligible to participate under the terms of such plans, and in the event Sturgess is not eligible to participate in any such plan, the Company shall use its best efforts to provide substantially similar coverages for Sturgess. All other employee benefits for Sturgess, including, without limitation, any of the benefit plans, programs and policies set forth on Exhibit A to the Employment Agreement not expressly continued pursuant to this Agreement, shall cease on the date hereof. 3. OPTIONS. a. CANCELED OPTION. Sturgess agrees that the option for 120,000 shares of Company Common Stock referenced in Section 9 of the Employment Agreement shall terminate effective as of the date hereof and such option is hereby canceled and shall be of no further force and effect. b. CONTINUED OPTION. The option for 240,000 shares of Company Common Stock referenced in Section 8 of the Employment Agreement shall remain in effect, in accordance with the terms of that certain Management Equity Plan Stock Option Agreement, dated January 1, 1996 (the "Stock Agreement"), as such Stock Agreement is amended as hereinafter set forth, which amendments have been approved by the Compensation Committee of the Company's Board of Directors and are hereby agreed to by Sturgess: A. Clauses (i), (ii) and (iii) of Section 3 of the Stock Agreement are hereby deleted and the following new clauses (i) and (ii) are substituted therefor: "(i) Options for 160,000 shares after the occurrence of an Event; and (ii) Options for 80,000 shares on or after the earliest date, if any, that both (1) the Company shall, on or prior to September 30, 1997, have acquired, been acquired by, entered into a joint venture with or otherwise engaged in a business combination with, an entity designated in writing as an "entity" for the purposes of the application of this Section 3(ii) by the Compensation Committee of the Board of Directors of the Company; provided that a definitive agreement with respect to such transaction shall have been entered into by the Company and such entity not later than March 31, 1997; and (2) an Event has occurred. B. Section 5 of the Stock Agreement is hereby deleted. 4. COOPERATION AND CONSULTING SERVICES. From and after the date hereof through December 31, 1999, Sturgess shall cooperate and consult reasonably on a non-full-time basis with the Company and its employees, agents and representatives to assist the businesses and operations of the Company, including. without limitation, cooperation with the transition of management. Such cooperation shall also include, without limitation, Sturgess' provision of any information (in connection with legal proceedings or otherwise) relating to his activities while an employee of the Company. Compensation for such cooperation and consulting services provided hereunder shall be determined on a project by project basis and on the basis of good faith negotiations between the Company and Sturgess. 5. CONFIDENTIAL INFORMATION. a. GENERAL. Sturgess acknowledges the Company's exclusive ownership of all information useful in the Company's business (including its dealings with suppliers, customers and other third parties, whether or not a true "trade secret"), which at the time or times concerned is not generally known to persons engaged in businesses similar to those conducted by the Company and which has been or is from time to time disclosed to, discovered by, or otherwise known by Sturgess as a consequence of his prior employment by or future consulting services to the Company or service on the Board of Directors of the Company (including information conceived, discovered or developed by Sturgess during his employment with or engagement as consultant by the Company or with Associated Stationers, Inc. or service on the Board of Directors of (i) The identity, purchase and payment patterns of, and special relations with, the Company's customers; (ii) The identity, net prices and credit terms of, and special relations with, the Company's suppliers; (iii) The Company's inventory selection and management techniques; (iv) The Company's product development and marketing plans; and (v) The Company's finances, except to the extent publicly disclosed. b. PROPRIETARY MATERIALS. The term "Proprietary Materials" shall mean all business records, documents, drawings, writings, software, programs and other tangible things which were or are created or received by or for the Company in furtherance of its business, including, by or but not limited to, those which contain Confidential Information. For example, Proprietary Materials include, but are not limited to the following especially sensitive types of materials: applications software, the data bases of Confidential Information maintained in connection with such software, and printouts generated from such data bases; market studies and strategic plans; customer, supplier and employee lists; contracts and correspondence with customers and suppliers; documents evidencing transactions with customers and suppliers; sales calls reports, appointment books, calendars, expense statements and the like, reflecting conversations with any company, customer or supplier, architectural plans; and purchasing, sales and policy manuals. Proprietary Materials also include, but are not limited to, any such things which are created by Sturgess or with Sturgess' assistance and all notes, memoranda and the like prepared using the Proprietary Materials and/or Confidential Information. c. INVENTIONS. While some of the information contained in Proprietary Materials may have been known to Sturgess prior to employment with the Company, or may now or in the future be in the public domain, Sturgess acknowledges that the compilation of that information contained in the Proprietary Materials has or will cost the Company a great effort and expense, and affords persons to whom Proprietary Materials are disclosed, including Sturgess, a competitive advantage over persons who do not know the information or have the compilation of the Proprietary Materials. Sturgess further acknowledges that Confidential Information and Proprietary Materials include commercially valuable trade secrets and automatically become the Company's exclusive property when they are conceived, created or received. Sturgess shall report to the Company fully and promptly, orally (or, at the Company's request, in writing) all discoveries, inventions and improvements, whether or not patentable, and all other ideas, developments, processes, techniques, designs and other information which may be of benefit to the Company, which Sturgess conceived, made or developed during his employment with the Company or conceives, makes or develops in connection with the provisions of any consulting services on behalf of the Company (whether or not during working hours or with the use or assistance of Company facilities, materials or personnel, and which either (i) relate to or arise out of any part of the Company's business in which Sturgess participates, or (ii) incorporate or make use of Confidential Information or Proprietary materials) (all items referred to in this Section 5(c) being sometimes collectively referred to herein as the "Intellectual Property") All Intellectual Property shall be deemed Confidential Information of the Company, and any writing or other tangible things describing, referred to, or containing Intellectual Property shall be deemed the Company's Proprietary Materials. At the request of the Company, during or after the term of employment or consultancy, Sturgess (or after Sturgess' death, Sturgess' personal representative) shall, at the expense of the Company, make, execute and deliver all papers, assignments, conveyances, installments or other documents, and perform or cause to be performed such other lawful acts, and give such testimony, as the Company deems necessary or desirable to protect the Company's ownership rights and Intellectual Property. d. CONFIDENTIAL DUTIES. Sturgess shall, except as may be required by law, during the term of service on the Company's Board of Directors or engagement as a consultant by the Company, and thereafter for the longest time permitted by applicable law: (i) Comply with all of the Company's instructions (whether oral or written) for preserving the confidentiality of Confidential Information and Proprietary Materials. (ii) Use Confidential Information and Proprietary Materials only at places designated by the Company, in furtherance of the Company's business, and pursuant to the Company's directions. (iii) Exercise appropriate care to advise other employees of the Company (and, as appropriate, subcontractors) of the sensitive nature of Confidential Information and Proprietary Materials prior to their disclosure, and to disclose the same only on a need-to-know basis. (iv) Not copy all or any part of Proprietary Materials, except as the Company directs. (v) Not sell, give, loan or otherwise transfer any copy of all or any part of Proprietary Materials to any person who is not an employee of the Company, except as the Company directs. (vi) Not publish, lecture on or otherwise disclose to any person who is not an employee of the Company, except as the Company directs, all or any part of Confidential Information or Proprietary Materials. (vii) Not use all or any part of any Confidential Information or Proprietary Materials for the benefit of any third party without the Company's written consent. Upon the termination of Sturgess' consultation and board services for whatever reason, Sturgess (or in the event of death, Sturgess' personal representative) shall promptly surrender to the Company the original and all copies of Proprietary Materials (including all notes, memoranda and the like concerning or derived therefrom), whether prepared by Sturgess or others, which are then in Sturgess' possession or control. Records or payments made by the Company to or for the benefit of Sturgess, Sturgess' copy of this Agreement and other such things lawfully possessed by Sturgess which relate solely to taxes payable by Sturgess, benefits due to Sturgess or the terms of Sturgess' prior employment with the Company, shall not be deemed Proprietary Materials for purposes of this Section 5. 6. NON-COMPETITION. a. During Sturgess' service as a consultant hereunder, and during the two year period following the expiration of such period of service as a consultant), Sturgess shall not, in any way, directly or indirectly, (i) manage, operate, control (or participate in any of the foregoing), accept employment or a consulting position with or otherwise advise or assist or be connected with or directly or indirectly own or have any other interest in or right with respect to (other than through ownership of not more than 1 % of the outstanding shares of a corporation's stock which is listed on a national securities exchange) any enterprise (other than for the Company or for the benefit of the Company) which is a wholesaler of office products having annual sales in excess of $1 ,000,000 or (ii) take any non-privileged action, disparage, dissipate or negatively affect the goodwill, business, prospects, or reputation of the Company or its relationships with its employees, customers, suppliers. competitors, vendors, stockholders, lenders, prospective investors, prospective purchasers of any businesses or assets of the Company or others. b. Notwithstanding Section 6(a), following the date hereof, Sturgess may be engaged in the business of selling office products at retail and Sturgess may be engaged by any company whose principal business is the manufacture of office products. c. Sturgess recognizes that the foregoing limitations are reasonable and properly required for the adequate protection of the business of the Company. If any such limitations are deemed to be unreasonable by a court having jurisdiction of the matter and parties, Sturgess hereby agrees and submits to the reduction of any such limitations or such territory or time as to such court shall appear reasonable. d. If Sturgess shall be in violation of any of the foregoing restrictive covenants and if the Company seeks relief from such breach in any court or other tribunal, such covenants shall be extended for a period of time equal to the pendency of such proceedings, including all appeals. e. Sturgess agrees that the remedy at law for any breach of the provisions of Section 5 or this Section 6 shall be inadequate and that the Company shall be entitled to injunctive relief in addition to any other remedies it may have. 7. REPRESENTATIONS AND WARRANTIES OF STURGESS. Sturgess has the full right, power and authority to enter into this Agreement. This Agreement has been duly and validly executed and delivered by Sturgess and constitutes a valid and binding obligation on his part, enforceable against him in accordance with its terms. The execution, delivery and performance of this Agreement will not, with or without the giving of notice or the passage of time or both, (a) violate any judgment, injunction or order of any court, arbitrator or governmental agency applicable to Sturgess, or (b) conflict with, result in the breach of any provision of or constitute a default under any agreement or instrument to which Sturgess is a party or by which he may be bound. 8. REPRESENTATIONS AND WARRANTIES OF COMPANY. Parent and Supply hereby represent and warrant that they are corporations duly organized and validly existing in good standing under the laws of the State of Delaware and Illinois, respectively, and have all requisite corporate power and authority to enter into and perform all of its obligations under this Agreement. The execution, delivery and performance of this Agreement by the Company and all the transactions contemplated hereby have been duly authorized by all necessary corporate action on its part. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation on its part, enforceable against it in accordance with its terms. The execution, delivery and performance of this Agreement will not, with or without the giving of notice or the passage of time or both, (a) violate any judgment, injunction or order of any court, arbitrator or governmental agency applicable to the Company, or (b) conflict with, result in the breach of any provision of or constitute a default under any agreement or instrument to which the Company is a party or by which it may be bound. 9. RELEASE. Effective immediately, Sturgess releases and discharges the Company, each subsidiary and affiliate of the Company and each present and former director, officer and employee of the Company or any subsidiary or affiliate of the Company (collectively "Company Affiliates") from all manner of claims, actions, causes of action or suits, in law or in equity, which Sturgess has or hereafter can, shall or may have against the Company or Company Affiliates or any of them by reason of any matter, cause or thing whatsoever, arising out of an event or matter occurring prior to the date hereof, including any action arising from or during his employment with the Company, resulting from his termination of such employment or related to his status as a shareholder, officer, employee or participant in any Company employee benefit plan, except for any claims or action Sturgess may have that results from a breach of the Company's obligations under this Agreement or a failure by the Company to perform its obligations under this Agreement. From and after the date hereof, Sturgess agrees and covenants not to sue or initiate arbitration, or threaten suit or arbitration against, or make any claim against, the Company or any Company Affiliate for or alleging any of the claims, actions, causes of action or suits as discussed above. Sturgess acknowledges that this release includes but is not limited to all claims arising under federal, state or local laws prohibiting employment discrimination and all claims growing out of any legal restrictions on the Company's right to terminate its employees. This release specifically encompasses all claims of employment discrimination based on race, color, religion, sex, handicap and national origin, as provided under Title VII of the Civil Rights Act of 1964, as amended, the 1991 Civil Rights Act, all claims of discrimination based on age, as provided under the Age Discrimination in Employment Act of 1967, as amended, all claims of discrimination based on handicap, as provided in the Americans with Disabilities Act, as amended. Notwithstanding anything hereto to the contrary, Sturgess shall not be deemed to have released the Company's obligation to Sturgess, if any, under indemnification provisions of the Company's charter or bylaws, whether or not covered by insurance, or any rights Sturgess may have under any directors' and officers' liability policy. Nothing herein shall limit Sturgess's ability to seek contribution from directors for liabilities for claims brought by third parties who are unrelated to Sturgess. The Company and the Company Affiliates hereby release Sturgess from all claims, actions, causes of action or suits, in law or in equity, which the Company or the Company Affiliates have or hereafter can, shall or may have against Sturgess by reason of any matter, cause of action or thing whatsoever, arising out of an event or matter occurring prior to the date hereof, including any alleged breach by Sturgess of the Employment Agreement or based on his actions as an employee, officer or director of the Company or a Company Affiliate, except for matters relating to a breach of fiduciary duty by Sturgess of which the Company is not now aware. 10. MISCELLANEOUS. a. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and Sturgess, his heirs, personal representatives, successors and assigns. b. SURVIVAL. All representations and warranties contained in this Agreement shall survive the execution and delivery hereof. c. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to injunctive relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they are entitled under this Agreement or at law or in equity. In addition, a party that is required to enforce the terms and provisions of this Agreement and is successful therein shall be reimbursed by the other party for all costs and expenses, including reasonable legal fees, that it may incur with respect to such enforcement. d. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Company and Sturgess relating to the subject matter hereof and there are no terms other than those contained herein. This Agreement may not be modified or amended except in a writing signed by the parties hereto. e. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without giving effect to principles of conflicts of law. f. COUNTERPARTS. This Agreement may be executed in counterparts, which together shall constitute one and the same agreement. g ENFORCEABILITY. If any provision of this Agreement shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all jurisdictions, because it conflicts with any provisions of any constitution, statute, rule or public policy, or for any reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions of this Agreement invalid, inoperative or unenforceable to any extent whatever. If any provision of this Agreement shall be held or deemed to impose restrictions which are too broad, too lengthy or otherwise unreasonable, the parties hereto agree to be bound by a court's decision as to what restrictions would be reasonable and acknowledge that such court has the authority and discretion to make such a determination. h. ACKNOWLEDGMENT BY STURGESS. Sturgess hereby acknowledges that he has carefully read and fully understands all the provisions of this Agreement. He further acknowledges that this Agreement sets forth the entire agreement between himself and the Company with respect to the subject matter of this Agreement. Finally, Sturgess hereby acknowledges that, in considering whether to sign this Agreement, he has not relied upon any representation or statement, written or oral, not set forth in this Agreement and that he has not been threatened or coerced into signing this Agreement by any official of the Company and that he has read, understood, and fully and voluntarily accepts the terms of this Agreement. i. CAPTIONS. The captions herein are for purposes of identification only and shall not be considered in construing this Agreement. j. NOTICES. All notices hereunder shall be given in writing and sent to the party for whom such is intended by hand delivery or United States certified or registered mail, return receipt requested, postage prepaid, or overnight courier service, addressed to the party for whom intended at the following respective addresses; If to the Company: United Stationers Supply Co. 2200 East Golf Road Des Plaines, IL 60016 Attn: Executive Vice President and Chief Financial Officer If to Sturgess: Thomas W. Sturgess c/o Wingate Partners 750 North St. Paul/Suite #1200 Dallas, TX 75201 or to such other persons and/or at such other addresses as may be designated by written notice served in accordance with the provisions hereof. Such notices shall be deemed to have been served, if hand delivered, on the day delivered, and if mailed, on the third day following the date deposited in the mail. Urgent notices shall be given by Telex or cable to the same addresses and confirmed by mail as provided above. All notices sent by Telex or cable shall be deemed to have been served upon receipt of the Telex or cable, but only if in fact confirmed by mail promptly after dispatch of the Telex or cable. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. UNITED STATIONERS INC. UNITED STATIONERS SUPPLY CO. By: /s/ F. B. Hegi, Jr. ------------------- Name: F. B. HEGI, JR. Title: CHAIRMAN, EXECUTIVE COMMITTEE /s/ Thomas W. Sturgess --------------------- THOMAS W. STURGESS EX-10.115 7 LEASE AGREEMENT Exhibit 10.115 L E A S E A G R E E M E N T STATE OF TEXAS COUNTY OF HARRIS This Lease Agreement is made and entered into by and between AMBERJACK LIMITED PARTNERSHIP, a Texas Limited Partnership, hereinafter referred to as "Landlord", and UNITED STATIONERS SUPPLY CO., AN ILLINOIS CORPORATION, hereinafter referred to as "Tenant". W I T N E S S E T H: 1. PREMISES and TERM In consideration of the obligation of Tenant to pay rent as herein provided, and in consideration of the other terms, provisions and covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant hereby takes from Landlord certain premises situated within the County of Harris, State of Texas, more particularly described on Exhibit "A" attached hereto and incorporated herein by reference, and as follows: Approximately 23,600 square feet of office/warehouse space located in building "A" containing approximately 138,800 square feet and situated on a tract of land out of the John Flowers Survey, Abstract 269, Houston, Harris County, Texas, and being more particularly described on Exhibit "A" attached hereto and made a part hereof. The address of this facility is 6600 Long Point Road, Suite 140, Houston, Texas 77055. together with all rights, privileges, easements, appurtenances and immunities belonging to or in any way pertaining to the premises and together with the building and other improvements situated or to be situated upon said premises (said real property, building and improvements being hereinafter referred to as the "Premises"). TO HAVE AND TO HOLD the same for a term commencing on the "commencement date" as March 1 1997, and ending eighteen (18) months thereafter; provided, however, that in the event the "commencement date" is a date other than the first day of a calendar month, said term shall extend for said number of months in addition to the remainder of the calendar month following the "commencement date". Tenant acknowledges that no representations as to the repair of the Premises have been made by Landlord, unless such are expressly set forth in this lease. After such "commencement date" Tenant shall, upon demand, execute and deliver to Landlord a letter of acceptance of delivery of the Premises. In the event of any dispute as to substantial completion or work performed or required to be performed by Landlord, the certificate of Landlord's architect or general contractor shall be conclusive. 2. BASE RENT and SECURITY DEPOSIT A. Tenant agrees to pay to Landlord rent for the Premises, in advance, without demand, deduction or set off, for the entire term hereof as follows: Month 1 to month 18 will be paid in equal monthly payments of Five Thousand Nine Hundred Sixty-eight Dollars ($5,968.00). One such monthly installment, plus monthly common area maintenance payments, shall be due and payable on the date hereof and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the commencement date recited above during the hereby demised term, except that the rental payment for any fractional calendar month at the commencement or end of the lease period shall be prorated. Failure by Tenant to pay any one monthly installment of rent by the fifth (5th) day from the date such payment was due shall be considered an event of default in accordance with the provisions of Paragraph 18(a) of this Lease Agreement. Upon such failure by Tenant to pay any rental installment within five (5) days of when such installment is due, Tenant shall pay to Landlord, on demand, a late charge in an amount equal to five percent (5%) of such installment. Failure to pay such late charge within ten (10) days after demand shall likewise be considered an event of default hereunder. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. B. Tenant agrees to pay to Landlord, as additional rental, all charges for any services, goods, or materials furnished by Landlord at Tenant's request which are not required to be furnished by Landlord under this lease (as well as all other sums payable by Tenant hereunder) within ten (10) days after Landlord renders a statement therefor to Tenant. All past due additional rental amounts shall bear interest from the date due until paid at the maximum rate allowed by law. C. In addition, Tenant agrees to deposit with Landlord on the date hereof the sum of Six Thousand Six Hundred Eight Dollars ($6,608.00), which sum shall be held by Landlord, without obligation for interest, as security for the performance of Tenant's covenants and obligations under this lease, it being expressly understood and agreed that such deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law, use such fund to the extent necessary to make good any arrears of rent or other payments due Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default; and Tenant shall pay to Landlord, on demand, the amount so applied in order to restore the security deposit to its original amount. Although the security deposit shall be deemed the property of Landlord, any remaining balance of such deposit shall be returned by Landlord to Tenant within thirty (30) days after termination of this lease, providing that all of Tenant's obligations under this lease have been fulfilled. 3. USE The demised Premises shall be used only for the purpose of receiving, storing, shipping and selling (other than retail) products, materials and merchandise made and/or distributed by Tenant and for such other lawful purposes as may be incidental thereto. Outside storage, including, without limitation, trucks and other vehicles, is prohibited without Landlord's prior written consent. Tenant shall obtain, at its own cost and expense, any and all licenses and permits necessary for any such use. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the Tenant's use of the Premises, and shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of nuisances caused by Tenant in, upon, or in connection with the Premises, all at Tenant's sole expense. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the Premises, nor take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the building in which the Premises are situated or unreasonably interfere with their use of their respective Premises. Without Landlord's prior written consent, Tenant shall not receive, store or otherwise handle any product, material or merchandise which is explosive or highly inflammable. Tenant will not permit the Premises to be used for any purpose or in any manner (including, without limitation, any method of storage) which would render the insurance thereon void or the insurance risk more hazardous or cause the State Board of Insurance or other insurance authority to disallow any sprinkler credits. 4. TAXES * A. Landlord agrees to pay, before they become delinquent, all taxes, assessments, and governmental charges of any kind and nature whatsoever (hereinafter collectively referred to as "taxes") lawfully levied or assessed against the building and the grounds, parking areas, driveways and alleys around the Building. If the Tenant's proportionate share of taxes levied or assessed against the Building and the grounds, parking areas, driveways and alleys around the Building during a real estate tax year, occurring within the term hereof or during any renewal or extension of this term, shall exceed an amount equal to the actual cost for this expense for the calendar year 1997 or $64,630.00, which is the total estimated taxes for the entire building of which Tenant's prorated share at 17.0028% is $10,989.00, Tenant shall pay to Landlord as additional rental, upon demand, the amount of such excess. In the event any such amount is not paid within ten (10) days after the date of Landlord's invoice to Tenant, the unpaid amount shall bear interest from the date due until paid at the maximum interest rate allowed by law. * SEE SPECIAL PROVISIONS EXHIBIT "C" ATTACHED HERETO AND MADE A PART HEREOF B. Tenant's "proportionate share", as used in this lease, shall mean a fraction, the numerator of which is the space contained in the Premises and the denominator of which is the entire space contained in the building(s). C. If at any time during the term of this lease the present method of taxation shall be changed so that in lieu of the whole or any part of any taxes, assessments or governmental charges levied, assessed or imposed on real estate and the improvements thereon, there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or a franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents for the present or any future building(s) on the Premises, then all such taxes, assessments, levies or charges or the part thereof so measured or based, shall be deemed to be included within the term "taxes" for the purposes hereof. D. The Landlord shall have the right to employ a tax consulting firm to attempt to assure a fair tax burden on the building and grounds within the applicable taxing jurisdiction. Tenant shall pay to Landlord the amount of Tenant's "proportionate share" (as defined in subparagraph 4.B above) of the cost of such service. E. Any payment to be made pursuant to this Paragraph 4 with respect to the real estate tax year in which this lease commences or terminates shall be prorated. F. Tenant shall pay all ad valorem and similar taxes or assessments levied upon or applicable to all equipment, fixtures, furniture, and other property placed by Tenant in the Premises and all license and other fees or charges imposed on the business conducted by Tenant on the Premises. It is agreed that Tenant will also be responsible for ad valorem taxes on the value of leasehold improvements to the extent that such leasehold improvements exceed standard building allowances. 5. LANDLORD'S REPAIRS Landlord shall, at his expense, maintain only the roof, foundation, and the structural soundness of the exterior walls of the building in good repair, reasonable wear and tear excepted. Tenant shall repair and pay for any damage caused by the negligence of Tenant, or Tenant's employees, agents or invitees, or caused by Tenant's default hereunder. The term "walls" as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries. Tenant shall promptly give Landlord written notice of defect or need for repairs, after which Landlord shall have reasonable opportunity to repair same or cure such defect. Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible under any of the provisions of this lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. 6. TENANT'S REPAIRS A. Tenant shall, at its own cost and expense, keep and maintain all parts of the Premises (except those for which Landlord is expressly responsible under the terms of this lease) in good condition, reasonable wear and tear excepted - See Exhibit "C", paragraph 28.f, promptly making all necessary repairs and replacements, including, but not limited to, windows, glass and plate glass, doors, special store fronts or office entries, interior walls and finish work, floors and floor covering, downspouts, gutters, truck doors, dock bumpers, paving (not to exceed S2,000.00/year and is part of common area services), plumbing work and fixtures, termite and pest extermination, regular removal of trash and debris, keeping the parking areas, driveways, alleys and the whole of the Premises in a clean and sanitary condition. Tenant shall not be obligated to repair any damage caused by fire, tornado or other casualty covered by the insurance to be maintained by Landlord pursuant to subparagraph 13.A below, except that Tenant shall be obligated to repair all wind damage to glass, except with respect to tornado or hurricane damage. B. Tenant shall not damage any demising wall or disturb the integrity and support provided by any demising wall and shall, at its sole cost and expense, promptly repair any damage or injury to any demising wall caused by Tenant or its employees, agents or invitees. C. Tenant and its employees, customers and licensees shall have the right to use the parking areas, if any, as may be designated by Landlord in writing, subject to such reasonable rules and regulations as Landlord may from time to time prescribe and subject to rights of ingress and egress of other tenants. Landlord shall not be responsible for enforcing Tenant's parking rights against any third parties. Landlord reserves the right to perform the paving and landscape maintenance, exterior painting, common sewage line plumbing, and care for the grounds around the Building, and Tenant shall be liable for its proportionate share (as defined in subparagraph 4.B above) of the cost and expense. If Tenant or any other particular tenant of the Building can be clearly identified as being responsible for obstructions or stoppage of the common sanitary sewage line, then Tenant, if Tenant is responsible, or such other responsible tenant, shall pay the entire cost thereof, upon demand, as additional rent. Tenant shall pay, when due, its share, determined as aforesaid, of such costs and expenses along with the other tenants of the building to Landlord upon demand, as additional rent, for the amount of its share as aforesaid of such costs and expenses in the event Landlord elects to perform or cause to be performed such work. In the event any such amount is not paid within ten (10) days after the date of Landlord's invoice to Tenant, the unpaid amount shall bear interest from the date due until paid at the maximum interest rate allowed by law. 7. COMMON AREA MAINTENANCE * A. Tenant agrees to pay Landlord $0.0271 per square foot per month as its estimated share of the common area services which are provided by Landlord for the mutual benefit of all tenants, including all expenses incurred by Landlord with respect to the maintenance and operation of the building and/or project of which the Premises are a part. These services may include, but are not limited to, general landscaping, mowing of grass, care of shrubs (including replacement of expired plants); operation and maintenance of lawn sprinkler system; operation and maintenance of exterior lighting; water service and sewer charges; repainting of exterior surfaces of truck doors, handrails, downspouts, and other parts of the building which require periodic preventive maintenance; parking lot maintenance; pro rata share of the project's common area maintenance and monitoring service; and a management fee equal to 3% of the gross rental due under this lease, payable monthly. * SEE SPECIAL PROVISIONS EXHIBIT "C" ATTACHED HERETO AND MADE A PART HEREOF B. The actual cost of these services, other than Tenant's management fee, shall be prorated among tenants on the basis of square footage occupied in the same manner as provided in subparagraph 4.B above. Landlord shall send Tenant an annual statement of actual common area service costs, along with either an invoice or a rebate for the amount that Tenant's actual proportionate share exceeded or was less than Tenant's $0.0271 per square foot per month common area service payment for the year then ended. Tenant agrees to reimburse Landlord within thirty (30) days after receipt of such invoice from Landlord. Subject to Landlord's reasonable discretion, this monthly common area service charge may be renegotiated periodically based upon increases in Landlord's annual cost of providing these services, provided, however, that at no time during the term of this lease shall an increase, if any, in the monthly common area service charge payable by Tenant, hereunder, exceed an aggregate of 5% per year cumulative as calculated on an annual basis. 8. ALTERATIONS Tenant shall not make any alterations, additions or improvements to the Premises (including, but not limited to, roof and wall penetrations) without the prior written consent of Landlord. If Landlord consents to Tenant's contractors doing the work, Landlord may require, at Landlord's sole option, that Tenant provide, at Tenant's expense, a lien and completion bond in an amount equal to 1-1/2 times any and all estimated costs of improvements, additions or alterations in the Premises to insure Landlord against any liability or mechanic's and materialmen's lien which may arise in accordance with Paragraph 23 of this Lease Agreement and to insure completion of the work. Tenant may, without the consent of Landlord, but at its own cost and expense and in a good workmanlike manner, erect such shelves, bins, machinery and trade fixtures as it may deem advisable, without altering the basic character of the Building or improvements and without overloading or damaging such Building or improvements, and in each case complying with all applicable governmental laws, ordinances, regulations and other requirements. All alterations, additions, improvements and partitions erected by Tenant shall be and remain the property of Tenant during the term of this lease; and Tenant shall, unless Landlord otherwise elects as hereinafter provided, remove all alterations, additions, improvements and partitions erected by Tenant and restore the Premises to their original condition by the date of termination of this lease or upon earlier vacating of the Premises, provided, however, that, if Landlord so elects, prior to termination of this lease or upon earlier vacating of the Premises, such alterations, additions, improvements and partitions shall become the property of Landlord as of the date of termination of this lease or upon earlier vacating of the Premises and shall be delivered up to the Landlord with the Premises. All shelves, bins, machinery and trade fixtures installed by Tenant may be removed by Tenant prior to the termination of this lease, if Tenant so elects, and shall be removed by the date of termination of this lease or upon earlier vacating of the Premises if required by Landlord. Upon any such removal, Tenant shall restore the Premises to their original condition. All such removals and restoration shall be accomplished in a good workmanlike manner so as not to damage the primary structure or structural qualities of the Buildings and other improvements situated on the Premises. 9. SIGNS Tenant shall have the right to install signs upon the Premises only when first approved in writing by Landlord and subject to any applicable governmental laws, ordinances, regulations, Landlord's standard sign criteria and other requirements. At Landlord's direction, Tenant shall be responsible for the removal of all such signs by the termination of this lease. Such installations and removals shall be made in such a manner as to avoid injury or defacement of the building and other improvements, and Tenant shall be responsible for the repair of any injury or defacement, including, without limitation, discoloration caused by such installation and/or removal. 10. INSPECTION Landlord and Landlord's agents and representatives shall have the right to enter and inspect the Premises at any reasonable time during business hours, on reasonable notice, for the purpose of ascertaining the condition of the Premises or in order to make such repairs as may be required or permitted to be made by Landlord under the terms of this lease. During the period that is six (6) months prior to the end of the term hereof, Landlord and Landlord's agents and representatives shall have the right to enter the Premises at any reasonable time during business hours on reasonable notice, for the purpose of showing the Premises and shall have the right to erect on the Premises a suitable sign indicating the Premises are available. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall arrange to meet with Landlord for a joint inspection of the Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 11. UTILITIES Landlord agrees to provide, at its cost, water, electricity and telephone service connections into the Premises; but Tenant shall pay for all water, gas, heat, light, power, telephone, sewer, sprinkler charges and other utilities and services used on or from the Premises, together with any taxes, penalties, surcharges or the like pertaining thereto and any maintenance charges for utilities, and shall furnish all electric light bulbs and tubes. If any such services are not separately metered to Tenant, Tenant shall pay its proportionate share, as determined by Landlord, of all charges jointly metered with other Premises. Landlord shall in no event be liable for any interruption or failure of utility services on the Premises. 12. ASSIGNMENT and SUBLETTING Tenant shall not have the right to assign this lease or to sublet the whole or any part of the Premises without the prior written consent of Landlord, which consent shall not unreasonably withheld or delayed - - See Exhibit "C", paragraph 28.g. Notwithstanding any permitted assignment or subletting, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent herein specified and for compliance with all of its other obligations under the terms, provisions and covenants of this lease. Upon the occurrence of an "event of default" as hereinafter defined, if the Premises or any part thereof are then assigned or sublet, Landlord, in addition to any other remedies herein provided or provided by law, may, at its option, collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of Tenant's obligations hereunder. Notwithstanding the terms above, Landlord reserves the right to either: 1) enter into a new Lease Agreement with the proposed assignee or subtenant and terminate the lease coincident with occupancy by the new tenant and commencement of the new lease; or, 2) Landlord and Tenant may mutually agree to terminate this lease. 13. FIRE and CASUALTY DAMAGE * A. Landlord agrees to maintain standard fire and extended coverage insurance covering the Building, of which the Premises are a part, in an amount not less than eighty percent (80%) (or such greater percentage as may be necessary to comply with the provisions of any co-insurance clauses of the policy) of the "replacement cost" thereof, as such term is defined in the Replacement Cost Endorsement to be attached thereto insuring against the perils of Fire, Lighting and Extended Coverage, such coverage and endorsements to be as defined, provided and limited in the standard bureau forms prescribed by the insurance regulatory authority for the State of Texas for use by insurance companies admitted in the State of Texas for the writing of such insurance on risks located within the State of Texas. Subject to the provisions of subparagraphs 13.C, 13.D and 13.E below, such insurance shall be for the sole benefit of Landlord and under its sole control. In addition Landlord agrees to maintain general liability coverage insurance in an amount deemed prudent and necessary by Landlord or required by mortgagee presently (or in the future) holding a mortgage and/or deed(s) of trust constituting a lien against the Building of which the Premises are a part. If the annual premiums charged Landlord for insurance exceed the standard premium rates because the nature of the Tenant's operation results in extra hazardous exposure, and if Landlord permits such operations, then Tenant, upon receipt of appropriate premium notices, shall reimburse Landlord for such increase in such premiums as additional rent hereunder. Tenant shall maintain, at its own expense, fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Premises and on all additions and improvements made by Tenant and not required to be insured by Landlord. In addition, Tenant shall reimburse Landlord annually, as additional rent and upon receipt of notice from Landlord, for Tenant's proportionate share of all amounts paid by Landlord for insurance premiums which exceed an amount equal to the actual cost of such premium for the calendar year 1997 or $6,070.00, which is the total estimated insurance for the entire building. Tenant's prorated share at 17.0028% equates to $1,032.00. In the event the Premises constitute a portion of a multiple- occupancy building, Tenant shall be responsible for reimbursing Landlord for Tenant's full proportionate share of such excess, as such share is defined in subparagraph 4.B above. Said payment shall be made to Landlord within ten (10) days after presentation to Tenant of Landlord's statement setting forth the amount due. Any payment to be made pursuant to this subparagraph A with respect to the year in which this lease commences or terminates shall bear the same ratio to the payment which would be required to be made for the full year as the part of such year covered by the term of this lease bears to a full year. In the event any such additional rental amount is not paid within ten (10) days after the date of Landlord's invoice to Tenant, the unpaid amount shall bear interest from the date due until paid at the maximum interest rate allowed by law. * SEE SPECIAL PROVISIONS EXHIBIT "C" ATTACHED HERETO AND MADE A PART HEREOF B. If the buildings situated upon the Premises should be damaged or destroyed by fire, tornado or other casualty, Tenant shall give immediate written notice thereof to Landlord. C. If the buildings situated upon the Premises should be totally destroyed by fire, tornado, or other casualty, or if they should be so damaged thereby that rebuilding or repairs cannot, in Landlord's estimation, be completed within two hundred (200) days after the date upon which Landlord is notified by Tenant of such damage occurs, this lease shall terminate and the rent shall be abated during the unexpired portion of this lease, effective upon the date of the occurrence of such damage. D. If the Building of which the Premises is a part should be damaged by any peril covered by the insurance to be provided by Landlord under subparagraph 13.A above, but only to such extent that rebuilding or repairs can, in Landlord's estimation, be completed within 200 days after the date upon which Landlord is notified by Tenant of such damage, this lease shall not terminate, and Landlord shall, at its sole cost and expense, thereupon proceed with reasonable diligence to rebuild and repair such buildings to substantially the condition in which they existed prior to such damage, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the Premises by Tenant. If the Premises are untenable in whole or in part following such damage, the rent payable hereunder during the period in which they are untenable shall be reduced to such extent as may be fair and reasonable under all of the circumstances. In the event that Landlord should fail to complete such repairs and rebuilding within 200 days after the date upon which Landlord is notified by Tenant of such damage, Tenant may, at its option, terminate this lease by delivering written notice of termination to Landlord as Tenant's exclusive remedy, whereupon all rights and obligations hereunder shall cease and terminate. E. Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Building requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon all rights and obligations hereunder shall cease and terminate. F. Landlord and Tenant each hereby releases the other from any loss or damage to property caused by fire or any other perils insured through or under them by way of subrogation, or otherwise for any loss or damage to property caused by fire or any other perils insured in policies of insurance covering such property, even if such loss or damage shall have been caused by the fault or negligence of the other party or anyone for whom such party may be responsible; provided, however, that his release shall be applicable and in force and effect only with respect to loss or damage occurring during such times in which the releasor's policies contain a clause or endorsement stating that any such release shall not adversely affect or impair said policies or prejudice the right of the releasor to recover thereunder and then only to the extent of the insurance proceeds payable under such policies. Both Landlord and Tenant agree that they will request their insurance carriers to include such a clause or endorsement in their policies. If extra cost shall be charged therefor, each party shall advise the other thereof and of the amount of the extra cost, and the other party, at its election, may pay the same, but shall not be obligated to do so. 14. LIABILITY Landlord shall not be liable to Tenant or Tenant's employees, agents, patrons or visitors, or to any other person whomsoever, for any injury to person or damage to property on or about the Premises, resulting from and/or caused in part or whole by the negligence or misconduct of Tenant, its agents, servants, employees, invitee or of any other person entering upon the Premises, or caused by the buildings and improvements located on the Premises becoming out of repair, or caused by leakage of gas, oil, water or steam or by electricity emanating from the Premises, and Tenant hereby covenants and agrees that it will at all times indemnify and hold safe and harmless the property, the Landlord (including, without limitation, the trustee and beneficiaries if Landlord is a trust), Landlord's agents and employees from any loss, liability, claims, suits, costs, expenses, including, without limitation, attorney's fees and damages, both real and alleged, arising out of any such damage or injury; except injury to persons or damage to property the sole cause of which is negligence of Landlord, or the failure of Landlord to repair any part of the Premises which Landlord is obligated to repair and maintain hereunder within a reasonable time after the receipt of written notice from Tenant of needed repairs. Tenant shall, at Tenant's sole cost and expense, fully insure its property located within the Premises against fire and other casualty, and shall maintain public liability insurance with combined limits of at least $1,000,000. The limits or amounts of said insurance coverage shall not, however, limit the liability of the Tenant hereunder. Tenant shall cause Landlord, and Landlord's Manager, to be named as an additional insured under such public liability insurance policy. In addition, Landlord shall be named as additional insured on the fire and casualty insurance policy which Tenant is required to maintain with respect to Tenant's property located in the Premises. If Tenant shall fail to procure and maintain said insurance, Landlord may, but shall not be required to, procure and maintain same, and in such event, premiums and costs thereof shall be reimbursed and paid by Tenant to Landlord on demand by Landlord. All such policies shall be procured by Tenant from responsible insurance companies satisfactory to Landlord. Certificates of insurance, together with receipt evidencing payment of premiums therefor, shall be delivered to Landlord prior to the commencement date of this lease. Not less than fifteen (15) days prior to the expiration date of any such policies, certificates evidencing the renewals thereof (bearing notations evidencing the payment of renewal premiums) shall be delivered to Landlord. Such policies shall further provide that not less than thirty (30) days written notice shall be given to Landlord before such policy may be canceled or changed to reduce insurance provided thereby. 15. CONDEMNATION A. If the whole or any substantial part of the Premises should be taken for any public or quasi-public use under any governmental law, ordinance or regulation or by right of eminent domain, or by private purchase in lieu thereof and the taking would prevent or materially interfere with the use of the Premises for the purpose for which they are being used, this lease shall terminate and the rent shall be abated during the unexpired portion of this lease, effective when the physical taking of said Premises shall occur. B. If part of the Premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking does not prevent or materially interfere with the use of the Premises, and this lease is not terminated as provided in the subparagraph above, this lease shall not terminate but the rent payable hereunder during the unexpired portion of this lease shall be reduced to such extent as may be fair and reasonable under all of the circumstances. C. In the event of any such taking or private purchase in lieu thereof, Landlord shall be entitled to receive and retain all compensation awarded in any condemnation proceedings. 16. HOLDING OVER Tenant will, at the termination of this lease by lapse of time or otherwise, yield up immediate possession to Landlord. If Landlord agrees in writing that Tenant may hold over after the expiration or termination of this lease, unless the parties hereto otherwise agree in writing on the terms of such holding over, the hold-over tenancy shall be subject to termination by Landlord at any time upon not less than thirty (30) days advance written notice, or by Tenant at any time upon not less than thirty (30) days advance written notice, and all of the other terms and provisions of this lease shall be applicable during that period, except that Tenant shall pay Landlord from time to time upon demand, as rental for the period of any hold-over, an amount equal to two (2) times rent in effect on the termination date, computed on a daily basis for each day of the hold-over period. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this lease except as otherwise expressly provided. The preceding provisions of this paragraph 16 shall not be construed as Landlord's consent for Tenant to hold over. 17. QUIET ENJOYMENT Landlord covenants that it now has, or will acquire before Tenant takes possession of the Premises, good title to the Premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this lease, zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of such property, and easements, restrictions and other conditions of record. In the event this lease is a sublease, then Tenant agrees to take the Premises subject to the provisions of the prior leases. Landlord represents and warrants that it has full right and authority to enter into this lease and that Tenant, upon paying the rental herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the Premises for the term hereof without hindrance or molestation from Landlord, subject to the terms and provisions of this lease. 18. EVENTS OF DEFAULT The following events shall be deemed to be events of default by Tenant under this lease: (a) Tenant shall fail to pay any installment of the rent herein reserved when due, or any payment with respect to taxes hereunder when due, or any other payment or reimbursement to Landlord required herein when due, and such failure shall continue for a period of five (5) days from the date such payment was due after written notice of such default. (b) Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. (c) Tenant shall be adjudged bankrupt or insolvent in proceedings filed against Tenant thereunder. (d) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant. (e) Tenant shall desert or vacate any substantial portion of the Premises. (f) Tenant shall fail to comply with any term, provision or covenant of this lease (other than the foregoing in this Paragraph 18), and shall not cure such failure within fifteen (15) days after written notice thereof to Tenant. 19. REMEDIES Upon the occurrence of any of such events of default described in Paragraph 18 hereof, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: (a) Terminate this lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearage in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part thereof, by force if necessary, without being liable for prosecution or any claim of damages therefor; and Tenant agrees to pay Landlord, on demand, the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise. (b) Enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part thereof, by force if necessary, without being liable for prosecution or any claim for damages therefor, and relet the Premises and receive the rent therefore; and Tenant agrees to pay to the Landlord, on demand, any deficiency that may arise by reason of such reletting. In the event Landlord is successful in reletting the Premises at a rental in excess of that agreed to be paid by Tenant pursuant to the terms of this lease, Landlord and Tenant each mutually agree that Tenant shall not be entitled, under any circumstances, to such excess rental, and Tenant does hereby specifically waive any claim to such excess rental. (c) Enter upon the Premises, by force if necessary, without being liable for prosecution or any claim for damages therefor, and do whatever Tenant is obligated to do under the terms of this lease; and Tenant agrees to reimburse Landlord, on demand, for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action, whether caused by the negligence of Landlord or otherwise. (d) Alter locks and other securing devices at the Premises, without being liable for prosecution or any claim of damages therefor, and such alteration of locks and securing devices shall not be deemed unauthorized or constitute a conversion. Tenant acknowledges that Landlord may require full payment of all sums then due to Landlord under this lease as a condition to Tenant's entitlement to a key to new or altered locks that Landlord may have placed on the leased premises after an Event of Default. (e) Receive payment from Tenant, in addition to any sum provided to be paid above, for any and all of the following expenses for which Tenant shall be considered liable: 1. Broker's fees incurred by Landlord in connection with reletting the whole or any part of the Premises; 2. The cost of removing and storing Tenant's or other occupant's property; 3. The cost of repairing, altering, remodeling or otherwise putting the Premises into condition acceptable to a new tenant or tenants, plus a reasonable charge to cover overhead; and 4. All reasonable expenses incurred by Landlord in enforcing Landlord's remedies. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. No act or thing done by the Landlord or its agents during the term hereby granted shall be deemed a termination of this lease or an acceptance of the surrender of the Premises, and no agreement to terminate this lease or accept a surrender of said Premises shall be valid unless it is in writing and signed by Landlord. No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the other terms, provisions and covenants herein contained. Landlord's acceptance of the payment of rental or other payments hereunder after the occurrence of an event of default shall not be construed as a waiver of such default, unless Landlord so notifies Tenant in writing. Forbearance of default shall not be deemed or construed to constitute a waiver of such default or of Landlord's right to enforce any such remedies with respect to such default of any subsequent default. If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning any of Landlord's rights or remedies hereunder, Tenant agrees to pay any reasonable attorney's fees so incurred. 20. LANDLORD'S LIEN Any statutory lien for rent is not hereby waived, the express contractual lien herein granted being in addition and supplementary thereto. 21. MORTGAGES Tenant accepts this lease subject and subordinate to any mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a lien or charge upon the Premises or the improvements situated thereon; provided, however, that if the mortgagee, trustee or holder of any such mortgage or deed of trust elects to have Tenant's interest in this lease superior to any such instrument, then by notice to Tenant from such mortgagee, trustee or holder, this lease shall be deemed superior to such lien, whether this lease was executed before or after said mortgage or deed of trust. Tenant shall at any time hereafter on demand execute any instruments, releases or other documents which may be required by any mortgagee for the purpose of subjecting and subordinating this lease to the lien of any such mortgage. 22. LANDLORD'S DEFAULT 23. MECHANIC'S LIENS Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord in the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs, and each such claim shall affect and each such lien shall attach to, if at all, only the leasehold interest granted to Tenant by this instrument. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Premises or the improvements thereon, and that it will save and hold Landlord harmless from any and all loss, cost or expenses based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of the Landlord in the Premises or under the terms of this lease. 24. ASSIGNMENT BY LANDLORD Landlord shall have the right to assign or transfer, in whole or in part, every feature of its rights and obligations hereunder and in the Building and leased Premises. Such assignments or transfers may be made to a corporation, trust, trust company, individual or group of individuals, and howsoever made shall be in all things respected and recognized by Tenant. 25. DISCLAIMER This lease and the obligations of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on the part of the Tenant to be performed shall not be affected, impaired or executed because Landlord is unable to fulfill any of its covenants and obligations under this lease, expressly or impliedly to be performed by Landlord, if Landlord is prevented or delayed from doing so by reason of strike, labor troubles, accident, adjustment to insurance, or by any reason or cause whatsoever reasonably beyond Landlord's control. Reasons beyond Landlord's control shall include, but not be limited to, laws, governmental preemption in connection with a National Emergency or by any reason of any rule, order or regulation of any governmental agency, federal, state, county or municipal authority or any department or subdivision thereof, or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. 26. NOTICES Each provision of this instrument or of any applicable governmental laws, ordinances, regulations and other requirements with reference to the sending, mailing or delivery of any notice or the making of any payment by Landlord to Tenant or with reference to the sending, mailing or delivery of any notice or the making of any payment by Tenant to Landlord shall be deemed to be complied with when and if the following steps are taken: (a) All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address hereinbelow set forth or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay rent and any other amounts to Landlord under the terms of this lease shall not be deemed satisfied until such rent and other amounts have been actually received by Landlord. (b) All payments required to be made by Landlord to Tenant hereunder shall be payable to Tenant at the address hereinbelow set forth, or at such other address within the continental United States as Tenant may specify from time to time by written notice delivered in accordance herewith. (c) Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered, whether actually received or not, three (3) days after being deposited in the United States mail, postage prepaid, certified or registered mail return receipt requested, addressed to the parties hereto at the respective addresses set out below, or at such other address as they have theretofore specified by written notice delivered in accordance herewith. Landlord: Tenant: c/o RW Management Company, Inc. United Stationers Supply Co. 8554 Katy Freeway, Suite 300 2200 E. Golf Road Houston, Texas 77024 Des Plaines, IL. 60016 Attn.: President Copy to: General Counsel If and when included within the term "Landlord", as used in this instrument, there is more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address for the receipt of notices and payments to Landlord; if and when included within the term "Tenant", as used in this instrument, there is more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address within the continental United States for the receipt of notices and payments to Tenant. All parties included within the terms "Landlord" and "Tenant", respectively, shall be bound by notices given in accordance with the provisions to this paragraph to the same effect as if each had received such notice. 27. MISCELLANEOUS A. Words of any gender used in this lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. B. The terms, provisions and covenants and conditions contained in this lease shall apply to, inure to the benefit of, and be binding upon the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. Landlord shall have the right to assign any of its rights and obligations under this lease. Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this lease. C. Whenever a clause or provision of this lease requires Landlord's consent or approval, Landlord agrees not to withhold or delay its consent or approval unreasonably. D. The captions inserted in this lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this lease, or any provision hereof, or in any way affect the interpretation of this lease. E. Tenant agrees, if requested in writing by Landlord, to furnish financial statements, bank references, credit references, or any other financial data to Landlord as may be reasonably required to establish Tenant's financial stability and credit-worthiness. Such information will be furnished with 10 days of request. F. This lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. G. All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this lease shall survive the expiration or earlier termination of the term hereof, including, without limitation, all payment obligations with respect to taxes and insurance and all obligations concerning the condition of the Premises. Upon the expiration or earlier termination of the term hereof, and prior to Tenant vacating the Premises, Tenant shall pay to Landlord any amount reasonably estimated by Landlord as necessary to put the Premises, including, without limitation, equipment therein, in good repair. Tenant shall also, prior to vacating the Premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's obligation hereunder for real estate taxes and insurance premiums for the year in which the lease expires or terminates. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant hereunder, with Tenant being liable for any additional costs therefor upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied, as the case may be. Any security deposit held by Landlord shall be credited against the amount payable by Tenant under this Paragraph 27.G. H. If any clause or provision of this lease is illegal, invalid or unenforceable under present or future laws effective during the term of this lease, then and in that event, it is the intention of the parties hereto that the remainder of this lease shall not be affected thereby, and it is also the intention of the parties to this lease that, in lieu of each clause or provision of this lease that is illegal, invalid or unenforceable, there be added as a part of this lease contract a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. I. Because the Premises are on the open market and are presently being shown, this lease shall be treated as an offer with the Premises being subject to prior lease and such offer subject to withdrawal or non-acceptance by Landlord or to other use of the Premises without notice, and this lease shall not be valid or binding unless and until accepted by Landlord in writing and a fully executed copy delivered to both parties hereto. J. All references in this lease to "the date hereof" or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this lease. K. Tenant agrees, from time to time within ten (10) days after request of Landlord, to deliver an estoppel certificate to Landlord or Landlord's designee. Such estoppel certificate shall state that this lease is in full force and effect, the date to which rent has been paid, the unexpired term of this lease and such other matters pertaining to this lease as may be requested by Landlord. L. See Exhibits "A", "B", "C" and "D" attached hereto and made a part hereof. EXECUTED by the parties this day of , 19 _. LANDLORD: Amberjack Limited Partnership By: _________________________________________________ Robert S. Wilson Title: Manager ATTEST: By: _________________________________________________ Janet L. Wilson Title: V.P. for Manager Before me, the above signed authority on this day personally appeared Robert S. Wilson, of RW Management Company, Inc., a Corporation, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, and in the capacity stated. Given under my hand and seal of office on this, the _______ day of __________________, 1997. _______________________________________________ Notary Public, State of Texas, County of Harris TENANT: United Stationers Supply Co., an Illinois corporation By: _______________________________________ Title: ____________________________________ ATTEST: By: _______________________________________ Title: _____________________________________ Before me, the above signed authority on this day personally appeared Daniel Bushell, of United Stationers Supply Co., an Illinois corporation, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, and in the capacity stated. Given under my hand and seal of office on this, the _______day of ____________, 1997. ____________________________________ Notary Public, State of Illinois County of Cook EXHIBIT "A" Legal Description BUILDING A All that certain 5.914 acres of land out of a 31.015 acre tract of land described in a deed dated January 24, 1977 from Longhemp Corp. to I.D.S. Realty Trust filed in the official public records at County Clerk File No. F-037766 out of the John Flowers Survey, Abstract 269, Harris County, Texas and being more particularly described by metes and bounds as follows: Commencing at a 1-1/2" pinched-top pipe found marking the northwest corner of the above mentioned 31.015 acre tract, said pipe located in the southwesterly right-of-way line of the H.& T.C.R.R. (100' wide), thence south 49DEG. 40' 00" East - 1234.76' along said southwesterly right-of-way line to the POINT OF BEGINNING of the herein described tract. THENCE South 49DEG. 40' 00" East - 365.96', continuing with said southwesterly right-of-way line to a point for corner; THENCE South 00DEG. 15' 00" West - 801.65' to a point for corner, located in the north right-of-way line of Long Point Road (60.00' wide); THENCE North 89DEG. 59' 00" West - 280.00' along said north right-of-way line to a point for corner; THENCE North 00DEG. 15' 00" East - 1038.43' to the POINT OF BEGINNING and containing 5.914 acres of land, more or less. EXHIBIT "B" [FLOOR PLAN OF BUILDING] Leased premises approximately 23,600 square feet of space located at 6600 Long Point, Suite 140, Houston, Texas Special Provisions Exhibit "C" - Paragraph 28 a. EARLY OCCUPANCY: In the event Tenant shall occupy the leased premises prior to March 1, 1997, then all of the terms, covenants and conditions of this lease shall be in full force and effect beginning on the date of occupancy. Tenant's rental for the partial month of February, 1997 (if any) shall be prorated at the rate of $220.26 per day; such amount being due and payable upon occupancy by Tenant. b. OCCUPANCY COSTS: Tenant shall pay its proportionate share of projected operating expenses for common area services, providing monitoring services, if any, and reimbursable operating expenses as the actual expenses exceed the amounts specified in Paragraphs 4. and 7. and 13. of the Lease Agreement. As used herein, building(s), Building or Project are synonymous with the total area combined in the one (1) buildings consisting of approximately 138,800 square feet. Tenant's proportionate share of the taxes, insurance, and common area services is 17.0028 %. Tenant agrees to pay Landlord such sums as additional rental upon demand. At the end of each calendar year, or from time to time thereafter, as Landlord may elect, Tenant agrees to pay Landlord as additional rental, upon demand, the amount that the actual Taxes, Insurance and Common Area Maintenance Expenses exceed Tenant's total estimated payments. At the end of each calendar year, or from time to time thereafter, as Landlord may elect, Landlord may raise or lower the estimated amount paid monthly by Tenant, so that Tenant's payments are equal to the projected Taxes, Insurance and Common Area Maintenance Expenses for that calendar year. Effective March 1, 1997, Tenant shall pay monthly Base Rent and estimated payments as follows: Base Rent as set forth in Paragraph 2A $ 5,968.00 Estimated Common Area Service Payment 640.00 -------- Initial Monthly Payment Total $ 6,608.00 c. ADA: The leased premises, excluding uses for retail sales and premises open to the general public, comply fully with (and no notices of violation have been received in connection with) all environmental, air quality, building, health, fire, safety, and governmental or regulatory rules, laws, ordinances, statutes, codes and requirements applicable to the leased premises, including the Americans with Disabilities Act of 1990. However, in the event that through amendment, interpretation or through Tenant's use of the leased premises, modifications to same become necessary to fully comply with the terms and provisions of the Americans with Disabilities Act of 1990, the parties agree that it shall be the sole responsibility of the Tenant to comply with any and all provisions of the Americans with Disabilities Act of 1990, as same may be amended or interpreted in the future, and Tenant agrees to be fully responsible for all expenses related to the tenant improvements or the later modifications of the leased premises and/or the entire entry area of the leased premises during the term of this Lease Agreement. The Tenant further agrees to indemnify and hold the Landlord harmless against any claims which may arise out of Tenant's failure to comply with the Americans with Disabilities Act of 1990. Such indemnification shall include, but shall not be limited to, all fines, fees and penalties, and all legal and other expenses (including attorney's fees), incurred by Landlord and for the costs of collection of the sums due under the terms of this indemnity. d. INDEPENDENT COVENANTS: Landlord shall have no liability by reason of any apparent or latent defect therein. Tenant hereby waives and relinquishes any right to assert, either as a claim or a defense, that Landlord is bound to perform or is liable for the nonperformance of any implied covenant or implied duty of Landlord not expressly set forth in this Lease. Tenant hereby waives any implied warranty by Landlord that the Premises are suitable for their intended commercial purposes and, further acknowledges that the obligations of Tenant under this Lease (including, without limitation, the obligation of Tenant to pay rent) are independent of any such implied warranty and are independent of all other covenants and warranties of Landlord. Tenant agrees to perform all of its obligations under this Lease (including, without limitation, the obligation of Tenant to pay rent) irrespective of any breach or alleged breach by Landlord of any such implied warranty. It is the intent and agreement of Landlord and Tenant that, so long as Tenant has not been wrongfully evicted or constructively evicted from the Premises, the doctrine of independent covenants will apply in all matters relating to this Lease (including, without limitation, the obligation of Landlord to perform Landlord's lease covenants and the obligation of Tenant to pay rent and the other monetary amounts and perform Tenant's other covenants provided under this Lease). e. PRE-OCCUPANCY INSPECTION: Prior to Tenant's occupancy of the Leased Premises, Tenant and Landlord's representative shall conduct an inspection of the Leased Premises to document the existing condition of the space not affected by any work stipulated in the lease documents. Such inspection shall identify the location and condition of any existing damage and/or above ordinary wear and tear that exists in the Leased Premises at the time of Tenant's taking possession of the space. An inspection report will be prepared by the Landlord's representative and submitted to Tenant for execution and acknowledgment. Tenant's acceptance of the Leased Premises shall be subject to the existing condition of the Leased Premises, and Tenant shall not be responsible for restoring any damage/above ordinary wear and tear that existed as of Tenant's occupancy of the Leased Premises, per the pre-occupancy inspection letter agreement. f. WEAR AND TEAR: Pursuant to Paragraph 6. of this Lease Agreement, at the termination of this Lease Agreement, Tenant agrees to surrender the leased premises to Landlord in the same condition as when occupancy was taken by Tenant, ordinary wear & tear excluded. Ordinary wear and tear as described above shall be that condition or conditions which may exist as a result of the use of the leased premises in the ordinary course of business which does not physically alter the character of the leased premises, beyond smudges to the paint, washable blemishes to any wallcoverings, or carpet wear as a result of normal foot traffic. Damages to the leased premises which exceed ordinary wear and tear include but shall not be limited to: 1. Doors: holes, stains, chips, missing hardware, and/or displacement. 2. Overhead Doors: holes, bent panels or tracks, missing or damaged rollers, inoperable condition, and/or missing hardware. 3. Office Walls: holes, stains, unwashable marks and/or gouges. 4. Warehouse Walls: holes, cracks, displacement, gouges, unwashable marks, and/or graffiti. 5. Ceiling Tile: holes, chips, and/or missing. 6. Pipe Bollards and Structural Columns: bent, dented, cracked, and/or displaced. 7. Floors: cracks or gouges caused by Tenant's operation, holes, equipment mounting plates or bolts and/or any unremoved foreign material from the floor surface; i.e. spilled epoxy, glues, oils, etc. 8. Carpet: unremovable stains, mildew, chair wear, and/or tears. 9. Electrical: broken light lenses or lights, chipped electrical outletsor switches, damaged electrical panels, inoperable fixtures, any unremoved electrical conduits, boxes or wiring added by Tenant. 10. Sprinklers: heads damaged or missing; damaged pipes, valves, and/or risers. 11. Warehouse Heaters: missing or damaged thermostats, covers bent or missing, units displaced, vents damaged or missing, gas piping damaged or missing, and/or unit inoperable. 12. Air Conditioning Systems: thermostats missing and/or inoperable, disconnected duct work; dirty air diffusers, coils and/or filters; unit inoperable, improperly serviced and/or not in proper working condition. 13. Exterior Building: bent or displaced downspouts, damaged or missing truck bumpers, any cracks or damages to the exterior wall, any broken or cracked windows, and/or any graffiti. 14. Parking Lot: cracks, gouges, or any damage caused by Tenant's operation. 15. Any equipment or part of the Premises described in Paragraph 6 of the Lease Agreement that is not operational and in proper condition as described therein. g. ASSIGNMENT AND SUBLETTING CRITERIA: i. Pursuant to Paragraph 12 of the lease, Landlord shall look at the following criteria in making a decision as to consenting to any request by Tenant to sublease or assignment of the leased premises, other than to an affiliate or subsidiary of Tenant: (1). Tenant shall, at the time of making such request, not be in default of any of the terms, covenants or conditions of this lease; and (2). The prospective subtenant or assignee's parking shall be no greater than that amount allocated to Tenant; and (3). The prospective subtenant or assignee's credit shall be acceptable to Landlord; and (4). The prospective subtenant or assignee's use of the leased premises shall be compatible with the other tenants in the project and in compliance with the terms of this lease; and (5) If Landlord is in negotiations with a prospective subtenant or assignee prior to Tenant's request to sublease or assign the space, Landlord shall have the right to refuse Tenant's request to sublease or assignment of the leased premises. ii. In the event Landlord consents to a sublease or assignment and is called upon to prepare the necessary documentation, Landlord shall be entitled to a fee of $300.00 for preparation of said documents. This fee shall be apart from, and in addition to, any leasing commissions, renovations, or other costs incidental to the subleasing or assignment of the leased premises. iii. In the event Tenant subleases or assigns the leased premises, Landlord shall be entitled to all net rents in excess of Tenant's monthly rent collected or received by Landlord, less the monthly proration of Tenant's costs for renovations, construction, or direct costs incidental to the subleasing or assignment of the leased premises. h. DEMISING WALL: One boundary of the Leased Premises is defined by the yellow tape attached to the floor and wall. Tenant is not allowed to expand beyond that point and will be monitored by RW Management Company personnel. Should any infraction of this boundary line be detected, Tenant shall be responsible for a full month's rental on the adjacent bay(s) or $1,S12.00/bay. Landlord, at Landlord's sole cost and expense, shall have the option to construct a permanent demising wall at any time during the term of this lease. EXHIBIT "D" HAZARDOUS MATERIAL 1. Tenant shall not cause or permit any Hazardous Material to be brought upon, manufactured, kept, or used in or about the Premises by Tenant, its agents, employees, contractors, or invitees, except for such Hazardous Material as is necessary or useful to Tenant's business and the use of which is expressly approved by Landlord in writing. 2. Any Hazardous Material permitted on the Premises as provided in Section 1, and all containers therefor, shall be used, kept, stored, and disposed of in a manner that complies with all federal, state, and local laws or regulations applicable to this Hazardous Material. 3. Tenant shall not discharge, leak, or emit, or permit to be discharged, leaked, or emitted, any material into the Premises, the building which includes the Premises, the atmosphere, ground, sewer system, or any body of water, if that material (as is reasonably determined by the Landlord, or any governmental authority) does or may pollute or contaminate the same, or may adversely affect (a) the health, welfare, or safety of persons, whether located on the Premises or elsewhere, or (b) the condition, use, or enjoyment of the building or any other real or personal property. 4. At the commencement of each Lease Year, Tenant shall disclose to Landlord the names and approximate amounts of all Hazardous Material that Tenant intends to store, use, or dispose of on the Premises in the coming Lease Year. In addition, at the commencement of each Lease Year, beginning with the second Lease Year, Tenant shall disclose to Landlord the names and amounts of all Hazardous Materials that were actually used, stored, or disposed of on the Premises if those material were not previously identified to the Landlord at the commencement of the previous Lease Year. 5. As used herein, the term "Hazardous Material" means (a) any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; (b) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder; (c) any oil, petroleum products, and their by-products; (d) any substance that is or become regulated by any federal, state, or local governmental authority; and (e) any other ignitable, reactive, corrosive, hazardous, toxic or dangerous substance or material. 6. Tenant hereby agrees that it shall be fully liable for all costs and expenses related to the use, manufacture, storage, and disposal of Hazardous Material kept on the Premises, and the Tenant shall give immediate notice to the Landlord of any violation or potential violation of the provisions of Section 2. Tenant shall defend, indemnify, and hold harmless Landlord, and its agents, and employees from and against all claims, demands, penalties, fines, liabilities, settlements, damages, costs, expenses (including, without limitation, attorneys and consultants fees, court costs, and litigation expenses), or losses (including, without limitation, a decrease in value of the Premises or the land or building on which the Premises are a part, loss or restriction of rentable or usable space) of whatever kind or nature, known or unknown, contingent or otherwise, arising out of or in any way related to (a) the presence, disposal, release, or threatened release of any such Hazardous Material that is on, from, or affecting the soil, water, vegetation, buildings, personal property, persons, animals, or otherwise; (b) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to that Hazardous Material; (c) any lawsuit brought or threatened, settlement reached, or government order relating to that Hazardous Material; (d) any violation of any laws applicable thereto; or (e) any violation of any requirements or provisions of this lease concerning Hazardous Material. The provisions of this Section 6 shall be in addition to any other obligations and liabilities Tenant may have to Landlord at law or equity and shall survive the transactions contemplated herein and shall survive the termination of this lease. TENANT'S RESPONSIBILITY REGARDING HAZARDOUS SUBSTANCES 1. Hazardous Substances. The term "Hazardous Substances", as used in this lease, shall include, without limitations, flammable, explosives, radioactive materials, asbestos, polychlorinated biphenyl (PCB), chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, petroleum and petroleum products, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority. 2. Tenant's Restrictions. Tenant shall not cause or permit to occur: (a) Any violation of any federal, state, or local law, ordinance, or regulation now or hereafter enacted, related to environmental conditions on, under, or about the Premises, or arising from Tenant's use or occupancy of the Premises, including, but not limited to, soil and ground water conditions; or (b) The use, generation, release, manufacture, refining, production, processing, storage, or disposal of any Hazardous Substance on, under or about the Premises, or the transportation to or from the Premises of any Hazardous Substance, except as specifically disclosed on Schedule A to this lease. 3. Environmental Clean-up. (a) Tenant shall, at Tenant's own expense, comply with all laws regulating the use, generation, storage, transportation, or disposal of Hazardous Substances ("Laws"). (b) Tenant shall, at Tenant's own expense, make all submissions to, provide all information required by, and comply with all requirements of all governmental authorities (the "Authorities") under the Laws. (c) Should any Authority or any third party demand that a clean-up plan be prepared and that a clean-up be undertaken because of any deposit, spill, discharge, or other release of Hazardous Substances that occurs during the term of this lease, at or from the Premises, or which arises at any time from Tenant's use or occupancy of the Premises, then Tenant shall, at Tenant's own expense, prepare and submit the required plans and all related bonds and other financial assurances; and Tenant shall carry out all such clean-up plans. (d) Tenant shall promptly provide all information regarding the use, generation, storage, transportation, or disposal of Hazardous Substances that is requested by Owner. If Tenant fails to fulfill any duty imposed under this Paragraph (3) within reasonable time, Owner may do so; and in such case, Tenant shall cooperate with Owner in order to prepare all documents Owner deems necessary or appropriate to determine the applicability of the Laws to the Premises and Tenant's use thereof, and for compliance therewith, the Tenant shall execute all documents promptly upon Owner's request. No such action by Owner and no attempt made by Owner to mitigate damages under any Law shall constitute a waiver of any of Tenant's obligations under this Paragraph (3). (e) Tenant's obligations and liabilities under this Paragraph (3) shall survive the expiration of this lease. 4. Tenant's Indemnity. (a) Tenant shall indemnify, defend, and hold harmless the Owner, manager of the property, and their respective officers, directors, beneficiaries, shareholders, partners, agents, and employees from all fines, suits, procedures, claims and actions of every kind, and all costs associated therewith (including attorneys' and consultants' fees) arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Substances that occurs during the term of this lease, at or from the Premises, or which arises at any time from Tenant's use or occupancy of the Premises, or from Tenant's failure to provide all information, make all submissions, and take all steps required by all Authorities under the laws and all other environmental laws. (b) Tenant's obligations and liabilities under this Paragraph (4) shall survive the expiration of this lease. EX-10.116 8 LEASE Exhibit 10.116 LEASE A. Lessor: Name: Davis Partnership Address: c/o Robert Davis 1244 North Shore Road Lake Oswego, OR 97034 B. Lessee: United Stationers Supply Co. an Illinois corporation qualified to do business in Oregon. Address: United Stationers Supply Co. 2200 East Golf Road Des Plaines, IL 60016-1267 C Date of execution of Lease September 20, 1996 D. Address of premises 4409 S.E. 24th Avenue, Portland, OR 97202 E. Legal description Spantons Add TL3 of Lots 6-11 and 20-25 Block 6 Map 3432 plus TL1 of Block 6 Map 3432 plus the south 35@ feet of Lot 18 Block 3 and the north 24 1/2 feet of Lot 19 Block 3 Map 3432, all per the Multnomah County Assessor's tax maps for 1995-96. F. Commencement date of Lease: March 1, 1997 G. Expiration date of Lease: February 28, 2002 H. Initial rental: $ 21,5B2.00 per month. J. Lease deposit $ none K. Rental adjustments: See First Addendum L. Lessee's use of premises: Office and Warehouse M. Additional provisions regarding repairs: See First Addendum N. Liability insurance coverages to be provided by Lessee: Injury to one person: $ 0ne Million Injuries arising out of a single occurrence: $ Five Mi11ion Property damage: $ Full Replacement Value P. Term of payment for business interruption: 12 months at 100% occupancy Q. Permitted period for display of Lessor's signs: 180 days R. Liquidated damages for holding over: $ Double the latest rent, prorated on a daily basis. S. Additional terms and conditions: See First Addendum Davis Partnership United Stationers Supply Co. By: By: Title: Title: Lessor Lessee THIS AGREEMENT AND LEASE was made and entered into by and between the "Lessor" identified at paragraph A. above and the "Lessee" identified at Paragraph B. above on the date set forth at Paragraph C. above. Lessor does hereby lease, demise and let unto Lessee the premises located and described in Paragraphs D. and E. above for a term commencing at 12:01 a m on the date set forth at Paragraph F. above and expiring at midnight on the date set forth at Paragraph G. above. 1. TENANT'S ACCEPTANCE OF PROPERTY. The Lessee accepts the building, improvements, and personalty on the leased premises (all of which are hereinafter referred to as "the Leased Property".) in their present state and without any representation or warranty by the Lessor as to the condition of such property or as to the use which may be made thereof, except as stated in the first addendum. The lessee acknowledges that the Leased Property, the title thereto, the streets, sidewalks, driveways, parking areas, curbs, utilities and structures adjoining the same, any subsurface conditions thereof, and the present use and non-uses thereof have been examined by the Tenant. The Lessor shall not be responsible for any later defect or change of condition in the Leased Property and the rent hereunder shall in no case be withheld or diminished on account of any defect in the Leased Property and change in conditions thereof, any damage occurring thereto, or the existence with respect thereto of any violations of the laws or regulations of any government authority except as may be otherwise specifically provided herein. The obligation of the Lessee to pay the full rent herein reserved shall not be affected by any future act of omission on the part of the Lessor with respect to the tenantability of the Leased Property, or the building of which it is a part, except as otherwise specifically provided herein. The taking of possession of the Leased Property by the Lessee shall be conclusive evidence that the Lessee accepts the same "as is" and that the Leased Property and the building and land of which the same form a part were in good condition at the time possession was taken. 2. RENTAL. The initial rent to be paid by the Lessee to the Lessor is the sum set forth at Paragraph H. above, said sum to be due and payable monthly commencing on the commencement date set forth at Paragraph F. above and paid monthly thereafter on the first day of each month during the term hereof. 3. LEASE DEPOSIT. Concurrently with the execution of this Lease, the Lessee has deposited with the Lessor the sum set forth at Paragraph J. above as security for the performance by the Lessee of all the conditions required to be performed by the Lessee under this Lease. 4. RENT REVISION. At the time or times, and in accordance with the terms et forth in Paragraph K. above, the rental set forth in Paragraph H. above shall be adjusted for the remaining term of the Lease. 5. USE OF PREMISES. (i) The Lessee shall use the Leased Property for the conduct of the business described at Paragraph L. above and for no other purposes whatsoever without the Lessor's prior written consent. (ii) The Lessee will not make any unlawful, improper or offensive use of the Leased Property; he will not suffer any strip or waste thereof; he will not permit an objectionable noise or odor to escape or to be emitted from the Leased Property or do anything or permit anything to be done upon or about the Leased Property in any way tending to create a nuisance. (iii) The Lessee will not allow the Leased Property at any time to fall into such a state of repair or disorder as to increase the fire hazard thereon; he shall not install any power machinery on the Leased Property except under the supervision and with written consent of the Lessor; he shall not store gasoline or other highly combustible materials on the Leased Property in such a way or for such a purpose that the fire insurance rate on the building in which the Leased Property is locates is thereby increased or that would prevent the Lessor from taking advantage of any rulings of the Insurance Rating Bureau of the state in which the Leased Property is situated which would allow the Lessor to obtain reduced premium rates for long term fire insurance policies. (iv) The Lessee shall comply at the Lessee's own expense with all laws and requiations of any municipal, county, state, federal or other public authority respecting the use of the Leased Property, including the Americans With Disabilities Act. (v) The Lessee will not overload the floors of the Leased Property in such a way as to cause any undue or serious stress or strain upon the building in which the Leased Property is located, or any part thereof, and the Lessor shall have the right, at any time, to call upon any competent engineer or architect whom the Lessor may choose to decide whether or not the floors of the Leased Property, or any part thereof, are being overloaded so as to cause any undue or serious stress or strain on said building, or any part thereof, and the decision of said engineer or architect shall be final and binding upon the Lessee; and in the event that the engineer or architect so called upon shall decide that in his opinion the stress or strain is such as to endanger or injure said building, or any part thereof, then and in that event the Lessee agrees immediately to relieve said stress or strain either by reinforcing the building or by lightening the load which causes such stress or strain in a manner satisfactory to the Lessor. 6. UTILITIES. The Lessee shall pay for all heat, light, water, power, garbage and other services of utilities used in the Leased Property during the term of this Lease. 7. REPAIRS AND IMPROVEMENTS. (i) The Lessor shall not be required to make any repairs, alterations, additions or improvements to or upon the Leased Property during the term of his Lease, except only those hereinafter specifically provided for; the Lessee hereby agrees to maintain and keep the Leased Property including, but not limited to, all interior and exterior doors, heating, ventilating and cooling systems, interior wiring, plumbing and drain pipes to sewers or septic tank, in good order and repair during the entire term of the Lease at the Lessee's own cost and expense, and to replace all glass which may be broken or damaged during the term hereof in the windows and doors of the Leased Property with glass of as good or better quality as that now in use; the Lessee hereby agrees to keep and maintain the sidewalks, driveways and parking areas immediately adjoining the Leased Property in a safe and orderly condition. (ii) Except as otherwise provided in Paragraph M. above, the lessor agrees to maintain in good order and repair during the term of this Lease the exterior walls, roof, gutters, downspouts and foundations of the building in which the Leased Property is situated. It is understood and agreed that the Lessor reserves and at any and all times shall have the right to alter, repair or improve the building of which the Leased Property is a part, or to add thereto, and for that purpose at any time may erect scaffolding and all other necessary structures upon the Leased Property, and the Lessor and Lessor's representatives, contractors and workmen for the aforedescribed purposes may, upon reasonable advance notice, enter in or about the Leased Property with such materials and equipment as Lessor may deem necessary therefore. Lessee waives any claim to damages, including loss of business resulting therefrom. 8. RIGHT OF ENTRY. It shall be lawful for the Lessor, his agents and representatives, at any reasonable time upon reasonable notice, except in the case of emergency, to enter into or upon the Leased Property for the purpose of examining into the condition thereof, or any other lawful purpose. If during the last month of the term the Lessee shall have removed all, or substantially all, of the Lessee's property from the Leased Property, the Lessor may immediately enter and alter, renovate, and redecorate the Leased Property, without elimination or abatement of rent without liability to the Lessee for any compensation, and such acts shall have no effect upon this Lease. 9. RIGHTS OF ASSIGNMENT. The Lessee will not assign, transfer, pledge, hypothecate, surrender or dispose of this Lease, or any interest herein, or permit any other person or persons whomsoever to occupy the Leased Property without the written consent of the Lessor being first obtained in writing. This Lease is personal to the Lessee. Lessor interest, in whole or in part, cannot be sold, assigned, transferred, seized or taken by operation at law, or under or by virtue of any execution or legal process, attachment proceedings instituted against Lessee, or under or by virtue of any bankruptcy or insolvency proceedings had in regard to the Lease or in any other manner, except as above mentioned. Subject to the foregoing, all rights, remedies and liabilities herein given or imposed upon either of the parties hereto, shall extend to, inure to the benefit of, and bind, as the circumstances may require, the heirs, personal representative, successors and, so far as this Lease is assignable by the terms hereof, the assigns of all parties. 10. LIENS. The Lessee will not permit any lien of any kind, type or description to be placed or imposed upon the Leased Property or any part thereof. 11. ICE, SNOW AND DEBRIS. If the Leased Property is located at street level, then at all times Lessee shall keep the sidewalks, curbs, driveways, and parking spaces immediately adjoining the building (whether or not they are included herein as Leased Property), in front thereof free and clear of ice, snow, rubbish, debris and obstructions and if the Lessee occupies the entire building, he will not permit rubbish, debris, ice or snow to accumulate on the roof of said building so as to stop up or obstruct gutter downspouts or cause damage to said roof, 12. ADVERTISING SIGNS. The lessee will not use the outside walls of the Leased Property, or allow signs or devices of any kind to be attached thereto or suspend therefrom, for advertising or displaying the name or business of the Lessee or for any purpose whatsoever without the written consent of the Lessor. 13. INSURANCE COVERAGES. The Lessee shall, at all times during the term hereof, at his own expense, keep in effect, furnish and deliver to the Lessor insurance policies (or certificates evidencing same,) in form and with an insurer satisfactory to the Lessor insuring: (I) Both the Lessor and Lessee against all liability for damage to personal property in or about said Leased Property. The amount of said liability insurance shall be not less than the amount set forth in Paragraph N. above. (ii) The Lessor against the damage or destruction of the Leased Property by fire or other casualty under a standard fire insurance policy with standard specific extended form coverage endorsement to 100% of the full, current replacement value. (iii) The Lessor against business interruption including the payment of rental to the Lessor for the period set forth in Paragraph P. above. The renewal forms of each such policy or certificate shall be delivered to the Lessor not less than 30 days prior to the expiration of the current policy. Each policy shall provide that it cannot be canceled as to the Lessor with less than 15 days' notice to it. 14. INDEMNIFICATION. The Lessee agrees to and shall indemnify and hold the Lessor harmless against any and all claims and demands arising from, (i)the negligence of the Lessee, his officers, agents, invitees and/or employees; (ii)the failure by the Lessee to perform any covenant required to be performed by the Lessee hereunder, (iii)accident, injury, or damage which shall happen in or about the Leased Property or appurtenances, or on or under the adjoining streets, sidewalks, driveways, parking areas, or curbs, or resulting from the condition, maintenance, or operation of the Leased Property or of the adjoining streets, sidewalks, driveways, parking areas or curbs. Lessee's failure to comply with any requirements of any governmental authority; and (iv)any mechanic's lien, or security agreement, filed against the Leased Property as a result of the acts of the Lessee. The Lessee shall at his own expense defend the Lessor against any and all suits or actions arising out of the aforedescribed acts or acts, and all appeals therefrom and shall satisfy and discharge any judgment which may be awarded against Lessor, including but not limited to, the Lessor's attorney in any such suit or action. 15. TAXES AND ASSESSMENTS. The Lessee shall pay all real property taxes, assessments (general and special) and other public charges levied, assessed or otherwise imposed upon the Leased Property, all promptly before the same or any part thereof become past due; provided, however, that any municipal, county or state assessment over $2,000.00 total which become or may become a lien on the premises, may be bonded by the Lessee as provided by law, and the Lessee shall pay all installment on principal and interest on such bonds during his tenancy, but shall be released from all obligation for payment of installments becoming due after the end of the lease herein reserved without proration. The Lessee shall also pay promptly, when due, all taxes levied against his own personal property and all taxes, assessments and public charges whatsoever arising in respect to, and because of, the Lessee's occupancy, use or possession of the leased property. Such real property taxes for which the commencement and expiration of the term of this Lease shall fall shall be appropriately pro-rated and adjusted between the Lessor and the Lessee. The Lessee shall furnish to the Lessor, within 30 days after the date any amount is payable by the Lessee, as provided in this Paragraph, copies of official receipts of the appropriate taxing authority or other proof satisfactory to the Lessor evidencing payment. 16. LESSEE'S ALTERATIONS AND IMPROVEMENTS. No alteration, addition, or improvement to the Leased Property shall be made by the Lessee without the written consent of the Lessor. Any alteration, addition, or improvement made by the Lessee after such consent shall have been given, and any fixtures installed as part thereof, (except Lessee movable trade fixtures), shall at the Lessor's option, become the property of the Lessor upon the expiration or other sooner termination of this Lease; provided, however, the Lessor shall have the right to require the Lessee to remove such fixtures at the Lessee's cost upon such termination of this Lease. 17. DAMAGE BY CASUALTY OR FIRE AND DUTY TO REPAIR. If all or any part of the Leased Property is damaged or destroyed by fire or other casualty subject to coverage under the standard fire insurance policy with standard special or extended form coverage endorsement applicable to the Leased Property, the Lessor shall, except as otherwise provided herein, repair and rebuild the Leased Property with reasonable diligence. If there is a substantial interference with the operation of the Lessee's business in the leased Property, the then applicable rental shall be equitably apportioned for the duration of such repairs. Notwithstanding the foregoing provisions, if at any time within eighteen months prior to the end of the initial or any renewal term, and provided the Lessee shall not have served upon the Lessor notice of renewal or extension as herein provided, the Leased Property is completely destroyed or so damaged by fire or other casualty covered by insurance as to render it unfit for the use as set forth at Paragraph L. above, the Lessor may terminate this Lease on 30 days' written notice tot he Lessee. If all or any substantial part of the Leased Property is damaged or destroyed by casualty which is not subject to coverage under the standard fire insurance policy with standard special or extended form coverage endorsement applicable to the Leased Property, or if subject to such coverage, the loss is, in fact, not covered to within 100% of replacement, the Lessor may terminate this Lease upon 30 days' written notice to the Lessee. If the Lessor shall terminate this Lease as provided herein, all rent shall be apportioned to the date of termination and all insurance proceeds shall belong to the Lessor. Except to the extent provided for in the Paragraph, neither the rent payable by the Lessee nor any of the Lessee's other obligations under any provision of this Lease shall be affected by any damage to or destruction of the Leased Property by any cause whatsoever, and the Lessee hereby expressly waives any and all additional rights it might otherwise have under any law or statute. 18. WAIVER OF SUBROGATION RIGHTS. Neither the Lessor nor the Lessee shall be liable to the other for loss arising out of damage to, or destruction of, the Leased Property or the contents thereof, when such loss is caused by any of the perils which are or could be included within or insured against by a standard fire insurance policy with standard extended or special form coverage endorsement, including sprinkler leakage insurance and business interruption insurance, if any. All such claims for any and all loss, however caused, hereby are waived. Said absence of liability shall exist whether or not the damage or destruction is caused by the negligence of either Lessor or Lessee or by any of their respective agents, servants or employees. Neither the Lessor nor the Lessee shall have any interest or claim in the other's insurance policy or policies or the proceeds thereof, unless specifically covered therein as a joint assured and notwithstanding any provision hereof requiring the Lessee to furnish such coverages on behalf of the Lessor. If the Lessee, at any time, is unable to obtain inclusion of any of the matters set forth above in any of its policies, the Lessee shall, at its own expense, have the Lessor named in such policies as one of the insureds. 19. EMINENT DOMAIN. (i) If the whole of the Leased Property shall be taken for any public or any quasi-public use under any statute or by right of eminent domain, or by private purchase in lieu thereof, then the Lease shall automatically terminate as of the date that title shall be taken. If any part of the Leased Property shall be so taken as to render the remainder thereof unusable for the purposes for which the Leased Property was leased as set forth in Paragraph L., then the Lessor and the Lessee shall each have the right to terminate this Lease on 30 days' notice to the other given not later than the date of such taking. In the event that this Lease shall terminate or be terminated, the rental shall, if and as necessary, be equitably adjusted. (ii) If a part of the Leased Property shall be taken as provided in Subparagraph (i) above, without so rendering the remainder of the Leased Property unusable, then the Lessor shall rebuild and restore the Leased Property with reasonable diligence, and if there is a substantial interference with the operation of the Lessee's business in the Leased Property the then applicable rental shall be equitably apportioned for the duration of such rebuilding and restoration; provided, however, that the cost of such work shall not exceed the proceeds of its condemnation award; and provided, further, that if such taking occurs within 18 months prior to the end of the initial or any renewal term, the Lessor may upon 30 days' notice given to the Lessee on or before the date of such taking elect not to so rebuild or restore the Leased Property. (iii) All compensation awarded or paid upon such a total or partial taking of the Leased Property shall belong to and be the property of the Lessor without any participation by the Lessee; provided, however, that nothing contained herein shall be construed to preclude the Lessee from prosecuting any claim directly against the condemning authority in such condemnation proceedings for loss of business, or depreciation to damage to, or cost of removal of, or for the value of stock, trade fixtures, furniture, and other personal property belonging to he Lessee; provided, further, however, that no such claim shall diminish or otherwise adversely affect the Lessor's award or the award of any fee mortgagee. 20. LESSOR'S SIGNS. During the periods specified in Paragraph Q. above, the Lessor may post on the Leased Property, including the windows thereof, signs of moderate size notifying the public that the premises are "for sale" or "for rent" or "for lease". 21. SURRENDER UPON TERMINATION. At the expiration of this term of the Lease or upon any sooner termination hereof, the Lessee will quit and deliver up said Leased Property and all future erections or additions to or upon the same, broom clean, to the Lessor or those having Lessor's estate in the premises, peaceably quiet, and in a good order and condition, reasonable use and wear thereof, damage or loss excused pursuant to the terms hereof excepted, as the same are now in or hereafter may be put in by the Lessor and Lessee. 22. LIQUIDATED DAMAGES. In the event that the Lessee shall fail to deliver up the Leased Property as above agreed, he shall become liable for the payment, at the option of the Lessor, of a sum for each and every day which he holds possession and fails to deliver over possession in the amount set forth at Paragraph R. above. The lessor by availing itself of the rights and privileges granted by this provision and the acceptance of said liquidated rental shall not be deemed to have waived any of the rights and privileges granted in other parts of this Lease, but the rights granted under this provision shall be considered, in any event, as in addition to, and not in exclusion of, such rights and privileges. 23. HOLDING OVER. In the event the Lessee for any reason shall hold over after the expiration of this Lease, such holding over shall not be deemed to operate as a renewal or extension of this Lease, but shall only create a tenancy from month-to-month which may be terminated at will at any time by the Lessor. 24. ATTORNEY'S FEES AND COURT COSTS. In case suit, action, or arbitration is instituted to enforce compliance with any of the terms, covenants or conditions of this Lease, or to collect the rental which may become due hereunder, or any portion thereof or to enforce any right of Lessor while Lessee is holding over after expiration hereof, the losing party agrees to pay such sum as the trial court or arbitrators may adjudge reasonable as attorney's fees to be allowed the prevailing party in such suit, action, or arbitration and in the event any appeal is taken from any judgment or decree in such suit or action , the losing party agrees to pay such further sum as the appellate court shall adjudge reasonable as prevailing party's attorney's fees on such appeal. 25. WAIVER. Any waiver by either party of any breach of any covenant herein contained to be kept and performed by the other party shall not be deemed or considered as a continuing waiver, and shall not operate to bar or prevent the party from declaring as forfeiture for any succeeding breach, either of the same condition or covenant or otherwise. 26. NOTICES. Any notice required by the terms of this Lease to be given by one party to the other or desired so to be given, shall be sufficient if in writing contained in a sealed envelope, deposited in the U.S. Registered or Certified Mails with postage fully prepaid, and if intended for the Lessor, then if addressed to said Lessor at the address set forth in Paragraph A. above and if intended for the Lessee, then if addressed to the Lessee at the address set forth for it in Paragraph B. above. 27. DELAY OF POSSESSION. If the Lessor for any reason cannot deliver possession of the Leased Property to the Lessee at the commencement of the Lease term, this Lease shall not be void or voidable, nor shall the Lessor be liable to the Lessee for any loss or damage resulting therefrom, but there shall be an abatement of rent for the period between the commencement of the Lease term and the time when the Lessor does deliver possession. 28. QUIET ENJOYMENT. The Lessee, upon the payment of the rent herein reserved and upon the performance of, and subject to the provisions of this Lease, shall at all times during the Lease term and during any extension or renewal term peaceably and quietly enjoy the Leased Property without any disturbance from the Lessor or from any other person claiming through the Lessor. 29. PERFORMANCE OF LESSEE'S OBLIGATIONS. If the Lessee shall be in default hereunder, the lessor may cure such default on behalf of the Lessee, in which event the Lessee shall reimburse the Lessor for all sums paid to effect such cure, together with interest at the highest legal rate. In order to collect such reimbursement the Lessor shall have all the remedies available under this Lease for a default in the payment of rent. 30. ARBITRATION. In the event of any controversy between the parties over the application of Paragraphs 17., 19., or 27. hereof, the same shall be settled by arbitration at Portland, Oregon in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. 31. DEFAULT. (I) The Lessor may give the Lessee five days' notice of intention to terminate this lease in any of the following circumstances: 1. If the Lessee shall be in default in the performance of any covenant of the lease (other than the covenants for the payment of basic rent or additional rent) and such is not cured within 15 days after written notice thereof given by the Lessor; or, if such default shall be of such nature that it cannot be cured completely within such 15-day period, if the Lessee shall not have promptly commenced the cure within such 15-day period or shall not thereafter proceed with reasonable diligence and in good faith to remedy such default. 2. If the Lessee shall be adjudicated a bankrupt, make a general assignment for the benefit of creditors, or the benefit of any insolvency act, or if a permanent receiver or trustee in bankruptcy shall be appointed for the Lessee's property and such appointment is not vacated within 90 days. For these purposes the "Lessee" shall mean the tenant then in possession of the Leased Property. 3. If the Leased Property becomes abandoned for a period of 30 days. 4. If this Lease shall be assigned or the Leased Property sublet other than in accordance with the terms of this Lease and such default is not cured within 15 days after notice. (ii) The Lessor may give the Lessee 10 days written notice of intention to terminate this Lease if the Lessee shall be in default in the payment of the initial rent or any additional rent. (iii) If the Lessor shall give the notice of intention to terminate provided above, then at the expiration of such period this Lease shall terminate as completely as if that were the date herein definitely fixed for the expiration of the term of this Lease, and the Lessee shall then surrender the Leased Property to the Lessor. If this Lease shall so terminate, it shall be lawful for the Lessor, at its option, without formal demand or notice of any kind, to re-enter the Leased Property by a forcible entry and detainer action or by any other means, including force, and to remove the Lessee and his possessions therefrom without being liable for any damages therefor. Upon the termination of this Lease, as herein provided, the Lessor shall have the right, at its election , to terminate any sublease then in effect, without the consent of the sublessee concerned. (iv) The Lessee shall remain liable for all its obligations under this Lease despite the Lessor's re-entry, and the Lessor may re-rent or use the Leased Property as agent for the Lessee, if the Lessor so elects. The Lessee waives any legal requirement for notice of intention to re-enter and any right of redemption. (v) If this Lease shall terminate as provided in this Paragraph the Lessor shall have the right, at its election at any time, to recover from the Lessee the amount by which the rent and charges equivalent to rent reserved herein for the balance of the term shall exceed the reasonable rental value of the Leased Property for the same period. 32. ESTOPPEL CERTIFICATE. Each party, within ten (10) days after notice from the other party, shall execute and deliver to the other party, in recordable form a certificate stating that this Lease is unmodified and in full force and effect, or in full force and effect as modified, and stating the modifications. The certificate shall also state the day on which the term of the Lease commenced, the date of expiration of the initial term of the Lease, the amount of the minimum monthly rent, the dates to which the rent has been paid in advance, and that the Lease represents the entire agreement between the parties, that there are no defaults by the party to whom the certificate is given not any defenses or offsets against such party, that all amounts due as rental under the Lease have been paid through and including a date specified in the certificate, and the amount of any security deposit or prepaid rent. Failure to deliver the certificate within such ten (10) days shall be conclusive upon the party failing to deliver the certificate for the benefit of the party requesting the certificate that this Lease is in full force and effect, that it has not been modified except as may be requested by the party requesting the certificate, and that there are no defaults by or offsets or defenses against the party requesting the certificate. 33. SUBORDINATION. (a) This Lease , at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust or other security now or hereafter placed upon the real property of which the premises are a party and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms . If any mortgagee, trustee or ground lessee shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within 10 days after written demand shall constitute a material default by Lessee hereunder. 34. MISCELLANEOUS PROVISIONS. (i) Time is of the essence of this Lease with respect of performance by each party of his obligations hereunder. (ii) In construing this Lease, masculine or feminine pronouns shall be substituted for those neuter in form and vice versa, and plural terms shall be substituted for singular and singular for plural in any place in which the context requires. (iii) If there is more than one party tenant, the covenants of the Lessee shall be the joint and several obligations of each such party, and, if the Lessee is a partnership the covenants of the Lessee shall be the joint and several obligations of each of the partners and the obligations of the firm. (iv) The parties agree to execute and deliver any instruments in writing necessary to carry out any agreement, term, conditions, or assurance in this Lease whenever occasion shall arise and request for such instruments shall be made. (v) The specified remedies to which the Lessor may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress, as provided herein or by law, to which the Lessor may be lawfully entitled in case of any breach or threatened breach by the Lessee of any provision or provisions of this Lease. (vi) The captions of this Lease are inserted only as a matter of convenience and for reference and in no way define, limit, or describe the scope or intent of the Lease , nor in any way affect this Lease. (vii) This Lease, together with any written agreements which shall have been executed simultaneously herewith, contains the entire agreement and understanding between the parties. There are no oral understandings, terms, or conditions, and neither party has relied upon any representation, express or implied, not contained in the Lease or the simultaneous writings heretofore referred to. Al l prior understandings, terms, or conditions are deemed merged in this Lease. This Lease cannot be changed or supplemented orally. (viii) If any provision of this Lease shall be declared invalid or unenforceable, the remainder of this Lease shall continue in full force and effect. 35. ADDITIONAL TERMS AND CONDITIONS. Additional terms and conditions of this Lease are set forth at Paragraph S. above (and attached) and have the same force and effect as if printed here; provided, however, that in the event that any provisions of Paragraph S. conflict with any other provision hereof, and both may not be given effect Paragraph S. shall control. 36. ENVIRONMENTAL MATTERS. Tenant warrants for itself, and for any subtenant or assignee, that it does not and shall not during any time when it, its subtenant or assignee is in possession of the Property allow, possess, generate, sue, release, store or deposition, over or beneath the Property any hazardous substances (as defined in ORS 466.540, et seq. and regulations related thereto), any substances, materials or contaminants regulated under 42 USC Section 3001, and regulations related thereto, or any polychlorinated biphenyls, nor shall it install, use or decommission any underground storage tank, except in accordance with governing federal, state and local laws or regulations. The use of the premises for any activities involving, directly or indirectly, the use, generation, treatment, storage or disposal of any hazardous or toxic chemical material, substance or waster, except as required or allowed in the normal course of each Tenant's business in accordance with local, state or federal environmental protection laws and regulations is hereby prohibited. Tenant agrees to indemnify Landlord and any lender suing the Property as security from and against any and all costs, expenses, including, without limitation, attorneys' fees for settlement, at trial or on appeal; losses; actions; suits; claims, judgments and any other liability whatsoever in connection with the breach by Tenant, tenant's subtenant or assignee of any federal, state or local environmental protection laws or regulations. Upon request from Landlord, Tenant will furnish an environmental estoppel certificate in commercially reasonable form to Landlord. IN WITNESS WHEREOF, the Lessor identified at Paragraph A. above and the Lessee identified at Paragraph B. above have executed this instrument in duplicate, the day and year set forth at Paragraph C. above, any corporate signature being by the authority of the board of directors of such corporation. FIRST ADDENDUM LESSOR: Davis Partnership LESSEE: United Stationers Supply Co. LOCATION: 4409 S.E. 24TH Avenue, Portland, Oregon RENTAL: First year-$21,582.00 per month (March 1, 1997-February 28, 1998) Second year-$22,230.00 per month (March 1, 1998-February 28, 1999) Third year-$22,896.00 per month (March 1,1999-February 29, 2000) Fourth year-$23,583.00 per month (March 1, 2000-February 28, 2001) Fifth year-$24,291.00 per month (March 1, 2001-February 28, 2002) REPAIRS: Lessor shall be responsible for the maintenance of the concrete floors if major settlements should occur to said floors. Lessee shall be responsible for all other maintenance of the concrete floors, except where major settlements occur. IMPROVEMENTS: Lessor, at Lessor's sole cost and expense, shall perform those tenant improvements listed on the attached exhibit entitled "Tenant Improvements" unless the parties subsequently agree in writing on additional improvements. The first $2,000 of cost overrun in excess of $59,723 for the listed items shall be paid by Lessor, but still cause the monthly rent to be increased by an amount which shall permit such costs to be amortized over the term of the lease assuming a nine (9) percent interest rate. Any cost overruns over $2,000 shall be paid for by the Lessee. Savings on any allowance item may be applied to overruns on other items. Any net savings on allowance items will be applied as a credit against rent at project completion. Lessor will use best efforts to complete the Tenant Improvements as soon as possible. All parties hereto acknowledge that the exterior painting and parking lot striping will probably not be completed until May or June of 1997. If the parties subsequently agree to additional tenant improvements, in writing, the cost of the additional improvements will cause the rent to be increased by an amount which shall permit such costs to be amortized over the terms of the Lease assuming a nine (9) percent interest rate. RIGHT TO CANCEL: The Lessee, upon not less than 180 days advance written notice, may terminate the lease effective February 28, 1999 or any date thereafter. Lessee may only exercise this right of termination if the reason for termination is the relocation of Lessee's business to a new building in the states of Oregon or Washington that is at least 150 percent larger than the building that is the subject of this lease. As consideration for so terminating this Lease, the Lessee agrees to pay as cost reimbursement to Lessor an amount equal to the unamortized portion of the Tenant Improvements and the unamortized portion of a $20,000 real estate fee. Said amortization shall assume a 9 percent interest rate and five-year amortization period. Lease cancellation fee must be paid at the time cancellation notice if delivered. CONSENT: Where the consent of either party is required, such consent shall not be unreasonably withheld or delayed. LESSOR'S REPRESENTATIONS: Lessor represents and warrants to Lessee that the premises, when originally built, was in compliance with the building code in effect at that time. EX-21 9 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES SUBSIDIARIES OF UNITED STATIONERS INC. United Stationers Supply Co., an Illinois corporation SUBSIDIARIES OF UNITED STATIONERS SUPPLY CO. United Stationers Hong Kong Limited, a Hong Kong corporation United Worldwide Limited, a Hong Kong corporation Lagasse Bros., Inc., a Louisiana corporation SAH, Inc., an Illinois corporation CJS/GT Corp., a Georgia corporation EX-23.1 10 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-02247) of United Stationers Inc. and in the related Prospectus of our reports dated June 27, 1995 with respect to the consolidated financial statements and schedule of United Stationers Inc. for the seven-month period ended March 30, 1995 and January 28, 1996 with respect to the consolidated financial statements and schedules of United Stationers Inc. as of and for the years ended December 31, 1996 and 1995 included in this Annual Report (Form 10-K) for the year ended December 31, 1996. /s/Ernst & Young LLP Chicago, Illinois March 25, 1997 EX-23.2 11 CONSENT OF PUBLIC ACCOUNTANTS EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-62739) of United Stationers Inc. and in the related Prospectus of our report dated January 23, 1995 on the consolidated financial statements and schedule of Associated Holdings, Inc. as of December 31, 1994 and for the year ended December 31, 1994 and to all references to our Firm included in the Annual Report (Form 10-K) of United Stationers Inc. for the year ended December 31, 1996. /S/ Arthur Andersen LLP Chicago, Illinois March 25, 1997 EX-23.3 12 CONSENT OF PUBLIC ACCOUNTANTS EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-62739) of United Stationers Inc. and in the related Prospectus of our report dated October 6, 1994 on the consolidated financial statements and schedule of United Stationers Inc. for the year ended August 31, 1994, and to all references to our Firm included in the Annual Report (Form 10-K) of United Stationers Inc. for the year ended December 31, 1996. /S/ Arthur Andersen LLP Chicago, Illinois March 25, 1997 EX-27 13 EXHIBIT 27-1
5 0000355999 UNITED STATIONERS INC. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 10,619 0 297,719 6,318 463,239 790,480 225,041 51,266 1,109,867 385,507 0 19,785 0 1,153 74,667 1,109,867 2,298,170 2,298,170 1,907,209 1,907,209 277,957 7,791 57,456 55,548 23,555 31,993 0 0 0 31,993 2.03 2.03
EX-27 14 EXHIBIT 27-2
5 0000945633 UNITED STATIONERS SUPPLY CO. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 10,619 0 297,719 6,318 463,239 790,480 225,041 51,266 1,109,867 385,507 0 19,785 0 1,153 74,667 1,109,867 2,298,170 2,298,170 1,907,209 1,907,209 277,957 7,791 57,456 55,548 23,555 31,993 0 0 0 31,993 2.03 2.03
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