SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 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.)
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 April 30, 1997.
Common Stock, no par value 132,519,051 shares
<PAGE>
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--March 31, 1997
and September 30, 1996
Consolidated Statements of Income--Three months ended
March 31, 1997 and March 31, 1996 and Six months ended
March 31, 1997 and March 31, 1996
Consolidated Statements of Cash Flows--Six months ended
March 31, 1997 and March 31, 1996
Notes to Consolidated Financial Statements--
March 31, 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 )
March 31 September 30
ASSETS 1997 1996
Current Assets
Cash $25,427 $46,056
Accounts receivable, net 627,106 513,378
Finance receivables, net 585,646 435,434
Inventories 442,110 350,774
Prepaid expenses 115,683 80,352
Deferred taxes 96,008 83,161
---------- ----------
Total current assets 1,891,980 1,509,155
---------- ----------
Investments and Long-Term Receivables 21,041 48,165
Long-Term Finance Receivables, net 1,107,672 878,324
Equipment on Operating Leases, net 95,820 95,043
Property and Equipment, at cost 394,840 358,234
Less accumulated depreciation 205,367 169,416
---------- ----------
189,473 188,818
---------- ----------
Other Assets
Goodwill 1,274,155 1,087,210
Miscellaneous 142,085 88,679
---------- ----------
1,416,240 1,175,889
---------- ----------
Net Assets of Discontinued Operations 1,489,201
---------- ----------
$4,722,226 $5,384,595
========== ==========
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
<TABLE>
<CAPTION>
March 31 September 30
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Current Liabilities
Current portion of long-term debt $58,637 $62,697
Current portion of long-term debt, finance subsidiaries 393,000 314,000
Notes payable 56,934 186,462
Trade accounts payable 202,415 123,571
Accrued salaries, wages and commissions 86,752 101,632
Deferred revenues 204,624 200,225
Other accrued expenses 286,529 269,400
----------- -----------
Total current liabilities 1,288,891 1,257,987
----------- -----------
Long-Term Debt 500,460 721,923
Long-Term Debt, Finance Subsidiaries 1,085,714 813,026
Deferred Taxes 231,308 191,272
Other long term liabilities 127,784 144,883
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 3/97 -135,684 shares; 9/96 - 131,930 shares 670,687 1,305,413
Retained earnings 534,329 701,771
Foreign currency translation adjustment (2,090) (25,187)
Cost of common shares in treasury: 3/97 - 114 shares;
9/96 - 374 shares (5,027) (16,663)
----------- -----------
1,488,069 2,255,504
----------- -----------
$4,722,226 $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 Six Months Ended
March 31 March 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Net sales $744,552 $585,006 $1,383,380 $1,100,018
Service and rentals 480,293 394,719 934,153 748,491
Finance income 53,015 35,636 100,761 67,431
----------- ----------- ----------- -----------
1,277,860 1,015,361 2,418,294 1,915,940
----------- ----------- ----------- -----------
Costs and Expenses
Cost of goods sold 469,792 393,906 874,726 727,132
Service and rental costs 239,343 188,402 455,450 357,737
Finance interest expense 23,370 15,930 43,381 30,739
Selling and administrative 442,451 336,101 846,078 649,945
Transformation costs 61,190 5,613 75,533 6,303
----------- ----------- ----------- -----------
1,236,146 939,952 2,295,168 1,771,856
----------- ----------- ----------- -----------
Operating income 41,714 75,409 123,126 144,084
Interest expense 11,605 9,167 19,806 16,507
----------- ----------- ----------- -----------
Income from continuing operations before taxes
and extraordinary loss 30,109 66,242 103,320 127,577
Taxes on income 15,494 25,756 44,046 50,154
----------- ----------- ----------- -----------
Income from continuing operations before
extraordinary loss 14,615 40,486 59,274 77,423
Discontinued operations 28,631 20,151 54,860
----------- ----------- ----------- -----------
Income before extraordinary loss 14,615 69,117 79,425 132,283
Extraordinary loss from early extinguishment
of debt, net of tax benefit (12,156)
----------- ----------- ----------- -----------
Net Income 14,615 69,117 67,269 132,283
Less: Preferred Dividends 4,885 4,885 9,770 12,549
----------- ----------- ----------- -----------
Available to Common Shareholders $9,730 $64,232 $57,499 $119,734
=========== =========== =========== ===========
Earnings (Loss) Per Share (1)
Continuing Operations $0.07 $0.28 $0.37 $0.53
Discontinued Operations $0.22 $0.15 $0.44
Extraordinary loss $(0.09)
----------- ----------- ----------- -----------
$0.07 $0.50 $0.43 $0.97
=========== =========== =========== ===========
</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>
Six Months Ended
March 31
1997 1996
Operating Activities
<S> <C> <C>
Income from continuing operations before extraordinary loss $59,274 $77,423
Additions (deductions) to reconcile income from continuing
operations before extraordinary loss to net cash
provided by operating activities of continuing operations
Depreciation 50,418 34,146
Amortization 22,730 15,672
Provisions for losses on accounts receivable 11,339 8,102
Provision for deferred taxes 30,000
Writeoff of assets related to transformation 23,311
Changes in operating assets and liabilities, net
of effects from acquisitions and divestitures:
Increase in accounts receivable (82,394) (53,141)
Increase in inventories (81,428) (39,020)
Increase in prepaid expenses (34,154) (47,958)
Increase in accounts payable, deferred
revenues and accrued expenses 47,907 84,805
Miscellaneous 1,374 (1,434)
--------- ---------
Net cash provided by operating activities of continuing operations 48,377 78,595
Net cash provided by operating activities of
discontinued operations 24,174 63,399
--------- ---------
Net cash provided by operating activities 72,551 141,994
Investing activities
Proceeds from the sale of property and equipment 19,106 16,477
Payments received on long term receivables 4,999 3,748
Payments made on deferred liabilities (13,442)
Cost of companies acquired, net of cash acquired (99,856) (62,814)
Expenditures for property and equipment (77,376) (54,805)
Purchase of miscellaneous assets (9,509) (11,289)
Finance subsidiaries receivables - additions (741,735) (431,671)
Finance subsidiaries receivables - collections 303,913 173,381
--------- ---------
Net cash used in investing activities of continuing operations (613,900) (366,973)
Net cash used in investing activities of discontinued operations (38,058) (165,931)
--------- ---------
Net cash used in investing activities (651,958) (532,904)
Financing activities
Payments of short-term borrowings, net (131,380) (72,977)
Proceeds from issuance of long-term debt 39,878 433,630
Proceeds from option exercises and sale of treasury shares 33,134 34,690
Proceeds from sale of finance subsidiaries lease receivables 51,407 26,454
Proceeds from (payments to) discontinued operations 553,183 (142,952)
Long-term debt repayments (316,784) (81,321)
Finance subsidiaries debt - additions 427,688 254,800
Finance subsidiaries debt - repayments (76,000) (74,402)
Dividends paid (33,815) (45,700)
Purchase of treasury shares (2,415) (53,141)
--------- ---------
Net cash provided by financing activities of continuing operations 544,896 279,081
Net cash provided by financing activities of discontinued operations 13,882 102,532
--------- ---------
Net cash provided by financing activities 558,778 381,613
--------- ---------
Net decrease in cash (20,629) (9,297)
Cash at beginning of year 46,056 66,413
--------- ---------
Cash at end of period $25,427 $57,116
========= =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. As a result of the spin-off of Unisource as discussed in Note
3, prior period amounts have been restated.
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. The agreement was filed as Exhibit 4.1 to
the Company's Form 10-K for the year ended September 30, 1996.
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,
Alco 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. 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.
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 Six Months Ended
March 31 March 31
1996 1997 1996
Revenues $1,746,821 $1,728,533 $3,462,986
========== ========== ==========
Income before taxes $47,113 $34,743 $90,395
Tax expense 18,482 14,592 35,535
---------- ---------- ----------
Net income $28,631 $20,151 $54,860
========== ========== ==========
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
MARCH 31, 1997
Note 3: Discontinued Operations and Spin-off (Continued)
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 six months ended March 31, 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.
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.
<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 Six Months Ended March 31, 1997
Compared with the Three and Six Months Ended March 31, 1996
Revenues and income before taxes for the second quarter and
year-to-date of fiscal 1997 compared to the second quarter and year-to-date of
fiscal 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 % March 31 %
1997 1996 Change 1997 1996 Change
(in millions)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $1,278 $1,015 25.9% $2,418 $1,916 26.2%
====== ====== ====== ======
INCOME BEFORE TAXES:
Operating income, excluding
transformation costs $102.9 $81.0 27.0% $198.6 $150.4 32.0%
Transformation costs (61.2) (5.6) (75.5) (6.3)
------ ----- ------ ------
Operating income 41.7 75.4 123.1 144.1
Interest expense (11.6) (9.2) (19.8) (16.5)
------ ----- ------ ------
$30.1 $66.2 (54.5%) $103.3 $127.6 (19.0%)
===== ===== ====== ======
</TABLE>
SECOND QUARTER:
The Company's second quarter revenues increased $263 million, or 25.9%
over the second quarter of fiscal 1996, of which $147 million relates to current
and prior year acquisitions and $116 million to base companies' internal growth.
The Company's internal revenue growth was 11.5% in the second quarter of fiscal
1997. The results reflect a very strong performance from the Company's
traditional copier business in North America, despite a temporary shortage in
high-end and color copiers and printers from suppliers, net of revenue declines
in the U.K. Revenues from the Company's operations outside the U.S. were $167
million for the second quarter of fiscal 1997 compared to $134 million for the
same period of the prior fiscal year. The Company's European operations
accounted for $1 million of the increase, which consisted of revenue declines in
IKON U.K. of $17 million offset by revenue increases in other European
operations, while Canadian revenues increased $29 million as a result of
acquisitions and internal growth in base companies. A fiscal 1996 Mexican
acquisition added $3 million of revenue to the second quarter of fiscal 1997.
U.K. operations are continuing to recover from an abrupt and untested
consolidation which began in October 1996. Since then, management changes were
made, the organization is being rebuilt, and the Company expects the U.K. to
return to previous run rates within the next 12 months.
<PAGE>
The Company's operating income decreased by $33.7 million compared to
the prior year's quarter. However, excluding transformation costs, operating
income increased 27.0% to $102.9 million from $81.0 million in the prior year.
Finance subsidiaries contributed 13.5% of the Company's operating income before
transformation costs in the second quarter of fiscal 1997 compared to 11.1% in
the second quarter of fiscal 1996. The Company's operating margins were 3.3% in
the second quarter of fiscal 1997, compared to 7.4% in fiscal 1996. Excluding
transformation costs, the Company's operating margins were 8.1% in the second
quarter of fiscal 1997, compared to 8.0% in the second quarter of fiscal 1996.
Costs associated with the Company's transformation program, announced
the end of fiscal 1995, increased significantly in the second quarter of fiscal
1997. Due to the significance of these costs in the second quarter, and the fact
that these costs will be incurred through fiscal 1998, when the transformation
program is expected to be completed, the Company began this quarter to
separately disclose these costs as a component of operating expenses on the
Statement of Income. The increase of $55.6 million in the second quarter of
fiscal 1997 compared to the second quarter of fiscal 1996, was primarily the
result of the write-off of costs associated with the SAP computer platform that
was abandoned during the quarter ($25 million), employee severance agreements
($6 million), outside consultants ($1 million), temporary labor ($3 million),
facility consolidations ($6 million) and costs incurred in connection with the
adoption of the IKON name worldwide ($9 million).
Operating income from foreign operations was $12.1 million for the
three months ended March 31, 1997, down $2.2 million from the prior year's
quarter. European operations posted a $4.3 million decline in operating income
in the second quarter, relating primarily to revenue declines in the U.K. as a
result of its consolidation which began in October 1996, while Canadian
operating income increased $2.2 million and the Mexican operation reported a $.1
million operating loss for the second quarter of fiscal 1997. There was no
material effect of foreign currency exchange rate fluctuations on the results of
operations in the second quarter of fiscal 1997 compared to the second quarter
of fiscal 1996.
SIX MONTHS:
The Company's six month revenues increased $502 million, or 26.2% over
the first six months of fiscal 1996, of which $254 million relates to current
and prior year acquisitions and $248 million to base companies' internal growth.
The Company's internal revenue growth was 13% in the first half of fiscal 1997.
The results reflect a very strong performance from the Company's traditional
copier business in North America with substantial growth in both equipment
placements and copy volume, net of revenue declines in the U.K. Revenues from
the Company's operations outside the U.S. were $314 million for the first six
months of fiscal 1997 compared to $258 million for the same period of the prior
fiscal year. The Company's European operations accounted for $3 million of the
increase, which consisted of revenue declines in IKON U.K. of $29 million offset
by revenue increases in other European operations, while Canadian revenues
increased $47 million as a result of acquisitions and internal growth in base
companies and the fiscal 1996 Mexican acquisition added $6 million of revenue to
the second quarter of fiscal 1997.
Transformation costs increased $69.2 million for the six months ended
March 31, 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 ($7 million),
outside consultants ($2 million), temporary labor ($6 million), facility
consolidations ($7 million) and costs incurred in connection with the adoption
of the IKON name worldwide ($10 million).
The Company's operating income decreased by $21.0 million compared to
the prior year's first half. Excluding transformation costs, operating income
increased 32% in the first half of fiscal 1997 to $198.6 million from $150.4
million in the first half of fiscal 1996. Finance subsidiaries contributed 14.3%
of the Company's operating income in the first half of fiscal 1997 compared to
11.6% in the first half of fiscal 1996. The Company's operating margins were
5.1% in the first six months of fiscal 1997, compared to 7.5% in fiscal 1996.
Excluding transformation costs, operating margins were 8.2% for the first six
months of fiscal 1997 compared to 7.8% in the first six months of fiscal 1996.
<PAGE>
Operating income from foreign operations was $22.1 million for the six
months ended March 31, 1997, down $3.8 million from the prior year's first half.
European operations posted a $7.0 million decline in operating income in the
first six months of fiscal 1997, relating primarily to revenue declines in the
U.K. as a result of its consolidation which began in October 1996, while
Canadian operating income increased $3.2 million. There was no material effect
of foreign currency exchange rate fluctuations on the results of operations in
the first six months of fiscal 1997 compared to the first six months of fiscal
1996.
Acquisitions
In the second quarter of fiscal 1997, the Company completed 24
acquisitions, bringing total year-to-date acquisitions to 47. Of the 24
companies acquired, nine were systems integration companies, six were
outsourcing and imaging companies and nine 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 $2.4 million in the second quarter of fiscal
1997, and $3.3 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 $36.1 million in the second quarter
and $24.3 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 42.6% compared with 39.3% 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 $.28 per
share for the second quarter of fiscal 1996 to $.07 per share for the second
quarter of fiscal 1997. Excluding transformation costs, earnings per share from
continuing operations would have increased 19.4% from $.31 per share for the
second quarter of fiscal 1996 to $.37 per share in the second quarter of fiscal
1997. Including discontinued operations, earnings per share of the Company were
$.50 for the second quarter ended March 31, 1996. Year-to-date, earnings per
share from continuing operations, excluding the extraordinary charge, decreased
from $.53 per share for the first six months of fiscal 1996 to $.37 per share
for the first six months of fiscal 1997. Excluding transformation costs,
earnings per share from continuing operations would have increased 30.4% from
$.56 per share for the first six months of fiscal 1996 to $.73 per share for the
first six 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 $.43 for the six months ended
March 31, 1997 compared to $.97 (which includes $.44 for discontinued
operations) for the six months ended March 31, 1996.
Weighted average shares of 136.3 million for the quarter ended March
31, 1997 were 7.8 million shares greater than the 128.5 million for the quarter
ended March 31, 1996, primarily the result of acquisitions for stock (6.0
million weighted average shares).
<PAGE>
Financial Condition and Liquidity
Net cash provided by operating activities of continuing operations for
the first six months of fiscal 1997 was $48 million. During the same period, the
Company used $614 million in cash for investing activities, which included
finance subsidiary activity of $438 million, acquisition activity at a cash cost
of $100 million and capital expenditures of $77 million. Investing activities
were funded through cash flow from operations and financing activities. Cash
provided by financing activities included $553 million of intercompany debt
repaid by Unisource which was used primarily to prepay corporate debt of the
Company and $352 million of additional funding for finance subsidiaries. Debt,
excluding finance subsidiaries, was $616 million at March 31, 1997, a decrease
of $355 million from the continuing operations debt balance at September 30,
1996 of $971 million. The debt to capital ratio was 29.3% at March 31, 1997
compared to 31.4% at September 30, 1996 and 29.8% at December 31, 1996.
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 March 31, 1997, borrowings under this
agreement totaled $47.3 million, leaving $352.7 million available. 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 $352 million from September 30, 1996,
a result of increased leasing activity. During the six months ended March 31,
1997, IKON Capital issued an additional $385.5 million under its $1.5 billion
medium term notes program which began in July 1994. At March 31, 1997, $1.3
billion of medium term notes were outstanding with a weighted interest rate of
6.7%, leaving $115 million available under this program. IKON Capital intends to
file a new shelf registration in May 1997 for $2 billion of medium term notes.
The new registration statement will have essentially the same provisions as the
existing program. Under its $275 million asset securitization program, IKON
Capital sold $51.4 million in direct financing leases during the first half 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. Shares
issued under these registration statements are being used for acquisitions.
Approximately 11 million shares have been issued under these shelf registrations
through March 31, 1997. A new shelf registration was filed on April 10, 1997 for
an additional 10 million shares to be used for acquisitions.
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.
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 $105 million to $140 million,
excluding capital costs of $90 million to $100 million.
<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 4. Submission of Matters to a Vote of Security Holders
On January 23, 1997, the Company held its annual meeting of shareholders,
at which seven directors were elected to hold office until election of their
successors. The shareholders also voted on a proposal to amend the Amended
Articles of Incorporation of the Company to change the name of the Company from
Alco Standard Corporation to IKON Office Solutions, Inc.
The following sets forth the tabulation of votes with respect to the above
proposals:
Proposals to Elect Directors For Withheld
James R Birle 112,874,379 305,737
Kurt E. Dunkelacker 112,846,880 333,237
William F. Drake, Jr 112,874,775 305,341
Frederick S. Hammer 112,861,193 318,923
Barbara B. Hauptfuhrer 112,853,540 326,576
Richard A. Jalkut 111,957,192 1,222,925
John E. Stuart 112,810,011 370,105
For Against Abstain
Proposal to Amend Articles
of Incorporation to Change Name: 111,377,627 680,696 1,121,793
All proposals were routine; therefore, no broker non-votes were recorded.
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) Computation of Earnings per Share
Exhibit No. (27) Financial Data Schedule.
(b) Reports on Form 8-K
On January 30, 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 December 31, 1996 and the announcement of
the name change from Alco Standard Corporation to IKON Office
Solutions, Inc. which was approved by shareholder vote at the
annual shareholders meeting held January 23, 1997.
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 and 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 23, 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.
<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 May 15, 1997 /s/ Michael J. Dillon
------------ ---------------------
Michael J. Dillon
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
(11) Computation 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 March 31
<S> <C> <C> <C> <C>
Average Shares Outstanding
Common shares 134,797 134,797 126,709 126,709
Preferred stock
Senior Securities 848
Convertible loan notes 287 367
Options 1,461 1,461 1,742 1,941
--------- --------- --------- ---------
Total shares 136,258 136,545 128,451 129,865
========= ========= ========= =========
Income
Continuing Operations $14,615 $14,696 $40,486 $40,562
Discontinued Operations 28,631 28,631
--------- --------- --------- ---------
Net income 14,615 14,696 69,117 69,193
Less: Preferred dividends 4,885 4,885 4,885 4,885
--------- --------- --------- ---------
Net income available to common shareholders $9,730 $9,811 $64,232 $64,308
========= ========= ========= =========
Earnings Per Share
Continuing Operations $0.07 $0.07 $0.28 $0.28
Discontinued Operations 0.22 0.22
========= ========= ========= =========
Earnings Per Share $0.07 $0.07 $0.50 $0.50
========= ========= ========= =========
Six Months Ended March 31
Average Shares Outstanding
Common shares 133,723 133,723 122,054 122,054
Preferred stock
Senior Securities 4,793
Convertible loan notes 259 374
Options 1,503 1,565 1,784 2,054
--------- --------- --------- ---------
Total shares 135,226 135,547 123,838 129,275
========= ========= ========= =========
Income
Continuing Operations $59,274 $59,440 $77,423 $77,575
Discontinued Operations 20,151 20,151 54,860 54,860
--------- --------- --------- ---------
Income before extraordinary loss 79,425 79,591 132,283 132,435
Extraordinary loss on extinguishment of debt (12,156) (12,156)
--------- --------- --------- ---------
Net Income 67,269 67,435 132,283 132,435
Less:Preferred Dividends 9,770 9,770 12,549 9,770
--------- --------- --------- ---------
Net income available to common shareholders $57,499 $57,665 $119,734 $122,665
========= ========= ========= =========
Earnings Per Share
Continuing Operations $0.37 $0.37 $0.53 $0.53
Discontinued Operations 0.15 0.15 0.44 $0.42
Extraordinary Loss (0.09) (0.09)
========= ========= ========= =========
Earnings Per Share $0.43 $0.43 $0.97 $0.95
========= ========= ========= =========
</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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 25,427,000
<SECURITIES> 0
<RECEIVABLES> 671,590,000
<ALLOWANCES> 44,484,000
<INVENTORY> 442,110,000
<CURRENT-ASSETS> 1,891,980,000
<PP&E> 658,464,000<F1>
<DEPRECIATION> 373,171,000<F2>
<TOTAL-ASSETS> 4,722,226,000
<CURRENT-LIABILITIES> 1,288,891,000
<BONDS> 1,586,174,000
<COMMON> 670,687,000
0
290,170,000
<OTHER-SE> 527,212,000
<TOTAL-LIABILITY-AND-EQUITY> 4,722,226,000
<SALES> 1,383,380,000
<TOTAL-REVENUES> 2,418,294,000
<CGS> 874,726,000
<TOTAL-COSTS> 1,373,557,000<F3>
<OTHER-EXPENSES> 921,611,000<F4>
<LOSS-PROVISION> 11,339,000<F5>
<INTEREST-EXPENSE> 19,806,000
<INCOME-PRETAX> 103,320,000
<INCOME-TAX> 44,046,000
<INCOME-CONTINUING> 59,274,000
<DISCONTINUED> 20,151,000
<EXTRAORDINARY> (12,156,000)
<CHANGES> 0
<NET-INCOME> 67,269,000
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
<FN>
<F1>Includes equipment on operating leases, at cost, of $263,624,000
<F2>Includes accumulated depreciations for equipment on operating leases of
$167,804,000
<F3>Includes Finance Subsidiaries interest of $43,381,000
<F4>Represents selling, general and administrative expenses and transformation
costs.
<F5>Continuing operations only.
</FN>
</TABLE>
