UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 1998 or [ ] Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
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 January 31, 1999.
Common Stock, no par value 147,696,695 shares
<PAGE>
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--December 31, 1998
and September 30, 1998
Consolidated Statements of Income--Three months
ended December 31, 1998 and December 31, 1997
Consolidated Statements of Cash Flows--Three months
ended December 31, 1998 and December 31, 1997
Notes to Consolidated Financial Statements--
December 31, 1998
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>
December 31 September 30
ASSETS 1998 1998
------------- -------------
Current Assets
<S> <C> <C>
Cash $ 12,058 $ 963
Accounts receivable, net 765,370 793,934
Finance receivables, net 676,378 827,363
Inventories 417,979 431,837
Prepaid expenses and other current assets 137,088 97,534
Deferred taxes 112,404 112,609
----------- -----------
Total current assets 2,121,277 2,264,240
----------- -----------
Investments and Long-Term Receivables 24,260 25,109
Long-Term Finance Receivables, net 1,522,766 1,565,674
Equipment on Operating Rental, net 110,559 110,891
Property and Equipment, at cost 509,059 499,546
Less accumulated depreciation 249,581 239,440
----------- -----------
259,478 260,106
----------- -----------
Goodwill 1,398,816 1,387,390
Miscellaneous 153,707 149,400
----------- -----------
$ 5,590,863 $ 5,762,810
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 70,017 $ 56,358
Current portion of long-term debt, finance subsidiaries 560,068 726,159
Notes payable 163,943 87,180
Trade accounts payable 197,702 245,520
Accrued salaries, wages and commissions 88,932 115,101
Deferred revenues 202,547 211,824
Other accrued expenses 347,545 326,725
----------- -----------
Total current liabilities 1,630,754 1,768,867
----------- -----------
Long-Term Debt 711,831 712,384
Long-Term Debt, Finance Subsidiaries 1,302,377 1,374,478
Deferred Taxes 335,044 325,488
Other Long-Term Liabilities 155,977 154,305
Shareholders' Equity
Series BB conversion preferred stock, no par value,
9/98 - 3,877 depositary shares issued and outstanding 290,170
Common stock, no par value:
Authorized - 300,000 shares
Issued 12/98 - 147,338 shares; 9/98 - 137,139 shares 983,635 689,195
Retained earnings 474,814 452,051
Accumulated other comprehensive income 31 (473)
Cost of common shares in treasury: 12/98 - 103 shares;
9/98 - 124 shares (3,600) (3,655)
----------- -----------
1,454,880 1,427,288
----------- -----------
$ 5,590,863 $ 5,762,810
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended
December 31
----------------------------
1998 1997
---------- ----------
Revenues
Net sales $ 707,719 $ 728,105
Service and rentals 591,417 575,822
Finance income 97,281 70,330
---------- ----------
1,396,417 1,374,257
---------- ----------
Costs and Expenses
Cost of goods sold 471,746 468,200
Service and rental costs 341,589 332,155
Finance interest expense 32,680 30,746
Selling and administrative 477,255 441,219
Transformation costs 19,519
---------- ----------
1,323,270 1,291,839
---------- ----------
Operating income 73,147 82,418
Interest expense 19,547 17,029
---------- ----------
Income before taxes 53,600 65,389
Income taxes 24,924 28,405
---------- ----------
Net Income 28,676 36,984
Less: Preferred Dividends 4,885
---------- ----------
Available to Common Shareholders $ 28,676 $ 32,099
========== ==========
Basic and Diluted Earnings Per Share $ 0.19 $ 0.24
========== ==========
Cash Dividends Per Share of Common Stock $ 0.04 $ 0.04
========== ==========
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31
---------------------------
1998 1997
---------------------------
Operating Activities
<S> <C> <C>
Net income $ 28,676 $ 36,984
Additions (deductions) to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 34,342 31,617
Amortization 15,105 15,052
Provisions for losses on accounts receivable 10,567 13,188
Provision for deferred taxes 10,000 15,000
Gain on asset securitizations (16,676) (564)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Decrease (increase) in accounts receivable 19,080 (53,763)
Decrease (increase) in inventories 15,058 (95,246)
Increase in prepaid expenses and other current assets (11,966) (15,755)
Decrease in accounts payable, deferred
revenues and accrued expenses (86,295) (42,126)
Miscellaneous 4,551 4,885
--------- ---------
Net cash provided by (used in) operating activities 22,442 (90,728)
Investing activities
Cost of companies acquired, net of cash acquired (15,880) (26,149)
Expenditures for property and equipment (18,328) (30,340)
Expenditures for equipment on operating rental (12,907) (20,578)
Purchase of miscellaneous assets (6,398) (9,969)
Finance subsidiaries receivables - additions (305,843) (344,812)
Finance subsidiaries receivables - collections 221,727 182,808
Proceeds from sale of finance subsidiaries lease receivables 281,135 25,760
--------- ---------
Net cash provided by (used in) investing activities 143,506 (223,280)
Financing activities
Proceeds (payments) of short-term borrowings, net 76,763 (120,958)
Proceeds from issuance of long-term debt 27,162 253,654
Proceeds from option exercises and sale of treasury shares 1,250 5,600
Long-term debt repayments (15,941) (5,071)
Finance subsidiaries debt - additions 2,181 275,328
Finance subsidiaries debt - repayments (240,373) (85,000)
Dividends paid (5,881) (10,240)
Purchase of treasury shares (14) (10)
--------- ---------
Net cash (used in) provided by financing activities (154,853) 313,303
Net increase (decrease) in cash 11,095 (705)
Cash at beginning of year 963 21,341
--------- ---------
Cash at end of period $ 12,058 $ 20,636
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, 1998.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Note 2: Asset Securitization
In addition to the $275 million of asset securitizations in place at
the end of fiscal 1998, in December 1998, the Company's U.S. finance subsidiary
entered into an asset securitization transaction whereby it sold $366.6 million
in direct financing lease receivables for $250 million in cash and a retained
interest in the remainder. The agreement is for an initial three year term with
certain renewal provisions and was structured as a revolving asset
securitization so that as collections reduce previously sold interests in this
new pool of leases, additional leases can be sold up to $250 million. The terms
of the agreement provide that the Company continues to service the lease
portfolio for the securitization provider. At December 31, 1998, the
interest-only strip of $27.9 million related to the sale is included in prepaid
expenses and other current assets and the recourse and servicing obligations of
$8.6 million and $5.5 million, respectively, are included in other accrued
expenses. The retained interest is classified in current finance receivables
($38.5 million) and long-term finance receivables ($71.4 million). The Company
recognized a pretax gain of $14.3 million during the first quarter of fiscal
1999 on this agreement.
Note 3: Transformation Costs
In September 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. The
Company substantially completed the transformation program as of September 30,
1998. The transformation involved a variety of activities that the Company
believes will ultimately lower administrative costs and improve gross margins
through the creation of marketplace-focused field operations with greater
attention to customer sales and service. These activities included 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 common benefit programs. Transformation costs in the first three months of
fiscal 1998 of $19.5 million relate principally to severance and other
employee-related costs, including temporary labor ($14.3 million), facility
consolidation costs, including lease buyouts and write-offs of leasehold
improvements ($3.3 million) and technology conversion costs ($1.9 million). Cash
of $2.7 million was expended during the first quarter of fiscal 1999 reducing
the September 30, 1998 severance and lease buyout accruals to $7.2 million and
$10.2 million, respectively, at December 31, 1998.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
Note 4: Comprehensive Income
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes rules for the reporting and presentation of comprehensive income
and its components. SFAS 130 requires foreign currency translation adjustments,
equity adjustments related to pension liabilities and mark to market adjustments
on retained interests in lease receivables to be included in other comprehensive
income. Equity accounts as of September 30, 1998 have been reclassified to
conform to the requirements of SFAS 130. The adoption of SFAS 130 did not impact
the Company's net income or total shareholders' equity.
Total comprehensive income is as follows (in thousands):
Three Months Ended
December 31
----------------------
1998 1997
---- ----
Net income $28,676 $36,984
Foreign currency translation adjustments (465) 12
Mark to market adjustment, net of tax 969
------- -------
Total comprehensive income $29,180 $36,996
======= =======
Note 5: Conversion of Series BB Preferred Stock
On October 1, 1998, each of the outstanding depositary shares of the
Series BB Preferred Stock automatically converted to 2.4972 shares of common
stock per depositary share, resulting in the issuance of 9,682,143 common
shares. The common stock account increased by $290.2 million to reflect the
conversion. There was no change to total shareholders' equity.
Note 6: Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
<TABLE>
<CAPTION>
For the fiscal quarter ended 12/31/98 12/31/97
Numerator:
<S> <C> <C>
Net income $ 28,676 $ 36,984
Preferred stock dividends 4,885
------------- ------------
Numerator for basic earnings per
share - income available to
common shareholders 28,676 32,099
Effect of dilutive securities:
Convertible loan notes 77
------------- ------------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed conversions $ 28,676 $ 32,176
============= ============
Denominator:
Weighted average shares 146,965 133,729
Contingently issuable shares 1,384
------------- ------------
Denominator for basic earnings per
share - weighted average shares 148,349 133,729
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
Note 6: Earnings Per Share (continued)
Effect of dilutive securities:
Additional contingently issuable shares 522
Employee stock options 36 780
Convertible loan notes 258
------------- ------------
Dilutive potential common shares 558 1,038
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 148,907 134,767
============= ============
Basic earnings per share $0.19 $0.24
===== =====
Diluted earnings per share $0.19 $0.24
===== =====
</TABLE>
Options to purchase 4,945,964 shares of common stock at $8.70 per share
to $62.45 per share were outstanding during the first quarter of fiscal 1999 and
options to purchase 3,034,759 shares of common stock at $28.88 per share to
$61.08 per share were outstanding during the first quarter of fiscal 1998 but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
The Company's Series BB conversion preferred stock is excluded from the
diluted calculation for the quarter ended December 31, 1997 because the effect
of adding 9,682,143 shares and deleting the preferred dividends to reflect
assumed conversion would be antidilutive.
Note 7: Shareholder Lawsuit
The Company and certain current and former principal officers and
employee directors were named as defendants in a series of purported class
action complaints which were purportedly filed on behalf of purchasers of the
Company's common stock. The complaints were filed in the United States District
Court for the Eastern District of Pennsylvania following the issuance of the
Company's August 14, 1998 earnings release. By court order dated November 30,
1998 the Court appointed co-lead counsel. By court order dated December 3, 1998,
all the complaints were consolidated. The consolidated complaint was filed on
December 18, 1998 and alleges that the defendants publicly disseminated a series
of false and misleading statements, including filings with the Securities and
Exchange Commission, concerning the Company's revenue, profitability and
financial condition, in violation of the federal securities law. The plaintiffs
seek to represent a class of persons who purchased or acquired the Company's
common stock between January 24, 1996 and August 14, 1998. The complaint seeks
unspecified compensatory and punitive damages, prejudgment interest, attorneys'
fees and costs. The Company has responded to the complaint and believes that
the allegations contained therein are without merit and that the outcome of the
proceedings will not have a material adverse effect on the financial position or
overall trends in the results of operations of the Company. However, due to the
inherent uncertainties of litigation, the Company cannot predict the ultimate
outcome of these proceedings or the probability of any liability or losses
relating thereto, and, accordingly, no provision has been made for any liability
or loss that may result from the adjudication or settlement of these proceedings
in the financial statements for the first quarter of fiscal 1999. An unfavorable
outcome of these proceedings could have a material adverse impact on the
Company's financial condition and results of operations.
<PAGE>
Item 2: Management's Discussion and Analysis of Results of Operations and
Financial Condition and Liquidity
The Company sells, rents and leases photocopiers, digital printers and
other automated office equipment for use in both traditional and integrated
office environments. The Company also provides outsourcing and imaging services
and offers consulting, design, computer networking and technology training for
the networked office environment.
Results of Operations
The discussion of the results of operations reviews the operations of
the Company as reported in the Consolidated Statements of Income.
Three Months Ended December 31, 1998
Compared with the Three Months Ended December 31, 1997
Results of operations for the first quarter of fiscal 1999 compared to
the first quarter of fiscal 1998 were as follows:
Three Months Ended
December 31 %
1998 1997 Change
(in millions)
REVENUES $ 1,396 $ 1,374 1.6%
======== ========
INCOME BEFORE TAXES:
Operating income, excluding
transformation costs $ 73.1 $ 101.9 (28.3%)
Transformation costs (19.5)
-------- --------
Operating income 73.1 82.4
Interest expense (19.5) (17.0)
-------- --------
$ 53.6 $ 65.4 (18.0%)
======== ========
The Company's first quarter revenues increased $22 million, or 1.6%
over the first quarter of fiscal 1998. The first quarter of fiscal 1999 included
a $14.3 million gain from an asset securitization. Excluding the gain, overall
revenue was essentially flat compared to the first quarter of fiscal 1998. The
flat revenue reflects the elimination of unprofitable revenue streams and a
transition away from low-margin commodity products. Net sales, which includes
equipment revenue, decreased $20 million or 2.8%. Equipment revenue has been
affected by the shift from analog to digital, color and high volume copiers and
the sales activity has been impacted by the transition to a common sales
strategy and a centralized, tighter credit policy. Service and rental revenue
increased $15 million or 2.7%. This increase is lower than in prior periods due
to the closure of several Document Services locations during the first quarter
of fiscal 1999. Finance income increased $13 million, or 17.9%, excluding the
gain, due to the growth in the lease portfolio.
Revenues from the Company's operations outside the U.S. were $198
million for the first quarter of fiscal 1999 compared to $177 million for the
same period of the prior fiscal year. European operations increased $30 million,
due primarily to acquisitions, while Canadian revenues decreased $8 million and
other foreign operations revenue decreased $1 million in the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998. In the first quarter
of fiscal 1999, the Company completed five acquisitions, all in Europe, as the
Company continues to concentrate on its core business in North America.
<PAGE>
The Company's operating income decreased by $9.3 million compared to
the prior year's quarter. Excluding transformation costs in fiscal 1998 and the
gain from the asset securitization in fiscal 1999, operating income decreased
$43.1 million to $58.8 million for the first quarter of fiscal 1999 compared to
$101.9 million in the prior year. Gross margins in the first quarter of fiscal
1999, excluding the gain, were 38.8% compared to 39.5% in the prior year.
However, gross margins in the first quarter of fiscal 1999 are higher than the
34.3% in the fourth quarter of fiscal 1998. The improvement reflects greater
profitability in both equipment and service sales, due to the elimination of
inappropriate discounting, an increased focus on controlling services costs and
the turnaround in underperforming units compared to the fourth quarter of fiscal
1998. Selling and administrative expense as a percent of revenue was 34.5% in
the first quarter of fiscal 1999 compared to 32.1% in the first quarter of
fiscal 1998. Selling and administrative expense as a percent of revenue was
essentially flat compared to the fourth quarter of fiscal 1998, adjusted for the
special charges in that quarter of $40.4 million. This is due in part to the
lower revenue levels and to the lag in the benefits of cost cutting programs.
The Company has made strides in the first quarter of fiscal 1999 in workforce
reductions and facility closures and expects to see benefits in future quarters.
Costs associated with the Company's transformation program were $19.5
million in the first quarter of fiscal 1998. Severance and other employee costs
were $14.3 million, facility consolidation costs were $3.3 million and
technology conversion costs were $1.9 million. The transformation is essentially
complete and there are no significant transformation expenses in fiscal 1999.
Operating income from foreign operations was $3.6 million for the first
quarter of fiscal 1999, down $9 million from $12.6 million for the first quarter
of fiscal 1998. European operations decreased $1.7 million in the first quarter,
while Canadian operating income decreased $6.6 million. Other foreign operations
decreased $.7 million in the first quarter of fiscal 1999. There was no material
effect of foreign currency exchange rate fluctuations on the results of
operations in the first quarter of fiscal 1999 compared to the first quarter of
fiscal 1998.
Interest expense increased $2.5 million in the first quarter of fiscal
1999. The increased expense is due to higher debt levels and slightly higher
interest rates than in the first quarter of fiscal 1998.
Income before taxes decreased by $11.8 million in the first quarter as
a result of decreasing gross margins, increasing selling and administrative
expenses and increasing interest expense, offset by no transformation expense in
the first quarter of fiscal 1999. The effective income tax rate for the first
quarter of fiscal 1999 is 46.5% compared to 43.4% for the comparable period in
fiscal 1998. The increase in the effective tax rate is due to the effect of a
lower pretax income on non-tax-deductible items, primarily goodwill
amortization.
Diluted earnings per common share decreased from $.24 per share for the
first quarter of fiscal 1998 to $.19 per share for the first quarter of fiscal
1999. Excluding the after-tax gain on the asset securitization that was
completed in December 1998, diluted earnings per common share were $.13 in the
first quarter of fiscal 1999 and, excluding transformation costs, diluted
earnings per common share were $.33 per share in the first quarter of fiscal
1998. Diluted weighted average shares increased 14.1 million as a result of the
conversion of the Series BB preferred stock on October 1, 1998 (9.7 million
weighted shares) and the full period impact of 1998 common share issuances
related to acquisitions (4.7 million weighted shares).
<PAGE>
Impact of Year 2000
State of Readiness. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded technology (non-IT systems) may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The potential
for a problem exists with all computer hardware and software, as well as in
products with embedded technology: copiers and fax machines; security and HVAC
systems; voice/telephony systems; elevators, etc.
The Company has appointed a Year 2000 Corporate Compliance Team, which
has prepared an international compliance program for the Company and is
responsible for coordinating and inspecting compliance activities in all
business units. The compliance program requires all business units and locations
in every country to inventory potentially affected systems and products, assess
risk, take any required corrective actions, test and certify compliance. The
Company's Year 2000 Testing and Certification Guidelines delineate the Year 2000
compliance process, testing and quality assurance guidelines, certification and
reporting processes and contingency planning. An independent consulting company
has reviewed the compliance program and any appropriate recommendations have
been implemented. All internal IT systems and non-IT systems have been
inventoried. Risk assessment and testing plans are 23% complete, remediation is
16% complete, testing and validation are 14% complete and implementation is 12%
complete. The Company anticipates completing all phases of the Year 2000 project
no later than October 31, 1999, which is prior to any anticipated material
impact on its operating systems.
Product warranties and certifications are being sought from vendors and
suppliers. The Company has obtained "Year 2000 Statements" from national vendors
including Canon, Oce, Ricoh and Sharp.
Costs. The Company will use both internal and external resources to
reprogram or replace, test and implement its IT and non-IT systems for Year 2000
modifications. The Company does not separately track the internal costs incurred
on the Year 2000 project. Such costs are principally payroll and related costs
for its internal IT personnel. The total cost of the Year 2000 project,
excluding these internal costs, is estimated at $11.4 million and is being
funded through operating cash flows. Of the total estimated project cost,
approximately $2.4 million is attributable to the purchase of new software which
will be capitalized. The remaining $9.0 million will be expensed as incurred. To
date, the Company has incurred approximately $1.8 million ($1.5 million expensed
and $291,000 capitalized), related to its Year 2000 project.
Risks. Management believes, based on the information currently available to
it, that the most reasonably likely worse case scenario that could be caused by
technology failures relating to the Year 2000 could pose a significant threat
not only to IKON, its customers and suppliers, but to all businesses. Risks
include:
o Legal risks, including customer, supplier, employee or shareholder lawsuits
over failure to deliver contracted services, product failure, or health and
safety issues.
o Loss of sales due to failure to meet customer quality expectations or
inability to ship products.
o Increased operational costs due to manual processing, data corruption or
disaster recovery.
o Inability to bill or invoice.
The Company has taken steps to limit the scope of product and service
warranties to customers to either the replacement of noncompliant products or to
reimbursement of the cost of the product or service provided. With respect to
products sold by the Company prior to the inclusion of such limited warranties,
differing interpretations of the warranties included with such products will
likely result in litigation against the Company. The Company is not able to
assess the impact of such potential litigation at this time.
<PAGE>
The Company is engaged in the provision of certain Year 2000 services to
customers, whereby the Company evaluates the Year 2000 compliance of customers'
software and hardware, and works with customers to find solutions to Year 2000
problems. The Company has taken steps to limit its warranties with respect to
the Company's provision of such services.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based in management's best estimates,
which were derived using numerous assumptions of future events, including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Contingency Plans. The Company's Guidelines require that contingency plans
be developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. Contingency plans are
currently being developed and are approximately 29% complete at this time. The
Company expects to have its contingency plans in place by October 31, 1999. In
addition, the Company is forming a rapid response team as part of its IT group
that will respond to any operational problems during the Year 2000 date change
period.
Financial Condition and Liquidity
Net cash provided by operating activities for the first quarter of
fiscal 1999 was $22 million. During the same period, the Company generated $144
million in cash from investing activities, which included net finance subsidiary
activity of $197 million, less acquisition activity at a cash cost of $16
million, capital expenditures for property and equipment of $18 million and
capital expenditures for equipment on operating rental of $13 million. Cash used
in financing activities includes $88 million net increase in corporate debt,
excluding the effects of acquisitions, and $238 million decrease in finance
subsidiaries debt. Debt, excluding finance subsidiaries, was $946 million at
December 31, 1998, an increase of $90 million from the debt balance at September
30, 1998 of $856 million. The debt to capital ratio, excluding finance
subsidiaries, was 39.4% at December 31, 1998 compared to 37.5% at September 30,
1998. The Company continues to focus on goals to reduce working capital and
related debt levels.
As of December 31, 1998, short-term borrowings supported by a $600
million credit agreement totaled $149 million. The Company also has $700 million
available for either stock or debt offerings under its shelf registration
statement.
Finance subsidiaries debt decreased by $238 million from September 30,
1998, as a result of payments on medium term notes and bank borrowings. During
the three months ended December 31, 1998, the U.S. finance subsidiary repaid
$135 million of its medium term notes and $100 million of bank debt. No new
notes were issued. At December 31, 1998, $1.7 billion of medium term notes were
outstanding with a weighted interest rate of 6.5%, while $1.1 billion remains
available under this program. In December 1998, the U.S. finance subsidiary
entered into a new asset securitization agreement under which it received cash
of $250 million. Under its previously existing $275 million asset securitization
programs, the U.S. finance subsidiary sold $31 million in direct financing
leases during the first quarter of fiscal 1999, replacing those leases
liquidated and leaving the amount of contracts sold unchanged. No additional
leases were sold under the Canadian CN$175 million asset securitization
agreement during the first quarter of fiscal 1999.
The Company filed a shelf registration for 10 million shares of common
stock in April 1997. Shares issued under the registration statement are being
used for acquisitions. Approximately 2.3 million shares have been issued under
this shelf registration through December 31, 1998, leaving 7.7 million shares
available for issuance.
<PAGE>
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 fiscal 1998, the Company repurchased 4.6
million common shares for $113 million 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 the remaining accrued costs
associated with the Company's transformation program.
Forward-Looking Information
This document includes or incorporates by reference information which
may constitute forward-looking statements within the meaning of the federal
securities laws. Although the Company believes the expectations contained in
such forward-looking statements are reasonable, no assurances can be given that
such expectations will prove correct. 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 the integration of acquired companies, including companies
with technical services and products that are relatively new to the Company, and
also including companies outside the United States, 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 consolidation of business operations; risks and uncertainties associated
with the implementation of a preferred vendor porgram; risks and uncertainties
relating to potential year 2000 deficiencies associated with the operation of
IKON's internal systems and distributed products; 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 materially 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. (27) Financial Data Schedule
(b) Reports on Form 8-K
On November 5, 1998, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, information contained in its
press release dated November 4, 1998 concerning earnings for the
fiscal quarter and year ended September 30, 1998.
On January 26, 1999, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, its press release dated
January 19, 1999, indicating that the Company anticipated first
quarter earnings to exceed the First Call consensus estimate of
$.05 per share for the quarter ending December 31, 1998 and that
based on preliminary results, the Company expects earnings per
share for the quarter to be in the range of $.12 to $.15, excluding
a gain from asset securitization of $.04 to $.06 per share and that
revenues for the quarter are expected to be in the range of $1.36
billion to $1.39 billion, excluding the gain from the asset
securitization of $12 million to $16 million. The Company also
stated that, based on a single quarter of performance and the
balance of the initiatives being rolled out, it would not adjust
its full-year earnings expectation at this time and that the
Company's complete first quarter earnings report will be released
on January 27, 1999.
On February 5, 1999, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, information contained in its
press release dated January 27, 1999 concerning earnings for the
first quarter ended December 31, 1998.
<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 February 12, 1999 /s/ Michael J. Dillon
-------------------------- ------------------------------------
Michael J. Dillon
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
(27) Financial Data Schedule
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 12,058,000
<SECURITIES> 0
<RECEIVABLES> 829,411,000
<ALLOWANCES> 64,041,000
<INVENTORY> 417,979,000
<CURRENT-ASSETS> 2,121,277,000
<PP&E> 783,538,000<F1>
<DEPRECIATION> 413,501,000<F2>
<TOTAL-ASSETS> 5,590,863,000
<CURRENT-LIABILITIES> 1,630,754,000
<BONDS> 2,014,208,000
<COMMON> 983,635,000
0
0
<OTHER-SE> 471,245,000
<TOTAL-LIABILITY-AND-EQUITY> 5,590,863,000
<SALES> 707,719,000
<TOTAL-REVENUES> 1,396,417,000
<CGS> 471,746,000
<TOTAL-COSTS> 846,015,000<F3>
<OTHER-EXPENSES> 477,255,000<F4>
<LOSS-PROVISION> 10,567,000
<INTEREST-EXPENSE> 19,547,000
<INCOME-PRETAX> 53,600,000
<INCOME-TAX> 24,924,000
<INCOME-CONTINUING> 28,676,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,676,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<FN>
<F1> Includes equipment on operating leases, at cost, of $274,479,000.
<F2> Includes accumulated depreciation for equipment on operating leases of
$163,920,000.
<F3> Includes Finance Subsidiaries interest of $32,680,000.
<F4> Represents selling, general and administrative expenses.
</FN>
</TABLE>
