<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 December 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
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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)
N/A
- --------------------------------------------------------------------------------
(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 January 31, 1999.
Common Stock, par value $0.001 70,187,376 shares
<PAGE>
INDEX
UNISOURCE WORLDWIDE, INC.
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - December 31, 1998 3-4
and September 30, 1998
Condensed Consolidated Statements of Income - Three-Month 5
Periods Ended December 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows - Three- 6
Month Periods Ended December 31, 1998 and December 31, 1997
Notes to Condensed Consolidated Financial Statements - 7-9
December 31, 1998
Item 2. Management's Discussion and Analysis of Results 10-15
of Operations and Financial Condition and Liquidity
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
- ---------
INDEX TO EXHIBITS 19
- -----------------
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>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1998
- --------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 22,319 $ 49,960
Accounts receivable, net 560,504 640,443
Inventories 371,064 353,270
Prepaid expenses and deferred taxes 84,368 87,746
-------------------- -------------------
Total current assets 1,038,255 1,131,419
-------------------- -------------------
LONG-TERM RECEIVABLES 3,612 5,723
PROPERTY AND EQUIPMENT, AT COST 431,001 428,884
Less accumulated depreciation 209,620 201,599
-------------------- -------------------
221,381 227,285
-------------------- -------------------
GOODWILL 576,532 580,932
DEFERRED COSTS AND OTHER ASSETS 22,052 21,292
-------------------- -------------------
$1,861,832 $1,966,651
==================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
UNISOURCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(In thousands, except par values and shares)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
- ---------------------------------------------------------- ------------------ -------------------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 1,133 $ 1,155
Notes payable 6,052 3,651
Trade accounts payable 374,850 451,123
Accrued salaries, wages and commissions 27,741 40,520
Restructuring costs 58,032 61,588
Other accrued expenses 103,202 107,356
------------------ -------------------
Total current liabilities 571,010 665,393
------------------ -------------------
LONG-TERM DEBT 497,018 505,199
OTHER LIABILITIES
Deferred taxes 12,815 11,770
Restructuring costs 28,528 30,414
Other long-term liabilities 52,553 55,517
------------------ -------------------
93,896 97,701
------------------ -------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.001, authorized -
250,000,000 shares, issued: 12/31/98 - 70,179,530
shares; 9/30/98 - 70,245,536 shares 70 70
Additional paid in capital 831,945 832,268
Unearned compensation (2,219) (2,727)
Retained deficit (85,982) (87,533)
Cumulative other comprehensive losses:
Foreign currency translation adjustments (43,881) (43,711)
Cost of common shares in treasury: 12/31/98 - 3,052
shares; 9/30/98 - 1,205 shares (25) (9)
------------------ -------------------
699,908 698,358
------------------ -------------------
$1,861,832 $1,966,651
================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
UNISOURCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
DECEMBER 31,
---------------------------------------------
1998 1997
-------------------- ---------------------
<S> <C> <C>
Revenues
Printing & Imaging $1,044,734 $1,172,665
Supply Systems 635,797 696,470
-------------------- ---------------------
1,680,531 1,869,135
-------------------- ---------------------
Cost of Goods Sold:
Printing & Imaging 895,925 1,018,647
Supply Systems 480,217 527,486
-------------------- ---------------------
Total Cost of Goods Sold 1,376,142 1,546,133
-------------------- ---------------------
Gross Profit 304,389 323,002
-------------------- ---------------------
Expenses:
Selling and administrative 281,072 286,258
Special charges:
Information technology write-off - 168,000
Restructuring implementation costs 2,972 -
-------------------- ---------------------
Total Expenses 284,044 454,258
-------------------- ---------------------
INCOME (LOSS) FROM OPERATIONS 20,345 (131,256)
INTEREST EXPENSE 11,464 12,123
-------------------- ---------------------
INCOME (LOSS) BEFORE INCOME TAXES 8,881 (143,379)
INCOME TAX EXPENSE (BENEFIT) 3,819 (42,766)
-------------------- ---------------------
NET INCOME (LOSS) $ 5,062 $ (100,613)
==================== =====================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ 0.07 $ (1.47)
==================== =====================
DIVIDENDS PER SHARE $ 0.05 $ 0.20
==================== =====================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
UNISOURCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 5,062 $(100,613)
Additions (deductions) to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 8,464 8,610
Amortization 5,140 5,515
Provision for losses on accounts receivable 2,482 2,859
Special charge, net of deferred taxes - 122,500
Payments relating to restructuring and special charges,
net (5,039) (1,718)
Changes in operating assets and liabilities, net of
effects from acquisitions and divestiture:
Sale of accounts receivable - 150,000
Other changes in accounts receivable 77,457 51,723
Increase in inventories (17,794) (54,367)
Decrease (increase) in prepaid expenses 521 (3,369)
Decrease in accounts payable and accrued expenses (92,810) (59,392)
Miscellaneous (1,333) (5,328)
---------------- -----------------
Net cash (used in) provided by operating activities (17,850) 116,420
---------------- -----------------
INVESTING ACTIVITIES
Cost of companies acquired, net of cash acquired (100) (35,098)
Proceeds from divestiture - 48,126
Proceeds from the sale of property and equipment 73 592
Collection of notes receivable 2,111 -
Expenditures for property and equipment (2,731) (8,554)
Deferred cost expenditures - (11,163)
---------------- -----------------
Net cash used in investing activities (647) (6,097)
---------------- -----------------
FINANCING ACTIVITIES
(Repayments of) proceeds from borrowings under credit
facility, net (5,802) 16,773
Debt repayments - (116,254)
Payment of dividends (3,511) (13,805)
Other 169 (180)
---------------- -----------------
Net cash used in financing activities (9,144) (113,466)
---------------- -----------------
NET DECREASE IN CASH (27,641) (3,143)
CASH AT BEGINNING OF YEAR 49,960 45,384
---------------- -----------------
CASH AT END OF PERIOD $ 22,319 $ 42,241
================ =================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
UNISOURCE WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 charge
and normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three-month period ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 1999. 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, 1998 ("1998 Annual Report").
Note 2: Comprehensive Income
--------------------
In the first quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is generally defined as all changes in shareholders' equity except those
resulting from distributions to shareholders. Comprehensive income, net of
taxes, is as follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
----------------- -------------------
<S> <C> <C>
(in thousands)
Net income (loss) $ 5,062 $(100,613)
Change in cumulative translation adjustment (170) (9,492)
----------------- -------------------
Total comprehensive income (loss) $ 4,892 $(110,105)
================= ===================
</TABLE>
7
<PAGE>
Note 3: Debt
----
On September 25, 1998, the Company entered into an amended and restated
$900,000,000 credit agreement (the "credit facility"), which will mature on
November 22, 2001. The credit facility is secured by accounts receivable and
inventories. The credit facility includes financial covenants requiring a ratio
of funded debt to capitalization of less than 65% decreasing 5% annually to 55%,
and a minimum net worth of $575,000,000 plus 50% of consolidated net income
(without deduction for net losses) after September 30, 1998, and an initial
minimum consolidated EBITDA (earnings before interest, taxes, depreciation and
amortization, and excluding special charges) to consolidated interest expense
coverage of 2.25 times, which increases in .25 increments periodically to 3.5
times as of June 30, 2001. The amount available under the credit facility at
December 31, 1998 was $403,025,000. On February 9, 1999, the Company reduced
aggregate commitments under the credit facility to $825.0 million.
Note 4: Earnings Per Share
-------------------
Basic earnings (loss) per share for the three-month periods ended December 31,
1998 and 1997 was calculated based on the weighted average number of Company
shares issued and outstanding for the quarter, exclusive of non-vested
restricted stock.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
December 31,
(in thousands except per share data) 1998 1997
- --------------------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Numerator for basic and diluted (loss) earnings per share:
Net income (loss) $ 5,062 $(100,613)
======= =========
Denominator for basic earnings (loss) per share 69,933 68,567
Effect of dilutive securities:
Stock options 99 0(a)
------- ---------
Denominator for diluted earnings (loss) per share 70,032 68,567
======= =========
Basic earnings (loss) per share $ 0.07 $ (1.47)
======= =========
Diluted earnings (loss) per share $ 0.07 $ (1.47)(a)
======= =========
(a) No incremental shares related to options are included due to the antidilutive effect on the
loss per share.
</TABLE>
Note 5: Restructuring Implementation
----------------------------
On July 29, 1998, the Company announced an extensive restructuring program
designed to increase profitability by decreasing overall costs, growing
profitable market segments and enhancing customer service. Through December 31,
1998, the Company has reduced the total number of U.S. locations from 424 to 360
and its net facility space by 1.1 million square feet, achieving approximately
one-third of its 3 million square foot reduction goal. Workforce reductions
through the first quarter of fiscal 1999 were approximately 500 positions.
Approximately $5.0 million of costs were charged against the restructuring
reserve in the quarter ended December 31, 1998. In addition, restructuring
implementation costs incurred in the first quarter of fiscal 1999 amounted to
approximately $3 million and were comprised of relocation/recruitment - $2
million; communications/consulting - $0.5 million; and other costs - $0.5
million.
8
<PAGE>
Note 6: Information Technology Write-Off
--------------------------------
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 was 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 7: Divestiture
-----------
In October 1997, the Company sold a significant portion of its United States-
based Grocery Supply Systems business for approximately $48 million in cash.
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 related mainly to non-deductible intangible assets related
to the business sold.
Note 8: Income Tax Expense (Benefit)
----------------------------
The income tax expense (benefit) was $3,819,000 and ($42,766,000) equating to
overall effective tax rates of 43.0% and 29.8% for the three months ended
December 31, 1998 and 1997, respectively. The components of the effective tax
rate for the three months ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Income (Loss) Income Tax Effective
Before Taxes Expense (Benefit) Rate
------------------ ---------------------- ----------------
(in thousands)
<S> <C> <C> <C>
Income before taxes - excluding
special charges $ 24,621 $ 10,334 42.0%
Special charge (168,000) (58,800) 35.0%
Grocery divestiture - tax charge -- 5,700 --
----------- ---------- ----
($ 143,379) ($ 42,766) 29.8%
=========== ========== ====
</TABLE>
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- --------------------------------------------------------------------------
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
PAPER PRICING TRENDS
Unisource has experienced fluctuations in revenues and net income from quarter
to quarter due to a combination of factors, including changes in pulp and paper
prices. These changes can significantly impact the Company's Printing & Imaging
Business, which accounted for 62% of revenues and 49% of gross profit in the
first quarter of fiscal 1999.
Declining prices produce lower revenues and gross profits, providing less
coverage for fixed expenses. Recently, market conditions in Printing & Imaging
papers have weakened, resulting in lower paper prices. Causes cited include:
weaknesses in the pulp market; mills' relatively high uncoated and coated
freesheet inventories; the threat of imports resulting from weak Asian markets;
and the strong U.S. dollar. Paper prices for the first quarter of fiscal 1999
remain significantly below levels of a year ago, and the Company believes that
the decline may continue through the second quarter.
END-USER BROKERAGE BUSINESS
On January 19, 1999, the Company filed a lawsuit against four former employees
of its New York-based Websource division, all of whom recently resigned.
Websource is an end-user-focused brokerage business serving national-scope
printers and publishers. The suit alleges that the former employees breached
the duty of loyalty they owed to Unisource by - while still employed by
Unisource - enticing and attempting to entice Unisource employees, customers and
suppliers to leave Unisource; misusing and misappropriating Unisource's trade
secrets and confidential information; failing to use their full energies and
efforts to promote Unisource's business; and working to establish a newly-formed
company as a competitor to Unisource.
The suit also names as a defendant the new company, which was recently
incorporated to broker paper to the magazine, catalog, direct mail,
documentation and book industries on a nationwide basis, putting it in direct
competition with Websource. Three of the four former Websource employees named
in the suit are principals of the newly-formed company.
While the Company is taking aggressive steps to protect this important business,
Unisource management estimates that lost business at Websource could reduce
operating income by $5 to $8 million for the current fiscal year.
RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS
On July 29, 1998, the Company announced an extensive restructuring program
designed to increase profitablity by decreasing overall costs, growing
profitable market segments and enhancing customer service. Through December 31,
1998, the Company has reduced the total number of U.S. locations from 424 to 360
and its net facility space by 1.1 million square feet, achieving approximately
one-third of its 3 million square foot reduction goal. Workforce reductions
through the first quarter of fiscal 1999 were approximately 500 positions.
10
<PAGE>
Approximately $5.0 million of costs were charged against the restructuring
reserve in the quarter ended December 31, 1998. In addition, restructuring
implementation costs incurred in the first quarter of fiscal 1999 amounted to
approximately $3 million and were comprised of relocation/recruitment - $2
million; communications/consulting - $0.5 million; and other costs - $0.5
million.
MEXICAN OPERATIONS
In September 1998, the Company determined that its Mexican operations did not
fit its long-term strategy and announced its intention to divest such operations
and focus on its U.S. and Canadian operations. The Company recorded an
associated pre-tax charge of $70.0 million in the fourth quarter of fiscal 1998.
The Company continues to actively market this business and several third parties
have expressed interest.
YEAR 2000 COMPLIANCE
Computer systems that use only the final two digits to represent years are
unable to distinguish between years beginning with 19 and those that begin with
20. If not corrected, many computer applications could fail or create erroneous
results when dealing with dates later than December 31, 1999. The Year 2000
problem is believed to affect virtually all companies and organizations.
With the exception of some packaging and maintenance-related machinery, products
sold by Unisource do not contain any date-sensitive hardware, software or
embedded computer technology. Unisource's business transaction systems use a
variety of information technology hardware and software for processing and
shipping customer orders, procurement, invoicing, financial reporting, human
resources and logistics. In addition to such IT systems, the Company relies on
other equipment and systems that contain embedded computer technology, such as
bar code, phone and voice-mail systems.
Any Year 2000 effect on the third parties with whom Unisource has commercial
relationships, including vendors, customers and others who provide services to
the Company, could also affect Unisource.
Compliance Program. The Company's Year 2000 initiative consists of four phases.
Phase I: Conduct a comprehensive inventory of all of the Company's significant
IT and non-IT equipment and systems to determine which are Year 2000 compliant
and which need to be remediated or replaced.
Phase II: Remediate or replace all significant equipment and systems that are
not Year 2000 compliant.
Phase III: Test all equipment and systems believed to be Year 2000 compliant,
including those that were remediated or replaced during Phase II.
Phase IV: Implement the remediated or replaced systems into the Company's
operations and continue to monitor and evaluate the compliance of such systems
with Year 2000 issues.
Phase I has been completed with regard to our significant systems, and Phase II
is well under way. As of December 31,1998, approximately 75% of the Company's
business transaction systems have been remediated, replaced or are already Year
2000 compliant. Concurrent with the Phase II corrective measures, the Company is
conducting the testing and implementation phases as appropriate. Unisource
anticipates that all of its business transaction systems will be compliant by
June 30, 1999. The Company expects that its other significant embedded computer
technology systems and equipment will be Year 2000 compliant by September 30,
1999.
11
<PAGE>
Unisource has contacted its technology and service providers as well as its key
customers and suppliers to determine the extent to which their systems are Year
2000 compliant and the extent to which Unisource could be affected if they are
not. Based upon responses received to date, the Company cannot determine the
extent to which it could be impacted by such third parties' failure to be Year
2000 compliant.
Risks Associated With Year 2000. The failure by Unisource or its suppliers,
customers and third parties with whom it has business dealings to correct on a
timely basis their material Year 2000 problems could result in an interruption
in, or failure of, the Company's normal business activities, e.g., the ability
to purchase products and maintain adequate inventory levels, to service
customers or to invoice and collect payments from customers. Such failures
could materially and adversely affect the Company's results of operations,
liquidity and financial condition. The inherent uncertainty in the issues
associated with the Year 2000 problem makes it difficult, if not impossible, to
determine the likelihood or the extent of the impact of such failure.
Contingency Plans. Although Unisource believes that its systems will be ready
for the Year 2000, the Company may experience incidences of non-compliance and
may be affected by the non-compliance of third parties. If certain suppliers
are unable to deliver products on a timely basis due to Year 2000 issues,
Unisource anticipates that other suppliers will be able to meet the Company's
requirements.
Unisource currently has plans in place to address power failures and other
computer outages, which include processing orders, invoices and collections
manually. The Company is in the process of expanding those plans to address
additional issues that may result from Year 2000 non-compliance.
Costs. The steps that Unisource is taking to make its systems Year 2000
compliant will cost approximately $12 million. Of this amount, $5.9 million was
expended and charged to operations in fiscal 1998, $2.6 million was expended in
the first quarter of fiscal 1999, and the rest will be spent in the remainder of
fiscal 1999. Unisource anticipates that all of these costs will be funded
through its operating cash flows.
The Company is in the process of a major IT transformation and cannot adequately
distinguish between dedicated Year 2000 capital costs and those related to
business transformation that will also address Year 2000 compliance.
12
<PAGE>
RESULTS OF OPERATIONS
---------------------
Revenues and income (loss) before taxes for the three-month period ended
December 31, 1998 compared to the three-month period ended December 31, 1997
were as follows:
<TABLE>
<CAPTION>
($'s in millions) Three Months Ended December 31
---------------------------------------------
1998 1997 % Change
------------- --------------- -------------
<S> <C> <C> <C>
Revenues:
Printing & Imaging $1,044.7 $1,172.7 (10.9)%
Supply Systems 635.8 696.4 (8.7)%
-------- --------
$1,680.5 $1,869.1 (10.1)%
======== ========
Gross Profit:
Printing & Imaging $ 148.8 $ 154.0 (3.4)%
Supply Systems 155.6 169.0 (7.9)%
-------- --------
304.4 323.0 (5.8)%
Selling and
Administrative Expense 281.1 286.3 (1.8)%
Restructuring implementation costs 3.0 - -
Special Charge - 168.0 -
-------- --------
Income from Operations 20.3 (131.3) -
Interest Expense 11.4 12.1 (5.8)%
-------- --------
Income (Loss) Before Taxes $ 8.9 $ (143.4) -
======== ========
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998:
Revenues decreased $188.6 million, or 10.1%, to $1.68 billion in the first
quarter of fiscal 1999 as compared to the same period in fiscal 1998. Overall
decreases in pricing accounted for an estimated 6.7% of this decline with
Printing & Imaging pricing down an estimated 9.1% ($106.7 million) and Supply
Systems down 2.6% ($18.1 million). Volume decreases in base operations accounted
for 1.0% of the revenue decline in the quarter with Printing & Imaging volumes
down by 0.7% ($8.0 million) and Supply Systems volumes down 1.5% ($10.1
million). The weakness in the Canadian and Mexican currencies resulted in a 1.2%
or $22.6 million decrease in revenue for the quarter ended December 31, 1998 as
compared to the same period last year. The Company's divestiture of its U.S.
grocery business in the first quarter of fiscal 1998 resulted in reduced Supply
Systems revenue of $23.1 million in the current quarter as compared to the same
period last year.
Gross profit decreased by $18.6 million or 5.8%, to $304.4 million in the first
quarter of fiscal 1999, compared to the prior year's quarter. The decline in
gross profit dollars is attributable to the declines in revenues discussed
above; however, the decline was partially offset by an improvement in gross
profit percentages. Gross profit percentages in Printing & Imaging increased
from 13.1% in 1998 to 14.2% in 1999, while Supply Systems increased from 24.3%
to 24.5% in the first quarter of fiscal 1999. Overall, total gross profit as a
percentage of revenues increased from 17.3% to 18.1%.
Selling and administrative expense decreased by $5.2 million, or 1.8%, in the
first quarter of fiscal 1999, compared to the first quarter of fiscal 1998. The
net decrease is primarily due to savings associated with the restructuring
program initiated in fiscal 1998.
13
<PAGE>
Income from operations increased $151.6 million for the quarter compared to the
prior year's quarter. Excluding the $168 million special charge (see Note 6)
recorded in fiscal 1998, and $3.0 million of restructuring implementation
costs recorded in fiscal 1999, income from operations decreased $13.4 million or
36.5%. The decrease in income from operations is primarily attributable to the
Printing & Imaging pricing declines discussed above. The positive impact of
improved gross profit percentages and restructuring benefits essentially served
to offset the modest volume declines and general expense inflation. Operating
margin, excluding the special charge and restructuring and implementation costs,
was 1.4% for the quarter, compared to 2.0% for the corresponding period of
fiscal 1998.
Interest expense decreased by $.7 million to $11.4 million during the quarter
compared to the same period of the prior year. The decrease was attributable
primarily to lower average outstanding borrowings, net of an increase in average
borrowing rates.
The effective income tax rates were 43.0% and 29.8% for the three months ended
December 31, 1998 and 1997, respectively. The effective rate for the three
months ended December 31, 1997 was impacted by a one-time $5.7 million charge
related to the divestiture of the U.S. grocery business and the 35.0% income tax
benefit applied to the $168 million information technology write-off (see Note
8).
Foreign Operations
Revenues from foreign operations decreased $25.9 million to $203.0 million for
the three-month period ended December 31, 1998, as compared to the same period
of the prior year. Revenues from Canadian operations decreased $15.9 million to
$177.8 million, while revenues from Mexican operations decreased $9.0 million to
$23.9 million. Revenues of other foreign sales offices decreased $1.0 million to
$1.3 million over the same period of the prior year. The decline in revenue in
foreign operations is primarily attributable to the effects of price declines
and the negative impact of weaknesses in foreign currencies which reduced
reported revenues for both Canada and Mexico.
Income from operations from foreign operations decreased $3.2 million to $4.7
million for the three-month period ended December 31, 1998, as compared to the
same period of the prior year. Canadian income from operations decreased $2.2
million to $4.0 million and Mexican income from operations decreased $0.9
million to $0.8 million for the three-month period ended December 31, 1998.
Other foreign sales offices' operating loss decreased by $0.1 million for the
quarter. There is no allocation of general corporate expenses to foreign
operations.
In the quarter ended December 31, 1998, weakened foreign currencies negatively
impacted reported revenue and income from operations by $22.6 million and $0.7
million, respectively, as compared to the same period in 1998.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Net cash used in operating activities for the three-month period ended December
31, 1998 was $17.8 million. The primary performance measurements for the
Company's major components of working capital all showed improvements in the
first quarter of fiscal 1999 compared to the same period in fiscal 1998.
Inventory turns improved to 8.1 from 7.0; days sales outstanding improved to
42.4 from
14
<PAGE>
42.6 and days payables outstanding improved to 27.3 from 25.9. Included in
operating activities were cash expenditures of $5.0 million (net of tax) in
connection with the Company's restructuring programs and special charges.
Remaining cash expenditures for restructuring and related implementation costs
are estimated at $125 - $135 million, a significant portion of which will be
expended in calendar 1999. Investing activities included capital expenditures of
$2.7 million which were partially offset by $2.1 million in proceeds from
collection of notes receivable, resulting in a net $.6 million used in investing
activities. Cash used in financing activities included $5.8 million of debt
repayments and dividend payments of $3.5 million.
On December 31, 1998, total debt of $504.2 million was outstanding. The Company
had a total of $900 million in bank credit commitments as of December 31, 1998,
of which $403 million was unused and available. On February 9, 1999, the Company
reduced its commitment under the credit facility to $825 million. The Company
intends to issue $225 million of long-term debt to institutional investors in
March 1999. The proceeds will be used to repay debt outstanding, after which
time the Company expects to reduce aggregate commitments under the credit
facility to $600 million.
The Company's U.S. and Canadian asset securitization programs are scheduled to
mature on April 30, 1999 and June 15, 1999, respectively. The Company intends to
renew these programs and is currently negotiating extensions. The Company is
confident that, should these programs not be renewed, replacement asset
securitization programs would be available.
In January 1999, the Company declared a dividend on its Common Stock of $.05 per
share payable on March 10, 1999 to stockholders of record on February 22, 1999.
The Company believes that its operating cash flow, together with financing
arrangements, will be sufficient to finance current operating requirements,
including capital expenditures, acquisitions, restructuring costs, Year 2000
compliance costs, other cash requirements, and future dividends.
The preceding paragraph, and all other statements, other than statements of
historical fact, made in this report, including, without limitation, (i)
statements relating to the restructuring program and the timing thereof, the
projected costs and expenses associated with the restructuring program, and the
financial results and benefits to be realized from such restructuring, (ii)
statements relating to anticipated future pricing levels and the effect thereof
upon the Company's business, (iii) statements relating to lost business at
Websource, including the effect such lost business would have upon the Company's
future operating income, (iv) statements relating to Year 2000, including, the
Company's Year 2000 initiative, and the implementation and timing thereof, the
effect of Year 2000 upon the Company (either directly or as a result of the
effect of Year 2000 upon third parties), the risks associated with Year 2000,
the Company's contingency plans (including the Company's ability to utilize
other suppliers), the amount of, and the Company's ability to fund, the costs of
its Year 2000 initiative, (v) the Company's intention to issue long-term debt,
(vi) the Company's intention and ability to renew its asset securitization
programs or to find suitable replacements therefor, and (vii) statements
qualified by the words "believes," "anticipates," "expects," "intends," "may,"
"estimates," "will," and other words or expressions 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, leverage and debt service requirements (including
sensitivity to interest rate fluctuations), operating in a competitive
environment, general economic conditions, the ability to attract and retain
qualified personnel, changes or volatility in pulp and paper prices, the effect
of Year 2000 upon the Company or third parties with whom the Company conducts
business, delays, difficulties or increased costs associated with consolidation
of the Company's information technology systems and the upgrading of such
systems to be year 2000 compliant and the outcome of the litigation instituted
by the Company against certain of its former Websource employees. 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, 1998, which is on file with the Securities and Exchange
Commission.
15
<PAGE>
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 1999 Annual Meeting of Stockholders of Unisource Worldwide, Inc. was duly
called and held on January 27, 1999 at the Company's corporate headquarters
located at 1100 Cassatt Road, Berwyn, Pennsylvania, 19312.
Proxies for the annual meeting were solicited on behalf of the Board of
Directors of the Company pursuant to Regulation 14A of the Securities Exchange
Act of 1934 and pursuant to the Company's Proxy Statement which was filed with
the Securities and Exchange Commission and which is hereby incorporated herein
by this reference (the "Proxy Statement"). There was no solicitation in
opposition to the nominees for election as Class II Directors as listed in the
Proxy Statement, and all such nominees were elected as Class II Directors.
At the meeting, votes were cast as follows:
Proposal 1 - To elect three Class II Directors to serve for a term expiring at
the 2002 annual meeting of stockholders and until their successors
are elected and qualified.
Name For Withheld Vote
---- --- -------------
Gary L. Countryman 58,008,727 1,809,343
Paul J. Darling, II 58,014,317 1,803,754
Dana G. Mead 58,724,094 1,093,976
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) The following Exhibits are furnished pursuant to Item 601 of Regulation
S-K:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule for the Three Months Ended
December 31, 1998
</TABLE>
(b) Reports on Form 8-K
- Report, dated November 19, 1998, reporting the filing as an Exhibit
thereto certain selected unaudited historical financial statements of
the Company for the years ended September 30, 1998 and 1997.
- Report, dated October 29, 1998, reporting the issuance of a press
release announcing the Company's results for the year ended September
30, 1998.
- Report, dated October 26, 1998, reporting the issuance of a press
release announcing the appointment of Richard Bogan as the President
and Chief Financial Officer of the Company.
- Report, dated October 1, 1998, reporting the issuance of a press
release providing an update of the Company's restructuring program and
announcing its intention to divest its operations in Mexico.
17
<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 accounting officer of the
Registrant.
UNISOURCE WORLDWIDE, INC.
Date: February 16, 1999 /s/ Robert M. McLaughlin
------------------------
Robert M. McLaughlin
Vice President Finance
(Principal Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
-------------------
Exhibit
Number Description
------ -----------
27 Financial Data Schedule for the Three Months Ended
December 31, 1998
19
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,319,000
<SECURITIES> 0
<RECEIVABLES> 585,176,000
<ALLOWANCES> 24,672,000
<INVENTORY> 371,064,000
<CURRENT-ASSETS> 1,038,255,000
<PP&E> 431,001,000
<DEPRECIATION> 209,620,000
<TOTAL-ASSETS> 1,861,832,000
<CURRENT-LIABILITIES> 571,010,000
<BONDS> 497,018,000
0
0
<COMMON> 70,000
<OTHER-SE> 699,838,000
<TOTAL-LIABILITY-AND-EQUITY> 1,861,832,000
<SALES> 1,680,531,000
<TOTAL-REVENUES> 1,680,531,000
<CGS> 1,376,142,000
<TOTAL-COSTS> 1,376,142,000
<OTHER-EXPENSES> 281,562,000<F1>
<LOSS-PROVISION> 2,482,000
<INTEREST-EXPENSE> 11,464,000
<INCOME-PRETAX> 8,881,000
<INCOME-TAX> 3,819,000
<INCOME-CONTINUING> 5,062,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,062,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1>REPRESENTS SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, INCLUDING
RESTRUCTURING IMPLEMENTATION COSTS AND EXCLUDING PROVISION FOR LOSSES ON
ACCOUNTS RECEIVABLE.
</FN>
</TABLE>
