ITEM 1: BUSINESS - -----------------
(a) General Development of Business. -------------------------------
Book Centers, Inc. (formerly known as Industrial Investment Corporation) (the "Company" or the "Registrant") is an Oregon corporation organized in 1961. Its principal continuing business is the distribution of books on a wholesale basis worldwide to college, university, industrial, and other research libraries either for their own use or for resale. It conducts this business through a wholly-owned subsidiary corporation, Academic Book Center, Inc., an Oregon corporation("Academic").
Academic is located in Portland, Oregon, at the same mailing address as the Company. Academic also operates a separate division under a different name. Academic, under the assumed business name Professional Book Center, Inc. ("Professional"), sells medical, technical, scientific, and business books.
Academic previously provided marketing, promotional, warehousing order fulfillment, accounting, and consulting services to publishers of books and periodicals under the assumed business name International Specialized Book Services, Inc. ("International"). Academic sold its assets comprising this division on September 11, 1992, to Chvatel Corporation, and on and after that date, it no longer provides those services.
The Company also formerly conducted a part of its business through another wholly-owned subsidiary, Scholarly Book Center, Inc., an Oregon corporation ("Scholarly"). Scholarly, located in New York, New York, distributed books throughout the Eastern United States, Canada, and Europe. In June, 1991, the Company's Board of Directors decided to close Scholarly's operations and to transfer them to Academic, including fulfilling all of the orders of Scholarly's former customers out of Academic's offices in Portland, Oregon. The Company completed the transfer of Scholarly's operations to Academic on October 31, 1991.
The Company, after it was incorporated, engaged principally in the businesses of agriculture and ownership of real property. It now engages solely in the business of marketing, warehousing, and distributing books.
(b) Financial Information about Industry Segments. ---------------------------------------------
The Company, through its subsidiaries, markets, warehouses, and distributes books on a wholesale basis to college, university, industrial, and other research libraries and to libraries and others (e.g., bookstores) for resale. Book wholesaling is the only industry segment material to its operations. See Note 7 to the consolidated financial statements, Item 8 of this Report.
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(c) Narrative Description of Business. ---------------------------------
(i) Principal Products and Services. -------------------------------
The Company's principal business is to market, warehouse, and distribute books on a wholesale basis to college, university, industrial, and other research libraries either for their own use or for resale. It also sells medical, technical, scientific, and business books. The Company hires sales representatives to solicit such sales. Such employees solicit these sales from libraries, government agencies, and the purchasing departments of other prospective purchasers either in person or by telephone. The Company sells its products to its customers on credit. Its customers are required to pay for the products sold within 60 days of the date of the invoice. The Company also attends all significant trade shows, including trade shows sponsored by the American Library Association and the American Book Sellers Association.
(ii) New Products. ------------
The Company has nothing to report under this caption.
(iii) Raw Materials. -------------
Not applicable.
(iv) Patents, Trademarks, Licenses, Franchises, and Concessions. ----------------------------------------------------------
Not applicable.
(v) Seasonality of Business. -----------------------
The Company's business is not seasonal except that its sales decrease during the summer months.
(vi) Working Capital Practices. -------------------------
The Company purchases its inventory on the basis of its customers' projected requirements. If it does not sell the inventory purchased within a reasonable time, it returns it to the publisher for credit. It purchases its inventory from over 50,000 sources. The terms of the Company's purchase of its inventory varies from publisher to publisher. The Company considers its working capital practices similar to other wholesale distributors of books.
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(vii) Major Customers. ---------------
The Company and its subsidiaries provide services to more than 2,000 academic and research libraries worldwide. No one customer accounts for more than 10 percent of consolidated revenues. Sales to customers outside the United States constitute approximately 41 percent of the total volume for the 12 months ended June 30, 1995 (see Note 7 to the consolidated financial statements, Item 8 of this Report).
(viii) Backlog. -------
The Company does not have any backlog. Customers generally place orders on an "as needed basis" and expect delivery within a short period of time.
(ix) Renegotiation or Termination of Contracts or Subcontracts at Government's ------------------------------------------------------------------------- Election. - --------
Not applicable.
(x) Competitive Conditions. ----------------------
The Company is in a highly competitive business. Competition is principally through customer contacts, price, and service. Adequate service generally requires delivery of a book 30 to 60 days after receipt of an order. Publishers also compete against the Company by selling books directly to consumers. There are approximately 25 significant competitors in this market, some of whom have resources substantially greater than those of the Company.
(xi) Research and Development. ------------------------
The Company has not spent any material amounts during the last three fiscal years for company-sponsored research and development or for customer-sponsored research activities with respect to the development of new products.
(xii) Environment. -----------
The Company has nothing to report under this caption.
(xiii) Number of Persons Employed. --------------------------
As of June 30, 1995, the Company (including its subsidiaries) employed approximately 96 persons. Labor unions do not represent any of the Company's employees. The Company considers its relationships with its employees satisfactory.
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(d) Financial Information About Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales. - -----
See Note 7 to the consolidated financial statements, Item 8 of this Report for information with respect to foreign and domestic operations and export sales.
ITEM 2:

ITEM 2: PROPERTIES - -------------------
The Company and its subsidiaries lease offices and warehouses in Portland, Oregon, and offices in New York, New York. See Note 3 to the consolidated financial statements, Item 8 of this Report, for obligations under these leases. The Company considers its facilities suitable and adequate for its business purposes. The offices and warehouses provide sufficient additional space for growth.
ITEM 3:

ITEM 3: LEGAL PROCEEDINGS - --------------------------
There are no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject.
ITEM 4:

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
The Company did not submit any matters to a vote of its shareholders during the quarter ended June 30, 1995.
PART II -------
ITEM 5:

ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER ---------------------------------------------------------------- MATTERS - -------
The Company's common stock is not traded on any exchange. An established public trading market for the stock has not existed for the past ten years. Carr Securities in New York, New York, serves as the "market maker" for the Company. It has served in such position since 1985. Carr Securities effected only two purchases and sales of common stock for the fiscal year ended June 30, 1995 for the purchase and sale of 500 shares in the aggregate at 25 cents per share. Prospective purchasers and sellers have engaged Carr Securities only sporadically since 1985 with the stock price ranging from a low bid of 1/8 to a high bid of 1/2. Information on stock prices on a quarterly basis and for years prior to 1985 is not available due to the absence of an established market.
The Company also established an employee stock ownership plan (ESOP) in 1985 to facilitate the purchase and sale of stock in an inactive market. The ESOP may purchase stock in the open market or directly from the Company. Purchases from the Company increase the number of shares outstanding and the Company's equity, but, depending on the sales price, dilute the interests of existing shareholders. The ESOP is designated as a retirement program for all qualified Company employees. At June 30, 1995, the ESOP owned 65,167 shares of the Company's common stock. - 5 -
At June 30, 1995, there were 816 shareholders. The Company has not declared any dividends since its incorporation. Under Oregon law, the Company may not pay any dividends if, after the payment of such dividend, the Company would not be able to pay its debts in the usual course of business or the Company's total assets would be less than the sum of its total liabilities. At June 30, 1995, the Company had an accumulated deficit of $1,938,819 and, accordingly, could not pay dividends. The payment of dividends in the future, if the existing deficit is eliminated, is subject to the discretion of the Board of Directors. The Company does not plan to pay dividends in the foreseeable future.
ITEM 6:

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - -------------
(a) Results of Operations. ---------------------
1995 Compared to 1994 - ---------------------
The Company's sales increased in the fiscal year ended June 30, 1995, in the amount of $1,498,433, from $21,496,122 to $22,994,555, a 6.5 percent increase. Sales increased because of an eight percent increase in units sold. Margins continued to decrease as a percentage of sales because of lower discounts from publishers and increased competition requiring higher discounts to customers. Management cannot determine if these trends will continue.
Operating and administrative costs declined by $25,895 from $3,443,153 for the fiscal year ended June 30, 1994, to $3,417,258 for the fiscal year ended June 30, 1995. Efficiencies of the Company's new Firm Order computer system and continuous analysis of how various functions are performed caused this decrease. The Company will continue its efforts to improve the productivity of its employees through education and training.
Negative pressures on the Company include increased competition from large competitors, information being produced in electronic formats, increased use of library materials budgets to purchase journals, and budgetary constraints of state-supported educational institutions.
1994 Compared to 1993 - ---------------------
The Company experienced a decline in sales in 1994 in the amount of $497,193 due to a reduction in products sold. There were two primary reasons for this reduction. One was the lower sales to several commercial customers. The other was in 1993 the Company sold about $125,000 worth of an expensive reference work to libraries. There were no comparable sales in 1994. The cost of goods sold declined for the first time, because of efforts to work with major suppliers to get better terms. It is impossible to tell if this trend will continue.
Operating and administrative costs declined by $58,734, although as a percentage of sales they increased by 1/10 of 1 percent. The Company will continue efforts to improve the productivity of employees and to negotiate better terms with suppliers of goods and services in an effort to reduce operating and administrative costs. The Company introduced new software for its Firm Order operations in June, 1994. It is impossible to predict the effect on increased sales or lower costs.
As noted in previous years, there are several negative factors affecting the Company. Libraries continue to spend larger portions of the budgets on non- book materials such as journals, audio-visual material, and data base access.
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1993 Compared to 1992 - ---------------------
The Company experienced a decline in sales in 1993 in the amount of $1,865,602 due to a reduction in products sold. This was primarily caused by the loss of several former Scholarly customers and the reduction in sales to a large corporate customer. The cost of goods sold continued to increase for several reasons. Publishers continue to lower discounts to the Company in order to prevent the list price of their material from increasing. Publishers also switch the mix of trade, technical, and text discounts such that their overall discounts decline even though their price structure remains the same. The Company is also actively soliciting orders from its customers for audio-visual material that carries little, if any, discount. It is impossible to predict what the future cost of goods will be.
Operating and administrative expenses declined by $221,058 in the fiscal year ended June 30, 1993. They continue to decline for two reasons: decreasing volume and attention to all expenditures.
Two negative factors facing the Company are the continued upward spiral in the cost of serials (the library term for magazines) and the pressure on governmental agencies and departments at all levels to decrease costs. Serials are bought from the same materials budget that a library uses to buy books. As serials absorb a larger portion of the budget, the number of books purchased by many institutions declines. This trend will not be reversed until the national economy improves.
The Company continues to work against these trends by reducing staff, introducing labor-saving technologies, and working with the suppliers of its goods and services to improve prices and the quality of service provided. The Company will introduce a newly programmed Firm Order system in late 1993. It is hoped that this will improve and enhance the quality of the services the
Company provides to its customers. It is impossible, at this point, to predict the effect on increased sales or lower costs.
(b) Inflation, Market Trends, and Business Factors Beyond Company Control. ---------------------------------------------------------------------
Inflation is not considered to be a factor in the Company's business at this time.
Negative pressures on the Company, as previously stated, include increased competition from large competitors, information being produced in electronic formats, increased use of library materials budgets to purchase journals, and budgetary constraints of state-supported educational institutions.
(c) Liquidity and Capital Resources. -------------------------------
It is anticipated that cash flows from financing and operating activities will be sufficient to meet the Company's liquidity need over the next twelve months and thereafter. The Company entered into a new line of credit in June 1995 with a bank. The new line of credit, which expires September 1996, permits the Company to borrow up to $1,400,000 (subject to certain limitations) and bears interest at a rate of two and one-half percent to four percent above the bank's reference rate (the "Index"). The Index equaled nine percent at June 30, 1995.
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The new line of credit is secured by all of the Company's assets and is guaranteed by the present officers of the Company who are also stockholders.
The Company, at the time it entered into the new line of credit with the bank, terminated its existing line of credit with another lending institution. This line of credit, which the Company entered into in June 1993, permitted the Company to borrow up to $1,250,000 and bore interest at the rate of six percent above the prime rate (15 percent, 13.25 percent, and 12 percent at June 30, 1995, 1994, and 1993, respectively). It was secured by the Company's accounts receivable, inventory, and equipment and was guaranteed by the present officers of the Company who are also stockholders. The weighted average interest rate under this line of credit in 1995 and 1994 was 14.33 and 12.27 percent, respectively.
The Company does not have any other unused sources of liquid assets. The Company will continue to improve its working capital situation through profitable operations.
The Company did not make any material capital expenditures during the fiscal year ended June 30, 1995.
ITEM 8:

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The financial statements and schedules listed on the Index to Consolidated Financial Statements and Schedules on page 23 are incorporated herein by reference.
ITEM 9:

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE - --------------------
The Company has nothing to report under this item.
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PART III --------
ITEM 10:

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS - ------------------------------------------
(a) Directors. ---------
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Directors are elected to hold office until their successors are elected and qualified, subject to prior death, resignation, or removal.
(b) Executive Officers. ------------------
Certain of the directors also serve as the executive officers of the Company. Under the Corporation's Bylaws, executive officers are elected by the Board of Directors and serve until their successors are elected and qualified, subject to prior death, resignation, or removal. Those officers are:
Name Position - ---- --------
Daniel P. Halloran President, Chief Financial Officer, Controller, Secretary/Treasurer, and Chairman of the Board of Directors
Barry E. Fast Vice President
(c) Significant Employees. ---------------------
John F. Knapp serves as the manager of systems development for the Company. He has served in that capacity since January 1, 1987. His responsibilities include computer systems development for the Company.
Catherine J. Labsch serves as a controller for the Company. She has served in that position since September, 1989. Prior to working for the Company, she worked as the assistant controller for Pihas Schmidt Westerdahl, an advertising agency in Portland, Oregon.
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Robert Schatz is the sales manager for the Company. He has served in that position since May, 1979. He manages all of the sales for the Company, including serving as a sales representative himself.
(d) Compliance With Section 16(a) of the Securities Exchange Act of 1934. --------------------------------------------------------------------
For a company with a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934 (the "1934 Act"), Section 16(a) of the 1934 Act requires the officers, directors, and persons who hold more than 10 percent of a registered class of such company's equity securities (the "10 Percent Holders") to file reports of ownership and changes of ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors, and 10 Percent Holders are required by the regulations the SEC has promulgated under Section 16 of the 1934 Act to furnish such company with copies of all forms they file pursuant to Section 16(a).
Based solely on the Company's review of Forms 3 and 4 and amendments thereto furnished to the Company during the fiscal year ended June 30, 1995, Forms 5 and amendments thereto furnished to the Company with respect to such fiscal year, and the written representations from certain of the reporting persons that no Forms 5 were required to be filed also with respect to such fiscal year, all required forms were timely filed, except a Form 5 for the fiscal year ended June 30, 1995, filed by Barry E. Fast on September 5, 1995, was 21 days late.
ITEM 11:

ITEM 11: EXECUTIVE COMPENSATION - --------------------------------
(a) Cash Compensation. -----------------
The following table sets forth information concerning the compensation for services to the Company in all capacities, for each of the fiscal years ended June 30, 1995, June 30, 1994, and June 30, 1993, of the person who was, at June 30, 1995, the Chief Executive Officer of the Company and each other executive officer of the Company at June 30, 1995 whose compensation for such fiscal year exceeded $100,000.
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For purposes of each employment agreement, a change of control is deemed to occur if a person becomes the beneficial owner of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities, the persons who at the beginning of any period of 24 consecutive months constitute the Board of Directors of the Company cease for any reason to constitute a majority thereof (unless the election of each director who is not a director of the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period), the Company is merged or consolidated with another corporation and, as a result of such merger or consolidation, less than 75 percent of the outstanding voted securities of the surviving or resulting corporation is owned in the aggregate by the former shareholders of the Company, or the Company sells all or substantially all of its assets to another corporation which is not a wholly- owned subsidiary.
ITEM 12:

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners. -----------------------------------------------
The following table sets forth information as of September 22, 1995, with respect to persons known to the Company to be beneficial owners of more than 5 percent of the Company's outstanding shares of common stock. Unless otherwise indicated, the beneficial ownership of securities includes sole investment and voting power with respect to such securities.
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(b) Security Ownership of Management. --------------------------------
ITEM 13:

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
The Company has nothing to report under this item.
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PART IV -------
ITEM 14:

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ----------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules. ------------------------------------------------------
The financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this Report.
(b) Reports on Form 8-K. -------------------
The Company did not file any Reports on Form 8-K during the last quarter of the fiscal year ended June 30, 1995.
(c) Exhibits. --------
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession: None.
3. Articles of Incorporation and Bylaws:
(a) Restated Articles of Incorporation and Restated Bylaws (incorporated herein by reference to Appendices I and II of the Company's Proxy Statement filed May 24, 1988).
(b) Articles of Amendment to Restated Articles filed with the Corporation Division of the State of Oregon on October 4, 1990 (incorporated herein by reference to Exhibit "I" to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).
4. Instruments defining the rights of security holders, including indentures: None.
9. Voting trust agreements: None.
10. Material contracts:
10.1 Split Dollar Agreement dated May 1, 1993, between Daniel P. Halloran and Book Centers, Inc. (incorporated herein by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993).
10.2 Amended and Restated Split Dollar Agreement dated May 1, 1993, between Daniel P. Halloran and Book Centers, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10- K for the fiscal year ended June 30, 1994).
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10.3 Second Amended and Restated Split Dollar Agreement dated May 1, 1994, between Daniel P. Halloran and Book Centers, Inc.(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994).
10.4 Book Centers, Inc. Employee Stock Ownership Plan and Trust (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995).
10.5 Loan Agreement dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
10.6 Promissory Note dated June 28, 1995, in the principal amount of $750,000, the maker of which is Academic Book Center, Inc. and the payee of which is Centennial Bank.
10.7 Commercial Security Agreement dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
10.8 Commercial Security Agreement dated June 28, 1995, among Book Centers, Inc., Academic Book Center, Inc., and Centennial Bank.
10.9 Commercial Pledge Agreement dated June 28, 1995, between Academic Book Center, Inc., Centennial Bank, and Daniel P. and Karen M. Halloran.
10.10 Agreement to Provide Insurance dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
10.11 Loan Agreement dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
10.12 Note dated June 28, 1995, in the principal amount of $650,000 the maker of which is Academic Book Center, Inc. and the payee of which is Centennial Bank.
10.13 Commercial Security Agreement dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
10.14 Commercial Security Agreement dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
10.15 Small Business Administration (SBA) Guaranty dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
10.16 Assignment of Life Insurance Policy as Collateral dated June 28, 1995, among Book Centers, Inc., Academic Book Center, Inc., and Centennial Bank.
10.17 Commercial Guaranty dated June 28, 1995, among Book Centers, Inc., Academic Book Center, Inc., and Centennial Bank.
10.18 Commercial Guaranty dated June 28, 1995, between Academic Book Center, Inc., Centennial Bank, and Daniel P. Halloran.
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10.19 Landlord's Consent dated June 28, 1995, between Academic Book Center, Inc. and Centennial Bank.
11. Statement regarding computation of per share earnings: Disclosed in note 1 to the consolidated financial statements.
12. Statements regarding computation of ratios: Not applicable.
13. Annual report to security holders, Form 10-Q or quarterly report to security holders: None.
16. Letter regarding change in certifying accountant: None.
18. Letter regarding change in accounting principles: None.
21. Subsidiaries of the registrant: See note 1 to the Consolidated Financial Statements.
22. Published report regarding matters submitted to vote of security holders: None.
23. Consents of experts and counsel: None.
24. Power of attorney: None.
27. Financial Data Schedule (filed electronically only).
28. Information from reports to state insurance regulation authorities: None.
99. Additional Exhibits: None.
(d) Schedules. ---------
The schedules listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BOOK CENTERS, INC.
Date: September 28, 1995 /s/ Daniel P. Halloran ------------------------------------- Daniel P. Halloran, President
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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Date: September 28, 1995 /s/ Daniel P. Halloran ------------------------------------- Daniel P. Halloran, President, Controller/Chief Financial Officer, Secretary/Treasurer, Chairman of the Board of Directors, and Director
Date: September 28, 1995 /s/ Frank L. Ford ------------------------------------- Frank L. Ford, Director
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Certified Public Accountants Relating to the Consolidated Financial Statements and Notes thereto 24
Financial Statements
Consolidated Balance Sheets as of June 30, 1995 and 1994 25
Consolidated Statements of Operations and Accumulated Deficit for the years ended June 30, 1995, 1994, and 1993 27
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1994, and 1993 29
Notes to Financial Statements 31
The schedules, other than those listed above, have been omitted since they are either not required, not applicable, or the information has been included in the aforementioned financial statements.
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INDEPENDENT AUDITORS' REPORT
The Stockholders of Book Centers, Inc. Portland, Oregon
We have audited the accompanying consolidated balance sheets of Book Centers, Inc. and subsidiaries as of June 30, 1995 and 1994, and the related consolidated statements of operations and accumulated deficit and of cash flows for each of the three years in the period ended June 30, 1995. These consolidated 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, such consolidated financial statements present fairly, in all material respects, the financial position of Book Centers, Inc. and subsidiaries at June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, Book Centers, Inc. and subsidiaries changed their method of accounting for income taxes effective June 1, 1993 to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP Portland, Oregon
August 24, 1995
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BOOK CENTERS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995, 1994, AND 1993 - -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Book Centers, Inc. is an Oregon corporation organized in 1961. The Company engages in the business of marketing, warehousing and distributing books worldwide to research and academic libraries.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its 100%-owned subsidiary, Academic Book Center, Inc. ("Academic"). All significant intercompany accounts and transactions have been eliminated upon consolidation.
Restructuring - During 1991, the Company closed its one hundred percent owned subsidiary Scholarly Book Center, Inc. ("Scholarly"), recording restructuring charges of $600,000. These charges included loss on equipment disposal, employee severance liability, lease termination costs and other incremental costs associated with the closure of these operations. The remaining accrual at June 30, 1993 and 1992, was for lease termination costs. These leases substantially expired during the year ended June 30, 1994 and the remaining restructuring accrual of $200,366 was reversed against operating expenses.
Statements of Cash Flows - For purposes of the statement of cash flows, the Company considers interest bearing deposits with maturities of 90 days or less to be cash. Cash paid for interest was $177,581, $169,711, and $176,346 for the years ended June 30, 1995, 1994, and 1993, respectively.
Accounts Receivable - Trade receivables are recorded at estimated collectible value.
Book Inventories - Inventories are valued at lower of cost or market value using the specific identification method.
Income Taxes - Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, which requires the provision of deferred income taxes based upon an asset and liability approach and represents the change in deferred income tax accounts during the year, including the effect of enacted tax rate changes. A consolidated federal income tax return is filed by the Company for the consolidated group. Federal tax credits are accounted for, when applicable, under the flow-through method whereby the credit is reflected as a reduction of federal income tax expense in the year in which the credit is used.
Deferred Revenue - The subsidiary companies receive advance payments from certain customers. These amounts are recognized as revenue when the related books are shipped.
Office Furnishings and Equipment and Depreciation - Office furnishings and equipment are stated at cost. Maintenance and repairs are charged to expenses as incurred, and improvements are capitalized. Depreciation is computed on a straight-line method over the estimated useful lives
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(generally three to ten years) of the related assets. Upon disposal of property subject to depreciation, the accounts are relieved of the related costs and accumulated depreciation and resulting gains and losses are reflected in operations.
Net Income (Loss) Per Share - Net income (loss) per share of common stock is computed based on the weighted average number of shares of common stock outstanding during each year. The weighted average number of shares for each of the three years ended June 30, 1995 was 636,889.
Reclassifications - Certain amounts from prior periods have been reclassified in order to conform to the 1995 presentation.
2. EMPLOYEE STOCK OWNERSHIP PLAN
During 1985, the Company adopted a qualified Employee Stock Ownership Plan. This Plan was initially funded with a $25,000 contribution and is available to all eligible personnel who have been employed by the Company for a least one year. As of June 30, 1995, 65,167 shares of the Company's outstanding common stock had been acquired by the Plan. There were no contributions to the Plan for the years ended June 30, 1995, 1994, and 1993.
3. LEASE COMMITMENTS
The Company and one of its subsidiaries are lessees under noncancelable real property leases through 1996. Other leases shown are for automobiles and office equipment. In September 1992, the Company sold certain assets related to an operating division of its wholly-owned subsidiary, Academic. In addition to the purchase of assets, the buyer assumed responsibility for certain liabilities, including the lease for the operating division's primary facility. The sale agreement provided that the Company would guarantee this lease until the expiration of its original term at October 31, 1995.
Minimum future rentals under capital and operating leases having initial or remaining terms of one year or more as of June 30, 1995 are as follows:
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Total rent expense was $129,640, $116,210, and $114,830 for the years ended June 30, 1995, 1994, and 1993, respectively.
4. NOTES PAYABLE
In June 1991, the Company entered into a new line of credit with a lending institution. Beginning July 1, 1993, the line renewed annually unless the Company elected to terminate the agreement. Under this agreement, the Company could borrow up to a capacity of $1,250,000. The line bore interest at 6% above the prime rate (15%, 13.25%, and 12% at June 30, 1995, 1994, and 1993, respectively), was secured by accounts receivable, inventory and equipment and was personally guaranteed by present officers who are stockholders of the Company. The weighted average interest rate in 1995 and 1994 was 14.33% and 12.27%, respectively. In June 1995, the Company paid off their line of credit with this lending institution, and entered into a new line of credit with a bank. This new agreement expires September 1996, and bears interest at a rate of 2.5% to 4% above the bank's reference rate (the "Index"). The Index was at 9% at June 30, 1995. The Company may borrow up to a capacity of $1,400,000 subject to certain limitations. These borrowings are secured by assets of the Company and are guaranteed by stockholders of the Company who are also officers.
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5. LONG-TERM DEBT
Long-term debt at June 30, 1995 and 1994 consisted of the following:
Maturities of long-term debt, including minimum capital lease payments, net of interest portion, at June 30, 1995 were as follows:
1996 $ 16,649 1997 17,738 1998 17,868 1999 7,595 2000 - ----------
Total $ 59,850 ==========
The above notes payable to related parties are to individuals who are present officers and stockholders of the Company.
6. INCOME TAXES
The Company adopted SFAS No. 109, Accounting for Income Taxes, effective July 1, 1993. The statement requires the provision of deferred income taxes based upon an asset and liability approach and represents the change in deferred income tax accounts during the year, including the effect of enacted tax rate changes. The statement also provides for the recognition of net operating loss ("NOL") carryforwards as a deferred tax asset.
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Income tax expenses attributable to operations consisted of the following:
Reconciliation between the statutory federal income tax rate and the effective tax is as follows:
The tax effort of temporary differences that give rise to significant deferred tax assets and deferred tax liabilities at June 30, 1995 and 1994 are presented below:
- 35 -
There were no deferred tax liabilities at June 30, 1995. Deferred tax assets have been reduced by a valuation allowance as realization of some portion of these future tax benefits is subject to significant uncertainties. The net change in the valuation allowance for the year ended June 30, 1995, was $55,000.
At June 30, 1995, the Company's net operating loss carryforwards totaled approximately $1,220,000 for financial reporting purposes expiring through 2008. Net operating loss carryforwards totaled approximately $649,000 for tax purposes and expire as follows:
- 36 -
Investment tax and new jobs credit carryovers approximate $21,000 at June 30, 1995 and expire at various dates through 2000.
7. BUSINESS SEGMENT INFORMATION
The Company's principal industry segment is book wholesaling. Other segments and transfers between segments are immaterial. Export sales were $9,524,537, $8,344,825, and $7,181,519 for the years ended June 30, 1995, 1994, and 1993, respectively, and were made to various countries. In addition, accounts receivable from export sales were $1,726,442, $1,418,251, and $1,529,259 at June 30, 1995, 1994, and 1993, respectively.
- 37 -
INDEX TO EXHIBITS
- 38 -
- 39 -


ITEM 1. BUSINESS
GENERAL
United Asset Management Corporation ("UAM" or the "Company") is a holding company organized in December, 1980 to acquire and own firms that provide investment advisory services primarily for institutional clients. The Company's 45 wholly owned subsidiaries (the "Affiliated Firms" or the "Firms") operate in one business segment, that is, as investment advisers, managing both domestic and international investment portfolios for corporate, government and union pension funds, endowments and foundations, mutual funds and individuals. UAM intends to continue expanding through the internal growth of its present Affiliated Firms and through the acquisition or organization of additional firms in the future (see "Affiliated Firms"). In addition, UAM plans to continue to diversify, both domestically and internationally, with respect to both the classes of assets managed for institutional investors and client base.
While UAM's Affiliated Firms primarily specialize in the management of U.S. equities, bonds and cash, other asset classes under management have grown significantly over recent years to include real estate, international securities and stable value assets.
Advisory fees based on the assets of pension plans, profit sharing plans, endowments and foundations provide the substantial portion of the Company's revenues. Such clients are sometimes referred to as "institutional" clients, and they are generally "tax-exempt" in that the income and any capital gains which result from their portfolio investments are not taxable to them under present law. Advisory fees are primarily based on the value of assets under management. Fee rates typically decline as account size increases. The assets of institutional clients have generally been growing, with the most rapid growth achieved by pension and profit sharing plans (sometimes called employee benefit plans). For the year ended December 31, 1995, no single client of any Affiliated Firm provided more than 2% of the Company's consolidated revenues. Accordingly, the loss of any single client would not have a material adverse effect on the Company's total investment management business.
Each Affiliated Firm operates under its own name, with its own investment philosophy and approach. Each conducts its own investment analysis, portfolio selection, marketing and client service. During any given period, investment results may vary among Firms. Client fees are set by each Firm based on its own judgment concerning the market for the services it renders. Each Firm is separately regulated under applicable federal, state or foreign law.
In addition to the Firms' individual efforts, UAM has established several distribution and client service organizations which are avaialable to the Affiliated Firms to supplement the investment management services being provided by them. This is described more fully under "Method of Operation."
UAM has established revenue sharing agreements with the Affiliated Firms which are described more fully under "Revenue Sharing." These agreements provide for UAM to derive increased or decreased income from each Affiliated Firm, based on a percentage of the change in each Firm's revenues from year to year, starting from a base amount agreed upon in the year of acquisition. These arrangements allow each Firm to set its own operating expense budget and compensation practices, limited by the share of revenues available to the Firm.
THE INDUSTRY
Revenues in the institutional investment management industry are determined primarily by fees based on assets under management. Therefore, the principal determinant of growth in the industry is the growth of institutional assets under management. In management's judgment, the major factors which influence changes in institutional assets under management are: (a) changes in the market value of securities; (b) net cash flow into or out of existing accounts; (c) gains of new or losses of existing accounts by specific firms or segments of the industry; and (d) the introduction of new products by the industry or by particular firms.
In general, assets under management in the institutional segments of the industry have increased steadily. For example, Money Market Directories, Inc. recorded in its 1996 Directory $3.7 trillion in assets under management in accounts of employee benefit plans, foundations and endowments within the United States as of mid-1995, which represents an average compound five-year annual growth rate of 8.4% over the corresponding figure as of mid-1990. The largest institutional segment of assets under management has been employee benefit plan assets. The 1996 Directory reported $3.5 trillion of employee benefit plan assets under management as of mid-1995, which represents an average compound five-year annual growth rate of 8.5% over the corresponding figure as of mid- 1990.
The employee benefit plan market includes two principal sectors: defined benefit and defined contribution plans. The majority of U.S. retirement plan assets are in defined benefit plans, which assure workers of a particular level of pension benefits when they retire. The Employee Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue Code of 1986 (the "Code") require employers to fund their defined benefit plans sufficiently to generate the benefits they have promised. However, the Code also discourages overfunding of defined benefit plans by employers by limiting tax deductions for contributions to fully funded plans. In management's opinion, high investment returns experienced in the 1980s and thus far in the 1990s has resulted in many defined benefit retirement plans reaching or exceeding their full funding limits based on actuarial calculations; therefore, many corporations ceased to contribute additional cash to the plans. However, if the value of plan assets declines due to market factors, or if sustained periods of low interest rates cause an increase in the actuarial value of plan liabilities, employers will generally be obligated to step up contributions to their defined benefit pension plans. This counter-cyclical funding pattern for defined benefit plans helps to smooth out fluctuations in the growth of plan assets under management by firms that provide investment advisory services to sponsors of defined benefit plans, and therefore, it helps to smooth out fluctuations in the revenues of these investment managers. Under defined contribution plans, on the other hand, employers may contribute to their employees' retirement funds on a tax- advantaged basis, but individual employees often decide how their plan assets will be invested. Defined contribution plans are the fastest growing sector of the employee benefit plan market.
The number and size of investment management firms which UAM would consider acquiring have grown in the past five years. The 1991 Money Market Directory showed 1,133 investment advisory firms (including branch offices) within the United States managing $2.9 trillion as of mid-1990. The 1996 Directory showed 1,349 such firms (including branch offices) within the United States managing approximately $6.6 trillion of assets as of mid-1995, which represents an average compound five-year annual growth rate of 18.0% over the corresponding assets of mid-1990.
COMPETITION
The Affiliated Firms compete with a large number of investment management firms, principally those engaged in the management of institutional accounts. In addition, the Affiliated Firms compete with commercial banks and insurance companies, many of which have substantially greater capital and other resources and some of which offer a wider range of financial services. Furthermore, each of the Affiliated Firms may compete with other Affiliated Firms for clients.
Management believes that the most important factors affecting competition in the investment management industry are the abilities and reputations of investment managers, differences in the investment performance of investment management firms and the development of new investment strategies, information technologies and client service capabilities, rather than differences in advisory fees.
Barriers to entry are low, and firms are relatively long-lived in the investment management business. A new investment management firm has low capital requirements. Maintaining the firm requires only the continued involvement of its professional personnel. A major portion of profits may be regularly withdrawn because new capital commitments are limited and rarely necessary.
UAM competes, with respect to the acquisition of investment management firms, with many other potential purchasers of investment management firms, including insurance companies, banks and other investment groups. For the most part, these acquirers have sought a single firm rather than undertaking a program of acquisitions similar to UAM's. As a result of its continuing acquisition activities, including regular contacts with potential acquisition candidates, UAM has an extensive knowledge of the candidate population both domestically and internationally.
UAM'S ACQUISITION PROGRAM
Since its inception, UAM has sought to acquire or to organize institutional investment management firms. Once it has acquired or organized such firms, UAM seeks to preserve their autonomy by allowing their key employees to retain control of investment decisions and manage the day-to-day operations. Where the Affiliated Firm is acquired from its employee-stockholders, the former stockholders receive the added benefits of a more diversified company by virtue of their equity ownership in UAM.
UAM conducts its own acquisition activities rather than relying primarily upon outside agents to find and develop acquisition candidates for it. UAM's activities include regular mailing and calling programs through which UAM seeks to contact and visit potential acquisition candidates on a regular basis. UAM is willing to use finders to locate suitable candidates and has paid finders' fees on four occasions. Once acquisition negotiations begin, UAM utilizes its own staff and outside legal counsel to negotiate price, terms and the wording of specific documents required. Typically, a definitive purchase agreement is signed, and then each of the clients of the firm to be acquired is contacted by a principal of that firm in order to obtain the client's consent to the assignment of its advisory contract as required by the Investment Advisers Act of 1940. Once sufficient consents have been received, the acquisition is completed. Consent of all of a firm's clients has been obtained in connection with virtually all of UAM's acquisitions to date.
After acquisition by UAM, Affiliated Firms continue to operate under their own firm name, with their own leadership and individual investment philosophy and approach. UAM seeks to achieve diversity by acquiring investment management firms having different investment philosophies and strategies and specializing in different asset classes. In addition, UAM has acquired or organized firms at various stages of their development, from start-up to relatively mature firms and has acquired both employee-stockholder firms and subsidiaries or divisions of financial institutions.
UAM has observed that the major reasons that employee-owned firms consider selling to UAM include: (a) the high value of the firm relative to its principals' total net worth; (b) the need for liquidity on the part of the principals; and (c) their desire for diversification and a reduction in their exposure to a single firm's results. Substantially all the key employees of Affiliated Firms continue to be vigorously involved in their firm long after its acquisition by UAM.
In purchasing investment management firms, UAM has structured the transactions in order to create incentives for the key personnel to remain with their firm after the expiration of their employment agreements. The key employees have entered into employment and non-competition agreements for terms ranging primarily from five to 12 years, which also prohibit the employees from competing with their firm for a substantial period after termination of employment. Most of the key employees of the Affiliated Firms were stockholders of such firms prior to their acquisition by UAM. In connection with the purchases, the former stockholders and/or key employees have typically received consideration in the form of cash, subordinated notes and warrants to purchase UAM common stock, or UAM common stock. The subordinated notes, which may be used to exercise the warrants, generally have terms between five and ten years. The key employees of each Affiliated Firm also participate directly, through a revenue sharing arrangement, in revenues of their firm and meet the firm's expenses from their share of these revenues, as described more fully under "Revenue Sharing."
UAM has over the past several years identified a substantial number of institutional investment management firms both domestically and internationally which it believes may be candidates for future acquisition on the basis of an evaluation of their personnel, investment approach, client base, revenues and profitability.
To fund acquisitions, the Company utilizes its existing capital, together with Operating Cash Flow (net income plus amortization and depreciation) and borrowings available under the $400,000,000 Reducing Revolving Credit Agreement (as more fully described in Note 3 to the Consolidated Financial Statements, see Items 8 and 14). Such borrowings are secured by the stock of the Company's subsidiaries. Subsequent to December 31, 1995, the Company is extending and expanding its Credit Agreement into a five year, $500,000,000 revolving facility.
METHOD OF OPERATION
UAM itself does not manage portfolio investments for clients and does not provide any investment advisory services to Affiliated Firms and therefore is not registered as an investment adviser under federal, state or foreign law. UAM respects the individual character of each Affiliated Firm and seeks to preserve an environment in which each Firm may continue to provide investment management services which are intended to meet the particular needs of each Firm's clients. UAM provides assistance to the Affiliated Firms in connection with the preparation of separate company financial statements, tax matters,
insurance and maintenance of a company-wide profit sharing retirement plan. In addition, UAM has an operations group composed of senior officers of the Company which is responsible for establishing new marketing and service organizations, creating growth incentives and encouraging the undertaking of new projects and programs by the Affiliated Firms. Upon request, the Operations Group is also available to assist Affiliated Firms in planning for future growth and management development, particularly with respect to succession planning. The Company also sponsors several seminars and meetings for executives from each of the Affiliated Firms and from UAM which serve as forums for sharing business information.
UAM seeks to assist the Affiliated Firms in their marketing activities by providing resources and support for developing new products and reaching new markets. As a part of these efforts, UAM organized UAM Funds, Inc. previously named The Regis Fund, Inc., a series mutual fund in which Affiliated Firms may open portfolios to pool client accounts in an efficient, cost-effective manner and to provide additional investment styles. As of December 31, 1995, 17 of the Affiliated Firms had opened, in the aggregate, 36 UAM Fund portfolios, and such portfolios held assets totaling $2.1 billion.
In 1993, UAM established Regis Retirement Plan Services in response to the growth in the defined contribution plan sector of the market by offering bundled products, including investment management capabilities through the UAM Fund portfolios managed by the Affiliated Firms, as well as employee education, recordkeeping and trustee services to the sponsors of these plans.
In 1994, UAM established United Asset Management (Japan), Inc. to offer and service products managed by the Affiliated Firms to Japanese investors. This affiliate is a single entity delivering service locally in Japan, but it represents the great breadth of expertise available in all of UAM's Affiliated Firms. It is currently registered in Japan as a non-discretionary adviser, and is preparing to apply for a license to offer discretionary investment services to Japanese institutional investors.
In 1995, UAM established two additional marketing and service organizations. UAM Investment Services, Inc. was organized to provide multi-product and global capabilities to large defined benefit plans and other major institutional investors such as insurance companies, as well as to financial planners. This new unit does not replace but supplements the marketing and client service activities of the Affiliated Firms and participation in it is voluntary on the part of each firm. It will provide a single convenient channel through which clients both domestically and abroad, can utilize the many investment products offered by the affiliated firms. In addition, UAM Fund Services, Inc. was formed to oversee the numerous service providers currently being used by some of UAM's Firms to support their funds that are part of UAM Funds, Inc. or their own separate family of funds.
UAM believes that the professional independence of the Affiliated Firms and the continuing diversification of investment philosophies and approaches within the Company are necessary ingredients of UAM's success and that of the Affiliated Firms. The key employees of each Affiliated Firm at the time of acquisition by UAM have continued with their Firm in accordance with employment agreements executed in connection with each acquisition, have remained on their Firm's Board of Directors, and have continued to serve as its executive officers. Each Affiliated Firm's directors and officers are responsible for reviewing their respective Firm's results, plans and budgets. UAM intends to continue the method of operation described above as it acquires or organizes additional firms.
REVENUE SHARING
UAM operates with the Affiliated Firms under "revenue sharing" agreements. The agreements permit each Firm to retain a specified percentage of its revenues (typically 50-70%) for use by its principals at their discretion in paying expenses of operations, including salaries and bonuses. The purposes of the agreements are to provide significant ongoing incentives for the principals of the Affiliated Firms to continue working as they did prior to the sale of their firm to UAM and to allow UAM to participate in the growth of revenues of each Affiliated Firm. The agreements are designed to allow each Firm's principals to participate in that Firm's growth in a substantial manner and to make operating decisions freely within the limits of that portion of the Firm's revenues which is retained under the Firm's control. In effect, the portion of its revenues retained by each Firm that is not used to pay salaries and other operating expenses is available for payment to the principals and other key employees of such Firm in the form of bonuses. Thus, the portion of Affiliated Firm revenues retained by the Firms and used to pay salaries, fund operating expenses and bonuses is included in the Company's Consolidated Statement of Income.
Under each agreement, when an Affiliated Firm is acquired by UAM, the "base revenues" of the Firm are established, and a share of such revenues is allocated to UAM, with the remaining balance being the acquired Firm's share of revenues. In addition, agreement is reached on the Firm's and UAM's respective percentage shares of changes in such Firm's revenues compared to its base revenues. The Affiliated Firm is required to pay for all of its business expenses out of its share of its revenues. Each year, the amount of the Affiliated Firm's revenues that is paid to UAM and the amount that is retained by the Firm are adjusted upwards in the case of growth in such Firm's revenues over its base, or downwards in the case of decreases in such Firm's revenues below its base, by applying the agreed-upon percentages to the total increase or decrease in the Firm's revenues. Under most of the existing revenue sharing agreements, UAM's share of increases above a Firm's base revenues is between 30% and 50%, and UAM's share of decreases below a Firm's base revenues is between 50% and 70%. Thus, in any year in which the Affiliated Firm's revenues increase over its base revenues, the Firm retains a portion of such additional amounts to use as its principals may decide. The balance of the increase in the Affiliated Firm's revenues is paid to UAM, in addition to UAM's share of such Firm's base revenues. In any year in which the Affiliated Firm's revenues decrease to a level below its base revenues, the Firm's share of its base revenues is reduced by the Firm's portion of the decrease, and therefore, the Firm may need to reduce its expenses. Similarly, the revenue sharing amount paid to UAM will be reduced by UAM's share of any decline in the Affiliated Firm's revenues below its base.
In addition to revenue sharing with its Affiliated Firms, UAM has designed several incentive programs to reward business growth, client retention, investment performance and managerial development. Incentives awarded pursuant to these programs are paid in the form of cash, stock options, incentive growth shares or some combination thereof.
AFFILIATED FIRMS
Each of the Affiliated Firms conducts its own marketing, client relations, research, portfolio management and administrative functions. Each Firm sets its own investment advisory fees and manages its business independently on a day-to- day basis.
The investment philosophy, style and approach of each Affiliated Firm are independently determined by it, and these philosophies, styles and approaches may vary substantially from Firm to Firm. As a consequence, more than one Affiliated Firm may be retained by a single client since many clients employ multiple investment advisers. The strategies employed and securities selected by Affiliated Firms are separately chosen by each of them, with the result that any one Firm may be bullish on the stock or bond market while another Firm is bearish. Two of the Affiliated Firms are full-service institutional real estate investment management firms with $13.3 billion of assets under management at year end. These Firms invest in real estate properties in the U.S. and overseas for their U.S. and foreign clients and provide a broad spectrum of real estate services, including research, acquisition and disposition, financing and asset and property management. In addition, another Affiliated Firm, with $7.4 billion of assets under management at year end, manages stable value asset portfolios such as guaranteed investment contracts ("GICs") and synthetic GICs.
All of these differences, when combined with the separate names and identities of the various Affiliated Firms may: (a) tend to insulate UAM from the various cycles of market performance for specific asset classes and individual Firms; (b) permit more than one Affiliated Firm to serve any single client; and (c) mean that some Affiliated Firms may attract substantial new business while other Firms may be growing more slowly or losing business.
On December 31, 1995, UAM's 45 Affiliated Firms had 6,040 clients with $142.1 billion of assets under management for an average account size of $23.5 million. On a fee basis, the 20 largest clients represented 10% of total revenues and the 100 largest clients represented 21%. On an asset basis, the 20 largest clients represented 16% of the total assets under management and the 100 largest clients represented 34%. The client list includes many of the largest corporate, government, charitable and union funds in the U.S. and abroad along with the funds of several mutual fund organizations, many individuals and a number of professional groups. Additional information regarding the number of clients and types and amounts of assets under management is found in the table on page 38 of the Company's 1995 Annual Report to Shareholders (the "Annual Report"), which table is incorporated herein by reference.
The following table summarizes UAM's asset mix:
As previously described, each of the Affiliated Firms is responsible for and provides its own marketing of its investment management services. Typically, one or more of the employees at each Firm is responsible for making an initial contact with prospective clients. Most Firms have brochures describing the Firm, its principals and its investment approach. These brochures are mailed to prospective clients. In addition, clients are solicited by telephone and in person. Once an initial contact is made, several face-to- face meetings between the principals of such Firm and the prospective client take place at which investment philosophy, management fees and a variety of other related matters are discussed.
REGULATION
UAM's domestic investment advisory subsidiaries are registered with and subject to regulation by the Securities and Exchange Commission (the "SEC") under the Investment Advisers Act of 1940 and, where applicable, under state advisory laws. The Company's foreign investment advisory affiliates are members of or subject to certain self-regulatory bodies or other regulatory agencies. The Company's brokerage subsidiaries are registered as broker-dealers with the SEC under the Securities Exchange Act of 1934 and, where applicable, under state securities laws, and are regulated by the SEC, state securities administrators and the National Association of Securities Dealers, Inc. Three Affiliated Firms are regulated by the Commodities Futures Trading Commission, and two own trust companies which are subject to regulation by the Office of Comptroller of the Currency or applicable state law.
UAM's domestic investment advisory subsidiaries are subject to ERISA and to regulations promulgated thereunder to the extent they are "fiduciaries" under ERISA with respect to their clients.
Registrations, reporting, maintenance of books and records and compliance procedures required by these laws and regulations promulgated thereunder are maintained by each UAM subsidiary on an independent basis.
The officers, directors and employees of UAM's investment advisory subsidiaries may from time to time own securities which are also owned by one or more of their clients. Each such Firm has internal guidelines and codes of ethics with respect to individual investments, and requires reporting of securities transactions and restricts certain transactions so as to minimize possible conflicts of interest.
UAM's Affiliated Firms as of December 31, 1995 are listed below in the order in which they were acquired or organized.
(1) Name was changed from Analytic Investment Management, Inc. to Analytic-TSA Global Asset Management, Inc., on January 31, 1996, upon the acquisition of TSA Capital Management, Inc.
EMPLOYEES
The UAM holding company has 51 employees, seven of whom are executive officers of UAM (see Item 10, Directors and Executive Officers). Each Affiliated Firm employs its own investment advisory, marketing and client service, administrative and operations personnel as needed to provide advisory services to its clients and to maintain necessary records in accordance with various regulatory agencies (see "Affiliated Firms" and "Regulation" on pages 7 and 8, respectively). At December 31, 1995, the Company as a whole employed 2,171 persons. These numbers exclude 1,783 individuals who are employed by the property management subsidiaries of The L&B Group and Heitman Financial Ltd. and whose total compensation is billed directly to clients of these affiliates.
ITEM 2.

ITEM 2. PROPERTY
UAM's only offices are its executive offices in Boston, Massachusetts, which occupy approximately 17,000 square feet under a lease which expires in 1997. Affiliated Firms are likewise lessees of their respective offices under leases which expire at various dates.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Certain of the Company's subsidiaries are subject to legal proceedings arising in the ordinary course of business. On the basis of information presently available and advice received from counsel, it is the opinion of management that the disposition or ultimate determination of such legal proceedings will not have a material adverse effect on the financial position of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of the security holders of the Company during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of December 31, 1995, there were 447 shareholders of record. As of March 4, 1996, there were 471 shareholders of record. The balance of the information required by this item is incorporated herein by reference to the "Common Stock Information" appearing on page 57 of the Annual Report.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to the "Eleven Year Review" appearing on pages 42 and 43 of the Annual Report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference to the "Management's Discussion and Analysis" appearing on pages 39 through 41 of the Annual Report.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to the "Selected Quarterly Financial Data" on page 57 of the Annual Report, "Consolidated Financial Statements" and "Notes to the Consolidated Financial Statements" appearing on pages 44 through 55 of the Annual Report and the "Report of Independent Accountants" on page 56 of the Annual Report. (See also the "Financial Statement Schedule" filed under Item 14 of this Form 10-K.)
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the sections entitled "Election of Directors-Nominees for Election as Directors" and "Executive Compensation-Executive Officers" included in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 1996 (the "Proxy Statement").
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the sections entitled "Executive Compensation-Summary Compensation Table," "Executive Compensation-Option Grants in 1995," "Executive Compensation- Aggregated Option Exercises in 1995 and Option Values at December 31, 1995" and "Election of Directors-Directors' Fees" included in the Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the section entitled "Voting Securities" included in the Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the section entitled "Election of Directors-Certain Transactions" included in the Proxy Statement.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of United Asset Management Corporation and report of independent accountants, included on pages 44 through 56 of the Annual Report, are incorporated herein by reference as a part of this Form 10-K:
Page(s) in the Title Annual Report ----- -------------
Report of Independent Accountants 56
Consolidated Balance Sheet as of December 31, 1995 and 1994 44
Consolidated Statement of Income for the three years ended December 31, 1995 45
Consolidated Statement of Cash Flows for the three years ended December 31, 1995 46
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1995 47
Notes to Consolidated Financial Statements 48-55
2. Financial Statement Schedule
The following consolidated financial statement schedule and report of independent accountants are filed as a part of this Form 10-K and are located on the following pages:
Page ----
Report of Independent Accountants on Financial Statement Schedule
Schedule VIII Valuation and Qualifying Accounts for the three years ended December 31, 1995
All other schedules have been omitted since they are not required, not applicable or the information is contained in the Financial Statements or Notes thereto.
3. Exhibits
Exhibit Number Title ------ -----
(1) 3.1 Restated Certificate of Incorporation of the Registrant.
(1) 3.2 By-Laws of the Registrant.
(2) 4.1 Specimen Certificate of Common Stock, $.01 par value, of the Registrant.
(3) 4.2 Agreement to furnish copies of subordinated debt instruments to the Commission.
9.0 Not Applicable
(4) 10.1 Acquisition Agreement by and among United Asset Management Corporation, Heitman Financial Ltd., JMB Institutional Realty Corporation, JMB Realty Corporation and Certain Affiliates of JMB Institutional Realty Corporation and JMB Realty Corporation dated as of October 18, 1994.
(4) 10.2 Acquisition Agreement by and among United Asset Management Corporation, Provident Investment Counsel, PIC Newco, Inc. and the Stockholders of Provident Investment Counsel dated as of November 10, 1994.
(1) 10.3 Second Amended and Restated Reducing Credit Agreement dated as of November 18, 1994, among United Asset Management Corporation, the banks parties thereto, Morgan Guaranty Trust Company of New York, as Agent, and The First National Bank of Boston, as Collateral Agent.
(5) 10.4 Note Purchase Agreement dated as of August 1, 1995.
(5) 10.5 First Amendment and consent dated as of August 1, 1995 to the Second Amended and Restated Credit Agreement dated as of November 18, 1994.
(6) 10.6 United Asset Management Corporation Profit Sharing and 401(k) Plan dated as of May 11, 1989 and amended and restated as of November 26, 1990.
(7) 10.7 Revised First Amendment to United Asset Management Corporation Profit Sharing and 401(k) Plan effective as of January 1, 1992.
(7) 10.8 Second Amendment to United Asset Management Corporation Profit Sharing and 401(k) Plan effective as of January 1, 1993.
(1) 10.9 Third Amendment to United Asset Management Corporation Profit Sharing and 401(k) Plan effective as of January 1, 1994.
10.10 Fourth Amendment to United Asset Management Corporation Profit Sharing and 401(k) Plan effective as of January 1, 1995.
(1) 10.11 1994 Stock Option Plan.
(1) 10.12 1994 Eligible Directors Stock Option Plan.
10.13 United Asset Management Corporation Deferred Compensation Plan effective January 1, 1994.
(8) 10.14 Consulting Agreement between United Asset Management Corporation and David I. Russell dated as of January 1, 1993.
11.1 Calculation of Earnings Per Share.
12.0 Not Applicable
13.1 Annual Report to Shareholders for the Year Ended December 31, 1995.
16.0 Not Applicable
18.0 Not Applicable
21.1 Subsidiaries of the Registrant.
22.0 Not Applicable
23.1 Consent of Independent Accountants.
24.0 Not Applicable
27.0 Financial Data Schedule for the Year Ended December 31, 1995.
28.0 Not Applicable _________________ (1) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Form S-1 as filed with the Commission and which became effective on August 22, 1986, and incorporated herein by reference (Registration No. 33-6874).
(3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Current Report on Form 8-K as filed with the Commission on December 1, 1994, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference.
Location of Documents Pertaining to Executive Compensation Plans and Arrangements:
(1) 1994 Stock Option Plan, Exhibit 10.11 to this Form 10-K.
(2) 1994 Eligible Directors Stock Option Plan, Exhibit 10.12 to this Form 10-K.
(3) United Asset Management Corporation Deferred Compensation Plan effective January 1, 1994, Exhibit 10.13 to this Form 10-K.
(4) Consulting Agreement between United Asset Management Corporation and David I. Russell dated as of January 1, 1993 - Form 10-K for fiscal year ended December 31, 1992, Exhibit 10.14 to this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of the fiscal year covered by this report.
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 ASSET MANAGEMENT CORPORATION ----------------------------------- (Registrant)
Date: March 28, 1996 By /s/ Norton H. Reamer --------------------------------- Norton H. Reamer President and Chief Executive Officer
By /s/ William H. Park --------------------------------- William H. Park Executive Vice President and Chief Financial Officer
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 in the capacities and on the dates indicated.
/s/ Norton H. Reamer - ---------------------------------- (Norton H. Reamer) Director March 28, 1996
/s/ Richard A. Englander - ---------------------------------- (Richard A. Englander) Director March 28, 1996
/s/ Robert J. Greenebaum - ---------------------------------- (Robert J. Greenebaum) Director March 28, 1996
/s/ Charles E. Haldeman, Jr. - ---------------------------------- (Charles E. Haldeman, Jr.) Director March 28, 1996
/s/ Robert M. Kommerstad - ---------------------------------- (Robert M. Kommerstad) Director March 28, 1996
/s/ M. Thomas Lardner - ---------------------------------- (M. Thomas Lardner) Director March 28, 1996
/s/ Jay O. Light - ---------------------------------- (Jay O. Light) Director March 28, 1996
/s/ John F. McNamara - ---------------------------------- (John F. McNamara) Director March 28, 1996
/s/ David I. Russell - ---------------------------------- (David I. Russell) Director March 28, 1996
/s/ Philip Scaturro - ---------------------------------- (Philip Scaturro) Director March 28, 1996
/s/ John A. Shane - ---------------------------------- (John A. Shane) Director March 28, 1996
/s/ Barbara S. Thomas - ---------------------------------- (Barbara S. Thomas) Director March 28, 1996
Exhibit 11.1
UNITED ASSET MANAGEMENT CORPORATION CALCULATION OF EARNINGS PER SHARE (in thousands, except per-share amounts)
______________
(1) The proceeds from the exercise of stock options and warrants in accordance with the modified treasury stock method are first used to buy back up to 20% of the Company's common stock at the average price for the period in the primary calculation and at the higher of the average or closing price in the fully diluted calculation. Any remaining proceeds are used to retire debt, and this adjusts income for the interest assumed to be saved, net of income tax, from the use of such proceeds.
(2) Adjusts shares for stock options and warrants under the modified treasury stock method and contingently issuable shares based on the probability of issuance, after adjusting for the stock assumed repurchased in accordance with (1) above.
UNITED ASSET MANAGEMENT CORPORATION Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Financial Affiliated Firm Organization Statements - --------------- ------------ ----------
Acadian Asset Management, Inc. Massachusetts Consolidated Alpha Global Fixed Income Managers Delaware Consolidated Analytic-TSA Global Asset Management, Inc. California Consolidated Barrow, Hanley, Mewhinney & Strauss, Inc. Nevada Consolidated Cambiar Investors, Inc. Colorado Consolidated The Campbell Group, Inc. Delaware Consolidated Chicago Asset Management Company Delaware Consolidated Cooke & Bieler, Inc. Pennsylvania Consolidated Dewey Square Investors Corporation Delaware Consolidated Dwight Asset Management Company Delaware Consolidated Fiduciary Management Associates, Inc. Delaware Consolidated First Pacific Advisors, Inc. Massachusetts Consolidated GSB Investment Management, Inc. Delaware Consolidated Hagler, Mastrovita & Hewitt, Inc. Delaware Consolidated Hamilton, Allen & Associates, Inc. Delaware Consolidated Hanson Investment Management Company California Consolidated Heitman Financial Ltd. Delaware Consolidated Heitman Properties Ltd.(1) Illinois Consolidated Heitman/JMB Advisory Corporation Illinois Consolidated Hellman, Jordan Management Company, Inc. Delaware Consolidated Investment Counselors of Maryland, Inc. Maryland Consolidated Investment Research Company Illinois Consolidated Jacobs Asset Management Delaware Consolidated Tom Johnson Investment Management, Inc. Massachusetts Consolidated Ki Pacific Asset Management, Inc. Delaware Consolidated L&B Realty Advisors, Inc. (The L&B Group) Delaware Consolidated L&B Institutional Property Managers, Inc.(2) Delaware Consolidated L&B Real Estate Counsel Texas Consolidated C.S. McKee & Company, Inc. Pennsylvania Consolidated Murray Johnstone Limited Scotland Consolidated Nelson, Benson & Zellmer, Inc. Colorado Consolidated Newbold's Asset Management, Inc. Pennsylvania Consolidated Northern Capital Management, Inc. Wisconsin Consolidated NWQ Investment Management Company Massachusetts Consolidated Olympic Capital Management, Inc. Washington Consolidated Pell, Rudman & Co., Inc. Delaware Consolidated Pilgrim Baxter & Associates Delaware Consolidated Provident Investment Counsel Massachusetts Consolidated Regis Retirement Plan Services Delaware Consolidated Rice, Hall, James & Associates California Consolidated Rothschild/Pell, Rudman & Co., Inc. Maryland Consolidated Sirach Capital Management, Inc. Washington Consolidated Spectrum Asset Management, Inc. Connecticut Consolidated Sterling Capital Management Company North Carolina Consolidated Suffolk Capital Management, Inc. Delaware Consolidated Thompson, Siegel & Walmsley, Inc. Virginia Consolidated UAM Fund Distributors, Inc. Massachusetts Consolidated UAM Fund Services, Inc. Delaware Consolidated UAM Investment Services, Inc. Delaware Consolidated United Asset Management (Japan), Inc. Delaware Consolidated
All of the Registrant's subsidiaries do business under the respective names indicated above and are wholly owned.
(1) Heitman Properties Ltd. has 40 wholly owned property management subsidiaries operating in the U.S.
(2) L&B Institutional Property Managers, Inc. has 5 wholly owned property management subsidiaries operating in the U.S.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of United Asset Management Corporation
Our audits of the consolidated financial statements referred to in our report dated February 7, 1996 appearing on page 56 of the 1995 Annual Report to Shareholders of United Asset Management Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP Boston, Massachusetts February 7, 1996
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-36928, 33-44215, 33-46310, 33-63350, 33-69034, 33-51443, 33-52517, 33-57049 and 33-64449) and in the Registration Statements on Form S-8 (Nos. 33-10621, 33-21756, 33-34288, 33-48858 and 33-54233) of United Asset Management Corporation of our report dated February 7, 1996 appearing on page 56 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP Boston, Massachusetts March 25, 1996
UNITED ASSET MANAGEMENT CORPORATION Schedule VIII VALUATION AND QUALIFYING ACCOUNTS (in $ thousands)
(A) Due to the structure of this acquisition, tax amortization is less than book amortization.