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 June 30, 2000 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
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IKON OFFICE SOLUTIONS, INC.
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(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
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(Address of principal executive offices)
(Zip Code)
(610) 296-8000
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(Registrant's telephone number, including area code)
NONE
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(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 corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 8, 2000.
Common Stock, no par value 145,856,349 shares
<PAGE>
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets--June 30, 2000
(unaudited) and September 30, 1999
Consolidated Statements of Income--Three and nine
months ended June 30, 2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows--Nine months
ended June 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements--
June 30, 2000 (unaudited)
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition and Liquidity
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
----------
<PAGE>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
ASSETS (unaudited)
------ -------------- --------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 49,213 $ 3,386
Restricted cash 89,179 29,625
Accounts receivable, less allowances of: June 30, 2000 -
$43,613; September 30, 1999 - $43,543 716,105 725,308
Finance receivables, net 1,073,152 887,396
Inventories 387,423 338,947
Prepaid expenses and other current assets 108,017 111,386
Deferred taxes 138,657 137,853
-------------- --------------
Total current assets 2,561,746 2,233,901
-------------- --------------
Long-Term Finance Receivables, net 2,022,519 1,677,230
Equipment on Operating Rental, net 73,987 87,496
Property and Equipment, at cost 535,169 535,304
Less accumulated depreciation 295,446 275,489
-------------- --------------
239,723 259,815
-------------- --------------
Goodwill, net 1,327,224 1,385,295
Other assets 150,399 157,576
-------------- --------------
$ 6,375,598 $ 5,801,313
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current portion of long-term debt $ 124,326 $ 95,262
Current portion of long-term debt, finance subsidiaries 1,405,201 974,033
Notes payable 267,315 44,968
Trade accounts payable 206,090 169,763
Accrued salaries, wages and commissions 116,673 128,501
Accrued shareholder litigation settlement 475 117,652
Deferred revenues 198,143 205,654
Other accrued expenses 303,589 311,758
-------------- --------------
Total current liabilities 2,621,812 2,047,591
-------------- --------------
Long-Term Debt 656,510 718,814
Long-Term Debt, Finance Subsidiaries 1,060,824 1,029,176
Deferred Taxes 416,579 375,007
Other Long-Term Liabilities 174,914 170,185
Shareholders' Equity
Common stock, no par value
Authorized - 300,000 shares
Issued: June 30, 2000 - 149,310 shares;
September 30, 1999 - 149,271 shares 1,015,702 1,008,392
Unearned compensation (7,782) (5,513)
Retained earnings 456,348 464,150
Accumulated other comprehensive loss (7,322) (4,922)
Common shares in treasury, at cost: June 30, 2000 -
2,124 shares; September 30, 1999 - 53 shares (11,987) (1,567)
-------------- --------------
1,444,959 1,460,540
-------------- --------------
$ 6,375,598 $ 5,801,313
============== ==============
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
Revenues
<S> <C> <C> <C> <C>
Net sales $ 740,959 $ 719,047 $2,137,370 $2,146,828
Service and rentals 583,524 595,573 1,737,774 1,782,494
Finance income 92,922 70,847 255,089 225,212
------------ ------------ ----------- -----------
1,417,405 1,385,467 4,130,233 4,154,534
------------ ------------ ----------- -----------
Costs and Expenses
Cost of goods sold 503,809 500,614 1,438,975 1,464,723
Service and rental costs 349,438 338,498 1,048,707 1,031,211
Finance interest expense 43,889 30,553 122,849 92,539
Selling and administrative 451,797 447,785 1,314,579 1,370,636
Asset impairment charge 51,548
Restructuring charge 53,792
------------ ------------ ----------- -----------
1,348,933 1,317,450 4,030,450 3,959,109
------------ ------------ ----------- -----------
Operating income 68,472 68,017 99,783 195,425
Gain on sale of investment 3,288 3,288
Interest expense 18,314 17,031 51,934 55,573
------------ ------------ ----------- -----------
Income before income tax expense and extraordinary gain 53,446 50,986 51,137 139,852
Income tax expense 23,525 23,708 41,999 61,031
------------ ------------ ----------- -----------
Income before extraordinary gain 29,921 27,278 9,138 78,821
Extraordinary gain from early extinguishment of
debt, net of tax of $1,342 1,707 1,707
------------ ------------ ----------- -----------
Net income $ 31,628 $ 27,278 $ 10,845 $ 78,821
============ ============ =========== ===========
Basic and Diluted Earnings Per Common Share $ 0.21 $ 0.18 $ 0.07 $ 0.53
============ ============ =========== ===========
Cash Dividends Per Common Share $ 0.04 $ 0.04 $ 0.12 $ 0.12
============ ============ =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended
June 30,
------------------------------
2000 1999
------------- -------------
Cash flows from operating activities
<S> <C> <C>
Net income $ 10,845 $ 78,821
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 98,855 103,040
Amortization 47,929 45,543
Provisions for losses on accounts receivable 20,007 25,743
Provision for deferred income taxes 35,435 32,000
Provision for lease default reserves 47,579 50,061
Gain on asset securitizations (73) (25,360)
Extraordinary gain from early extinguishment of debt (3,049)
Gain on sale of investment (3,288)
Asset impairment and restructuring charge 105,340
Changes in operating assets and liabilities, net
of effects from acquisitions:
(Increase) decrease in accounts receivable (31,923) 16,448
(Increase) decrease in inventories (51,570) 49,825
(Increase) decrease in prepaid expenses and other current assets (1,872) 3,909
Decrease in accounts payable, deferred
revenues and accrued expenses (16,032) (84,249)
Decrease in accrued shareholder litigation settlement (117,177)
Decrease in accrued restructuring (18,017)
Other 17,931 17,383
------------- -------------
Net cash provided by operating activities 140,920 313,164
------------- -------------
Cash flows from investing activities
Proceeds from the sale of property and equipment 8,363 14,644
Proceeds from the sale of property and equipment on operating leases 11,702 13,979
Proceeds from sale of investment 3,516
Cost of companies acquired, net of cash acquired (3,745) (24,419)
Expenditures for property and equipment (70,996) (72,617)
Expenditures for property and equipment on operating leases (31,550) (42,249)
Purchase of miscellaneous assets (2,595) (2,934)
Finance receivables - additions (1,427,765) (1,031,412)
Finance receivables - collections 1,091,314 694,289
Proceeds from sale of finance subsidiaries' lease receivables 25,603 399,446
Repurchase of finance subsidiary's lease receivables (275,000) (250,000)
------------- -------------
Net cash used in investing activities (671,153) (301,273)
------------- -------------
Cash flows from financing activities
Short-term borrowings (repayments), net 223,963 (85,013)
Proceeds from issuance of long-term debt 8,459 85,550
Long-term debt repayments (30,955) (48,573)
Finance subsidiaries' debt - issuances 1,633,662 866,159
Finance subsidiaries' debt - repayments (1,169,850) (665,795)
Dividends paid (17,896) (17,743)
Deposit to restricted cash (59,554) (33,433)
Proceeds from option exercises and sale of treasury shares 206 4,803
Purchase of treasury shares (11,975) (168)
------------- -------------
Net cash provided by financing activities 576,060 105,787
------------- -------------
Net increase in cash and cash equivalents 45,827 117,678
Cash and cash equivalents at beginning of year 3,386 963
------------- -------------
Cash and cash equivalents at end of period $ 49,213 $ 118,641
============= =============
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
Note 1: Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements of IKON
Office Solutions, Inc. and subsidiaries (the "Company", "we", or "our") 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 adjustments) 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/A for the year ended September 30, 1999. Certain prior year amounts have
been reclassified to conform with the current year presentation.
Note 2: Restructuring and Asset Impairment Charge
-----------------------------------------
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and asset
impairment charge (the "charge") of $105,340 ($78,479 after-tax, or $0.52 per
share on a basic and diluted basis). These actions address under-performance in
certain Technology Services, Business Document Services, and Business
Information Services locations; as well as the Company's desire to strategically
position these businesses for integration and profitable growth. Plans include
consolidating or disposing of certain under-performing and non-core locations;
implementing productivity enhancements through the consolidation and
centralization of activities in inventory management, purchasing,
finance/accounting and other administrative functions; and consolidating real
estate through the co-location of business units as well as the disposition of
unproductive real estate. Savings from the above programs are anticipated to be
approximately $15,000 in fiscal 2000 and approximately $45,000 on an annualized
basis beginning in fiscal 2001.
The pre-tax components of the charge are as follows:
Type of Charge
Restructuring Charge:
Severance $ 16,389
Contractual Commitments 37,403
--------
Total Restructuring Charge 53,792
--------
Asset Impairment Charge:
Fixed Assets 12,668
Goodwill and Intangibles 38,880
--------
Total Asset Impairment Charge 51,548
--------
Total Charge $105,340
========
The severance charge relates to the elimination of approximately 1,900
positions, while the charge for contractual commitments relates to lease
commitments where the Company is exiting certain locations and/or businesses and
which are expected to be paid over the next 9 years.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company commenced several actions specified under these initiatives in the
first quarter of fiscal 2000, which continued through the third quarter. The
following presents a reconciliation of the original components of the pre-tax
restructuring charge to the balance remaining at June 30, 2000, which is
included in other accrued expenses on the balance sheet:
Balance Balance
September 30, Provision Payments June 30,
1999 Fiscal 2000 Fiscal 2000 2000
-------- ------- ------- -------
Severance $ -- $16,389 $ 7,593 $ 8,796
Contractual Commitments -- 37,403 10,424 26,979
-------- ------- ------- -------
Total $ -- $53,792 $18,017 $35,775
======== ======= ======= =======
During the first nine months of fiscal 2000, approximately 848 employees were
terminated and left the Company and 18 facilities were closed.
Note 3: Asset Securitization Conduit Financing
--------------------------------------
On December 9, 1999, our U.S. finance subsidiary, IOS Capital, Inc. ("IOSC")
pledged or transferred $311,382 in financing lease receivables for $247,600 in
cash in connection with its revolving asset securitization, in a transfer
accounted for as a financing. On January 20, 2000, IOSC pledged or transferred
$2,860 in financing lease receivables for $2,400 in cash in connection with its
revolving asset securitization, in a transfer accounted for as a financing. IOSC
repaid $250,000 on June 2, 2000 when it issued the 2000-1 Notes described below.
On June 30, 2000, IOSC pledged or transferred $98,907 in financing lease
receivables for $83,000 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing. As of June 30, 2000,
IOSC had approximately $167,000 available under its revolving asset
securitization agreement.
IOSC had additional asset securitization agreements for $275,000 of eligible
direct financing receivables. These agreements were also structured as revolving
securitizations, whereby additional leases can be sold as collections reduce the
previously sold interests. During fiscal 1999, collections reduced previously
sold interests on asset securitization agreements by $152,098. IOSC sold an
additional $152,098 in net eligible direct financing receivables and recognized
pretax gains of $12,200 for fiscal year 1999. On October 7, 1999, these leases
were repurchased with a portion of the proceeds received from the issuance of
$699,595 of lease-backed notes.
Note 4: Lease-Backed Notes
-----------------
In addition to the $622,948 of lease-backed notes (the "1999-1 Notes")
outstanding at September 30, 1999, on October 7, 1999, IKON Receivables, LLC (a
consolidated affiliate of the Company) publicly issued $699,595 of lease-backed
notes (the "1999-2 Notes") under its $1,825,000 shelf registration statement
filed May 7, 1999 with the Securities and Exchange Commission. Class A-1 Notes
totaling $235,326 have a stated interest rate of 6.14125%, Class A-2 Notes
totaling $51,100 have a stated interest rate of 6.31%, Class A-3a Notes totaling
$100,000 have a stated interest rate of 6.59%, Class A-3b Notes totaling
$240,891 have a variable interest rate and Class A-4 Notes totaling $72,278 have
a stated interest rate of 6.88%. The Class A-3b Notes pay interest at a rate of
1-month LIBOR plus 0.36% (which has been fixed at 6.63% through an interest rate
swap).
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4: Lease-Backed Notes (continued)
-----------------------------
The 1999-1 and 1999-2 Notes are secured by a pool of office equipment leases or
contracts and related assets ("the 1999-1 and 1999-2 Asset Pools") and the
payments on the 1999-1 and 1999-2 Notes are made from payments received on the
leases. The Company received approximately $697,000 in net proceeds from the
sale of the 1999-2 Notes and used $275,000 of that amount to repurchase
previously sold leases. The repurchased leases were contributed as part of the
1999-2 Asset Pool.
On June 2, 2000, IKON Receivables, LLC publicly issued $498,510 of lease-backed
notes (the "2000-1 Notes") under a $2,000,000 shelf registration statement filed
in May 2000 (which incorporated the unused portion of the $1,825,000 shelf
registration statement filed May 7, 1999) with the Securities and Exchange
Commission. Class A-1 Notes totaling $130,000 have a stated interest rate of
6.99625%, Class A-2 Notes totaling $54,000 have a stated interest rate of 7.51%,
Class A-3 Notes totaling $230,000 have a variable interest rate, and Class A-4
Notes totaling $84,510 have a variable interest rate. The Class A-3 Notes pay
interest at a rate of 1-month LIBOR plus 0.19% (which has been fixed at 7.802%
through an interest rate swap) and the Class A-4 Notes pay interest at a rate of
1-month LIBOR plus 0.23% (which has been fixed at 7.82% through an interest rate
swap). The transaction was structured the same as the 1999-1 Notes and the
1999-2 Notes described above. The Notes are secured by a pool of office
equipment leases or contracts and related assets ("the 2000-1 Asset Pool") and
the payments on the Notes are made from payments received on the leases. The
Company received approximately $497,000 in net proceeds from the sale of the
2000-1 Notes and used $250,000 of that amount to repurchase previously sold
leases. The repurchased leases were contributed as part of the 2000-1 asset
pool. As of June 30, 2000, IKON Receivables, LLC had approximately $1,501,000
available under the $2,000,000 shelf registration statement.
Restricted cash on the balance sheet represents cash that has been collected on
the lease receivables in the 1999-1, 1999-2 and 2000-1 Asset Pools, which must
be used to repay the 1999-1, 1999-2 and 2000-1 Notes, respectively.
Note 5: Comprehensive Income
--------------------
Total comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income $31,628 $27,278 $10,845 $78,821
Foreign currency translation adjustments (1,547) (1,562) (2,400) (1,327)
Mark to market adjustment on the retained interest
of lease receivables, net of tax (1,128)
---------------- ------------- ---------------- -----------------
Total comprehensive income $30,081 $24,588 $8,445 $77,494
================ ============= ================ =================
</TABLE>
Minimum pension liability is adjusted at each year end, therefore there is no
impact on total comprehensive income during interim periods. The balances for
foreign currency translation adjustments and minimum pension liability
adjustments included in accumulated other comprehensive loss were $(5,672) and
$(1,650), respectively, at June 30, 2000 and $(3,272) and $(1,650),
respectively, at September 30, 1999.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------------- ------------------------------
Numerator: 2000 1999 2000 1999
--------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Net income $31,628 $27,278 $10,845 $ 78,821
=============== ============== ============== ============
Denominator:
Weighted average common shares 148,922 148,422 149,158 147,748
Contingently issuable common shares 365 828
--------------- -------------- -------------- ------------
Denominator for basic earnings per common
share - weighted average common shares 148,922 148,787 149,158 148,576
--------------- -------------- -------------- ------------
Effect of dilutive securities:
Additional contingently issuable common shares 157 253
Employee stock options 19 171 159 132
--------------- -------------- -------------- ------------
Dilutive potential common shares 19 328 159 385
--------------- -------------- -------------- ------------
Denominator for diluted earnings per
common share - adjusted weighted average
common shares and assumed conversions 148,941 149,115 149,317 148,961
=============== ============== ============== ============
Basic earnings per common share $ 0.21 $ 0.18 $ 0.07 $ 0.53
=============== ============== ============== ============
Diluted earnings per common share $ 0.21 $ 0.18 $ 0.07 $ 0.53
=============== ============== ============== ============
</TABLE>
Options to purchase 8,951 shares of common stock at $5.94 per share to $56.42
per share were outstanding during the third quarter of fiscal 2000 and options
to purchase 6,216 shares of common stock at $14.00 per share to $56.42 per share
were outstanding during the third quarter of fiscal 1999, but were not included
in the computation of diluted earnings per common share because the options'
prices were greater than the average market price of the common shares and
therefore the effect would be antidilutive.
Options to purchase 5,989 shares of common stock at $7.50 per share to $56.42
per share were outstanding during the first nine months of fiscal 2000 and
options to purchase 6,806 shares of common stock at $12.00 per share to $56.42
per share were outstanding during the first nine months of fiscal 1999, but were
not included in the computation of diluted earnings per common share because the
options' prices were greater than the average market price of the common shares
and therefore the effect would be antidilutive.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7: Segment Reporting
-----------------
In the first nine months of fiscal 2000, we made the following changes to our
segment reporting as a result of our restructuring program: IKON Document
Services (included in Other in fiscal 1999) was split into Business Document
Services ("BDS"), Legal Document Services ("LDS") and Business Imaging Services
("BIS"). BDS and LDS are aligned with and included in IKON North America and BIS
remains in Other. Our remanufacturing unit (included in IKON North America in
fiscal 1999) is now included in Other. Prior year results have been reclassified
to conform with the current year presentation.
The table below presents segment information for the three and nine months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
IKON Corporate
North IKON and
Three Months Ended June 30, 2000 America Europe Other Eliminations Total
------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues, excluding finance income $1,060,222 $ 113,600 $ 150,661 $ 1,324,483
Finance income 87,602 5,320 92,922
Intersegment revenues 4,178 932 $ (5,110)
Operating income (loss) 114,462 6,577 (6,213) (46,354) 68,472
Gain on sale of investment 3,288 3,288
Interest expense (18,314) (18,314)
Income before taxes and extraordinary gain 53,446
Three Months Ended June 30, 1999
Revenues, excluding finance income 1,013,322 125,895 175,403 1,314,620
Finance income 65,646 5,201 70,847
Intersegment revenues 4,582 481 (5,063)
Operating income (loss) 103,915 7,313 (6,024) (37,187) 68,017
Interest expense (17,031) (17,031)
Income before taxes 50,986
Nine Months Ended June 30, 2000
Revenues, excluding finance income 3,087,672 357,892 429,580 3,875,144
Finance income 238,830 16,259 255,089
Intersegment revenues 11,212 2,646 (13,858)
Operating income (loss) before
restructuring and asset impairment 333,031 17,831 (26,938) (118,801) 205,123
charges
Restructuring and asset impairment (34,752) (4,286) (12,124) (54,178) (105,340)
charges
Operating income (loss) 298,279 13,545 (39,062) (172,979) 99,783
Gain on sale of investment 3,288 3,288
Interest expense (51,934) (51,934)
Income before taxes and extraordinary gain 51,137
Nine Months Ended June 30, 1999
Revenues, excluding finance income 3,036,600 385,151 507,571 3,929,322
Finance income 209,834 15,378 225,212
Intersegment revenues 11,094 2,257 (13,351)
Operating income (loss) 299,216 20,814 (5,998) (118,607) 195,425
Interest expense (55,573) (55,573)
Income before taxes 139,852
</TABLE>
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8: Shareholder Lawsuit
-------------------
The District Court's May 11, 2000 decision approving the $111,000 settlement
with the plaintiffs in the series of federal securities class action lawsuits
and companion derivative lawsuit filed in the Eastern District of Pennsylvania
has been appealed to the United States Court of Appeals for the Third Circuit by
two individuals who objected to the settlement. The Company believes that the
appeal is without merit and that the Court of Appeals will affirm the District
Court's decision approving the settlement.
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. contains
------------------------------------------------------
one claim brought under the Employee Retirement Income Security Act of 1974
("ERISA"). In connection with that claim, the plaintiffs allege that the Company
and various individuals violated fiduciary duties under ERISA based on allegedly
improper investments in the Company's stock made through the Company's
Retirement Savings Plan. The court certified a class with respect to this claim
consisting generally of all those participants in the Retirement Savings Plan
after September 30, 1995 and through August 13, 1998, subject to certain
exceptions. To the extent that any of the ERISA class claim survives the
settlement of the federal securities class action lawsuits and companion
derivative suit, the Company believes that said claim is without merit and will
vigorously defend the suit.
Note 9: Extraordinary Gain
------------------
In the third quarter of fiscal 2000, we repurchased $10,000 par value of our
7.30% bonds due November 1, 2027 and recognized an extraordinary gain of $3,049
($1,707 after-tax) or $0.01 per common share.
<PAGE>
Item 2: Management's Discussion and Analysis of Results of Operations and
Financial Condition and Liquidity
The following discussion is in thousands, except per share amounts.
The Company provides products and services to meet business communications
needs, including copiers and printers, color solutions, distributed printing,
outsourcing services, imaging and legal outsourcing solutions, as well as
network design and consulting, application development and technology training.
Results of Operations
---------------------
The discussion reviews the results of operations of the Company as reported in
the Consolidated Statements of Income.
Three and Nine Months Ended June 30, 2000
Compared with the Three and Nine Months Ended June 30, 1999
Results of operations for the third quarter and the first nine months of fiscal
2000 compared to the third quarter and the first nine months of fiscal 1999 were
as follows:
Third Quarter:
Our third quarter revenues increased by $31,938, or 2.3%, compared to the third
quarter of fiscal 1999. Excluding the impact of foreign currency translation,
revenues increased by $41,219 or 3.0%. The increase resulted from increased net
sales and finance income partially offset by a decrease in service and rental
revenue as described below. During the third quarter we added 163 sales
representatives, concentrated in our areas of highest growth, such as color,
high volume and facilities management.
Net sales from the sale of office and production equipment, supplies and
technology hardware, increased by $21,912 or 3.0% due mainly to growth in
revenue from office and production equipment partially offset by a decrease in
revenue in our technology service business. Revenue from office and production
equipment, increased 15% compared to the third quarter of fiscal 1999,
reflecting our continued success in placing digital and color products. Digital
revenue, increased by 54% and color revenue, led by positive results in the
creative color line increased by 15% compared to the third quarter of fiscal
1999. Our segment 3-6 equipment base increased by 6% compared to the third
quarter of fiscal 1999, led by the launch of the market's first segment 5
digital machine, the Ricoh 850 in April 2000. Our net sales growth was slowed by
a decline in revenue from hardware, such as computers, routers and servers, in
our technology service business.
Service and rental revenue, which represents equipment service, outsourcing,
including facilities management, and technology services, decreased by $12,049
or 2.0%. The decrease is primarily due to the closure of non-strategic
outsourcing and technology service sites associated with our previously
announced restructuring program and was partially offset by growth in facilities
management. Finance income increased by $22,075 or 31.2% compared to the third
quarter of fiscal 1999 due to growth in the lease portfolio and a shift from
off-balance sheet treatment to on-balance sheet treatment of the asset
securitizations used to finance our captive leasing business.
Gross margin was 36.7% compared to 37.2% in the third quarter of fiscal 1999
with improvements in equipment margins helping to offset the decline in service
margins as described below. The gross margin on equipment sales increased to
32.0% from 30.4% in the third quarter of fiscal 1999, as low-margin technology
hardware becomes a smaller part of our mix and as we capitalized on productivity
initiatives such as centralized inventory and supply chain management. The gross
margin on service and rentals decreased to 40.1% compared to 43.2% in the third
quarter of fiscal 1999. The decrease primarily resulted from the impact of fixed
costs in our technology service business combined with a decrease in technology
service revenue in the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999 primarily due to the closure of non-strategic
<PAGE>
Third Quarter (continued):
technology service sites associated with our previously announced restructuring
program. The gross margin on finance income decreased to 52.8% from 56.9%,
primarily due to increased interest expense resulting from higher average
interest rates and finance subsidiary debt levels in the third quarter of fiscal
2000 compared to the third quarter of fiscal 1999.
Selling and administrative expense as a percent of revenue was 31.9% in the
third quarter of fiscal 2000 compared to 32.3% in the third quarter of fiscal
1999. The decrease was the result of the increase in revenue combined with
controlled costs due to our cost competitiveness programs, including
centralizing certain key functions, adopting new credit controls and
productivity improvements within our business units.
Our operating income increased by $455 or 0.7% compared to the third quarter of
fiscal 1999. Our operating margin was 4.8% for the third quarter of fiscal 2000,
down slightly from 4.9% for the third quarter of fiscal 1999.
In the third quarter of fiscal 2000, we sold certain equity securities and
recognized a pre-tax gain of $3,288 on the sale. Interest expense increased by
$1,283 in the third quarter of fiscal 2000 compared to the third quarter of
fiscal 1999 as a result of higher average debt levels and interest rates during
the third quarter of fiscal 2000 as compared to fiscal 1999.
Income before taxes and extraordinary gain was $53,446 in the third quarter of
fiscal 2000 compared to $50,986 in the third quarter of fiscal 1999. The
effective income tax rate for the third quarter of fiscal 2000 was 44.0%
compared to 46.5% for the comparable period in fiscal 1999. The tax rate
reduction was primarily due to the recording of benefits resulting from
legislative changes that facilitated utilization of net operating losses that
previously had a full valuation allowance.
In the third quarter of fiscal 2000 we repurchased $10,000 par value of our
7.30% bonds due November 1, 2027 and recognized an extraordinary gain of $3,049
($1,707 after-tax).
Diluted earnings per common share increased to $0.21 per share for the third
quarter of fiscal 2000 from $0.18 per share for the third quarter of fiscal
1999. Excluding the after-tax effect of the gain on sale of investment and
extraordinary gain on the early extinguishment of debt in fiscal 2000, diluted
earnings per common share were $0.19 in the third quarter of fiscal 2000. During
the third quarter of fiscal 2000, we repurchased 2,120 shares of common stock.
Review of Business Segments
---------------------------
In the third quarter of fiscal 2000, we made the following change to our segment
reporting as a result of our restructuring program: Our remanufacturing unit,
which was included in IKON North America in fiscal 1999, is now included in
Other. Prior year results have been reclassified to conform with the current
year presentation.
IKON North America
Revenues, excluding finance income, increased by $46,900, or 4.6%, to $1,060,222
in the third quarter of fiscal 2000 from $1,013,322 in the third quarter of
fiscal 1999. The increase was primarily due to a 14% increase in revenue from
the sale of office equipment offset by minimal growth in service and rentals due
to the closure of unprofitable or non-strategic locations associated with the
restructuring program. Finance income increased by $21,956, or 33.4%, to $87,602
in the third quarter of fiscal 2000 compared to $65,646 in the third quarter of
fiscal 1999. The increase was due to growth in the lease portfolio and a shift
from off-balance sheet treatment to on-balance sheet treatment of the asset
securitizations used to finance our captive leasing business. Operating income
increased by $10,547 or 10.2% to $114,462 in the third quarter of fiscal 2000
from $103,915 in the third quarter of fiscal 1999. The increase was due mainly
to increased revenue and the improved management of selling and administrative
expenses described above.
<PAGE>
Review of Business Segments (continued)
---------------------------------------
IKON Europe
Total revenues in Europe decreased by $12,176 or 9.3%. Excluding the impact of
foreign currency translation, revenues decreased by $3,574 or 2.8%. Revenues,
excluding finance income, decreased by $12,295, or 9.8%, to $113,600 in the
third quarter of fiscal 2000 from $125,895 in the third quarter of fiscal 1999
due mainly to the impact of foreign currency translation, a decrease in hardware
sales in our technology service business offset by a 21% increase in revenue
from the sale of office equipment. Finance income increased by $119, or 2.3%, to
$5,320 in the third quarter of fiscal 2000 from $5,201 in the third quarter of
fiscal 1999. Operating income decreased by $736, or 10.0%, to $6,577 in the
third quarter of fiscal 2000 from $7,313 in the third quarter of fiscal 1999 due
primarily to the decrease in revenue offset by improved management of
administrative expenses.
Other
Other revenues decreased by $24,742, or 14.1%, to $150,661 in the third quarter
of fiscal 2000 from $175,403 in the third quarter of fiscal 1999. There was an
operating loss of $6,213 in the third quarter of fiscal 2000 compared to a loss
of $6,024 in the third quarter of fiscal 1999. The decrease in revenues and
operating income was due to a significant decline in our North American systems
integration business as customers' demands have shifted from internal systems
deployment and Y2K migration to external, Internet-based applications and as
customers have begun to purchase hardware directly from manufacturers. The
Company has been repositioning its technology service businesses to optimize
growth strategies including the separation of advanced education, telephony and
e-business development into smaller functional units.
Nine Months:
Our revenues for the first nine months of fiscal 2000 decreased by $24,301, or
0.6%, compared to the first nine months of fiscal 1999. Excluding a $14,333 gain
from an asset securitization in fiscal 1999, revenues decreased by $9,968, or
0.2%. During the year we added 475 sales representatives concentrated in our
areas of highest growth, such as color, high volume and facilities management.
Net sales from the sale of office and production equipment, supplies and
technology hardware, decreased by $9,458 or 0.4%. The decrease is due mainly to
a decline in revenue from hardware, such as computers, routers and servers in
our technology service business.
Service and rental revenue decreased by $44,720 or 2.5%. The decrease resulted
from the decline in our technology service revenues and the closure of
non-strategic technology service and outsourcing sites associated with our
restructuring program which was announced in the first quarter of fiscal 2000.
Finance income, excluding the $14,333 gain from an asset securitization in
fiscal 1999, increased by $44,210 or 21.0% compared to the first nine months of
fiscal 1999 due to growth in the lease protfolio and a shift from off-balance
sheet treatment to on-balance sheet treatment of the asset securitizations used
to finance our captive leasing business.
Gross margin was 36.8% compared to 37.5% in the first nine months of fiscal
1999, excluding the gain from the asset securitization. This decrease is largely
due to lower service margins in our traditional equipment business and fixed
costs associated with lower revenues for technology services. The gross margin
on equipment sales was 32.7% compared to 31.8% in the first nine months of
fiscal 1999. This was due mainly to a significant increase in higher margin
digital and color revenues as compared to the first nine months of fiscal 1999
and the the impact of productivity initiatives such as centralized inventory and
supply chain management. The gross margin on service and rentals decreased to
39.7% compared to 42.1% in the first nine months of fiscal 1999. The decrease
primarily resulted from fixed costs associated with lower technology service
revenues and lower productivity in servicing new digital products, including the
impact of new vendor and digital training programs. The gross margin on finance
income decreased to 51.8% from 56.1% excluding the gain from the asset
securitization, primarily due to increased interest expense resulting from
higher average interest rates and finance subsidiary debt levels for the first
nine months of fiscal 2000 compared to the first nine months of fiscal 1999.
<PAGE>
Nine Months (continued):
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and asset
impairment charge (the "charge") of $105,340 ($78,479 after-tax, or $0.52 per
share on a basic and diluted basis). These actions address under-performance in
certain Technology Services, Business Document Services, and Business
Information Services locations; as well as the Company's desire to strategically
position these businesses for integration and profitable growth. Plans include
consolidating or disposing of certain under-performing and non-core locations;
implementing productivity enhancements through the consolidation and
centralization of activities in inventory management, purchasing,
finance/accounting and other administrative functions; and consolidating real
estate through the co-location of business units as well as the disposition of
unproductive real estate. Savings from the above programs are anticipated to be
approximately $15,000 in fiscal 2000 and approximately $45,000 on an annualized
basis beginning in fiscal 2001.
The pre-tax components of the charge are as follows:
Type of Charge
Restructuring Charge:
Severance $ 16,389
Contractual Commitments 37,403
--------
Total Restructuring Charge 53,792
--------
Asset Impairment Charge:
Fixed Assets 12,668
Goodwill and Intangibles 38,880
--------
Total Asset Impairment Charge 51,548
--------
Total Charge $105,340
========
The severance charge relates to the elimination of approximately 1,900
positions, while the charge for contractual commitments relates to lease
commitments where the Company is exiting certain locations and/or businesses and
which are expected to be paid over the next 9 years.
The Company commenced several actions specified under these initiatives in the
first quarter of fiscal 2000, which continued through the third quarter. The
following presents a reconciliation of the original components of the pre-tax
restructuring charge to the balance remaining at June 30, 2000, which is
included in other accrued expenses on the balance sheet:
<TABLE>
<CAPTION>
Balance Balance
September 30, 1999 Provision Payments June 30,
Fiscal 2000 Fiscal 2000 2000
------------------- --------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Severance $ -- $ 16,389 $ 7,593 $ 8,796
Contractual Commitments -- 37,403 10,424 26,979
------------------- --------------- -------------------- ------------------
Total $ -- $ 53,792 $ 18,017 $ 35,775
=================== =============== ==================== ==================
</TABLE>
During the first nine months of fiscal 2000 approximately 848 employees were
terminated and left the Company and 18 facilities were closed.
Selling and administrative expense as a percent of revenue was 31.8% for the
first nine months of fiscal 2000 compared to 33.0% in the prior year. Excluding
$17,000 of insurance proceeds related to our shareholder litigation settlement,
selling and administrative expense was 32.2% for the first nine months of fiscal
2000 compared to 33.1% in the first nine months of fiscal 1999, excluding the
$14,333 gain from an asset securitization. The decrease was the result of
centralizing certain key functions, adopting new credit controls, and
productivity improvements within our business units.
<PAGE>
Nine Months (continued):
Our operating income, excluding the $105,340 asset impairment and restructuring
charges and the $17,000 of insurance proceeds related to our shareholder
litigation settlement in fiscal 2000 and the $14,333 gain from an asset
securitization in fiscal 1999, increased by $7,031 compared to the first nine
months of fiscal 1999. Our operating margin, excluding the special items noted
above improved from 4.4% in the first nine months of fiscal 1999 to 4.6% in the
first nine months of fiscal 2000. This resulted from the improved management of
selling and administrative costs described above.
In the third quarter of fiscal 2000, we sold certain equity securities and
recognized a pre-tax gain of $3,288 on the sale. Interest expense decreased by
$3,639 in the first nine months of fiscal 2000 compared to the first nine months
of fiscal 1999 as a result of lower average debt levels partially offset by
higher average interest rates.
Income before taxes and extraordinary gain of $51,137 in the first nine months
of fiscal 2000 compared to income before taxes of $139,852 in the first nine
months of fiscal 1999. Excluding the asset impairment and restructuring charge
and the insurance proceeds related to our shareholder litigation, and gain on
the sale of an investment in fiscal 2000 and the gain from an asset
securitization in fiscal 1999, income before taxes and extraordinary gain
increased by $10,670 to $136,189 compared to $125,519 in the prior year. The
increase was primarily due to the decrease in selling and administrative
expenses and interest expense described above.
The effective income tax rate, for the first nine months of fiscal 2000 was
82.1% compared to 43.6% in the first nine months of fiscal 1999. The high rate
in fiscal 2000 is due to the impact of non-deductible goodwill associated with
our asset impairment charge. Excluding the effect of the asset impairment and
restructuring charge and insurance proceeds, the effective income tax rate was
44.0% compared to 47.2%, excluding the gain from an asset securitization and a
$4,000 benefit related to restructuring our European leasing operations, for the
comparable period in fiscal 1999. The tax rate reduction was primarily due to
the recording of benefits resulting from legislative changes that facilitated
utilization of net operating losses that previously had a full valuation
allowance.
In the third quarter of fiscal 2000, we repurchased $10,000 par value of our
7.30% bonds due November 1, 2027 and recognized an extraordinary gain of $3,049
($1,707 after-tax).
Diluted earnings per common share was $0.07 for the first nine months of fiscal
2000 compared to $0.53 for the first nine months of fiscal 1999. Excluding the
after-tax effect of the special items described above, diluted earnings per
common share were $0.51 in the first nine months of fiscal 2000 compared to
$0.47 in the first nine months of fiscal 1999. During the first nine months of
fiscal 2000 we repurchased 2,131 shares of common stock.
Review of Business Segments
---------------------------
During the first nine months of fiscal 2000, we made the following changes to
our segment reporting as a result of our restructuring program: IKON Document
Services (included in Other in fiscal 1999) was split into Business Document
Services ("BDS"), Legal Document Services ("LDS") and Business Imaging Services
("BIS"). BDS and LDS are aligned with and included in IKON North America and BIS
remains in Other. Our remanufacturing unit, which was included in IKON North
America in fiscal 1999, is now included in Other. Prior year results have been
reclassified to conform with the current year presentation.
IKON North America
Revenues, excluding finance income, increased by $51,072, or 1.7%, to $3,087,672
in the first nine months of fiscal 2000 from $3,036,600 in the first nine months
of fiscal 1999. The increase was due to strong net sales growth and minimal
growth in service and rentals due to the closure of unprofitable or
non-strategic locations associated with the restructuring program. Finance
income increased by $28,996, or 13.8%, to $238,830 in the first nine months of
fiscal 2000 compared to $209,834 in the first nine months of fiscal 1999. The
increase was mainly due to growth in the lease protfolio and a shift from
off-balance sheet treatment to on-balance sheet treatment of the asset
securitizations used to finance our captive leasing business offset by a $14,333
gain from an asset securitization in fiscal 1999. Operating income before
restructuring and asset impairment charges, excluding the gain from the asset
securitization, increased by $48,148 to $333,031 in the first nine months of
fiscal 2000 from $284,883 in the first nine months of fiscal 1999. The increase
was due mainly to increased total revenue and the improved management of selling
and administrative expenses.
<PAGE>
Review of Business Segments (continued)
---------------------------------------
IKON Europe
Total revenues in Europe decreased by $26,378 or 6.6%. Excluding the impact of
foreign currency translation, revenues decreased by $3,513 or 0.9%. Revenues,
excluding finance income, decreased by $27,259, or 7.1%, to $357,892 in the
first nine months of fiscal 2000 from $385,151 in the first nine months of
fiscal 1999 due mainly to the impact of foreign currency translation, a decrease
in hardware sales in our technology service business offset by an increase in
revenue from the sale of office equipment. Finance income increased by $881, or
5.7%, to $16,259 in the first nine months of fiscal 2000 from $15,378 in the
first nine months of fiscal 1999 due to growth in the lease portfolio. Operating
income before restructuring and asset impairment charges decreased by $2,983, or
14.3%, to $17,831 in the first nine months of fiscal 2000 from $20,814 in the
first nine months of fiscal 1999 mainly due to the underperformance of
technology services.
Other
Other revenues decreased by $77,991, or 15.4%, to $429,580 in the first nine
months of fiscal 2000 from $507,571 in the first nine months of fiscal 1999.
There was an operating loss before restructuring and asset impairment charges of
$26,938 in the first nine months of fiscal 2000 compared to $5,998 in the first
nine months of fiscal 1999. The decrease in revenues and operating income was
due to a significant decline in our North American systems integration business
as customers' demands have shifted from internal systems deployment and Y2K
migration to external, Internet-based applications and as customers have begun
to purchase hardware directly from manufacturers. The Company has been
repositioning its technology service businesses to optimize growth strategies
including the separation of advanced education, telephony and e-business
development into smaller functional units.
Impact of Year 2000
-------------------
Through July 31, 2000, our operations are fully functioning and have not
experienced any significant issues associated with the Year 2000 problem. For
further information, refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our report on Form 10-Q for the
period ended March 31, 2000 and the Company's Annual Report on Form 10-K/A for
its fiscal year ended September 30, 1999.
Financial Condition and Liquidity
---------------------------------
Net cash provided by operating activities for the first nine months of fiscal
2000 was $140,920. During the same period, the Company used $671,153 of cash in
investing activities, which included net finance subsidiary use of $336,451,
acquisition activity at a cash cost of $3,745, capital expenditures for property
and equipment of $70,996 and capital expenditures for equipment on operating
leases of $31,550. Cash provided by financing activities of $576,060, includes a
$201,467 net increase in corporate debt and a $463,812 increase in finance
subsidiaries debt. Debt, excluding finance subsidiaries, was $1,048,151 at June
30, 2000, an increase of $189,107 from the debt balance at September 30, 1999 of
$859,044. The debt to capital ratio, excluding the impact of short-term loans to
our U.S. finance subsidiary, was 39% at June 30, 2000 compared to 34.0% at
September 30, 1999. Excluding the impact of loans from our finance subsidiaries,
our debt increased by $192,000 at June 30, 2000 compared to September 30, 1999.
The increase was due mainly to payments related to the shareholder litigation
settlement and the restructuring program. The increase in the Company's assets
was due mainly to the repurchase of $275,000 of direct financing lease
receivables in the first quarter of fiscal 2000. Restricted cash on the balance
sheet represents cash collected on certain lease receivables, which must be used
to repay the lease-backed notes.
As of June 30, 2000, short-term borrowings under a $600,000 credit agreement
totaled $25,000 and $267,000 of short-term borrowings are backed by the credit
agreement. The Company also has $700,000 available for either stock or debt
offerings under a shelf registration statement filed with the Securities and
Exchange Commission.
<PAGE>
Financial Condition and Liquidity (continued)
---------------------------------------------
Finance subsidiaries debt increased by $462,816 from September 30, 1999, as a
result of the issuance of lease-backed notes offset by payments on medium term
notes and bank borrowings. During the nine months ended June 30, 2000, IOSC
repaid $1,155,789 of debt, $1,194,849 of lease-backed notes were issued and
there was $333,000 of new bank borrowings. At June 30, 2000, $743,500 of medium
term notes were outstanding with a weighted interest rate of 6.4%. In October
1999, a portion of the cash received from the issuance of the lease-backed notes
was used to repurchase the direct financing leases related to its previously
existing $275,000 asset securitization program. In December 1999 and January
2000, IOSC entered into new asset securitization agreements under which it
received cash of $250,000. This amount was repaid in June 2000 when the 2000-1
notes were issued. Also in June 2000, IOSC entered into a new asset
securitization agreement under which it received cash of $83,000.
The Company has filed several shelf registration statements with the Securities
and Exchange Commission to register the sale of 25,000 shares of common stock.
Shares issued under the registration statements may be used for acquisitions.
Approximately 18,970 shares have been issued under these shelf registrations
through June 30, 2000, leaving approximately 6,030 shares available for
issuance.
During fiscal 2000, the Company repurchased approximately 2,131 shares of common
stock for $11,975.
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 restructuring charge.
Pending Accounting Changes
--------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. It will require us
to recognize all derivatives as either assets or liabilities and measure the
instruments at fair value. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
statement No 138, "Accounting for Certain Derivitave Instruments and Certain
Hedging Activities - An Amendment to FASB Statement No. 133" which addresses a
limited number of implementation issues and should be adopted concurrently with
statement No. 133. We intend to adopt both standards on October 1, 2000. We do
not believe the effect of adoption will be material.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The SAB
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements. We are
currently assessing SAB 101 and cannot quantify the impact on our Company, if
any, at this time. Any change resulting from the application of SAB 101 will be
reported as a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes". In June 2000, the SEC issued SAB No. 101B, "Second
Amendment: Revenue Recognition in Financial Statements". SAB 101B delays the
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. We are required to begin
reporting changes, if any, to our revenue recognition policy in the fourth
quarter of fiscal year 2001. We are currently evaluating the effect, if any, the
adoption of SAB 101 will have on our financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk:
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt. We have no cash flow exposure due to interest rate changes
for long-term debt obligations. We primarily enter into debt
<PAGE>
Interest Rate Risk (continued):
obligations to support general corporate purposes, including acquisitions,
capital expenditures and working capital needs. Finance subsidiaries' long-term
debt is used to fund the lease receivables portfolio. The carrying amounts for
cash, accounts receivable, long-term receivables and notes payable reported in
the consolidated balance sheets approximate fair value. Additional disclosures
regarding interest rate risk are set forth in the Company's 1999 Annual Report
on Form 10-K/A filed with the Securities and Exchange Commission.
Foreign Exchange Risk:
The Company has various non-U.S. operating locations which expose it to foreign
exchange risk. However, gains and losses resulting from the remeasurement of
foreign financial statements into U.S. dollars have not had a significant effect
on the results of operations. Foreign denominated intercompany debt borrowed in
one currency and repaid in another is fixed via currency swap agreements.
Forward-Looking Information
This document includes or incorporates by reference information which
constitutes forward-looking statements within the meaning of the federal
securities laws, including but not limited to, statements regarding: the impact
of e-commerce initiatives; growth opportunities, productivity initiatives, and
the impact of the Company's revenue, margin, and cost-savings projections;
expected savings from the repositioning program; anticipated growth rates in the
digital and color equipment and outsourcing industries; the effect of foreign
exchange risk; the cost and completion date of the Company's Year 2000
remediation project (and the possible negative impact which might result from
nonremediated systems of the Company and/or its vendors); the reorganization of
the Company's business segments; and the Company's ability to finance its
current operations and growth initiatives. Although the Company believes such
forward-looking statements are reasonable, based on management's current plans
and expectations, the statements are 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, and therefore, no assurances
can be given that such statements will prove correct. These uncertainties and
risks include, but are not limited to, risks and uncertainties relating to:
conducting operations in a competitive environment and a changing industry
(which includes technical services and products that are relatively new to the
industry and to the Company); delays, difficulties, management transitions and
employment issues associated with consolidations and/or changes in business
operations; managing the integration of acquired businesses; existing and future
vendor relationships; risks relating to currency exchange; economic, legal and
political issues associated with international operations; potential Year 2000
deficiencies associated with the operation of IKON's internal systems and
distributed products; the Company's ability to access capital and its debt
service requirements (including sensitivity to fluctuation in interest rates);
and general economic conditions. Certain additional risks and uncertainties are
set forth in the Company's 1999 Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission. As a consequence, future 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 1: Legal Proceedings
The District Court's May 11, 2000 decision approving the $111,000
settlement with the plaintiffs in the series of federal securities
class action lawsuits and companion derivative lawsuit filed in the
Eastern District of Pennsylvania has been appealed to the United
States Court of Appeals for the Third Circuit by two individuals who
objected to the settlement. The Company believes that the appeal is
without merit and that the Court of Appeals will affirm the District
Court's decision approving the settlement.
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al.
------------------------------------------------------
contains one claim brought under the Employee Retirement Income
Security Act of 1974 ("ERISA"). In connection with that claim, the
plaintiffs allege that the Company and various individuals violated
fiduciary duties under ERISA based on allegedly improper investments
in the Company's stock made through the Company's Retirement Savings
Plan. The court certified a class with respect to this claim
consisting generally of all those participants in the Retirement
Savings Plan after September 30, 1995 and through August 13, 1998,
subject to certain exceptions. To the extent that any of the ERISA
class claim survives the settlement of the federal securities class
action lawsuits and companion derivative suit, the Company believes
that said claim is without merit and will vigorously defend the
suit.
Item 5: Other Information
On June 23, 2000, the Company announced that the Board of Directors
authorized the repurchase of up to $75,000 of common stock. The
repurchase program, which has no specific time limitation, will be
accomplished through periodic purchases of the Company's common
stock dependent upon market conditions and other considerations.
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 May 3, 2000, the Company filed a Current Report on Form 8-K,
under Item 5 of the form, information contained in its press release
dated April 26, 2000 regarding the results for the second quarter of
fiscal 2000 as well as announcing that James J. Forese had been
named to serve as Chairman of the Company's Board of Directors.
On May 22, 2000 and as amended on May 25, 2000, the Company's wholly
owned subsidiary, IKON Receivables, LLC filed a Current Report on
Form 8-K to file, under Item 5 of the form, information that
incorporated by reference the consolidated financial statements of
Ambac Assurance Corporation and its subsidiaries as of December 31,
1999 and December 31, 1998 and for each of the years in the
three-year period ended December 31, 1999, included in the Annual
Report on Form 10-K of Ambac Financial Group, Inc. and the unaudited
consolidated financial statements of Ambac Assurance Corporation and
its subsidiaries as of March 31, 2000, and for the periods ended
March 31, 2000 and March 31, 1999, included in the Quarterly Report
on Form 10-Q of Ambac Financial Group, Inc. for the period ended
March 31, 2000. The above referenced consolidated financial
statements were also incorporated into the Registration Statement of
IKON Receivables, LLC and the Preliminary Prospectus Supplement
dated May 19, 2000 and as amended on May 25, 2000, respectively,
relating to IKON Receivables, LLC's Lease-Backed Notes, Series
2000-1.
On May 30, 2000, the Company's wholly owned subsidiary, IKON
Receivables, LLC filed a Current Report on Form 8-K to file, under
Item 5 of the form, information furnished to certain prospective
investors regarding the offering of IKON Receivables, LLC
Lease-Backed Notes, Series 2000-1.
On June 16, 2000, the Company's wholly owned subsidiary, IKON
Receivables, LLC filed a Current Report on Form 8-K to file, under
Item 2 of the form, information regarding the registration of
$2,000,000 in principal amount of Lease-Backed Notes by a
Registration Statement on Form S-3 and the issuance of $498,510 in
principal amount of said Lease-Backed Notes. Each series of notes
which may be issued under the registration statement will be issued
pursuant to an indenture.
<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 14, 2000 /s/ William S. Urkiel
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William S. Urkiel
Senior Vice President and
Chief Financial Officer
