SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1997 or [ ] Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ______ to ______
Commission file number 1-5964
IKON OFFICE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
OHIO 23-0334400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 834, Valley Forge, Pennsylvania 19482
(Address of principal executive offices)
(Zip Code)
(610) 296-8000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
* Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1997.
Common Stock, no par value 132,830,027 shares
<PAGE>
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--June 30, 1997
and September 30, 1996
Consolidated Statements of Income--Three months ended
June 30, 1997 and June 30, 1996 and Nine months ended
June 30, 1997 and June 30, 1996
Consolidated Statements of Cash Flows--Nine months
ended June 30, 1997 and June 30, 1996
Notes to Consolidated Financial Statements--
June 30, 1997
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition and Liquidity
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
<TABLE>
<CAPTION>
June 30 September 30
ASSETS 1997 1996
<S> <C> <C>
Current Assets
Cash $24,664 $46,056
Accounts receivable, net 722,843 513,378
Finance receivables, net 618,579 435,434
Inventories 468,448 350,774
Prepaid expenses 113,068 80,352
Deferred taxes 96,133 83,161
---------- ----------
Total current assets 2,043,735 1,509,155
---------- ----------
Investments and Long-Term Receivables 21,167 48,165
Long-Term Finance Receivables, net 1,220,914 878,324
Equipment on Operating Leases, net 97,630 95,043
Property and Equipment, at cost 416,500 358,234
Less accumulated depreciation 207,624 169,416
---------- ----------
208,876 188,818
---------- ----------
Other Assets
Goodwill 1,319,058 1,087,210
Miscellaneous 144,838 88,679
---------- ----------
1,463,896 1,175,889
---------- ----------
Net Assets of Discontinued Operations 1,489,201
---------- ----------
$5,056,218 $5,384,595
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
<TABLE>
<CAPTION>
June 30 September 30
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Current Liabilities
Current portion of long-term debt $58,784 $62,697
Current portion of long-term debt, finance subsidiaries 375,737 314,000
Notes payable 273,532 186,462
Trade accounts payable 189,502 123,571
Accrued salaries, wages and commissions 100,051 101,632
Deferred revenues 205,580 200,225
Other accrued expenses 242,922 269,400
----------- -----------
Total current liabilities 1,446,108 1,257,987
----------- -----------
Long-Term Debt 491,293 721,923
Long-Term Debt, Finance Subsidiaries 1,289,504 813,026
Deferred Taxes 259,278 191,272
Other Long-Term Liabilities 132,315 144,883
Shareholders' Equity
Series BB conversion preferred stock, no par value:
3,877 depositary shares issued and outstanding 290,170 290,170
Common stock, no par value:
Authorized 300,000 shares
Issued 6/97 -135,705 shares; 9/96 - 131,930 shares 670,908 1,305,413
Retained earnings 559,986 701,771
Foreign currency translation adjustment (2,135) (25,187)
Cost of common shares in treasury: 6/97 - 3,230 shares;
9/96 - 374 shares (81,209) (16,663)
----------- -----------
1,437,720 2,255,504
----------- -----------
$5,056,218 $5,384,595
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Net sales $751,481 $615,245 $2,134,861 $1,715,263
Service and rentals 505,375 403,794 1,439,528 1,152,285
Finance income 59,450 40,086 160,211 107,517
----------- ----------- ----------- -----------
1,316,306 1,059,125 3,734,600 2,975,065
----------- ----------- ----------- -----------
Costs and Expenses
Cost of goods sold 475,897 387,266 1,350,623 1,114,398
Service and rental costs 251,838 194,553 707,288 552,290
Finance interest expense 26,350 17,334 69,731 48,073
Selling and administrative 474,541 372,148 1,320,619 1,022,093
Transformation costs 22,961 5,628 98,494 11,931
----------- ----------- ----------- -----------
1,251,587 976,929 3,546,755 2,748,785
----------- ----------- ----------- -----------
Operating income 64,719 82,196 187,845 226,280
Interest expense 12,089 9,435 31,895 25,942
----------- ----------- ----------- -----------
Income from continuing operations before taxes
and extraordinary loss 52,630 72,761 155,950 200,338
Taxes on income 22,502 29,105 66,548 79,259
----------- ----------- ----------- -----------
Income from continuing operations before
extraordinary loss 30,128 43,656 89,402 121,079
Discontinued operations (20,143) 20,151 34,717
----------- ----------- ----------- -----------
Income before extraordinary loss 30,128 23,513 109,553 155,796
Extraordinary loss from early extinguishment
of debt, net of tax benefit (12,156)
----------- ----------- ----------- -----------
Net Income 30,128 23,513 97,397 155,796
Less: Preferred Dividends 4,885 4,885 14,655 17,434
----------- ----------- ----------- -----------
Available to Common Shareholders $25,243 $18,628 $82,742 $138,362
=========== =========== =========== ===========
Earnings (Loss) Per Share (1)
Continuing Operations $0.19 $0.30 $0.56 $0.82
Discontinued Operations $(0.16) $0.15 $0.28
Extraordinary loss $(0.09)
----------- ----------- ----------- -----------
$0.19 $0.14 $0.62 $1.10
=========== =========== =========== ===========
</TABLE>
(1) See Exhibit 11 for computation of earnings per share.
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
1997 1996
Operating Activities
<S> <C> <C>
Income from continuing operations before extraordinary loss $89,402 $121,079
Additions (deductions) to reconcile income from continuing
operations before extraordinary loss to net cash
provided by operating activities of continuing operations
Depreciation 77,335 58,775
Amortization 34,737 23,571
Provisions for losses on accounts receivable 18,385 12,594
Provision for deferred taxes 58,000 50,817
Writeoff of assets related to transformation 24,183
Changes in operating assets and liabilities, net
of effects from acquisitions and divestitures:
Increase in accounts receivable (175,078) (70,670)
Increase in inventories (105,960) (44,473)
Increase in prepaid expenses (34,241) (61,528)
Increase in accounts payable, deferred
revenues and accrued expenses 7,162 68,869
Miscellaneous 10,453 (3,782)
----------- -----------
Net cash provided by operating activities of continuing operations 4,378 155,252
Net cash provided by operating activities of
discontinued operations 24,174 132,965
----------- -----------
Net cash provided by operating activities 28,552 288,217
Investing activities
Proceeds from the sale of property and equipment 25,878 29,163
Payments made on long-term liabilities (19,501)
Cost of companies acquired, net of cash acquired (128,772) (123,733)
Expenditures for property and equipment (128,630) (85,782)
Purchase of miscellaneous assets (10,585) (15,891)
Finance subsidiaries receivables - additions (1,092,435) (691,842)
Finance subsidiaries receivables - collections 477,994 282,967
----------- -----------
Net cash used in investing activities of continuing operations (876,051) (605,118)
Net cash used in investing activities of discontinued operations (38,058) (237,241)
----------- -----------
Net cash used in investing activities (914,109) (842,359)
Financing activities
Proceeds from short-term borrowings, net 84,210 5,023
Proceeds from issuance of long-term debt 36,662 429,522
Proceeds from option exercises and sale of treasury shares 39,348 46,053
Proceeds from sale of finance subsidiaries lease receivables 77,251 39,571
Proceeds from (payments to) discontinued operations 553,700 (152,427)
Long-term debt repayments (322,971) (100,473)
Finance subsidiaries debt - additions 697,215 439,743
Finance subsidiaries debt - repayments (159,000) (121,232)
Dividends paid (43,978) (68,630)
Purchase of treasury shares (112,154) (59,512)
----------- -----------
Net cash provided by financing activities of continuing operations 850,283 457,638
Net cash provided by financing activities of discontinued operations 13,882 104,276
----------- -----------
Net cash provided by financing activities 864,165 561,914
----------- -----------
Net (decrease) increase in cash (21,392) 7,772
Cash at beginning of year 46,056 66,413
----------- -----------
Cash at end of period $24,664 $74,185
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1996.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Note 2: Debt
On December 16, 1996, the Company entered into a credit agreement
with several banks under which it may borrow up to $400 million. This
multicurrency facility replaces a $500 million credit facility which was due to
expire December 1, 1999 and a $100 million credit facility which was canceled on
December 2, 1996. The reduced credit commitment reflects the spin-off of the
Unisource business which was effective December 31, 1996 (see note 3). The new
agreement, which expires December 15, 2001, includes a facility fee of 8 basis
points per annum on the commitment, based upon the Company's current long-term
debt rating. The agreement provides that loans may be made under either domestic
or Eurocurrency notes at rates computed under a selection of rate formulas
including prime or Eurocurrency rates.
Note 3: Discontinued Operations and Spin-off
On June 19, 1996, the Company announced that it would separate
Unisource Worldwide, Inc. ("Unisource"), its printing and imaging and supply
systems distribution business from IKON Office Solutions, Inc. ("IKON"), its
office solutions business, with each business operating as a stand-alone,
publicly traded company. In order to effect the separation of these businesses,
the Company declared a dividend payable to holders of record of Alco common
stock at the close of business on December 13, 1996 of one share of common
stock, $.001 par value, of Unisource for every two shares of Alco stock owned on
December 13, 1996. The distribution resulted in 100% of the outstanding shares
of Unisource common stock being distributed to Alco shareholders by December 31,
1996. The Company has accounted for Unisource as a discontinued operation for
all periods presented in these financial statements. The Company recorded a
charge against earnings of $50 million in the third quarter of fiscal 1996 for
restructuring activities at Unisource. In addition, an $18 million charge
against earnings was recorded in the third quarter of fiscal 1996 for costs
associated with the disposition of Unisource consisting primarily of investment
banking fees, legal and accounting fees, filing fees and employee termination
costs directly related to the spin-off. Prior year amounts have also been
restated to reflect the allocation of corporate interest and other corporate
expenses to the discontinued operations of the Company.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
Note 3: Discontinued Operations and Spin-off (Continued)
The results of discontinued operations, included in the Company's
results of operations through December 31, 1996, are as follows (in thousands):
Three Months Ended Nine Months Ended
June 30 June 30
1996 1997 1996
Revenues $1,748,732 $1,728,533 $5,211,718
=========== =========== ===========
Income (loss) before taxes
(including $50 million
restructuring charge and
$18 million disposition
charge in 1996) $(23,821) $34,743 $66,574
Tax expense (benefit) (3,678) 14,592 31,857
----------- ----------- -----------
Net income (loss) $(20,143) $20,151 $34,717
=========== =========== ===========
The unusual effective tax rates of 15.4% and 47.9% for the three months
and nine months ended June 30, 1996, respectively, result primarily from the
impact of certain nondeductible components of the disposition charge. Absent
such impact, the estimated effective tax rate for Unisource was approximately
39.5%.
The net carrying value at September 30, 1996 of the assets to be
distributed to shareholders consisted of (in thousands):
Working capital $750,792
Net property and equipment 224,168
Other assets 637,062
Long-term debt and other liabilities (122,821)
-----------
Unisource equity and intercompany debt $1,489,201
===========
In December 1996, Unisource repaid $553.5 million of intercompany debt
outstanding with the Company and the Unisource stock was distributed to Alco
shareholders. Equity of the Company was reduced by $952.3 million, which was the
equity of Unisource at December 31, 1996.
Note 4: Extraordinary Loss on Early Extinguishment of Debt
On December 2, 1996, Unisource borrowed under its new credit facility
to repay $553.5 million of intercompany debt with the Company. The Company
prepaid debt in the amount of $514 million from these funds. Early repayment of
this debt resulted in certain prepayment penalties. Total prepayment penalties
of $18.7 million and related tax benefits of $6.5 million are reflected as an
extraordinary loss on early extinguishment of debt on the Statement of Income
for the nine months ended June 30, 1997.
Note 5: Name Change
At their annual meeting on January 23, 1997, the shareholders voted to
change the name of the Company from Alco Standard Corporation to IKON Office
Solutions, Inc., the name previously used by Alco's remaining operating unit.
The name change was effective immediately and the Company's ticker symbol was
changed from ASN to IKN effective January 27, 1997.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
Note 6: Transformation Costs
At the end of fiscal 1995, the Company announced its transformation
program to change its organization into a more cohesive and efficient network by
building a uniform information technology system and implementing best practices
for critically important management functions throughout the IKON companies. In
March 1997, the Company announced that it was accelerating the transformation
program. As a result, the Company began to separately disclose these costs as a
component of operating expenses on the Statement of Income. The Company expects
to complete the transformation program by the end of fiscal 1998. The
transformation involves a variety of activities which the Company believes will
significantly lower administrative costs and improve margins. These activities
include consolidating purchasing, inventory control, logistics and other
activities into thirteen customer service centers in the U.S., establishing a
single financial processing center, building a common information technology
system, adopting a common name and creating marketplace-focused field operations
with greater attention to customer sales and services. Costs charged to
transformation expense relate principally to the write off of the abandoned SAP
computer platform, severance and other employee related costs, costs related to
consultants assisting with the transformation, facility consolidation costs,
including lease buyouts and write-offs of leasehold improvements, and costs
incurred in connection with the adoption of the IKON name worldwide.
Note 7: Pending Accounting Change
In February 1997, the FASB issued Statement No. 128 (FAS 128),
"Earnings Per Share", which simplifies the standards for computing earnings per
share (EPS). It replaces the presentation of primary EPS with the presentation
of basic and diluted EPS. It also requires dual presentation of basic and
diluted EPS. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not permitted. The
Company does not believe the effect of adoption will be material on EPS
previously presented.
<PAGE>
Item 2: Management's Discussion and Analysis of Results of Operations and
Financial Condition and Liquidity
On June 19, 1996, the Company announced that it would split its two
operating units into independent companies by spinning off Unisource, its paper
and supply systems distribution group, as a separate publicly owned company. The
Company accomplished the transaction through a U.S. tax-free distribution of
Unisource stock to Company shareholders on December 31, 1996. As a result of the
spin off of Unisource, the Company has accounted for Unisource as a discontinued
operation. Continuing operations of the Company consist of IKON, which sells,
rents and leases photocopiers, digital printers and other automated office
equipment for use in both traditional and integrated office environments. IKON
also provides outsourcing and imaging services and offers consulting, design,
computer networking and technology training for the networked office
environment. On January 23, 1997, shareholders of the Company voted to change
the name of the Company from Alco Standard Corporation to IKON Office Solutions,
Inc.
Results of Operations
The discussion of the results of operations reviews the continuing
operations of the Company as contained in the Consolidated Statements of Income.
Three and Nine Months Ended June 30, 1997
Compared with the Three and Nine Months Ended June 30, 1996
Revenues and income before taxes for the third quarter and year-to-date
of fiscal 1997 compared to the third quarter and year-to-date of fiscal 1996
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 % June 30 %
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
(in millions)
REVENUES $1,316 $1,059 24.3% $3,735 $2,975 25.5%
====== ====== ====== ======
INCOME BEFORE TAXES:
Operating income, excluding
transformation costs $87.7 $87.8 (0.1%) $286.3 $238.2 20.2%
Transformation costs (23.0) (5.6) (98.5) (11.9)
------ ----- ----- -----
Operating income 64.7 82.2 187.8 226.3
Interest expense (12.1) (9.4) (31.9) (26.0)
------ ----- ----- -----
$52.6 $72.8 (27.7%) $155.9 $200.3 (22.2%)
===== ===== ====== ======
</TABLE>
THIRD QUARTER:
The Company's third quarter revenues increased $257 million, or 24.3%
over the third quarter of fiscal 1996, of which $153 million relates to current
and prior year acquisitions and $104 million to base companies' internal growth.
The Company's worldwide internal revenue growth was 10% in the third quarter of
fiscal 1997 compared to 12% in the second quarter of fiscal 1997. The internal
revenue growth rate was lower than expected as a result of short-term issues
related to the acceleration of the Company's transformation initiative and its
impact on operations both in the U.S. and U.K. Revenues from the Company's
operations outside the U.S. were $169 million for the third quarter of fiscal
1997 compared to $135 million for the same period of the prior fiscal year. The
Company's European operations accounted for $6 million of the increase, which
consisted of revenue declines in the U.K. of $8 million offset by revenue
increases in other European operations, while Canadian revenues increased $24
million as a result of acquisitions and internal growth in base companies. A
fiscal 1996 Mexican acquisition added $4 million of revenue to the third quarter
of fiscal 1997.
<PAGE>
The Company's operating income decreased by $17.5 million compared to
the prior year's quarter. However, excluding transformation costs, operating
income was essentially flat at $87.7 million for the third quarter of fiscal
1997 compared to $87.8 million in the prior year. Operating income for the third
quarter was lower than expected due to: 1) lower sales productivity in certain
copier marketplaces as a result of the transformation initiative, and 2)
increased operating expenses resulting from the transformation process. Finance
subsidiaries contributed 18.3% of the Company's operating income before
transformation costs in the third quarter of fiscal 1997 compared to 13.3% in
the third quarter of fiscal 1996. The Company's operating margins were 4.9% in
the third quarter of fiscal 1997, compared to 7.8% in fiscal 1996. Excluding
transformation costs, the Company's operating margins were 6.7% in the third
quarter of fiscal 1997, compared to 8.3% in the third quarter of fiscal 1996.
Costs associated with the Company's transformation program increased
$17.3 million in the third quarter of fiscal 1997 compared to the third quarter
of fiscal 1996, primarily relating to employee severance agreements ($5
million), temporary labor ($2 million) and facility consolidations ($5 million).
Operating income from foreign operations was $12.8 million for the
three months ended June 30, 1997, down $.5 million from the prior year's
quarter. European operations posted a $2.0 million decline in operating income
in the third quarter, relating primarily to revenue declines in the U.K., while
Canadian operating income increased $1.4 million and the Mexican operation added
$.1 million of operating income in the third quarter of fiscal 1997. There was
no material effect of foreign currency exchange rate fluctuations on the results
of operations in the third quarter of fiscal 1997 compared to the third quarter
of fiscal 1996.
NINE MONTHS:
The Company's nine month revenues increased $760 million, or 25.5% over
the first nine months of fiscal 1996, of which $408 million relates to current
and prior year acquisitions and $352 million to base companies' internal growth.
The Company's worldwide internal revenue growth was 12% in the first nine months
of fiscal 1997. Revenues from the Company's operations outside the U.S. were
$483 million for the first nine months of fiscal 1997 compared to $393 million
for the same period of the prior fiscal year. The Company's European operations
accounted for $9 million of the increase, which consisted of revenue declines in
the U.K. of $36 million offset by revenue increases in other European
operations, while Canadian revenues increased $71 million as a result of
acquisitions and internal growth in base companies and the fiscal 1996 Mexican
acquisition added $10 million of revenue to the first nine months of fiscal
1997.
Transformation costs increased $86.6 million for the nine months ended
June 30, 1997 compared to the prior year, and was primarily due to the write-off
of costs associated with the SAP computer platform that was abandoned during the
second quarter ($28 million), employee severance agreements ($12 million),
outside consultants ($2 million), temporary labor ($8 million), facility
consolidations ($13 million) and costs incurred in connection with the adoption
of the IKON name worldwide ($10 million).
The Company's operating income decreased by $38.5 million compared to
the prior year's first nine months. Excluding transformation costs, operating
income increased 20.2% in the first nine months of fiscal 1997 to $286.3 million
from $238.2 million in the first nine months of fiscal 1996. Finance
subsidiaries contributed 15.5% of the Company's operating income before
transformation costs in the first nine months of fiscal 1997 compared to 12.2%
in the first nine months of fiscal 1996. The Company's operating margins were
5.0% in the first nine months of fiscal 1997, compared to 7.6% in fiscal 1996.
Excluding transformation costs, operating margins were 7.7% for the first nine
months of fiscal 1997 compared to 8.0% in the first nine months of fiscal 1996.
Operating income from foreign operations was $34.9 million for the nine
months ended June 30, 1997, down $4.3 million from the prior year's first nine
months. European operations posted a $9.0 million decline in operating income in
the first nine months of fiscal 1997, relating primarily to revenue declines in
the U.K. Canadian operating income increased $4.6 million and a fourth quarter
fiscal 1996 Mexican acquisition added $.1 million of operating income. There was
no material effect of foreign currency exchange rate fluctuations on the results
of operations in the first nine months of fiscal 1997 compared to the first nine
months of fiscal 1996.
<PAGE>
Acquisitions
In the third quarter of fiscal 1997, the Company completed 17
acquisitions, bringing total year-to-date acquisitions to 64. Of the 17
companies acquired, seven were outsourcing and imaging companies, four were
systems integration companies and six were traditional copier companies. This
year, as part of its total solutions strategy, IKON has emphasized the
acquisition of systems integration and outsourcing companies to build its
capabilities in these areas.
Other
Interest expense increased $2.7 million in the third quarter of fiscal
1997, and $5.9 million year-to-date. The increased expense is due to higher debt
levels in fiscal 1997 when adjusted for the Unisource intercompany debt
repayment made in December 1996.
Income before taxes decreased by $20.1 million in the third quarter and
$44.4 million year-to-date over the prior year, primarily reflecting the
combined result of internal growth from base companies, along with earnings
contributed by acquisitions, net of increased transformation and interest costs.
The effective income tax rate year-to-date is 42.7% compared with 39.6% for the
comparative period in fiscal 1996.
The Company recorded an extraordinary charge of $12.2 million after tax
in the first quarter of fiscal 1997 relating to its early extinguishment of
certain corporate debt. The Company used the proceeds of a December 2, 1996
$553.5 million intercompany debt repayment from its discontinued operation,
Unisource, to prepay $514 million of corporate debt. The pretax charge of $18.7
million is primarily for prepayment penalties and has a related tax benefit of
$6.5 million.
Earnings per share from continuing operations decreased from $.30 per
share for the third quarter of fiscal 1996 to $.19 per share for the third
quarter of fiscal 1997. Excluding transformation costs, earnings per share from
continuing operations decreased 6.3% from $.32 per share for the third quarter
of fiscal 1996 to $.30 per share in the third quarter of fiscal 1997. Including
a loss from discontinued operations, earnings per share of the Company were $.14
for the third quarter ended June 30, 1996. Year-to-date, earnings per share from
continuing operations, excluding the extraordinary charge, decreased from $.82
per share for the first nine months of fiscal 1996 to $.56 per share for the
first nine months of fiscal 1997. Excluding transformation costs, earnings per
share from continuing operations would have increased 17.0% from $.88 per share
for the first nine months of fiscal 1996 to $1.03 per share for the first nine
months of fiscal 1997. Including the loss per share of $.09 on the extraordinary
charge and the earnings per share of $.15 on discontinued operations, earnings
per share of the Company were $.62 for the nine months ended June 30, 1997
compared to $1.10 (which includes $.28 for discontinued operations) for the nine
months ended June 30, 1996.
Weighted average shares of 133.6 million for the quarter ended June 30,
1997 were 2.6 million shares greater than the 131.0 million for the quarter
ended June 30, 1996, primarily the result of stock issued for acquisitions (6.1
million weighted average shares), net of treasury share repurchases (3.7 million
weighted shares).
<PAGE>
Financial Condition and Liquidity
Net cash provided by operating activities of continuing operations for
the first nine months of fiscal 1997 was $4 million, primarily the result of net
income from continuing operations before the extraordinary loss, plus noncash
charges to income, offset by increases in working capital. During the same
period, the Company used $876 million in cash for investing activities, which
included finance subsidiary activity of $614 million, acquisition activity at a
cash cost of $129 million and capital expenditures of $129 million. Investing
activities were funded primarily through financing activities. Cash provided by
financing activities included $554 million of intercompany debt repaid by
Unisource which was used primarily to prepay corporate debt of the Company and
$538 million of additional net funding for finance subsidiaries. Financing
activities also included $112 million use of cash for the purchase of treasury
shares. Debt, excluding finance subsidiaries, was $824 million at June 30, 1997,
a decrease of $147 million from the continuing operations debt balance at
September 30, 1996 of $971 million. The debt to capital ratio was 36.4% at June
30, 1997 compared to 31.4% at September 30, 1996 and 29.3% at March 31, 1997.
The increased debt to capital ratio at the end of June reflects the effects of
higher working capital, which the Company is currently managing to lower levels
as the transformation proceeds, and the share repurchase program.
On December 16, 1996, the Company entered into a credit agreement with
several banks under which it may borrow up to $400 million. This credit facility
replaces a $500 million credit facility which was due to expire December 1999
and a $100 million credit facility which was canceled on December 2, 1996. The
reduced credit commitment reflects the spin-off of the Unisource business which
was effective December 31, 1996. As of June 30, 1997, short-term borrowings
totaled $256 million, leaving $144 million available under the $400 million
credit facility. The Company also has $450 million available for either stock or
debt offerings under its shelf registration statement filed November 1995.
Finance subsidiaries debt grew by $538 million from September 30, 1996,
a result of increased leasing activity. During the nine months ended June 30,
1997, IKON Capital issued an additional $632 million under its $3.5 billion
medium term notes program which began in July 1994 (including the new shelf
registration filed in May 1997 for $2 billion of medium term notes). At June 30,
1997, $1.5 billion of medium term notes were outstanding with a weighted
interest rate of 6.7%, leaving $1.9 billion available under this program. The
new registration statement has essentially the same provisions as the existing
program. Under its $275 million asset securitization programs, IKON Capital sold
$77.3 million in direct financing leases during the first nine months of fiscal
1997, replacing those leases liquidated and leaving the amount of contracts sold
unchanged.
The Company filed shelf registrations for 10 million shares of common
stock in January 1996 and 5 million shares of common stock in March 1996. A new
shelf registration was filed on April 10, 1997 for an additional 10 million
shares. Shares issued under these registration statements are being used for
acquisitions. Approximately 13.3 million shares have been issued under these
shelf registrations through June 30, 1997, leaving 11.7 million shares available
for issuance.
On April 17, 1997, the Company announced that it may repurchase from
time to time as much as five percent of the outstanding IKON common stock in
open market transactions. Through June 30, 1997, the Company repurchased 4.4
million common shares for $109.7 million. Approximately 2.3 million shares may
still be acquired by the Company in open market transactions under this program.
The Company believes that its operating cash flow together with unused
bank credit facilities and other financing arrangements will be sufficient to
finance current operating requirements including capital expenditures,
acquisitions, dividends, stock repurchases and costs associated with the
Company's transformation program. The Company estimates the total remaining
costs of its transformation program to be from $70 million to $100 million,
excluding capital costs of $90 million to $100 million. Quarterly transformation
costs are expected to be in the range of $5 million to $30 million for the next
five quarters.
<PAGE>
Forward-looking Information
This document contains, and other materials filed or to be filed by the
Company with the Commission which are incorporated by reference herein, as well
as information included in oral statements or other written statements made or
to be made by the Company, contain or will contain or include, disclosures which
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the 1934 Exchange Act.
Such forward-looking statements address, among other things, strategic
initiatives (including plans for enhancing the Company's business through new
acquisitions, information technology systems, sales strategies, market growth
plans, margin enhancement initiatives, capital expenditures and financing
sources). Such forward-looking information is based upon management's current
plans or expectations and is subject to a number of uncertainties and risks that
could significantly affect current plans, anticipated actions and the Company's
future financial condition and results. These uncertainties and risks include,
but are not limited to, those relating to successfully managing an aggressive
program to acquire and integrate new companies, including companies with
technical services and products that are relatively new to the Company, and also
including companies outside the U.S., which present additional risks relating to
international operations; risks and uncertainties relating to conducting
operations in a competitive environment; delays, difficulties, technological
changes, management transitions and employment issues associated with a
large-scale transformation project; debt service requirements (including
sensitivity to fluctuations in interest rates); and general economic conditions.
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 the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. (11) Computations of Earnings per Share
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
On April 18, 1997, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, the earnings for the
fiscal quarter ended March 31, 1997, the announcement of certain
management changes, and the announcement that it may repurchase
from time to time as much as 5 percent of its outstanding shares
in open market transactions.
On April 24, 1997, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, a Press Release stating
that it was unaware of any reason its stock, which recently had
traded down sharply, should be under pressure. The Press Release
also stated that IKON's business is strong and that the Company
knows of no material developments concerning its business or
financial statements which have not been publicly disclosed.
On June 19, 1997, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, a summary description of
its amended Rights Agreement which was adopted as of June 18,
1997, and which amends the previous agreement that was scheduled
to expire on February 10, 1998. A copy of the amended and
restated Rights Agreement dated as of June 18, 1997, was filed as
Exhibit 4.1 on Item 7(c) of the form.
On June 25, 1997, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, a Press Release announcing
that earnings for the third quarter ending June 30, 1997 would be
lower than expected, due to short-term issues related to the
acceleration of its business transformation process.
On July 17, 1997, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, the earnings for the
fiscal quarter ended June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. This report has also been signed by the
undersigned in his capacity as the chief accounting officer of the Registrant.
IKON OFFICE SOLUTIONS, INC.
Date August 12, 1997 /s/ Michael J. Dillon
Michael J. Dillon
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
(11) Computations of Earnings per Share
(27) Financial Data Schedule
EXHIBIT 11
IKON OFFICE SOLUTIONS, INC.
COMPUTATIONS OF EARNINGS PER SHARE
(in thousands, except earnings (loss) per share)
<TABLE>
<CAPTION>
1997 1996
Fully Fully
Primary Diluted(1) Primary Diluted(1)
Three Months June 30
<S> <C> <C> <C> <C>
Average Shares Outstanding
Common shares 132,781 132,781 128,905 128,905
Convertible loan notes 287 373
Options 771 771 2,050 2,067
--------- --------- --------- ---------
Total shares 133,552 133,839 130,955 131,345
========= ========= ========= =========
Income
Continuing Operations $30,128 $30,211 $43,656 $43,733
Discontinued Operations (20,143) (20,143)
--------- --------- --------- ---------
Net income 30,128 30,211 23,513 23,590
Less: Preferred dividends 4,885 4,885 4,885 4,885
--------- --------- --------- ---------
Net income available to common shareholders $25,243 $25,326 $18,628 $18,705
========= ========= ========= =========
Earnings Per Share
Continuing Operations $0.19 $0.19 $0.30 $0.30
Discontinued Operations (0.16) (0.16)
========= ========= ========= =========
Earnings Per Share $0.19 $0.19 $0.14 $0.14
========= ========= ========= =========
Nine Months Ended June 30
Average Shares Outstanding
Common shares 133,410 133,410 124,332 124,332
Preferred stock
Senior Securities 3,202
Convertible loan notes 268 373
Options 1,259 1,319 1,872 1,968
--------- --------- --------- ---------
Total shares 134,669 134,997 126,204 129,875
========= ========= ========= =========
Income
Continuing Operations $89,402 $89,651 $121,079 $121,308
Discontinued Operations 20,151 20,151 34,717 34,717
--------- --------- --------- ---------
Income before extraordinary loss 109,553 109,802 155,796 156,025
Extraordinary loss on extinguishment of debt (12,156) (12,156)
--------- --------- --------- ---------
Net Income 97,397 97,646 155,796 156,025
Less:Preferred Dividends 14,655 14,655 17,434 14,655
--------- --------- --------- ---------
Net income available to common shareholders $82,742 $82,991 $138,362 $141,370
========= ========= ========= =========
Earnings Per Share
Continuing Operations $0.56 $0.56 $0.82 $0.82
Discontinued Operations 0.15 0.15 0.28 $0.27
Extraordinary Loss (0.09) (0.09)
========= ========= ========= =========
Earnings Per Share $0.62 $0.62 $1.10 $1.09
========= ========= ========= =========
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K item 601
(b) (11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of IKON Office Solutions, Inc. and
subsidiaries and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000003370
<NAME> IKON OFFICE SOLUTIONS INC
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 24,644,000
<SECURITIES> 0
<RECEIVABLES> 770,354,000
<ALLOWANCES> 47,551,000
<INVENTORY> 468,448,000
<CURRENT-ASSETS> 2,043,735,000
<PP&E> 681,945,000<F1>
<DEPRECIATION> 375,439,000<F2>
<TOTAL-ASSETS> 5,056,218,000
<CURRENT-LIABILITIES> 1,446,108,000
<BONDS> 1,780,797,000
0
290,170,000
<COMMON> 670,908,000
<OTHER-SE> 476,642,000
<TOTAL-LIABILITY-AND-EQUITY> 5,056,218,000
<SALES> 2,134,861,000
<TOTAL-REVENUES> 3,734,600,000
<CGS> 1,350,623,000
<TOTAL-COSTS> 2,127,642,000<F3>
<OTHER-EXPENSES> 1,419,113,000<F4>
<LOSS-PROVISION> 18,385,000<F5>
<INTEREST-EXPENSE> 31,895,000
<INCOME-PRETAX> 155,950,000
<INCOME-TAX> 66,548,000
<INCOME-CONTINUING> 89,402,000
<DISCONTINUED> 20,151,000
<EXTRAORDINARY> (12,156,000)
<CHANGES> 0
<NET-INCOME> 97,397,000
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
<FN>
<F1>Includes equipment on operating leases, at cost, of $265,445,000
<F2>Includes accumulated depreciation for equipment on operating leases of
$167,815,000
<F3>Includes Finance Subsidiaries interest of $69,731,000
<F4>Represents selling, general and administrative expenses and transformation
costs.
<F5>Continuing operations only.
</FN>
</TABLE>
