<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 March 31, 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
------- ------
* Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------- ------
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 23, 1998.
Common Stock, par value $0.001 69,205,910 shares
1
<PAGE>
INDEX
UNISOURCE WORLDWIDE, INC.
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--March 31, 1998 3-4
and September 30, 1997
Condensed Consolidated Statements of Operations -- Three and 5
Six Month Periods Ended March 31, 1998 and March 31, 1997
Condensed Consolidated Statements of Cash Flows--Six Month 6
Periods Ended March 31, 1998 and March 31, 1997
Notes to Condensed Consolidated Financial Statements-- 7-9
March 31, 1998
Item 2. Management's Discussion and Analysis of Results 10-14
of Operations and Financial Condition and Liquidity
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
- ---------
INDEX TO EXHIBITS 17
- -----------------
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>
MARCH 31, SEPTEMBER 30,
1998 1997
ASSETS
- ------------------------------------------------------------ ----------------- ------------------
CURRENT ASSETS
<S> <C> <C>
CASH $ 52,330 $ 45,384
ACCOUNTS RECEIVABLE, NET 663,313 882,360
INVENTORIES 483,962 495,330
PREPAID EXPENSES AND DEFERRED TAXES 54,751 49,875
----------------- ------------------
TOTAL CURRENT ASSETS 1,254,356 1,472,949
----------------- ------------------
LONG-TERM RECEIVABLES 6,004 7,790
PROPERTY AND EQUIPMENT, AT COST 442,625 434,762
LESS ACCUMULATED DEPRECIATION 200,658 188,336
----------------- ------------------
241,967 246,426
----------------- ------------------
GOODWILL 661,489 668,575
DEFERRED COSTS AND OTHER ASSETS 30,012 163,092
----------------- ------------------
$2,193,828 $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>
MARCH 31, SEPTEMBER 30,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------ ----------------- ------------------
CURRENT LIABILITIES
<S> <C> <C>
CURRENT PORTION OF LONG-TERM DEBT $ 1,128 $ 638
NOTES PAYABLE 19,749 144,882
TRADE ACCOUNTS PAYABLE 466,180 498,503
ACCRUED SALARIES, WAGES AND COMMISSIONS 27,328 33,906
RESTRUCTURING COSTS 5,884 8,172
OTHER ACCRUED EXPENSES 97,254 119,431
----------------- ------------------
TOTAL CURRENT LIABILITIES 617,523 805,532
----------------- ------------------
LONG-TERM DEBT 656,682 661,350
OTHER LIABILITIES
DEFERRED TAXES 16,016 61,082
RESTRUCTURING COSTS 7,533 8,383
OTHER LONG-TERM LIABILITIES 39,165 38,100
----------------- ------------------
62,714 107,565
----------------- ------------------
SHAREHOLDERS' EQUITY
COMMON STOCK, PAR VALUE $0.001, AUTHORIZED - 250,000,000
SHARES, ISSUED AND OUTSTANDING; 3/31/98 - 69,132,689
SHARES; 9/30/97 - 68,792,842 SHARES 69 69
ADDITIONAL PAID IN CAPITAL 824,202 820,213
UNEARNED COMPENSATION (8,927) (5,845)
RETAINED EARNINGS 78,275 199,828
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (36,706) (29,320)
COST OF COMMON SHARES IN TREASURY; 3/31/98 - 268
SHARES; 9/30/97 - 32,027 SHARES (4) (560)
----------------- ------------------
856,909 984,385
----------------- ------------------
$2,193,828 $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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------------- ----------------------------------
1998 1997* 1998 1997*
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
PRINTING AND IMAGING $1,220,247 $1,127,175 $2,392,912 $2,224,737
SUPPLY SYSTEMS 647,673 588,733 1,344,143 1,219,704
--------------- --------------- -------------- ---------------
1,867,920 1,715,908 3,737,055 3,444,441
--------------- --------------- -------------- ---------------
COSTS AND EXPENSES
COST OF GOODS SOLD - PRINTING AND 1,063,979 965,905 2,082,626 1,901,733
IMAGING
COST OF GOODS SOLD - SUPPLY SYSTEMS 490,887 458,024 1,018,373 950,625
SELLING AND ADMINISTRATIVE 288,880 263,040 575,138 518,040
SPECIAL CHARGE - - 168,000 -
--------------- --------------- -------------- ---------------
1,843,746 1,686,969 3,844,137 3,370,398
--------------- --------------- -------------- ---------------
INCOME (LOSS) FROM OPERATIONS 24,174 28,939 (107,082) 74,043
INTEREST EXPENSE 12,620 10,030 24,743 20,391
--------------- --------------- -------------- ---------------
INCOME (LOSS) BEFORE TAXES 11,554 18,909 (131,825) 53,652
PROVISION (BENEFIT) FOR INCOME TAXES 4,867 8,361 (37,899) 22,953
--------------- --------------- -------------- ---------------
NET INCOME (LOSS) $ 6,687 $ 10,548 $ (93,926) $ 30,699
=============== =============== ============== ===============
BASIC EARNINGS (LOSS) PER SHARE $ 0.10 $ 0.16 $ (1.37) $ 0.46
=============== =============== ============== ===============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.10 $ 0.16 $ (1.37) $ 0.45
=============== =============== ============== ===============
DIVIDENDS PER SHARE $ 0.20 $ 0.20 $ 0.40 $ 0.20
=============== =============== ============== ===============
</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>
SIX MONTHS ENDED MARCH 31,
----------------------------------------
1998 1997
----------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
NET (LOSS) INCOME $ (93,926) $ 30,699
ADDITIONS (DEDUCTIONS) TO RECONCILE NET (LOSS) INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION 17,634 15,081
AMORTIZATION 10,951 8,196
PROVISION FOR LOSSES ON ACCOUNTS RECEIVABLE 6,249 9,846
SPECIAL CHARGE 168,000 -
DEFERRED TAX BENEFIT (45,500) -
LOSS ON DIVESTITURE 5,700 -
PAYMENTS RELATED TO RESTRUCTURING COSTS AND SPECIAL (9,632) (8,431)
CHARGE
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF
EFFECTS FROM ACQUISITIONS AND DIVESTITURES:
SALE OF ACCOUNTS RECEIVABLE 150,000 -
OTHER CHANGES IN ACCOUNTS RECEIVABLE 48,325 29,031
(INCREASE) DECREASE IN INVENTORIES (16,264) 8,178
(INCREASE) DECREASE IN PREPAID EXPENSES (6,064) 4,928
DECREASE IN ACCOUNTS PAYABLE AND ACCRUED (48,437) (22,197)
EXPENSES
MISCELLANEOUS (1,770) (1,012)
----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 185,266 74,319
----------------- ------------------
INVESTING ACTIVITIES
COST OF COMPANIES ACQUIRED, NET OF CASH ACQUIRED (46,079) (16,766)
PROCEEDS FROM DIVESTITURE 48,126 -
PROCEEDS FROM THE SALE OF PROPERTY AND EQUIPMENT 939 5,814
COLLECTION OF NOTES RECEIVABLE - 21,105
EXPENDITURES FOR PROPERTY AND EQUIPMENT (19,667) (13,103)
DEFERRED COST EXPENDITURES (11,673) (25,645)
----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (28,354) (28,595)
----------------- ------------------
FINANCING ACTIVITIES
PROCEEDS FROM BORROWING UNDER CREDIT FACILITY, NET 23,257 586,110
DEBT REPAYMENTS (147,059) (38,748)
REPAYMENTS TO IKON - (553,183)
PAYMENT OF DIVIDENDS (27,627) (13,418)
OTHER 1,463 -
----------------- ------------------
NET CASH USED IN FINANCING ACTIVITIES (149,966) (19,239)
----------------- ------------------
NET INCREASE IN CASH 6,946 26,485
CASH AT BEGINNING OF YEAR 45,384 14,596
----------------- ------------------
CASH AT END OF PERIOD $ 52,330 $ 41,081
================= ==================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
UNISOURCE WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Note 1: Spin-off and Basis of Presentation
----------------------------------
Effective December 31, 1996, one share of Unisource Worldwide, Inc. (the
"Company" or "Unisource") common stock was distributed to holders of Alco
Standard Corporation ("Alco") common stock for every two shares of Alco common
stock owned at the established record date (the "Spin-off"). Effective January
23, 1997, Alco changed its name to IKON Office Solutions, Inc. ("IKON"). At the
time of the Spin-off, Unisource became a separate publicly owned company.
The accompanying unaudited condensed consolidated financial statements 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
normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three and six month periods
ended March 31, 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 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 of
less than 55% and a minimum net worth of $745,000,000 plus 50% of consolidated
net income (without deduction for losses) after the date of the credit facility.
The amount outstanding under the credit facility at March 31, 1998 was
$649,114,000.
Note 3: Earnings Per Share
-------------------
Basic earnings (loss) per share for the three month periods ended March 31, 1998
and 1997, and the six month period ended March 31, 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 six month period ended March 31, 1997 was calculated based upon
the weighted average number of Company shares issued and outstanding for the
period December 31, 1996 ("Spin-off" date) through March 31, 1997, exclusive of
non-vested restricted stock.
7
<PAGE>
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
(in 000's except per share data) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 6,687 $10,548 $(93,926) $30,699
======= ======= ======== =======
Denominator for basic earnings (loss) per share 68,611 67,051 68,578 67,022
Effect of dilutive securities:
Stock options 147 906 - (a) 791
------- ------- -------- -------
Denominator for diluted earnings (loss) per share 68,758 67,957 68,578 67,813
======= ======= ======== =======
Basic earnings (loss) per share $ 0.10 $ 0.16 $ (1.37) $ 0.46
======= ======= ======== =======
Diluted earnings (loss) per share $ 0.10 $ 0.16 $ (1.37) (a) $ 0.45
======= ======= ======== =======
</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 March 31, 1998.
The Company has a similar agreement to sell 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$67,051,000) and CN$90,000,000
(US$65,142,000) at March 31, 1998 and September 30, 1997, respectively.
The total cost associated with these agreements was $2,984,000 and $529,000 for
the three month periods and $6,372,000 and $1,185,000 for the six month periods
ended March 31, 1998 and 1997, respectively. Such costs are classified within
"selling and administrative" expense in the Condensed Consolidated Statements of
Operations.
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 will 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.
8
<PAGE>
Note 6: Restructuring
-------------
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 million 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 and
the results of this study are due by the end of June. The restructuring plan
will be in place by the end of July. The restructuring charge, which will be
larger than announced in January 1998, will be taken in the second half of the
fiscal year.
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 Company retained approximately $16 million of receivables related to this
divested business. 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 ($37,899,000) and $22,953,000 based
upon overall effective tax rates of 28.7% and 42.8%, for the six month periods
ended March 31, 1998 and 1997, respectively. The components of the effective tax
rate for the six month period ended March 31, 1998 were as follows:
<TABLE>
<CAPTION>
Tax
Income (Loss) Provision Effective
($'s in thousands) Before Taxes (Benefit) Rate
------------------ ---------------- --------------
<S> <C> <C> <C>
Income before taxes - excluding special charge $ 36,175 $ 15,201 42.0%
Special charge (168,000) (58,800) 35.0%
Grocery divestiture - tax charge - 5,700 -
--------- -------- ----
$(131,825) $(37,899) 28.7%
========= ======== ====
</TABLE>
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- --------------------------------------------------------------------------
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Results of Operations
---------------------
Revenues and income (loss) before taxes for the three and six month periods
ended March 31, 1998 compared to the three and six month periods ended March 31,
1997 were as follows:
<TABLE>
<CAPTION>
($'s in millions) Three Months Ended March 31 Six Months Ended March 31
---------------------------------------- --------------------------------------------
1998 1997* % Change 1998 1997* % Change
----------- ----------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Printing and Imaging $1,220.2 $1,127.2 8.3 % $2,392.9 $2,224.7 7.6 %
Supply Systems 647.7 588.7 10.0 % 1,344.2 1,219.7 10.2 %
-------- -------- -------- --------
$1,867.9 $1,715.9 8.9 % $3,737.1 $3,444.4 8.5 %
======== ======== ======== ========
Gross Profit:
Printing and Imaging $ 156.3 $ 161.3 (3.1)% $ 310.3 $ 323.0 (3.9)%
Supply Systems 156.8 130.7 20.0 % 325.8 269.1 21.1 %
-------- -------- -------- --------
313.1 292.0 7.2 % 636.1 592.1 7.4 %
Selling and
Administrative Expense 288.9 263.1 9.8 % 575.2 518.1 11.0 %
Special Charge - - 168.0 -
-------- -------- -------- --------
Operating Income (Loss) 24.2 28.9 (16.5)% (107.1) 74.0 -
Interest Expense 12.6 10.0 25.8 % 24.7 20.3 21.3 %
-------- -------- -------- --------
Income (Loss) Before Taxes $ 11.6 $ 18.9 $ (131.8) $ 53.7
======== ======== ======== ========
</TABLE>
*Reclassified to conform with current year presentation.
THREE MONTH PERIOD ENDED MARCH 31, 1998
Revenues increased $152.0 million, or 8.9%, to $1.87 billion in the second
quarter of fiscal 1998 as compared to the same period in fiscal 1997. Current
and prior year acquisitions ($127.1 million) net of the divestiture of the
United States-based Grocery Supply Systems business ($88.2 million) contributed
$38.9 million of the increase. This net increase is primarily associated with
Supply Systems. Revenues from base operations increased $113.1 million due to
an estimated increase in volume of 1.7% ($18.9 million) in Printing and Imaging
and 4.4% ($25.4 million) in Supply Systems and an estimated average increase in
pricing of 6.1% ($68.8 million) in Printing and Imaging. Average pricing for
Supply Systems was flat when compared to the same period last year.
10
<PAGE>
Gross profit increased by $21.1 million or 7.2%, to $313.1 million in the second
quarter of fiscal 1998, compared to the prior year's quarter. Current and prior
year acquisitions ($40.1 million), net of the divestiture ($13.4 million),
contributed $26.7 million to the increase in gross profit. Gross profit from
base operations declined by $5.6 million, primarily due to a decrease in gross
profit percentages in Printing and Imaging which declined from 14.3% to 12.8%.
Total gross profit as a percentage of revenues decreased from 17.0% to 16.8%,
with the decline in Printing and Imaging more than offsetting higher gross
profit percentages from acquired companies.
Selling and administrative expense increased by $25.8 million, or 9.8%, in the
second quarter of fiscal 1998, compared to the second 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 agreement to sell accounts receivable (see Note 4). Excluding these
costs, selling and administrative expenses were consistent with the same period
last year.
Operating income decreased $4.7 million for the quarter compared to the prior
year's quarter. 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 was 1.3% for the
quarter, compared to 1.7% for the corresponding period of fiscal 1997.
Interest expense increased by $2.6 million to $12.6 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
and, to a lesser extent, increased working capital requirements and higher
average borrowing rates.
Foreign Operations
Revenues from foreign operations increased $5.6 million to $224.4 million for
the three month period ended March 31, 1998, as compared to the same period of
the prior year. Revenues from Canadian operations increased $11.9 million to
$192.5 million, while revenues from Mexican operations increased $4.2 million to
$30.9 million. The increase in Canadian revenues was primarily the result of
acquisitions and an increase in average paper pricing, while the increase in
Mexico was primarily the result of acquisitions. The increase in Canadian and
Mexican revenues was partially offset by a decrease in revenues of other foreign
sales offices of $10.6 million to $1.0 million for the quarter ended March 31,
1998.
Operating income from foreign operations decreased $1.6 million to $6.1 million
for the three month period ended March 31, 1998, as compared to the same period
of the prior year. Canadian operating income decreased $1.1 million due
primarily to a decline in the gross profit percentage in Printing and Imaging.
Other foreign sales offices' operating income decreased $.5 million for the
three month period ended March 31, 1998. Operating income for Mexico was flat
for the quarter.
11
<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 March 31, 1998 were US $69
million. Based upon the net monetary assets as of March 31, 1998 and the
devaluation of the Mexican Peso of 5.2% for the period January 1, 1998 to March
31, 1998, the Company recorded a $445,000 charge in the second quarter of fiscal
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.
SIX MONTH PERIOD ENDED MARCH 31, 1998
Revenues for this period increased $292.7 million, or 8.5%, to $3.74 billion, as
compared to the same period in fiscal 1997. Current and prior year acquisitions
($257.4 million) net of the divestiture of the United States-based Grocery
Supply Systems business ($168.2 million) contributed $89.2 million of the
increase. This net increase is primarily associated with Supply Systems.
Revenues from base operations increased $203.5 million, primarily due to an
estimated increase in average paper prices of 4.9%, as compared to the same
period last year, along with volume gains of 1.9% for Printing and Imaging and
4.1% for Supply Systems base operations.
Gross profits for this period increased by $44.0 million, or 7.4%, as compared
to the same period in fiscal 1997. This increase is associated with current and
prior year acquisitions ($81.7 million), net of the divestiture ($25.8 million),
offset by declines of $11.9 million in base operations for the six month period
ended March 31, 1998. The decline in base operations is due principally to a
decrease in gross profit percentages in Printing and Imaging from 14.5% to
13.0%. Total gross profit as a percentage of revenues decreased from 17.2% to
17.0% for the six month period, with the decline in Printing and Imaging more
than offsetting higher gross profit percentages from acquired companies.
Selling and administrative expense increased by $57.1 million, or 11.0%, for the
six month period ended March 31, 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 less than 1%.
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. The study has
concluded that NADS would not cost-effectively meet the Company's future
information technology needs.
12
<PAGE>
Operating income decreased $181.1 million for the six month period, as compared
to the same period of fiscal 1997. Excluding the $168 million special charge,
recorded in the first quarter of fiscal 1998, operating income for the six month
period decreased $13.1 million, or 17.7%, as compared to the same period of
fiscal 1997. Current and prior year acquisitions ($6.7 million), net of
divestiture ($.6 million), contributed an incremental $6.1 million of operating
income. Operating income from base operations declined $19.2 million for the
six month period, primarily due to gross profit percentage declines in the
Printing and Imaging business and $5 million of costs associated with the $150
million agreement to sell accounts receivable. Such decline was partially offset
by pricing improvement in Printing and Imaging and volume increases. Operating
margins were 1.6%, compared to 2.1% for the corresponding six month period of
fiscal 1997.
Interest expense increased by $4.4 million as compared to the first six 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 $18.3 million to $453.3 million for
the six month period ended March 31, 1998, as compared to the same period of
fiscal 1997. Revenues from Canadian operations increased $23.5 million to $386.2
million, while revenues from Mexican operations increased $10.3 million to $63.8
million. The increase in Canadian and Mexican revenues was attributable to an
increase in average paper prices and the results of acquisitions. Revenues from
the foreign sales offices decreased $15.5 million to $3.3 million for the six
month period ended March 31, 1998.
Operating income from foreign operations decreased $.4 million to $14.6 million
for the six month period, as compared to the same period of fiscal 1997.
Canadian operating income decreased $.5 million to $12.2 million, primarily due
to the decline in gross profit percentages in Printing and Imaging. Mexican
operating income increased $.2 million, with the increase from acquisitions
being substantially offset by the devaluation of the Mexican Peso. The foreign
sales offices' operating loss increased by $.1 million for the six month period
ended March 31, 1998.
13
<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. Based upon the net monetary assets and the devaluation
of the Mexican Peso, the Company recorded a $445,000 charge for the six month
period ended March 31, 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.
Year 2000
The Company has created a Corporate Year 2000 Project Office which will
coordinate the efforts to evaluate, identify, correct or reprogram, and test the
Company's existing systems for Year 2000 compliance. The Company will take 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. 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 six month period ended March 31,
1998 was $35.3 million. Included in operating activities were cash expenditures
of $3.1 million in connection with the Company's $50 million restructuring
program initiated in the third quarter of fiscal 1996. Remaining restructuring
cash expenditures relating to that program are estimated at $13.4 million. Cash
used for investing activities included deferred cost expenditures of $11.7
million principally related to costs associated with the information technology
system referred to as NADS through December 31, 1997, capital expenditures of
$19.7 million, and expenditures for acquisitions of $46.1 million. Investing
activity expenditures were offset by proceeds of $49.1 million 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
$28.4 million used in investing activities. Cash used in financing activities
included dividend payments and treasury share sales, net, of $26.2 million and
net debt reduction of $123.8 million.
On March 31, 1998, total debt of $677.6 million was outstanding. The Company
had a total of $1 billion in bank credit commitments as of March 31, 1998, of
which $350.9 million was unused and available.
The restructuring charge anticipated to be taken in the second half of fiscal
1998 may require renegotiation of the covenants in the Company's credit
facility. The Company is confident that appropriate new terms or new financing
arrangements will be put in place.
The Company believes that its operating cash flow, together with financing
arrangements, will be sufficient to finance current operating requirements,
including capital expenditures, acquisitions, Year 2000 compliance costs, the
restructuring program, other cash requirements, and future dividends.
The two immediately preceding paragraphs and other statements and estimated
costs and benefits set forth herein with respect to streamlining and
restructuring the Company, accelerating growth, improving return to
stockholders, enhancing and consolidating its information systems, and
implementing its Year 2000 compliance initiative, are forward looking statements
based upon management's current plans and expectations and are subject to a
number of uncertainties and risks that could cause actual results or
circumstances to differ materially. Such uncertainties and risks include general
economic conditions, conducting operations in a competitive environment, changes
in pulp and paper prices and market conditions within the Company's businesses,
delays or difficulties associated with the development or implementation of the
restructuring plan or with systems conversions, Year 2000 compliance and debt
service requirements. For additional information concerning these uncertainties
and risks, please see Part I, Item I, 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.
14
<PAGE>
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) The following Exhibit is furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. Description
- -------------------- ---------------------------------------------------------
27 Financial Data Schedule for the Six Month Period Ended
March 31, 1998
27(A) Financial Data Schedule for the Six Month Period Ended
March 31, 1997
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
Financial
Statement
Item Reported Filed Date of Report File Date
- --------------------------------------------- --------- ------------------ ------------------
<S> <C> <C> <C>
Unisource issues two press releases: No January 21, 1998 January 21, 1998
Press release reports first quarter earnings,
announces new IT strategy, Grocery charge.
Press release announcing plan
to streamline company.
Press release announcing plan to expand No March 24, 1998 March 24, 1998
scope of streamlining; Company expects
earnings below consensus estimates.
</TABLE>
15
<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: April 30, 1998 /s/ Richard H. Bogan
--------------------
Richard H. Bogan
Senior Vice President and Chief Financial Officer
16
<PAGE>
INDEX TO EXHIBITS
-------------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------ ----------------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule for the Six Month Period Ended March 31, 1998
27(A) Financial Data Schedule for the Six Month Period Ended March 31, 1997
</TABLE>
17
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 52,330,000
<SECURITIES> 0
<RECEIVABLES> 688,615,000
<ALLOWANCES> 25,302,000
<INVENTORY> 483,962,000
<CURRENT-ASSETS> 1,254,356,000
<PP&E> 442,625,000
<DEPRECIATION> 200,658,000
<TOTAL-ASSETS> 2,193,828,000
<CURRENT-LIABILITIES> 617,523,000
<BONDS> 656,682,000
0
0
<COMMON> 69,000
<OTHER-SE> 856,840,000
<TOTAL-LIABILITY-AND-EQUITY> 2,193,828,000
<SALES> 3,737,055,000
<TOTAL-REVENUES> 3,737,055,000
<CGS> 3,100,999,000
<TOTAL-COSTS> 3,100,999,000
<OTHER-EXPENSES> 736,889,000<F1>
<LOSS-PROVISION> 6,249,000
<INTEREST-EXPENSE> 24,743,000
<INCOME-PRETAX> (131,825,000)
<INCOME-TAX> (37,899,000)
<INCOME-CONTINUING> (93,926,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93,926,000)
<EPS-PRIMARY> (1.37)<F2>
<EPS-DILUTED> (1.37)<F3>
<FN>
<F1>Represents special charge, and selling, general and administrative expenses,
excluding provision for losses on accounts receivable.
<F2>Represents basic earnings per share.
<F3>Represents diluted earnings per share.
</FN>
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 41,081,000
<SECURITIES> 0
<RECEIVABLES> 775,368,000
<ALLOWANCES> 28,691,000
<INVENTORY> 463,079,000
<CURRENT-ASSETS> 1,301,062,000
<PP&E> 405,610,000
<DEPRECIATION> 188,478,000
<TOTAL-ASSETS> 2,169,415,000
<CURRENT-LIABILITIES> 523,961,000
<BONDS> 596,309,000
0
0
<COMMON> 67,000
<OTHER-SE> 947,733,000
<TOTAL-LIABILITY-AND-EQUITY> 2,169,415,000
<SALES> 3,444,441,000
<TOTAL-REVENUES> 3,444,441,000
<CGS> 2,852,358,000
<TOTAL-COSTS> 2,852,358,000
<OTHER-EXPENSES> 508,194,000<F1>
<LOSS-PROVISION> 9,846,000
<INTEREST-EXPENSE> 20,391,000
<INCOME-PRETAX> 53,652,000
<INCOME-TAX> 22,953,000
<INCOME-CONTINUING> 30,699,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,699,000
<EPS-PRIMARY> 0.46<F2><F3>
<EPS-DILUTED> 0.45<F2><F4>
<FN>
<F1>Represents special charge, and selling, general and administrative expenses,
excluding provision for losses on accounts receivable.
<F2>Restated to reflect the Company's adoption of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."
<F3>Represents basic earnings per share.
<F4>Represents diluted earnings per share.
</FN>
</TABLE>
