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, 1999 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 corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of January 31, 2000.
Common Stock, no par value 149,907,907 shares
<PAGE>
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--December 31, 1999
(unaudited) and September 30, 1999
Consolidated Statements of Operations--Three months
ended December 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows--Three months
ended December 31, 1999 and 1998 (unaudited)
Notes to Consolidated Financial Statements--
December 31, 1999 (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 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
ASSETS (unaudited)
----------- -----------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 73,584 $ 3,386
Restricted cash 69,028 29,625
Accounts receivable, net 753,659 725,308
Finance receivables, net 987,318 887,396
Inventories 397,691 338,947
Prepaid expenses and other current assets 127,776 111,386
Deferred taxes 138,515 137,853
----------- -----------
Total current assets 2,547,571 2,233,901
----------- -----------
Investments and Long-Term Receivables 8,660 24,313
Long-Term Finance Receivables, net 1,878,946 1,677,230
Equipment on Operating Rental, net 83,274 87,496
Property and Equipment, at cost 531,315 535,304
Less accumulated depreciation 289,596 275,489
----------- -----------
241,719 259,815
----------- -----------
Goodwill, net 1,337,358 1,385,295
Other assets 134,556 133,263
----------- -----------
$ 6,232,084 $ 5,801,313
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 96,314 $ 95,262
Current portion of long-term debt,
finance subsidiaries 1,109,298 974,033
Notes payable 10,277 44,968
Trade accounts payable 166,309 169,763
Accrued salaries, wages and commissions 92,973 128,501
Accrued shareholder litigation settlement 112,695 117,652
Deferred revenues 202,455 205,654
Other accrued expenses 333,684 311,758
----------- -----------
Total current liabilities 2,124,005 2,047,591
----------- -----------
Long-Term Debt 715,466 718,814
Long-Term Debt, Finance Subsidiaries 1,468,246 1,029,176
Deferred Taxes 358,800 375,007
Other Long-Term Liabilities 167,460 170,185
Shareholders' Equity
Common stock, no par value
Authorized - 300,000 shares
Issued December 31, 1999 - 149,787 shares; 1,011,760 1,008,392
September 30, 1999 - 149,271 shares
Unearned compensation (8,332) (5,513)
Retained earnings 402,334 464,150
Accumulated other comprehensive expense (6,737) (4,922)
Common shares in treasury, at cost:
December 31, 1999 - 34 shares;
September 30, 1999 - 53 shares (918) (1,567)
----------- -----------
1,398,107 1,460,540
----------- -----------
$ 6,232,084 $ 5,801,313
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE>
IKON Office Solutions, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
----------- -----------
Revenues
<S> <C> <C>
Net sales $ 668,482 $ 707,719
Service and rentals 582,921 601,259
Finance income 81,097 87,439
----------- -----------
1,332,500 1,396,417
----------- -----------
Costs and Expenses
Cost of goods sold 451,092 471,746
Service and rental costs 345,438 349,881
Finance interest expense 39,452 32,680
Selling and administrative 438,223 468,963
Asset impairment charge 53,792
Restructuring charge 51,548
----------- -----------
1,379,545 1,323,270
----------- -----------
Operating (loss) income (47,045) 73,147
Interest expense 15,994 19,547
----------- -----------
(Loss) income before income tax (benefit) expense (63,039) 53,600
Income tax (benefit) expense (7,403) 24,924
=========== ===========
Net (loss) income $ (55,636) $ 28,676
=========== ===========
Basic and Diluted Earnings (Loss) Per Common Share $ (0.37) $ 0.19
=========== ===========
Cash Dividends Per Share of Common Stock $ 0.04 $ 0.04
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended
December 31
------------------------------
1999 1998
------------------------------
Operating Activities
<S> <C> <C>
Net (loss) income $ (55,636) $ 28,676
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities
Depreciation 35,715 34,342
Amortization 15,913 15,105
Provisions for losses on accounts receivable 12,335 10,567
Provision for deferred tax (benefit) expense (13,400) 10,000
Gain on asset securitizations (73) (16,676)
Restructuring and asset impairment charge 105,340
Changes in operating assets and liabilities,
net of effects from acquisitions:
(Increase) decrease in accounts receivable (39,761) 19,080
(Increase) decrease in inventories (58,690) 15,058
Increase in prepaid expenses and other current assets (16,075) (11,966)
Decrease in accounts payable, deferred
revenues and accrued expenses (73,490) (86,295)
Decrease in accrued shareholder litigation settlement (4,957)
Decrease in accrued restructuring (4,241)
Other (3,114) 4,551
--------- ---------
Net cash (used in) provided by operating activities (100,134) 22,442
Cash flows from investing activities
Proceeds from the sale of property and equipment 3,422 6,487
Cost of companies acquired, net of cash acquired (1,931) (15,880)
Expenditures for property and equipment (22,674) (24,815)
Expenditures for equipment on operating rental (7,312) (12,907)
Finance receivables - additions (299,937) (305,843)
Finance receivables - collections 276,226 221,727
Proceeds from sale of finance subsidiaries' lease receivables 10,533 281,135
Repurchase of finance subsidiary's lease receivables (275,000)
Other (2,755) (6,398)
--------- ---------
Net cash (used in) provided by investing activities (319,428) 143,506
Cash flows from financing activities
Short-term (repayments) borrowings, net (34,691) 76,763
Proceeds from issuance of long-term debt 3,299 27,162
Proceeds from option exercises and sale of treasury shares 75 1,250
Long-term debt repayments (5,622) (15,941)
Finance subsidiaries' debt - issuance 945,069 2,181
Finance subsidiaries' debt - repayments (372,863) (240,373)
Dividends paid (5,952) (5,881)
Deposit to restricted cash (39,403)
Purchase of treasury shares (152) (14)
--------- ---------
Net cash provided by (used in) financing activities 489,760 (154,853)
Net increase in cash and cash equivalents 70,198 11,095
Cash and cash equivalents at beginning of year 3,386 963
--------- ---------
Cash and cash equivalents at end of period $ 73,584 $ 12,058
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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 $105.3 million ($78.5 million 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 $15.0 million in fiscal 2000 and approximately
$45 million on an annualized basis beginning in fiscal 2001.
The pre-tax components of the charge are as follows:
(dollars in thousands)
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.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1999
The Company commenced several actions specified under these initiatives
in the first quarter of fiscal 2000. The following presents a reconciliation of
the original components of the pre-tax restructuring charge to the balance
remaining at December 31, 1999, which is included in other accrued expenses on
the balance sheet:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance Provision Balance
September 30, Quarter 1 Quarter 1 December 31,
(dollars in thousands) 1999 Fiscal 2000 Payments 1999
------------------ ------------------ ------------------- ------------------
Severance $ -- $ 16,389 $ 2,319 $ 14,070
Contractual Commitments -- 37,403 1,922 35,481
================== ================== =================== ==================
Total $ -- $ 53,792 $ 4,241 $ 49,551
================== ================== =================== ==================
</TABLE>
During the first quarter of fiscal 2000 approximately 150 employees
were terminated and left the Company and 2 facilities were closed.
Note 3: Asset Securitization
In December 1999, our U.S. finance subsidiary sold $311.4 million in
direct financing lease receivables for $247.6 million in cash and a retained
interest in the remainder under our revolving asset securitization agreement.
Our U.S. finance subsidiary had asset securitization agreements for $275 million
of eligible direct financing lease receivables at September 30, 1999. On October
7, 1999 these leases were repurchased with a portion of the proceeds received
from the issuance of lease-backed notes as described in Note 4.
Note 4: Lease-Backed Notes
On October 7, 1999, IKON Receivables, LLC (an affiliate of the U.S.
finance subsidiary) publicly issued $699.6 million of lease-backed notes (the
"Notes") under our $1.825 billion shelf registration statement. Class A-1 Notes
totaling $235.3 million have a stated interest rate of 6.14%, Class A-2 Notes
totaling $51.1 million have a stated interest rate of 6.31%, Class A3a Notes
totaling $100 million have a stated interest rate of 6.59%, Class A3b Notes
totaling $240.9 million have a variable rate of libor plus 0.36% (which we have
fixed at 6.63% through an interest rate swap) and Class A-4 Notes totaling $72.3
million have a stated interest rate of 6.88%. Our U.S. finance subsidiary
received approximately $697 million in net proceeds from the sale of the Notes
and used $275 million of that amount to repurchase previously sold leases. The
Notes are collateralized by a pool of office equipment leases or contracts and
related assets and payments on the Notes are made from payments on the leases.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1999
Note 5: Comprehensive Income
Total comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
<S> <C> <C>
Net (loss) income $(55,636) $28,676
Foreign currency translation adjustments (1,815) (465)
Mark to market adjustment on the retained
interest of lease receivables , net of tax 969
-------- -------
Total comprehensive (loss) income $(57,451) $29,180
======== =======
</TABLE>
Note 6: Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per common share (in thousands except for per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
Numerator:
<S> <C> <C>
Net (loss) income $ (55,636) $ 28,676
Denominator:
Weighted average common shares 148,804 146,965
Contingently issuable common shares 475 1,384
--------- ---------
Denominator for basic earnings per common
share - weighted average common shares 149,279 148,349
Effect of dilutive securities:
Additional contingently issuable common shares 522
Employee stock options 36
--------- ---------
Dilutive potential common shares 558
Denominator for diluted earnings per
common share - adjusted weighted average
common shares and assumed conversions 149,279 148,907
========= =========
Basic and diluted (loss) earnings per common share $ (0.37) $ 0.19
========= =========
</TABLE>
Options to purchase 9,406,800 shares of common stock at $5.94 per share
to $56.42 per share were outstanding during the first quarter of fiscal 2000 and
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 but
were not included in the computation of diluted earnings per common share
because the effect would be antidilutive.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1999
Note 7: Segment Reporting
In the first quarter of fiscal 2000, we made the following change to
our segment reporting: IKON Document Services (which was reported in Other in
fiscal 1999) was split into Business Document Services ("BDS"), Legal Document
Services ("LDS") and Business Imaging Services ("BIS"). BDS is included in IKON
North America and LDS and BIS remain in Other. Prior year results have been
reclassified to conform with the current-year presentation.
The table below presents segment information for the quarter ended December 31,
1999 and 1998:
<TABLE>
<CAPTION>
IKON Corporate
(in thousands) North IKON and
Quarter Ended December 31, 1999 America Europe Other Eliminations Total
----------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues, excluding finance income $ 941,843 $ 121,988 $ 187,572 $ 1,251,403
Finance income 75,658 5,439 81,097
Intersegment revenues 2,300 889 $ (3,189)
Operating income (loss) before
restructuring and asset impairment charges 106,805 5,280 (8,186) (45,604) 58,295
Restructuring and asset impairment charges (34,752) (4,286) (12,124) (54,178) (105,340)
Operating income (loss) 72,053 994 (20,310) (99,782) (47,045)
Interest expense (15,994) (15,994)
Loss before income tax benefit (63,039)
Quarter Ended December 31, 1998
Revenues, excluding finance income $ 976,165 $ 126,080 $ 206,733 $ 1,308,978
Finance income 82,202 5,237 87,439
Intersegment revenues 4,797 636 $ (5,433)
Operating income (loss) 107,305 5,964 1,563 (41,685) 73,147
Interest expense (19,547) (19,547)
Income before taxes 53,600
</TABLE>
Note 8: Shareholder Lawsuit
On November 24, 1999, subject to formal approval by the court, we
reached a settlement with the plaintiffs in the series of purported class action
complaints which were filed in the United States District Court for the Eastern
District of Pennsylvania on behalf of our shareholders, and with the plaintiff
in a companion derivative lawsuit. The plaintiffs alleged that during the period
from January 24, 1996 to August 13, 1998, IKON and certain current and former
principal officers and employee directors publicly disseminated false and
misleading statements concerning our revenue, profitability and financial
condition in violation of the federal securities laws. Under the settlement, we
will pay $111 million. The court has preliminarily approved the settlement. The
court will hold a hearing on the approval of the settlement agreement on April
11, 2000. We believe that the settlement also resolves substantially all aspects
of a purported class action claim pending in federal court in Utah. The Utah
action contains one claim purporting to be a class claim brought under the
Employee Retirement Income Security Act of 1974 ("ERISA"). The plaintiffs seek
to represent a class of persons who participated in our Retirement Savings Plan
after January 1, 1994. The class allegations in the Utah action largely mirror
the allegations made in the complaints filed in the Eastern District of
Pennsylvania. To the extent that any of the putative ERISA class claim survives
the settlement, the Company believes that said claim is without merit.
We recorded a charge of $101.1 million in fiscal 1999 related to the
settlement, which consists of the $111 million settlement plus $10.1 million of
legal fees offset by $20 million of insurance proceeds. This does not include a
$20 million insurance claim which we are pursuing against another
<PAGE>
insurance carrier. Reflecting payment of a portion of the legal fees, the
balance sheet at December 31, 1999, includes $112.7 million in accrued
shareholder litigation settlement and $16.5 million of insurance proceeds
receivable (which is included in prepaid expenses and other current assets). In
January 2000, we transferred $111 million into an escrow account to fund the
settlement and we received $16.5 million of insurance proceeds.
<PAGE>
Item 2: Management's Discussion and Analysis of Results of Operations and
Financial Condition and Liquidity
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 of the results of operations reviews the operations of
the Company as reported in the Consolidated Statements of Operations.
Three Months Ended December 31, 1999
Compared with the Three Months Ended December 31, 1998
Results of operations for the first quarter of fiscal 2000 compared to
the first quarter of fiscal 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31 %
1999 1998 Change
(in thousands)
<S> <C> <C> <C>
Revenues $1,332,500 $1,396,417 (4.6%)
========== ==========
Operating income, excluding restructuring
And asset impairment charges $58,295 $73,147 (20.2%)
Restructuring and asset impairment charges (105,340)
---------- ----------
Operating (loss) income (47,045) 73,147
Interest expense (15,994) (19,547)
---------- ----------
(Loss) income before income tax (benefit) expense $(63,039) $53,600
========== ==========
</TABLE>
The Company's first quarter revenues decreased by $63.9 million, or
4.6%, compared to the first quarter of fiscal 1999. The first quarter of fiscal
1999 included a $14.3 million gain from an asset securitization. Excluding the
gain, overall revenue decreased by $49.6 million, or 3.6%, compared to the first
quarter of fiscal 1999. The decrease in revenue resulted from fewer sales
representatives as compared to the first quarter of 1999, greater than
anticipated Year 2000 deferrals in Technology Services and the continued backlog
status of some digital products. We began the year with 1,000 fewer sales
representatives than the first quarter of fiscal 1999, and although 175
representatives were added during the quarter, they typically require three to
six months to become fully productive. Net sales, which include equipment
revenue, decreased by $39.2 million or 5.5%. Approximately one-third of the
decrease was attributable to Year 2000 delays in purchasing equipment through
our Technology Services businesses in both the U.S. and Europe. The remainder of
the decrease resulted from the continued backlog status of some digital products
and fewer sales representatives as compared to the first quarter of fiscal 1999.
Service and rental revenue decreased by $18.3 million or 3.0%. This decrease
resulted from the continued underperformance of, and Year 2000 impact on, our
Technology Service and Business Document Service units. Finance income decreased
by $6.3 million or 7.3%. Excluding the gain from an asset securitization in the
first quarter of fiscal 1999, finance income increased by $8.0 million, or
10.9%, due to the recognition of deferred revenue items associated with last
year's balance sheet financings. These items have been recognized in conjunction
with subsequent financings that placed these securitizations back on the balance
sheet.
Gross margin was 37.3%, compared to 38.2%, excluding the asset
securitization gain, in the first quarter of fiscal 1999. However, the gross
margin in the first quarter of fiscal 2000 was relatively flat compared to the
fourth quarter of fiscal 1999, despite the lower revenue base. Margins on
<PAGE>
equipment sales were relatively stable. Service margins on the traditional
copier business have improved, but were offset by weak margins in our Technology
and Business Document Service businesses resulting in flat service margins
overall compared to the fourth quarter of fiscal 1999.
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 $105.3 million ($78.5 million
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 $15.0 million in fiscal 2000 and approximately
$45 million on an annualized basis beginning in fiscal 2001.
The pre-tax components of the charge are as follows:
(dollars in thousands)
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.
The Company commenced several actions specified under these initiatives
in the first quarter of fiscal 2000. The following presents a reconciliation of
the original components of the pre-tax restructuring charge to the balance
remaining at December 31, 1999, which is included in other accrued expenses on
the balance sheet:
<TABLE>
<CAPTION>
Balance Provision Balance
September 30, Quarter 1 Quarter 1 December 31,
(dollars in thousands) 1999 Fiscal 2000 Payments 1999
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Severance $ -- $ 16,389 $ 2,319 $ 14,070
Contractual Commitments -- 37,403 1,922 35,481
================== ================== =================== ==================
Total $ -- $ 53,792 $ 4,241 $ 49,551
================== ================== =================== ==================
</TABLE>
During the first quarter of fiscal 2000 approximately 150 employees
were terminated and left the Company and 2 facilities were closed.
The Company's operating income decreased by $120.2 million compared to
the last year's first quarter. Excluding restructuring and asset impairment
charges in the first quarter of fiscal 2000 and the gain from the asset
securitization in fiscal 1999, operating income decreased by $0.5 million to
$58.3 million for the first quarter of fiscal 2000, compared to $58.8 million in
the prior year. Our operating
<PAGE>
margin, excluding the restructuring and asset impairment charges in fiscal 2000,
and gain on asset securitization in fiscal 1999, improved from 4.3% in the first
quarter of fiscal 1999 to 4.4% in the first quarter of fiscal 2000 despite the
decrease in our revenues. This resulted from improved management of selling and
administrative costs. Selling and administrative expense as a percent of
revenue, excluding the asset securitization gain in fiscal 1999, was 32.9% in
the first quarter of fiscal 2000 compared to 33.9% in the first quarter of
fiscal 1999. The decrease was the result of centralizing certain key functions,
adopting new credit controls, and productivity improvements within our business
segments.
Interest expense decreased by $3.6 million in the first quarter of
fiscal 2000 compared to the first quarter of fiscal 1999 as a result of lower
average debt levels during the first quarter of fiscal 2000 as compared to
fiscal 1999.
There was a loss before taxes of $63.0 million in the first quarter of
fiscal 2000 compared to income before taxes of $73.1 million in the first
quarter of fiscal 1999. Excluding the restructuring and asset impairment charges
in fiscal 2000 and the gain from the asset securitization in fiscal 1999, income
before taxes increased by $3.0 million to $42.3 million in the first quarter of
fiscal 2000 compared to $39.3 million in the prior year. The increase was
primarily the result of the decrease in selling and administrative expenses and
interest expense described above. The effective income tax rate for the first
quarter of fiscal 2000, excluding the effect of the restructuring and asset
impairment charges, is 46.0% compared to 46.5% for the comparable period in
fiscal 1999.
Diluted earnings per common share decreased from $.19 per share for the
first quarter of fiscal 1999 to a loss of $.37 per share for the first quarter
of fiscal 2000. Excluding the after-tax effect of the restructuring and asset
impairment charges in fiscal 2000 and the gain on the asset securitization in
fiscal 1999, diluted earnings per common share were $.15 in the first quarter of
fiscal 2000 compared to $.13 in the first quarter of fiscal 1999.
Review of Business Segments
In the first quarter of fiscal 2000, we made the following change to our segment
reporting: IKON Document Services (which was reported in Other in fiscal 1999)
was split into Business Document Services ("BDS"), Legal Document Services
("LDS") and Business Imaging Services ("BIS"). BDS is included in IKON North
America and LDS and BIS remain in Other. Prior year results have been
reclassified to conform with the current-year presentation.
IKON North America
External revenues, excluding finance income, decreased by $34.4 million
or 3.5% to $941.8 million in the first quarter of fiscal 2000 from $976.2
million in the first quarter of fiscal 1999. The decrease was primarily due to
fewer sales representatives as compared to the first quarter of 1999 and the
continued backlog status of some digital products. Although there were fewer
sales representatives than the prior year, we are focusing on rebuilding our
sales force. In the first quarter of fiscal 2000, 175 sales representatives were
added to the sales force in key focus areas such as color, high volume and
facilities management. Approximately 79% of our equipment revenues came from
digital and color sales as compared to 69% in the fourth quarter of fiscal 1999
and 46% in the first quarter of fiscal 1999. Finance income increased by $7.8
million, or 11.5%, to $75.7 million in the first quarter of fiscal 2000 compared
to $67.9 million in the first quarter of fiscal 1999, excluding the asset
securitization gain. The increase was due to the recognition of deferred revenue
items associated with last year's balance sheet financings. These items have
been recognized in conjunction with subsequent financings that placed these
securitizations back on the balance sheet. Despite the decrease in revenues,
operating income (excluding the restructuring and asset impairment charges in
the first quarter of fiscal 2000) increased by $13.8 million to $106.8 million
in the first quarter of fiscal 2000 from $93.0 million in the first quarter of
fiscal 1999, excluding the asset securitization gain. The increase was due
mainly to the improved management of selling and administrative costs described
above.
IKON Europe
External revenues, excluding finance income, decreased by $4.1 million,
or 3.2%, to $122 million in the first quarter of fiscal 2000 from $126.1 million
in the first quarter of fiscal 1999.
<PAGE>
Excluding the impact of foreign currency translation, revenues in our IKON
Europe segment increased by 2.5% as compared to the first quarter of fiscal 1999
due mainly to an increase in traditional copier equipment revenues in the United
Kingdom. Finance income increased by $0.2 million, or 3.9%, to $5.4 million in
the first quarter of fiscal 2000 from $5.2 million in the first quarter of
fiscal 1999 due to growth in the lease portfolio. Operating income (excluding
the restructuring and asset impairment charges in the first quarter of fiscal
2000) decreased by $0.7 million, or 11.5%, to $5.3 million in the first quarter
of fiscal 2000 from $6.0 million in the first quarter of fiscal 1999. The
decrease is due to the mix of lower margin technology service operations and
direct competition from equipment vendors.
Other
Other external revenues decreased by $19.1 million, or 9.3%, to $187.6
million in the first quarter of fiscal 2000 from $206.7 million in the first
quarter of fiscal 1999. There was an operating loss before restructuring and
asset impairment charges of $8.2 million in the first quarter of fiscal 2000
versus operating income of $1.6 million in the first quarter of fiscal 1999. The
decrease in revenues and operating income was due to higher than anticipated
Year 2000 delays, increased competition and Windows 2000 delays, as well as a
restructuring in our Technology Services business.
Impact of Year 2000
January 2000 Update. Through January 31, 2000, our operations are fully
functioning and have not experienced any significant issues associated with the
Year 2000 problem (as described below).
State of Readiness. The Year 2000 issue arose from computer programs
being written using two digits rather than four to define the applicable year.
Any of our 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.
We have a Year 2000 Corporate Compliance Team, which has prepared an
international compliance program for us 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. Our 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.
Our Year 2000 compliance program has five phases: (1) inventory of
internal IT and non-IT systems; (2) risk assessment of the Year 2000 compliance
issues associated with such internal IT and non-IT systems; (3) remediation of
non-compliant systems; (4) testing and validation of remediated systems; and (5)
implementation of remediated systems throughout the Company. The progress to
date of each of these phases is as follows: (1) internal IT and non-IT systems
have been inventoried; (2) appropriate risk assessments have been completed; (3)
remediation of critical systems have been completed; (4) testing and validation
of critical systems have been completed; and (5) Year 2000 compliant versions
have been implemented in field operations.
Product warranties and certifications were sought from vendors and
suppliers. The Company has obtained "Year 2000 Statements" from national vendors
including Canon, Oce, Ricoh and Sharp.
Costs. We have used both internal and external resources to reprogram
or replace, test and implement our IT and non-IT systems for Year 2000
modifications. We do 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 approximately $7.4 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 and hardware
<PAGE>
and will be capitalized. Through January 31, 2000, we have incurred
approximately $7.4 million ($5.0 million expensed and $2.4 million capitalized),
related to our Year 2000 project.
Risks. We believe, based on the information currently available to us, 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 us, our customers and suppliers, but to all businesses. Risks
include, but are not limited to:
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.
We have 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
us prior to the inclusion of such limited warranties, differing interpretations
of the warranties included with such products will likely result in litigation
against us. We are not able to assess the impact of such potential litigation at
this time.
We are engaged in the provision of certain Year 2000 services to customers,
whereby we evaluate the Year 2000 compliance of customers' software and
hardware, and work with customers to find solutions to Year 2000 problems. We
have taken steps to limit its warranties with respect to our provision of such
services.
The cost of the project and the date on which we believe it will complete
the Year 2000 modifications are based on our 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. Our 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 have
been developed and completed.
Financial Condition and Liquidity
Net cash used in operating activities for the first quarter of fiscal
2000 was $100.1 million. During the same period, the Company used $319.4 million
of cash in investing activities, which included net finance subsidiary use of
$288.2 million, acquisition activity at a cash cost of $1.9
million, capital expenditures for property and equipment of $22.7 million and
net capital expenditures for equipment on operating rental of $7.3 million. Cash
provided by financing activities of $489.8 million, includes a $37.0 million net
decrease in corporate debt, excluding the effects of acquisitions and a $572.2
million increase in finance subsidiaries debt. Debt, excluding finance
subsidiaries, was $822.1 million at December 31, 1999, a decrease of $36.9
million from the debt balance at September 30, 1999 of $859.0 million. The debt
to capital ratio, excluding finance subsidiaries, was 37.0% at December 31, 1999
and September 30, 1999. Excluding the impact of loans from our finance
subsidiaries, our debt increased by $137 million at December 31, 1999 compared
to September 30, 1999. The increase in the Company's assets was due mainly to
the repurchase of $275 million of direct financing lease receivables and
additional inventory purchases due to an anticipated price increase. 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 December 31, 1999, short-term borrowings under a $600 million
credit agreement totaled $25 million. The Company also has $700 million
available for either stock or debt offerings under its shelf registration
statement.
<PAGE>
Finance subsidiaries debt increased by $574.3 million 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 three months ended December
31, 1999, the U.S. finance subsidiary repaid $372.9 million of debt, $697.5
million of lease-backed notes were issued and there was $247.6 million of new
bank borrowings. At December 31, 1999, $1.0 billion of medium term notes were
outstanding with a weighted interest rate of 6.4%, while $1.3 billion remains
available under this program. In December 1999, the U.S. finance subsidiary
entered into a new asset securitization agreement under which it received cash
of $247 million. 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 $275 million asset securitization
program. In December 1999, our Canadian finance subsidiary sold CN$ 16.1 million
in leases under the Canadian CN$175 million asset securitization agreement and
received CN$14.4 million in cash.
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 3.5 million shares have been issued under
this shelf registration through December 31, 1999, leaving 6.5 million shares
available for issuance.
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 and shareholder litigation
settlement.
Pending Accounting Changes
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), 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.
We intend to adopt the standard on October 1, 2000. We do not believe the effect
of adoption will be material.
Item 3: Quanitative 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
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 does not have significant foreign exchange risk. Foreign
denominated intercompany debt borrowed in one currency and repaid in another is
fixed via currency swap agreements.
<PAGE>
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: growth
opportunities, productivity initiatives, and the impact of the Company's brand
strategy, revenue, margin, and cost-savings projections, expected savings from
the repositioning program, anticipated growth rates in the digital equipment and
outsourcing industries; the financial and legal impact of the class action
litigation settlement; 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 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 October 21, 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 October 21, 1999 that the Company would not
meet the First Call consensus estimate of $.22 per share earnings
for the fiscal quarter and year ended September 30, 1999. Based on
preliminary results the Company expects earnings to be in the range
of $.13 to $.15 per share.
On November 24, 1999, the registrant filed a Current Report on Form
8-K to file under Item 5 of the form, information announcing the
registrant had reached an agreement to settle, subject to court
approval, the securities class action and derivative lawsuits
brought by its shareholders.
On December 21, 1999, the registrant filed a Current Report on Form
8-K to file, under Item 4 of the form, information regarding the
appointment of PricewaterhouseCoopers LLP as its independent
auditors for the fiscal year ending September 30, 2000 to replace
the firm of Ernst & Young LLP who were dismissed as auditors of the
registrant effective with their completion of their audit of the
registrant's financial statements for the fiscal year ended
September 30, 1999.
<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 14, 2000 /s/ William S. Urkiel
-------------------- ----------------------
William S. Urkiel
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of IKON Office Solutions, Inc. and
subsidiaries and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000003370
<NAME> IKON OFFICE SOLUTIONS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Sep-30-2000
<PERIOD-END> Dec-31-1999
<CASH> 73,584
<SECURITIES> 0
<RECEIVABLES> 802,805
<ALLOWANCES> 49,146
<INVENTORY> 397,691
<CURRENT-ASSETS> 2,547,571
<PP&E> 769,738 <F1>
<DEPRECIATION> 444,745 <F2>
<TOTAL-ASSETS> 6,232,084
<CURRENT-LIABILITIES> 2,124,005
<BONDS> 2,183,712
0
0
<COMMON> 1,011,760
<OTHER-SE> 386,347
<TOTAL-LIABILITY-AND-EQUITY> 6,232,084
<SALES> 668,482
<TOTAL-REVENUES> 1,332,500
<CGS> 451,092
<TOTAL-COSTS> 835,982 <F3>
<OTHER-EXPENSES> 543,563 <F4>
<LOSS-PROVISION> 12,335
<INTEREST-EXPENSE> 15,994
<INCOME-PRETAX> (63,039)
<INCOME-TAX> (7,403)
<INCOME-CONTINUING> (55,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,636)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
<FN>
<F1>
(1) Includes equipment on operating leases, at cost, of $238,423.
<F2>
(2) Includes accumulated depreciation for equipment on operating leases of
$155,149.
<F3>
(3) Includes Finance Subsidiaries interest of $39,452.
<F4>
(4) Represents selling, general and administrative expenses and restructuring
and asset impairment charge.
</FN>
</TABLE>
