AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1996
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10
FILED PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
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UNISOURCE WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-5369500
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
825 DUPORTAIL ROAD 19087-5589
WAYNE, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (610) 296-8000
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS TO BE REGISTERED NAME OF EACH EXCHANGE ON WHICH EACH
COMMON STOCK, NO PAR VALUE CLASS IS TO BE REGISTERED
NEW YORK STOCK EXCHANGE
PHILADELPHIA STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
Securities to be registered pursuant to Section 12(g) of the Act:
None
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UNISOURCE WORLDWIDE, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
---- ------------ ---------------------------------
1. Business................. "Summary;" "Management's Discussion and
Analysis of Financial Condition and Results
of Operations" and "Business."
2. Financial Information.... "Summary;" "Pro Forma Consolidated Financial
Information;" "Selected Financial Data" and
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations."
3. Properties............... "Business."
4. Security Ownership of
Certain Beneficial "Security Ownership of Unisource Common Stock
Owners and Management... By Certain Beneficial Owners, Directors and
Executive Officers."
5. Directors and Executive "Management" and "Description of Capital
Officers................ Stock--Limited Liability and Indemnification
Provisions."
6. Executive Compensation... "Management."
7. Certain Relationships and
Related Transactions.... "Summary;" "The Spin-Off" and "Arrangements
Between Alco and Unisource Relating to the
Spin-Off."
8. Legal Proceedings........ "Business."
9. Market Price of and
Dividends on the
Registrant's Common
Equity and Related "Summary;" "The Spin-Off" and "Dividend
Shareholder Matters..... Policy."
10. Recent Sales of Not Applicable.
Unregistered
Securities..............
11. Description of
Registrant's Securities
to be Registered........ "Description of Capital Stock."
12. Indemnification of "Description of Capital Stock--Limited
Directors and Officers.. Liability and Indemnification Provisions."
13. Financial Statements and
Supplementary Data...... "Summary;" "Pro Forma Consolidated Financial
Information;" "Selected Financial Data;"
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations" and "Index to Consolidated
Financial Statements."
14. Changes in and
Disagreements with
Accountants on
Accounting and Financial
Disclosure.............. Not Applicable.
15. Financial Statements and
Exhibits Financial "Consolidated Financial Statements" and
Statements and "Exhibit List."
Schedules...............
ALCO STANDARD CORPORATION'S
SPIN-OFF OF
UNISOURCE WORLDWIDE, INC.
LOGO
THROUGH A 100% COMMON STOCK DISTRIBUTION
Fellow Stockholders,
Earlier this year, the Board of Directors of Alco Standard Corporation
announced that it planned to separate its two principal businesses into two
publicly-owned companies through a Spin-Off by distributing all of the shares
of common stock of Unisource Worldwide, Inc. to Alco shareholders. I am pleased
to announce that the Spin-Off will occur on December 31, 1996.
If you own Alco common stock as of the close of business on December 13,
1996, you will receive one share of Unisource Common Stock for every two shares
of Alco common stock that you own. You should receive these Unisource shares in
January of 1997. The Spin-Off will be tax-free to U.S. shareholders.
No Alco shareholder action is necessary. You do not need to surrender shares
of Alco common stock to receive Unisource Common Stock in the Spin-Off. The
number of shares of Alco common stock you own will not change as a result of
the Spin-Off. Unisource Common Stock will trade on the New York Stock Exchange
under the UWW symbol.
This document provides you with detailed information about Unisource and the
Spin-Off. We are enthusiastic about the Spin-Off and our separate public
status. We encourage you to read this document carefully to learn more about
Unisource, the Spin-Off and our future plans.
Sincerely,
LOGO
Ray B. Mundt
Chairman and Chief Executive Officer
Unisource Worldwide, Inc.
November 26, 1996
TABLE OF CONTENTS
PAGE
----
SUMMARY.................................................................. iii
Introduction........................................................... iii
Questions and Answers About the Spin-Off and Unisource................. iii
What We Have Already Accomplished to Prepare for the Spin-Off.......... vi
Key Terms of the Spin-Off Transaction.................................. viii
Who Can Help Answer Your Questions..................................... ix
Unisource Worldwide, Inc............................................... x
Strategy............................................................... xii
Alco Standard Corporation.............................................. xiii
Summary Consolidated Financial Data.................................... xiv
RISK FACTORS............................................................. 1
Competition............................................................ 1
Quarterly Fluctuations in Operating Results; Sensitivity to Paper Pric-
es.................................................................... 1
Leverage and Debt Service Obligations.................................. 1
Delay in Implementing Information Technology System.................... 2
No Operating History as an Independent Company......................... 2
No Prior Market for Unisource Common Stock; Shares Available for Future
Sale.................................................................. 2
Certain Antitakeover Provisions........................................ 2
FORWARD-LOOKING INFORMATION.............................................. 3
THE SPIN-OFF............................................................. 4
Background and Reasons for the Spin-Off................................ 4
Manner of Effecting the Spin-Off....................................... 4
No Issuance of Fractional Shares....................................... 5
Results of the Spin-Off................................................ 5
Tax Consequences of the Spin-Off....................................... 5
Listing and Trading of Unisource Common Stock.......................... 6
Conditions; Termination................................................ 6
Reasons for Furnishing this Document................................... 7
ARRANGEMENTS BETWEEN ALCO AND UNISOURCE RELATING TO THE SPIN-OFF......... 7
Distribution Agreement................................................. 7
Benefits Agreement..................................................... 8
Tax Sharing Agreement.................................................. 9
CAPITALIZATION........................................................... 10
DIVIDEND POLICY.......................................................... 10
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION............................. 11
SELECTED FINANCIAL DATA.................................................. 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 15
General................................................................ 15
Results of Operations.................................................. 15
Fiscal 1996 Compared to Fiscal 1995.................................... 15
Fiscal 1995 Compared to Fiscal 1994.................................... 17
Financial Condition and Liquidity...................................... 17
Quarterly Results...................................................... 19
i
PAGE
----
BUSINESS.................................................................. 20
Introduction............................................................ 20
Customers and Products.................................................. 20
Strategy................................................................ 21
Sources of Supply....................................................... 22
Competition............................................................. 22
International Operations................................................ 23
Acquisitions............................................................ 23
Business Transformation and Information Technology System............... 24
Employees............................................................... 24
Proprietary Matters..................................................... 24
Environmental Regulation................................................ 25
Legal Proceedings....................................................... 25
Properties.............................................................. 25
MANAGEMENT................................................................ 26
Directors............................................................... 26
Executive Officers...................................................... 27
Summary of Executive Compensation....................................... 28
Option Grants........................................................... 29
Option Exercises........................................................ 30
Long-Term Incentive Compensation Plan Awards............................ 30
William Leith Separation and Consulting Agreement....................... 31
Stock Option Plan....................................................... 31
Long-Term Incentive Compensation Plan Description....................... 32
Annual Bonus Plan....................................................... 33
Pension Plan and Supplemental Retirement Plan........................... 33
Deferred Compensation Plans............................................. 34
Retirement Savings Plan................................................. 35
Partners' Stock Purchase Plan........................................... 35
Director Compensation................................................... 35
Loan Program............................................................ 36
SECURITY OWNERSHIP OF UNISOURCE COMMON STOCK BY CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS OF UNISOURCE............................ 38
DESCRIPTION OF CAPITAL STOCK.............................................. 40
Introduction............................................................ 40
Authorized and Outstanding Capital Stock................................ 40
Unisource Common Stock; Delaware Antitakeover Provisions................ 40
Preferred Stock......................................................... 41
Certain Antitakeover Provisions--Unisource Certificate and By-laws...... 41
Stockholder Rights Plan................................................. 43
Limited Liability and Indemnification Provisions........................ 45
DESCRIPTION OF CREDIT FACILITY............................................ 47
ADDITIONAL INFORMATION.................................................... 49
INDEX TO UNISOURCE WORLDWIDE, INC. CONSOLIDATED FINANCIAL STATEMENTS...... F-1
ii
SUMMARY
This summary highlights selected information from this document, but does not
contain all details concerning the Spin-Off or Unisource, including information
that may be important to you. To better understand the Spin-Off and Unisource,
you should carefully review this entire document. References in this document
to "we," "us," "our" or "Unisource" mean Unisource Worldwide, Inc. and its
subsidiaries and divisions. References in this document to "Alco" mean Alco
Standard Corporation and its subsidiaries and divisions. References in this
document to Alco Stock mean Alco common stock.
INTRODUCTION
The Spin-Off culminates a ten-month process in which the Alco Board and
executives and employees of Alco and Unisource worked diligently to separate
Alco and Unisource into two publicly traded companies. We did this in order to
eliminate competitive conflict at the customer level and create direct
investment opportunities in two industry leaders. The Alco Board firmly
believes that this action is in the best interest of shareholders and should
further growth and opportunities for Alco and Unisource. To provide you with a
better understanding of the Spin-Off and Unisource, we have highlighted
information within this Summary to take you through the Spin-Off process and
provide highlighted information about Unisource. We also have included cross-
references in the Summary to other portions of the document to help you find
more detailed information about Unisource and the Spin-Off. We encourage you to
read the entire document.
QUESTIONS AND ANSWERS ABOUT
THE SPIN-OFF AND UNISOURCE
HOW COULD I BENEFIT FROM DIRECT INVESTMENT IN TWO INDUSTRY LEADERS. The
THE SPIN-OFF? Spin-Off will give you a direct investment in two
industry leaders: Alco's IKON Office Solutions,
Inc., which has the largest network of
independent copier and office equipment dealers
in North America and the United Kingdom; and
Unisource, which is the largest marketer and
distributor of printing and imaging and supply
systems products and services in North America.
FOCUSED PERFORMANCE. Alco believes that,
following the Spin-Off, the financial markets
will be able to focus on the individual strengths
of Alco and Unisource and more accurately
evaluate the performance of each distinct
business compared to companies in the same or
similar businesses. Management of each company
will be able to concentrate its attention and
financial resources on its core business. Each
company will be able to pursue market share
growth opportunities without internal competitive
conflict. Separate Alco and Unisource incentive
compensation arrangements for key employees,
directly related to the performance of Alco Stock
and Unisource Common Stock, will provide enhanced
direct incentives for performance.
DIRECT ACCESS TO CAPITAL. The Spin-Off will give
each company direct access to capital markets and
stock-based acquisition currency to finance
expansion and growth opportunities.
iii
WHY IS ALCO SEPARATING COMPETITIVE CONFLICT. The Alco Board determined
IKON AND UNISOURCE INTO that the Spin-Off is necessary because of a
TWO SEPARATE PUBLIC growing strategic conflict between IKON and
COMPANIES AT THIS TIME? Unisource at the customer level. To capture
opportunities created by the availability of high
volume, high-resolution copiers, IKON expanded
its business to offer facilities management
services, which include copy center, mailroom and
other centralized office services for corporate
customers. IKON's facilities management centers
solicit substantial business from the local
community and compete with commercial printers
and office superstores, which are Unisource
customers. This has produced the threat of lost
Unisource business from large, established
Unisource fine paper accounts and has reduced
Unisource's ability to gain additional market
share in the fine paper market. Therefore, the
Alco Board concluded that the Spin-Off was
necessary to maximize opportunity for both
companies.
WHAT DO I HAVE TO DO TO NOTHING. No proxy or vote is necessary for the
PARTICIPATE IN THE SPIN- Spin-Off. If you own Alco Stock as of the close
OFF? of business on December 13, 1996, Unisource
Common Stock will be mailed to you or credited to
your brokerage account in January 1997. You need
not mail in Alco Stock certificates to receive
Unisource Common Stock certificates. You will not
receive new Alco Stock certificates.
PLEASE EXPLAIN THE ONE-FOR-TWO. One share of Unisource Common Stock
DISTRIBUTION RATIO. will be distributed in the Spin-Off for every two
shares of Alco Stock owned as of December 13,
1996.
Example: If you own 100 shares of Alco Stock as
of the close of business on December 13, 1996,
you will receive 50 shares of Unisource Common
Stock through the Spin-Off.
WILL MY DIVIDENDS CHANGE? NO OVERALL CHANGE IN DIVIDEND POLICY IS
EXPECTED. Before the Spin-Off, Alco paid a $.14
per share quarterly dividend. After the Spin-Off
and after giving effect to the distribution
ratio, there will be no change in the overall
dividend rate. Unisource will declare an initial
quarterly dividend of $.20 per share and Alco
will declare an initial quarterly dividend of
$.04 per share.
Example: If you owned 100 shares of Alco Stock
before the Spin-Off, your last quarterly Alco
dividend would have been $14.00 (or 100 shares x
$.14). Assuming you maintain a constant number of
shares of Alco Stock, after the Spin-Off you will
receive the same $14.00 in two checks: $10.00
from Unisource (50 shares x $.20) and $4.00 from
Alco (100 shares x $.04 ).
iv
WILL SHARES TRADE ANY YES, DURING PART OF DECEMBER 1996. We expect that
DIFFERENTLY AS A RESULT OF a temporary form of interim trading called "when-
THE SPIN-OFF? issued trading" will occur for Unisource Common
Stock on or before December 13, 1996 and will
continue through December 31, 1996. A when-issued
listing can be identified by the "wi" letters
next to Unisource Common Stock on the New York
Stock Exchange. If when-issued trading develops,
you may buy Unisource Common Stock in advance of
the December 31, 1996 Spin-Off. You may also sell
Unisource Common Stock in advance of such date on
a when-issued basis. During this time, Alco Stock
will continue to trade on a regular basis and may
also trade on a when-issued basis, reflecting an
assumed post-Spin-Off value for Alco Stock. Alco
Stock when-issued trading, if available, could
last from December 11, 1996 through December 31,
1996. If this occurs, an additional listing for
Alco Stock, followed by the "wi" letters, will
appear on the New York Stock Exchange. When-
issued trading occurs in order to develop an
orderly market and trading price for Unisource
Common Stock (and possibly Alco Stock) after the
Spin-Off. There may be temporary slight
differences between the combined value of when-
issued Unisource Common Stock and when-issued
Alco Stock versus the regular price of Alco Stock
during this period.
IS THE SPIN-OFF TAXABLE FOR NO. The IRS has ruled that the Spin-Off will be
U.S. TAX PURPOSES? tax-free, except for taxes on cash received
instead of a fractional share. In January of
1997, Alco will send a letter to shareholders
that will explain the way to allocate tax basis
between Alco Stock and the Unisource Common Stock
distributed in the Spin-Off. The allocation will
be based upon average trading values for Alco
Stock and Unisource Common Stock as of December
31, 1996. To review tax consequences in detail,
see pages 5 to 6.
WHAT ARE THE RISKS INVOLVED The Unisource business is subject to risks
IN OWNING UNISOURCE COMMON related to competition, fluctuations in quarterly
STOCK? results due to changes in paper prices, leverage
and debt service requirements and the delays
associated with the implementation of a large
scale information technology system. Unisource's
separation from Alco presents certain additional
risks because Unisource has never operated
independently, Unisource Common Stock has no
trading history or prior market and a large
number of shares could be sold into the market at
any given time. Unisource also has antitakeover
provisions in place that could discourage or make
more expensive a takeover attempt that is opposed
by the Unisource Board. To review these factors
in greater detail, see pages 1 to 3.
WILL ALCO AND UNISOURCE BE Alco will no longer own any Unisource Common
RELATED IN ANY WAY AFTER Stock after the Spin-Off. Alco and Unisource will
THE SPIN-OFF? not have common Board members after January 1997.
Alco has, however, entered into agreements with
Unisource to define their ongoing relationship,
to cooperate regarding past matters and to
allocate responsibility for past obligations and
certain obligations that might arise in the
future. These agreements are described in greater
detail on pages 7 to 9.
v
WHAT WE HAVE ALREADY ACCOMPLISHED TO PREPARE FOR THE SPIN-OFF
BOARD APPOINTMENTS Six current members of the Alco Board will serve
exclusively on the Unisource Board in January
1997 and none of these directors will continue
service on the Alco Board after January 1997. See
pages 26 to 27.
SENIOR MANAGEMENTAPPOINTMENTS The Alco Board enthusiastically appointed Ray
Mundt as Chairman and Chief Executive Officer of
Unisource in August of 1996. Ray's prior Alco
positions as President, Chief Executive Officer
and/or Chairman for over 22 years provides an
instant, invaluable wealth of chief executive
experience. Ray will be supported by a management
group which has extensive executive experience,
including former Alco officers and senior
executives previously responsible for Alco's
Unisource subsidiary operations. See page 27.
ARRANGED $1 BILLION CREDIT FACILITY
We have $1 billion available in aggregate
borrowings under a five-year unsecured revolving
credit facility. We expect to use borrowings
under this credit facility prior to December 13,
1996 to repay in full the then-outstanding
intercompany debt payable to Alco. Intercompany
debt as of November 8, 1996 was approximately
$600 million, and this amount could increase or
decrease before repayment based upon normal
interim operating cash receipts and payments and
acquisition funding requirements. See page 10 and
pages 47 to 48.
ALCO CAPITAL CONTRIBUTIONS Immediately prior to September 30, 1996,
Unisource owed Alco approximately $1 billion in
intercompany debt, and Alco had $138 million in
Unisource preferred stock and unpaid fiscal 1996
dividends on the preferred stock. On September
30, 1996, in anticipation of completing the Spin-
Off, Alco forgave $456 million of the
approximately $1 billion Unisource intercompany
debt and returned to Unisource, as a capital
contribution, the $138 million in preferred stock
and related dividends. Unisource will repay Alco,
before December 13, 1996, the remaining $554
million in intercompany debt plus any additional
borrowings from Alco after September 30, 1996.
Intercompany debt was approximately $600 million
as of November 8, 1996. See page 10.
vi
U.S. TAX RULING Alco filed for and successfully received a tax
ruling from the Internal Revenue Service
concerning the Federal tax consequences of the
Spin-Off. The tax ruling states that the
distribution of Unisource Common Stock in the
Spin-Off generally will be tax-free to Alco
shareholders for Federal income tax purposes.
However, you may have to pay tax on a relatively
limited amount of gain arising from cash that may
be paid to you instead of fractional share
interests. The cash payment and related tax
consequences only apply if you owned an odd
number or fractional number of shares of Alco
Stock on December 13, 1996.
The tax ruling also provides that Alco
shareholders should apportion their tax basis in
Alco Stock held immediately before the Spin-Off
between Alco Stock and the Unisource Common Stock
received in the Spin-Off. We will be sending to
shareholders a letter in January of 1997 that
explains how to allocate your tax basis between
Alco Stock and Unisource Common Stock received in
the Spin-Off based upon their average values on
December 31, 1996. See pages 5 to 6.
APPLIED FOR NEW YORK STOCKEXCHANGE LISTING
We expect that the Unisource Common Stock will
begin trading on the New York Stock Exchange in
December 1996. There is not currently a public
market for Unisource Common Stock, although a
"when-issued" trading market is expected to
develop on or before December 13, 1996. We have
applied to list the Unisource Common Stock on the
New York Stock Exchange under the symbol UWW and
regular trading will begin on January 2, 1997.
See page 6.
vii
KEY TERMS OF THE SPIN-OFF TRANSACTION
NO SHAREHOLDER No action is required by Alco shareholders to
ACTION REQUIRED receive Unisource Common Stock in the Spin-Off.
You do not need to surrender Alco Stock to
receive Unisource Common Stock in the Spin-Off.
The number of shares of Alco Stock you own will
not change as a result of the Spin-Off.
RECORD DATE You need to own Alco Stock as of close of
business on December 13, 1996 to receive
Unisource Common Stock in the Spin-Off.
DISTRIBUTION RATIO You will receive one share of Unisource Common
Stock for every two shares of Alco Stock you
owned as of the close of business on December 13,
1996.
SHARES TO BE DISTRIBUTED All Unisource Common Stock owned by Alco will be
distributed in the Spin-Off. Based on 132,573,000
shares of Alco Stock outstanding as of November
8, 1996, approximately 66,286,500 shares of
Unisource Common Stock will be distributed in the
Spin-Off.
MAILING DATE The distribution agent will mail Unisource Common
Stock certificates to Alco shareholders on or
about December 31, 1996.
NO FRACTIONAL SHARES Fractional shares will not be distributed.
WILL BE ISSUED Instead they will be aggregated and sold in the
public market by the distribution agent, and the
aggregate net cash proceeds will be distributed
equally to shareholders otherwise entitled to
fractional interests. See page 5.
viii
WHO CAN HELP ANSWER YOUR QUESTIONS
Before the Spin-Off, shareholders of Alco with inquiries relating to the Spin-
Off should contact:
National City Bank Distribution Alco Investor Relations
Agent P.O. Box 92301-N Cleveland, Department 825 Duportail Road
OH 44193-0900 Telephone: (800) 622- Wayne, Pennsylvania 19087-5589
6757 Telephone: (610) 993-3662
After the Spin-Off, stockholders of Unisource with inquiries relating to their
investment in Unisource Common Stock should contact:
Unisource Investor Relations Department
825 Duportail Road Wayne, Pennsylvania 19087-5589
Telephone: (610) 993-3609
The agent responsible for the distribution of Unisource Common Stock in the
Spin-Off and acting as transfer agent and registrar for Unisource Common Stock
after the Spin-Off is:
National City Bank
P.O. Box 92301-N Cleveland, Ohio 44193-0900 Telephone:
(800) 622-6757
ix
UNISOURCE WORLDWIDE, INC.
DISTRIBUTION STRENGTH Unisource is the largest marketer and distributor
of quality paper products in North America. We
also are a leading North American distributor of
paper and plastic shipping and foodservice
supplies, sanitary maintenance supplies and
equipment and packaging supplies and equipment
(collectively, "Supply Systems"). Our
distribution facilities are located throughout
the United States, Canada and Mexico.
BUSINESSES AND MARKET SHARE We serve a broad customer base by marketing and
distributing products and equipment that are
manufactured by third parties. We distribute
these products through two businesses: a business
which markets and distributes quality papers to
printers, publishers and corporate imaging
customers ("Printing and Imaging"); and a Supply
Systems business, which distributes a wide range
of paper and plastic products, sanitary
maintenance supplies and equipment and packaging
equipment and supplies, principally to
manufacturers, food processors and grocery
stores. We estimate that our Printing and Imaging
business commands a 17% market share in the
United States and a 50% market share in Canada.
We also compete with a large number of local and
regional distributors in the fragmented Supply
Systems market and estimate that we have a 6% and
8% share in our Supply Systems markets in the
United States and Canada.
FINANCIAL HIGHLIGHTS For the fiscal year ended September 30, 1996,
Unisource generated approximately $7 billion in
revenues and $184 million in operating income,
excluding a $50 million restructuring charge. In
fiscal 1996, our Printing and Imaging business
accounted for approximately 68% of total revenues
and our Supply Systems business accounted for
approximately 32% of total revenues.
MARKETING FOCUS Within our two businesses, we focus on five
target customer segments: commercial printers and
publishers; business imaging customers;
manufacturers; food processors; and grocery
stores. Each of the five target customer segments
has dedicated customer service professionals, a
separate sales force and, in some instances,
specialty groups dedicated to satisfying each end
user's specific needs.
PRINTING AND IMAGING Our Printing and Imaging business is the leading
CUSTOMERS North American supplier of printing papers to
commercial printers, publishers and business
forms manufacturers, which produce catalogs,
brochures, advertising supplements, annual
reports, business forms and direct mail
advertising. We also provide a broad array of
specialty and commodity papers and supplies to
imaging customers, such as in-plant print
facilities, quick printers, corporate copy
centers, government institutions and other paper-
intensive businesses.
x
SUPPLY SYSTEMS CUSTOMERS Our Supply Systems business distributes a wide
variety of paper and plastic supplies, sanitary
maintenance equipment and supplies and packaging
equipment and supplies. While our customer base
is broad, we have focused Supply Systems
acquisition and marketing efforts mainly in the
manufacturing, food processing and retail grocery
markets. The products we distribute to
manufacturers include shipping room supplies
(corrugated boxes, cushioning materials, tapes
and labeling), packaging equipment and supplies,
sanitary maintenance equipment and supplies and
foodservice supplies. Food processing customers
purchase films and food wraps, food containers,
apparel for food service workers, refrigerants
and sanitary maintenance supplies and equipment.
Retail grocery customers purchase food packaging
equipment and supplies, containers and wraps for
food, grocery bags and boxes, meat trays, wraps,
liners and sanitary maintenance supplies and
equipment.
xi
STRATEGY
We intend to expand beyond our distribution strengths to become a leading
marketing and logistics company that provides a broad array of Printing and
Imaging and Supply Systems products and services to target customer markets.
WHY HOW
TO MINIMIZE OUR EXPOSURE TO THE CYCLICAL PAPERMARKET
ACCELERATE GROWTH IN SUPPLY SYSTEMS BUSINESSES. We want
to expand through acquisitions and internal growth in the
Supply Systems market. We believe we have significant
opportunities to capture additional market share because
the Supply Systems distribution market is now dominated
by many smaller competitors that do not have Unisource's
infrastructure, economies of scale, technological
capability and breadth of product line. Supply Systems
acquisitions and growth will establish greater revenue
balance between our two principal businesses, reduce
exposure to the cyclical business trends associated with
the paper business and enhance overall gross margins. We
will also continue to expand internationally,
particularly in Canada and Mexico.
TO COMPETEBASED ON OURABILITY TO LOWER CUSTOMERS'OVERALL PURCHASECOSTS
ENHANCE OVERALL GROWTH AND EFFICIENCY THROUGH
TRANSFORMATION. We are building an advanced information
system network to track customer supply trends, monitor
customer inventory levels, and determine future inventory
needs at the time orders are placed. These services will
allow customers to realize significant savings through
more efficient management of working capital and work
flow. These services also will encourage customers to
outsource entire purchasing departments to Unisource. At
the same time, we have consolidated numerous regions,
facilities, operations and customer service departments
to provide better service and marketing functions. We
believe that the opportunities for growth arising out of
the transformation program are significant for both of
our businesses. The opportunity to "cross-sell" products
and expertise across markets will present significant
competitive advantages.
INCREASE MARKET SHARE THROUGH SEGMENTATION AND MORE
EFFICIENT DELIVERIES. We intend to increase market share
through aggressive sales and marketing techniques that
focus on specific customer segments and by offering
segment customers valuable procurement solutions through
a combination of products and services. We also are
implementing several software systems that will add both
flexibility and efficiency to our distribution
capabilities, so that we can make timely, accurate and
cost-effective deliveries.
TO EXPAND OUR PRODUCT ANDSERVICE OFFERINGS TO MEET CURRENTAND FUTURE CUSTOMER
NEEDS
EXPAND SALES TO NATIONAL ACCOUNTS. We believe that the
developments in our technology and customer service
capabilities, together with our distribution networks,
will attract large multi-location customers seeking to
consolidate suppliers and procurement activities. These
national accounts should provide a consistent and
profitable revenue stream. In fiscal 1996, Unisource had
approximately $400 million in sales to national accounts.
xii
ALCO STANDARD CORPORATION
Prior to the Spin-Off, Alco conducted two principal businesses: Unisource's
businesses; and the office solutions business of IKON, which is described below
and was formerly referred to as Alco Office Products, Inc. After Alco announced
that it intended to complete the Spin-Off, Alco began to report the results of
Unisource as discontinued operations. For comparison purposes, based upon prior
presentations before this change in reporting, Alco's fiscal 1996 consolidated
revenues would have been $11.1 billion and fiscal 1996 operating income would
have been $566 million, excluding the Unisource $50 million restructuring
charge. During the following fiscal years, based upon prior presentations
before the change in reporting and excluding restructuring costs, Unisource and
IKON results represented the following percentages of overall Alco results:
1994 1995 1996
---- ---- ----
Unisource revenues............................................ 72% 71% 63%
IKON revenues................................................. 28% 29% 37%
Unisource operating income.................................... 45% 47% 36%
IKON operating income......................................... 55% 53% 64%
IKON OFFICE SOLUTIONS, INC.
IKON sells, rents and leases photocopiers, fax machines and other automated
office equipment. These products are used in both traditional and integrated
office environments. IKON also provides equipment service and supplies,
equipment financing and facilities management and specialized document copying
services.
IKON has locations throughout the United States and Canada and in Europe
(primarily in the United Kingdom). IKON operates the largest network of
independent copier and office equipment dealers in North America and in the
United Kingdom. More recently, IKON has built upon these strengths to expand
into outsourcing and networking services, providing one-stop shopping to
customers who seek quality, accessible office productivity solutions.
xiii
SUMMARY CONSOLIDATED FINANCIAL DATA
We are providing the following summary financial information of Unisource to
highlight selected financial information for your benefit. We derived this
information from the audited financial statements of Unisource for each of the
fiscal years shown below and the unaudited pro forma consolidated financial
information as of and for the fiscal year ended September 30, 1996. Because
Unisource did not actually operate as an independent company during the periods
depicted, Unisource may have recorded different results had it been operated
separately. Therefore, the financial information presented below is not
necessarily indicative of the results of operations or financial position that
would have resulted if Unisource had been an independent company during the
periods shown, or of Unisource's future performance as an independent company.
The following information is only a summary and you should read it in
conjunction with Unisource's financial statements and notes (beginning on page
F-1 in the latter portion of this document), and the unaudited pro forma
consolidated financial information and notes (on pages 11 to 13). We have
presented unaudited pro forma financial information as of and for the year
ended September 30, 1996 to give you a better picture of what our financial
statements might have looked like if Unisource was operated independently
during this period. Actual results may have differed from pro forma results if
we were operated independently. You should not rely on the pro forma financial
information as being indicative of results we would have had or future results
after the Spin-Off. For selected historical financial information of Unisource
for the five years ended September 30, 1996, see "Selected Financial Data" (on
page 14). For a more detailed narrative explanation of the following results
and conditions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (on pages 15 to 19).
Fiscal 1994 net income includes the cumulative effect of a change in the
method of accounting for income taxes of $14 million upon the adoption of a new
accounting standard. These benefits relate to the additional tax benefit on a
fiscal 1993 restructuring charge which could not be recorded in fiscal 1993
under the accounting rules then in effect.
Fiscal 1996 income from operations includes a $50 million restructuring
charge ($32.5 million net of tax). Excluding the 1996 restructuring charge, pro
forma earnings per share for fiscal 1996 would have been $1.30.
PRO FORMA FISCAL
YEAR ENDED
FISCAL YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------
1994 1995 1996 1996
---------- ---------- ---------- ----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)
Consolidated Information
Revenues................... $ 5,756.5 $ 6,987.3 $ 7,022.8 $7,022.8
Income from operations..... 148.5 206.3 134.5 134.5
Income before income tax-
es........................ 122.3 172.7 103.0 93.8
Net income................. 88.5 105.2 60.0 54.4
Pro forma earnings per
share..................... -- -- -- $ .81
Pro forma common and common
equivalent shares......... -- -- -- 67.0
Total assets............... 1,720.0 2,019.0 2,191.7 2,191.7
Long-term debt, including
current portion........... 26.8 25.5 21.9 582.9
Total stockholder's equi-
ty........................ 353.5 415.9 935.5 935.5
xiv
RISK FACTORS
COMPETITION
Our businesses operate within highly competitive markets. Our competitors
include the distribution units of large paper manufacturers (e.g.,
International Paper's ResourceNet, Mead Corporation's Zellerbach and Champion
International's Nationwide Paper) and independent distributors. While we are
the largest distributor in this market, certain Printing and Imaging
competitors, principally the distribution units of large paper manufacturers,
may have greater total financial, purchasing and/or sourcing power than
Unisource. In the more fragmented Supply Systems business, we compete with a
large number of local and regional distributors, as well as distribution units
of larger companies, including ResourceNet and Zellerbach. We believe that the
principal competitive factors in these markets are responsiveness to customer
needs, price, quality of customer service and the range of products maintained
in inventory. We are responding to these competitive conditions by bundling
products and services in order to meet all customers' Printing and Imaging and
Supply Systems needs and by using our extensive distribution capabilities to
attract national accounts which provide consistent and profitable revenue
streams.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS; SENSITIVITY TO PAPER PRICES
Our revenues and net income have fluctuated from quarter to quarter due to a
combination of factors, including changes in pulp and paper prices (which may
also affect demand for Printing and Imaging products), acquisition activity and
the restructuring program. Changes in pulp and paper prices can significantly
impact our Printing and Imaging business, which accounted for $4.8 billion
(68%) and $666 million (59%) of our total revenues and gross profit during
fiscal 1996. In fiscal 1995, average prices for Printing and Imaging products
that we sold increased by more than 24% over average fiscal 1994 levels. By the
end of fiscal 1996, prices for those same products declined by more than 16%
compared to prices at fiscal 1995 year-end. For the three-year period ended
September 30, 1996, paper prices for uncoated cut size (copy) and coated papers
(our two greatest volume categories) ranged from $670 to $1,160 per ton and
$1,175 to $1,500 per ton.
In general, rising pulp and paper prices produce higher Unisource gross
trading margins and therefore represent favorable market conditions for
Unisource. This is especially true when market conditions allow us to quickly
pass along increased supplier costs to customers and maintain gross trading
margin percentage. When this percentage is maintained over a higher revenue
base that is brought about by increased prices, our results usually improve.
Increases in pulp and paper prices do not usually produce a proportionate
increase in operating expenses except for sales commission expense, which is
based on gross trading margins and therefore increases with higher paper
prices. Declining pulp and paper prices negatively impact Unisource. This is
true even when we maintain gross trading margin percentage and volumes, because
constant volumes and trading margin percentages in a declining price
environment will produce lower revenues and gross trading margins, in absolute
terms, and we also have certain fixed expenses which impact results regardless
of changes in pulp and paper prices. Changes in pulp and paper prices also may
alter purchasing patterns and cause customers to defer paper purchases and/or
deplete inventory levels until long-term price stability occurs.
Although we do not produce paper products and are not directly exposed to
related production and raw materials risks, industry overcapacity and
overproduction by paper suppliers also could adversely affect our revenues and
net income if these factors produce lower paper prices. In addition, while we
have been successful in ultimately passing on the effects of price increases,
there is sometimes a short lag from the time prices are increased by producers
until we are able to effectively pass along these increased costs to our
customers.
LEVERAGE AND DEBT SERVICE OBLIGATIONS
As of September 30, 1996, after giving pro forma effect to the Spin-Off and
an initial borrowing under Unisource's $1 billion unsecured credit facility
(the "Credit Facility") to repay outstanding intercompany debt payable to Alco
(the "Intercompany Debt") and certain other third-party debt as of September
30, 1996, Unisource's consolidated long-term debt would have been approximately
$614 million. Unisource also expects
1
to use future borrowings under the Credit Facility to, among other things, fund
acquisition activity. While we believe that future operating cash flow,
together with financing arrangements, will be sufficient to finance current
operating requirements and that interest rate protection agreements will
reduce, in part, our exposure to increasing interest rates, it is possible that
our leverage and debt service requirements may make us more vulnerable to
economic downturns.
DELAY IN IMPLEMENTING INFORMATION TECHNOLOGY SYSTEM
We began an ambitious restructuring program in late fiscal 1993 and have made
significant investments in the design, testing and implementation of a new
information technology system. The system was originally scheduled to begin
operating in 1995, but we delayed implementation to allow for additional
enhancements to the system and to better prepare our field operations for
installation. We now expect to complete the system implementation by the end of
fiscal 1999. While the information technology systems we currently use are
adequate to support our current operations, the new system will enable
Unisource to realize cost savings through streamlined operating and financial
functions, to increase responsiveness to customers and to enhance distribution
efficiency. Any significant further delay in implementing this program or any
significant difficulties in realizing the anticipated benefits of this program
could adversely impact our operations and future financial results and
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Business Transformation and Information
Technology System."
NO OPERATING HISTORY AS AN INDEPENDENT COMPANY
We do not have an operating history as an independent public company and have
historically relied on Alco for various financial, administrative and
managerial expertise relevant to operating as an independent, public company.
After the Spin-Off, we will maintain our own lines of credit and banking
relationships, perform our own administrative functions and employ senior
executives, including the former Chairman and Chief Executive Officer of Alco
and other former officers of Alco, to manage Unisource. We believe, based upon
current circumstances, that corporate administrative expenses to be incurred
after the Spin-Off will not differ materially from corporate administrative
expenses that were allocated to Unisource as reflected in our fiscal 1996
financial statements. However, effective October 1, 1996, Unisource will begin
to incur greater interest expense. While we have been profitable as part of
Alco, there can be no assurance that, as a stand-alone company, our future
profits will be comparable to reported historical consolidated results before
the Spin-Off. See "Pro Forma Consolidated Financial Information."
NO PRIOR MARKET FOR UNISOURCE COMMON STOCK; SHARES AVAILABLE FOR FUTURE SALE
There has been no prior trading market for Unisource Common Stock and we
cannot predict, estimate or give assurances about the trading prices for
Unisource Common Stock before or after December 31, 1996. Until the Unisource
Common Stock is fully distributed and an orderly market develops, the trading
prices for Unisource Common Stock may fluctuate significantly. Prices for the
Unisource Common Stock will be determined in the trading markets and may be
influenced by many factors, including the depth and liquidity of the market for
Unisource Common Stock, investor perceptions of Unisource and its business,
changes in pulp and paper prices, Unisource's results, Unisource's dividend
policy and general economic and market conditions. The Unisource Common Stock
distributed to Alco shareholders in the Spin-Off will be freely transferable
under the Securities Act of 1933, as amended (the "Securities Act"), except for
securities received by persons who may be deemed affiliates of Unisource. See
"The Spin-Off--Listing and Trading of Unisource Common Stock." The sale of a
substantial number of shares of Unisource Common Stock after the Spin-Off could
adversely affect the market price of the Unisource Common Stock.
CERTAIN ANTITAKEOVER PROVISIONS
Provisions in the Unisource Certificate of Incorporation, By-laws and
Stockholder Rights Plan and in the General Corporation Law of the State of
Delaware may make more difficult or more expensive or discourage a
2
tender offer, change in control or takeover attempt that is opposed by our
Board of Directors. See "Description of Capital Stock--Unisource Common Stock;
Delaware Antitakeover Provisions," "--Preferred Stock," "--Certain Antitakeover
Provisions--Unisource Certificate and By-Laws" and "--Stockholder Rights Plan."
In addition, provisions in the Unisource Tax Sharing Agreement with Alco, which
are intended to preserve the tax-free status of the Spin-Off for Federal income
tax purposes, could discourage certain takeover proposals or make them more
expensive. See "Arrangements Between Alco and Unisource Relating to the Spin-
Off--Tax Sharing Agreement."
FORWARD-LOOKING INFORMATION
This document contains, and other materials filed or to be filed by Unisource
with the Securities and Exchange Commission (the "Commission"), as well as
information included in oral statements or other written statements made or to
be made by Unisource, contain or will contain or include, disclosures which are
forward-looking statements. These forward-looking statements address, among
other things, strategic initiatives (including plans for transforming
Unisource's business through new information technology systems, sales
strategies, market growth plans and acquisition and margin enhancement
initiatives, capital expenditure requirements and financing sources). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Strategy," "--Acquisitions" and "--Business
Transformation and Information Technology System." These forward-looking
statements are based upon our current plans or expectations and are subject to
a number of uncertainties and risks that could significantly affect current
plans, anticipated actions and our future financial condition and results.
These uncertainties and risks include, but are not limited to, those relating
to conducting operations in a competitive environment; delays, difficulties and
technological changes associated with a large-scale systems transformation
project; acquisition activities (including uncertainties associated with
projecting the use of Unisource Common Stock as acquisition currency when there
has been no historic trading market for such stock and projecting future cash
flows to finance cash-based acquisitions); leverage and debt service
requirements (including sensitivity to fluctuations in interest rates); general
economic conditions; and changes or volatility in pulp and paper prices. As a
consequence, current plans, anticipated actions and future financial condition
and results may differ from those expressed in any forward-looking statements
made by or on behalf of Unisource.
3
THE SPIN-OFF
BACKGROUND AND REASONS FOR THE SPIN-OFF
The Alco Board of Directors has determined that the Spin-Off is in the best
interests of Alco shareholders and is necessary because of a growing strategic
conflict between IKON Office Solutions, Inc. ("IKON") and Unisource at the
customer level. To capture opportunities created by the availability of high
volume, high-resolution copiers, IKON expanded its business to offer facilities
management services, which include copy center, mailroom and other centralized
office services for corporate customers. IKON's facilities management centers
solicit substantial business from the local community and compete with
commercial printers and office superstores, which are Unisource customers. This
has produced the threat of lost business from large, established Unisource fine
paper accounts and has reduced Unisource's ability to gain additional market
share in the fine paper market. Therefore, the Alco Board concluded that the
Spin-Off was necessary to maximize opportunity for both companies.
The Alco Board believes that the Spin-Off should be beneficial to each of
Alco's current businesses, because, among other things, it will separate
businesses with distinct financial, investment and operating characteristics so
that each business can adopt strategies and pursue objectives more appropriate
to its specific business plan than is possible under Alco's present combined
structure. The Spin-Off will enable management of each company to concentrate
its attention and financial resources on its core businesses, while also
allowing each company's management to respond to the characteristics and
competitive disciplines of its own industry segment.
Following the Spin-Off, we will be able to more closely tie compensation
incentives for our key employees to the performance of Unisource Common Stock.
The value of Unisource Common Stock will more closely correspond to the
performance of our employees. Consequently, Unisource and its stockholders
should benefit from the positive effects of the closer link between Unisource's
incentive compensation arrangements for key employees and Unisource Common
Stock.
The Spin-Off will also give Unisource direct access to capital markets and
stock-based acquisition currency to finance expansion and growth opportunities.
As part of Alco, Unisource has competed with IKON for capital to finance
expansion and growth opportunities. As a separate entity, Unisource management
will be in a better position to control capital funding and acquisition
initiatives and the implementation of business strategies. Alco also believes
that, following the Spin-Off, the financial markets will be able to focus on
the individual strengths of Alco and Unisource and more accurately evaluate the
performance of each distinct business compared to companies in the same or
similar businesses.
MANNER OF EFFECTING THE SPIN-OFF
The general terms and conditions relating to the Spin-Off are set forth in a
Distribution Agreement between Alco and Unisource. See "Arrangements Between
Alco and Unisource Relating to the Spin-Off--Distribution Agreement."
Alco will effect the Spin-Off by delivering all of the outstanding shares of
Unisource Common Stock to National City Bank, as distribution agent (the
"Distribution Agent") for distribution to the holders of record of Alco Stock
as of the close of business on December 13, 1996. The Spin-Off will be made on
the basis of one share of Unisource Common Stock for every two shares of Alco
Stock held as of the close of business on December 13, 1996 (the "Distribution
Ratio"). The actual total number of shares of Unisource Common Stock to be
distributed will depend on the number of shares of Alco Stock outstanding on
December 13, 1996. The shares of Unisource Common Stock will be fully paid and
nonassessable, and the holders thereof will not be entitled to preemptive
rights. See "Description of Unisource Capital Stock." It is expected that
certificates representing shares of Unisource Common Stock will be mailed to
Alco shareholders on or about December 31, 1996.
4
NO ISSUANCE OF FRACTIONAL SHARES
No certificates or scrip representing fractional interests in shares of
Unisource Common Stock ("Fractional Shares") will be issued to Alco
shareholders as part of the Spin-Off. The Distribution Agent, acting as agent
for the Alco shareholders otherwise entitled to receive in the Spin-Off
certificates representing Fractional Shares, will aggregate and sell in the
open market all Fractional Shares at then prevailing prices and distribute the
net proceeds to the stockholders who are entitled to payment.
RESULTS OF THE SPIN-OFF
After the Spin-Off, Unisource will be a separate public company. The number
and identity of stockholders of Unisource immediately after the Spin-Off will
be the same as the number and identity of shareholders of Alco on December 13,
1996. Immediately after the Spin-Off, Unisource expects to have approximately
15,000 holders of record of Unisource Common Stock and approximately 66,286,500
shares of Unisource Common Stock outstanding, based on the number of record
shareholders and issued and outstanding shares of Alco Stock as of the close of
business on November 8, 1996 and the Distribution Ratio. The actual number of
shares of Unisource Common Stock to be distributed will be determined as of
December 13, 1996 and could be affected by the conversion of Alco convertible
preferred stock, which as of November 8, 1996 could have been converted into
approximately 6,356,000 shares of Alco Stock. The Spin-Off will not affect the
number of outstanding shares of Alco Stock or the rights of Alco shareholders.
TAX CONSEQUENCES OF THE SPIN-OFF
United States Tax Consequences to Alco Shareholders. Alco has received a
ruling (the "Tax Ruling") from the Internal Revenue Service (the "IRS") to the
effect, among other things, that for Federal income tax purposes:
1. The Spin-Off will qualify as a tax-free spin-off under Section 355 of
the Internal Revenue Code of 1986, as amended (the "Code").
2. No gain or loss will be recognized by the Alco shareholders as a
result of their receipt of Unisource Common Stock in the Spin-Off except
for any cash received in lieu of Fractional Shares.
3. In connection with the Spin-Off, a shareholder's tax basis in Alco
Stock will be apportioned between Alco Stock and Unisource Common Stock
received in the Spin-Off in accordance with relative fair market values of
such shares at the time of the Spin-Off.
4. The holding period of the Unisource Common Stock received in the Spin-
Off will include the holding period of the Alco Stock with respect to which
the Unisource Common Stock will be distributed, provided the Alco Stock is
held as a capital asset on December 13, 1996.
The Tax Ruling was issued based upon the accuracy of factual representations
made by Alco and Unisource.
Canadian Tax Consequences to Alco Shareholders. The Spin-Off will be
considered to be a dividend for Canadian income tax purposes. The Income Tax
Act requires a Canadian resident shareholder to include in income the amount of
a dividend received. The amount of the dividend will be the fair market value
of the shares of Unisource received on the date those shares are received by
the shareholder. This dividend will be subject to the rules in the Income Tax
Act applicable to dividends received from a foreign corporation and will not be
eligible for the gross-up and credit rules applicable to a dividend from a
taxable Canadian corporation.
The Unisource Common Stock received through the Spin-Off will have a cost to
a shareholder equal to the fair market value of the shares on the date those
shares are received. The cost and adjusted cost basis of a shareholder's Alco
shares will not change as a consequence of the Spin-Off.
The foregoing is a general description of the material United States and
Canadian tax consequences associated with the Spin-Off, and is not intended to
address every shareholder's tax consequences and does not purport to address
all tax consequences applying to every Alco shareholder. In particular, this
summary
5
description does not cover state, local, municipal, provincial or international
tax consequences. Consequently, shareholders are strongly encouraged to consult
their individual tax advisors for relevant particular tax consequences
concerning the Spin-Off. In addition, shareholders residing outside of the
United States or Canada are encouraged to seek tax advice regarding tax
implications of the Spin-Off.
LISTING AND TRADING OF UNISOURCE COMMON STOCK
There is not currently a public market for the Unisource Common Stock.
Application has been made to list the Unisource Common Stock on the New York
Stock Exchange. A when-issued trading market for Unisource Common Stock is
expected to develop on or before about December 13, 1996. The term "when-
issued" means that shares can be traded prior to the time certificates are
actually available or issued. Prices at which the Unisource Common Stock may
trade on a when-issued basis or after such time certificates are actually
available or issued cannot be predicted. Until the Unisource Common Stock is
fully distributed and an orderly market develops, the prices at which trading
in such stock occurs may fluctuate significantly. The prices at which the
Unisource Common Stock trades will be determined by the marketplace and may be
influenced by many factors, including, among others, the depth and liquidity of
the market for Unisource Common Stock, investor perception of Unisource and its
business, changes in pulp and paper prices, Unisource's results, Unisource's
dividend policy and general economic and market conditions. See "Dividend
Policy."
Alco Stock will continue to trade on a regular basis and may also trade on a
when-issued basis, reflecting an assumed post-Spin-Off value for Alco Stock.
Alco Stock when-issued trading, if available, could last from December 11, 1996
through December 31, 1996. Unisource and Alco understand that if Alco Stock
when-issued trading is not available, the New York Stock Exchange will require
that shares of Alco Stock that are sold or purchased from the period beginning
on December 11, 1996, and ending on December 31, 1996, be accompanied by due-
bills representing the Unisource Common Stock distributable with respect to
such shares and that during such period neither the Alco Stock nor the due
bills may be purchased or sold separately.
The Transfer Agent and Registrar for the Unisource Common Stock will be
National City Bank. For certain information regarding options to purchase
Unisource Common Stock that will be granted in connection with the Spin-Off,
see "Management--Stock Option Plan."
Unisource Common Stock distributed to Alco shareholders in the Spin-Off will
be freely transferable under the Securities Act, except for securities received
by persons who may be deemed to be affiliates of Unisource pursuant to Rule 405
under the Securities Act. Persons who may be deemed to be affiliates of
Unisource after the Spin-Off generally include individuals or entities that
control, are controlled by, or are under common control with Unisource, and
such persons include directors of Unisource. Persons who are affiliates of
Unisource will be permitted to sell their shares of Unisource Common Stock
received in the Spin-Off pursuant to Rule 144 under the Securities Act except
for the holding period requirements of Rule 144 which are not applicable in
this instance. As a result, Unisource Common Stock received by Unisource
affiliates pursuant to the Spin-Off may be sold if certain provisions of Rule
144 under the Securities Act are complied with (e.g., the amount sold within a
three-month period does not exceed the greater of one percent of the
outstanding Unisource Common Stock or the average weekly trading volume for
Unisource Common Stock during the preceding four week period and the securities
are sold in "brokers' transactions" and in compliance with certain notice
provisions under Rule 144).
CONDITIONS; TERMINATION
It is expected that the Spin-Off will occur on December 31, 1996, provided
(i) the Registration Statement on Form 10, including this document (the
"Exchange Act Registration Statement"), under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), filed by Unisource with
the Commission has been declared effective;
(ii) a favorable response from the Staff of the Commission is issued with
respect to Alco's no-action request concerning, among other things,
whether the Spin-Off may be effected without registration of the
Unisource Common Stock under the Securities Act;
6
(iii) Unisource has borrowed under the Credit Facility to repay the
Intercompany Debt; and
(iv) the Tax Ruling shall not have been withdrawn or modified in any
material respect.
See "Arrangements Between Alco and Unisource Relating to the Spin-Off--
Distribution Agreement."
REASONS FOR FURNISHING THIS DOCUMENT
This document is being furnished by Alco solely to provide information to
Alco shareholders who will receive Unisource Common Stock in the Spin-Off. It
is not, and is not to be construed as, an inducement or encouragement to buy or
sell any securities of Alco or Unisource. We believe that the information
contained in this document is accurate as of the date on the cover. Changes may
occur after that date, and neither Alco nor Unisource will update the
information except as is required in the normal course of their respective
public disclosure practices.
ARRANGEMENTS BETWEEN ALCO AND UNISOURCE RELATING TO THE SPIN-OFF
For the purpose of an orderly transition establishing Unisource as an
independent company, Alco and Unisource have entered into certain agreements
described in this section. The agreements summarized below have been filed as
exhibits to the Exchange Act Registration Statement, which includes this
document. The following descriptions include a summary of all material terms of
these agreements but do not purport to be complete and are qualified in their
entirety by reference to the filed agreements.
DISTRIBUTION AGREEMENT
Unisource has entered into a distribution agreement with Alco (the
"Distribution Agreement") providing for, among other things, the principal
corporate transactions required to effect the Spin-Off, the conditions
precedent to the Spin-Off (see "The Spin-Off--Conditions; Termination"), the
allocation between Alco and Unisource of certain assets and liabilities, the
settlement of intercompany accounts between Alco and Unisource, the common use
of the existing Alco headquarters facility and certain equipment for a period
of time after December 31, 1996 and certain other transition arrangements.
ALLOCATION OF ASSETS AND LIABILITIES. The Distribution Agreement provides
generally that all assets and liabilities that are associated exclusively with
the business of Unisource will be transferred to or retained by Unisource. In
addition, certain commonly used equipment will be allocated to Unisource, and
liabilities and potential liabilities that relate to certain sold businesses
formerly associated with the business of Unisource will be assumed by
Unisource.
Under the Distribution Agreement, Alco will retain sole responsibility for
all external debt for borrowed money and other financings with the exception of
the Credit Facility, approximately $9.4 million aggregate principal amount of
industrial development bonds issued to finance the facilities of Unisource and
certain capitalized lease obligations and other financings related to
Unisource.
The Distribution Agreement provides that all assets and liabilities of Alco
that are not identified or described as being the property or responsibility of
Unisource will remain the property or responsibility of Alco.
CROSS-INDEMNIFICATION. Each of Alco and Unisource has agreed to indemnify,
defend and hold harmless the other party and its subsidiaries and their
respective directors, officers, employees and agents from and against any and
all damage, loss, liability and expense arising out of or due to the failure of
the indemnitor or its subsidiaries to pay, perform or otherwise discharge any
of the liabilities or obligations for which it is responsible under the terms
of the Distribution Agreement, which include, subject to certain exceptions,
all liabilities and obligations arising out of the conduct or operation of
their respective businesses before, on or after December 31, 1996. The
Distribution Agreement includes procedures for notice and payment of
7
indemnification claims and provides that the indemnifying party may assume the
defense of the claim or suit brought by a third party.
HEADQUARTERS FACILITY; MANAGEMENT INFORMATION SYSTEMS. Under the Distribution
Agreement, the land and buildings located at 825 Duportail Road, Wayne,
Pennsylvania, presently owned by Alco and utilized as the corporate
headquarters for Alco and Unisource (the "Headquarters Facility") will be held
for sale, and ownership and responsibility for maintenance will remain with
Alco for so long as Alco occupies the Headquarters Facility. Unisource will
have the right to continue to use the Headquarters Facility until December 31,
1997 but prior to that date, upon notice to Alco, may terminate its occupancy
and obligation to contribute to the costs of operation and maintenance.
For so long as both Alco and Unisource occupy the Headquarters Facility,
Unisource will be obligated to pay a ratable share (initially 40% and adjusted
on April 1, 1997 and monthly thereafter based upon relative numbers of
employees occupying the Headquarters Facility) of the cost of operations and
maintenance of the Headquarters Facility, including real estate taxes and
assessments, maintenance, insurance and normal repairs. If Alco terminates its
occupancy of the Headquarters Facility while Unisource remains, Unisource will
become responsible for 100% of such costs. Following the Spin-Off, Alco and
Unisource will each be responsible for its own management information systems.
Accordingly, the Distribution Agreement does not provide for performance of
specific management information services by one party for the other. The
Distribution Agreement does provide, however, for continued access, cooperation
and support for a period of one year after December 31, 1996 and, in the case
of certain computer equipment, up to two years after December 31, 1996. Under
the Distribution Agreement, Alco will maintain ownership of existing software
licenses. Unisource will be responsible for obtaining its own licenses,
although Alco has agreed to reimburse Unisource up to $200,000 for these costs.
Unisource believes that they can be obtained from existing licensors without
material expense by Unisource. Additionally, Alco will maintain ownership of
certain IBM computer equipment used in common with Unisource. For so long as
both parties utilize the equipment, normal operating costs will be shared
equally. If Alco or Unisource ceases to occupy the Headquarters Facility,
Unisource will continue to have access to the equipment but will bear the cost
of remote access. Unisource will have the right to purchase the equipment at
book value if Alco elects to discontinue its own use and support.
Based upon current circumstances, Unisource believes that the foregoing
expenses to be incurred after September 30, 1996, on an annualized basis, will
not produce a material future additional annual expense when compared to
corporate administrative expenses that were allocated to Unisource in its
fiscal 1996 financial statements. See "Pro Forma Consolidated Financial
Information."
INTERCOMPANY DEBT. The Distribution Agreement also provides for the repayment
by Unisource to Alco of the Intercompany Debt. Outstanding balances shall bear
interest from September 30, 1996 at a rate of 6.75% per annum. In calculating
Intercompany Debt as of September 30, 1996, Unisource received a credit of $4
million in lieu of any interest in the Headquarters Facility or any proceeds of
any sale thereof.
OTHER EXPENSES OF SPIN-OFF. The Distribution Agreement provides that all
costs and expenses incurred in connection with the consummation of the Spin-Off
and the transactions contemplated thereby and in connection with the
preparation, execution, delivery and implementation of the Distribution
Agreement and the related agreements necessary to effectuate the Spin-Off, such
as the Benefits Agreement and Tax Sharing Agreement described below, will be
paid by Alco.
BENEFITS AGREEMENT
Unisource and Alco have entered into an agreement which provides, among other
things, that the wages, salaries and employee benefits of all employees of
Unisource (including present employees and, principally with respect to certain
retiree health and life insurance liabilities, past employees) will be the
responsibility of Unisource (the "Benefits Agreement"). Generally, Unisource's
obligation to provide benefits will include all obligations with respect to
Unisource employees under pension plans, savings plans, multiemployer plans,
8
welfare plans, retiree medical plans, supplemental benefit plans, certain
deferred compensation plans, incentive plans, stock-based plans and other plans
covering Unisource employees and will include liabilities that arose while the
individuals were employed by Alco. The Benefits Agreement requires Alco to
reimburse Unisource for a portion of any payments made by Unisource to former
Unisource employees under Alco's 1985, 1991 and 1994 deferred compensation
plans. Unisource will assume certain Alco pension plans covering Unisource
employees, and assets and liabilities attributable to Unisource employees under
Alco's Participating Companies Pension Plan and Alco's 401(k) plan will be
transferred to a new Unisource pension plan and a 401(k) plan, respectively.
Unisource employees and directors will be given the opportunity to convert Alco
options into options to purchase Unisource Common Stock. See "Management."
TAX SHARING AGREEMENT
Unisource and Alco have entered into a Tax Sharing and Indemnification
Agreement (the "Tax Sharing Agreement") to allocate pre-Spin-Off tax
liabilities between Unisource and Alco and their respective subsidiaries. Under
the Tax Sharing Agreement, Unisource will bear its share of:
(i) Alco's Federal consolidated income tax liability (or benefit),
(ii) any unitary state income tax liability, and
(iii) Alco's consolidated personal property tax liability for all tax
periods that end before or that include December 31, 1996.
For the taxable year ending September 30, 1996, Unisource's share of Alco's
Federal consolidated tax liability (or benefit) will be 40% of such liability
(or benefit) and Alco's share of such liability (or benefit) will be 60%.
Unisource is responsible for paying any tax liabilities arising from any tax
returns which it files separately. If any tax year ending before or including
December 31, 1996 is subsequently examined by the IRS, and an adjustment
results from such examination, then Unisource's share of Alco's additional
Federal consolidated income tax liability (or benefit for that tax year) shall
be computed and agreed to by the parties. The parties generally assume, for
example, that any adjustment would be readily attributable either to the Alco
group or the Unisource group and that the benefit (or burden) would be computed
and paid by the appropriate party at the highest marginal tax rate. If any
adjustments cannot be readily attributed to the Alco group or the Unisource
group, then Unisource's share of any additional Federal tax liability (or tax
benefit) shall be computed and equal to the difference between the Unisource
Federal "stand-alone" consolidated tax liability without taking the adjustment
into account and the Unisource Federal "stand-alone" consolidated tax liability
after taking the adjustment into account.
The Tax Sharing Agreement generally provides that in the event that either
Alco or Unisource takes any action inconsistent with, or fails to take any
action required by, or in accordance with, the qualification of the Spin-Off as
tax-free, then Alco or Unisource, as the case may be, will be liable for and
indemnify and hold the other harmless from any tax liability resulting from
such action or inaction. If within two years after December 31, 1996, either
party engages in any transaction involving its stock or assets, and as a
result, the Spin-Off is treated as a taxable event, then the party engaging in
such transaction shall hold the other party harmless from any tax liabilities
that result from the treatment of the Spin-Off as a taxable event. Alco is also
responsible for any tax liability resulting from any action necessary to
implement the Spin-Off and its associated events, including, for example,
intercompany sales, liquidations, and mergers.
Furthermore, whenever Alco or Unisource receives a notice of adjustment for
any prior tax liability which may require payment from the other party, certain
procedures are required to be followed under the Tax Sharing Agreement, subject
to certain limitations, to ensure that the party that may ultimately be
responsible for payment is in control of the matter.
9
CAPITALIZATION
The following table sets forth the capitalization of Unisource as of
September 30, 1996 (actual) and after giving pro forma effect to the Spin-Off
and related transactions. Immediately prior to September 30, 1996, Unisource
had notes and advances payable to Alco of approximately $1.0 billion,
principally as a result of borrowings to finance acquisition activity ($910
million). As of September 30, 1996 in preparation for the Spin-Off, Alco
contributed to the capital of Unisource $456 million of such outstanding debt
payable to Alco and $138 million in preferred stock and the related fiscal 1996
cumulative dividends. Unisource is expected to use borrowings under the Credit
Facility prior to December 13, 1996 to repay in full the then-outstanding
Intercompany Debt (approximately $554 million as of September 30, 1996).
Intercompany Debt as of November 8, 1996 was approximately $600 million, and
this amount could increase or decrease before repayment based upon normal
interim operating cash receipts and payments and acquisition funding
requirements.
AS OF
SEPTEMBER 30, 1996
-----------------------
ACTUAL PRO FORMA (1)
-------- -------------
(IN MILLIONS)
(UNAUDITED)
Long-term debt, excluding current portion(2)........... $ 21.1 $ 582.1
Notes and advances payable to Alco (2)................. 553.7 --
Stockholders' Equity:
Preferred stock, 10,000,000 shares authorized, no par
value; no shares issued and outstanding............. -- --
Common stock, 200,000 shares authorized, $.01 par
value per share (actual), 250,000,000 shares
authorized, no par value (pro forma); 100,000 shares
issued and outstanding (actual), 65,965,000 shares
issued and outstanding
(pro forma) (3)(4).................................. -- 778.4
Additional paid-in capital........................... 778.4 --
Retained earnings.................................... 181.5 181.5
Foreign currency translation adjustments............. (24.4) (24.4)
-------- --------
Total stockholder's equity......................... 935.5 935.5
-------- --------
Total Capitalization................................... $1,510.3 $1,517.6
======== ========
- - --------
(1) See the Pro Forma Consolidated Financial Information and notes thereto
included elsewhere herein.
(2) See Note 2(a) to the Pro Forma Consolidated Financial Information.
(3) See Note 2(c) to the Pro Forma Consolidated Financial Information.
(4) The number of shares outstanding after giving effect to the Spin-Off was
determined based upon the number of shares of Alco Stock outstanding at
September 30, 1996 and reflects the assumed distribution of one share of
Unisource Common Stock for every two shares of Alco Stock. The actual
number of shares distributed will depend on the number of shares of Alco
Stock outstanding on December 13, 1996.
DIVIDEND POLICY
Unisource anticipates paying a quarterly cash dividend of $.20 per share with
respect to the Unisource Common Stock during the first fiscal quarter following
the Spin-Off. The decision as to whether to declare any dividend and the amount
thereof, if any, will be in the sole discretion of the Unisource Board of
Directors. Any additional future payment of dividends will depend upon the
financial condition, capital requirements and earnings of Unisource, and such
other factors that the Unisource Board of Directors may deem relevant.
10
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited Pro Forma Consolidated Statement of Income for the
year ended September 30, 1996 and the unaudited Pro Forma Consolidated Balance
Sheet as of September 30, 1996 present the results of operations and
consolidated financial position of Unisource assuming that the transactions
contemplated by the Spin-Off had been completed as of the beginning of fiscal
1996 and as of September 30, 1996. In the opinion of management, they include
all material adjustments necessary to reflect, on a pro forma basis, the impact
of transactions contemplated by the Spin-Off on Unisource's historical
financial information. The adjustments are described in Note 2 of the Notes to
the Pro Forma Consolidated Financial Information (Unaudited) and are set forth
in the "Pro Forma Adjustments" columns. No pro forma adjustments have been made
to selling and administrative expenses because expenses reflected in the
historical statements include an allocation of corporate administrative
expenses which Unisource believes, based upon current circumstances, will not
differ materially from actual selling and administrative expenses to be
incurred following the Spin-Off.
The unaudited Pro Forma Consolidated Financial Information of Unisource
should be read in conjunction with the historical financial statements of
Unisource (beginning on page F-1 in the latter portion of this document). We
have presented unaudited pro forma financial information as of and for the year
ended September 30, 1996 to give you a better picture of what our financial
statements might have looked like if Unisource was operated independently
during this period. Actual results may have differed from pro forma results if
we were operated independently. You should not rely on the pro forma financial
information as being indicative of results we would have had or future results
after the Spin-Off.
UNISOURCE WORLDWIDE, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1996
------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)
Revenues.................. $ 7,022.8 $ 7,022.8
Costs and expenses:
Cost of goods sold...... 5,896.2 5,896.2
Selling and administra-
tive................... 942.1 942.1
Restructuring charge.... 50.0 50.0
------------- -------------
6,888.3 6,888.3
------------- -------------
Income from operations.... 134.5 134.5
Interest expense........ 31.5 $ 9.2(2a) 40.7
------------- ----------- -------------
Income before income tax-
es....................... 103.0 (9.2) 93.8
Provision for income tax-
es....................... 43.0 (3.6)(2b) 39.4
------------- ----------- -------------
Net income................ $ 60.0 $ (5.6) $ 54.4
============= =========== =============
Pro forma net income per
common and common equiva-
lent share............... $ .81(3)
=============
See Notes to the Pro Forma Consolidated Financial Information (Unaudited).
11
UNISOURCE WORLDWIDE, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 1996
-----------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
ASSETS
Cash...................................... $ 14.6 $ 14.6
Accounts receivable, net.................. 790.8 790.8
Inventories............................... 470.2 470.2
Prepaid expenses and deferred taxes....... 54.9 54.9
-------- --------
Total current assets...................... 1,330.5 1,330.5
Long-term receivables..................... 21.9 21.9
Property and equipment, net............... 224.2 224.2
Goodwill.................................. 509.8 509.8
Deferred costs and other assets........... 105.3 105.3
-------- --------
Total assets............................ $2,191.7 $2,191.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt......... $ .8 $ .8
Notes payable............................. 38.4 $ (7.3)(2a) 31.1
Trade accounts payable.................... 438.9 438.9
Accrued salaries, wages and commissions... 27.0 27.0
Restructuring costs....................... 15.6 15.6
Other accrued expenses.................... 59.0 59.0
-------- ------ --------
Total current liabilities............... 579.7 (7.3) 572.4
Long-term debt............................ 21.1 561.0 (2a) 582.1
Notes and advances payable to Alco........ 553.7 (553.7)(2a) --
Deferred taxes and other liabilities
Deferred taxes.......................... 54.4 54.4
Restructuring costs..................... 13.9 13.9
Other long-term liabilities............. 33.4 33.4
Stockholders equity
Common Stock............................ -- 778.4 (2c) 778.4
Additional paid-in capital.............. 778.4 (778.4)(2c) --
Retained Earnings....................... 181.5 181.5
Foreign currency translation adjust-
ments.................................... (24.4) (24.4)
-------- --------
Total stockholders' equity.............. 935.5 935.5
-------- ------ --------
Total liabilities and stockholders' eq-
uity..................................... $2,191.7 -- $2,191.7
======== ====== ========
See Notes to the Pro Forma Consolidated Financial Information (Unaudited).
12
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
NOTE 1.
The accompanying unaudited Pro Forma Consolidated Financial Information
reflects all adjustments which, in the opinion of management, are necessary to
present fairly the pro forma financial position and pro forma results of
operations. This information should be read in conjunction with Unisource's
historical financial statements and notes thereto (beginning on page F-1 in the
latter portion of this document).
NOTE 2.
The pro forma adjustments to the accompanying financial information as of and
for the year ended September 30, 1996, are described below:
(a) To record the expected repayment of $554 million of Intercompany Debt
to Alco and notes payable to banks of $7 million and the associated
increase in debt and interest expense from the borrowings incurred to fund
the repayment. An interest rate of 7% is assumed on the borrowings. The pro
forma adjustments are net of the corporate interest expense allocation
reflected in the historical amounts. Borrowings under the Credit Facility
will have a variable interest rate and each 1% change in the annual
interest rate would have impacted pro forma interest expense by $5.5
million for the year ended September 30, 1996. See "Capitalization" and
"Description of Credit Facility."
(b) To record the estimated income tax benefit on the income effect of
pro forma adjustment (a) above.
(c) To reflect the distribution of Alco's 100% equity interest in
Unisource to Alco's shareholders. See "Capitalization."
NOTE 3.
Net income per share information is based upon 67 million common and common
equivalent shares for the fiscal year ended September 30, 1996. This amount was
determined assuming the Distribution Ratio of one share of Unisource Common
Stock for every two shares of Alco Stock reflected in Alco's Consolidated
Balance Sheet at September 30, 1996, and adding the estimated dilutive effect
of Unisource stock options expected to be issued to replace Alco stock options
held by Unisource officers and employees. The number of shares under option
will depend upon the extent to which existing stock options to purchase Alco
Stock are converted into stock options to purchase Unisource Common Stock. The
number of Unisource stock options granted in respect of converted Alco stock
options and their exercise prices will be set in a manner that will maintain in
the aggregate the excess of market value over exercise price of the Alco stock
options after taking into account such excess amount before December 11, 1996
and the fair market value of Unisource Common Stock on and after December 11,
1996. See "Management--Stock Option Plan" and "--Director Compensation." The
number of common and common equivalent shares used to compute earnings per
share after the Spin-Off will depend on the number of shares of Unisource
Common Stock and Unisource stock options outstanding and the market price of
Unisource Common Stock. Excluding the restructuring charge, pro forma net
income per share for fiscal 1996 would have been $1.30.
13
SELECTED FINANCIAL DATA
The following table summarizes certain selected historical financial
information of Unisource that has been derived from the audited financial
statements of Unisource for each of the five years in the period ended
September 30, 1996. The historical financial information may not be indicative
of Unisource's future performance as a stand-alone company. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Unisource's
Consolidated Financial Statements and notes thereto included elsewhere in this
document. Per share data has not been presented because Unisource was a wholly-
owned subsidiary of Alco during the periods presented.
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN MILLIONS)
Revenues........................ $3,667.9 $4,864.1 $5,756.5 $6,987.3 $7,022.8
Costs and expenses:
Cost of goods sold............ 3,079.5 4,077.1 4,825.7 5,925.2 5,896.2
Selling and administrative.... 475.7 661.0 782.3 855.8 942.1
Restructuring charge.......... -- 175.0 -- -- 50.0
-------- -------- -------- -------- --------
3,555.2 4,913.1 5,608.0 6,781.0 6,888.3
-------- -------- -------- -------- --------
Income from operations.......... 112.7 (49.0) 148.5 206.3 134.5
Interest expense.............. 20.0 23.8 26.2 33.6 31.5
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of accounting
change......................... 92.7 (72.8) 122.3 172.7 103.0
Provision for income taxes...... 36.7 (7.7) 47.8 67.5 43.0
-------- -------- -------- -------- --------
Income before cumulative effect
of accounting change........... 56.0 (65.1) 74.5 105.2 60.0
Cumulative effect of change in
method of accounting for income
taxes.......................... -- -- 14.0 -- --
-------- -------- -------- -------- --------
Net income (loss)............... $ 56.0 $ (65.1) $ 88.5 $ 105.2 $ 60.0
======== ======== ======== ======== ========
Capital expenditures............ $ 20.2 $ 21.7 $ 33.9 $ 50.1 $ 35.8
Depreciation and amortization... 20.6 28.7 32.5 33.4 40.0
Working capital................. 310.4 551.0 549.8 815.1 750.8
Total assets.................... 1,284.4 1,633.9 1,720.0 2,019.0 2,191.7
Long-term debt, including cur-
rent portion................... 30.5 29.5 26.8 25.5 21.9
Total stockholder's equity...... 372.5 280.3 353.5 415.9 935.5
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is based upon and should be read in conjunction with
the "Pro Forma Consolidated Financial Information," "Selected Financial Data"
and Unisource's Consolidated Financial Statements, including the notes thereto,
included elsewhere in this document.
GENERAL
Unisource is the largest marketer and distributor of Printing and Imaging and
Supply Systems products in North America. These products are primarily paper or
paper-based products. Consequently, our revenues, gross profit and net income
are affected by fluctuations in pulp and paper prices. Volatility in pulp and
paper prices may also alter purchasing patterns and cause customers to defer
paper purchases and/or deplete inventory levels until long-term price stability
occurs, which can cause fluctuations in quarterly results. See "Risk Factors--
Quarterly Fluctuations in Operating Results; Sensitivity to Paper Prices" and
"--Quarterly Results."
Following the Spin-Off, our results are expected to be impacted by an
increase in interest expense resulting from expected higher borrowing costs as
a stand alone entity and the refinancing of the Intercompany Debt payable to
Alco. While such borrowing costs are expected to fluctuate as interest rates
change, we expect to enter into interest rate protection arrangements to
minimize the impact of such fluctuations. As a result, based upon anticipated
average borrowings under the Credit Facility during fiscal 1997 and interest
rate protection arrangements that will be entered into coincident with the
Spin-Off, it is anticipated that a 1% increase in average interest rates
throughout fiscal 1997 would not result in a material change in annual interest
expense.
Future results also may be impacted by the degree of success encountered in
implementing our acquisition strategy and in realizing growth and efficiency
through our transformation program. See "Risk Factors--Delay in Implementing
Information Technology System," "Business--Strategy," "--Acquisitions" and "--
Business Transformation and Information Technology System."
RESULTS OF OPERATIONS
Revenues and operating income for the fiscal years ended September 30, 1994,
1995 and 1996 were as follows:
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------
1994 1995 1996
---------- ---------- ----------
(IN MILLIONS)
Revenues..................................... $ 5,757 $ 6,987 $ 7,023
========= ========== ==========
Gross profit................................. $ 930.8 $ 1,062.1 1,126.6
Selling and administrative expense........... (782.3) (855.8) (942.1)
Restructuring charge......................... -- -- (50.0)
--------- ---------- ----------
Operating income............................. $ 148.5 $ 206.3 $ 134.5
========= ========== ==========
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues increased $36 million, or .5% to $7 billion in fiscal 1996. This
change is principally due to increases associated with current and prior year
acquisitions of $528 million, which were offset by revenue declines of $383
million in base operations and $109 million related to an operation sold in
September 1995. Revenues of base operations were down as a result of paper
price and volume declines. Gross margin percentages rose from 15.2% in fiscal
1995 to 16.0% in fiscal 1996 due to lower costs from suppliers for many
products, higher margin percentages generated by acquired companies and a
higher proportion of Unisource
15
warehouse delivered (versus mill direct) sales. Warehouse delivered sales
generally result in higher gross margins, as compared to mill direct sales, but
also have higher associated operating expenses due to related warehouse
handling and delivery costs. See "Business--Customers and Products." Selling
and administrative expense increased by $86.3 million due to additional
operating costs associated with current and prior year acquisitions, net of
reductions related to the operation that was sold in September of 1995.
Excluding the effects of the restructuring charge, operating income decreased
$21.8 million, or 10.6%. Current and prior year acquisitions, net of the
divestiture, provided $19.6 million of operating income. Operating income from
base operations declined $41.4 million as a result of price and volume declines
during fiscal 1996 partially offset by improvement in gross margin percentages,
restructuring benefits and operating efficiencies. Operating margins, excluding
the restructuring charge, were 2.6% in fiscal 1996, compared to 3.0% in fiscal
1995. The overall decrease in operating income of 34.8% is primarily
attributable to the $50 million of restructuring costs recorded in the third
quarter of fiscal 1996 and operating income decreases described above.
Foreign Operations
Revenues from foreign operations increased $44 million, from $877 million in
fiscal 1995 to $921 million in fiscal 1996. Revenues from Canadian operations
decreased $30 million to $774 million, net of $13 million contributed by a
fourth quarter 1995 acquisition, while revenues from Mexican operations
increased $61 million to $73 million as a result of acquisitions and revenues
from foreign sales offices (Vienna and Hong Kong) increased $13 million.
Operating income from foreign operations, excluding $12 million of the
restructuring charge that relates to Canadian operations, decreased $4.6
million to $33.6 million in fiscal 1996 compared to $38.2 million in fiscal
1995. Canadian operating income decreased $9 million to $27.3 million, while
Mexican operating income increased $3.7 million to $4.8 million and the foreign
sales offices contributed an increase of $.7 million to $1.5 million in
operating income. The decrease in Canadian operating income reflects paper
price decreases while the increase in the Mexican operating income is the
result of acquisitions. There was no material effect of foreign currency
exchange rate fluctuations on the results of operations in fiscal 1996 compared
to fiscal 1995.
We believe that our foreign operations do not expose us to material foreign
currency risk and, therefore, we only engage in limited currency hedging. We
believe that economic risk is minimized because we source locally in excess of
90% of the products we distribute within our foreign markets and consistent
with our growth plans, we reinvest profits in the country where the profits are
derived, except for a limited amount of dividends and interest.
Restructuring
We recorded a restructuring charge of $50 million during the third quarter of
fiscal 1996, which included the cost of facility closures ($33 million) and
severance costs ($17 million) associated with the regional realignment from ten
to five regions in the United States and facilities mergers in the United
States and Canada. Our information technology ("IT") system is expected to be
fully implemented by the end of fiscal 1999 and is significant to our plans to
realize cost savings through streamlined operating and financial functions and
to our plans to increase responsiveness to customers and enhance distribution
efficiency. At September 30, 1996, the remaining restructuring reserve was
$29.5 million.
Acquisitions
In fiscal 1996, we completed 41 acquisitions with annualized revenues of $854
million. Almost all of the U.S.-based acquisitions are Supply Systems
companies, reflecting our goal of moving toward a balanced revenue contribution
between our Printing and Imaging and Supply Systems businesses. Fifteen of the
acquisitions are located in Mexico, further expanding the group's presence in
the Mexican market. The 41
16
acquisitions were financed with cash ($185 million), Alco Stock ($104 million)
and promissory notes ($45 million). See "--Financial Condition and Liquidity."
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues increased $1.2 billion, or 21.4% from $5.8 billion to $7.0 billion,
which includes current and prior year acquisitions that had an additive revenue
impact of $74 million. Increased revenues of base operations is primarily
related to substantial price increases experienced in the paper industry during
fiscal 1995, as well as volume increases. Gross margin percentages declined to
15.2% in fiscal 1995 compared to 16.2% in fiscal 1994. Gross margin percentages
in fiscal 1995 were negatively impacted by higher costs from suppliers for many
products, in addition to a higher proportion of mill direct (versus warehouse)
sales that was caused largely by rapidly increasing prices.
Operating income increased $57.8 million, or 38.9%, in fiscal 1995 compared
to fiscal 1994. Current and prior year acquisitions provided $3.9 million of
operating income. The remaining $53.9 million was from internal growth,
reflecting the impact of price and volume increases along with net benefits
realized from the restructuring program initiated in 1993. Operating margins
were 3.0% in fiscal 1995, compared to 2.6% in fiscal 1994.
Foreign Operations
Revenues from foreign operations increased by $228 million, from $649 million
in fiscal 1994 to $877 million in fiscal 1995. Revenues from Canadian
operations increased $155 million to $804 million, which is net of a negative
impact of approximately $12 million relating to foreign currency rate
fluctuations, while acquisitions in Mexico in fiscal 1995 added $12 million and
foreign sales offices (opened in 1995) added $61 million. Operating income of
foreign operations increased $27.1 million in fiscal 1995 compared to fiscal
1994. Canadian operating income increased $25.2 million to $36.3 million, while
Mexican acquisitions contributed $1.1 million in operating income and foreign
sales offices contributed $.8 million in operating income. Operating income
increases in Canada reflect price increases, growth in the fine paper
distribution business and restructuring benefits.
Acquisitions and Divestitures
We completed 12 acquisitions with annualized revenues of approximately $152
million in fiscal 1995. Most of the acquisitions were Supply Systems companies,
reflecting our goal of a balanced revenue contribution between the Printing and
Imaging and Supply Systems businesses. Two acquisitions were in Canada, and
four acquisitions led to our entrance into the Mexican market, further
expanding our presence in North America.
In September 1995, we divested Central Products Company for $80 million in
cash and notes and recorded a gain of approximately $4 million on the sale.
Also included in operations, and related to Central Products Company, are
fiscal 1995 revenues of approximately $109 million and income before taxes of
$7.9 million.
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities in fiscal 1996 was $206 million.
During the same period, we used $210 million in cash for investing activities,
which included acquisition activity (at a cash cost of $191 million, including
cash earn-out payments relating to pre-fiscal 1996 acquisitions and net of cash
acquired associated with fiscal 1996 acquisitions), deferred cost expenditures
of $52 million principally associated with the IT system and capital
expenditures of $36 million. These investing activities were primarily funded
through cash flow from operations. Cash used in financing activities included
$53 million advanced from Alco less $58 million that was used for debt
repayment.
17
On September 30, 1996, total third party debt of Unisource was $60.3 million
and outstanding Intercompany Debt was $554 million. See "Summary--What We Have
Already Accomplished to Prepare for the Spin-Off--Arranged $1 Billion Credit
Facility," "Capitalization" and "Pro Forma Consolidated Financial Information."
Intercompany Debt as of November 8, 1996 was approximately $600 million. The
amount of Intercompany Debt to be repaid prior to December 13, 1996 will be
dependent upon the normal interim operating cash receipts and payments and
acquisition funding requirements. We intend to borrow funds under an available
$1 billion Credit Facility to finance the repayment of such Intercompany Debt
and approximately $7.3 million (at September 30, 1996) in borrowings under an
existing credit facility for Canadian operations. See Notes 8 and 9 to the
Consolidated Financial Statements. See "Description of Credit Facility." We
have historically used Alco's centralized cash management system for all of our
domestic operations. Cash reflected on the consolidated balance sheets are
primarily the balances maintained by Unisource's foreign subsidiaries.
We presently expect to pursue acquisitions during fiscal 1997 at a slightly
less aggressive pace compared to fiscal 1996 activity. See "--Fiscal 1996
Compared to Fiscal 1995; Acquisitions." Such acquisitions will be funded with a
combination of Unisource Common Stock, cash flow from operations and available
borrowings under the Credit Facility.
Total cash expenditures in connection with the Unisource restructuring plans
amounted to $35 million in fiscal 1996. Remaining cash expenditures are
estimated at $29 million. We are party to a long-term technology outsourcing
agreement and related amendments, which is expected to continue through
September 30, 2005. The remaining commitment under this agreement and related
amendments was $194 million at September 30, 1996. During fiscal 1996, we spent
$43 million under this agreement, and cash outlays of approximately $39 million
are projected under this outsourcing arrangement during fiscal 1997. See
"Business--Business Transformation and Information Technology System." These
restructuring and outsourcing expenditures are anticipated to be funded from
our operating cash flow.
We periodically sell Canadian accounts receivable pursuant to a limited
recourse, bank sponsored program which provides a cost-effective source of
financing for Canadian operations. These arrangements are not material to
overall liquidity, and we could readily replace this funding source if
necessary.
We anticipate paying a quarterly dividend of $.20 per share with respect to
the Unisource Common Stock during the first fiscal quarter following the Spin-
Off. See "Dividend Policy."
At the end of fiscal 1996, our commitments for capital expenditures were
approximately $7.2 million, all of which are expected to be expended during
fiscal 1997.
We believe that our operating cash flow, together with financing
arrangements, will be sufficient to finance current operating requirements
including capital expenditures, acquisitions, cash requirements under the
restructuring program and future dividends.
18
QUARTERLY RESULTS
The following table reflects Unisource's selected quarterly results for the
last eight fiscal quarters.
UNAUDITED QUARTERLY STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DEC. 31, MAR. 31, JUNE 30, SEP. 30 DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- ------- -------- -------- -------- --------
Revenues................ $1,547 $1,750 $1,833 $1,857 $1,716 $1,747 $1,749 $1,811
Gross profit............ 242 269 274 277 269 290 292 276
Income (loss) before
taxes.................. 32 38 48 55 43 47 (5)(1) 18
Net income (loss)....... 20 23 29 33 26 29 (6)(1) 11
Pro forma net income
(loss)(2).............. 25 27 (7)(1) 10
Pro forma earnings
(loss) per share(2).... $ .37 $ .41 $ (.11)(1) $ .14
- - --------
(1) Includes $50 million restructuring charge ($32.5 million net of tax).
(2) See Pro Forma Consolidated Financial Information, which presents pro forma
financial information for fiscal 1996.
We have experienced fluctuations in quarterly revenues, gross profits and net
income due to a variety of factors, including volatility in pulp and paper
prices (which may also affect customer demand for Printing and Imaging
products), restructuring efforts and the timing and magnitude of acquisition
activities and the implementation of our restructuring program. Results of
operations for any previous fiscal quarter are not necessarily indicative of
results for any future periods, and future quarterly results could be adversely
impacted by these, and other, factors. See "Risk Factors--Quarterly
Fluctuations in Operating Results; Sensitivity to Paper Prices."
19
BUSINESS
INTRODUCTION
Unisource is the largest marketer and distributor of quality paper products
in North America. We also are a leading North American distributor of paper and
plastic shipping and foodservice supplies, sanitary maintenance supplies and
equipment and packaging supplies and equipment. Our distribution facilities are
located throughout the United States, Canada and Mexico.
We serve a broad customer base by marketing and distributing products and
equipment that are manufactured by third parties. We distribute these products
through two businesses: a Printing and Imaging business which markets and
distributes quality papers to printers, publishers and corporate imaging
customers; and a Supply Systems business, which distributes a wide range of
paper and plastic products, sanitary maintenance supplies and equipment and
packaging equipment and supplies, principally to manufacturers, food processors
and grocery stores. We estimate that our Printing and Imaging business commands
a 17% market share in the United States and a 50% market share in Canada. We
also compete with a large number of local and regional distributors in the
fragmented Supply Systems market and estimate that we have a 6% and 8% share in
our Supply Systems markets in the United States and Canada.
In fiscal 1996, Unisource generated approximately $7 billion in revenues and
$184 million in operating income, excluding a $50 million restructuring charge.
In fiscal 1996, our Printing and Imaging business accounted for approximately
68% of total revenues and the Supply Systems business accounted for
approximately 32% of total revenues.
CUSTOMERS AND PRODUCTS
Within our two businesses, we focus on five target customer segments:
commercial printers and publishers; business imaging customers; manufacturers;
food processors; and grocery stores. Each of the five target customer segments
has dedicated customer service professionals, a separate sales force and, in
some instances, specialty groups dedicated to satisfying each end user's
specific needs.
Our Printing and Imaging business is the leading North American supplier of
printing papers to commercial printers, publishers and business forms
manufacturers, which produce catalogs, brochures, advertising supplements,
annual reports, business forms and direct mail advertising. We also provide a
broad array of specialty and commodity papers and supplies to imaging
customers, such as in-plant print facilities, quick printers, corporate copy
centers, government institutions and other paper-intensive businesses.
Products sold by Unisource's Printing and Imaging business are distributed
both by Unisource (i.e., through Unisource's distribution facilities) and
through mill direct deliveries (i.e., direct deliveries from paper mills to
Unisource customers). In fiscal 1996, the Printing and Imaging business
represented approximately $4.8 billion or 68% of Unisource's total revenues.
Approximately 48% of fiscal 1996 sales in this business were effected through
Unisource's distribution facilities and 52% of such sales were effected through
mill direct deliveries. The quantity of goods ordered and delivery lead times
are the primary factors involved in determining whether an order will be filled
from the warehouse or directly shipped from a mill. In periods of rapidly
falling paper prices, customers may purchase smaller quantities with short
delivery lead times in anticipation of further price declines. These factors
could result in a shift to a greater proportion of warehouse, versus mill
direct, deliveries.
Our Supply Systems business distributes a wide variety of paper and plastic
supplies, sanitary maintenance equipment and supplies and packaging equipment
and supplies. While our customer base is broad, we have focused Supply Systems
acquisition and marketing efforts mainly in the manufacturing, food processing
and retail grocery markets. The products we distribute to manufacturers include
shipping room supplies (corrugated boxes, cushioning materials, tapes and
labeling), packaging equipment and supplies, sanitary maintenance equipment and
supplies and foodservice supplies. Food processing customers purchase films and
food wraps, food containers, apparel for food service workers, refrigerants and
sanitary supplies and equipment. Retail
20
grocery customers purchase food packaging equipment and supplies, containers
and wraps for food, grocery bags and boxes, meat trays, wraps, liners and
sanitary maintenance supplies. In fiscal 1996, the Supply Systems business
comprised approximately $2.2 billion or 32% of our revenues.
We believe that the critical factors for success in our businesses include
prompt and accurate delivery of orders, close contact with customers and a full
array of products and services. We offer daily delivery to certain customer
locations and have the capability of delivering special orders on short notice.
Our more than 2,800 sales and marketing representatives fulfill customers'
requirements and actively market new product offerings. Our extensive
distribution network and national presence in both the United States and Canada
enable us to service national accounts, and our large size gives us important
economies of scale in purchasing and other functions. The percentage of paper
products sold through distributors such as Unisource has increased over the
past several years, and we expect this trend to continue.
No single customer accounted for more than 2% of Unisource's sales for its
fiscal year ended September 30, 1996. There are no material long-term contracts
with any customer that may not be canceled by either party at its option.
STRATEGY
We intend to expand beyond our distribution strengths to become a leading
marketing and logistics company which provides a broad array of Printing and
Imaging and Supply Systems products and services to target customer markets. We
are implementing this strategy in order to
(i) minimize our exposure to the cyclical paper market,
(ii) position Unisource to compete based on our ability to lower customers'
overall cost of procurement rather than on individual product cost and
(iii) expand our product and service offerings to meet current and future
customer needs.
We are pursuing our objective through the following means:
Accelerate Growth in Supply Systems Businesses
We want to expand through acquisitions and internal growth in the Supply
Systems market. We believe we have significant opportunities to capture
additional market share because the Supply Systems distribution market is now
dominated by many smaller competitors that do not have Unisource's
infrastructure, economies of scale, technological capability and breadth of
product line. Supply Systems acquisitions and growth will establish greater
revenue balance between our two principal businesses, reduce exposure to the
cyclical business trends associated with the paper business and enhance overall
gross margins. We will also continue to expand internationally, particularly in
Canada and Mexico.
Enhance Overall Growth and Efficiency Through Transformation
We are building an advanced information system network to track customer
supply trends, monitor customer inventory levels, and determine future
inventory needs at the time orders are placed. These services will allow
customers to realize significant savings through more efficient management of
working capital and work flow. These services also will encourage customers to
outsource entire purchasing departments to Unisource. At the same time, we have
consolidated numerous regions, facilities, operations and customer service
departments to provide better service and marketing functions. We believe that
the opportunities for growth arising out of the transformation program are
significant for both of our businesses. The opportunity to "cross-sell"
products and expertise across markets will present significant competitive
advantages.
21
Increase Market Share Through Segmentation and More Efficient Deliveries
We intend to increase market share through aggressive sales and marketing
techniques that focus on specific customer segments and by offering segment
customers valuable procurement solutions through a combination of products and
services. We are also implementing several software systems which will add both
flexibility and efficiency to our distribution capabilities, so that we can
make timely, accurate and cost-effective deliveries. The software systems that
will maximize efficiency in deliveries include a truck-routing system which
maps optimal delivery routes and estimates delivery times and an on-board
computer terminal which tracks mileage in order to ensure driver productivity.
Expand Sales to National Accounts
We believe that the developments in our technology and customer service
capabilities, together with our distribution networks, will attract large
multi-location customers seeking to consolidate suppliers and procurement
activities. These national accounts should provide a consistent and profitable
revenue stream. In fiscal 1996, Unisource had approximately $400 million in
sales to national accounts.
SOURCES OF SUPPLY
Our Printing and Imaging business suppliers include all of the major North
American paper producers, which accounted for over 80% of Unisource's Printing
and Imaging purchases. We do not anticipate the termination of any significant
Printing and Imaging supply relationship and, in any case, any such termination
would not have a material adverse effect because we would be able to arrange
comparable alternative supply arrangements. Unisource represents no less than
10% of the estimated sales to distributors by each of its ten largest
suppliers. Typically, distribution arrangements involve exclusive or semi-
exclusive arrangements to sell a manufacturer's product in a given market.
Our Supply Systems business has 31 core suppliers. Currently, the ten largest
suppliers represent approximately 30% of Supply System product purchases.
Unisource is one of the leading Supply Systems customers for each of its ten
largest suppliers. Unisource does not anticipate the termination of any
significant Supply Systems relationships with any of its ten largest suppliers
and, in any case, any such termination would not have a material adverse effect
because we would be able to arrange comparable alternative supply arrangements.
Supplier relationships are good and such relationships are expected to
continue.
COMPETITION
Our Printing and Imaging competitors include the distribution units of large
paper manufacturers (e.g., International Paper's ResourceNet, Mead
Corporation's Zellerbach and Champion International's Nationwide Paper) and
independent distributors. While we are the largest distributor in this market,
certain Printing and Imaging competitors, principally the distribution units of
large paper manufacturers, may have greater total financial, purchasing and/or
sourcing power than Unisource. We estimate, based upon 1995 data, that we have
an approximate 17% share of the United States Printing and Imaging market and
an approximate 50% share of the Canadian Printing and Imaging market.
In the more fragmented Supply Systems business, we compete with a large
number of local and regional distributors, as well as larger companies,
including ResourceNet and Zellerbach. We are the largest North American
distributor of, and a leading consolidator in, Supply Systems. We estimate
that, in the Supply Systems markets in which we compete, we have an approximate
6% share of the United States Supply Systems market and an approximate 8%
market share in the Canadian Supply Systems market.
During 1995, we entered the Mexican Printing and Imaging and Supply Systems
distribution markets. These markets are highly fragmented and are not dominated
by any individual distributor. We plan to aggressively pursue market share in
these markets, principally through acquisitions. See "--International
Operations."
22
Although our businesses are highly competitive, we believe that our size,
strategic supply relationships and unique distribution and servicing
capabilities have resulted in a strong competitive position in all of the
markets in which we compete. We compete principally on the basis of
responsiveness to customer needs, price, quality customer service and the range
of products maintained in inventory.
INTERNATIONAL OPERATIONS
Unisource has operations in every major province of Canada and throughout
Mexico. During fiscal 1996, our international revenues were $921 million,
including $774 million attributable to Canadian operations, $73 million
attributable to Mexican operations and $74 million in revenues derived from our
two foreign sales offices in Vienna and Hong Kong. In fiscal 1996, foreign
operations represented approximately 13% of our revenues and 18% of our
operating income, excluding the restructuring charge. At September 30, 1996,
approximately 18% of our total assets were attributable to these operations.
For further information regarding our international operations, see Note 18 to
the Consolidated Financial Statements. There are certain risks attendant to
foreign operations, including, but not limited to, risks with respect to
currency fluctuations and unsettled political conditions.
Our international strategy is to acquire Supply Systems companies in Canada
and small and medium-sized companies in both the Printing and Imaging and
Supply Systems markets in Mexico. We have established acquisition targets
which, if successfully executed, could add up to $700 million in annual
revenues in these markets by the year 2000.
We currently are the leading Printing and Imaging and Supply Systems
distributor in Canada. Consistent with our overall acquisition strategy, we are
targeting substantial growth in the Supply Systems business through selective
acquisitions over the next three years.
Unisource entered the Mexican market in 1995 through the acquisition of a
distributor which had approximately $8 million in annualized revenues and
focused primarily on Supply Systems products. Our Mexican operations have grown
substantially through successive acquisitions of Printing and Imaging and
Supply Systems distributors and generated $73 million in revenues in fiscal
1996. These acquisitions have had a positive impact on operating results.
ACQUISITIONS
We have a full-time staff of professionals dedicated to evaluating,
negotiating and completing acquisitions. In fiscal 1995, Unisource acquired 12
companies with $152 million in annualized revenues, including four acquisitions
in Mexico with a total of $52 million in annualized revenues. In fiscal 1996,
Unisource acquired 41 companies with $854 million in annualized revenues,
consisting predominantly of Supply Systems companies with approximately $750
million in annualized revenues.
Unisource's current acquisition strategy includes a long-term commitment to
building market share in the North American Supply Systems market, primarily
through acquisitions. Unisource also will continue to expand in the Mexican
markets through strategic acquisitions of Printing and Imaging companies. In
the event Unisource's current acquisition plans are successfully executed, such
acquisitions could have a cumulative additive effect on annual Supply Systems
revenues by up to $2 billion by September 30, 2000. Supply Systems acquisitions
are being pursued aggressively in order to:
(i) achieve greater balance in total revenues between our two businesses;
(ii) reduce our exposure to the cyclical paper market; and
(iii) enhance overall margins.
23
BUSINESS TRANSFORMATION AND INFORMATION TECHNOLOGY SYSTEM
Beginning in late fiscal 1993, Unisource embarked on an ambitious
restructuring program to transform itself from a distributor, focused
principally in the Paper and Imaging products markets, to a leading marketing
and logistics company which provides a broad array of products and services to
target customer markets. Unisource's transformation program is focused on:
(i) unifying its business under one name--Unisource;
(ii) re-engineering business processes;
(iii) consolidating administrative and operational functions;
(iv) implementing a common IT system; and
(v) realigning our organization to focus on target market segments.
These changes should allow Unisource to pursue growth in market share,
improve customer convenience and service, facilitate electronic communication
with suppliers and customers, increase operating efficiency and reduce
expenses.
To date, the restructuring effort has resulted in the following operating
improvements:
(i) the consolidation of 23 autonomous United States companies into a new
streamlined structure consisting of five regional units;
(ii) the consolidation of approximately 100 operating divisions; and
(iii) the consolidation of over 200 customer service departments into 11
customer service centers in the United States.
An integral part of Unisource's transformation program is the North American
Distribution System, an IT transformation program which will effectively
centralize administrative functions and electronically link Unisource to both
suppliers and customers, to allow for automatic inventory replenishment and
just-in-time delivery capabilities. These electronic links will allow suppliers
and customers to manage their operations more efficiently. We anticipate that
as this system is implemented, numerous financial and accounting centers will
be consolidated into one financial processing center, which has already been
established in Jacksonville, Florida. Unisource has entered into a long-term
systems alliance with Integrated Systems Solutions Corp. ("ISSC"), a unit of
IBM. ISSC is assisting Unisource in managing and consolidating our existing
operations and in implementing an SAP software system, which has been
customized to accommodate our changing needs and our customers' needs. We
expect the new IT system to be fully implemented by the end of fiscal 1999.
EMPLOYEES
Unisource employs approximately 12,000 people, of whom approximately 10% are
unionized. In the United States, there are 36 separate collective bargaining
agreements with a total of six unions, covering 1,018 employees, with 83% of
these unionized employees covered under agreements with the International
Brotherhood of Teamsters. In Canada, approximately 15% of the employees are
unionized under agreements with the Communications, Energy and Paperworkers
Union, the National Automobile, Aerospace and Agricultural Implement Workers of
Canada, and two other unions. Approximately 80% of Unisource's total workforce
is employed in the United States, 15% of the workforce is in Canada and the
remaining 5% is in Mexico. There have been no work stoppages or threatened work
stoppages in recent years. Unisource believes its relations with its employees
and unions are good.
PROPRIETARY MATTERS
Unisource has a number of trademarks and tradenames, which Unisource believes
to be important to its business. However, except for the Unisource trademark,
Unisource is not dependent upon any single trademark or tradename, or group of
trademarks or tradenames. The trademark on the Unisource name is registered
24
throughout North America. The current duration for such registration ranges
from seven years to 15 years, but each registration may be renewed an unlimited
number of times. Other trademarks and tradenames used in the Unisource business
are registered and maintained on a worldwide basis.
ENVIRONMENTAL REGULATION
Unisource is engaged in distribution businesses which do not generate
significant hazardous wastes. Unisource's distribution facilities have tanks
for storage of diesel fuel and other petroleum products which are subject to
laws regulating such storage tanks. Federal, state and local provisions
relating to the protection of the environment or the discharge of hazardous
materials have not had, and are not expected to have, a material adverse effect
on Unisource's capital expenditures, liquidity, earnings or competitive
position.
LEGAL PROCEEDINGS
A number of ordinary course legal proceedings against Unisource are pending,
the outcome of which is not expected to have a material adverse effect on
Unisource or its operations as a whole.
PROPERTIES
Unisource's current principal executive office, located in Wayne,
Pennsylvania, occupies a portion of Alco's 110,000 square foot facility.
Unisource uses this space pursuant to a lease with Alco. See "Arrangements
Between Alco and Unisource Relating to the Spin-Off--Distribution Agreement."
In the event Alco sells this facility, which is presently under consideration,
Unisource will lease alternative facilities. We anticipate that the cost of any
new leased facility will not exceed amounts currently being spent under the
Alco lease.
Unisource has approximately 190 warehouses, distribution centers, sales
offices and other facilities. Of this total, 135 facilities are located in the
United States, 35 are located in Canada and 20 are located in Mexico. As of
September 30, 1996, leased facilities comprised approximately 12 million square
feet of space and owned facilities comprised approximately 6 million square
feet of space. When we complete the transformation program in 1999, we expect
the total number of facilities to be reduced from 190 to approximately 150,
excluding the impact of acquisitions.
Unisource's properties described above are generally well maintained,
suitable for present operations and adequate for current requirements.
Productive capacity and extent of utilization of Unisource's facilities are
difficult to quantify with certainty because in any one facility maximum
capacity and utilization varies periodically depending upon the product that is
being distributed, the degree of automation and the utilization of the labor
force in the facility. In this context, Unisource estimates that its overall
facilities were effectively utilized during fiscal 1996, and Unisource believes
that its facilities have the capacity, if necessary, to expand distribution
capabilities to meet customer demand.
25
MANAGEMENT
DIRECTORS
Effective January 1, 1997, the directors of Unisource and the organization of
the Unisource Board of Directors will consist of the persons named below.
PRINCIPAL OCCUPATION OR EMPLOYMENT FOR PAST FIVE
NAME YEARS AGE
---- ------------------------------------------------ ---
Paul J. Darling, II.. Chairman, President and Chief Executive Officer, 58
Corey Steel Company (1984-Present) (also a
director of Liberty Mutual Insurance Company,
Liberty Mutual Fire Insurance Company and Liberty
Financial Companies, Inc.)
James J. Forese...... Executive Vice President, IKON and President, IKON 61
International (November 1996-Present); Executive
Vice President and Chief Operating Officer, Alco
(January 1996-November 1996); General Manager, IBM
Customer Financing, and Chairman, IBM Credit
Corporation (1993-1995); IBM Vice President,
Finance (1990-1993); IBM Vice President and Group
Executive (1988-1990) (also a director of Lexmark
International, Inc., IBM Latin America, American
Management Systems, Inc. and NUI Corporation)
Dana G. Mead......... Chairman and Chief Executive Officer (1994- 60
Present), President and Chief Operating Officer
(1992-1994) and a director (1992-Present),
Tenneco, Inc.; Chairman (1992-Present), Case
Corporation; Chairman (1995-Present) and a
director, National Association of Manufacturers;
Executive Vice President (1989-1992), Senior Vice
President (1986-1989), International Paper Company
(also a director of National Westminster Bancorp,
Cummins Engine Company, Inc. and Baker Hughes
Incorporated)
Ray B. Mundt......... Chairman and Chief Executive Officer (August 1996- 68
Present), Unisource; Director (1971-Present),
Chairman of the Board of Directors (1986-1995),
Chief Executive Officer (1980-1993) and President
(1974-1988), Alco (also a director of Liberty
Mutual Insurance Company, Liberty Mutual Fire
Insurance Company, Liberty Financial Companies,
Inc. and Nocopi Technologies, Inc.)
Rogelio G. Sada...... Private investor; Mayor, San Pedro, N.L., Mexico 61
(1992-1994); Director, International Advisory
Board of Security Pacific National Bank (1980-
1991); Director General, VITRO, a glass and glass-
related products manufacturer in Mexico (1972-
1985)
James W. Stratton.... President, Stratton Management Company (1972- 60
Present); Chairman (1993-Present) and a director,
Stratton Small-Cap Yield Fund; Chairman
(1981-Present) and a director, Stratton Monthly
Dividend Shares; Chairman (1972-Present) and a
director, Stratton Growth Fund (also a director of
UGI Corporation, Gilbert Associates and Teleflex)
Each of the foregoing prospective Unisource directors is serving on the Alco
Board of Directors as of November 26, 1996, but will not stand for re-election
at the Alco January 1997 annual meeting of shareholders.
The Certificate of Incorporation, as amended, and By-laws of Unisource,
provide that our Board of Directors will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible and
that, of the initial Unisource directors following the Spin-Off, one-third will
continue to serve until the 1997 Annual Meeting of Stockholders, one-third will
continue to serve until the 1998 Annual Meeting of Stockholders, and one-third
will continue to serve until the 1999 Annual Meeting of Stockholders. Of the
initial directors, Messrs. Sada and Forese will serve until the 1997 Annual
Meeting of Stockholders; Messrs. Darling and Mead will serve until the 1998
Annual Meeting of Stockholders; and Messrs. Stratton and Mundt will serve until
the 1999 Annual Meeting of Stockholders. Starting with the 1997 Annual Meeting
of Stockholders,
26
one class of directors will be elected each year for a three-year term. See
"Description of Capital Stock--Certain Antitakeover Provisions--Unisource
Certificate and By-laws; Classified Board of Directors."
The Unisource Board has a number of standing committees, including an Audit
Committee and a Human Resources Committee. The Unisource Board does not
currently have a Nominating Committee, but such functions will be performed by
the Human Resources Committee. See "Description of Capital Stock--Certain
Antitakeover Provisions--Unisource Certificate and By-laws."
The Audit Committee recommends the selection and retention of independent
accountants; reviews auditing and financial accounting and reporting matters,
the adequacy of internal accounting controls and asset security, audit fees and
expenses; and counsels regarding auditing and financial accounting and
reporting matters. Messrs. Darling (Chairman), Stratton and Sada are expected
to serve on the Audit Committee.
The Human Resources Committee reviews and recommends compensation of officers
and directors; administers supplementary retirement, performance incentive and
stock option plans; and counsels regarding compensation of other key employees,
management development and succession, and major personnel matters. Messrs.
Mead (Chairman), Stratton and Sada are expected to serve on the Human Resources
Committee.
EXECUTIVE OFFICERS
The executive officers of Unisource are as follows:
NAME AGE POSITION AND PROFESSIONAL EXPERIENCE
---- --- ------------------------------------
Ray B. Mundt............ 68 Chairman and Chief Executive Officer (August
1996-Present), Unisource; Chairman (1986-1995),
Chief Executive Officer (1980-1993), President
(1974-1988), Alco
Charles F. White........ 50 President and Chief Operating Officer (August
1996-Present), Unisource; President, Unisource
Southeast Region (August 1994-1996); President,
Unijax-Sloan (a Unisource company) (1993-1994);
President, Monarch Paper (a Unisource company)
(1986-1993)
Hugh G. Moulton......... 63 Executive Vice President--Chief Administrative
Officer (effective January 1, 1997), Unisource;
Executive Vice President (1992-1996), General
Counsel (1979-1994), Senior Vice President--
Administration (1983-1992), Alco
Kathleen M. Burns....... 44 Vice President and Treasurer (effective January
1, 1997), Unisource; Vice President (1994-1996)
and Treasurer (1989-1996), Alco
Jack H. Keeney.......... 44 Vice President--Finance, Unisource (1995-
Present), Vice President--Finance, Unisource U.S.
Operations (1994-1995); Vice President--Finance,
Unisource Central Region (1992-1994)
David L. Rhodes, Jr..... 43 Senior Vice President--Printing and Imaging,
Unisource (1994--Present); President, Unisource
South (1993-1994); Vice President--Marketing,
Unisource West (1992-1993); President--Western
Area, Zellerbach Paper Company (1986-1992)
L. Bruce Williams....... 54 Senior Vice President--Supply Systems (1994-
Present), Unisource; Region President (1994),
Unisource; President (1993-1994), Butler Paper (a
Unisource company); President (1991-1993), Seneca
Paper (a Unisource company)
27
SUMMARY OF EXECUTIVE COMPENSATION
The following table shows, for fiscal 1996, compensation awarded to, earned
by or paid to the Unisource Chief Executive Officer during fiscal 1996 and the
five most highly compensated executive officers of Unisource other than the
Unisource Chief Executive Officer who were serving at September 30, 1996
(collectively, the "Named Officers"). During the periods depicted below, all
cash compensation was paid by Unisource except for the retirement and
consulting income of Mr. Mundt and the cash compensation of Mr. Moulton, which
were paid by Alco.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------- --------------------------------------
NAME AND SECURITIES ALL OTHER
PRINCIPAL FISCAL UNDERLYING COMPENSATION LTIP
POSITION YEAR SALARY($) BONUS($) OPTIONS(1) ($)(2) PAYOUTS($)(3)
--------- ------ ---------- --------- ---------- ------------ -------------
Ray B. Mundt............ 1996 $ 850,000(4) -- 2,243 $539,916 --
Chairman and Chief
Executive Officer
Charles F. White........ 1996 400,000(5) -- 24,600 59,076 $155,760
President and Chief
Operating Officer
Hugh G. Moulton(6)...... 1996 250,000 $ 250,000 2,000 98,211 453,414
Executive Vice
President--Chief
Administrative Officer
(effective January 1,
1997)
L. Bruce Williams....... 1996 218,400 -- 2,700 42,715 198,353
Senior Vice President--
Supply Systems
David L. Rhodes, Jr..... 1996 200,000 -- 2,700 30,451 --
Senior Vice President--
Printing and Imaging
William T. Leith(7)..... 1996 400,000 100,000 9,000(7) 74,725 319,699
Former President and
Chief Executive Officer
- - --------
(1) Does not include LTIP awards, which will only vest if certain performance
goals are met. See "--Long Term Incentive Compensation Plan Description."
(2) Amounts reflected with respect to Mr. Mundt include retirement income paid
pursuant to Alco's pension plans ($315,618), consulting income ($200,000)
and certain compensation described in the next sentence. For Messrs. Mundt,
White, Moulton, Williams, Rhodes and Leith, amounts include the value of
shares of Alco Stock purchased with matching contributions under Alco's
stock purchase plans, calculated as of the date of purchase, as follows:
$24,298, $54,343, $71,727, $42,715, $30,451 and $74,725; the remaining
amounts for Messrs. White and Moulton represent above-market interest
earned on deferred compensation.
(3) Represents the earned LTIP payouts for the 1994-1996 plan period that were
paid in October 1996, in the form of Alco Stock based on the fair market
value of Alco Stock on September 30, 1996, the last day of the 1994-1996
plan period.
(4) Mr. Mundt, the former Chief Executive Officer of Alco, retired from Alco in
December 1994, and assumed his current responsibilities as Chairman and
Chief Executive Officer of Unisource on August 1, 1996. The amount
reflected under the Salary column does not reflect actual salary paid
during fiscal 1996 ($141,667), but instead reflects annualized salary for
his services as Unisource Chairman and Chief Executive Officer under his
current compensation arrangement.
(5) Reflects annualized salary payable to Mr. White for the Unisource President
and Chief Operating Officer position he assumed effective August 1, 1996,
not actual salary paid during fiscal 1996 ($254,175).
(6) At all times during fiscal 1996, Mr. Moulton served as Executive Vice
President of Alco, and will continue in that capacity until January 1,
1997, at which time he will assume the position shown above.
(7) Mr. Leith served as Unisource's President and Chief Executive Officer for
the first nine months of fiscal 1996, and resigned all positions with
Unisource in July 1996. Mr. Leith surrendered stock options he was granted
in fiscal 1996 after he resigned. See "--William Leith Separation and
Consulting Agreement."
28
OPTION GRANTS
The following table shows option grants by Alco to the Named Officers during
the 1996 fiscal year:
OPTION GRANTS IN LAST FISCAL YEAR
(1)
------------------------------------
% OF TOTAL
NUMBER OPTIONS
OF SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE GRANT DATE
OPTIONS IN FISCAL PRICE EXPIRATION PRESENT
NAME GRANTED(#) YEAR (%) ($/SH) DATE VALUE ($)(2)
- - ---- ------------- ---------- -------- ---------- ------------
Ray B. Mundt............ 800(3) .05% $38.875 1/25/2006 $ 8,776
1,443(3) .09 29.156 1/25/2016 21,890
Charles White........... 2,500 .16 42.312 10/2/2005 25,150
2,100(4) .14 38.875 1/25/2006 19,572
20,000 1.31 45.250 8/5/2006 308,400
Hugh G. Moulton......... 2,000(4) .13 38.875 1/25/2006 21,940
L. Bruce Williams....... 2,700(4) .18 38.875 1/25/2006 29,619
David L. Rhodes, Jr..... 2,700(4) .18 38.875 1/25/2006 29,619
William T. Leith........ 9,000(4)(5) .59 38.875 1/25/2006 98,730
- - --------
(1) Except as described in Note 3, all stock options were granted at an
exercise price equal to the fair market value of Alco Stock on the date of
grant. Except as described in Notes 3 and 4, all stock options become
exercisable 20% per year from the date of grant.
(2) The option grant present value was calculated using Black-Scholes option
valuation methodology, based on the following assumptions: (a) options
remain outstanding for the maximum stated option term and become
exercisable in accordance with the relevant option vesting period; (b)
6.19% expected weighted average risk-free rate of return; and (c) 25.26%
expected weighted average volatility.
(3) Represents option grants made to Mr. Mundt in his capacity as a director of
Alco under Alco's directors stock option plans. The option to purchase 800
shares of Alco Stock was granted at an exercise price equal to the fair
market value of Alco Stock on the date of grant and was fully exercisable
on the option grant date. The option to purchase 1,443 shares of Alco Stock
was granted at an exercise price equal to 75% of the fair market value of
Alco Stock on the date of grant and becomes exercisable in full on January
25, 1997.
(4) Represents options which are scheduled to vest in three equal installments
on the third, fourth and fifth anniversaries of the date of grant;
provided, however, such scheduled vesting shall be accelerated to the third
anniversary of the date of grant if certain performance targets are
satisfied.
(5) These options were surrendered after Mr. Leith resigned from Unisource in
July 1996.
29
OPTION EXERCISES
The following table shows Alco stock option exercises for Named Officers
during fiscal 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF NUMBER OF
SECURITIES SECURITIES VALUE OF
UNDERLYING UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT OPTIONS AT OPTIONS AT
ACQUIRED VALUE FY-END FY-END FY-END FY-END
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($)(1) ($)(1)
---- ----------- -------- ----------- ------------- ------------ -------------
Ray B. Mundt............ -- $ -- 6,160 1,443 $ 149,103 $ 29,897.08
Charles White........... 9,600 479,550 21,000 33,400 715,488 341,806.25
Hugh G. Moulton......... 15,400 512,938 67,400 22,000 2,259,500 674,500.00
L. Bruce Williams....... 8,860 282,177 240 13,300 8,280 282,425.00
David L. Rhodes, Jr..... -- -- 2,760 12,040 61,485 226,086.25
William T. Leith........ -- -- 42,900 80,200 984,188 1,391,200.00
- - --------
(1) Value of unexercised options equals fair market value of Alco Stock as of
September 30, 1996 ($49.875), less the exercise price, multiplied by the
number of shares underlying the stock options.
LONG-TERM INCENTIVE COMPENSATION PLAN AWARDS
The following table shows the dollar value of awards granted to Named
Officers under Alco's long-term incentive compensation plan (the "LTIP") during
fiscal 1996 and the dollar amount which will become payable under the LTIP
after fiscal 1998 upon attainment of threshold, target and maximum performance
levels:
LONG TERM INCENTIVE COMPENSATION PLANS--AWARDS IN LAST FISCAL YEAR
DOLLAR VALUE OF PERFORMANCE
NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS
SHARES, UNITS PERIOD UNTIL (IN DOLLARS) (#)(2)
OR OTHER MATURATION --------------------------
NAME RIGHTS (#)(1) OR PAYOUT THRESHOLD TARGET MAXIMUM
---- --------------- --------------- --------- ------- --------
Ray B. Mundt............ $ -- -- $-- $ -- $ --
Charles White........... 81,638 10/1/95-9/30/98 -- 40,819 81,638
Hugh G. Moulton......... 77,750 10/1/95-9/30/98 -- 38,875 77,750
L. Bruce Williams....... 104,962 10/1/94-9/30/97 -- 52,481 104,962
David L. Rhodes, Jr..... 104,962 10/1/95-9/30/98 -- 52,481 104,962
William T. Leith........ 349,875(3) 10/1/95-9/30/98 -- 174,938 349,875
- - --------
(1) Represents the number of cash awards granted, which, if vested, will
entitle the participant to receive cash. The foregoing awards were made
under Alco's LTIP and will be paid under Unisource's LTIP. See "--Long Term
Incentive Compensation Plan Description." The LTIP awards are based on a
comparison of total stockholder return (stock price appreciation and
dividends) versus the total stockholder return of the Standard & Poor's 500
Stock Index and Unisource's internal financial measurements of total
stockholder return. A portion of stockholder return is based on Alco Stock
for the period before the Spin-Off and a portion of stockholder return is
based on Unisource Common Stock for the period thereafter. The awards (or
pro rated portions thereof), if vested, will be paid at the end of the
three-year period.
(2) Represents the cash amount which will be received upon attainment of
threshold, target and maximum performance. For performance between
threshold and maximum, the cash amount to be received will be prorated on a
straight-line basis.
(3) Mr. Leith surrendered this award after he resigned in July 1996.
30
WILLIAM LEITH SEPARATION AND CONSULTING AGREEMENT
In July 1996, William Leith resigned as President and Chief Executive Officer
of Unisource and subsequently entered into a separation and consulting
agreement with Alco and Unisource (the "Consulting Agreement"). The Consulting
Agreement provides that during the period from August 31, 1996 to August 31,
1999, Mr. Leith will render advice and consulting services to Unisource and
Unisource will pay Mr. Leith $1.66 million in cash and benefits through August
1999, subject to reduction if Mr. Leith finds new employment. The Consulting
Agreement provides that all stock options provided to Mr. Leith prior to
January 1, 1996, shall continue to vest during the period Mr. Leith receives
the foregoing payments and shall become fully vested on the earlier of the date
when Mr. Leith's payments cease or January 1, 1999. Mr. Leith will continue to
have the right to exercise all vested options until August 31, 1999. Mr. Leith
and Unisource have agreed that 50% of Mr. Leith's existing Alco stock options
will be converted into Unisource stock options and the remaining 50% will
continue as Alco options after the Spin-Off.
STOCK OPTION PLAN
We have adopted a stock option plan (the "Stock Option Plan"), which is
intended to provide an incentive to employees and other persons who will be
responsible for Unisource's future growth and continued success. The Stock
Option Plan authorizes grants of options for an aggregate of 10 million shares
of Unisource Common Stock (subject to adjustment for subsequent stock splits,
stock dividends and in certain other circumstances). This aggregate number
includes shares to be issued as a result of the conversion of Alco options held
by Unisource employees as of December 31, 1996 into options to purchase
Unisource Common Stock. Options may be granted to persons who are employees of
Unisource or its subsidiaries, including employee directors and officers, or
who provide services as independent contractors to Unisource or its
subsidiaries. Members of the Board of Directors who are not employees of
Unisource or a Subsidiary are not eligible to participate in the Stock Option
Plan. See "--Director Compensation." The Stock Option Plan authorizes grants at
per share option prices equal to, less than or greater than the fair market
value of shares of Unisource Common Stock on the date of grant. No one person
may receive more than 500,000 options pursuant to the Stock Option Plan in any
fiscal year. We estimate that there may be approximately 200 persons (including
employee directors and officers) in the category of key employees to whom
options may be granted under the Stock Option Plan.
The Human Resources Committee will determine the persons to whom options will
be granted, the dates of grant, the number of shares to be subject to each
option, the option prices, the duration, and the other terms and conditions of
the options, including any restrictions to be placed on transferability of
shares upon exercise of options. Options will be granted for various terms, but
unless the particular option award provides otherwise, they will generally
terminate 90 days following the optionee's termination of employment or service
or, in the case of death or disability, within one year thereafter. Options
generally are not transferable except by will or the laws of descent and
distribution. The Human Resources Committee will determine whether to grant
options qualifying as "incentive stock options" under Section 422 of the Code
(hereinafter referred to as "ISOs"), or options which do not so qualify
(hereinafter referred to as "non-ISOs"), or a combination of both. Only
employees of Unisource or its majority owned subsidiaries are eligible to
receive ISOs.
The Human Resources Committee may establish conditions precedent to the
vesting of the right to exercise options, including continued employment with
Unisource. Our obligation to sell, issue and deliver shares under options
granted under the Stock Option Plan will be subject to all applicable laws,
rules and regulations, and to such approvals as may be required by any
governmental agencies. Shares subject to an option which expired or was
terminated will again be available for option grant under the Stock Option
Plan.
The Board of Directors may amend or terminate the Stock Option Plan in any
manner and at any time, except that, with certain exceptions, no such amendment
or termination may adversely affect the rights of the holders of then
outstanding options, without such holders' consent.
31
Unisource employees will be given the opportunity to convert outstanding Alco
options into options to purchase Unisource Common Stock. Pursuant to such
election, Alco options will be converted into Unisource stock options based on
a formula that preserves the economic value inherent in the converted option
after taking into account the fair market value of Alco Stock before December
11, 1996 and the fair market value of Unisource Common Stock on and after
December 11, 1996. Such Unisource stock options will become vested and may be
exercised in accordance with terms comparable to those in effect under the
corresponding Alco options.
The Federal income tax consequences of the grant and exercise of options
under the Stock Option Plan will depend upon the terms and conditions of
particular options as determined by the Human Resources Committee, and upon the
provisions of law as then in effect. Under the Code as currently in effect, an
optionee will not recognize taxable income upon the grant or exercise of an
ISO, except that the excess of the fair market value of the shares at the time
of exercise over the option price is a tax preference item. As an item of tax
preference, such excess would be included in the alternative minimum tax
calculation for the year in which the ISO is exercised. If the optionee holds
the shares for at least two years after the date of grant and one year after
the date the shares are transferred to the optionee, any difference between the
option price and amount received upon sale is treated as capital gain or loss.
If the optionee does not comply with such holding periods, ordinary income is
recognized in the year of disposition of the shares in an amount equal to the
sale price (or, for other transfers, the fair market value on the date of
transfer) or the fair market value on the date of exercise (whichever is less)
less the option price. In such event, any item of tax preference otherwise
generated upon the exercise of the option is disregarded. Unisource will not be
allowed a deduction for federal income tax purposes in connection with the
grant or exercise of any ISO. If the shares acquired are disposed of during the
one-year or two-year holding periods described above, Unisource will generally
be entitled to a tax deduction with respect to the ordinary income recognized
by the optionee.
As to non-ISOs, the optionee will recognize ordinary income upon the exercise
of the option to the extent that the fair market value of the shares at the
time of exercise exceeds the option price. Unisource is generally entitled to a
deduction for Federal income tax purposes with respect to the optionee's
ordinary income. For the purpose of subsequent disposition of the stock (which
would be treated as any other sale of stock), the optionee's cost basis is
equal to the option price plus any amount recognized as ordinary income, and
the holding period for the stock commences with the exercise of the option.
LONG-TERM INCENTIVE COMPENSATION PLAN DESCRIPTION
We have adopted an LTIP to provide long-term incentives to selected
employees. The LTIP is intended to motivate and reward growth in stockholder
value by granting to eligible employees awards which vest only if certain
performance criteria are met. The LTIP will be administered for executives by
the Human Resources Committee, which has the authority to select the employees
to whom awards will be made. The Committee also will determine the number of
shares of Unisource Common Stock subject to each award and will set the
objective performance goals that must be met within a specified time period in
order for the employee to receive the shares. All management personnel,
including the Named Officers, are eligible for selection to participate in the
LTIP.
The performance goals specified by the Human Resources Committee generally
relate to the performance of the employee's business unit or the performance of
Unisource as a whole. Measurements of performance may include stock price,
sales, earnings per share, return on equity, return on assets, growth in
assets, total stockholder return or such other objective performance goals as
may be established by the Human Resources Committee. If the applicable
performance goals are met within the specified time period and the Human
Resources Committee so certifies, the employee will receive the earned LTIP
award (or pro rated portion thereof). The employee may elect to have up to one-
half of the value of the award withheld by Unisource to satisfy tax
obligations. If the Human Resources Committee does not certify that the
applicable performance goals have been met within the specified time period,
the award will be forfeited.
32
We will be responsible for paying Unisource employees' LTIP awards for
periods that end after December 31, 1996. Outstanding awards held by our
employees under Alco's long term incentive compensation plan as of December 31,
1996 will be converted into awards payable in Unisource Common Stock under the
Unisource LTIP.
A maximum of 6,000,000 shares of Unisource Common Stock may be issued under
the LTIP (subject to adjustment in certain cases). Shares subject to awards
which are forfeited under the LTIP will be available to be awarded again under
the LTIP. The Board of Directors may amend or terminate the LTIP in any manner
and at any time, except that, with certain exceptions, no such amendment or
termination shall adversely affect the rights of employees with respect to
outstanding awards without such employees' consent.
ANNUAL BONUS PLAN
We have adopted an annual bonus plan (the "Bonus Plan") that will provide for
the payment of annual cash bonuses following the close of each fiscal year,
based upon the achievement of objective performance goals. The Bonus Plan will
be administered by the Human Resources Committee. The Human Resources Committee
will designate employees eligible to receive bonuses and will determine
performance objectives, types of bonuses to be paid, bonus amounts, and how and
when bonuses will be paid. Participation is generally limited to management
employees. Bonuses paid to individuals other than the Named Officers will be
paid at the discretion of the Human Resources Committee.
For each Named Officer, the Human Resources Committee will establish
objective performance goals under which a bonus can be paid to the employee.
The Human Resources Committee will establish, in writing, for each fiscal year,
the bonus opportunity for each Named Officer, the performance goals, the
specific performance criteria and the appropriate weight of each performance
criteria and the performance target or range of targets to measure
satisfaction, in whole or in part, of the performance goals. Bonuses for the
Named Officers may not exceed 100% of the individual's annual base compensation
for the year.
At the end of the performance period, the Human Resources Committee will
evaluate Unisource's performance based upon the achievement of the pre-
established performance goals and certify, in writing, the extent to which the
specific performance criteria were attained. Individual awards will be
determined based on performance against the pre-established goals. The Board
may amend or terminate the Bonus Plan in any manner and at any time.
PENSION PLAN AND SUPPLEMENTAL RETIREMENT PLAN
We have adopted a pension plan for salaried employees (the "Pension Plan").
The Pension Plan provides to each eligible employee retiring at age 65 annual
pension benefits equal to the number of the employee's years of credited
service multiplied by 1% of the employee's average annual compensation earned
during the three consecutive years within the employee's last ten years of
participation in the Pension Plan which yield the highest average. Employees
will receive credit for their covered service with Alco to the extent that they
received such credit under Alco's retirement plan, and past participation in
the Alco plan will be taken into account for purposes of computing benefits
under the Unisource Pension Plan. Assets attributable to Unisource employees'
benefits under the corresponding Alco retirement plan will be transferred from
the Alco plan to the Pension Plan, and Unisource employees' benefits under the
Pension Plan will include benefits previously accrued under the Alco plan. All
Pension Plan costs are paid by Unisource and the Pension Plan benefits are
funded on an actuarial basis. The years of credited service as of September 30,
1996 for the Named Officers were: Ray B. Mundt--24.7 years; Charles F. White--
31.3 years; Hugh G. Moulton--25.9 years; L. Bruce Williams--7.0 years; David L.
Rhodes, Jr.--4.4 years; and William T. Leith--4.6 years. In addition, Mr. Leith
earned a past service benefit from his former company (which was acquired by
Alco in 1990) which entitles him to receive a single life annuity of $1,738 per
month beginning at age 65.
33
We have adopted a supplemental executive retirement plan ("SERP"). Coverage
under the SERP is limited to participants in Unisource's Pension Plan who are
not commissioned sales employees and whose benefits under the Pension Plan are
limited because of (a) restrictions imposed by the Code on the amount of
benefits which may be paid from a tax-qualified plan, (b) restrictions imposed
by the Code on the amount of an employee's compensation that may be taken into
account in calculating benefits to be paid from a tax-qualified plan, or (c)
any reductions in the amount of compensation taken into account under the
Pension Plan because of an employee's participation in certain deferred
compensation plans sponsored by Unisource or a Subsidiary. The SERP provides
for a supplement to the annual pension paid under the Pension Plan to
participants who attain early or normal retirement under the Pension Plan or
who suffer a total and permanent disability while employed by Unisource or a
subsidiary and a supplement to the pre-retirement death benefits payable under
the Pension Plan on behalf of such participants who die with a vested interest
in the Pension Plan. The amount of the supplement will be the difference, if
any, between the pension or pre-retirement death benefit paid under the Pension
Plan and the benefit that would otherwise have been payable but for the
restrictions imposed by the Code and any reduction in the participant's
compensation for purposes of the Pension Plan resulting from his or her
participation in certain deferred compensation plans of Unisource or a
subsidiary. The maximum amount of annual compensation upon which the supplement
may be based is $500,000 per participant.
Employees will receive credit for their covered service with Alco for
purposes of the SERP, to the extent that they received such credit under Alco's
supplemental executive retirement plan. The benefits provided under Unisource's
SERP will include benefits previously accrued by Unisource employees under
Alco's supplemental executive retirement plan.
The following table shows estimated annual retirement benefits that would be
payable to participants under Unisource's Pension Plan and, if applicable, the
SERP, upon normal retirement at age 65 under various assumptions as to final
average annual compensation and years of credited service and on the assumption
that benefits will be paid in the form of a single life annuity. The benefits
are not subject to any reduction for Social Security benefits.
ESTIMATED ANNUAL RETIREMENT BENEFITS
YEARS OF CREDITED SERVICE
------------------------------------------
FINAL AVERAGE
COMPENSATION 5 10 20 30 35
- - ------------- ------- ------- -------- -------- --------
$200,000............................. $10,000 $20,000 $ 40,000 $ 60,000 $ 70,000
250,000.............................. 12,500 25,000 50,000 75,000 87,500
300,000.............................. 15,000 30,000 60,000 90,000 105,000
400,000.............................. 20,000 40,000 80,000 120,000 140,000
500,000 or above..................... 25,000 50,000 100,000 150,000 175,000
Covered compensation under the Pension Plan and SERP of each of the Named
Officers includes salary and bonus as set forth in the Summary Compensation
Table.
DEFERRED COMPENSATION PLANS
Alco and Unisource have historically maintained deferred compensation plans
for their employees. The Company will provide the benefits related to past
deferrals made by Unisource employees under certain of these plans. We have
implemented a new deferred compensation plan that will allow certain Unisource
employees to defer all or a portion of their annual salary, bonus and LTIP
payouts. A participant's deferred compensation will be invested in one or more
hypothetical investment funds selected by the participant under the plan.
34
RETIREMENT SAVINGS PLAN
We have adopted a 401(k) retirement savings plan (the "RSP"), under which
eligible Company employees may contribute up to 16% of their compensation.
Under federal law, not more than $150,000 of an employee's annual compensation
may be taken into account for purposes of the RSP. Unisource would make
matching contributions in the form of Unisource Common Stock equal to two-
thirds of the first 6% of an employee's contributions. Employee contributions
would be invested in one or more of six available investment funds, including a
Unisource stock fund. Matching contributions would be invested in the Unisource
stock fund, except that after an employee attains age 55, the employee may
invest matching contributions in any of the other available investment funds.
Employees generally would earn a vested interest in their matching
contributions accounts over a five-year period, based on the employees' service
with Unisource and past service with Alco. Employees' accounts attributable to
their contributions are fully vested. Employees' vested accounts are payable
upon retirement or other termination of employment. Withdrawals and plan loans
are permitted under certain circumstances. Unisource may amend or terminate the
RSP at any time in accordance with its terms and applicable law.
Assets of Alco's retirement savings plan that are attributable to the
accounts of Unisource employees will be transferred to Unisource's RSP and will
be held for the benefit of such employees. Unisource employees will have an
opportunity to direct that their investment in the Alco stock fund be
liquidated and that the proceeds be invested in a Unisource stock fund or, in
the case of employee contributions and accounts of employees over age 55, any
of the other available investment funds.
PARTNERS' STOCK PURCHASE PLAN
We have adopted a partners' stock purchase plan ("PSPP") to encourage
ownership of Unisource Common Stock by employees and directors who are
designated as "partners." As of January 1, 1997, it is expected that
participation in the PSPP will be made available to 163 key management persons
(including independent directors) who have been designated as "partners." All
of Unisource's directors and executive officers have been designated as
"partners." Participants may contribute to the PSPP between 2% and 15% of their
annual compensation, including any annual bonus. Unisource will contribute to
the PSPP an amount equal to two-thirds of the participant's investments.
Additionally, Unisource will make an annual contribution to the PSPP after the
end of each fiscal year in an amount equal to one-third of the participant's
investments in the PSPP during the preceding fiscal year, if Unisource achieves
its financial performance goals for that fiscal year. The PSPP is administered
by trustees who will invest contributions to the PSPP in Unisource Common
Stock.
A participant's interest in shares purchased with the participant's
contributions to the PSPP vest immediately. Shares purchased with Unisource's
contributions to the PSPP will vest over a period of five years beginning
approximately one year following the year for which the contribution is made.
Shares purchased under the PSPP are distributed as the participant's interest
in the shares vests.
The Board of Directors may amend the PSPP in any respect, provided that no
such amendment shall affect the right of a participant to receive his or her
proportionate interest in amounts which have vested under the PSPP.
Shares of Alco Stock and Unisource Common Stock that are held under Alco's
partners' stock purchase plan for persons who are "partners" of Unisource will
be transferred to the PSPP. The shares will continue to vest based on the
participant's service with Unisource and past service with Alco. Participants
will have an opportunity to direct that their Alco Stock be sold and the
proceeds invested in Unisource Common Stock.
DIRECTOR COMPENSATION
All independent directors are entitled to receive fees of $25,000 per year
for service on the Board of Directors and committees thereof, and attendance
fees of $1,000 for each Board and committee meeting
35
attended. Committee members also receive $3,000 per committee per year and
committee chairmen receive $3,000 per chairmanship per year. In addition,
independent directors who serve as trustees for Unisource's employee benefit
plans receive $3,000 per year for services rendered to the plans, $3,000 per
year for trustee chairmanship, and attendance fees of $1,000 for each trustees'
meeting attended.
We have adopted a stock option plan for directors (the "Directors' Plan")
which would enable directors of Unisource to receive all or a portion of their
directors' fees (excluding attendance fees) in the form of options to purchase
Unisource Common Stock at exercise prices equal to 75% of the fair market value
on the date such options are granted. The Directors' Plan provides for an
automatic annual grant of stock options to each director who has filed with
Unisource an election to receive such options in lieu of all or a portion of
his or her Board, committee and trustee fees. The options are exercisable for
twenty years and will not terminate upon the director's termination as a
director (except in the case of death), but generally may not be exercised
prior to the twelve-month anniversary of the date of grant. An option which is
outstanding on the date of a director's death may be exercised by such
director's legal representative for a twelve-month period following the date of
death.
In addition to the foregoing amounts, each independent director will receive
an annual grant of options to purchase 800 shares of Unisource's Common Stock
pursuant to the Directors' Plan. These options are granted at an exercise price
equal to the fair market value of Unisource's Common Stock on the date of
grant. Options are exercisable six months after the date of grant and remain
exercisable for a period of ten years from the date of grant. The right of a
director in such options will not terminate upon the director's termination as
a director, except that an option which is outstanding on the date of a
director's death may be exercised by such director's legal representative for a
twelve-month period following the date of death.
A total of 250,000 shares of Unisource Common Stock (subject to adjustment in
certain cases) are reserved for issuance under the Directors' Plan. If an
option issued under the Directors' Plan is terminated or canceled without being
exercised, the shares which were not purchased thereunder will again become
available for issuance under the Directors' Plan. The Board of Directors has
the power to amend, modify or terminate the Directors' Plan, provided that no
amendment, modification or termination may adversely affect the rights of an
option holder without such holder's consent. The Federal income tax
consequences of the grant and exercise of options under the Directors' Plan are
as described with respect to non-ISOs under "--Stock Option Plan." Before the
Spin-Off, Unisource directors may elect to have their outstanding Alco options
converted into options to purchase Unisource Common Stock. The Alco options
will be converted into Unisource stock options based on a formula that
preserves the economic value inherent in the converted option after taking into
account the fair market value of Alco Stock before December 11, 1996 and the
fair market value of Unisource Common Stock on and after December 11, 1996.
Unisource stock options so issued may be exercised according to terms
comparable to those in effect under the corresponding Alco options.
Independent directors who complete at least five full years of service as a
member of the Unisource Board of Directors and who are not otherwise entitled
to receive a pension benefit from Unisource are entitled to receive a monthly
retirement benefit after retiring from Unisource's Board of Directors. Payment
of such benefit begins upon the later of the director's 70th birthday or his or
her separation from service on the Board of Directors. The amount of such
monthly benefit is equal to one-twelfth of the annual retainer in effect for
such director (excluding committee fees, chairmanship fees, trustee fees and
attendance fees) immediately preceding his or her separation from service on
the Board of Directors. Payment of the monthly retirement benefit ceases upon
the director's death. Unisource directors who were members of Alco's Board of
Directors immediately before the Spin-Off will receive credit for their service
as a director of Alco, and the benefits provided under Unisource's retirement
plan for directors will include benefits previously accrued by such directors
under Alco's retirement plan for directors.
LOAN PROGRAM
We have adopted a loan program which would encourage persons designated as
"partners" to purchase and retain Unisource Common Stock. Such loans would be
expected to carry a requirement that the loan be
36
secured by the borrower's pledge of Unisource Common Stock having a value at
the time of the loan of not less than twice the amount of the loan. Such loans
would be payable upon demand and bear interest at an annual rate of 6%. Alco
had a similar loan program for its "partners." Unisource will assume
responsibility for all outstanding loans made by Alco to persons who are
"partners" of Unisource, and such loans may be secured by the borrower's pledge
of Unisource Common Stock or Alco Stock. As of September 30, 1996, loans were
outstanding to 17 Unisource partners in an aggregate amount of approximately
$1.25 million. From October 1, 1995 to September 30, 1996, the indebtedness of
the following Named Officers and group under Alco's loan program was as
follows:
LARGEST AMOUNT OUTSTANDING AMOUNT OUTSTANDING AT
NAME OR GROUP DURING PERIOD($) SEPTEMBER 30, 1996($)
------------- -------------------------- ---------------------
Ray B. Mundt.............. $ -- $ --
Charles White............. -- --
Hugh G. Moulton........... 530,000 300,000
L. Bruce Williams......... -- --
David L. Rhodes, Jr....... -- --
William T. Leith.......... 224,000 224,000
All Unisource directors
and executive officers as
a group.................. 904,000 674,000
37
SECURITY OWNERSHIP OF UNISOURCE COMMON STOCK BY CERTAIN
BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OF UNISOURCE
The table below sets forth certain projected information as of December 13,
1996 regarding the direct beneficial ownership of shares of Unisource Common
Stock and the indirect beneficial ownership of Unisource Common Stock,
associated with the potential conversion of exercisable Alco stock options for
Unisource stock options in connection with the Spin-Off, by: (i) each person we
estimate will beneficially own more than five percent of the outstanding shares
of Unisource Common Stock; (ii) each prospective director of Unisource as of
January 1, 1997; (iii) each Named Officer; and (iv) the prospective directors
and executive officers of Unisource, as a group. See "Management--Stock Option
Plan." The ownership information presented below with respect to all persons
and organizations:
(a) is based on record ownership of Alco Stock at September 30, 1996 and
the number of Alco stock options exercisable as of November 29, 1996;
(b) reflects the Distribution Ratio of one share of Unisource Common
Stock for every two shares of Alco Stock; and
(c) assumes no change in record ownership of Alco Stock or beneficial
ownership of Alco options between such dates and December 13, 1996.
PROJECTED
NUMBER OF DIRECT PERCENTAGE OF
SHARES NUMBER OF OUTSTANDING
BENEFICIALLY EXERCISABLE UNISOURCE
OWNED(1) OPTIONS(2) COMMON STOCK
---------------- ----------- -------------
5% STOCKHOLDERS:
American Express Company........... 4,479,951 -- 6.8%
DIRECTORS AND EXECUTIVE OFFICERS:
Paul J. Darling, II................ 390 8,322 *
James J. Forese.................... 38,119 -- *
Dana G. Mead....................... 347 8,322 *
Ray B. Mundt....................... 135,458(3) -- *
Rogelio G. Sada.................... 6,939 34,916 *
James W. Stratton.................. 2,569 9,910 *
Charles F. White................... 21,383 23,500 *
Hugh G. Moulton.................... 51,848(4) 59,400 *
L. Bruce Williams.................. 3,850 3,440 *
David L. Rhodes, Jr................ 2,588 4,880 *
William T. Leith................... 14,931 42,900 *
All directors and executive offi-
cers as a group (13 persons)...... 291,856(5) 206,450 *
- - --------
* Less than one percent.
(1) Includes Alco Stock owned of record and shares of Alco Stock that are
beneficially owned in Alco's Retirement Savings Plan (The "Alco RSP") and
Alco's Partners' Stock Purchase Plan (the "Alco PSPP"); assumes all shares
of Alco Stock that are owned of record are converted into shares of
Unisource Common Stock pursuant to the Spin-Off and that shares
beneficially owned in the Alco RSP and Alco PSPP are converted into
Unisource Common Stock in Unisource's RSP and PSPP, respectively, in
accordance with the Distribution Ratio. See "Management--Retirement Savings
Plan" and "--Partners' Stock Purchase Plan."
(2) Reflects number of Alco stock options exercisable as of November 29, 1996.
The actual number of Unisource stock options which each director and
executive officer will own as of December 31, 1996 will be dependent upon,
among other things, the Distribution Ratio, exercise activity concerning
Alco stock options, the inherent value of such options and the prevailing
trading prices for Alco Stock and Unisource
38
Common Stock. See "Management--Stock Option Plan" for more information
concerning Unisource employees' conversion of Alco stock options to
Unisource stock options in connection with the Spin-Off.
(3) Includes 26,572 shares owned by family members, the beneficial ownership of
which Mr. Mundt disclaims.
(4) Includes 6,400 shares owned by family members, the beneficial ownership of
which Mr. Moulton disclaims.
(5) Includes 32,972 shares owned by family members of directors and executive
officers.
As of September 30, 1996, Alco employees, through direct ownership or
employee benefit plans, owned approximately 11.6% of the outstanding Alco
Stock. Unisource estimates that, after giving effect to the Spin-Off, Unisource
employees will beneficially own approximately 4.5% of the Unisource Common
Stock.
39
DESCRIPTION OF CAPITAL STOCK
INTRODUCTION
We presently expect that we will have the following capital stock
authorization and terms and antitakeover provisions in place on December 31,
1996.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of Unisource consists of 250 million shares of
Unisource Common Stock, no par value, and 10 million shares of Preferred Stock,
no par value (the "Preferred Stock").
Following December 31, 1996 there are expected to be approximately 66,286,500
shares of Unisource Common Stock outstanding held of record by approximately
15,000 persons, excluding shares of Unisource Common Stock issuable upon the
exercise of Unisource stock options granted in connection with the Spin-Off.
See "The Spin-Off--Results of the Spin-Off" and "Management--Stock Option
Plan." No shares of Preferred Stock have been issued by Unisource, and there is
no present intention to issue any shares of Preferred Stock.
UNISOURCE COMMON STOCK; DELAWARE ANTITAKEOVER PROVISIONS
Holders of shares of Unisource Common Stock are entitled to one vote per
share on all matters to be voted upon by the stockholders and are not entitled
to cumulate votes for the election of directors. Subject to preferences that
may be applicable to any outstanding Preferred Stock, holders of shares of
Unisource Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Unisource Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of Unisource, the holders of shares of Unisource Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of Preferred Stock, if any, then
outstanding. Holders of Unisource Common Stock have no preemptive, conversion
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the Unisource Common Stock.
Unisource is subject to the provisions of Section 203 of the Delaware General
Corporation Law ("DGCL"). Subject to certain exceptions, Section 203 of the
DGCL prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock. A
"business combination" includes a merger, consolidation, sale or other
disposition of assets having an aggregate value in excess of 10% of either the
aggregate market value of the consolidated assets of the corporation or the
aggregate market value of all the outstanding stock of the corporation, and
certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation or which provide the
interested stockholder with a financial benefit. These restrictions do not
apply where:
(i) the business combination or the transaction in which the stockholder
becomes interested is approved by the corporation's board of directors
prior to the date the interested stockholder acquired its shares;
(ii) the interested stockholder acquired at least 85% of the outstanding
voting stock of the corporation in the transaction in which the stockholder
became an interested stockholder excluding, for determining the number of
shares outstanding, shares owned by persons who are directors as well as
officers and by employee stock plans in which participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
(iii) the business combination is approved by the board of directors and
the affirmative vote of two-thirds of the outstanding voting stock not
owned by the interested stockholder at an annual or special meeting.
40
The business combinations provisions of Section 203 of the DGCL may have the
effect of deterring merger proposals, tender offers or other attempts to effect
changes in control of Unisource that are not negotiated with and approved by
the Board of Directors.
PREFERRED STOCK
The Amended and Restated Certificate of Incorporation of Unisource (the
"Unisource Certificate") provides that Unisource may issue up to 10 million
shares of Preferred Stock. The Unisource Board has the authority to issue
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions, including the dividend, conversion, voting,
redemption (including sinking fund provisions), and other rights, liquidation
preferences, and the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders of Unisource. Because the terms of the Preferred Stock may be
fixed by the Unisource Board without stockholder action, the Preferred Stock
could be issued quickly with terms calculated to defeat a proposed takeover of
Unisource or to make the removal of management of Unisource more difficult.
Under certain circumstances this could have the effect of decreasing the market
price of the Unisource Common Stock. Unisource has authorized a class of series
Preferred Stock in connection with the authorization of its Stockholder Rights
Plan. See "--Stockholder Rights Plan."
CERTAIN ANTITAKEOVER PROVISIONS--UNISOURCE CERTIFICATE AND BY-LAWS
Certain provisions of the Unisource Certificate and our by-laws (the "By-
laws") may have the effect, either alone or in combination with each other, of
making more difficult or discouraging a tender offer, takeover attempt or
change in control that is opposed by Unisource's Board of Directors but that a
stockholder might consider to be in its best interest. Unisource believes that
such provisions are necessary to enable Unisource to develop its business in a
manner that will foster its long-term growth without disruption caused by the
threat of a takeover not deemed by the Board of Directors to be in the best
interests of Unisource and its stockholders. These provisions are summarized in
the following paragraphs.
Classified Board of Directors. The Unisource Certificate and By-laws provide
that the Board will be divided into three classes of directors, with the
classes to be as nearly equal in number as possible. The Board consists of the
persons referred to in "Management--Directors." The Certificate and By-laws
provide that of the initial directors of Unisource, one-third will continue to
serve until the 1997 Annual Meeting of Stockholders, one-third will continue to
serve until the 1998 Annual Meeting of Stockholders, and one-third will
continue to serve until the 1999 Annual Meeting of Stockholders. Of the initial
directors, Messrs. Sada and Forese will serve until the 1997 Annual Meeting of
Stockholders; Messrs. Darling and Mead will serve until the 1998 Annual Meeting
of Stockholders; and Messrs. Stratton and Mundt will serve until the 1999
Annual Meeting of Stockholders. Starting with the 1997 Annual Meeting of
Stockholders, one class of directors will be elected each year for a three-year
term.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Board of Directors.
At least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the Board of Directors. Such a
delay may help ensure that Unisource's directors, if confronted by a holder
attempting to force a proxy contest, a tender or exchange offer, or an
extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Board would be
beneficial to Unisource and its stockholders and whether or not a majority of
Unisource's stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Unisource, even through such an attempt might
be beneficial to Unisource and its stockholders. The classification of the
Board could thus increase the likelihood that incumbent directors will retain
their positions. In addition, because the classification
41
provisions may discourage accumulations of large blocks of the Unisource Common
Stock by purchasers whose objective is to take control of Unisource and remove
a majority of the Board, the classification of the Board could tend to reduce
the likelihood of fluctuations in the market price of the Unisource Common
Stock that might result from accumulations of large blocks for such a purpose.
Accordingly, stockholders could be deprived of certain opportunities to sell
their shares of Unisource Common Stock at a higher market price than might
otherwise be the case.
Number of Directors; Removal of Directors; Vacancies. The By-laws provide
that the number of directors of Unisource shall be a number between six and
seventeen which shall be fixed by resolution adopted by either a majority of
the entire Board of Directors or the affirmative vote of the holders of at
least 66 2/3% of the voting power of all of the shares of Unisource entitled to
vote generally in the election of directors voting together as a single class.
The Unisource Certificate and By-laws also provide that, subject to the
rights of holders of any Preferred Stock then outstanding and any requirements
of law, directors may be removed only for cause by the affirmative vote of the
holders of at least 66 2/3% of the outstanding shares of Unisource then
entitled to vote generally in the election of directors, voting as a single
voting group. Subject to the rights of holders of any outstanding Preferred
Stock issued by Unisource, vacancies on the Board of Directors may be filled
only by the Board of Directors, the stockholders acting at an annual meeting
or, if the vacancy is with respect to a director elected by a voting group, by
action of any other directors elected by such voting group or such voting
group.
Business Conducted at Meetings; Director Nominations. The By-laws provide
that in order to bring matters before the annual meetings of stockholders,
stockholders must give notice to Unisource containing certain information
within 60 to 90 days prior to the anniversary date of the previous year's
annual meeting or, if the date of the annual meeting is not within 30 days of
the anniversary date of the previous year's annual meeting, no earlier than 90
days prior to such annual meeting and no later than the close of business on
the tenth day following the day on which notice of the date of such meeting was
mailed or the tenth day following the day on which public disclosure of the
date of the meeting of stockholders was made, whichever first occurs. In order
to nominate candidates for directors of Unisource, stockholders must give
notice to Unisource containing certain information within 60 to 90 days prior
to the anniversary date of the previous year's annual meeting or, if the date
of an annual meeting is not within 30 days of the anniversary of the previous
year's annual meeting, not later than the close of business on the tenth day
following the day on which notice of the date of such meeting was mailed or
public disclosure of the date of the meeting of stockholders was made,
whichever first occurs.
Special Meeting of Stockholders. The DGCL provides that special meetings of
stockholders may be called by the Board of Directors of Unisource or any person
authorized by the Unisource Certificate or By-laws to call a special meeting.
The By-laws provide that special meetings may be called by the Board of
Directors or any person authorized by the Board of Directors to call a special
meeting. Nominations of persons for election to the Board of Directors may be
made at a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of special meeting by or at the direction
of the Board of Directors. In order to nominate candidates for directors of
Unisource at a special meeting, stockholders must give notice to Unisource
containing certain information not earlier than the close of business on the
90th day prior to such special meeting and not later than the close of business
on the later of the 60th day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
No Stockholder Action by Written Consent; Stockholder Action at Meetings. The
Unisource Certificate and By-Laws provide that stockholder action can be taken
only at an annual or special meeting of stockholders, and prohibit stockholder
action by written consent in lieu of a meeting.
Supermajority Voting. The Unisource Certificate requires the approval of the
holders of at least 66 2/3% of the voting power of all of the shares entitled
to vote to alter, amend, repeal or adopt any provision inconsistent with or
limiting the effect of provisions of certain enumerated antitakeover provisions
in the Unisource
42
Certificate and By-laws, including the anti-takeover provisions listed above.
The Board of Directors may amend, supplement or repeal the By-laws at any time,
except as limited by law.
STOCKHOLDER RIGHTS PLAN
Unisource's Board of Directors has adopted a Stockholder Rights Plan (the
"Stockholder Rights Plan") and has declared a dividend of one right (a "Right")
for each outstanding share of Unisource Common Stock, which Rights will attach
to and trade with Unisource Common Stock, except as described below.
Rights Distribution Date. The Rights will separate from the Unisource Common
Stock and a distribution date ("Rights Distribution Date") will occur upon the
earlier of:
(i) 10 days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding Unisource Common Stock (the "Stock Acquisition Date") or
(ii) the close of business on such date as may be fixed by the Board of
Directors, which date shall not be more than ten days following the
commencement of a tender offer or exchange offer that would result in a
person or group beneficially owning 20% or more of the outstanding
Unisource Common Stock.
The surrender for transfer of any certificates of Unisource Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Unisource Common Stock represented by such certificates.
Exercise of Rights; Term of Plan. The Rights are not exercisable until the
Rights Distribution Date and will expire at the close of business on November
8, 2006, unless earlier redeemed by the Company as described below or unless
certain transactions set forth in the Stockholder Rights Plan have occurred.
Except in the circumstances described below, after the Rights Distribution
Date, each Right will be exercisable into one one-hundredth of a Series A
Preferred Share (a "Series A Preferred Share Fraction"). The voting and
dividend rights of the Series A Preferred Shares are subject to adjustment in
the event of dividends, subdivisions and combinations with respect to the
Unisource Common Stock. In lieu of issuing certificates for Series A Preferred
Share Fractions which are less than an integral multiple of one Series A
Preferred Share (i.e., 100 Series A Preferred Share Fractions), Unisource may
pay cash representing the current market value of the Series A Preferred Share
Fractions.
Flip-In Rights. In the event that at any time following the Stock Acquisition
Date:
(i) Unisource is the surviving corporation in a merger with an Acquiring
Person and Unisource Common Stock remains outstanding;
(ii) a person, including affiliates and associates, becomes the
beneficial owner of more than 20% of the then outstanding Unisource Common
Stock (unless such acquisition is made pursuant to a tender or exchange
offer for all outstanding shares of Unisource, upon terms and conditions
determined by a majority of the Continuing Directors (as defined below) to
be in the best interest of Unisource and its stockholders (a "Qualifying
Offer"));
(iii) an Acquiring Person engages in one or more "self-dealing"
transactions as set forth in the Stockholder Rights Plan; or
(iv) during such time as there is an Acquiring Person an event occurs
that results in such Acquiring Person's ownership interest being increased
by more than one percent (e.g., a reverse stock split), each holder of a
Right will thereafter have the right to receive, upon exercise, Unisource
Common Stock (or, in certain circumstances, cash, property or other
securities of Unisource) having a value equal to approximately two times
the exercise price of the Right.
In lieu of requiring payment of the purchase price upon exercise of the Rights
following any such event, Unisource, by action of a majority of the Continuing
Directors in office at the time, may permit the holders simply to surrender the
Rights, in which event they would be entitled to receive Unisource Common Stock
(and
43
other property, as the case may be) with a value of 50% of what could otherwise
be purchased by payment of the full Purchase Price. Notwithstanding any of the
foregoing, following the occurrence of any of the events set forth in clauses
(i), (ii), (iii) or (iv) of this paragraph, all Rights that are, or (under
certain circumstances specified in the Stockholder Rights Plan) were,
beneficially owned by any Acquiring Person who was involved in the transaction
giving rise to any such event will be null and void. However, Rights are not
exercisable following the occurrence of any of the events set forth above until
such time as the Rights are no longer redeemable by Unisource as set forth
below.
Flip-Over Rights. In the event that, at any time following the Stock
Acquisition Date:
(i) Unisource is acquired in a merger or other business combination
transaction in which Unisource is not the surviving corporation (other than
a merger that is described in, or that follows a tender offer or exchange
offer described in, the preceding paragraph) or
(ii) 50% or more of Unisource's assets or earning power is sold or
transferred,
each holder of a Right (except Rights that previously have been voided as set
forth above) shall thereafter have the right to receive, upon exercise, common
shares of the acquiring company having a value equal to approximately two times
the exercise price of the Rights. Again, provision is made to permit, at the
option of the Continuing Directors, surrender of the Rights in exchange for
one-half of the value otherwise purchasable. The events set forth in this
paragraph and in the preceding paragraph are referred to as the "Triggering
Events."
Antidilution Adjustments. The Purchase Price payable and/or the number of
units of Series A Preferred Shares or other securities or property issuable
upon exercise of the Rights are subject to adjustment from time to time to
prevent dilution:
(i) in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Unisource Common Stock;
(ii) if holders of the Unisource Common Stock are granted certain rights
or warrants to subscribe for Series A Preferred Shares or convertible
securities at less than the current market price of the Series A Preferred
Shares; or
(iii) upon the distribution to holders of the Unisource Common Stock of
evidences of indebtedness or assets (excluding regular quarterly dividends)
or of subscription rights or warrants (other than those referred to above).
Redemption. At any time until ten days following the Stock Acquisition Date,
Unisource may redeem the Rights in whole, but not in part, at a price of $.01
per Right. That ten day redemption period may be extended by the Board of
Directors so long as the Rights are still redeemable. Under certain
circumstances set forth in the Stockholder Rights Plan, the decision to redeem
will require the concurrence of the Continuing Directors (as defined below).
Immediately upon the action of the Board of Directors ordering redemption of
the Rights, with, where required, the concurrence of the Continuing Directors,
the Rights will terminate and the only rights of the holders of Rights will be
to the right to receive the $.01 per Right redemption price.
The term "Continuing Directors" means any member of the Board of Directors of
Unisource who was a member of the Board on January 1, 1997, and any person who
is subsequently elected to the Board if such person is recommended or approved
by a majority of the Continuing Directors, but shall not include an Acquiring
Person, or an affiliate or associate of an Acquiring Person, or any
representative of the foregoing entities.
No Stockholder Rights Associated with Rights Before Exercise; Tax
Consequences. Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of Unisource, including, without limitation,
the right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders or to Unisource, stockholders may,
depending upon the circumstances, recognize taxable income
44
in the event that the Rights become exercisable for Series A Preferred Shares
(or other consideration) of the Company or for common shares of the acquiring
company as set forth above. See "--Flip-Over Rights."
Amendment. Other than those provisions relating to the principal economic
terms of the Rights, any of the provisions of the Stockholder Rights Plan may
be amended by the Board of Directors of Unisource prior to the Rights
Distribution Date. After the Rights Distribution Date, the provisions of the
Stockholder Rights Plan may be amended by the Board (in certain circumstances,
with the concurrence of a majority of the Continuing Directors) in order to
cure any ambiguity, to make changes that do not adversely affect the interests
of the holders of Rights (excluding the interests of any Acquiring Person), or
to shorten or lengthen any time period under the Stockholder Rights Plan;
provided, however, that no amendment to adjust the time period governing
redemption shall be made at such time as the Rights are not redeemable.
Effect of Stockholders Rights Plan. The Rights have certain defensive
effects. The Rights will cause substantial dilution to a person or group that
attempts to acquire Unisource without conditioning the offer on a substantial
number of Rights being acquired or redeemed. The Rights should not interfere
with any merger or other business combination approved by the Board of
Directors of Unisource because:
(i) the Board of Directors (under certain circumstances, with the
concurrence of the Continuing Directors) may, at its option, at any time
prior to the close of business on the earlier of
(a) the tenth day following the Stock Acquisition Date or
(b) November 8, 2006, redeem all of the then outstanding Rights at
$.01 per Right; and
(ii) in any event, the Stockholder Rights Plan does not apply to a tender
or exchange offer for all outstanding shares of Unisource which is
determined by a majority of the Continuing Directors to be a Qualifying
Offer.
The Board of Directors may, as discussed above, extend the ten day redemption
period so long as the Rights are still redeemable. See "--Redemption."
LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
The Unisource Certificate eliminates to the fullest extent now or hereafter
permitted by Delaware law, liability of a director to Unisource or its
stockholders for monetary damages for any action taken, or failure to take any
action, as a director, except for liability:
(i) for any breach of the director's duty of loyalty to Unisource or its
stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(iii) under Section 174 of the DGCL, relating to prohibited dividends,
distributions and repurchases or redemptions of stock; or
(iv) for any transaction for which the director derives an improper
personal benefit (the "Exculpatory Provision").
The Exculpatory Provision is intended to afford directors additional
protection from, and limit their potential liability for, suits alleging a
breach of duty by a director. Unisource believes this provision will assist it
in maintaining and securing the services of directors who are not employees of
Unisource. As a result of the inclusion of the Exculpatory Provision,
stockholders may be unable to recover monetary damages from directors for
actions taken by them that constitute negligence or gross negligence or that
are in violation of their fiduciary duties, although it may be possible to
obtain injunctive or other equitable relief with respect to such actions, such
as an injunction or rescission based on a director's breach of the duty of
care, as a practical matter, equitable remedies may not be available (e.g.
after a transaction has already been effected). If equitable remedies are found
not to be available to stockholders for any particular case, stockholders may
not have any effective remedy against the challenged conduct.
45
Section 145 of the DGCL ("Section 145") permits indemnification of directors,
officers, agents and controlling persons of a corporation under certain
conditions and subject to certain limitations. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person is or was a director, officer or agent of the
corporation or another enterprise if serving at the request of the corporation.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a
manner such person reasonably believed to be in or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. In the case of an action by or in the right of Unisource, no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of Unisource has been
successful in the defense of any action, suit or proceeding referred to above
or in the defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
Unisource's By-laws contain provisions for indemnification of directors,
officers, employees and agents to the fullest extent permitted by Section 145
and Delaware law which, in general, presently requires that the individual act
in good faith and in a manner he or she reasonably believed to be in or not
opposed to Unisource's best interests and, in the case of any criminal
proceedings, that the individual has no reason to believe his or her conduct
was unlawful. Unisource's By-laws also permit Unisource to purchase insurance
and Unisource has purchased and maintains insurance on behalf of Unisource
directors, officers, employees and agents against any liability asserted
against such person and incurred by such person in any such capacity, or
arising out of such person's status as such, whether or not Unisource would
have the power to indemnify such person against such liability under the
foregoing provision of the By-laws.
46
DESCRIPTION OF CREDIT FACILITY
Unisource has a $1 billion unsecured Credit Facility with a syndicate of
banks, including The Chase Manhattan Bank ("Chase"), the administrative agent
for the Credit Facility. The information set forth herein relating to the
Credit Facility summarizes all material terms of the Credit Facility, but is
qualified in its entirety by reference to the complete text of the documents
which are exhibits to the Exchange Act Registration Statement.
The Credit Facility is available to Unisource, Unisource Capital
Corporation, a wholly-owned Delaware subsidiary of Unisource ("Delaware
Borrower"), and Unisource Canada, Inc. (the "Canadian Borrower" and, together
with Unisource and the Delaware Borrower, the "Borrowers"). All obligations of
the Delaware Borrower and the Canadian Borrower are unconditionally guaranteed
by Unisource. The Credit Facility will be used to repay the Intercompany Debt
and for general corporate purposes of the Borrowers. The commitment
termination and the final maturity of the Credit Facility will occur on
November 22, 2001.
The Credit Facility incorporates two borrowing options: (i) an unsecured
Revolving Credit Facility (the "Revolver") and (ii) an unsecured Competitive
Advance Facility (the "CAF"). Availability under each such borrowing option
will be reduced by usage under the other option on a dollar-for-dollar basis.
The Revolver will be provided on a committed basis and will include (i) a
multi-currency option pursuant to which Unisource and the Delaware Borrower
may borrow up to the equivalent of U.S. $100,000,000 in Pounds Sterling,
Deutsche Marks and French Francs, (ii) a Canadian Dollar subfacility pursuant
to which the Canadian Borrower may borrow up to the equivalent of U.S.
$100,000,000 in Canadian Dollars from certain lenders and (iii) a swingline
borrowing option under which certain lenders will commit to make up to
$100,000,000 in swingline loans to Unisource and the Delaware Borrower. The
swingline loans will be made on short notice on a same-day basis, will be
payable no later than the fifth business day after the borrowing date and will
be denominated in U.S. Dollars only.
Borrowings under the Revolver (other than swingline loans and loans under
the Canadian Dollar subfacility) shall bear interest at either the Alternate
Base Rate or LIBOR plus a spread equal to 18.5 basis points during the initial
six months of the Credit Facility. After the initial six month period of the
Credit Facility, the LIBOR spread will range from 14.5 to 30 basis points
based initially on Unisource's consolidated ratio of funded debt to
capitalization and subsequently on S&P and Moody's ratings of Unisource's
senior, unsecured, non-credit enhanced long-term debt after such ratings are
in effect. "Alternate Base Rate" means the highest of:
(i) the publicly announced Chase prime rate of interest;
(ii) an adjusted three-month certificate of deposit rate plus 1.0%; and
(iii) the prevailing federal funds rate plus 0.5%.
"LIBOR" means the London interbank offered rate (adjusted for statutory
reserve requirements for eurocurrency liabilities) for eurodollar deposits of
one, two, three or six (or, with the consent of each lender, nine or twelve)
months determined two business days prior to the relevant interest period.
Borrowings under the swingline loan option of the Revolver shall bear interest
at the overnight money market rate of the swingline lender determined in good
faith, unless the relevant swingline lender requires the other lenders to
acquire participations in such swingline loan, in which case the loan shall
bear interest at the Alternate Base Rate. Borrowings under the Canadian Dollar
subfacility shall bear interest at the Canadian Prime Rate. The "Canadian
Prime Rate" means the higher of the rate announced by Toronto Dominion Bank
(the "Canadian Agent") as its prime rate and the average 30-day bankers'
acceptance rate as quoted on the Reuters Service CDOR Page plus 0.625%.
Bankers' acceptances under the Canadian Dollar subfacility shall be discounted
at the Reference Rate. The Canadian Borrower is also required to pay a
stamping fee equal to 18.5 basis points during the initial six month period of
the Credit Facility. After the initial six month period of the Credit
Facility, the stamping fee will range from 14.5 to 30 basis points, determined
in a manner consistent with the determination of the LIBOR
47
spread described above. "Reference Rate" means the average of the discount rate
applicable to acceptances under the Canadian Dollar subfacility to be accepted
by the Canadian lenders on the date of acceptance, as determined by the
Canadian Agent. Borrowings under the Revolver may be prepaid at any time
subject to reimbursement for redeployment costs in the case of LIBOR
borrowings.
The CAF will be provided on an uncommitted competitive advance basis through
an auction mechanism. Unisource and the Delaware Borrower may borrow in U.S.
Dollars up to the full Credit Facility amount under the CAF option, less the
sum of all existing Revolver and CAF loans outstanding. Unisource and the
Delaware Borrower shall have the option to request that the lenders bid for CAF
loans bearing interest at an absolute rate with specified maturities ranging
from 7 to 360 days or bearing interest at a margin over LIBOR for interest
periods up to 12 months. Each lender shall have the right, but not the
obligation, to submit CAF bids at its discretion.
The Credit Facility provides for certain ongoing fees, including a facility
fee and a utilization fee. The facility fee will be based on the full amount of
the Credit Facility, regardless of usage, and will range from 8 to 15 basis
points per annum determined in a manner consistent with the determination of
the LIBOR spread described earlier. A utilization fee equal to 5 basis points
per annum will accrue on the aggregate amount of all loans outstanding under
the Credit Facility during the initial six month period of the Credit Facility.
Thereafter, a utilization fee of 5 basis points per annum will accrue on each
day when the aggregate amount of all loans outstanding under the Credit
Facility exceeds two-thirds of the aggregate Credit Facility commitments.
The principal amount of any Credit Facility loans not paid when due shall
bear interest at 2% above rate otherwise applicable thereto. Overdue interest,
fees and other amounts shall bear interest at 2% above the rate applicable to
Alternate Base Rate loans.
The conditions precedent to the initial borrowing under the Credit Facility
shall include, in addition to the customary conditions, the requirements that:
(i) the proceeds of the initial borrowing be applied to repay the
Intercompany Debt;
(ii) all material assets to be transferred by Alco to Unisource in
connection with the Spin-Off shall have been transferred; and
(iii) all governmental and third party approvals necessary or advisable
in connection with the Spin-Off, the Credit Facility and the
continuing operation of Unisource and its subsidiaries shall have
been obtained.
The Credit Facility includes customary covenants and provisions and contains
covenants and provisions customary for facilities of this type that will
restrict, among other things, Unisource's (and its subsidiaries') ability to:
(i) merge, consolidate or engage in certain assets sales or
dispositions (provided that an existing Canadian securitization
program and additional U.S. and Canadian securitization programs,
subject to certain dollar limits, shall not be prohibited),
(ii) incur indebtedness and enter into guarantees;
(iii) incur liens and enter into sale leaseback transactions; and
(iv) engage in transactions with affiliates.
The Credit Facility requires the satisfaction of certain financial
performance criteria, including the requirements that:
(i) the consolidated ratio of funded debt to capitalization not equal
or exceed 55%; and
(ii) minimum consolidated Net Worth (as defined therein) shall not be
less than the sum of
(a)$745,000,000 plus
(b) 50% of consolidated net income (without deduction for losses)
after the date of the Credit Facility.
48
ADDITIONAL INFORMATION
Unisource has filed the Exchange Act Registration Statement with the
Commission concerning the shares of Unisource Common Stock being received by
Alco shareholders in the Spin-Off. This document does not contain all of the
information set forth in the Exchange Act Registration Statement and the
exhibits and schedules thereto. Statements made in this document concerning the
contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Exchange Act Registration Statement,
reference is made to such exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
The Exchange Act Registration Statement and the exhibits and schedules
thereto filed by Unisource may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 5th Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
information can be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such material can also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005 or accessed electronically
by means of the Commission's home page on the Internet (http://www.sec.gov).
Following the Spin-Off, Unisource will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. Unisource will also be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its stockholders in connection with its annual
meetings of stockholders.
No person is authorized by Alco or Unisource to give any information or to
make any representations other than those contained in this document, and if
given or made, such information or representations must not be relied upon as
having been authorized.
49
INDEX TO UNISOURCE WORLDWIDE, INC. CONSOLIDATED FINANCIAL
STATEMENTS
Unisource Worldwide, Inc.
Report of Independent Auditors............................................ F-2
Consolidated Statements of Income......................................... F-3
Consolidated Balance Sheets............................................... F-4
Consolidated Statements of Cash Flows..................................... F-5
Consolidated Statements of Changes in Stockholder's Equity................ F-6
Notes to the Consolidated Financial Statements............................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
Unisource Worldwide, Inc.
We have audited the accompanying consolidated balance sheets of Unisource
Worldwide, Inc. (a wholly owned subsidiary of Alco Standard Corporation) as of
September 30, 1995 and 1996, and the related consolidated statements of income,
changes in stockholder's equity and cash flows for each of the three years in
the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Unisource
Worldwide, Inc. at September 30, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 10 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective October 1, 1993.
Ernst & Young LLP
Philadelphia, Pennsylvania
October 16, 1996, except for
notes 1 and 9, as to which the date
is November 22, 1996
F-2
UNISOURCE WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenues................................ $ 5,756,519 $ 6,987,274 $ 7,022,808
Costs and expenses
Cost of goods sold.................... 4,825,712 5,925,174 5,896,251
Selling and administrative............ 782,281 855,818 942,088
Restructuring charge.................. -- -- 50,000
------------ ------------ ------------
5,607,993 6,780,992 6,888,339
Income from operations.................. 148,526 206,282 134,469
Interest expense........................ 26,233 33,537 31,466
------------ ------------ ------------
Income before income taxes and
cumulative effect of accounting
change................................. 122,293 172,745 103,003
Provision for income taxes.............. 47,817 67,543 43,005
------------ ------------ ------------
Income before cumulative effect of
accounting change...................... 74,476 105,202 59,998
Cumulative effect of change in method of
accounting for income taxes............ 14,000 -- --
------------ ------------ ------------
Net income.............................. $ 88,476 $ 105,202 $ 59,998
============ ============ ============
Pro forma net income per common and
common equivalent share (unaudited).
See Note 2............................. $ .81
============
See notes to consolidated financial statements.
F-3
UNISOURCE WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
ASSETS
Current Assets
Cash............................................. $ 23,657 $ 14,596
Accounts receivable, less allowances for doubtful
accounts;
1995--$15,772; 1996--$19,927.................... 859,168 790,818
Inventories...................................... 492,396 470,217
Prepaid expenses and deferred taxes.............. 48,972 54,853
---------- ----------
Total current assets........................... 1,424,193 1,330,484
---------- ----------
Long-Term Receivables.............................. 8,901 21,890
Property and Equipment, net........................ 227,137 224,168
Goodwill........................................... 268,287 509,850
Deferred costs and other assets.................... 90,506 105,322
---------- ----------
Total Assets....................................... $2,019,024 $2,191,714
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current portion of long-term debt................ $ 935 $ 840
Notes payable.................................... 45,519 38,367
Trade accounts payable........................... 443,077 438,899
Accrued salaries, wages and commissions.......... 38,000 27,011
Restructuring costs.............................. 33,302 15,575
Other accrued expenses........................... 48,258 59,000
---------- ----------
Total current liabilities...................... 609,091 579,692
---------- ----------
Long-Term Debt..................................... 24,515 21,097
Notes and Advances Payable to Alco................. 919,089 553,700
Deferred Taxes and Other Liabilities
Deferred taxes................................... 25,126 54,462
Restructuring costs.............................. 6,000 13,896
Other long-term liabilities...................... 19,316 33,366
---------- ----------
50,442 101,724
---------- ----------
Stockholder's Equity
Series A Preferred Stock, par value $.01,
authorized 200,000 shares; issued and
outstanding 122,884 shares at $1 stated face
value (liquidation preference $122,884) in
1995............................................ 122,884 --
Common Stock, $.01 par value, authorized 200,000
shares, issued and outstanding 100,000 shares... 1 1
Additional paid-in capital....................... 184,394 778,444
Retained earnings................................ 127,892 181,458
Foreign currency translation adjustments......... (19,284) (24,402)
---------- ----------
Total stockholder's equity..................... 415,887 935,501
---------- ----------
Total Liabilities and Stockholder's Equity......... $2,019,024 $2,191,714
========== ==========
See notes to consolidated financial statements.
F-4
UNISOURCE WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------
1994 1995 1996
---------- ---------- ----------
Operating Activities
Net income................................. $ 88,476 $ 105,202 $ 59,998
Additions (deductions) to reconcile net
income to net cash (used) provided by
operating activities
Cumulative effect of change in
accounting............................... (14,000) -- --
Depreciation.............................. 23,970 24,435 27,248
Amortization.............................. 8,577 8,973 12,771
Provisions for losses on accounts
receivable............................... 12,855 12,960 17,204
Provision for deferred income taxes....... 16,381 33,281 32,314
Restructuring costs, net.................. (46,588) (60,364) 14,703
Changes in operating assets and
liabilities net of effects from
acquisitions and divestiture:
Decrease (increase) in accounts
receivable............................. (27,607) (122,744) 46,492
Decrease (increase) in inventories...... (9,063) (70,671) 71,347
Decrease (increase) in prepaid
expenses............................... (7,177) 5,245 (877)
Increase (decrease) in accounts payable
and accrued expenses................... 47,322 (9,352) (70,949)
Miscellaneous............................. 1,392 6,417 (4,337)
--------- ---------- ----------
Net cash provided (used)................. 94,538 (66,618) 205,914
--------- ---------- ----------
Investing Activities
Cost of companies acquired, net of cash
acquired.................................. (593) (38,865) (191,196)
Collection of notes receivable............. -- -- 59,500
Proceeds from the sale of property and
equipment................................. 4,735 7,499 9,327
Expenditures for property and equipment.... (33,934) (50,054) (35,758)
Deferred cost expenditures................. (18,005) (57,337) (52,290)
--------- ---------- ----------
Net cash used............................ (47,797) (138,757) (210,417)
--------- ---------- ----------
Financing Activities
Short-term debt repayments, net............ (4,195) (3,245) (30,521)
Long-term debt repayments.................. (3,062) (1,461) (27,407)
Dividend payments to Alco.................. (14,746) (43,299) --
Proceeds (repayments) to Alco.............. (12,981) 260,872 53,370
--------- ---------- ----------
Net cash provided (used)................. (34,984) 212,867 (4,558)
--------- ---------- ----------
Net (decrease) increase in cash............. 11,757 7,492 (9,061)
Cash at beginning of year................... 4,408 16,165 23,657
--------- ---------- ----------
Cash at end of year......................... $ 16,165 $ 23,657 $ 14,596
========= ========== ==========
See notes to consolidated financial statements.
F-5
UNISOURCE WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
FOREIGN
SERIES A ADDITIONAL CURRENCY
PREFERRED COMMON PAID IN RETAINED TRANSLATION
STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS TOTAL
--------- ------ ---------- -------- ----------- --------
Balance September 30,
1993................... $ 122,884 $ 1 $184,394 $ (8,508) $(18,434) $280,337
Net income.............. 88,476 88,476
Translation
adjustments............ (1,360) (1,360)
Preferred stock dividend
to Alco................ (14,746) (14,746)
Other................... 767 767
--------- --- -------- -------- -------- --------
Balance September 30,
1994................... 122,884 1 184,394 65,989 (19,794) 353,474
Net income.............. 105,202 105,202
Translation
adjustments............ 510 510
Preferred stock dividend
to Alco................ (14,746) (14,746)
Common stock dividend to
Alco................... (28,553) (28,553)
--------- --- -------- -------- -------- --------
Balance September 30,
1995................... 122,884 1 184,394 127,892 (19,284) 415,887
Equity of company pooled
by Alco................ 8,314 8,314
Net income.............. 59,998 59,998
Translation
adjustments............ (5,118) (5,118)
Preferred stock dividend
to Alco................ 14,746 (14,746)
Contribution of Series A
Preferred Stock to
capital................ (122,884) 122,884
Contribution of Alco
intercompany notes and
advances to capital.... 456,420 456,420
--------- --- -------- -------- -------- --------
Balance September 30,
1996................... -- $ 1 $778,444 $181,458 $(24,402) $935,501
========= === ======== ======== ======== ========
See notes to consolidated financial statements
F-6
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SPIN-OFF AND BASIS OF PRESENTATION
Alco Standard Corporation ("Alco") will separate its printing and imaging and
supply systems business from its office solutions business, with each business
operating as a stand-alone publicly traded company. In order to effect the
separation of these businesses, Alco has declared a dividend (the "Spin-Off")
payable to holders of record of Alco common stock at the close of business on
December 13, 1996 (the "Record Date") of one share of common stock, no par
value, of Unisource Worldwide, Inc. ("Unisource Common Stock"), for every two
shares of Alco stock owned on December 13, 1996 ("Exchange Ratio"). The actual
number of shares of Unisource Common Stock to be distributed will be determined
as of December 13, 1996. As a result of the distribution, 100% of the
outstanding shares of Unisource Common Stock will be distributed to Alco
shareholders.
The consolidated financial statements of Unisource Worldwide, Inc.
("Unisource" or the "Company") include substantially all of the assets,
liabilities, revenues and expenses of the printing and imaging and supply
systems businesses of Alco. The Company is engaged in the marketing and
distribution of quality printing papers, paper and imaging products for office
and reprographic use, and supply systems products--disposable paper and plastic
products, packaging equipment and supplies and sanitary maintenance supplies
and equipment. Such consolidated financial statements include the assets,
liabilities, revenues and expenses of Alco's wholly owned subsidiary, Unisource
Worldwide, Inc., and the assets, liabilities, revenues and expenses of certain
operations which were contributed to Unisource by Alco on October 1, 1995. All
transactions between entities included in the consolidated financial statements
have been eliminated. The consolidated financial statements have been prepared
on the historical cost basis, and present the Company's financial position,
results of operations and cash flows as derived from Alco's historical
financial statements, except that the method of allocation of general corporate
expenses and corporate interest expense has been changed to more appropriately
reflect the Company's actual use of corporate services, and to allocate Alco's
interest expense on consolidated borrowings to Unisource based on the
relationship of its net assets to consolidated Alco net assets.
In conjunction with the separation of their businesses, Unisource and Alco
entered into various agreements that address the allocation of assets and
liabilities between them and define their relationship after the separation,
including a Distribution Agreement ("Distribution Agreement"), a Benefits
Agreement ("Benefits Agreement") and a Tax Sharing and Indemnification
Agreement ("Tax Sharing Agreement").
The Distribution Agreement provides for, among other things, the principal
transactions required to effect the Spin-Off, the conditions to the Spin-Off,
the allocation between Alco and Unisource of certain assets and liabilities,
and cooperation by Alco and Unisource in the provision of information and
certain facilities necessary to perform the administrative functions incident
to their respective businesses. The Distribution Agreement includes cross-
indemnification provisions pursuant to which Unisource and Alco indemnify each
other for damages that may arise out of a breach of their respective
obligations under the agreement, which include, subject to certain exceptions,
all liabilities and obligations arising out of the conduct or operation of
their respective businesses before, on or after the Spin-Off. The Distribution
Agreement also provides that the premises located at 825 Duportail Road, Wayne,
Pennsylvania, presently owned by Alco and used as the corporate headquarters of
Alco and Unisource (the "Headquarters Facility") will be held for sale and
ownership and responsibility for maintenance will remain with Alco. Unisource
will have the right to continue to use the Headquarters Facility until December
31, 1997 but prior to that date, upon notice to Alco, may terminate its
occupancy and obligation to contribute to the cost of operating and maintaining
the premises.
Unisource will be obligated to pay a ratable share of the cost of operations
and maintenance of the Headquarters Facility, including real estate taxes,
utilities, maintenance, insurance and normal repairs. Following the Spin-Off,
Alco and Unisource will each be responsible for its own management systems. The
Distribution
F-7
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Agreement does provide, however, for continued access, cooperation and support
for a period of one year after December 31, 1996 and, in the case of certain
computer equipment, up to two years after December 31, 1996.
Under the Benefits Agreement, the wages, salaries and employee benefits of
all employees of the Company will be the responsibility of the Company.
Generally, the Company's obligation to provide benefits will include all
obligations with respect to Company employees under pension plans, savings
plans, multiemployer plans, welfare plans (retiree medical plans),
supplemental benefit plans, certain deferred compensation plans, incentive
plans, stock-based plans and other plans covering Company employees and will
include liabilities that arose while the individuals were employed by Alco.
The Benefits Agreement requires Alco to reimburse Unisource for a portion of
any payments made by Unisource to former Unisource employees under Alco's
1985, 1991 and 1994 deferred compensation plans. The Company will assume
certain Alco pension plans covering Company employees, and assets and
liabilities attributable to Company employees under Alco's participating
companies pension plan and Alco's 401(k) plan will be transferred to a new
Company pension plan and 401(k) plan, respectively. Unisource employees and
directors will be given the opportunity to convert Alco options into options
to purchase Unisource Common Stock.
Under the Tax Sharing Agreement, Unisource will bear its respective share of
(i) Alco's Federal consolidated income tax liability (or benefit), (ii) any
unitary state income tax liability, and (iii) Alco's consolidated personal
property tax liability for all tax periods that end before or that include
December 31, 1996. For the taxable year ended September 30, 1996, Unisource's
share of Alco's Federal consolidated tax liability (or benefit) will be 40% of
such liability (or benefit) and Alco's share of such liability (or benefit)
will be 60%. Unisource is responsible for paying any tax liabilities arising
from any tax returns that it files separately. If any tax year ending before
or including December 31, 1996 is subsequently examined by the IRS, and an
adjustment results from such examination, then Unisource's share of Alco's
additional Federal consolidated income tax liability (or benefit for that tax
year) shall be computed and agreed to by the parties. The Tax Sharing
Agreement generally provides that in the event that either Alco or Unisource
takes any action inconsistent with, or fails to take any action required by,
or in accordance with, the qualification of the Spin-Off as tax-free then Alco
or Unisource, as the case may be, will be liable for and indemnify and hold
the other harmless from any tax liability resulting from such action or
inaction. If, within two years after December 31, 1996, either party engages
in any transaction involving its assets or stock, and as a result, the Spin-
Off is treated as a taxable event, then the party engaging in such transaction
shall hold the other party harmless from any tax liability that results from
the treatment of the Spin-Off as a taxable event. Alco is also responsible for
any tax liability resulting from any action necessary to implement the Spin-
Off and its associated events, including, for example, intercompany sales,
liquidations and mergers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Foreign Currency Translation
All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of equity.
F-8
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. The Company uses the
last-in, first-out ("LIFO") method of determining cost for approximately 87%
of its inventories and the first-in, first-out ("FIFO") method for the
balance.
Depreciation and Amortization
Property and equipment are depreciated over their useful lives by the
straight-line method. Amortization of capital lease assets is included in
depreciation expense.
Goodwill
Substantially all goodwill (excess of purchase price over net assets
acquired) is amortized over 40 years by the straight-line method. The
recoverability of goodwill is evaluated at the operating unit level by an
analysis of operating results and consideration of other significant events or
changes in the business environment. If an operating unit has current
operating losses and based upon projections there is a likelihood that such
operating losses will continue, the Company will evaluate whether impairment
exists on the basis of undiscounted expected future cash flows from operations
before interest for the remaining amortization period. If impairment exists,
the carrying amount of the goodwill is reduced by the estimated shortfall of
cash flows.
Interest Rate Swap Agreements
The Company has entered into several interest rate swap agreements as a
means of managing its interest rate exposure. These agreements have the effect
of converting a portion of the Company's expected variable rate borrowings to
fixed rate borrowings. Net amounts paid or received will be reflected as
adjustments to interest expense.
Cash Management
Alco uses a centralized cash management system for all of its domestic
operations, including those of Unisource. Cash reflected in the Consolidated
Balance Sheets are primarily the balances maintained by Unisource's foreign
subsidiaries.
Accounting Changes
During fiscal 1994, the Company changed its methods of accounting for income
taxes and retiree health benefits. The cumulative effect of adopting Financial
Accounting Standards Board ("FASB") Statement No. 109 ("FAS 109"), "Accounting
for Income Taxes," (Note 10) was to increase net income by $14,000,000. The
cumulative effect of adopting the new method of accounting for retiree health
benefits was immaterial.
Reclassifications
Certain prior-year amounts have been reclassified to conform to current year
presentation.
Pending Accounting Changes
In March 1995, the FASB issued Statement No. 121 ("FAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. FAS 121 also
F-9
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company will adopt FAS 121 in the first quarter of fiscal
1997 and, based on current circumstances, does not believe the effect of
adoption will be material.
In October 1995, the FASB issued Statement No. 123 ("FAS 123"), "Accounting
for Stock-Based Compensation." This statement establishes a fair value method
of accounting for stock-based compensation plans. Adoption of the fair value
method is encouraged; however, entities may elect to continue to account for
stock-based compensation plans according to the provisions of Accounting
Principles Board Statement No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," but provide the disclosures related to FAS 123. The Company is
required to adopt FAS 123 in the first quarter of fiscal 1997, and at this
time intends to account for stock-based compensation according to APB 25 and
provide FAS 123 disclosures as required.
In June 1996, the FASB issued Statement No. 125 ("FAS 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" which establishes accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on the consistent application of a financial components approach that
focuses on control. FAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. The Company does not believe the effect of adoption will be
material.
Pro forma Net Income Per Common and Common Equivalent Share (unaudited)
Historical net income per share has been omitted since Unisource was a
wholly owned subsidiary of Alco during the periods presented and will be
recapitalized as part of the Spin-Off.
Unaudited pro forma net income per common and common equivalent share is
calculated as if the Spin-Off had occurred on October 1, 1995 and assumes
Unisource borrowed to fund the $553,700,000 intercompany notes repayment. See
Note 5. Net income used in determining the pro forma amount is based on
historical net income adjusted for $9,187,000 of additional interest expense
and $3,638,000 of related tax benefits. These adjustments relate to the
assumed borrowings of $553,700,000 at an assumed weighted average interest
rate of 7%, less corporate interest previously allocated by Alco. The assumed
number of weighted average common and common equivalent shares (67 million) is
based on actual Alco Common Shares outstanding as of September 30, 1996, the
issuance of one Unisource share for every two Alco shares, and the estimated
dilutive effect of Unisource stock options expected to be issued to replace
Alco stock options held by Unisource employees. The actual number of common
and common equivalent shares used to compute earnings per share after the
Spin-Off will depend upon the number of shares of Unisource Common Stock that
are outstanding at such time as well as the market price of the Unisource
Common Stock. Excluding the $50 million restructuring charge in 1996, pro
forma net income per common and common equivalent share would be $1.30.
3. ACQUISITIONS AND DIVESTITURE
In fiscal 1994, the Company made one acquisition for $3,550,000 in Alco
common stock. Total assets relating to this acquisition amounted to
$5,456,000, including goodwill of $2,120,000. An additional $600,000 was paid
and capitalized in fiscal 1994 relating to prior years' acquisitions.
In fiscal 1995, the Company made 12 acquisitions for $38,515,000 in cash.
Total assets relating to these 12 acquisitions totaled $54,870,000, including
goodwill of $26,119,000. An additional $350,000 was paid and capitalized in
fiscal 1995 relating to prior years' acquisitions.
In September 1995, Central Products Company was sold for $2,000,000 in cash
and $78,000,000 in notes, and a pre-tax gain of $3,867,000 was realized.
F-10
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In fiscal 1996, the Company made 40 acquisitions for an aggregate purchase
price of $305,615,000 in cash, notes and Alco common stock. Total assets
related to these 40 acquisitions were $359,717,000, including goodwill of
$241,272,000. Alco also issued 651,175 common shares for an additional
acquisition accounted for as a pooling-of-interests and results of operations
of that acquisition have been included from the beginning of the fiscal year.
An additional $10,315,000 was paid and capitalized in fiscal 1996 relating to
prior-years' acquisitions.
All purchase acquisitions are included in results of operations from their
dates of acquisition.
Adjusted for the effects of the divestiture, had the purchase acquisitions
been made at the beginning of the fiscal year prior to their acquisition,
unaudited pro forma results of operations would have been:
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------
1994 1995 1996
---------- ---------- ----------
(IN MILLIONS EXCEPT PER SHARE
AMOUNT)
Revenues................................... $ 5,843.3 $ 7,675.7 $ 7,438.7
Net income................................. 89.1 122.3 69.8
Pro forma earnings per share--See Note 2... .96
The divestiture had the impact of decreasing pro forma net income by
$3,679,000 and $4,793,000 respectively, in fiscal 1994 and fiscal 1995.
4. SALE OF ACCOUNTS RECEIVABLE
The Company entered into an agreement to sell, with limited recourse, up to
CN$95,000,000 of certain eligible Canadian accounts receivable through December
1, 1996. The agreement provides limited recourse to the Company in the event
that any of the previously sold receivables become uncollectible. As
collections reduce previously sold interests, new receivables will be sold up
to CN$95,000,000. The amount of receivables sold under the agreement was
CN$95,000,000 (US$71,000,000) and CN$90,000,000 (US$66,100,000) at September
30, 1995 and 1996, respectively.
5. TRANSACTIONS WITH ALCO
Prior to the Spin-Off, Unisource is expected to borrow $553,700,000 under a
credit facility (see note 9) to repay the outstanding intercompany notes and
advances payable. The balance of the intercompany notes and advances in excess
of $553,700,000 was contributed to Unisource's common stockholder equity as of
September 30, 1996. Effective September 30, 1996, the $553,700,000 amount plus
any additional advances to Unisource subsequent to September 30, 1996 will bear
interest at 6.75% per annum.
The Series A Preferred Stock, all of which was owned by Alco, and the related
fiscal 1996 cumulative dividends were contributed to common equity by Alco on
September 30, 1996.
There are no material intercompany purchase or sale transactions between Alco
and Unisource. Under Alco's centralized cash management system, short-term
advances from Alco and excess cash sent to Alco are reflected as intercompany
advances. Notes payable to Alco reflect borrowings by the Company to finance
acquisitions. Unisource has been charged corporate interest expense based on
the relationship of its net assets to total Alco net assets, excluding
corporate debt, in amounts of $19,813,000 in 1994, $26,586,000 in 1995 and
$29,572,000 in 1996.
F-11
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in the Consolidated Statements of Income is an allocation of general
corporate expenses related to services provided for Unisource by Alco in the
amounts of $11,347,000 in 1994, $14,168,000 in 1995 and $18,014,000 in 1996.
This allocation was based on an estimate of the proportion of corporate
expenses related to the Unisource business for the periods presented and, in
the opinion of management, has been made on a reasonable basis and approximates
the incremental costs that would have been incurred had Unisource been
operating on a stand-alone basis.
6. INVENTORIES
If the FIFO method of accounting had been used exclusively, inventories would
have been $92,590,000 and $68,463,000 higher at September 30, 1995 and 1996,
respectively. See Note 2. Inventories consist principally of finished goods.
7. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of (in thousands):
SEPTEMBER 30,
-----------------
1995 1996
-------- --------
Land...................................................... $ 26,798 $ 24,937
Buildings and improvements................................ 171,740 177,289
Machinery and equipment................................... 162,687 194,455
-------- --------
361,225 396,681
Less: accumulated depreciation............................ 134,088 172,513
-------- --------
$227,137 $224,168
======== ========
8. NOTES PAYABLE
The Company may borrow up to $100,000,000 or the Canadian dollar equivalent
under a credit agreement with four banks. Facility fees of 9 basis points per
annum are charged for this commitment. Loans under the agreement may be made
under a selection of rate formulas including prime, the Eurodollar rate in the
United States or Canada, or the Canadian Bankers Acceptance rate. At September
30, 1995 and 1996, the Company had borrowed $45,519,000 and $7,345,000
respectively, under this agreement. The average interest rate at September 30,
1995 and 1996, was 6.73% and 4.3%, respectively. This credit agreement, which
is guaranteed by Alco, will be canceled and amounts outstanding thereunder will
be repaid after Unisource enters into the Credit Facility. At September 30,
1996, the Company also borrowed $8,658,000 at 5.75% under an overdraft line of
credit with a Canadian Bank. Notes payable also includes $22,364,000 related to
acquisitions at an average interest rate of 6%.
Interest paid on the above notes was $2,937,000, $3,799,000 and $2,295,000 in
1994, 1995 and 1996, respectively.
F-12
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LONG-TERM DEBT AND CREDIT FACILITY
Long-term debt consisted of:
SEPTEMBER 30,
---------------
1995 1996
------- -------
(IN THOUSANDS)
Industrial revenue bonds at average interest rate of 5.1%
in 1995 and 4.4% in 1996.................................. $10,328 $ 9,424
Capital lease obligations.................................. 14,444 12,322
Sundry notes, bonds and mortgages at average interest rate
of 10% in 1995 and 6.7% in 1996........................... 678 191
------- -------
25,450 21,937
Less current maturities.................................... 935 840
------- -------
$24,515 $21,097
======= =======
The industrial revenue bonds, capital lease obligations and mortgages are
secured by related property and equipment with a net book value of
approximately $17,937,000 and $14,962,000 at September 30, 1995 and 1996,
respectively.
Long-term debt matures in fiscal years as follows: 1997--$840,000; 1998--
$565,000; 1999--$609,000; 2000--$648,000; 2001--$696,000; 2002-2012--
$18,579,000.
On November 22, 1996, the Company entered into a $1,000,000,000 five-year
unsecured competitive advance and revolving credit facility. The credit
facility includes multicurrency options for up to $100,000,000 in Pounds
Sterling, Deutsche Marks and French Francs and a $100,000,000 Canadian dollar
subfacility. Borrowings under the revolver shall bear interest at either the
Alternate Base Rate (as defined) or LIBOR plus a spread equal to 18.5 basis
points during the initial six months of the credit facility. After the initial
six month period, the LIBOR spread will range from 14.5 to 30 basis points,
depending on certain financial ratios and credit ratings. The credit facility
provides for certain fees, including a facility fee and utilization fee. The
facility fee will range from 8 to 15 basis points per annum on the full amount
of the credit facility, determined in a manner consistent with the LIBOR spread
described above. A utilization fee of 5 basis points per annum will accrue on
the aggregate amount of all loans outstanding during the initial six months of
the credit facility and 5 basis points per annum thereafter each day the
aggregate amount of all loans under the credit facility exceeds two-thirds of
the aggregate commitment. The credit facility includes financial covenants
requiring a ratio of funded debt 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.
Interest paid on long-term debt, excluding amounts charged by Alco, totaled
$3,830,000, $3,079,000 and $3,213,000 in 1994, 1995 and 1996, respectively.
10. TAXES ON INCOME
Effective October 1, 1993, the Company adopted FAS No. 109, "Accounting for
Income Taxes." FAS 109 permitted the Company to recognize the benefit of
certain deferred tax assets that could not be recognized under the previous
standard, FAS 96. The cumulative effect of adopting FAS 109 as of October 1,
1993 was to increase net income by $14,000,000. As permitted under FAS 109,
prior years' financial statements were not restated.
F-13
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has been included in the consolidated federal income tax return
of Alco. The following provision for income taxes was determined as if the
Company were a separate taxpayer.
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
Current provision:
Federal................................ $27,913 $32,486 $ 6,093
Foreign................................ 3,277 1,946 2,728
State and local........................ 246 (170) 1,870
---------- ---------- ----------
31,436 34,262 10,691
Deferred provision (benefit):
Federal................................ 21,878 25,070 26,265
Foreign................................ (5,392) 8,258 3,801
State and local........................ (105) (47) 2,248
---------- ---------- ----------
16,381 33,281 32,314
---------- ---------- ----------
$ 47,817 $ 67,543 $ 43,005
========== ========== ==========
The components of deferred income tax assets and liabilities were as follows:
SEPTEMBER 30
------------------
1995 1996
-------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation and amortization.......................... $ 30,359 $ 32,917
Long-Term contract..................................... 16,039 37,868
Other.................................................. -- 1,021
-------- --------
Total deferred tax liabilities....................... 46,398 71,806
-------- --------
Deferred tax assets:
Nondeductible accruals................................. 30,400 30,292
Net operating loss carryforwards....................... 20,955 20,408
Other.................................................. 3,688 --
-------- --------
Total deferred tax assets............................ 55,043 50,700
Valuation allowance.................................... (11,420) (12,736)
-------- --------
Deferred tax assets, net of valuation allowance........ 43,623 37,964
-------- --------
Net deferred tax liabilities............................. $ 2,775 $ 33,842
======== ========
The net operating loss deferred tax asset at September 30, 1996 consists
primarily of foreign carryforwards of $26,017,000 principally expiring in years
1997 through 2000 and domestic state carryforwards expiring in years 1997
through 2011.
F-14
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of the effective income tax rate:
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------
1994 1995 1996
----- ----- -----
Federal................................................. 35.0% 35.0% 35.0%
State................................................... .1 (.1) 2.5
Goodwill................................................ 1.3 .9 1.4
Foreign, including credits.............................. 1.0 2.0 4.2
Other................................................... 1.7 1.3 (1.3)
----- ----- -----
39.1% 39.1% 41.8%
===== ===== =====
Tax provisions are settled through the intercompany account and Alco made
payments (refunds) on behalf of the Company, which approximated $(4,124,000),
$12,610,000 and $(14,070,000) in fiscal years 1994, 1995 and 1996,
respectively.
Undistributed earnings of the Company's foreign subsidiaries were
approximately $5,216,000 at September 30, 1996. Those earnings are considered
to be indefinitely reinvested and, therefore, no provision has been recorded
for U.S. federal and state income taxes.
11. PENSION AND STOCK PURCHASE PLANS
The Company sponsors defined benefit pension plans for the majority of its
employees. The benefits generally are based on years of service and average
compensation. The Company funds at least the minimum amount required by
government regulations. The cost of these plans, together with contributions to
multiemployer and defined contribution pension plans ($4,806,000 in 1994,
$2,619,000 in 1995 and $3,748,000 in 1996), is charged to operations, and
amounted to $12,035,000, $11,600,000 and $14,552,000 in 1994, 1995 and 1996,
respectively.
The components of net periodic pension cost for Company-sponsored defined
benefit pension plans are:
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
Service cost............................ $ 11,661 $ 10,896 $ 12,850
Interest cost on projected benefit obli-
gation................................. 12,974 15,191 17,611
Actual return on plan assets............ (7,675) (41,761) (42,193)
Net amortization and deferral........... (9,731) 24,655 22,536
--------- ---------- ----------
$ 7,229 $ 8,981 $ 10,804
========= ========== ==========
Assumptions used in accounting for the Company-sponsored defined benefit
pension plans were:
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
Weighted average discount rates........ 7.75% 7.50% 7.75%
Rates of increase in compensation lev-
els................................... 6.25% 6.00% 6.25%
Expected long-term rate of return on
assets................................ 10.00% 10.00% 10.00%
F-15
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status and amounts recognized in the consolidated balance sheets
for the Company-sponsored defined benefit pension plans are:
SEPTEMBER 30,
------------------
1995 1996
-------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested................................................ $180,307 $112,041
======== ========
Accumulated........................................... $183,830 $115,707
======== ========
Projected............................................. $221,274 $138,033
Plan assets at fair value............................... 200,051 132,644
-------- --------
Plan assets less than projected benefits................ (21,223) (5,389)
Items not yet recognized:
Net gain.............................................. (5,976) (14,541)
Prior service cost.................................... 4,761 7,496
Transition asset, net of amortization................. (9,955) (4,487)
Adjustment required to recognize minimum liability...... (285) (3,831)
-------- --------
Net pension liability................................... $(32,678) $(20,752)
======== ========
Under the Benefits Agreement, Alco will assume certain benefit obligations
and related assets for retirees and terminated vested employees of the Company,
which are estimated to be $101,000,000 and have been removed from the September
30, 1996 balances reflected in the table above.
Substantially all of the Alco and Unisource plan assets totaling $346,721,000
at September 30, 1996 are invested in listed stocks, bonds, and government
securities, including common stock of Alco having a fair value of $59,850,000.
The majority of the Company's employees were eligible to participate in
Alco's Stock Participation Plan through fiscal 1995, under which they were
permitted to invest 2% to 6% of regular compensation before taxes. The Company
contributed an amount equal to two-thirds the employee's investment and all
amounts were invested in Alco's common shares. Effective October 2, 1995, the
Stock Participation Plan was replaced by a Retirement Savings Plan ("RSP"). The
RSP allows employees to invest 1% to 16% of regular compensation before taxes
in multiple investment funds. The Company contributes an amount equal to two-
thirds of the employees' investments, up to 6% of regular compensation, for a
maximum company match of 4%. Prior to the Spin-Off, Company contributions are
invested in Alco common stock. Following the Spin-Off, Company contributions
will be invested in Unisource Common Stock. Employees vest in a percentage of
the Company's contribution after two years of service, with full vesting at the
completion of five years of service. There is a similar plan for eligible
management employees. The cost of the stock purchase plans charged to
operations amounted to $9,359,000, $9,902,000 and $13,307,000 in 1994, 1995 and
1996, respectively.
The Company increased its net pension liability by $1,048,000 in fiscal 1995
due to early retirement benefits granted to employees in connection with the
1993 restructuring program.
As a result of the divestiture of Central Products Company, the Company
realized and recorded a curtailment loss of $446,000 in 1995.
F-16
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. LEASES
Capital leases are included in property and equipment in the amount of
$17,430,000 and $15,596,000 at September 30, 1995 and 1996, respectively.
Accumulated amortization of $8,973,000 and $8,508,000 is included in
accumulated depreciation at September 30, 1995 and 1996, respectively. Related
obligations are in long-term debt (See Note 9).
Future minimum lease payments under noncancelable leases with remaining terms
of more than one year are due as follows:
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
1997....................................... $ 1,872 $ 43,422
1998....................................... 1,817 38,103
1999....................................... 1,772 31,356
2000....................................... 1,737 26,092
2001....................................... 1,683 19,847
2002 and thereafter........................ 14,319 57,091
-------- --------
Total minimum lease payments............... 23,200 $215,911
========
Amount representing interest and executory
costs..................................... (10,878)
--------
Present value of net minimum lease pay-
ments..................................... $ 12,322
========
Rental expense under operating leases for the years ended September 30, 1994,
1995 and 1996 totaled $46,938,000, $51,090,000 and $61,907,000, respectively.
13. STOCK OPTIONS
Alco has certain Stock Option Plans (the "Plans") under which incentive stock
options and non-qualified stock options may be granted to officers, key
employees and directors of Alco. In connection with the separation of Unisource
from Alco, stock options under the Plans that are not exercised prior to the
effective date of the Spin-Off will be adjusted. Optionholders who remain
employees of Alco will retain their options to purchase Alco shares, while
optionholders who become employees of Unisource after the Spin-Off will be
given the opportunity to receive options to purchase shares of Unisource Common
Stock in lieu of their Alco options. The number of shares subject to, and the
exercise price of, each Alco option that is converted to a Unisource option
will be converted based upon a formula that preserves the inherent economic
value and vesting and term provisions of such Alco options. The Exchange Ratio
and the fair market value of the Unisource Common Stock, upon active trading,
will also impact the number of options issued to Unisource employees. The
number of Alco stock options held by optionholders expected to become Unisource
employees at September 30, 1996 was 1,287,683 with a range of exercise price
from $9.69 to $57.50. The ultimate number of Alco stock options to be held by
Unisource employees at December 13, 1996 and the number and exercise price of
the Unisource stock options to be issued, subject to the above calculation,
cannot yet be determined.
Unisource intends to establish its own Stock Option Plan in order to grant
incentive stock options and non-qualified stock options to officers, key
employees and directors of the Company. This plan will permit Unisource to
determine the option price and other terms and conditions of the options.
F-17
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
The Company is subject to credit risk through trade accounts receivable.
Credit risk with respect to trade accounts receivable is minimized because of a
large customer base and its geographic dispersion.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Interest Rate Swap Agreements
The Company has entered into four interest rate swap agreements with terms
beginning December 2, 1996 and expiring annually through December 1, 2000.
These agreements have a total principal/notional amount of $200,000,000 and
have fixed rates from 6.18% to 6.83%. The Company is required to make payments
to the counterparties at the fixed rates stated in the agreements and in return
the Company receives payments at variable rates (LIBOR), effectively hedging a
portion of the expected borrowings under the variable rate Credit Facility. At
September 30, 1996, these interest rate swap agreements had a fair value of
($1,150,000).
Cash, Notes Payable and Long-Term Receivables
The carrying amounts reported in the balance sheet approximate fair value.
Long-Term Debt
The fair value of long-term debt instruments is estimated using a discounted
cash flow analysis.
The fair value of the Company's long-term debt (excluding capital leases) was
$10,500,000 and $8,550,000 at September 30, 1995 and 1996, respectively as
compared to the carrying amounts of $11,006,000 and $9,615,000, respectively.
15. RESTRUCTURING
On September 29, 1993, the Company adopted a plan to restructure its business
including the following: installation of a customer-focused information system,
redesigning of warehouse and transportation management functions,
regionalization of management and administrative support functions, and
consolidation of service center locations. In connection with certain elements
of the restructuring plan, the Company recorded a pre-tax charge to earnings of
$175,000,000 in the fourth quarter of fiscal 1993. The charge provided for
facility consolidation ($60,700,000), severance costs ($48,000,000), and the
related organizational and system redesign ($22,000,000). The remaining balance
at September 30, 1995 was $39,302,000 which consisted principally of
$17,000,000 for facilities consolidation costs, $10,000,000 for severance
costs, and $6,000,000 for system redesign costs.
In June 1996, the Company recorded a restructuring charge of $50,000,000
associated with the regional realignment from ten to five regions in the United
States and facility mergers in the United States and Canada. The $50,000,000
charge includes facility closure costs of $33,000,000 and severance costs for
approximately 900 employees of $17,000,000. At September 30, 1996, the
remaining restructuring reserves are approximately $29,500,000, which consists
of $14,800,000 for facilities consolidation and $14,700,000 for severance
costs.
16. CONTINGENCIES
There are contingent liabilities for taxes, guarantees, lawsuits,
environmental remediation claims and various other matters occurring in the
ordinary course of business. On the basis of information furnished by counsel
and others, management believes that none of these contingencies will
materially affect the Company.
17. COMMITMENTS
Effective January 1, 1994, the Company entered into an outsourcing agreement
that provided for the information technology system to be implemented as part
of its 1993 restructuring plan. This agreement calls
F-18
UNISOURCE WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for the payment of $300,000,000 over a ten-year period. Supplemental amendments
to the contract for additional services will require additional payments of
$30,000,000 over the remaining contract period expected to extend through
fiscal 2005. At September 30, 1996, the remaining commitment under the
agreement and related amendments is $194,000,000. Included in deferred costs
and other assets is $90,940,000 of costs associated with the information
technology outsourcing agreement, which will be amortized over the remaining
contract life upon implementation of the system. The information technology
system is expected to be fully implemented by the end of fiscal 1999.
18. GEOGRAPHIC INFORMATION
Revenues, income before taxes and identifiable assets by geographic area for
fiscal years ended September 30 are as follows:
1994 1995 1996
-------- -------- --------
(IN MILLIONS)
Revenues
Domestic...................................... $5,107.6 $6,110.5 $6,101.9
Canada........................................ 648.9 804.0 774.0
Other Foreign................................. -- 72.8 146.9
-------- -------- --------
Total....................................... $5,756.5 $6,987.3 $7,022.8
======== ======== ========
Income before taxes and cumulative effect of ac-
counting change
Domestic...................................... $ 113.9 $ 138.3 $ 81.9
Canada........................................ 8.4 32.5 13.2
Other Foreign................................. 1.9 7.9
-------- -------- --------
Total....................................... $ 122.3 $ 172.7 $ 103.0
======== ======== ========
Assets
Domestic...................................... $1,423.5 $1,665.3 $1,804.0
Canada........................................ 296.5 330.3 280.6
Other Foreign................................. 23.4 107.1
-------- -------- --------
Total....................................... $1,720.0 $2,019.0 $2,191.7
======== ======== ========
Included in income before taxes for fiscal 1996 are restructuring costs of
$38,000,000 for domestic operations and $12,000,000 for Canadian operations.
Other foreign consists of operations in Mexico and sales offices in Vienna
and Hong Kong.
19. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Following is a summary of the unaudited interim results of operations for
each quarter in the years ended September 30, 1995 and September 30, 1996.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- ------
(IN MILLIONS)
Year ended September 30,
1995
Revenues................ $1,547 $1,750 $1,833 $1,857 $6,987
Gross profit............ 242 269 274 277 1,062
Net income.............. 20 23 29 33 105
Year Ended September 30,
1996
Revenues................ 1,716 1,747 1,749 1,811 7,023
Gross Profit............ 269 290 292 276 1,127
Net income.............. 26 29 (6)(1) 11 60(1)
- - --------
(1) Includes $50,000,000 restructuring charges; $32,500,000 net of tax.
F-19
INDEX OF INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
DESCRIPTION PAGE
- - ----------- ----
Signature Page............................................................. II-1
Report of Independent Auditors on Schedule................................. II-2
Schedule II................................................................ II-3
Exhibit Index.............................................................. II-4
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed on its behalf
by the undersigned, thereunto duly authorized.
Unisource Worldwide, Inc.
/s/ Ray B. Mundt
By: _________________________________
Name: Ray B. Mundt
Title: Chairman and Chief
Executive Officer
Date: November 26, 1996
II-1
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
To the Board of Directors and Stockholder
Unisource Worldwide, Inc.
We have audited the consolidated financial statements of Unisource Worldwide,
Inc. as of September 30, 1995 and 1996, and for each of the three years in the
period ended September 30, 1996, and have issued our report thereon dated
October 16, 1996, except for notes 1 and 9, as to which the date is November
22, 1996 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule of Valuation and Qualifying Accounts
included in this Registration Statement. This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Philadelphia, Pennsylvania
October 16, 1996
II- 2
UNISOURCE WORLDWIDE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. C
----------------------------
COL. A COL. B ADDITIONS COL. D COL. E
------ ------------ ---------------------------- ------------ --------------
BALANCES AT CHARGED TO CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
----------- ------------ ----------- ---------------- ------------ --------------
YEAR ENDED SEPTEMBER 30,
1994
Allowance for doubtful
accounts............... $15,680,000 $12,855,000 $ 232,000(1) $12,833,000(2) $15,934,000
YEAR ENDED SEPTEMBER 30,
1995
Allowance for doubtful
accounts............... $15,934,000 $12,960,000 $ 187,000(1) $13,309,000(2) $15,772,000
YEAR ENDED SEPTEMBER 30,
1996
Allowance for doubtful
accounts............... $15,772,000 $17,204,000 $4,009,000(1) $17,058,000(2) $19,927,000
- - --------
(1) Represents beginning balances of acquired companies.
(2) Accounts written off during year, net of recoveries.
II-3
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Distribution Agreement between Alco Standard Corporation and Unisource
Worldwide, Inc. and certain of its subsidiaries.
2.2 Form of Rights Agreement (to be in effect upon the effectiveness of
the Spin-Off).
3.1 Form of Restated Certificate of Incorporation, as amended, including
form of amendment to be in effect upon the effectiveness of the Spin-
Off of Unisource Worldwide, Inc.
3.2 Form of Amended and Restated By-laws of Unisource Worldwide, Inc. (to
be in effect upon the effectiveness of the Spin-Off).
10.1 Tax Sharing Agreement between Alco Standard Corporation and Unisource
Worldwide, Inc. and certain of its subsidiaries.
10.2 The Unisource Worldwide, Inc. 1996 Directors' Stock Option Plan.
10.3 The Unisource Worldwide, Inc. Supplemental Employee Retirement Plan.
10.4 Information Technology Services Agreement between Unisource Worldwide,
Inc. and Integrated Systems Solutions Corporation, incorporated by
reference to Alco Standard Corporation Form 10-K for fiscal year ended
1995, Exhibit 10.19 (File No. 1-05964).
10.5 Benefits Agreement between Alco Standard Corporation and Unisource
Worldwide, Inc.
10.6 Long Term Incentive Compensation Plan.
10.7 Partners' Stock Purchase Plan.
10.8 Stock Award Plan.
10.9 1997 Deferred Compensation Plan.
10.10 Credit Agreement among Unisource Worldwide, Inc., Unisource Capital
Corporation, Unisource Canada, Inc., The Chase Manhattan Bank, as
Administrative Agent and the Toronto-Dominion Bank, as Canadian Agent,
Toronto Dominion (Texas), Inc., as Documentation Agent and Chase
Securities Inc., as Arranger.
10.11 Partners' Loan Program.
10.12 Revolving Credit and Acceptance Agreement, dated as of April 21, 1993,
among Alco, Unisource Canada Inc. and The Toronto Dominion Bank, filed
as Exhibit 4.2 to Alco's 1993 Form 10-K, is incorporated herein by
reference. Amendment No. 1 to Revolving Credit and Acceptance
Agreement, filed as Exhibit 4.2 to Alco's 1994 Form 10-K, is
incorporated herein by reference (File No. 1-05964).
10.13 Receivables Purchase Agreement and Guarantee between PCA Paper
Acquisition Inc., Stars Trust, Alco and Bank of Montreal, filed as
Exhibit 4.4 to Alco's 1992 Form 10-K, is incorporated herein by
reference. Amendment dated September 30, 1994 to Receivables Purchase
Agreement, filed as Exhibit 4.4 to Alco's 1994 Form 10-K, is
incorporated herein by reference (File No. 1-05964).
21.0 List of Subsidiaries of Unisource Worldwide, Inc.
II-4