<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1998 or
-------------
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to _____________
Commission file number 1-14482
------------
UNISOURCE WORLDWIDE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-5369500
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Cassatt Road, Berwyn, PA 19312
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 296-4470
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the 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.
Yes X No ______
------
As of July 31, 1998, there were outstanding 70,039,982 shares of the
registrant's common stock, par value $0.001.
<PAGE>
INDEX
UNISOURCE WORLDWIDE, INC.
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets June 30, 1998 3-4
and September 30, 1997
Condensed Consolidated Statements of Operations Three and 5
Nine Month Periods Ended June 30, 1998 and June 30, 1997
Condensed Consolidated Statements of Cash Flows Nine Month 6
Periods Ended June 30, 1998 and June 30, 1997
Notes to Condensed Consolidated Financial Statements 7-10
June 30, 1998
Item 2. Management's Discussion and Analysis of Results 11-17
of Operations and Financial Condition and Liquidity
PART II. OTHER INFORMATION
- ---------------------------
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
- ---------
INDEX TO EXHIBITS 20
- -----------------
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
UNISOURCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values and shares)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
ASSETS 1998 1997
- ------ ------------------ --------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 47,884 $ 45,384
Accounts receivable, net 620,607 882,360
Inventories 430,313 495,330
Prepaid expenses and deferred taxes 58,726 49,875
------------------ --------------------
Total current assets 1,157,530 1,472,949
------------------ --------------------
LONG-TERM RECEIVABLES 5,531 7,790
PROPERTY AND EQUIPMENT, AT COST 436,946 434,762
Less accumulated depreciation 205,016 188,336
------------------ --------------------
231,930 246,426
------------------ --------------------
GOODWILL 641,463 668,575
DEFERRED COSTS AND OTHER ASSETS 17,688 163,092
------------------ --------------------
$ 2,054,142 $ 2,558,832
================== ====================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
UNISOURCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values and shares)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ------------------ ---------------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 1,165 $ 638
Notes payable 11,344 144,882
Trade accounts payable 426,393 498,503
Accrued salaries, wages and commissions 32,559 33,906
Restructuring costs 12,847 8,172
Other accrued expenses 85,891 119,431
------------------ --------------------
Total current liabilities 570,199 805,532
------------------ --------------------
LONG-TERM DEBT 586,482 661,350
OTHER LIABILITIES
Deferred taxes 19,578 61,082
Restructuring costs 7,210 8,383
Other long-term liabilities 37,872 38,100
------------------ --------------------
64,660 107,565
------------------ --------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.001, authorized - 250,000,000
shares, issued and outstanding: 6/30/98 - 69,732,048
shares; 9/30/97 - 68,792,842 shares 70 69
Additional paid in capital 831,757 820,213
Unearned compensation (8,927) (5,845)
Retained earnings 53,979 199,828
Foreign currency translation adjustments (43,975) (29,320)
Cost of common shares in treasury; 6/30/98 - 7,493
shares; 9/30/97 - 32,027 shares (103) (560)
------------------ --------------------
832,801 984,385
------------------ --------------------
$ 2,054,142 $ 2,558,832
================== ====================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
UNISOURCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
1998 1997* 1998 1997*
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues
Printing and Imaging $1,152,073 $1,132,829 $3,544,985 $3,357,566
Supply Systems 669,343 631,212 2,013,486 1,850,916
--------------- --------------- --------------- --------------
1,821,416 1,764,041 5,558,471 5,208,482
--------------- --------------- --------------- --------------
Costs and Expenses
Cost of goods sold - Printing and Imaging 1,000,156 973,029 3,082,782 2,874,762
Cost of goods sold - Supply Systems 506,375 496,601 1,524,748 1,447,226
Selling and administrative 290,304 261,686 865,442 779,726
Restructuring charge 27,600 - 27,600 -
Special charge - - 168,000 -
--------------- --------------- --------------- --------------
1,824,435 1,731,316 5,668,572 5,101,714
--------------- --------------- --------------- --------------
(Loss) Income from operations (3,019) 32,725 (110,101) 106,768
Interest expense 11,155 10,541 35,898 30,932
--------------- --------------- --------------- --------------
(Loss) Income before taxes (14,174) 22,184 (145,999) 75,836
(Benefit) Provision for income taxes (3,759) 9,650 (41,658) 32,603
--------------- --------------- --------------- --------------
Net (Loss) Income $ (10,415) $ 12,534 $ (104,341) $ 43,233
=============== =============== =============== ==============
Basic (Loss) Earnings Per Share $ $ 0.19 $ (1.52) $ 0.64
(0.15)
=============== =============== =============== ==============
Diluted (Loss) Earnings Per Share $ (0.15) $ 0.19 $ (1.52) $ 0.64
=============== =============== =============== ==============
Dividends Per Share $ 0.20 $ 0.20 $ 0.60 $ 0.40
=============== =============== =============== ==============
</TABLE>
* Reclassified to conform with current year presentation.
See notes to condensed consolidated financial statements.
5
<PAGE>
UNISOURCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-----------------------------------------
1998 1997*
------------------ -------------------
<S> <C> <C>
Operating Activities
Net (loss) income $ (104,341) $ 43,233
Additions (deductions) to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 27,058 22,582
Amortization 15,906 12,474
Provision for losses on accounts receivable 10,439 13,657
Special charges 195,600 -
Deferred tax benefit (48,650) -
Loss on divestiture 5,700 -
Payments relating to restructuring and special charges (22,946) (11,498)
Changes in operating assets and liabilities, net of effects from
acquisitions and divestitures:
Sale of accounts receivable 150,000 -
Other changes in accounts receivable 83,945 27,323
Decrease in inventories 32,742 4,269
(Increase) decrease in prepaid expenses (12,341) 10,961
(Decrease) increase in accrued and deferred income taxes (16,019) 18,702
Decrease in accounts payable and accrued expenses (65,962) (21,443)
Miscellaneous 40 (64)
------------------ -------------------
Net cash provided by operating activities 251,171 120,196
------------------ -------------------
Investing Activities
Cost of companies acquired, net of cash acquired (49,017) (51,017)
Proceeds from divestitures 57,929 -
Proceeds from the sale of property and equipment 15,378 7,823
Collection of notes receivable - 21,577
Expenditures for property and equipment (24,019) (21,070)
Deferred cost expenditures (13,976) (37,462)
------------------ -------------------
Net cash used in investing activities (13,705) (80,149)
------------------ -------------------
Financing Activities
(Repayments) proceeds from borrowing under credit facility, net (54,051) 624,600
Debt repayments (148,319) (38,154)
Repayments to IKON Office Solutions, Inc. - (553,700)
Payment of dividends (41,515) (26,873)
Proceeds from stock issuances, net 8,919 (1,198)
------------------ -------------------
Net cash (used in) provided by financing activities (234,966) 4,675
------------------ -------------------
Net increase in cash 2,500 44,722
Cash at beginning of year 45,384 14,596
================== ===================
Cash at end of period $ 47,884 $ 59,318
================== ===================
</TABLE>
* Reclassified to conform with current year presentation.
See notes to condensed consolidated financial statements.
6
<PAGE>
UNISOURCE WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
Note 1: Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements for
Unisource Worldwide, Inc. (the "Company" or "Unisource") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of the special and
restructuring charges and normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations for the three
and nine month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 1998.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the fiscal year ended September 30, 1997 ("1997 Annual
Report").
Note 2: Debt
----
On November 22, 1996, the Company entered into a $1,000,000,000 five-year
unsecured credit agreement (the "credit facility"). The amount outstanding under
the credit facility at June 30, 1998 was $571,806,000. The credit facility
includes financial covenants requiring a ratio of consolidated total debt plus
the $150 million of accounts receivable sold (see Note 4) to capitalization (the
"leverage ratio") of less than 55% and a minimum consolidated net worth of
$745,000,000 plus 50% of consolidated net income (without deduction for losses)
after the date of the credit facility.
On July 29, 1998, the Company announced a restructuring charge (see Note 6) of
$130-$150 million. The Company has obtained an interim waiver for the financial
covenants in the credit facility through September 30, 1998, provided the
leverage ratio does not exceed 70%, and the Company's consolidated net worth is
not less than $550,000,000, at any time during the waiver period. The Company is
currently renegotiating the financial covenants in the credit facility with the
intent of amending the credit facility . To effect the amendment, a 51% approval
of the committed amount must be obtained from the group of lenders in the credit
facility. If such facility is not amended by October 1, 1998, the Company would
most likely be in violation of the minimum net worth covenant in the credit
facility ($764 million at June 30, 1998) and, if so, the creditors thereunder
would have the right to declare the loan due and payable. At such time, unless
alternative long-term financing is obtained, borrowings under the credit
facility would be classified as a current liability on the balance sheet. The
Company is confident that appropriate new terms will be put in place prior to
October 1, 1998.
7
<PAGE>
Note 3: Earnings Per Share
------------------
Basic (loss) earnings per share for the three month periods ended June 30, 1998
and 1997, and the nine month period ended June 30, 1998, was calculated based
upon the weighted average number of Company shares outstanding for the
respective period, exclusive of non-vested restricted stock. Basic earnings per
share for the nine-month period ended June 30, 1997 was calculated based upon
the weighted average number of Company shares issued and outstanding for the
period December 31, 1996 (date in which Unisource became a separate publicly
owned company) through June 30, 1997, exclusive of non-vested restricted stock.
The following table sets forth the computation of basic and diluted (loss)
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(in thousands except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income $ (10,415) $ 12,534 $(104,341) $43,233
========= ======== ========= =======
Denominator for basic (loss) earnings per share 68,878 67,131 68,662 67,074
Effect of dilutive securities:
Stock options - 402 (a) 661
--------- -------- --------- -------
Denominator for diluted (loss) earnings per share 68,878 67,533 68,662 67,735
========= ======== ========= =======
Basic (loss) earnings per share $ (0.15) $ 0.19 $ (1.52) $ 0.64
========= ======== ========= =======
Diluted (loss) earnings per share $ (0.15) $ 0.19 $ (1.52) (a) $ 0.64
========= ======== ========= =======
</TABLE>
(a) No incremental shares related to options are included due to the
antidilutive effect on the loss per share.
Note 4: Sale of Accounts Receivable
---------------------------
Effective October 1, 1997, the Company entered into an agreement to sell up to
$150,000,000 of certain qualifying accounts receivable. The agreement provides
limited recourse to the Company in the event that previously sold receivables
become uncollectible. As collections reduce previously sold interests, new
receivables may be sold up to $150,000,000. The proceeds from the sale were
primarily utilized to repay certain notes payable. The amount of receivables
sold under the agreement was $150,000,000 at June 30, 1998.
The Company has a similar agreement to sell up to CN$95,000,000 of Canadian
accounts receivable, as described in the Company's 1997 Annual Report. The
amount of receivables sold under this agreement amounted to CN$95,000,000
(US$64,679,000) and CN$90,000,000 (US$65,142,000) at June 30, 1998 and September
30, 1997, respectively.
The total cost associated with these agreements was $3,053,000 and $551,000 for
the three-month periods and $9,425,000 and $1,736,000 for the nine month periods
ended June 30, 1998 and 1997, respectively. Such costs are classified within
"selling and administrative" expense in the Condensed Consolidated Statements of
Operations.
8
<PAGE>
Note 5: Special Charge
--------------
In January 1998, the Company announced it had completed an in-depth study and
evaluation of the cost/benefit relationship of NADS, its North American
Distribution System, under development since 1994, and concluded that this
information technology system would not cost-effectively meet the Company's
future information technology needs. In the first quarter of fiscal 1998, the
Company recorded a $168 million ($109 million after-tax) or $1.60 per share
special charge to write-off capitalized development and related costs associated
with NADS. The charge, which is primarily non-cash, consisted of $155 million
related to the write-off of deferred costs, along with $13 million for
terminating the existing outsourcing contracts and other related costs.
Note 6: Restructuring Charge
-------------------
In January 1998, the Company announced that it would take a number of
significant steps to streamline its organization, accelerate profitable growth
and improve its return to stockholders. The steps outlined included moving from
a regional to a functionally-aligned organizational structure, closing or
consolidating underperforming and overlapping locations, and implementing more
consistent business practices across the Company. The Company had estimated that
as many as 50 locations and approximately 800 employees were to be impacted by
these moves and the Company had expected to take a pre-tax charge in the range
of $55 to $70 million in the second quarter of fiscal 1998 to reflect the costs
of this program.
In March 1998, the Company announced it had substantially completed the initial
phase of the streamlining analysis and, based on its findings, it had
significantly expanded the scope of the project. The Company engaged Coopers &
Lybrand Consulting to assist in designing its new organizational structure. The
Company also announced that the restructuring plan would be developed by the end
of July, and that the charge would be larger than announced in January 1998 and
would be taken in the second half of the fiscal year.
On July 29, 1998, the Board of Directors approved and the Company announced
details of an extensive restructuring plan designed to improve service to
customers, decrease costs, increase financial flexibility and grow profitable
market segments. The expanded scope of the restructuring plan includes a net
reduction of more than 1,500 employees across all business functions, or
approximately 15% of the Company's U.S. workforce, and approximately 20% of its
U.S. warehouse space. As a result of the restructuring, the Company estimates it
will take a total pre-tax charge of $130-$150 million in fiscal 1998 and
estimates it will incur one-time implementation expenses of $50-$60 million over
the following two years. Such estimated charges reflect severance, facility
closures, inventory write-down due to closure of facilities, discontinuation of
certain product lines and rationalization of vendors and SKUs, and anticipated
restructuring of the Company's Canadian and Mexican operations. Such
implementation costs are expected to cover relocation, recruitment, training,
duplicate manning during the transition, and IT consolidation expenses related
to the restructuring. Future cash expenditures related to the total $180 to $210
million pre-tax charge and one-time implementation expenses will range from $120
to $150 million with the majority being expended in fiscal 1999.
9
<PAGE>
The Company recorded $27.6 million ($17.9 million after-tax) of the charge in
the third quarter reflecting closures or sales of facilities initiated during
that quarter. Proceeds of approximately $10 million were received from the sale
of two divisions as part of the restructuring plan. In addition, an $11.5
million non-cash write-off of intangible assets associated with the sale of one
of these divisions is included as part of the third quarter charge. The balance
of the third quarter charge relates to severance ($5.9 million) and facility
closure and other related costs ($10.2 million). The Company estimates it will
record a $102-$122 million ($66-$79 million after-tax) charge in the fourth
quarter of fiscal 1998.
A final determination of the amounts of the charge and implementation costs
depend on work presently in process to refine the requirements for Canada and
Mexico and to complete an analysis of the inventory impact. The Company
anticipates that this work will be completed in the current quarter and
announced prior to fiscal year-end September 30, 1998.
Note 7: Divestiture
-----------
Effective October 20, 1997, the Company sold a significant portion of its United
States-based Grocery Supply Systems business for approximately $48 million in
cash. This is $3 million less than the estimated proceeds disclosed in the 1997
Annual Report due to a reduction in the quantity of inventories ultimately sold.
The pre-tax effect of the sale was not material; however, the Company recorded a
tax charge of $5.7 million ($0.08 per share) in the first quarter of fiscal
1998. The tax charge relates mainly to non-deductible intangible assets related
to the business sold.
Note 8: Income Tax (Benefit) Provision
------------------------------
The income tax (benefit) provisions were ($41,658,000) and $32,603,000 based
upon overall effective tax rates of 28.5% and 43.0%, for the nine month periods
ended June 30, 1998 and 1997, respectively. The components of the effective tax
rate for the nine month period ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Tax
Income (Loss) Provision Effective
($'s in thousands) Before Taxes (Benefit) Rate
------------ --------- ----
<S> <C> <C> <C>
Income before taxes - excluding restructuring and $ 49,601 $ 21,102 42.5%
special charges
Restructuring charge (27,600) (9,660) 35.0%
Special charge (168,000) (58,800) 35.0%
Grocery divestiture - tax charge - 5,700 -
------------ ----------
$ (145,999) $ (41,658) 28.5%
============ ==========
</TABLE>
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- -------------------------------------------------------------------------
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
RESULTS OF OPERATIONS
---------------------
Revenues and income (loss) before taxes for the three and nine-month periods
ended June 30, 1998 compared to the three and nine-month periods ended June 30,
1997 were as follows:
<TABLE>
<CAPTION>
($'s in millions) Three Months Ended June 30 Nine Months Ended June 30
-------------------------- -------------------------
1998 1997* % Change 1998 1997* % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Printing and Imaging $1,152.1 $1,132.8 1.7 % $3,545.0 $3,357.6 5.6 %
Supply Systems 669.3 631.2 6.0 % 2,013.5 1,850.9 8.8 %
---------- --------- --------- ---------
$1,821.4 $1,764.0 3.3 % $5,558.5 $5,208.5 6.7 %
========== ========= ========= =========
Gross Profit:
Printing and Imaging $ 151.9 $ 159.8 (4.9)% $ 462.2 $ 482.8 (4.3)%
Supply Systems 162.9 134.6 21.1 % 488.7 403.7 21.1 %
---------- --------- --------- ---------
314.8 294.4 7.0 % 950.9 886.5 7.3 %
Selling and
Administrative Expense 290.2 261.7 10.9 % 865.4 779.7 11.0 %
Restructuring Charge 27.6 - 27.6 -
Special Charge - - 168.0 -
---------- --------- ---------
- - -
- - -
Operating (Loss) Income (3.0) 32.7 nm (110.1) 106.8 nm
Interest Expense 11.2 10.5 5.8 % 35.9 31.0 16.1 %
---------- --------- --------- ---------
Income (Loss) Before Taxes $ (14.2) $ 22.2 nm $ (146.0) $ 75.8 nm
=========== ========= ========== =========
</TABLE>
*Reclassified to conform with current year presentation.
nm = not meaningful
THREE-MONTH PERIOD ENDED JUNE 30, 1998
Revenues increased $57.4 million, or 3.3%, to $1.82 billion in the third quarter
of fiscal 1998 as compared to the same period in fiscal 1997. Current and prior
year acquisitions ($111.3 million) net of the divestiture of a significant
portion of the United States-based Grocery Supply Systems business ($89.0
million) contributed $22.3 million of the increase. This net increase is
primarily associated with Supply Systems. Revenues from base operations
increased $35.1 million due to an estimated increase in volume of .2% ($2.1
million) in Printing and Imaging and 2.9% ($18.1 million) in Supply Systems and
an estimated average increase in pricing of .4% ($4.3 million) in Printing and
Imaging and 1.7% ($10.6 million) in Supply Systems.
Gross profit increased by $20.4 million or 7.0%, to $314.8 million in the third
quarter of fiscal 1998, compared to the prior year's quarter. This increase is
associated with current and prior year acquisitions ($34.8 million), net of the
divestiture ($13.9 million). Gross profit from base operations declined by $.5
million, primarily due to a decrease in gross profit percentages in Printing and
Imaging which declined from 14.1% to 13.2%. Total gross profit as a percentage
of revenues increased from 16.7% to 17.3%, with the decline in Printing and
Imaging being more than offset by higher gross profit percentages from acquired
companies and the Supply Systems
11
<PAGE>
base business. Selling and administrative expense increased by $28.5 million, or
10.9%, in the third quarter of fiscal 1998, compared to the third quarter of
fiscal 1997. The increase is primarily attributable to costs associated with
current and prior year acquisitions (net of divestiture), along with costs
related to the Company's agreements to sell accounts receivable (see Note 4).
Excluding these costs, selling and administrative expenses increased by
approximately 3% primarily due to planned expenditures associated with IT and
Year 2000 compliance costs.
On July 29, 1998, the Board of Directors approved and the Company announced the
details of an extensive restructuring plan designed to improve customer service,
decrease costs, increase financial flexibility and grow profitable market
segments. As a result of the restructuring, the Company recorded a $27.6 million
($17.9 million after-tax) charge in the third quarter and estimates it will
record a $102-$122 million ($66-$79 million after-tax) charge in the fourth
quarter of fiscal 1998. The Company also estimates it will incur one-time
implementation expenses of $50-$60 million over the following two years with the
majority of such costs being incurred in fiscal 1999 (see Note 6.)
Operating income decreased $35.7 million for the quarter compared to the prior
year's quarter. Excluding the $27.6 million restructuring charge, operating
income for the quarter decreased $8.1 million or 24.9%, as compared to the same
period of fiscal 1997. The decrease in operating income is primarily due to
gross profit percentage declines in the Printing and Imaging business and costs
associated with the $150 million agreement to sell accounts receivable which
became effective on October 1, 1997. Such decreases were partially offset by the
incremental contributions from acquisitions and by volume and pricing increases
in the Company's base business. Operating margin (excluding restructuring
charge) was 1.3% for the quarter, compared to 1.9% for the corresponding period
of fiscal 1997.
Interest expense increased by $.7 million to $11.2 million during the quarter
compared to the same period of the prior year. The increase was attributable
primarily to higher average outstanding borrowings associated with acquisitions.
Foreign Operations
Revenues from foreign operations increased $1.9 million to $228.5 million for
the three month period ended June 30, 1998, as compared to the same period of
the prior year. Revenues from Canadian operations increased $5.1 million to
$194.7 million, while revenues from Mexican operations increased $1.2 million to
$32.0 million. The increase in Canadian and Mexican revenues was primarily the
result of acquisitions and an increase in average paper pricing which was
partially offset by a decrease in revenues of other foreign sales offices of
$4.4 million to $1.8 million for the quarter ended June 30, 1998.
Operating income from foreign operations decreased $2.2 million to $7.7 million
for the three month period ended June 30, 1998, as compared to the same period
of the prior year. Canadian operating income decreased $1.7 million due
primarily to a decline in the gross profit percentages in the Printing and
Imaging business. Mexico and other foreign sales offices' operating income
decreased $.5 million for the three month period ended June 30, 1998.
12
<PAGE>
Mexico is considered a hyper-inflationary economy for accounting purposes, and
the changes in exchange rates applied to the Company's net monetary assets are
reflected in net income. The net monetary assets at June 30, 1998 were US $43
million. As a result of the devaluation of the Mexican Peso of 5.2% for the
period April 1, 1998 to June 30, 1998, the Company recorded a $424,000 charge in
the third quarter of fiscal 1998.
Except as noted above, there was no material effect of foreign currency exchange
rate changes on the results of operations during the period as compared to the
same period of the prior fiscal year.
NINE-MONTH PERIOD ENDED JUNE 30, 1998
Revenues for this period increased $350.0 million, or 6.7%, to $5.56 billion, as
compared to the same period in fiscal 1997. Current and prior year acquisitions
($368.7 million) net of divestiture of a significant portion of the United
States-based Grocery Supply Systems business ($257.3 million) contributed $111.4
million of the increase. Revenues from base operations increased $238.6 million,
primarily due to an estimated increase in average paper prices in the Printing
and Imaging business of 3.4%, as compared to the same period last year, along
with volume gains of 1.3% for Printing and Imaging and 3.7% for Supply Systems
base operations.
Gross profits for this period increased by $64.4 million, or 7.3%, as compared
to the same period in fiscal 1997. This increase is associated with current and
prior year acquisitions ($116.6 million), net of the divestiture ($39.7
million), offset by declines of $12.5 million in base operations for the
nine-month period ended June 30, 1998. The decline in base operations is due
principally to a decrease in gross profit percentages in Printing and Imaging
from 14.4% to 13.0%. Total gross profit as a percentage of revenues increased
from 17.0% to 17.1% for the nine month period, with the decline in Printing and
Imaging being offset by higher gross profit percentages from acquired companies
and the Supply Systems base business.
Selling and administrative expense increased by $85.7 million, or 11.0%, for the
nine-month period ended June 30, 1998, when compared with the corresponding
period of fiscal 1997. The increase is primarily attributable to costs
associated with current and prior year acquisitions, net of divestiture, along
with costs associated with the Company's agreement to sell accounts receivable
(see Note 4). Excluding these costs, selling and administrative expenses
increased by approximately 1%.
In connection with the restructuring plan (see Note 6), the Company estimates
that it will take a pre-tax restructuring charge of $130-$150 million in fiscal
1998 and estimates it will incur one-time implementation expenses of $50-$60
million over the following two years with the majority of such costs being
incurred in fiscal 1999. During the nine month period ended June 30, 1998, the
Company recorded $27.6 million ($17.9 million after tax) relating to this
charge.
13
<PAGE>
At the end of the first quarter of fiscal 1998, the Company recorded a $168
million ($109 million after tax) or $1.60 per share special charge for the
write-off of its information technology system ("NADS") (See Note 5). In October
1997, the Company announced an in-depth study to evaluate the cost/benefit
relationship of NADS, which was under development. Management concluded that
NADS would not cost-effectively meet the Company's future information technology
needs.
Operating income decreased $216.9 million for the nine month period, as compared
to the same period of fiscal 1997. Excluding the $195.6 million special and
restructuring charges, operating income for the nine-month period decreased
$21.3 million, or 19.9%, as compared to the same period of fiscal 1997. Current
and prior year acquisitions ($10.8 million), net of divestiture ($1.2 million),
contributed an incremental $9.6 million of operating income. Operating income
from base operations declined $30.9 million for the nine-month period, primarily
due to gross profit percentage declines in the Printing and Imaging business and
$7.7 million of incremental costs associated with agreements to sell accounts
receivable. Such decline was partially offset by pricing improvement and volume
increases. Operating margins (excluding restructuring and special charges) were
1.5%, compared to 2.0% for the corresponding nine-month period of fiscal 1997.
Interest expense increased by $4.9 million as compared to the first nine months
of fiscal 1997. The increase was attributable to higher average outstanding
borrowings primarily due to acquisitions, and to a lesser extent, increased
working capital requirements.
Foreign Operations
Revenues from foreign operations increased $20.2 million to $681.8 million for
the nine-month period ended June 30, 1998, as compared to the same period of
fiscal 1997. Revenues from Canadian operations increased $28.6 million to $580.9
million, while revenues from Mexican operations increased $11.5 million to $95.8
million. The increase in Canadian and Mexican revenues was attributable to an
increase in average paper prices and the results of acquisitions. Revenues from
other foreign sales offices decreased $19.9 million to $5.1 million for the
nine-month period ended June 30, 1998.
Operating income from foreign operations decreased $2.6 million to $22.3 million
for the nine-month period, as compared to the same period of fiscal 1997.
Canadian operating income decreased $2.2 million to $18.9 million, primarily due
to the decline in gross profit percentages. Mexican operating income was flat,
with the increase from acquisitions being substantially offset by the
devaluation of the Mexican Peso. The other foreign sales offices' operating loss
increased by $.4 million for the nine-month period ended June 30, 1998.
Mexico is considered a hyper-inflationary economy for accounting purposes, and
the changes in exchange rates applied to the Company's net monetary assets are
reflected in net income. As a result of the devaluation of the Mexican Peso of
13.6%, the Company recorded an $869,000 charge for the nine-month period ended
June 30, 1998.
Except as noted above, there was no material effect of foreign currency on the
results of operations during the period as compared to the same period of the
prior fiscal year.
14
<PAGE>
Year 2000
The Company has created a Corporate Year 2000 Project Office which is
coordinating the efforts to evaluate, identify, correct or reprogram, and test
the Company's existing systems for Year 2000 compliance. The Company is taking
the required steps to make its existing systems Year 2000 ready at a total
estimated cost of $12 million over the two fiscal years of 1998 and 1999. For
the nine-month period ended June 30, 1998, the Company has incurred $3.1 million
of Year 2000 costs. The Company estimates it will spend approximately $2.5
million in the fourth quarter and is on schedule to complete its remediation
efforts by May 1999. If such efforts are not completed timely, the Year 2000
issue could have a material impact on the operations of the Company.
In addition to making its own systems Year 2000 ready, the Company has and will
continue to contact its key suppliers and customers to determine the extent to
which the systems of such suppliers and customers are Year 2000 compliant and
the extent to which the Company could be affected by the failure of such third
parties to be Year 2000 compliant. The Company cannot presently estimate the
impact of the failure of such third parties to be Year 2000 compliant.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Net cash provided by operating activities (excluding proceeds of $150 million
from the sale of accounts receivable) for the nine-month period ended June 30,
1998 was $101.2 million. Included in operating activities was $22.9 million of
cash expenditures in connection with the Company's fiscal 1998 special and
restructuring charges and the fiscal 1996 $50 million restructuring program.
Remaining restructuring and special charge cash expenditures relating to
accruals as of June 30, 1998 are estimated at $26 million. Cash used for
investing activities included deferred cost expenditures of $14.0 million
principally related to costs associated with the information technology system
referred to as NADS through December 31, 1997, capital expenditures of $24.0
million, and expenditures for acquisitions of $49.0 million. Investing activity
expenditures were offset by proceeds of $73.3 million primarily associated with
the sale of a significant portion of its U.S.-based Grocery Supply Systems
business and proceeds received from the sale of property, resulting in a net
$13.7 million used in investing activities. Cash used in financing activities
included dividend payments net of proceeds from stock issued of $32.6 million
and net debt reduction of $202.4 million.
On June 30, 1998, total debt of $599.0 million was outstanding. The Company had
a total of $1 billion in bank credit commitments as of June 30, 1998, of which
$428.2 million was unused and available.
15
<PAGE>
On July 29, 1998, the Company announced that the Board of Directors approved an
amendment to its credit facility (see Note 2), as well as the issuance of $300
million of senior subordinated 10-year notes anticipated to be offered to
institutional investors in September. The amendment will reduce the amount of
the credit facility from $1 billion to $900 million and will permit more
flexible financial covenants. The immediate reduction of $100 million is due to
the expectation that this additional borrowing capacity will not be needed. The
amount of the credit facility will be further reduced to $600 million when the
note proceeds are received. The Company's lenders have approved a covenant
waiver through September 30, 1998 and the final amendment is expected to be
completed in early September.
Interest costs are forecast to increase in fiscal 1999 by $8 to $10 million, due
to higher rates associated with the long-term financing and an expected increase
in the pricing of the Company's credit facility. Additionally, the Company
announced its intention to reduce future quarterly dividends from $.20 to $.05
per share, beginning with the dividend payable in December 1998. This reduction
in dividend payments is expected to reduce quarterly cash outflows by
approximately $11 million.
Also, on July 29, 1998, the Company announced that it anticipates recording
$102-$122 million of the $130-$150 million restructuring charge (see Note 6) in
the fourth quarter of fiscal 1998. The portion of the fourth quarter charge
which is expected to result in future cash expenditures is estimated to range
between $70-$90 million. The non-cash charges primarily relate to the disposal
of assets. In addition, the Company will incur one-time implementation expenses
of $50-$60 million. The majority of the restructuring charge cash expenditures
and the one-time implementation expense will be incurred in fiscal 1999.
The business impact of the anticipated changes, combined with the elimination of
unprofitable business, could result in an estimated net revenue decline of
$500-$700 million in 1999. Depending on the amount of the revenue decline,
additional positions could be eliminated . However, upon full implementation,
the plan is expected to have a significant positive effect on the Company's
financial performance, resulting in an estimated annualized increase in
operating income of $150-$170 million, with a return on shareholders equity
approaching 14% and a return on capital of nearly 10% by the end of the year
2000.
Unisource's long-term acquisition strategy includes a commitment to achieve
greater revenue balance between Printing and Imaging and Supply Systems, reduce
the Company's exposure to the cyclical paper market, provide a broader range of
products and services to customers, and leverage its distribution infrastructure
to increase sales and profitability. However, over the next eighteen months, the
Company intends to focus significant resources on the implementation of its
Restructuring Plan. Accordingly, while the Company will continue to consider
strategic acquisition candidates, the pace of its acquisition activity is likely
to significantly decrease compared with prior years.
The majority of the Company's revenues are denominated in U.S. dollars, although
the Company owns properties and conducts operations in non-U.S. facilities
including Canada and Mexico. Accordingly, fluctuations in the exchange rate
between the U.S. dollar and the respective currencies of the aforementioned
countries could have an adverse effect on the Company.
The Company believes that operating cash flow, the financial benefits to be
realized from the restructuring efforts, and its financing arrangements will be
sufficient to finance current operating requirements, including capital
expenditures, acquisitions, Year 2000 compliance costs, the restructuring
program and related implementation costs, other cash requirements, and future
dividends.
16
<PAGE>
The senior subordinated notes that Unisource anticipates offering to
institutional investors in September 1998 have not been and will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements.
All statements, other than statements of historical fact, made in this report,
including, without limitation, (i) statements relating to the implementation of
the restructuring plan and the timing thereof (including the planned reduction
of employees and warehouse space, and the anticipated restructuring of its
Canadian and Mexican operations), the projected costs and expenses associated
with the restructuring plan and the implementation thereof (including the amount
and timing of the charges to be taken in connection therewith and the amount of
cash to be used in connection therewith) and the financial results and benefits
to be realized from, such restructuring (including projected increased operating
income, increased cash flow, improved financial performance, and improved return
on shareholders equity and return on capital), and the other projected
ramifications of the restructuring plan (including any decrease in revenues),
(ii) statements relating to the payment of future dividends not yet declared,
the consummation of the amendment to the company's credit facility, the issuance
of senior subordinated notes, and other proposed future actions, (iii)
implementation of the Company's Year 2000 initiative, (iv) statements concerning
the Company's ability to finance current operating requirements, and (v)
statements qualified by the words "believes," "anticipates," "expects,"
"intends," "may," "estimates," "will," and other words similar thereto, are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the
company believes these statements are based upon reasonable assumptions with
respect to future events and circumstances, such statements are subject to risks
and uncertainties which could cause actual results or circumstances to differ
materially. Such risks and uncertainties include, without limitation, delays,
difficulties, or increased costs associated with the implementation of the
restructuring plan, the consummation of the amendment of its credit facility,
the issuance of the senior subordinated notes, leverage and debt service
requirements (including sensitivity to interest rate fluctuations), operating in
a competitive environment, general economic conditions, delays, difficulties, or
increased costs with the implementation of its Year 2000 initiative, the ability
to attract and retain qualified personnel, changes or volatility in pulp and
paper prices, and delays or difficulties with consolidation of its information
technology systems and the upgrading of such systems to be year 2000 compliant.
For further detail and information concerning such risks and uncertainties,
please consult Part I, Item 1, of the company's annual report on Form 10-K for
the fiscal year ended September 30, 1997, which is on file with the Securities
and Exchange Commission.
17
<PAGE>
PART II. - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- --------------------------
TIMELY SUBMISSION OF CERTAIN STOCKHOLDER PROPOSALS
------------------------------------------
The Securities and Exchange Commission ("SEC") recently amended
certain rules, including its rules governing the exercise of discretionary
proxy voting authority with respect to stockholder proposals submitted
outside of the Rule 14a-8 procedures under the Securities Exchange Act of
1934. The amended rules provide, among other things, that a Company may
exercise discretionary voting authority conferred upon it if the proponent
of a stockholder proposal outside of the Rule 14a-8 procedures fails to
give timely notice of the proposal.
The amended rules provide that to be deemed timely the required notice
must be received within certain time parameters established by these rules,
as applied to the Company's annual meeting date and relevant provisions of
the Company's charter and by-laws. The Company's Board of Directors has not
yet fixed the date of the Company's 1999 Annual Meeting of Stockholders.
Assuming that such meeting is held on, or within 30 days before or after,
the anniversary of last year's annual meeting, notice of a stockholder
proposal to be submitted outside of the procedures of Rule 14a-8, to be
timely, must be received, on or after October 30, 1998 but on or before
November 29, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. Description
----------- -----------
10.14 Unisource Worldwide, Inc. Stock Option Plan for
employees, as amended and restated as of January 28,
1998.
27 Financial Data Schedule for the Nine Month Period
Ended June 30, 1998.
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
Financial
Statement
Item Reported Filed Date of Report File Date
------------- ----- -------------- ---------
<S> <C> <C> <C>
Press release disclosing second No April 28, 1998 April 28, 1998
quarter fiscal 1998 financial results
</TABLE>
18
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. This report has also been signed by the
undersigned in his capacity as the principal financial officer of the
Registrant.
UNISOURCE WORLDWIDE, INC.
Date: August 14, 1998 /s/ Richard H. Bogan
-------------------------
Richard H. Bogan
Senior Vice President and Chief Financial Officer
19
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
------ -----------
10.14 Unisource Worldwide, Inc. Stock Option Plan for employees,
as amended and restated as of January 28, 1998.
27 Financial Data Schedule for the Nine Month Period Ended
June 30, 1998
20
<PAGE>
Exhibit 10.14
UNISOURCE WORLDWIDE, INC.
STOCK OPTION PLAN
As Amended and Restated as of January 28, 1998
----------------------------------------------
ARTICLE I
Purpose
The purpose of this Stock Option Plan (the "Plan") is to enable Unisource
Worldwide, Inc. (the "Company") to offer employees and consultants of the
Company and its subsidiaries equity interests in the Company, thereby
attracting, retaining and rewarding such persons, and strengthening the
mutuality of interests between such persons and the Company's shareholders.
ARTICLE II
Definitions
For purposes of this Plan, the following terms shall have the following
meanings:
2.1 "Board" shall mean the Board of Directors of the Company.
-----
2.2 "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
2.3 "Committee" shall mean a committee appointed by the Board to
---------
administer the Plan, consisting of two or more Directors, each of whom is a
"non-employee director" as defined in Rule 16b-3 under the Securities Exchange
Act of 1934 and an "outside director" as defined in regulations under Section
162(m) of the Code.
2.4 "Common Stock" shall mean the Common Stock, par value $.001, of
------------
the Company.
2.5 "Company" shall mean Unisource Worldwide, Inc..
-------
2.6 "Fair Market Value" as of any date shall mean, unless
-----------------
otherwise required by any applicable provision of the Code or any regulations
issued thereunder, the closing sales price of a share of Common Stock for the
applicable trading day as reported on the New York Stock Exchange Composite
Tape.
2.7 "Incentive Stock Option" shall mean any Stock Option
----------------------
awarded under this Plan intended to be and designated as an "Incentive Stock
Option" within the meaning of Section 422 of the Code or any successor section.
1
<PAGE>
2.8 "Non-Qualified Stock Option" shall mean any Stock Option
--------------------------
awarded under this Plan that is not an Incentive Stock Option.
2.9 "Participant" shall mean a person to whom an Option has
-----------
been granted under this Plan.
2.10 "Stock Option" or "Option" shall mean any option to purchase
------------ ------
shares of Common Stock granted pursuant to Article VI.
ARTICLE III
Administration
3.1 The Committee. The Plan shall be administered and interpreted
-------------
by the Committee.
3.2 Awards. The Committee shall have full authority to grant Stock
------
Options to persons eligible under Article V, including the authority:
(a) to select the persons to whom Stock Options may from time to
time be granted;
(b) to determine whether and to what extent Incentive Stock
Options or Non-Qualified Stock Options, or any combination thereof, are to be
granted to one or more persons eligible to receive Options under Article V;
(c) to determine the number of shares of Common Stock to be
covered by each Option granted; and
(d) to determine the terms and conditions, not inconsistent with
the terms of this Plan, of any Option granted (including, but not limited to,
the exercise price of the Option, the term of the Option, any restriction or
limitation affecting the exercisability of the Option and any conditions under
which the exercisability of the Option will be accelerated).
3.3 Guidelines. Subject to Article VII hereof, the Committee shall
----------
have the authority to adopt, alter and repeal such administrative rules,
guidelines and practices governing this Plan as it shall, from time to time,
deem advisable; to interpret the terms and provisions of this Plan and any
Option granted under this Plan (and any agreements relating thereto), and to
otherwise supervise the administration of this Plan. The Committee may correct
any defect, supply any omission or reconcile any inconsistency in this Plan or
in any Option in the manner and to the extent it shall deem necessary to carry
this Plan into effect.
3.4 Decisions Final. Any decision, interpretation or other action
---------------
made or taken in good faith by the Committee arising out of or in connection
with the Plan shall be final, binding and conclusive on the Company, all
employees and Participants and their respective heirs, executors,
administrators, successors and assigns.
2
<PAGE>
ARTICLE IV
Share Limitations
4.1 Shares. The maximum aggregate number of shares of Common Stock
------
that may be issued under this Plan shall be 10,000,000 (subject to any increase
or decrease pursuant to Section 4.3), which may be either authorized and
unissued Common Stock or issued Common Stock reacquired by the Company. If any
Option granted under this Plan expires, terminates or is cancelled for any
reason without having been exercised in full, the number of unpurchased shares
shall again be available for the purposes of the Plan.
4.2 Individual Limit. The maximum aggregate number of shares with
----------------
respect to which Options may be granted to any individual during any fiscal year
shall be 500,000 (subject to increase or decrease pursuant to Section 4.3).
4.3 Adjustments. If the outstanding shares of Common Stock are
-----------
increased, decreased or exchanged for a different number or kind of shares or
other securities, or if additional shares or other property (other than ordinary
cash dividends) are distributed with respect to such shares of Common Stock or
other securities, through merger, consolidation, sale of all or substantially
all of the assets of the Company, reorganization, recapitalization,
reclassification, dividend, stock split, reverse stock split, spin off, split
off, or other distribution with respect to such shares of Common Stock, or other
securities, an appropriate and proportionate adjustment may be made in (i) the
maximum number and kind of shares that may be issued under the Plan, (ii) the
maximum number and kind of shares with respect to which Options may be granted
to any individual during any fiscal year, (iii) the number and kind of shares or
other securities subject to then outstanding Options, and (iv) the price for
each share subject to any then outstanding Options. No fractional shares will be
issued under the Plan on account of any such adjustments.
ARTICLE V
Eligibility
5.1 Employees. Officers and other employees of the Company
---------
(including directors of the Company who are also employees of the Company) and
employees of any subsidiary of the Company are eligible to be granted Options
under this Plan.
5.2 Consultants. Persons who directly or through a corporation in
-----------
which they own a majority of the outstanding shares of voting stock provide
services to the Company or any of its subsidiaries as independent contractors
are eligible to be granted Non-Qualified Stock Options under this Plan.
3
<PAGE>
ARTICLE VI
Stock Options
6.1 Options. Each Stock Option granted under this Plan shall be
-------
either an Incentive Stock Option or a Non-Qualified Stock Option.
6.2 Grants. The Committee shall have the authority to grant to any
------
person eligible under Article V one or more Incentive Stock Options, Non-
Qualified Stock Options, or both types of Stock Options. To the extent that any
Stock Option does not qualify as an Incentive Stock Option (whether because of
its provisions or the time or manner of its exercise or otherwise), such Stock
Option or the portion thereof which does not qualify as an Incentive Stock
Option shall constitute a separate Non-Qualified Stock Option.
6.3 Incentive Stock Options. Anything in the Plan to the contrary
-----------------------
notwithstanding, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify the Plan under Section
422 of the Code, or, without the consent of the Participant affected, to
disqualify any Incentive Stock Option under such Section 422.
6.4 Terms of Options. Options granted under this Plan shall be
----------------
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of this Plan, as the
Committee shall deem desirable:
(a) Stock Option Award. Each Stock Option shall be evidenced
------------------
by, and subject to the terms of, a Stock Option Award. The Stock Option Award
shall specify whether the Option is an Incentive Stock Option or a Non-Qualified
Stock Option, the number of shares of Common Stock subject to the Stock Option,
the option price, the option term, and the other terms and conditions applicable
to the Stock Option.
(b) Option Price. The option price per share of Common Stock
------------
purchasable upon exercise of a Stock Option shall be determined by the Committee
at the time of grant but shall be not less than 100% of the Fair Market Value of
the Common Stock on the date of grant if the Stock Option is intended to be an
Incentive Stock Option, and for options granted after June 30, 1997, the option
price shall not be less than 100% of the Fair Market Value of the Common Stock
on the date of the grant if the Stock Option is a Non-Qualified Stock Option.
(c) Option Term. The term of each Stock Option shall be fixed
-----------
by the Committee at the time of grant but shall not be exercisable more than ten
years after the date of grant if the Stock Option is intended to be an Incentive
Stock Option.
(d) Exercisability. Stock Options shall be exercisable at such
--------------
time or times and subject to such terms and conditions as shall be determined by
the Committee at the time of grant; provided, however, that the Committee may
waive any installment exercise or waiting period provisions, in whole or in
part, at any time after the date of grant, based on such factors as the
Committee shall, in its sole discretion, deem appropriate.
4
<PAGE>
(e) Method of Exercise. Subject to such installment exercise
------------------
and waiting period provisions as may be imposed by the Committee, Stock Options
may be exercised in whole or in part at any time during the option term, by
giving written notice of exercise to the Company specifying the number of shares
of Common Stock to be purchased and the option price for such shares. The option
exercise price shall be paid in full in cash or check payable to the order of
Unisource prior to the delivery of the shares, or by tendering the number of
shares of Unisource common stock equal in value to the exercise price, or the
options may be exercised through broker-assisted exercises in which the broker
may forward the exercise price. Upon payment in full of the option price, a
stock certificate or stock certificates representing the number of shares of
Common Stock to which the Participant is entitled shall be delivered to the
Participant (or the broker). A Participant shall not be deemed to be the holder
of Common Stock, or to have the rights of a holder of Common Stock, with respect
to shares subject to the Option, unless and until a stock certificate
representing such shares of Common Stock is issued.
(f) Termination of Employment. Unless otherwise determined
-------------------------
by the Committee, Stock Options held by a Participant who ceases to be an
employee or consultant of the Company and its subsidiaries shall be exercisable
as follows:
(i) In the case of a Participant who dies, all Options
that were outstanding on the date of the Participant's death may be exercised by
the legal representative of the Participant's estate for a period of one year
after the date of death or until the expiration of the stated term of the
Option, whichever period is shorter.
(ii) In the case of a Participant who becomes disabled (as
defined by the Company's Long Term Disability Plan), all Options that were
outstanding on the effective date of such disability may be exercised by the
Participant for a period of one year after such date or until the expiration of
the stated term of the Option, whichever period is shorter.
(iii) In the case of a Participant who ceases to be an
employee or consultant of the Company and its subsidiaries for any reason other
than death or disability, all Options that were exercisable on the date of
termination of the Participant's employment or consulting relationship may be
exercised by the Participant for a period of three months after such date or
until the expiration of the stated term of the Option, whichever period is
shorter.
(iv) Any Option not exercised during the periods specified in
Subsections (i), (ii) or (iii) shall terminate at the end of such period;
provided, however, that the Committee may extend such period, based on such
factors as the Committee shall, in its sole discretion, deem appropriate. If an
Incentive Stock Option is exercised after the expiration of the exercise periods
that apply for purposes of Section 422 of the Code, such Option will thereafter
be treated as a Non-Qualified Stock Option.
5
<PAGE>
(g) Incentive Stock Option Limitations. To the extent that
----------------------------------
the aggregate Fair Market Value (determined as of the date of grant) of the
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by the Participant during any calendar year under the Plan and/or
any other stock option plan of the Company or any subsidiary or parent
corporation (within the meaning of Section 424 of the Code) exceeds $100,000,
such Options shall be treated as Non-Qualified Stock Options.
Should the foregoing provisions not be necessary in order for
the Stock Options to qualify as Incentive Stock Options, or should any
additional provisions be required, the Board may amend this Plan or any
individual award accordingly.
ARTICLE VII
Termination or Amendment
7.1 Termination or Amendment of the Plan. The Board may at any
------------------------------------
time terminate this Plan or amend all or any part of this Plan; provided,
however, that, unless otherwise required by law, and subject to Article IV, the
rights of a Participant with respect to Options granted prior to such
termination or amendment may not be materially impaired without the consent of
such Participant.
7.2 Amendment of Options. The Committee may amend the terms of
--------------------
any outstanding Option, prospectively or retroactively, but, subject to Article
IV, no such amendment or other action by the Committee may have a material
adverse effect on the rights of any holder without the holder's consent,
provided however, that except as provided in Section 4.3, no such amendment will
have the effect of reducing the exercise price below the exercise price in
effect immediately prior to any such amendment.
ARTICLE VIII
General Provisions
8.1 Nonassignment. Except as otherwise provided in this Plan,
---------------
Options granted hereunder and the rights and privileges conferred thereby shall
not be sold, transferred, assigned, pledged or hypothecated in any way (whether
by operation of law or otherwise), and shall not be subject to execution,
attachment or similar process.
8.2 Legend. All certificates representing shares of Common Stock
--------
delivered under this Plan shall be subject to such stock transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Common Stock is listed or traded, any
applicable federal or state securities law, and any applicable corporate law,
and the Committee may cause a legend or legends to be put on stock certificates
to make appropriate reference to such restrictions.
6
<PAGE>
8.3 Other Plans. Nothing contained in this Plan shall prevent
-----------
the Board from adopting other or additional compensation arrangements, subject
to shareholder approval if such approval is required, and such arrangements may
be either generally applicable or applicable only in specific cases.
8.4 No Right to Employment. Neither this Plan nor the grant of
----------------------
any Option shall give any Participant or other employee or consultant any right
with respect to continuance of employment or consulting relationship with the
Company or any subsidiary of the Company, nor shall there be a limitation in any
way on the right of the Company or a subsidiary, as the case may be, to
terminate such Participant's employment or consulting arrangement at any time.
8.5 Withholding of Taxes. The Company shall have the right,
--------------------
prior to delivering a stock certificate representing the shares of Common Stock
otherwise deliverable to a Participant upon exercise of an Option, to (i)
require the Participant to remit to the Company an amount sufficient to satisfy
all federal, state, local and non-U.S. tax withholding requirements (including
social security and Medicare withholding requirements, if applicable), (ii)
reduce the number of shares of Common Stock otherwise deliverable to the
Participant by an amount that would have a Fair Market Value on the date of
exercise equal to the amount of all federal, state, local and non-U.S. taxes
(including social security and Medicare taxes, if applicable) required to be
withheld, or (iii) deduct the amount of such taxes from cash payments otherwise
to be made to the Participant. In connection with such withholding, the
Committee may make such arrangements as are consistent with this Plan as it may
deem appropriate.
8.6 Listing and Other Conditions.
----------------------------
(a) The issuance of any shares of Common Stock upon exercise of
an Option shall be conditioned upon such shares being listed on the New York
Stock Exchange. The Company shall have no obligation to issue any shares of
Common Stock unless and until the shares are so listed, and the right to
exercise any Option shall be suspended until such listing has been effected.
(b) If at any time counsel to the Company shall be of the
opinion that any sale or delivery of shares of Common Stock upon exercise of an
Option is or may in the circumstances be unlawful or result in the imposition of
excise taxes under the statutes, rules or regulations of any applicable
jurisdiction, the Company shall have no obligation to make such sale or
delivery, or to make any application or to effect or to maintain any
qualification or registration under the Securities Act of 1933 or otherwise with
respect to shares of Common Stock or Options, and the right to exercise any
Option shall be suspended until, in the opinion of such counsel, such sale or
delivery shall be lawful or shall not result in the imposition of excise taxes.
(c) Upon termination of any period of suspension under this
Section 8.6, any Option affected by such suspension which shall not then have
expired or terminated shall be reinstated as to all shares available before such
suspension and as to shares which would otherwise have become available during
the period of such suspension, but no such suspension shall extend the term of
any Option.
7
<PAGE>
8.7 Governing Law. This Plan and actions taken in connection
-------------
herewith shall be governed and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
8.8 Construction. Wherever any words are used in this Plan in
------------
the masculine gender they shall be construed as though they were also used in
the feminine gender in all cases where they would so apply, and wherever any
words are used herein in the singular form they shall be construed as though
they were also used in the plural form in all cases where they would so apply.
8.9 Liability of Committee Members. No member or former member
------------------------------
of the Committee shall be liable, in the absence of bad faith or willful
misconduct, for any act or omission with respect to service on the Committee.
Service on the Committee shall constitute service as a director of the Company
so that members of the Committee shall be entitled to indemnification and
reimbursement as directors of the Company pursuant to its By-Laws.
8.10 Other Benefits. The grant of an Option shall not be deemed
--------------
compensation for purposes of computing benefits under any retirement plan nor
affect any benefits under any other benefit plan now or hereafter in effect
under which the availability or amount of benefits is related to the level of
compensation.
8.11 Costs. Unless otherwise determined by the Board of
-----
Directors and except as set forth in this Plan, the Company shall bear all
expenses incurred in administering this Plan, including expenses of issuing
Common Stock upon the exercise of Options.
8.12 Severability. If any part of this Plan shall be
------------
determined to be invalid or void in any respect, such determination shall not
affect, impair, invalidate or nullify the remaining provisions of this Plan
which shall continue in full force and effect.
8.13 Successors. This Plan shall be binding upon and inure
----------
to the benefit of any successor or successors of the Company.
8.14 Headings. Article and section headings contained in this
--------
Plan are included for convenience only and are not to be used in construing or
interpreting this Plan.
ARTICLE IX
Effective Date of Plan
9.1 Effective Date. This Plan shall be effective as of
--------------
January 1, 1997.
8
<PAGE>
ARTICLE X
Term of Plan
10.1 Term. No Stock Option shall be granted pursuant to this
----
Plan on or after December 31, 2007, but Options granted prior to such date may
extend beyond that date.
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF UNISOURCE WORLDWIDE, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 47,884,000
<SECURITIES> 0
<RECEIVABLES> 647,102,000
<ALLOWANCES> 26,495,000
<INVENTORY> 430,313,000
<CURRENT-ASSETS> 1,157,530,000
<PP&E> 436,946,000
<DEPRECIATION> 205,016,000
<TOTAL-ASSETS> 2,054,142,000
<CURRENT-LIABILITIES> 570,199,000
<BONDS> 586,482,000
0
0
<COMMON> 70,000
<OTHER-SE> 832,731,000
<TOTAL-LIABILITY-AND-EQUITY> 2,054,142,000
<SALES> 5,558,471,000
<TOTAL-REVENUES> 5,558,471,000
<CGS> 4,607,530,000
<TOTAL-COSTS> 4,607,530,000
<OTHER-EXPENSES> 1,050,603,000<F1>
<LOSS-PROVISION> 10,439,000
<INTEREST-EXPENSE> 35,898,000
<INCOME-PRETAX> (145,999,000)
<INCOME-TAX> (41,658,000)
<INCOME-CONTINUING> (104,341,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104,341,000)
<EPS-PRIMARY> (1.52)
<EPS-DILUTED> (1.52)
<FN>
<F1>REPRESENTS SPECIAL CHARGE, RESTRUCTURING CHARGE, AND SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES, EXCLUDING PROVISION FOR LOSSES ON ACCOUNTS RECEIVABLE.
</FN>
</TABLE>
