Financial Contents
22 Management's Responsibility for Financial Reporting
22 Report of Ernst & Young LLP, Independent Auditors
23 Consolidated Financial Statements
38 Financial Review
40 Corporate Financial Summary
42 Quarterly Financial Summary (Unaudited)
IKON OFFICE SOLUTIONS 21
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Alco Standard Corporation is responsible for the preparation
and presentation of the financial statements and related financial information
included in this annual report. The financial statements include amounts that
are based on management's best estimates and judgements. These statements have
been prepared in conformity with generally accepted accounting principles
consistently applied and have been audited by Ernst & Young LLP, independent
auditors.
Management is also responsible for maintaining systems of internal
accounting controls that are designed to provide reasonable assurance as to the
integrity of the financial records and the protection of corporate assets. Alco
Standard Corporation supports an active program of auditing to monitor the
proper functioning of its systems. The reports issued by Alco, as well as
comment letters from Ernst & Young LLP, are reviewed regularly by the Audit
Committee of the Board of Directors, which is composed of three directors who
are not employees of the Company. The Audit Committee meets periodically with
Ernst & Young LLP, Alco and management to review audit scope, timing and
results.
/s/ John E. Stuart
John E. Stuart
Chairman and Chief Executive Officer
/s/ Kurt E. Dinkelacker
Kurt E. Dinkelacker
President and Chief Operating Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Alco Standard Corporation
We have audited the accompanying consolidated balance sheets of Alco Standard
Corporation and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Alco Standard Corporation and subsidiaries at September 30, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 16, 1996,
except for note 2,
as to which the date is
November 20, 1996
IKON OFFICE SOLUTIONS 22
CONSOLIDATED STATEMENTS OF INCOME
Alco Standard Corporation and Subsidiaries
Fiscal Year Ended September 30 (in thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $2,381,151 $1,807,408 $1,397,271
Service and rentals 1,560,915 1,191,175 927,065
Finance income 157,707 93,019 66,731
- --------------------------------------------------------------------------------------------------------------------
4,099,773 3,091,602 2,391,067
- --------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of goods sold 1,552,183 1,189,533 905,933
Service and rental costs 794,686 603,664 457,983
Finance interest expense 68,043 40,216 27,978
Selling and administrative 1,374,805 1,046,005 822,586
Loss from unconsolidated affiliate 117,158
- --------------------------------------------------------------------------------------------------------------------
3,789,717 2,879,418 2,331,638
- --------------------------------------------------------------------------------------------------------------------
Operating Income 310,056 212,184 59,429
Interest Expense 37,179 21,672 16,118
- --------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Taxes 272,877 190,512 43,311
Taxes on Income 107,984 75,501 41,315
- --------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 164,893 115,011 1,996
Discontinued Operations 45,848 88,661 74,476
- --------------------------------------------------------------------------------------------------------------------
Net Income 210,741 203,672 76,472
Less Preferred Dividends 22,319 15,209 11,572
- --------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 188,422 $ 188,463 $ 64,900
- --------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share
Continuing operations $ 1.12 $ .86 $ (.09)
Discontinued operations .36 .76 .67
====================================================================================================================
$ 1.48 $ 1.62 $ .58
====================================================================================================================
Cash Dividends Per Share of Common Stock $ .56 $ .52 $ .50
See notes to consolidated financial statements.
IKON OFFICE SOLUTIONS 23
CONSOLIDATED BALANCE SHEETS
Alco Standard Corporation and Subsidiaries
September 30 (dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 46,056 $ 66,413
Accounts receivable, less allowances of:
1996 - $35,308; 1995 - $32,856 513,378 368,518
Finance receivables, net 435,434 326,315
Inventories 350,774 267,756
Prepaid expenses 80,352 46,626
Deferred taxes 83,161 56,323
- ----------------------------------------------------------------------------------------------
Total current assets 1,509,155 1,131,951
- ----------------------------------------------------------------------------------------------
Investments and Long-Term Receivables 48,165 47,185
Long-Term Finance Receivables, net 878,324 587,789
Equipment on Operating Leases, net
of accumulated amortization of:
1996 - $153,909; 1995 - $134,848 95,043 68,488
Property and Equipment, at cost
Land 9,412 4,966
Buildings and improvements 72,709 58,101
Machinery and equipment 276,113 187,350
- ----------------------------------------------------------------------------------------------
358,234 250,417
Less accumulated depreciation 169,416 126,155
- ----------------------------------------------------------------------------------------------
188,818 124,262
- ----------------------------------------------------------------------------------------------
Other Assets
Goodwill 1,087,210 792,850
Miscellaneous 88,679 22,829
- ----------------------------------------------------------------------------------------------
1,175,889 815,679
- ----------------------------------------------------------------------------------------------
Net Assets of Discontinued Operations 1,489,201 1,334,976
- ----------------------------------------------------------------------------------------------
$ 5,384,595 $ 4,110,330
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
IKON OFFICE SOLUTIONS 24
September 30 (dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt $ 62,697 $ 37,457
Current portion of long-term debt, finance subsidiaries 314,000 171,232
Notes payable 186,462 256,601
Trade accounts payable 123,571 68,827
Accrued salaries, wages and commissions 101,632 82,382
Deferred revenues 200,225 182,172
Other accrued expenses 269,400 188,593
- ----------------------------------------------------------------------------------------------
Total current liabilities 1,257,987 987,264
- ----------------------------------------------------------------------------------------------
Long-Term Debt 721,923 316,688
Long-Term Debt, Finance Subsidiaries 813,026 646,353
Deferred Taxes 191,272 108,706
Other Long-Term Liabilities 144,883 159,957
Shareholders' Equity
Series AA convertible preferred stock, no par value:
1995 - 4,025,000 depositary shares issued and outstanding 201,924
Series BB conversion preferred stock, no par value:
3,877,200 depositary shares issued and outstanding 290,170 290,170
Common stock, no par value: authorized 300,000,000 shares;
issued 1996 - 131,930,000 shares; 1995 - 116,136,000 shares 1,305,413 643,998
Retained earnings 701,771 781,536
Foreign currency translation adjustment (25,187) (21,540)
Cost of common shares in treasury: 1996 - 374,000 shares;
1995 - 118,000 shares (16,663) (4,726)
- ----------------------------------------------------------------------------------------------
2,255,504 1,891,362
- ----------------------------------------------------------------------------------------------
$5,384,595 $4,110,330
==============================================================================================
See notes to consolidated financial statements.
IKON OFFICE SOLUTIONS 25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Alco Standard Corporation and Subsidiaries
Fiscal Year Ended September 30 (in thousands, except per share data) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Shares Amounts
- ---------------------------------------------------------------------------------------------------------------------------------
Series AA Convertible Preferred Stock
Balance, beginning of year 4,025 $ 201,924 4,025 $ 199,912 4,025 $197,900
Dividend accretion 503 2,012 2,012
Preferred stock conversion (4,025) (202,427)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 4,025 $ 201,924 4,025 $199,912
=================================================================================================================================
Series BB Conversion Preferred Stock
Balance, beginning of year 3,877 $ 290,170
Issued in public offering 3,877 $ 290,170
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,877 $ 290,170 3,877 $ 290,170
=================================================================================================================================
Common Stock
Balance, beginning of year 116,136 $ 643,998 112,998 $ 551,711 101,498 $ 259,527
Issued in public offering 11,500 293,500
Series AA preferred stock conversion 8,198 368,382
Mergers, acquisitions and other 7,596 285,836 3,138 87,566 (4,104)
Tax benefit relating to stock plans 7,197 4,721 2,788
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 131,930 $1,305,413 116,136 $ 643,998 112,998 $ 551,711
=================================================================================================================================
Retained Earnings
Balance, beginning of year $ 781,536 $ 659,526 $ 664,910
Net income 210,741 203,672 76,472
Cash dividends declared:
Series AA preferred stock, per share: 1996 - $.719;
1995 - $2.875; 1994 - $2.875 (2,779) (11,572) (11,572)
Series BB preferred stock, per share: 1996 - $5.04;
1995 - $.938 (19,540) (3,637)
Common stock, per share: 1996-$.56;
1995 - $.52; 1994 - $.50 (70,010) (57,267) (52,222)
Pooled companies, prior to merger (177) (2,159) (4,916)
Series AA preferred stock conversion (199,108)
Credits (charges) from issuance of
treasury shares and other 1,108 (7,027) (13,146)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 701,771 $ 781,536 $ 659,526
=================================================================================================================================
Foreign Currency Translation Adjustment
Balance, beginning of year $ (21,540) $ (22,609) $ (23,602)
Translation adjustment (3,647) 1,069 (1,444)
Sale of investment in unconsolidated affiliate 2,437
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (25,187) $ (21,540) $ (22,609)
=================================================================================================================================
Cost of Common Shares in Treasury
Balance, beginning of year 118 $ (4,726) 148 $ (4,067) 3,616 $ (64,048)
Purchases 2,004 (86,084) 2,783 (91,430) 1,774 (47,733)
Reissued for:
Exercise of options (395) 17,287 (544) 16,652 (908) 18,027
Sales to employee stock plans (534) 23,710 (2,267) 74,067 (2,344) 47,799
Mergers, acquisitions and other (2) 52 (1,990) 41,888
Series AA preferred stock conversion (819) 33,150
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 374 $ (16,663) 118 $ (4,726) 148 $ (4,067)
=================================================================================================================================
See notes to consolidated financial statements.
26 IKON OFFICE SOLUTIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Alco Standard Corporation and Subsidiaries
Fiscal Year Ended September 30 (in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Operating Activities
Income from continuing operations $ 164,893 $ 115,011 $ 1,996
Additions (deductions) to reconcile net income from continuing
operations to net cash provided by operating activities
of continuing operations
Depreciation 84,447 62,064 48,881
Amortization 34,107 25,309 18,548
Provisions for losses on accounts receivable 18,296 10,051 7,133
Provision for deferred income taxes 62,174 42,106 6,106
Loss on sale of investment in unconsolidated affiliate 115,265
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Increase in accounts receivable (83,783) (66,184) (35,003)
(Increase) decrease in inventories (41,445) (41,698) 13,840
Increase in prepaid expenses (52,733) (18,508) (2,154)
Increase in accounts payable, deferred revenues
and accrued expenses 77,430 73,552 32,700
Miscellaneous 4,475 5,166 7,052
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of continuing operations 267,861 206,869 214,364
Net cash provided by (used in) operating activities of
discontinued operations 205,914 (66,618) 94,538
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 473,775 140,251 308,902
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Cost of companies acquired, net of cash acquired (171,804) (260,975) (46,112)
Expenditures for property and equipment (146,634) (91,112) (79,026)
Proceeds from sale of property and equipment 34,482 18,427 20,098
Purchase of miscellaneous assets (19,054) (8,729) (3,360)
Finance receivables - additions (1,005,270) (665,058) (408,412)
Finance receivables - collections 389,384 241,886 210,969
Proceeds from sale (net of cash retained) of investment
in unconsolidated affiliate 8,226
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of continuing operations (918,896) (765,561) (297,617)
Net cash used in investing activities of
discontinued operations (201,356) (131,628) (59,554)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,120,252) (897,189) (357,171)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from:
Issuance of long-term debt 436,800 30,035 11,150
Issuance of Series BB conversion preferred stock, net 290,170
Issuance of common stock, net 293,500
Option exercises and sale of treasury shares 55,084 91,848 69,914
Sale of finance subsidiaries' lease receivables 202,713 66,677 125,000
Life insurance borrowings 2,349 3,342 31,055
Issuance (repayment) of short-term borrowings, net (69,883) 158,569 (68,278)
Long-term debt repayments (74,546) (40,394) (344,511)
Finance subsidiaries' debt - issuance 515,673 534,717 248,098
Finance subsidiaries' debt - repayments (206,232) (182,014) (196,308)
Dividends paid (91,826) (70,464) (61,900)
Purchase of treasury shares (86,084) (91,430) (47,733)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities of continuing operations 684,048 791,056 59,987
Net cash used in financing activities of
discontinued operations (57,928) (4,706) (7,257)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 626,120 786,350 52,730
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (20,357) 29,412 4,461
Cash at beginning of year 66,413 37,001 32,540
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 46,056 $ 66,413 $ 37,001
==========================================================================================================================
See notes to consolidated financial statements.
IKON OFFICE SOLUTIONS 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alco Standard Corporation and Subsidiaries
Alco Standard Corporation (Alco or the Company), through its IKON Office
Solutions business (IKON), sells, rents and leases photocopiers, fax machines
and other automated office equipment for use in both traditional and integrated
office environments. IKON, which operates as one business segment, also provides
equipment service and supplies, equipment financing and facilities management
and specialized document copying services. IKON has locations throughout the
United States and Canada and in Europe (primarily in the United Kingdom), which
comprise the largest network of independent copier and office equipment dealers
in North America and in the United Kingdom. IKON has built upon these strengths
in recent years to expand into outsourcing and networking services to provide
one-stop shopping to customers who seek quality, accessible office productivity
solutions.
1 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Alco and its
wholly owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation. As a result of the decision to spin off
Unisource Worldwide, Inc. (Unisource), the Company's printing and imaging and
supply systems distribution business, as discussed in note 2, and the mergers
with two companies that have been accounted for as poolings of interests, as
discussed in note 3, prior-period amounts have been restated. All of the
following notes, unless otherwise stated, reflect data on a continuing
operations basis.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and notes. Actual results
could differ from those estimates and assumptions.
Revenue Recognition
Revenues are recorded at the time of shipment of products or performance of
services. Revenues from service contracts are recognized in earnings over the
term of the contract. The present values of payments due under sales-type lease
contracts are recorded as revenues and cost of goods sold is charged with the
book value of the equipment at the time of shipment. Future interest income is
deferred and recognized over the related lease term.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method and consist of finished goods available for sale.
Goodwill
Substantially all goodwill (excess of purchase price over net assets acquired)
is amortized over 40 years by the straight-line method. The recoverability of
goodwill is evaluated at the operating unit level by an analysis of operating
results and consideration of other significant events or changes in the business
environment. If an operating unit has current operating losses and based upon
projections there is a likelihood that such operating losses will continue, the
Company will evaluate whether impairment exists on the basis of undiscounted
expected future cash flows from operations before interest for the remaining
amortization period. If impairment exists, the carrying amount of the goodwill
is reduced by the estimated shortfall of cash flows.
Depreciation
Properties and equipment are depreciated over their useful lives by the
straight-line method.
Earnings (Loss) Per Share
Earnings (Loss) per share are based on 127,649,000 weighted average shares in
1996, 116,474,000 shares in 1995 and 111,412,000 shares in 1994, and include the
dilutive effect of common stock equivalents, principally stock options. All
common shares and per share amounts have been adjusted to give retroactive
effect to a two-for-one stock split effected in the form of a stock dividend
distributed on November 9, 1995 to holders of record on October 27, 1995.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of shareholders'
equity.
Accounting Changes
During fiscal 1994, the Company changed its methods of accounting for income
taxes and retiree healthcare benefits. The cumulative effect of adopting each of
these new accounting methods was immaterial.
Pending Accounting Changes
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (FAS 121), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. FAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt FAS 121 in the first quarter of fiscal 1997 and, based on
current circumstances, does not believe the effect of adoption will be material.
28 IKON OFFICE SOLUTIONS
1 SIGNIFICANT ACCOUNTING POLICIES (cont)
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). This statement establishes a fair value method of
accounting for stock-based compensation plans. Adoption of the fair value method
is encouraged; however, entities may elect to continue to account for
stock-based compensation plans according to the provisions of Accounting
Principles Board Statement No. 25, "Accounting for Stock Issued to Employees"
(APB 25), while providing additional disclosures required by FAS 123. The
Company is required to adopt FAS 123 in the first quarter of fiscal 1997, and
intends to account for stock-based compensation according to APB 25 and provide
FAS 123 disclosures as required.
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125),
which establishes accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control. FAS 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. The Company does not believe
the effect of adoption will be material.
Interest Rate Swap Agreements
The Company has entered into several interest rate swap agreements as a means of
managing its interest rate exposure. These agreements have the effect of
converting certain of the Company's variable rate obligations to fixed rate
obligations. Net amounts paid or received are reflected as adjustments to
interest expense.
2 DISCONTINUED OPERATIONS
On June 19, 1996, the Company announced that it would separate Unisource, its
printing and imaging and supply systems distribution business from IKON, its
office solutions business, with each business operating as a stand-alone,
publicly traded company. In order to effect the separation of these businesses,
Alco has declared a dividend payable to holders of record of Alco common stock
at the close of business on December 13, 1996 (the Record Date) of one share of
common stock, no par value, of Unisource Worldwide, Inc. (Unisource Common
Stock), for every two shares of Alco stock owned on the Record Date. The actual
number of shares of Unisource Common Stock to be distributed will be determined
as of the Record Date. As a result of the distribution, 100% of the outstanding
shares of Unisource Common Stock will be distributed to Alco shareholders. The
Internal Revenue Service has issued a ruling letter which provides that, except
for any cash received in lieu of fractional shares, the spin-off of Unisource
will be tax-free to Alco and to Alco's U.S. shareholders. Alco expects to
complete the spin-off by December 31, 1996 (the Distribution Date) and to mail
the Unisource shares during the last week of December 1996.
In conjunction with the separation of their businesses, Unisource and Alco
entered into various agreements that address the allocation of assets and
liabilities between them and define their relationship after the separation,
including a Distribution Agreement (Distribution Agreement), a Benefits
Agreement (Benefits Agreement) and a Tax Sharing and Indemnification Agreement
(Tax Sharing Agreement).
The Distribution Agreement provides for, among other things, the principal
transactions required to effect the Distribution, the conditions to the
Distribution, the allocation between Alco and Unisource of certain assets and
liabilities, and cooperation by Alco and Unisource in the provision of
information and certain facilities necessary to perform the administrative
functions incident to their respective businesses. The Distribution Agreement
includes cross indemnification provisions pursuant to which Unisource and Alco
indemnify each other for damages that may arise out a breach of their respective
obligations under the agreement.
Under the Benefits Agreement, the wages, salaries and employee benefits of all
employees of Unisource will be the responsibility of Unisource. Generally,
Unisource's obligation to provide benefits will include all obligations with
respect to Unisource employees under pension plans, savings plans and
multiemployer plans, welfare plans (retiree medical plans), supplemental benefit
plans, certain deferred compensation plans, incentive plans, stock-based plans
and other plans covering Unisource employees and will include liabilities that
arose while the individuals were employed by Alco. The Benefits Agreement
requires Alco to reimburse Unisource for a portion of any payments made by
Unisource to former Unisource employees under Alco's 1985, 1991 and 1994
deferred compensation plans. Unisource will assume certain Alco pension plans
covering Unisource employees, and assets and liabilities attributable to
Unisource employees under Alco's participating companies pension plan and Alco's
401(k) plan will be transferred to a new Unisource pension plan and 401(k) plan,
respectively.
Under the Tax Sharing Agreement, Unisource will bear its respective share of (i)
Alco's Federal consolidated income tax liability (or benefit), (ii) any unitary
state income tax liability, and (iii) Alco's consolidated personal property tax
liability for all tax periods that end before or that include the Distribution
Date. For the taxable year ended September 30, 1996, Unisource's share of Alco's
Federal consolidated tax liability (or benefit) will be 40% of such liability
(or benefit) and Alco's share of such liability (or benefit) will be 60%.
Unisource is responsible for paying any tax liabilities arising for any tax
returns that it files separately. If any tax year ending before or including the
Distribution Date is subsequently examined by the IRS, and an adjustment results
from such examination, then Unisource's share of Alco's additional Federal
consolidated income tax liability (or benefit for that tax year) shall be
computed and agreed to by the parties. The Tax Sharing Agreement generally
provides that in the event
IKON OFFICE SOLUTIONS 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alco Standard Corporation and Subsidiaries
2 DISCONTINUED OPERATIONS (CONT)
either Alco or Unisource takes any action inconsistent with, or fails to take
any action required by, or in accordance with the qualification of the
Distribution as tax-free, then Alco or Unisource, as the case may be, will be
liable for and indemnify and hold the other harmless from any tax liability
resulting from such action.
The Company has accounted for Unisource as a discontinued operation for all
periods presented in these financial statements. Prior-year amounts for
Unisource have been restated to reflect interest and other expenses allocated by
Alco. Unisource has been charged corporate interest expense based on the
relationship of its net assets to total Alco net assets, excluding corporate
debt, in amounts of $29,572,000 in 1996, $26,586,000 in 1995 and $19,813,000 in
1994. The Company recorded a charge against earnings of $50,000,000 in the third
quarter of fiscal 1996 for new restructuring activities at Unisource. The charge
includes facility closures costs of $33,000,000 and severance costs for
approximately 900 employees of $17,000,000 associated with the announced
regional realignment from ten to five regions in the United States and
facilities mergers in the U.S. and Canada. An $18,000,000 charge against
earnings was recorded in the third quarter of fiscal 1996 for costs associated
with the spin-off of Unisource consisting primarily of investment banking fees,
legal and accounting fees, filing fees and employee termination costs directly
related to the spin-off.
The Company has owned several manufacturing and industrial businesses, all of
which have been sold. There are currently environmental remediation claims
pending for manufacturing or landfill sites in the United States that relate to
these discontinued operations. As a result of several environmental remediation
claims, and increased estimated costs associated with existing environmental
remediation sites, primarily related to discontinued manufacturing operations
divested by the Company in 1991 and prior, the Company took a fourth quarter
charge in fiscal 1995 to increase its liabilities for environmental remediation.
The discontinued operations charge was $23,630,000 ($16,541,000 net of tax) or
$.14 per share.
During 1995, the Company agreed to pay $10,000,000 to settle a claim by a former
subsidiary, which had asserted that the Company was liable for certain employee
liabilities. This amount was primarily charged against existing reserves for
discontinued operations. The Company paid $5,000,000 during 1995 and $2,000,000
in 1996, with the remaining $3,000,000 to be paid over the next three years.
The results of discontinued operations were:
Fiscal year ended September 30 (in thousands)
1996 1995 1994
- --------------------------------------------------------------------------------
Revenues (Unisource) $7,022,808 $6,987,274 $5,756,519
- --------------------------------------------------------------------------------
Income (loss) before taxes
Unisource
(including $50,000
restructuring charge
in 1996) $ 103,003 $ 172,745 $ 122,293
Spin-off costs (18,000)
Environmental charge (23,630)
- --------------------------------------------------------------------------------
85,003 149,115 122,293
Tax expense (benefit)
Unisource 43,005 67,543 47,817
Spin-off costs (3,850)
Environmental charge (7,089)
- --------------------------------------------------------------------------------
39,155 60,454 47,817
Net income (loss)
Unisource 59,998 105,202 74,476/(1)/
Spin-off costs (14,150)
Environmental charge (16,541)
- --------------------------------------------------------------------------------
$ 45,848 $ 88,661 $ 74,476
================================================================================
/(1)/ Before cumulative effect of accounting change.
The net assets of discontinued operations consist of:
September 30 (in thousands) 1996 1995
- --------------------------------------------------------------------------------
Working capital $ 750,792 $ 815,102
Net property and equipment 224,168 227,137
Other assets 637,062 367,694
Long-term debt and
other liabilities (122,821) (74,957)
- --------------------------------------------------------------------------------
Unisource equity and
intercompany debt $1,489,201 $1,334,976
================================================================================
In the first quarter of fiscal 1997, Unisource is expected to borrow under a
credit facility amounts sufficient to repay $553,700,000 of intercompany notes
and advances due to Alco as of September 30, 1996 and additional advances that
may be made subsequent to that date. Intercompany notes and advances of
$456,420,000 were contributed to Unisource's equity as of September 30, 1996.
30 IKON OFFICE SOLUTIONS
3 MERGERS
During the second quarter of fiscal 1996, the Company completed two mergers
accounted for as poolings-of-interests by issuing common stock for all the
shares of Legal Copies International, Inc. and JMM Enterprises, Inc. Total
common shares issued in connection with these mergers were 3,953,990.
Components of the operating results from continuing operations for periods prior
to the mergers were:
Three Months Ended Fiscal Year Ended
12/31/95 9/30/95 9/30/94
- --------------------------------------------------------------------------------
(Unaudited)
Revenues
Alco Standard
Corporation $852,396 $2,911,626 $2,240,398
Pooled companies 48,183 179,976 150,669
- --------------------------------------------------------------------------------
$900,579 $3,091,602 $2,391,067
================================================================================
Income (loss) from continuing operations
Alco Standard
Corporation $ 35,186 $ 114,071 $ (3,867)
Pooled companies 1,751 940 5,863
- --------------------------------------------------------------------------------
$ 36,937 $ 115,011 $ 1,996
================================================================================
The mergers reduced fiscal 1995 earnings per share by $.02 and increased fiscal
1994 earnings per share by $.05.
4 ACQUISITIONS
In addition to the mergers described in note 3, 97 acquisitions were made in
fiscal 1996 for an aggregate purchase price of $358,568,000 in cash, notes and
stock. Total assets related to these 97 acquisitions were $499,729,000,
including goodwill of $313,495,000. The Company also issued 486,304 common
shares for an acquisition accounted for as a pooling-of-interests whose results
of operations were included from the beginning of the fiscal year. An additional
$4,086,000 was paid and capitalized in fiscal 1996 relating to prior years'
acquisitions.
In June 1995, Erskine Limited, a U.K. subsidiary of the Company, purchased all
of the outstanding shares of Southern Business Group PLC (renamed A:Copy (UK)
PLC on October 1, 1995), for approximately $133,800,000. A:Copy (UK) sells,
leases, services and remanufactures copiers and other office equipment in
Southern England. Total assets acquired were $163,359,000, which includes
goodwill of $119,556,000. In addition, 99 other acquisitions were made in fiscal
1995 for an aggregate purchase price of $228,258,000 in cash, notes and stock.
Total assets related to these 99 acquisitions were $313,966,000, including
goodwill of $218,549,000. The Company also issued 675,106 common shares for two
acquisitions accounted for as poolings-of-interests and their results of
operations were included from the beginning of the fiscal year. $4,648,000 of
additional cash was paid and capitalized in fiscal 1995 relating to prior years'
acquisitions.
In fiscal 1994, the Company issued 1,397,350 common shares from treasury for
three acquisitions accounted for as poolings-of-interests and their results of
operations were included from the beginning of the fiscal year. Also during
fiscal 1994, 46 other acquisitions were made for an aggregate purchase price of
$58,466,000 in cash, notes and stock. Total assets related to these 46
acquisitions were $105,643,000, including goodwill of $53,045,000. An additional
$4,300,000 was paid and capitalized in fiscal 1994 relating to prior years'
acquisitions.
All acquisitions, unless otherwise noted, are included in results of operations
from their dates of acquisition.
Had the purchase acquisitions been made at the beginning of the fiscal year
prior to their acquisition, pro forma results from continuing operations would
have been:
Fiscal Year Ended September 30 (in thousands, except per share data)
1996 1995 1994
- --------------------------------------------------------------------------------
Revenues $4,438,191 $3,847,045 $2,997,171
Income from
continuing operations 175,359 146,589 25,494
Earnings per share from
continuing operations 1.19 .95 .05
- --------------------------------------------------------------------------------
The pro forma results assume that $261,000,000 of the purchase price of 1995
acquisitions was funded by the proceeds from issuance of Series BB conversion
preferred stock, while $46,000,000 of the total purchase price of 1994
acquisitions was funded by the proceeds from issuance of common stock in
December 1993.
5 LOSS FROM UNCONSOLIDATED AFFILIATE
In September 1994, the Company completed the sale of its 49.9% interest in IMM
Office Systems GmbH (IMMOS) for cash plus a passive interest in any subsequent
sale of IMMOS for five years. The Company retains no ongoing liability relating
to the joint venture and the parties exchanged complete mutual releases for past
actions. As part of the transaction, the Company acquired operations in Denmark
and France and retained limited operations in Germany. The Company recognized a
loss on the sale of its investment in IMMOS of $115,300,000 ($95,100,000, net of
tax) or $.85 per share in fiscal year 1994.
6 NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consisted of:
September 30 (in thousands) 1996 1995
- --------------------------------------------------------------------------------
Notes payable to banks at
average interest rate:
1996- 6.0%; 1995- 6.9% $184,358 $252,852
Other notes payable at
average interest rate:
1996- 8.2%; 1995- 8.3% 2,104 3,749
- --------------------------------------------------------------------------------
$186,462 $256,601
================================================================================
IKON OFFICE SOLUTIONS 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alco Standard Corporation and Subsidiaries
6 NOTES PAYABLE AND LONG-TERM DEBT (cont)
Long-term debt consisted of:
September 30 (in thousands) 1996 1995
- --------------------------------------------------------------------------------
Bond issue at stated interest rate
of 6.75%, net of $4,519
premium, due 2025,
effective interest rate of 6.87% $ 295,481
Bond issue at interest rate
of 8 7/8% due 2001 150,000 $150,000
Private placement debt at
average interest rate:
1996- 7.7%; 1995- 8.3%,
due 1998 and 2005 105,000 50,000
Bank debt at average interest
rate of 7.6% due 2000 72,721
Notes payable to insurance
company at average interest
rate of 9.7% due 1997-2005 60,000 60,000
Sundry notes, bonds and mortgages
at average interest rate: 1996- 6.9%
1995- 8.0% due 1997-2005 74,929 73,899
Present value of capital lease
obligations (gross amount:
1996-$30,201; 1995-$22,752) 26,489 20,246
- --------------------------------------------------------------------------------
784,620 354,145
Less current maturities 62,697 37,457
- --------------------------------------------------------------------------------
$ 721,923 $316,688
================================================================================
Long-term debt, finance subsidiaries consisted of:
September 30 (in thousands) 1996 1995
- --------------------------------------------------------------------------------
Medium term notes at
average interest rate:
1996- 6.8%; 1995-7.0% $969,900 $602,000
Notes payable to banks at
average interest rate:
1996- 6.4%; 1995-5.6% 157,126 215,585
- --------------------------------------------------------------------------------
1,127,026 817,585
Less current maturities 314,000 171,232
- --------------------------------------------------------------------------------
$ 813,026 $646,353
================================================================================
Long-term debt and long-term debt, finance subsidiaries mature as follows:
Long-Term Debt,
Finance
(in thousands) Long-Term Debt Subsidiaries
- --------------------------------------------------------------------------------
(fiscal year)
1997 $ 62,697 $314,000
1998 63,717 278,780
1999 10,968 311,842
2000 80,106 160,295
2001 189,048 58,978
2002 - 2025 378,084 3,131
On December 1, 1994, the Company entered into a credit agreement with several
banks under which it may borrow up to $500,000,000. The agreement has two parts:
$150,000,000 is available for 364 days subject to annual renewal for successive
364-day periods through November 26, 1999; the other $350,000,000 terminates on
December 1, 1999. Facility fees of 8 basis points per annum on the 364-day
portion and 10 basis points per annum on the five-year portion are charged for
these commitments. The agreement provides that loans may be made under either
domestic or Eurocurrency notes at rates computed under a selection of rate
formulas including prime or Eurocurrency rates.
The Company may also borrow up to $100,000,000 or the Canadian dollar equivalent
under a credit agreement with four banks expiring in April 1997. Facility fees
of 9 basis points per annum are charged for this commitment. Loans under the
agreement may be made under a selection of rate formulas including prime, the
Eurodollar rate in the United States or Canada, or the Canadian Bankers
Acceptance rate. This credit agreement will be cancelled and amounts outstanding
thereunder will be repaid after Unisource enters into its credit agreement.
At September 30, 1996, short-term borrowings supported by the combined lines of
credit totaled $187,345,000, including $7,345,000 borrowed by discontinued
operations, leaving $412,655,000 unused and available.
IKON Capital, Inc. (IKON Capital), a wholly owned finance subsidiary of the
Company, may offer to the public from time to time up to $1,500,000,000 or the
equivalent thereof in foreign currency under its medium term notes program.
These notes are offered at varying maturities of nine months or more from their
dates of issue and may be subject to redemption at the option of IKON Capital or
repayment at the option of the holder, in whole or in part, prior to the
maturity date in conjunction with meeting specified provisions. Interest rates
are determined based on market conditions at the time of issuance. At September
30, 1996, $500,100,000 is available for issuance under this program.
The Company is in compliance with all covenants, including financial, for all
loan agreements. Capital lease obligations and mortgages are secured by property
and equipment that had a net book value of $21,650,000 at September 30, 1996.
Interest paid, including finance subsidiaries and corporate interest allocated
to discontinued operations, approximated $119,000,000, $84,000,000 and
$68,000,000 for fiscal years 1996, 1995 and 1994, respectively.
The Company expects to receive $553,700,000 from Unisource as repayment of
intercompany notes. The proceeds are expected to be used to repay notes payable
to banks and certain long-term debt obligations.
32 IKON OFFICE SOLUTIONS
7 SHAREHOLDERS' EQUITY
The Series AA Preferred Stock was issued in December 1992. Prior to October
1995, all of the 4,025,000 depositary shares issued, each representing 1/100th
of a share of Series AA convertible preferred stock, were outstanding. The
Series AA Preferred Stock was eligible for redemption by the Company anytime on
or after January 9, 1996. The Series AA Preferred Stock had one vote per share
(equivalent to 1/100th vote per depositary share) and was convertible at the
option of the holder at any time prior to the Company's redemption at the
exchange rate of 2.2402 shares of common stock for each depositary share. During
the first quarter of fiscal 1996, 432,130 common shares were issued for Series
AA Preferred Stock conversions by holders. On February 9, 1996, the Company
redeemed the balance of its Series AA Preferred Stock for common stock at the
conversion rate of 2.2402 shares of common stock for each depositary share.
Common shares totaling 8,584,423 were issued in connection with this redemption.
Dividends were cumulative at $2.375 per year per depositary share through
January 2, 1996 and $3.25 per depositary share per year thereafter. The dividend
was accrued on a straight-line basis ($2.875 per depositary share) and accretion
for the difference between the accrued and cash dividend, which amounted to
$6,092,000 at December 31, 1995, the last period before the redemption, was
credited to Series AA convertible preferred stock.
On July 25, 1995, the Company sold 3,877,200 depositary shares, each
representing 1/100th of a share of Series BB conversion preferred stock, for
$77.375 per depositary share totaling $299,998,350, and used the net proceeds to
reduce debt. Dividends are cumulative at $5.04 per year per depositary share.
This series of preferred stock has one vote per share (equivalent to 1/100th
vote per depositary share) and has a liquidation preference of $77.375 per
depositary share plus an amount equal to accrued and unpaid dividends. Prior to
October 1, 1998, each depositary share is convertible at the option of the
holder into 1.6393 shares of common stock of the Company. On October 1, 1998,
unless previously converted at the option of the holder, each of the outstanding
depositary shares will automatically convert into a number of shares of common
stock of the Company equal to (a) 1.6393 shares of common stock per depositary
share if the current market price of the Company's common stock is greater than
or equal to $47.20 per share, (b) between 1.6393 and two shares, equivalent to
the current market price of the common stock if the stock price is between
$47.20 and $38.6875, and (c) two shares of common stock per depositary share if
the current market price of the Company's common stock is at or below $38.6875
per share. The current market price to be used in the conversion calculation
will be the average closing price per share of common stock of the Company on
the twenty trading days immediately prior to, but not including, October 1,
1998. As a result of the spin-off of Unisource, there will be an adjustment in
the number of common shares to be received upon conversion and the prices of the
common stock used to determine the number of common shares received. Such
adjustments will be effective on December 16, 1996. At September 30, 1996,
7,754,400 shares of common stock were reserved for conversion of the Series BB
conversion preferred stock.
In December 1993, the Company issued 11,500,000 shares of common stock in a
public offering. The net proceeds from the offering of $293,500,000 were used
for repayment of debt. Income from continuing operations for fiscal 1994 would
have been $3,283,000 and loss per share would have been ($.07) if the offering
had occurred on October 1, 1993.
Employee stock options are granted at the market price at dates of grant and
expire in ten years. The proceeds of options exercised are credited to
shareholders' equity. There are no charges or credits to income in connection
with these options. A 1989 plan for the Company's directors enables participants
to receive their annual directors' fees in the form of options to purchase
shares of common stock at a discount. The discount is equivalent to the annual
directors' fees and is charged to expense.
Changes in common shares under option were:
Directors Employees
- ----------------------------------------------------------------------------------------------------
Shares Option Price Range Shares Option Price Range
- ----------------------------------------------------------------------------------------------------
September 30, 1993 188,256 $9.77 to $20.13 4,447,562 $8.06 to $20.13
Granted 34,832 21.14 to 28.19 924,670 24.50 to 31.00
Exercised (42,630) 9.77 to 20.13 (865,482) 8.06 to 20.13
Cancelled (1,520) 15.09 (21,102) 8.06 to 28.81
- ----------------------------------------------------------------------------------------------------
September 30, 1994 178,938 9.77 to 28.19 4,485,648 9.09 to 31.00
Granted 32,604 24.56 to 32.75 789,632 28.62 to 40.31
Exercised (39,852) 9.77 to 15.09 (814,398) 9.09 to 28.19
Cancelled (46,214) 14.31 to 32.81
- ----------------------------------------------------------------------------------------------------
September 30, 1995 171,690 9.77 to 32.75 4,414,668 9.09 to 40.31
Granted 24,962 29.16 to 38.88 1,557,805 14.31 to 58.12
Exercised (48,024) 9.77 to 32.75 (765,384) 9.09 to 32.81
Cancelled (72,077) 15.38 to 58.12
- ----------------------------------------------------------------------------------------------------
September 30, 1996 148,628 $9.77 to $38.88 5,135,012 $9.69 to $58.12
====================================================================================================
IKON OFFICE SOLUTIONS 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alco Standard Corporation and Subsidiaries
7 SHAREHOLDERS' EQUITY (CONT)
At September 30, 1996, options to purchase 2,410,210 shares were exercisable
(1996: employees-2,280,144, directors- 130,066; 1995: employees-2,144,162,
directors-147,086) and 4,365,980 shares were available for grant (1996:
employees- 3,493,816, directors-872,164; 1995: employees-5,131,744,
directors-897,126).
In connection with the separation of Unisource from Alco, stock options which
are not exercised prior to the effective date of the Distribution will be
adjusted. Optionholders who remain employees of Alco will retain their options
to purchase Alco shares, while optionholders who become employees of Unisource
after the Distribution will be given the opportunity to receive options to
purchase shares of Unisource Common Stock in lieu of their Alco options. The
number of shares subject to, and the exercise price of, each Alco option that is
not converted to a Unisource option will be adjusted based upon a formula that
preserves the inherent intrinsic value and vesting and term provisions of such
Alco options. The Alco stock options held by optionholders expected to become
Unisource employees at September 30, 1996 were 1,287,683, with a range of
exercise price from $9.69 to $57.50. The ultimate number of remaining Alco stock
options as of the Distribution date and the number and exercise prices of the
Alco stock options to be outstanding after the Distribution cannot yet be
determined.
In fiscal 1995, with Board of Director and shareholder approvals, the Company
amended and restated its Long-Term Incentive Compensation Plan (LTIP). The plan
is intended to motivate, recognize and reward key management employees for
long-term performance. Under the plan, key management employees are granted
stock or cash awards, which are earned upon achieving predetermined performance
objectives during three-year intervals. The value of these awards is charged to
expense over the related plan period. In fiscal 1995, the Company granted
602,530 stock awards under the plan, including 403,824 to replace stock options
granted under the original LTIP. At September 30, 1996, 207,446 of these awards
had been earned. In 1996, the Company changed the form of the LTIP award granted
from a stock award to a fixed cash award. In fiscal 1996, cash awards totaling
$6,123,000 were granted to LTIP participants, none of which have been earned as
of September 30, 1996.
One preferred share purchase right (Right) exists for each outstanding share of
common stock (the Shares). The Rights become exercisable ten days after the
earlier of a public announcement by another entity that it has acquired
beneficial ownership of 20% or more of the Shares or a public announcement of
another entity's intention to commence a tender offer to acquire beneficial
ownership of 30% or more of the Shares.
When the Rights become exercisable, each Right will entitle a holder to purchase
1/100th of a share of Series 12 preferred stock for an exercise price of $75. If
the Company consolidates or merges with another entity, or sells assets that
aggregate 50% of its consolidated assets or generates more than 50% of its
consolidated operating income or cash flow, then each Right holder will have the
right to purchase, for the exercise price, a number of shares of the other
entity having a then-current market value equal to twice the exercise price.
If another entity owning 20% or more of the Shares (a) engages in certain
transactions with the Company, or (b) causes the Company to forgo or reduce
quarterly dividends or take an action that would result in a more than 2%
increase in the other entity's proportionate share of the outstanding shares; or
if another entity becomes the beneficial owner of 30% or more of the outstanding
shares; then each Right holder (other than the other entity) will have the right
to purchase, for the exercise price, a number of shares of the Company having a
then-current market value equal to twice the exercise price.
The Rights are redeemable by the Company prior to becoming exercisable at $.05
per Right and expire on February 10, 1998.
8 TAXES ON INCOME
Effective October 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes"(FAS 109). FAS 109 permitted the Company to
recognize the benefit of certain deferred tax assets that could not be
recognized under the previous standard, FAS 96. The cumulative effect of
adopting FAS 109 as of October 1, 1993 was to increase net income by $1,421,000
or $.01 per share in fiscal 1994. As permitted under FAS 109, prior years'
financial statements were not restated.
Provision for income taxes:
Fiscal Year Ended September 30 (in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
- ----------------------------------------------------------------------------------------------------------------------
Federal $21,144 $58,540 $8,832 $41,723 $21,365 $7,543
Foreign 13,496 528 8,923 1,653 8,585 (2,463)
State 11,170 3,106 15,640 (1,270) 5,259 1,026
- ----------------------------------------------------------------------------------------------------------------------
Taxes on income $45,810 $62,174 $33,395 $42,106 $35,209 $6,106
======================================================================================================================
34 IKON OFFICE SOLUTIONS
8 TAXES ON INCOME (CONT)
The components of deferred income tax assets and liabilities, including finance
subsidiaries, were as follows:
September 30 (in thousands) 1996 1995
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization $ 32,284 $ 43,759
Lease income recognition 227,003 119,228
- -------------------------------------------------------------------------------
Total deferred tax liabilities 259,287 162,987
Deferred tax assets:
Nondeductible reserves 137,982 112,857
Net operating loss carryforwards 17,939 8,561
Other-net 21,902 8,814
- -------------------------------------------------------------------------------
Total deferred tax assets 177,823 130,232
Valuation allowance 26,647 19,628
- -------------------------------------------------------------------------------
Net deferred tax assets 151,176 110,604
- -------------------------------------------------------------------------------
Net deferred tax liabilities $108,111 $ 52,383
================================================================================
Net operating loss carryforwards, including discontinued operations, consist
primarily of foreign carryforwards of $42,543,000 principally expiring in years
1997 through 2000. Credit carryforwards consist principally of federal and state
alternative minimum tax credits of approximately $7,600,000 (with no expiration
date) and affordable housing credits of approximately $1,017,000 (expiring in
2010 and 2011).
Components of the effective income tax rate:
Fiscal Year Ended September 30 1996 1995 1994
- --------------------------------------------------------------------------------
Federal 35.0% 35.0% 35.0%
State 3.4 4.9 9.4
Goodwill 2.1 2.5 9.1
Foreign including credits (.3) 1.2 3.8
Effect of sale of IMMOS 46.6
Other (.6) (4.0) (8.5)
- --------------------------------------------------------------------------------
Effective income tax rate 39.6% 39.6% 95.4%
================================================================================
The effective tax rate for the fiscal year ended September 30, 1994, excluding
the effects of the loss on the sale of the investment in IMMOS, is 38.8%.
Income tax payments for all operations, including discontinued, amounted to
$46,231,000 in 1996, $30,436,000, net of $30,000,000 refund, in 1995, and
$62,270,000 in 1994.
Undistributed earnings of the Company's foreign subsidiaries, including
discontinued operations, were approximately $59,102,000 at September 30, 1996.
Those earnings are considered to be indefinitely reinvested and, therefore, no
provision has been recorded for US federal and state income taxes.
9 PENSION AND STOCK PURCHASE PLANS
The Company sponsors defined benefit pension plans for the majority of its
employees. The benefits generally are based on years of service and
compensation. The Company funds at least the minimum amount required by
government regulations. The cost of these plans, together with contributions to
multiemployer and defined contribution pension plans ($1,338,000 in 1996,
$1,346,000 in 1995 and $2,074,000 in 1994) charged to continuing operations
amounted to $20,215,000 for 1996, $12,846,000 for 1995 and $6,248,000 for 1994.
The components of net periodic pension cost for the Company-sponsored defined
benefit pension plans are:
Fiscal Year Ended September 30 (in thousands)
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 15,734 $ 10,610 $ 5,330
Interest cost on
projected benefit
obligation 7,448 7,429 5,533
Actual return on plan
assets (15,663) (18,409) (3,345)
Net amortization and
deferral 11,358 11,870 (3,344)
- --------------------------------------------------------------------------------
Net pension cost $ 18,877 $ 11,500 $ 4,174
================================================================================
Assumptions used in accounting for the Company-sponsored defined benefit pension
plans were:
1996 1995 1994
- --------------------------------------------------------------------------------
Weighted average
discount rates 7.75% 7.50% 7.75%
Rates of increase in
compensation levels 6.25% 6.00% 6.25%
Expected long-term
rate of return on assets 10.00% 10.00% 10.00%
- --------------------------------------------------------------------------------
The funded status and amounts recognized in the Consolidated Balance Sheets for
the Company-sponsored defined benefit pension plans are:
September 30 (in thousands) 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value
of benefit obligations
Vested $170,642 $ 77,823
================================================================================
Accumulated $174,731 $80,184
================================================================================
Projected $222,215 $100,352
Plan assets at fair value 214,077 83,212
- --------------------------------------------------------------------------------
Plan assets less than
projected benefits (8,138) (17,140)
Items not yet recognized
Net gain (28,362) (6,487)
Prior service cost 10,907 14,646
Net asset existing at
transition date (8,096) (4,469)
Adjustment required to
recognize minimum liability (3,237) (7,120)
- --------------------------------------------------------------------------------
Net pension liability $(36,926) $(20,570)
================================================================================
Under the Benefits Agreement with Unisource, Alco will assume certain benefit
obligations and related assets for retirees and terminated vested employees of
Unisource, which are estimated to be $101,000,000 and have been included in the
September 30, 1996 balances reflected in the table above. Substantially all of
the Alco and Unisource plan assets, totaling $346,721,000 at September 30, 1996,
are invested in listed stocks, bonds and government securities, including common
stock of the Company having a fair value of $59,850,000.
IKON OFFICE SOLUTIONS 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alco Standard Corporation and Subsidiaries
9 PENSION AND STOCK PURCHASE PLANS (CONT)
The majority of the Company's employees were eligible to participate in the
Company's Stock Participation Plan through fiscal 1995, under which they were
permitted to invest 2% to 6% of regular compensation before taxes. The Company
contributed an amount equal to two-thirds of the employees' investments and all
amounts were invested in the Company's common shares. Effective October 2, 1995,
the Stock Participation Plan was replaced by a Retirement Savings Plan (RSP).
The RSP allows employees to invest 1% to 16% of regular compensation before
taxes in six different investment funds. The Company contributes an amount equal
to two-thirds of the employees' investments, up to 6% of regular compensation,
for a maximum company match of 4%. All Company contributions are invested in the
Company's common shares. Employees vest in a percentage of the Company's
contribution after two years of service, with full vesting at the completion of
five years of service. There is a similar plan for eligible management
employees. The cost of the plans charged to continuing operations amounted to
$23,596,000 in 1996, $16,983,000 in 1995 and $14,125,000 in 1994.
10 GEOGRAPHIC INFORMATION
Revenues, income before taxes and identifiable assets by geographic area from
continuing operations for the fiscal years ended September 30 are as follows:
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenues
Domestic $3,559.7 $2,802.2 $2,196.9
Europe 360.6 178.4 100.7
Canada 177.7 111.0 93.5
Other 1.8 -- --
- --------------------------------------------------------------------------------
Total $4,099.8 $3,091.6 $2,391.1
================================================================================
Income Before Taxes
Domestic $ 251.1 $ 186.7 $ 161.0
Europe 38.3 9.0 2.0
Canada 20.6 16.5 13.6
Other .1 -- --
- --------------------------------------------------------------------------------
Operating $ 310.1 212.2 176.6
Unconsolidated affiliate (117.2)
Interest expense (37.2) (21.7) (16.1)
- --------------------------------------------------------------------------------
Total $ 272.9 $ 190.5 $ 43.3
================================================================================
Assets
Domestic $3,096.2 $2,313.4 $ 1,610.4
Europe 560.2 300.5 123.6
Canada 227.5 161.5 154.9
Other 11.5 -- --
- --------------------------------------------------------------------------------
Total $3,895.4 $2,775.4 $ 1,888.9
================================================================================
11 LEASES
Equipment acquired under capital leases is included in property and equipment in
the amount of $33,141,000 in 1996 and $22,404,000 in 1995 and the related
amounts of accumulated amortization are $11,491,000 in 1996 and $6,925,000 in
1995. Related obligations are in long-term debt and related amortization is
included in depreciation.
At September 30, 1996, future minimum payments under noncancelable operating
leases with initial or remaining terms of more than one year were:
1997-$65,763,000; 1998-$50,977,000; 1999-$36,662,000; 2000-$22,125,000;
2001-$15,664,000; thereafter-$37,181,000.
Total rental expense was $67,006,000 in 1996, $61,398,000 in 1995 and
$48,812,000 in 1994.
12 CONTINGENCIES
There are contingent liabilities for taxes, guarantees, lawsuits, environmental
remediation claims relating to continuing and discontinued operations (see note
2) and various other matters occurring in the ordinary course of business. On
the basis of information furnished by counsel and others, management believes
that none of these contingencies will materially affect the Company.
13 FINANCE RECEIVABLES
The Company's wholly owned finance subsidiaries are engaged in purchasing office
equipment from Company dealers and leasing the equipment to customers under
direct financing leases.
Components of finance receivables, net, are as follows:
September 30 (in thousands) 1996 1995
- --------------------------------------------------------------------------------
Gross receivables $1,538,183 $1,068,117
Unearned income (272,279) (165,793)
Unguaranteed residuals 108,338 58,774
Allowance for doubtful accounts (60,484) (46,994)
- --------------------------------------------------------------------------------
Lease receivables 1,313,758 914,104
Less: Current portion 435,434 326,315
- --------------------------------------------------------------------------------
Long-term lease receivables $ 878,324 $ 587,789
================================================================================
At September 30, 1996, future minimum payments to be received under direct
financing leases were: 1997-$540,732,000; 1998-$473,645,000; 1999-$300,166,000;
2000-$160,035,000; 2001-$63,605,000.
36 IKON OFFICE SOLUTIONS
13 FINANCE RECEIVABLES (cont)
In September 1996, IKON Capital entered into a new agreement, which expires in
September 1997, to sell, under an asset securitization program, an undivided
ownership interest in $150,000,000 of eligible direct financing lease
receivables. The September 1994 agreement for $125,000,000 expires in March
1997. Both agreements contain limited recourse provisions that require IKON
Capital to assign an additional amount of undivided interest in leases as a
reserve to cover any potential losses to the purchaser due to uncollectible
leases. As collections reduce previously sold interests, new leases can be sold
up to the agreement amount. The weighted average interest rate on the 1994
agreement, which is partially fixed by two interest rate swap agreements
totaling a principal/notional amount of $60,000,000, is 6.7% at September 30,
1996. In fiscal year 1996, IKON Capital sold an additional $52,712,000 in
leases, replacing leases liquidated during the year under the 1994 agreement and
$150,000,000 in leases under the 1996 agreement.
14 FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its business.
These financial instruments include debt, commitments to extend credit and
interest rate and currency swap agreements. The notional or contractual amounts
of these commitments and other financial instruments are discussed below.
Concentration of Credit Risk
The Company is subject to credit risk through trade receivables and short-term
cash investments. Credit risk with respect to trade receivables is minimized
because of a large customer base and its geographic dispersion. Short-term cash
investments are placed with high credit quality financial institutions and in
short duration corporate and government debt securities funds. By policy, the
Company limits the amount of credit exposure in any one type of investment
instrument.
Interest Rate and Currency Swap Agreements
In addition to the interest rate swap agreements related to finance subsidiaries
financial instruments, the Company has several other interest rate swap
agreements. U.S. dollar denominated agreements have a total principal/notional
amount of $47,000,000 and have fixed rates from 6.99% to 7.74%. Canadian dollar
denominated agreements have a total principal/notional amount of $72,163,000
(CN$98,248,000) and have fixed rates from 7.43% to 7.74%. The Company is
required to make payments to the counterparties at the fixed rate stated in the
agreements and in return the Company receives payments at variable rates.
The Company has also entered into five cross currency swap agreements. These
agreements have a total principal/notional amount of $72,163,000 (CN$98,248,000)
and have fixed rates from 9.53% to 9.90%. The Company is required to make
payments to counterparties at the fixed rate stated in the agreements and in
return the Company receives payments at fixed rates from 9.02% to 9.375%.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the swap agreements. However, the Company does not anticipate
nonperformance by the counterparties.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments.
Cash, Notes Payable and Long-Term Receivables
The carrying amounts reported in the consolidated balance sheets approximate
fair value.
Long-Term Debt
The fair value of long-term debt instruments is estimated using a discounted
cash flow analysis. For more information on these instruments, refer to note 6.
Off-Balance-Sheet Instruments
Fair values for the Company's off-balance-sheet instruments (interest rate and
currency swaps) are based on the termination of the agreements.
The carrying amounts and fair values of the Company's financial instruments are
as follows:
1996 1995
September 30 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt:
Bond issues $ 445,481 $ 423,667 $150,000 $165,311
Private placement debt 105,000 103,538 50,000 52,043
Bank debt 72,721 73,406
Notes payable to insurance company 60,000 61,813 60,000 65,286
Sundry notes, bonds and mortgages 74,929 75,900 73,899 76,401
Finance subsidiaries debt 1,127,026 1,124,395 817,585 824,989
Interest rate and currency swaps (5,074) (3,671)
IKON OFFICE SOLUTIONS 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alco Standard Corporation and Subsidiaries
On June 19, 1996, the Company announced that it would split its two operating
units into independent companies by spinning off its paper and supply systems
distribution group, Unisource Worldwide, Inc. (Unisource), as a separate
publicly owned company. The Company will accomplish the transaction through a
tax-free distribution of Unisource stock to Company shareholders, and expects to
complete the separation by the end of calendar year 1996. As a result of the
decision to spin off Unisource, the Company has accounted for Unisource as a
discontinued operation. Continuing operations of the Company consist of IKON
Office Solutions (IKON), formerly Alco Office Products, the Company's office
technology solutions group.
RESULTS OF OPERATIONS
Revenues and income before taxes for continuing operations for fiscal years
ended September 30, 1996, 1995 and 1994 and the percentage change for 1996
versus 1995 and 1995 versus 1994 were:
(in millions) 1996 1995 % Change 1995 1994 % Change
- -----------------------------------------------------------------------------------------------------
Revenues $4,100 $3,092 32.6% $3,092 $2,391 29.3%
=====================================================================================================
Income before taxes:
Operating income $310.1 $212.2 46.1% $212.2 $ 59.4
Interest expense (37.2) (21.7) (21.7) (16.1)
- -----------------------------------------------------------------------------------------------------
$272.9 $190.5 43.3% $190.5 $ 43.3
=====================================================================================================
Fiscal 1996 Compared to Fiscal 1995
IKON's revenues increased $1 billion, or 32.6% in fiscal 1996 compared to fiscal
1995, of which $675 million relates to current and prior-year acquisitions and
$333 million is internal growth. In fiscal 1996, IKON completed 100 acquisitions
with annualized revenues of $878 million. Revenues from the Company's operations
outside the U.S. were $540 million in fiscal 1996 compared to $289 million in
fiscal 1995. IKON's European operations accounted for $182 million of the
increase, primarily the result of the acquisitions of A:Copy (UK) PLC and
Copymore PLC in the latter half of fiscal 1995, while IKON's Canadian revenues
increased $67 million as a result of acquisitions and internal growth.
IKON's operating income increased by $97.9 million, or 46.1% over the prior
year. Current and prior-year acquisitions accounted for $55.8 million, while the
remaining $42.1 was the result of internal growth. Finance subsidiaries
contributed 15.1% of IKON's operating income in fiscal 1996 compared to 12.3% in
fiscal 1995. IKON's operating margins were 7.6% in fiscal 1996 compared to 6.9%
in fiscal 1995. Operating income from foreign operations was $59 million in
fiscal 1996, up $33.5 million from the prior year of which $29.3 million is
attributable to European operations and $4.1 million is attributable to Canadian
operations.
Interest expense, net of corporate interest allocated to discontinued
operations, increased $15.5 million in fiscal 1996, primarily the result of
increased borrowing levels. Income from continuing operations before taxes
increased by $82.4 million, or 43.3% over the prior year, primarily reflecting
the combined result of internal growth along with earnings contributed by
acquisitions, net of increased interest costs. The effective income tax rate is
39.6% in both fiscal 1996 and fiscal 1995. Earnings per share from continuing
operations increased 30.2% from $.86 per share in fiscal 1995 to $1.12 per share
in fiscal 1996. Weighted average shares of 127.6 million in fiscal 1996 were
11.1 million shares greater than the 116.5 million weighted average shares in
fiscal 1995, primarily the result of acquisitions for stock (4.7 million
weighted shares) and conversion of the Series AA Preferred Stock effective
February 9, 1996 (6.6 million weighted shares).
Fiscal 1995 Compared to Fiscal 1994
IKON's revenues increased $701 million, or 29.3% in fiscal 1995 compared to
fiscal 1994, of which $416 million is related to internal growth, while $68
million relates to fiscal 1994 acquisitions and $217 million relates to fiscal
1995 acquisitions. In fiscal 1995, IKON completed 102 acquisitions with
annualized revenues of $578 million. Revenues from the Company's operations
outside the U.S. were $289 million in fiscal 1995 compared to $194 million in
the prior year. IKON's European operations accounted for $78 million of the
increase, primarily the result of the acquisitions of A:Copy (UK) PLC and
Copymore PLC in the third and fourth quarters of fiscal 1995, while IKON's
Canadian revenues increased $17 million as a result of internal growth.
IKON's operating income increase of $152.8 million relates primarily to the
$117.2 million loss recorded in fiscal 1994 on the investment in IMMOS.
Excluding the IMMOS loss, operating income increased $35.6 million, or 20.2%
which includes $6.1 million from fiscal 1994 acquisitions and $20.2 million from
fiscal 1995 acquisitions. The remaining $9.3 million increase is from internal
growth. Finance subsidiaries contributed 12.3% of operating income in fiscal
1995 compared to 10.2% in fiscal 1994, excluding the IMMOS loss. Operating
margins were 6.9% in 1995 compared to 7.4% in 1994, excluding the loss on IMMOS.
Excluding costs related to IKON's transformation program discussed below, the
operating margin for 1995 was 7.2%.
Operating income from foreign operations was $25.5 million for 1995, up $9.9
million from the prior year of which $7 million is attributable to European
operations and $2.9 million is attributable to Canadian operations.
Interest expense, net of corporate interest allocated to discontinued
operations, increased $5.6 million from the comparable period in fiscal 1994, as
a result of higher interest rates and borrowing levels during the year to fund
acquisitions and working capital requirements, offset by the effect of the debt
reductions resulting from the Company's conversion preferred stock offering in
July 1995. The increase in income from continuing operations before taxes of
$147.2 million consists of $30 million relating to the combined effect of
internal growth and earnings contributed by acquisitions, net of increased
interest costs and other corporate items and the $117.2 million loss on the
investment in IMMOS recorded in 1994. The effective income tax rate for fiscal
1995 was 39.6%. The effective tax rate for 1994 was 95.4%; however, excluding
the IMMOS loss, the effective rate was 38.8%. Fiscal 1995 weighted average
shares were 5.1 million shares greater
38 IKON OFFICE SOLUTIONS
than the 111.4 million shares for fiscal 1994, primarily the result of issuance
of shares for acquisitions.
In fiscal 1995, IKON initiated a transformation
program to change its organization into a more cohesive and efficient network by
building a uniform information technology system and implementing best practices
for critically important management functions throughout the IKON companies. The
initiative includes the exploration of new vendor alliances, the establishment
of a national identity for the group (IKON) and a targeted national accounts
program.
Discontinued Operations
Revenues of Unisource, the Company's discontinued operation, were flat at $7
billion in both fiscal 1996 and 1995 as a result of price and volume declines,
net of $528 million contributed by acquisitions. Income before income taxes
decreased $69.7 million to $103 million in fiscal 1996 compared to $172.7
million in fiscal 1995. This decrease consists of a $50 million restructuring
charge recorded in the third quarter of fiscal 1996 and an operating income
decrease of $21.8 million, primarily related to the price and volume decreases
experienced during the year, net of operating income contributed by
acquisitions, while a reduction in interest expense of $2.1 million in fiscal
1996 slightly offset the operating income decline.
Fiscal 1995 revenues of Unisource increased $1.2 billion to $7 billion from $5.8
billion in fiscal 1994. The revenue increase primarily relates to substantial
price increases experienced in the paper industry during 1995 as well as volume
increases. Income before income taxes increased $50.5 million, or 41.3% in
fiscal 1995 compared to fiscal 1994, as a result of an operating income increase
of $57.8 million, which primarily reflects the impact of price and volume
increases along with net benefits realized from the restructuring program
initiated in 1993, net of an increase in interest expense of $7.3 million.
An $18 million charge against earnings was recorded in the third quarter of
fiscal 1996 for costs associated with the spin-off of Unisource consisting
primarily of investment banking fees, legal and accounting fees, filing fees and
employee termination costs directly related to the spin-off.
The Company has owned several manufacturing and industrial businesses, all of
which have been sold. There are currently environmental remediation claims
pending for manufacturing or landfill sites in the United States that relate to
these discontinued operations. As a result of several environmental remediation
claims and increased estimated costs associated with existing environmental
remediation sites, primarily related to discontinued manufacturing operations
divested by the Company in 1991 and prior, the Company took a fourth quarter
charge in fiscal 1995 to increase its liabilities for environmental remediation.
The discontinued operations charge was $24 million ($17 million net of tax), or
$.14 per share.
During 1995, the Company agreed to pay $10 million to settle a claim by a former
subsidiary, which had asserted that the Company was liable for certain employee
liabilities. This amount was primarily charged against existing reserves for
discontinued operations. The Company paid $5 million during 1995 and $2 million
in 1996, with the remaining $3 million to be paid over the next three years.
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities of continuing operations in fiscal
1996 was $268 million. This cash, plus operating cash provided by discontinued
operations and increased debt levels, funded the Company's cash usage for fiscal
1996, primarily acquisitions, capital expenditures, dividends and investing and
financing activities of discontinued operations.
Debt of continuing operations, excluding finance subsidiaries, was $971 million
at September 30, 1996, an increase of $360 million from continuing operations
debt balance at September 30, 1995 of $611 million. On August 6, 1996, the Board
of Directors approved the capitalization of Unisource in connection with the
spin-off, which will include intercompany notes repayment by Unisource to the
Company in the first quarter of fiscal 1997 of $554 million, the proceeds which
will be used to retire debt of the continuing operation. Unisource intends to
borrow funds to finance the intercompany debt repayment. The Company will also
incur additional costs to retire its debt early, which will be recorded as an
extraordinary charge when incurred.
On December 11, 1995, the Company issued to the public $300 million of 30-year
bonds with a stated interest rate of 6.75% and a discount of 98.48%. The
proceeds were used to repay short- term borrowings. The Company had a total of
$600 million in bank credit commitments as of September 30, 1996. Short-term
borrowings supported by these facilities totaled $187.3 million leaving $412.7
million unused and available. At September 30, 1996, debt as a percentage of
capitalization was 31.4%, while the current ratio was 1.2 to 1. At the end of
fiscal 1996, the Company's commitments for capital expenditures were
approximately $7.6 million, all of which are expected to be expended during
fiscal 1997.
The Company filed shelf registrations for 10 million shares of common stock in
January 1996 and 5 million shares of common stock in March 1996. Shares issued
under these registration statements are being used primarily for acquisitions.
Approximately 9.4 million shares have been issued under these shelf
registrations through September 30, 1996.
Finance subsidiaries' debt grew by $309.4 million from September 30, 1995, a
result of increased leasing activity. During the fiscal year ended September 30,
1996, IKON Capital issued an additional $397.9 million under its medium term
notes program that began in July 1994. At September 30, 1996, $969.9 million of
medium term notes were outstanding with a weighted interest rate of 6.8%,
leaving $500.1 million available under this program.
In September 1996, IKON Capital entered into a new asset securitization
agreement for $150 million and completed the sale of $150 million in direct
financing leases by September 30, 1996. Under its $125 million asset
securitization agreement commenced in September 1994, IKON Capital sold $52.7
million in direct financing leases during fiscal 1996, replacing those leases
liquidated and leaving the amount of contracts sold unchanged.
The Company believes that its operating cash flow together with unused lines of
credit and other financing arrangements will be sufficient to finance current
operating requirements, including capital expenditures, acquisitions and
discontinued operations through the end of calendar 1996.
IKON OFFICE SOLUTIONS 39
CORPORATE FINANCIAL SUMMARY
Alco Standard Corporation and Subsidiaries
Nine-Year
(in millions, except per share data, Compound
shareholders of record, employees) Growth 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Revenues 18.1% $4,099.8 $3,091.6 $2,391.1
Gross profit 23.2 1,684.9 1,258.2 999.2
% of revenues 41.1 40.7 41.8
Selling and administrative 21.7 1,374.8 1,046.0 822.6
% of gross profit 81.6 83.1 82.3
Operating income 25.4 310.1 212.2 59.4
% of revenues 7.6 6.9 2.5
Income before taxes 29.9 272.9 190.5 43.3
% of revenues 6.7 6.2 1.8
Effective income tax rate (%) 39.6 39.6 95.4
Income 30.6 164.9 115.0 2.0
% of revenues 4.0 3.7 0.1
Earnings (loss) per share
Primary 1.12 0.86 (0.09)
Fully diluted (e) (e) (e)
Capital expenditures 19.7 146.6 91.1 79.0
Depreciation and amortization 17.9 118.6 87.4 67.4
- -------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Income (loss) $45.8 $88.7 $74.5
Earnings (loss) per share
Primary .36 0.76 0.67
Fully diluted (e) (e) (e)
- -------------------------------------------------------------------------------------------------------------------------
Total Operations
Net income 11.0% $210.7 $203.7 $76.5
Earnings (loss) per share
Primary 1.48 1.62 0.58
Fully diluted (e) (e) (e)
- -------------------------------------------------------------------------------------------------------------------------
Share Activity
Dividends per share 6.3% $0.56 $0.52 $0.50
Per share book value 10.4 14.94 12.06 10.50
Return on shareholders' equity 13.8 15.8 15.1
Average common and common equivalent shares 127.6 116.5 111.4
Shareholders of record 15,033 15,099 14,348
- -------------------------------------------------------------------------------------------------------------------------
Supplementary Information
Days sales outstanding (g) 34.2 33.6 30.2
Inventory turns (g) 5.7 6.3 5.7
Current ratio 1.2 1.1 1.3
Pretax return on capital employed 14.8 17.1 15.9 (b)
Pretax return on capital employed with
finance subsidiaries on equity method 19.0 21.1 18.6 (b)
Working capital (1.4)% $251.2 $144.7 $171.5
Total assets 19.3 5,384.6 4,110.3 2,897.7
Total debt 27.8 2,158.4 1,499.3 949.2
% of capitalization 48.9 44.2 40.7
Total debt, excluding finance subsidiaries 19.1 1,031.4 681.7 484.3
% of capitalization 31.4 26.5 25.9
Serial preferred stock
Employees (h) 43,100 39,200 33,100
- -------------------------------------------------------------------------------------------------------------------------
(a) Continuing operations include unrelated businesses sold in 1988.
(b) Excludes the effect of the sale of IMMOS (note 5) in fiscal 1994 and
Unisource restructuring costs in fiscal 1993.
(c) Includes the sale of an automobile leasing subsidiary that resulted in a
pretax gain of $17,637,000.
(d) Includes unusual pretax charges relating to the Hillman Companies of
$10,323,000.
(e) Dilution is immaterial after 1987; therefore, no disclosure.
(f) Excludes gain on sale of Alco Health Services Corporation of pretax -
$96,800,000; net income - $61,900,000.
(g) Continuing operations only.
(h) Includes discontinued operations.
Note: Unless otherwise noted, ratios and operating results include the effect
of: fiscal 1994 - loss on sale of investment in IMMOS (note 5), pretax income
($115,265,000), net income ($95,086,000), earnings per share ($.85); fiscal 1993
- - Unisource restructuring costs, operating income ($175,000,000), net income
($112,875,000), earnings per share ($1.14).
40 IKON OFFICE SOLUTIONS
1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------
$1,723.1 $1,354.2 $1,127.4 $1,018.6 $789.3 $667.0 (a) $917.9 (a)
732.7 594.4 489.2 445.4 324.8 245.8 (a) 256.8 (a)
42.5 43.9 43.4 43.7 41.2 36.9 28.0
613.4 504.6 431.4 411.9 300.9 231.2 (a) 234.1 (a)
83.7 84.9 88.2 92.5 92.6 94.1 91.2
116.8 96.5 57.8 28.8 23.9 22.5 (a) 40.3 (a)
6.8 7.1 5.1 2.8 3.0 3.4 4.4
101.4 85.1 40.4 8.3 (d) 9.1 10.7 (a) 26.0 (a)(c)
5.9 6.3 3.6 0.8 1.2 1.6 2.8
39.6 39.4 39.0 40.7 20.0 25.5 42.5
61.3 51.6 24.6 4.9 (d) 7.3 8.0 (a) 14.9 (a)(c)
3.6 3.8 2.2 0.5 0.9 1.2 1.6
0.52 0.53 0.26 0.06 (d) 0.08 0.08 (a) 0.16 (a)(c)
(e) (e) (e) (e) (e) (e) 0.16 (a)(c)
64.3 36.9 33.4 40.5 35.1 26.3 (a) 29.1 (a)
51.3 42.3 43.1 38.0 32.1 25.3 (a) 27.0 (a)
- ----------------------------------------------------------------------------------------------------------
($58.6) $47.5 $94.1 $88.6 $160.2 $103.4 $67.4
(0.59) 0.49 1.00 0.95 1.70 1.04 0.73
(e) (e) (e) (e) (e) (e) 0.68
- ----------------------------------------------------------------------------------------------------------
$2.6 $99.1 $118.7 $93.5 (d) $167.5 $111.4 $82.3 (c)
(0.07) 1.01 1.26 1.01 1.78 1.12 0.89 (c)
(e) (e) (e) (e) (e) (e) 0.84 (c)
- ----------------------------------------------------------------------------------------------------------
$0.48 $0.46 $0.44 $0.42 $0.38 $0.34 $0.32
8.55 9.11 8.91 8.20 7.25 6.98 6.15
11.6 11.6 15.0 13.4 16.6 (f) 17.1 16.2
98.7 97.7 94.1 93.1 94.3 99.5 92.3
13,999 13,726 14,096 14,152 13,410 14,103 12,875
- ----------------------------------------------------------------------------------------------------------
32.9 32.3 33.8 34.8 37.6 37.9 45.0
5.1 5.2 4.8 4.7 4.3 4.1 3.6
1.1 1.3 1.9 1.7 1.5 2.2 2.4
13.5 (b) 15.1 15.3 18.5 19.4 (f) 19.2 21.6
15.8 (b) 17.5 17.6 20.9 21.1 (f) 20.0 22.2
$87.2 $140.4 $299.9 $216.9 $161.9 $209.8 $284.5
2,734.2 1,944.0 1,703.0 1,544.0 1,295.8 1,182.1 1,099.8
1,240.0 805.4 548.1 469.2 391.2 261.5 237.1
54.5 48.0 39.8 38.3 37.8 27.4 27.9
825.7 504.9 327.4 309.6 296.7 209.3 213.4
44.4 36.6 28.3 29.0 31.5 23.2 25.9
0.3 1.6 2.9 4.9 7.4 9.9 11.4
30,200 24,800 19,800 21,700 20,500 17,900 17,800
- ----------------------------------------------------------------------------------------------------------
IKON OFFICE SOLUTIONS 41
QUARTERLY FINANCIAL SUMMARY
Alco Standard Corporation and Subsidiaries
(unaudited, in millions except per share data) First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------------------------------------------------------
1996
Revenues $ 900.6 $ 1,015.4 $ 1,059.1 $ 1,124.7 $ 4,099.8
Gross profit 371.8 403.8 446.5 462.8 1,684.9
Income before taxes 61.3 66.3 72.8 72.5 272.9
Income (loss)
Continuing operations 36.9 40.5 43.7 43.8 164.9
Discontinued operations 26.3 28.6 (20.2) (a) 11.1 45.8 (a)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 63.2 $ 69.1 $ 23.5 $ 54.9 $ 210.7
================================================================================================================================
Earnings (loss) per share
Continuing operations $ .25 $ .28 $ .30 $ .30 $ 1.12
Discontinued operations .22 .22 (.16) (a) .08 .36 (a)
- --------------------------------------------------------------------------------------------------------------------------------
$ .47 $ .50 $ .14 $ .38 $ 1.48
================================================================================================================================
Dividends per share $ .14 $ .14 $ .14 $ .14 $ .56
Common stock price
High/Low 46 3/8 - 42 54 5/8 - 37 3/8 66 - 44 5/8 49 7/8 - 38 66 - 37 3/8
- --------------------------------------------------------------------------------------------------------------------------------
1995
Revenues $ 678.7 $ 740.8 $ 812.0 $ 860.1 $ 3,091.6
Gross profit 279.7 300.0 332.9 345.6 1,258.2
Income before taxes 45.2 44.5 51.2 49.6 190.5
Income
Continuing operations 27.4 26.3 30.9 30.4 115.0
Discontinued operations 19.6 23.4 29.0 16.7 (b) 88.7 (b)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 47.0 $ 49.7 $ 59.9 $ 47.1 $ 203.7
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings per share
Continuing operations $ .21 $ .21 $ .24 $ .20 $ .86
Discontinued operations .17 .20 .25 .14 (b) .76 (b)
- --------------------------------------------------------------------------------------------------------------------------------
$ .38 $ .41 $ .49 $ .34 $ 1.62
- --------------------------------------------------------------------------------------------------------------------------------
Dividends per share $ .13 $ .13 $ .13 $ .13 $ .52
Common stock price
High/Low 31 7/8 - 26 1/2 36 7/8 - 30 7/8 40 1/8 - 34 3/8 43 5/8 - 38 1/4 43 5/8 - 26 1/2
(a) Discontinued operations in the third quarter and year-to-date fiscal 1996
includes a pretax charge of $50,000,000 ($32,500,000 net of taxes or $.25 per
share) for restructuring activities of Unisource and a pretax charge of
$18,000,000 ($14,150,000 net of taxes or $.11 per share) for expenses related to
the spin-off of Unisource.
(b) Discontinued operations in the fourth quarter and year-to-date fiscal 1995
include a pretax charge of $23,630,000 ($16,541,000 net of taxes or $.14 per
share) for environmental liabilities of discontinued operations.
42 IKON OFFICE SOLUTIONS