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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 1-5964
IKON OFFICE SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 23-0334400
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
P.O. BOX 834, VALLEY FORGE, PENNSYLVANIA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 296-8000
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 9, 2002.
Common Stock, no par value 149,309,911 shares
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Explanatory Note
This Amendment to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 is being filed to provide certain additional
information contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") and the Notes to the Condensed
Consolidated Financial Statements. All financial data contained in the
Consolidated Statements of Income, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows remain unchanged.
IKON OFFICE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets--June 30, 2002 (unaudited) and
September 30, 2001
Consolidated Statements of Income--Three and nine months ended
June 30, 2002 and 2001 (unaudited)
Consolidated Statements of Cash Flows--Nine months ended June
30, 2002 and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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FORWARD-LOOKING INFORMATION
---------------------------
IKON Office Solutions, Inc. (the "Registrant," "IKON" or the "Company") may
from time to time provide information, whether verbally or in writing,
including certain statements included in or incorporated by reference in this
Form 10-Q/A, which constitute "forward-looking" statements within the meaning of
the Private Securities Litigation Reform Act of 1995 ("Litigation Reform
Act"). These forward-looking statements include, but are not limited to,
statements regarding the following (and certain matters discussed in greater
detail herein): growth opportunities and increasing market share, productivity
and infrastructure initiatives; earnings, revenue, cash flow, margin, and
cost-savings projections; the effect of competitive pressures on equipment
sales; expected savings and lower costs from the restructuring programs and
productivity and infrastructure initiatives; developing and expanding
strategic alliances and partnerships; the impact of e-commerce and
e-procurement initiatives; the implementation of the Oracle e-business suite;
anticipated growth rates in the digital and color equipment and outsourcing
industries; the effect of foreign currency exchange risk; the reorganization
of the Company's business segments and the anticipated benefits of operational
synergies related thereto; and the Company's ability to finance its current
operations and its growth initiatives. Although IKON believes the expectations
contained in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove correct.
The words "anticipate," "believe," "estimate," "expect," "intend," "will," and
similar expressions, as they relate to the Company or the Company's
management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Registrant with respect to future
events and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
The Registrant does not intend to update these forward-looking statements.
In accordance with the provisions of the Litigation Reform Act, the Company
is making investors aware that such "forward-looking" statements, because they
relate to future events, are by their very nature subject to many important
factors which could cause actual results to differ materially from those
contained in the "forward-looking" statements. These uncertainties and risks
include, but are not limited to, the following (some of which are explained in
greater detail herein): conducting operations in a competitive environment and
a changing industry (which includes technical services and products that are
relatively new to the industry and to the Company); delays, difficulties,
management transitions and employment issues associated with consolidations
and/or changes in business operations; managing the integration of acquired
businesses; existing and future vendor relationships; risks relating to
foreign currency exchange; economic, legal and political issues associated
with international operations; the Company's ability to access capital and
meet its debt service requirements (including sensitivity to fluctuations in
interest rates); and general economic conditions.
Competition. The Registrant operates in a highly competitive environment.
There are a number of companies worldwide with significant financial resources
which compete with the Registrant to provide similar products and services,
such as Canon, Ricoh, Oce, Xerox and Danka. Competition is based largely upon
technology, performance, pricing, quality, reliability, distribution, customer
service and support. In addition, the financial pressures faced by some of the
Registrant's competitors may cause them to engage in uneconomic pricing
practices, which may cause the prices that the Registrant is able to charge in
the future for its products and services to be less than the Registrant has
historically charged. The Registrant's future success is based in large part
upon its ability to successfully compete in its current markets and expand
into additional products and services offerings. The intense competition
inherent in the Registrant's industry could also result in additional pressure
in pricing and the retention of customers which could negatively affect the
Registrant's results of operations.
Pricing. The Registrant's ability to succeed is dependent upon its ability to
obtain adequate pricing for its products and services. Depending on
competitive market factors, future prices the Registrant can obtain for its
products and services may vary from historical levels.
Transition to Digital. The analog segment of the office equipment market
continues to decline as the office equipment industry transitions to digital
technology. This transition represents a significant technological change in
the Registrant's industry with ramifications that cannot be fully foreseen.
Some of the digital products placed by the Registrant replace or compete with
the analog products placed by the Registrant. If the Company does not adapt
successfully to these changes, our actual results may differ materially from
those expected.
Vendor Relationships. The Registrant's access to equipment, parts and supplies
is dependent upon close relationships with its vendors and its ability to
purchase products from these vendors on competitive terms. The cessation or
deterioration in relationships with, or the financial condition of,
significant vendors may cause the Company to be unable to distribute
equipment, including digital products and high-volume or color equipment,
parts and supplies, and would cause actual results to differ materially from
those expected.
Financing Business. A significant portion of the Registrant's profits are
derived from the financing of equipment provided to its customers. The
Registrant's ability to provide such financing at competitive rates and
realize profitable margins is highly dependent upon its own costs of
borrowing. Significant changes in credit ratings could reduce the Company's
access to
certain credit markets. There is no assurance that these credit ratings can be
maintained and/or the credit markets can be readily accessed.
Productivity Initiatives. The Registrant's ability to improve its profit
margins is largely dependent on its ability to maintain an efficient,
cost-effective operation. The Registrant continues to invest in new market
opportunities and to streamline its infrastructure. These investments are
aimed at making the Company more profitable and competitive in the long-term,
and include initiatives such as centralized credit and purchasing, shared
services and the implementation of the Oracle e-business suite, a
comprehensive, multi-year initiative designed to web-enable our information
technology infrastructure. The Registrant's ability to improve its profit
margins through the implementation of these productivity initiatives is
dependent upon certain factors outside the control of the Registrant and
therefore could cause actual results to differ materially from those
anticipated.
International Operations. The Registrant's future revenue, cost and profit
results could be affected by a number of factors, including changes in foreign
currency exchange rates, changes in economic conditions from country to
country, changes in a country's political condition, trade protection
measures, licensing and other legal requirements and local tax issues.
Restructuring. In the fourth quarter of fiscal 2001, the Company announced the
acceleration of certain cost cutting and infrastructure improvements and
recorded a pre-tax restructuring and asset impairment charge of $60,000 and
reserve adjustments related primarily to the exit of the Company's telephony
operations of $5,300. This resulted in a charge of $65,300 ($49,235 after-tax,
or $0.34 per share on a diluted basis). These actions address the exit from
the Company's telephony operations, the closing of a number of non-strategic
digital print centers and further downsizing of operational infrastructures
throughout the organization as the Company leverages and intensifies prior
standardization and centralization initiatives. These actions include the
ongoing centralization and consolidation of many selling and administrative
functions, including marketplace consolidation, supply chain, finance,
customer service, sales support and the realignment of sales coverage against
our long-term growth objectives. Additionally, the Company recorded an asset
impairment charge of $3,582 ($3,300 after-tax, or $0.02 per share on a diluted
basis) related to the exit of the Company's technology education operations.
Therefore, the aggregate charge recorded in fiscal 2001 (the "Fiscal 2001
Charge") was $68,882 ($52,535 after-tax, or $0.36 per share on a diluted
basis).
In the first and fourth quarters of fiscal 2000, the Company announced certain
restructuring charges totaling approximately $105,168 (the "Fiscal 2000
Charge"). The restructuring charges are to consolidate or dispose of certain
underperforming and non-core locations and implement productivity enhancements
through consolidation/centralization of activities in inventory management,
purchasing, finance/accounting and other administrative functions and
consolidate or eliminate unproductive real estate facilities. These efforts
are aimed at improving the Company's performance and efficiency.
The failure to execute the actions described above concerning the Fiscal 2001
Charge or Fiscal 2000 Charge would cause actual results to differ materially
from those anticipated.
New Product Offerings. The process of developing and/or distributing new high
technology products and solutions is inherently complex and uncertain. It
requires accurate anticipation of customers' changing needs and emerging
technological trends. The Registrant must make long-term investments and
commit significant resources before knowing whether these investments will
eventually result in products that achieve customer acceptance and generate
the revenues required to provide anticipated returns from these investments.
Integration of Acquired Companies. The Company's success is dependent upon its
ability to integrate acquired companies and their operations which include
companies with technical services and products that are relatively new to the
Company and companies outside the United States that present additional risks
relating to international operations. There can be no assurance the Company
will be successful in managing the integration of acquired companies and their
operations.
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
2002 September 30,
(in thousands) (UNAUDITED) 2001
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ASSETS
Cash and cash equivalents $ 90,164 $ 80,351
Restricted cash 135,248 128,365
Accounts receivable, less allowances of: June 30, 2002 - $17,123;
September 30, 2001 - $23,510 597,766 641,059
Finance receivables, less allowances of: June 30, 2002 - $20,492;
September 30, 2001 - $24,424 1,194,211 1,171,004
Inventories 326,783 299,776
Prepaid expenses and other current assets 105,638 95,381
Deferred taxes 98,450 98,701
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TOTAL CURRENT ASSETS 2,548,260 2,514,637
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LONG-TERM FINANCE RECEIVABLES, LESS ALLOWANCES OF: JUNE 30, 2002 -
$38,056; SEPTEMBER 30, 2001 - $45,360 2,217,775 2,176,205
EQUIPMENT ON OPERATING LEASES, NET 92,077 71,181
PROPERTY AND EQUIPMENT, NET 209,122 207,812
GOODWILL, NET 1,244,117 1,258,112
OTHER ASSETS 60,982 63,045
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TOTAL ASSETS $ 6,372,333 $ 6,290,992
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt $ 13,067 $ 17,643
Current portion of long-term debt, finance subsidiaries 1,065,323 1,229,631
Notes payable 7,551 183,688
Trade accounts payable 221,905 222,999
Accrued salaries, wages and commissions 95,190 126,280
Deferred revenues 164,686 185,261
Other accrued expenses 278,444 299,624
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TOTAL CURRENT LIABILITIES 1,846,166 2,265,126
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LONG-TERM DEBT 595,315 599,608
LONG-TERM DEBT, FINANCE SUBSIDIARIES 1,715,008 1,366,108
DEFERRED TAXES 497,871 446,059
OTHER LONG-TERM LIABILITIES 208,541 218,513
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value: authorized 300,000 shares; issued: June
30, 2002-149,989 shares; September 30, 2001-150,128 shares;
outstanding: June 30, 2002-143,981 shares; September 30, 2001-
141,776 shares 1,010,567 1,012,302
Series 12 preferred stock, no par value: authorized 480 shares; none
issued or outstanding
Unearned compensation (2,428) (3,745)
Retained earnings 561,843 463,152
Accumulated other comprehensive loss (37,203) (43,484)
Cost of common shares in treasury: June 30, 2002-5,329 shares;
September 30, 2001-7,480 shares (23,347) (32,647)
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TOTAL SHAREHOLDERS' EQUITY 1,509,432 1,395,578
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,372,333 $ 6,290,992
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See notes to condensed consolidated financial statements.
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
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(in thousands, except per share amounts) 2002 2001 2002 2001
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REVENUES
Net sales $ 598,698 $ 641,858 $ 1,759,136 $ 2,001,648
Services 527,204 577,741 1,610,611 1,721,934
Finance income 92,714 91,558 279,492 266,852
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1,218,616 1,311,157 3,649,239 3,990,434
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COSTS AND EXPENSES
Cost of goods sold 390,757 409,861 1,155,784 1,305,473
Services costs 304,755 338,486 955,169 1,030,613
Finance interest expense 39,103 41,783 117,263 132,350
Selling and administrative 401,017 456,249 1,202,562 1,362,578
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1,135,632 1,246,379 3,430,778 3,831,014
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OPERATING INCOME 82,984 64,778 218,461 159,420
INTEREST EXPENSE 12,955 18,345 41,551 54,222
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INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES ON INCOME 70,029 46,433 176,910 105,198
TAXES ON INCOME 26,887 20,431 65,899 46,287
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INCOME FROM CONTINUING OPERATIONS 43,142 26,002 111,011 58,911
DISCONTINUED OPERATIONS,
NET OF TAXES OF $942 1,200
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NET INCOME $ 43,142 $ 26,002 $ 111,011 $ 60,111
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BASIC EARNINGS PER COMMON SHARE
Continuing Operations $ 0.30 $ 0.18 $ 0.78 $ 0.41
Discontinued Operations 0.01
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NET INCOME $ 0.30 $ 0.18 $ 0.78 $ 0.42
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DILUTED EARNINGS PER COMMON SHARE
Continuing Operations $ 0.28 $ 0.18 $ 0.74 $ 0.41
Discontinued Operations 0.01
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NET INCOME $ 0.28 $ 0.18 $ 0.74 $ 0.42
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CASH DIVIDENDS PER COMMON SHARE $ 0.04 $ 0.04 $ 0.12 $ 0.12
See notes to condensed consolidated financial statements.
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
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(in thousands) 2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 111,011 $ 60,111
Additions (deductions) to reconcile net income to net cash
provided by operating activities of continuing operations:
Depreciation 90,392 88,758
Amortization 10,902 44,128
Provision for losses on accounts receivable 5,090 6,947
Provision for deferred income taxes 52,063 33,174
Provision for lease default reserves 50,557 47,224
Changes in operating assets and liabilities, net of effects from
acquisitions and divestitures:
Decrease in accounts receivable 39,141 40,041
Increase in inventories (11,007) (4,572)
Increase in prepaid expenses and other current assets (15,344) (10,435)
Decrease in accounts payable, deferred revenues and accrued
expenses (75,668) (94,866)
Decrease in accrued restructuring (16,212) (13,902)
Other 8,000 1,628
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Net cash provided by operating activities of continuing operations 248,925 198,236
Gain from discontinued operations (2,142)
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Net cash provided by operating activities 248,925 196,094
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CASH FLOWS FROM INVESTING ACTIVITIES
Cost of companies acquired, net of cash acquired (2,666)
Expenditures for property and equipment (78,833) (68,737)
Expenditures for equipment on operating leases (63,216) (34,709)
Proceeds from sale of property and equipment 21,627 37,945
Proceeds from sale of equipment on operating leases 10,653 10,209
Finance receivables - additions (1,189,003) (1,381,790)
Finance receivables - collections 1,090,693 1,187,403
Proceeds from sale of finance subsidiaries' lease receivables 15,940
Other (6,521) (317)
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Net cash used in investing activities (214,600) (236,722)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 2,608 36,747
Short-term (repayments) borrowings, net (178,376) 264,907
Long-term debt repayments (11,866) (193,284)
Finance subsidiaries' debt - issuances 1,522,265 2,080,191
Finance subsidiaries' debt - repayments (1,347,815) (2,094,733)
Dividends paid (17,160) (17,022)
Increase in restricted cash (6,883) (53,156)
Proceeds from option exercises and sale of treasury shares 6,203 3,904
Purchase of treasury shares and other (258) (7,876)
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Net cash (used in) provided by financing activities (31,282) 19,678
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Effect of exchange rate changes on cash and cash equivalents 6,770 (7,011)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,813 (27,961)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 80,351 78,118
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 90,164 $ 50,157
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See notes to condensed consolidated financial statements.
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of IKON
Office Solutions, Inc. and subsidiaries (the "Company", "we", or "our") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended September 30, 2001. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
Note 2: Significant Accounting Policies
The following provides additional information regarding our significant
accounting policies contained in footnote 1 of the Company's Annual Report on
Form 10-K/A for the year ended September 30, 2001:
Revenue Recognition. We install the majority of the equipment we sell.
Revenues for company-installed copier/printer equipment and technology
hardware, included in net sales, are recognized upon receipt of a signed sales
contract and "delivery and acceptance" certificate. The "delivery and
acceptance" certificate confirms that the product has been delivered,
installed, accepted, is in good working condition, and is satisfactory for the
intended purposes. Revenues for customer installed copier/printer equipment
and technology hardware, included in net sales, are recognized upon receipt of
a sales contract and delivery. The Company does not offer any equiqment
warranties in addition to those which are provided by the equipment
manufacturer. Revenues for sales of supplies are recognized at time of
shipment following the placement of an order from a customer. Revenues for
monthly equipment service and facilities management service are recognized in
the month in which the service is performed. Revenues for other services and
rentals are recognized in the period performed. The present value of payments
due under sales-type lease contracts is recorded as revenue within net sales
and cost of goods sold is charged with the book value of the equipment when
products are delivered to and accepted by the customer. Finance income is
recognized over the related lease term.
Supporting the Company's objective to provide complete solutions to its
customers, the Company generally sells a service agreement when copier/printer
equipment is sold. The typical agreement includes a minimum number of copies
for a base service fee plus an overage charge for any copies in excess of the
minimum. Revenue for each element of a bundled contract is derived from our
national price lists for equipment and service. The national price list for
equipment includes a price range between the manufacturers' suggested retail
price ("MSRP") and the minimum price for which our sales force is permitted to
sell equipment. The price list for equipment is updated monthly to reflect any
vendor-communicated changes in MSRP and any changes in the fair value for
which equipment is being sold to customers. The national price list for
service reflects the price of service charged to customers. The price list for
service is updated quarterly to reflect new service offerings and any changes
in the competitive environment affecting the fair value for which service is
being provided to customers. The national price list, therefore, is
representative of the fair value of each element of a bundled agreement when
it is sold unaccompanied by the other elements.
Revenue for a bundled contract is first allocated to service revenue using the
fair value per our national price list. The remaining revenue is allocated to
equipment revenue and finance income based on a net present value calculation
utilizing an appropriate interest rate that considers the creditworthiness of
the customer and costs of financing. The equipment revenue is compared to the
national price list. If the equipment revenue falls within the price range per
the national price list, no adjustment is required. If the equipment revenue
is not within the price range per the national price list, service and
equipment revenues are proportionately adjusted while holding the interest
rate constant, so that both service and equipment revenues fall within the
price range per the national price list.
Restricted Cash. Restricted cash on the consolidated balance sheets primarily
represents the cash that has been collected on the leases that are pledged as
collateral for lease-backed notes. This cash must be segregated within two
business days into a trust account and the cash is used to pay the principal
and interest on lease-backed notes as well as any associated administrative
expenses. The level of restricted cash is impacted from one period to the next
by the volume of leases pledged as collateral on the lease-backed notes and
timing of collections on such leases.
Note 3: Adoption of Statement of Financial Accounting Standards ("SFAS") 142,
"Goodwill and Other Intangible Assets"
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
142. SFAS 142 supercedes APB 17, Intangible Assets, and primarily addresses
accounting for goodwill and intangible assets subsequent to their acquisition.
The provisions of SFAS 142 are effective for fiscal years beginning after
December 15, 2001, with early adoption permitted. The most significant changes
made by SFAS 142 were: (1) goodwill and indefinite lived intangible assets
will no longer be amortized, (2) goodwill will be tested for impairment at
least annually at the reporting unit level, (3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually, and
(4) the amortization period of intangible assets with finite lives will no
longer be limited to forty years. Effective October 1, 2001, the Company
adopted SFAS 142, which requires that goodwill not be amortized, but instead
tested at least annually for impairment. An impairment charge will be
recognized only when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. The Company calculates fair value
using a discounted cash flow model. As of March 31, 2002, the Company
completed its initial impairment review and determined that no impairment
charge was required. The Company has identified the following reporting units
and associated goodwill:
IKON North IKON North
America America Business Sysinct
Copier Outsourcing Imaging (e-business
Business Business IKON Europe Services development) Total
---------------------------------------------------------------------------------------------------
June 30, 2002
Goodwill $866,434 $70,927 $294,749 $9,011 $2,996 $1,244,117
Changes in the goodwill balance since September 30, 2001 are attributable to
foreign currency translation adjustments.
As of June 30, 2002, there are no intangible assets that are required to be
amortized by SFAS 142.
A reconciliation of reported net income adjusted to reflect the adoption of
SFAS 142 is provided below:
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Reported net income $43,142 $26,002 $111,011 $60,111
Add-back goodwill amortization, net of
taxes of $236 and $711 10,102 30,468
------------- ------------- ------------- -------------
Adjusted net income $43,142 $36,104 $111,011 $90,579
============= ============= ============= =============
Reported basic earnings per common share $0.30 $0.18 $0.78 $0.42
Add-back goodwill amortization 0.07 0.21
------------- ------------- ------------- -------------
Adjusted basic earnings per common share $0.30 $0.25 $0.78 $0.63
============= ============= ============= =============
Reported diluted earnings per common share $0.28 $0.18 $0.74 $0.42
Add-back goodwill amortization 0.07 0.21
------------- ------------- ------------- -------------
Adjusted diluted earnings per common share $0.28 $0.25 $0.74 $0.63
============= ============= ============= =============
Note 4: Restructuring and Asset Impairment Charges
In the fourth quarter of fiscal 2001, the Company announced the acceleration
of certain cost cutting and infrastructure improvements (as described below)
and recorded a pre-tax restructuring and asset impairment charge of $60,000,
and reserve adjustments related primarily to the exit of the Company's
telephony operations of $5,300. The related reserve adjustments were included
in cost of goods sold for the write-off of obsolete inventory and selling and
administrative expense for the write-off of accounts receivable in the
consolidated statement of income. The asset impairments included fixed asset
write-offs totaling $6,078 as follows: $100 from technology services
businesses closures; $897 from digital print center business closures; $338
from digital print center business sales; and $4,743 relating to IKON
infrastructure. The asset impairments also included goodwill write-offs
totaling $19,422 as follows: $955 from technology services business
closures; $6,591 from digital print center business sales; and $11,876
relating to telephony business sales. The Company developed this plan as part
of our continuing effort to streamline IKON's infrastructure to increase
future productivity, and to address economic changes within specific
marketplaces. This resulted in a charge of $65,300 ($49,235 after-tax, or
$0.34 per share on a diluted basis). These actions addressed the sale of the
Company's telephony operations and the closing of twelve non-strategic digital
print centers as the Company shifts its focus from transactional work toward
contract print work and the support of major accounts. These actions also
addressed further downsizing of operational infrastructures throughout the
organization as the Company leverages and intensifies prior standardization
and centralization initiatives. These actions included the ongoing
centralization and consolidation of many selling and administrative functions,
including marketplace consolidation, supply chain, finance, customer service,
sales support and the realignment of sales coverage against our long-term
growth objectives. Additionally, the Company recorded an asset impairment
charge of $3,582 ($3,300 after-tax, or $0.02 per share on a diluted basis)
related to the sale of the Company's technology education operations. The
asset impairments included fixed asset write-offs totaling $828. The asset
impairments also included goodwill write-offs totaling $2,754. Therefore, the
aggregate charge recorded in fiscal 2001 (the "Fiscal 2001 Charge") was
$68,882 ($52,535 after-tax, or $0.36 per share on a diluted basis). The Fiscal
2001 Charge and the related actions taken resulted in a decline of
approximately $85,000 in revenues and an increase in operating income of
approximately $33,000 for the nine months ended June 30, 2002 compared to the
nine months ended June 30, 2001 as a result of the actions described above.
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and
asset impairment charge (the "First Quarter 2000 Charge") of $105,340 ($78,479
after-tax, or $0.52 per share on a basic and diluted basis). The asset
impairments included fixed asset write-offs totaling $12,668 as follows: $631
from technology
services integration and education business closures; $2,530 from technology
services integration and education business downsizing; $1,269 from digital
print center business closures; $588 from digital print center business
downsizing; $1,405 from document services excess equipment; $1,244 from a
technology services business sale; and $5,001 relating to IKON infrastructure.
The asset impairments included goodwill write-offs totaling $38,880 as
follows: $3,279 from technology services integration business sales; $10,156
from technology services integration and education business closures; $9,566
from digital print center business closures; $14,950 from a technology
services business sale; and $929 relating to an IKON Europe closure. These
actions addressed under-performance in certain technology services operations,
business document services, and business information services locations as
well as the Company's desire to strategically position these businesses for
integration and profitable growth. Plans included consolidating or disposing
of certain under-performing and non-core locations; implementing productivity
enhancements through the consolidation and centralization of activities in
inventory management, purchasing, finance/accounting and other administrative
functions; and consolidating real estate through the co-location of business
units as well as the disposition of unproductive real estate. In the fourth
quarter of fiscal 2000, the Company determined that some first quarter
restructuring initiatives would not require the level of spending that had
been originally estimated, and certain other initiatives would not be
implemented due to changing business dynamics. Previously targeted sites were
maintained based on their potential for improvement as well as their
relationship to IKON's overall strategic direction. As a result of our
integration efforts, locations originally identified for sale or closure will
be combined with other IKON businesses. As a result, $15,961 was reversed from
the First Quarter 2000 Charge, and the total amount of the First Quarter 2000
Charge was reduced to $89,379 ($66,587 after-tax, or $0.45 per share on a
basic and diluted basis). The components of the reversal were: 538 fewer
positions eliminated reduced severance by $1,784, real estate lease payments
reduced by $13,426, and contractual commitments reduced by $751. The severance
reversal resulted from successfully negotiating business sales whereby
employees assumed positions with the acquiring companies, higher-than-expected
voluntary resignations, and our decision not to implement certain supply chain
and shared service center consolidation efforts. The real estate lease payment
reversal was primarily the result of our decision not to close certain sites.
Also, in the fourth quarter of fiscal 2000, the Company announced other
specific actions designed to address the changing market conditions impacting
technology services, IKON North America, and outsourcing locations and
incurred a total pre-tax restructuring and asset impairment charge (the
"Fourth Quarter 2000 Charge") of $15,789 ($12,353 after-tax, or $0.08 per
share on a basic and diluted basis). The asset impairments consisted of fixed
asset write-offs totaling $2,371 as follows: $1,371 from technology
services integration and education business closures; $721 from digital print
center business closures; and $279 relating to IKON infrastructure. The First
Quarter 2000 Charge (as reduced) and Fourth Quarter 2000 Charge resulted in a
net fiscal 2000 charge (the "Fiscal 2000 Charge") of $105,168 ($78,940
after-tax, or $0.53 per share on a basic and diluted basis). The Fiscal 2000
Charge and the related actions resulted in a decline in revenue of
approximately $34,000 and an increase in operating income of approximately
$63,000 in fiscal 2001, as compared to fiscal 2000.
The pre-tax components of the restructuring and asset impairment charges for
fiscal 2001 and fiscal 2000 were as follows:
FISCAL FOURTH QUARTER FIRST QUARTER
2001 FISCAL 2000 FISCAL 2000
TYPE OF CHARGE CHARGE CHARGE CHARGE
- ---------------------------------------------------------------------------------------------------------------------------
Restructuring Charge:
Severance $ 26,500 $ 6,092 $14,605
Leasehold termination costs 5,534 6,685 20,265
Contractual commitments 2,466 641 2,961
- ---------------------------------------------------------------------------------------------------------------------------
Total Restructuring Charge 34,500 13,418 37,831
- ---------------------------------------------------------------------------------------------------------------------------
Asset Impairment Charge:
Fixed assets 6,906 2,371 12,668
Goodwill and intangibles 22,176 - 38,880
- ---------------------------------------------------------------------------------------------------------------------------
Total Asset Impairment Charge 29,082 2,371 51,548
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 63,582 $15,789 $ 89,379
- ---------------------------------------------------------------------------------------------------------------------------
The Company calculated the asset and goodwill impairments as required by SFAS
121 "Accounting for the Impairment of Long-Lived Assets and Assets to Be
Disposed of." The proceeds received businesses that were sold were not
sufficient to cover the fixed asset and goodwill balances. As such, those
balances were written-off. Goodwill directly associated with businesses that
were closed was also written-off.
The following presents a reconciliation of the original restructuring
components of the Fiscal 2001 Charge and First Quarter 2000 Charge and Fourth
Quarter 2000 Charge to the balance remaining at June 30, 2002, which is
included in other accrued expenses on the consolidated balance sheet:
FISCAL PAYMENTS BALANCE PAYMENTS BALANCE
2001 FISCAL SEPTEMBER 30, FISCAL JUNE 30,
FISCAL 2001 RESTRUCTURING CHARGE CHARGES 2001 2001 2002 2002
- -------------------------------------------------------------------------------------------------------------------------------
Severance $ 26,500 - $ 26,500 $ (9,223) $ 17,277
Leasehold termination costs 5,534 - 5,534 (1,166) 4,368
Contractual commitments 2,466 - 2,466 (1,129) 1,337
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 34,500 - $ 34,500 $(11,518) $ 22,982
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE BALANCE BALANCE
FOURTH QUARTER FISCAL 2000 FISCAL 2000 PAYMENTS SEPTEMBER 30, PAYMENTS SEPTEMBER 30, PAYMENTS JUNE 30,
RESTRUCTURING CHARGE CHARGES FISCAL 2000 2000 FISCAL 2001 2001 FISCAL 2002 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Severance $ 6,092 - $ 6,092 $(4,763) $ 1,329 $ (632) $ 697
Leasehold termination costs 6,685 $ (41) 6,644 (1,843) 4,801 (1,296) 3,505
Contractual commitments 641 - 641 (301) 340 (198) 142
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 13,418 $ (41) $ 13,377 $(6,907) $ 6,470 $(2,126) $ 4,344
- -----------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENT TO BALANCE BALANCE BALANCE
FIRST QUARTER FISCAL 2000 FISCAL 2000 PAYMENTS FISCAL 2000 SEPTEMBER 30, PAYMENTS SEPTEMBER 30, PAYMENTS JUNE 30,
RESTRUCTURING CHARGE CHARGES FISCAL 2000 CHARGE 2000 FISCAL 2001 2001 FISCAL 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Severance $16,389 $(10,616) $ (1,784) $ 3,989 $ (3,295) $ 694 $ (322) $ 372
Leasehold termination costs 33,691 (10,052) (13,426) 10,213 (5,328) 4,885 (2,246) 2,639
Contractual commitments 3,712 (2,734) (751) 227 (227) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 53,792 $(23,402) $(15,961) $14,429 $(8,850) $ 5,579 $ (2,568) $ 3,011
- ------------------------------------------------------------------------------------------------------------------------------------
The projected reductions of the remaining balances of the Fiscal 2001 Charge,
Fourth Quarter Fiscal 2000 Charge and First Quarter 2000 Charge are as
follows:
FISCAL 2001 PROJECTED REDUCTIONS FY 2002 FY 2003 FY 2004 FY 2005 BEYOND TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Severance $ 9,478 $6,508 $1,214 $ 77 - $17,277
Real estate lease contracts 2,117 1,420 504 327 - 4,368
Other contractual commitments 1,307 30 - - - 1,337
- ------------------------------------------------------------------------------------------------------------------------------------
Total $12,902 $7,958 $1,718 $404 - $22,982
- ------------------------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER FISCAL 2000
PROJECTED REDUCTIONS FY 2002 FY 2003 FY 2004 FY 2005 BEYOND TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Severance $ 585 $ 112 - - - $ 697
Real estate lease contracts 557 1,230 $ 838 $ 259 $621 3,505
Other contractual commitments 142 - - - - 142
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,284 $1,342 $ 838 $ 259 $621 $ 4,344
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER FISCAL 2000
PROJECTED REDUCTIONS FY 2002 FY 2003 FY 2004 FY 2005 BEYOND TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Severance $ 17 $ 355 - - - $ 372
Real estate lease contracts 1,025 1,114 $ 337 $ 163 - 2,639
Other contractual commitments - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,042 $1,469 $ 337 $ 163 - $ 3,011
- ------------------------------------------------------------------------------------------------------------------------------------
The Company determined its probable sublease income through the performance of
local commercial real estate market valuations by our external regional real
estate brokers. All lease termination amounts are shown net of projected
sublease income. Projected sublease income was $3,366, $180 and $9,957 for
the Fiscal 2001 Charge, Fourth Quarter Fiscal 2000 Charge and First Quarter
Fiscal 2000 Charge, respectively.
All actions related to our restructurings are complete. Severance payments to
terminated employees are made in installments. The charges for contractual
commitments relate to real estate lease contracts where the Company has exited
certain locations and is required to make payments over the remaining lease
term.
The employees affected by the charges for fiscal 2001 and fiscal 2000 were as
follows:
REMAINING
ADJUSTMENT TO EMPLOYEES TO
FISCAL 2001 EMPLOYEES EMPLOYEE FISCAL 2001 BE TERMINATED
HEADCOUNT REDUCTIONS AFFECTED TERMINATIONS CHARGE AS OF JUNE 30, 2002
- -----------------------------------------------------------------------------------------------------------------------
Telephony 101 (101) - -
Education 17 (17) - -
Technology Businesses 94 (76) - 18
Digital Print Centers 190 (174) - 16
Infrastructure & Other 1,198 (908) - 290
- -----------------------------------------------------------------------------------------------------------------------
Total 1,600 (1,276) - 324
- -----------------------------------------------------------------------------------------------------------------------
REMAINING REMAINING
EMPLOYEES TO EMPLOYEES TO
EMPLOYEE ADJUSTMENT TO BE TERMINATED EMPLOYEE BE TERMINATED
FOURTH QUARTER FISCAL 2000 EMPLOYEES TERMINATIONS FISCAL 2000 AT SEPTEMBER 30, TERMINATIONS AT SEPTEMBER 30,
HEADCOUNT REDUCTIONS AFFECTED FISCAL 2000 CHARGE 2000 FISCAL 2001 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Education & Integration 130 - - 130 (130) -
Digital Print Centers 137 - - 137 (137) -
Infrastructure & Other 119 - - 119 (119) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 386 - - 386 (386) -
- ------------------------------------------------------------------------------------------------------------------------------------
REMAINING REMAINING
EMPLOYEES TO EMPLOYEES TO
EMPLOYEE ADJUSTMENT TO BE TERMINATED EMPLOYEE BE TERMINATED
FIRST QUARTER FISCAL 2000 EMPLOYEES TERMINATIONS FISCAL 2000 AT SEPTEMBER 30, TERMINATIONS AT SEPTEMBER 30,
HEADCOUNT REDUCTIONS AFFECTED FISCAL 2000 CHARGE 2000 FISCAL 2001 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Education & Integration 434 (329) (80) 25 (25) -
Technology Businesses 238 (35) (70) 133 (133) -
Digital Print Centers 323 (189) (116) 18 (18) -
Infrastructure & Other 937 (251) (272) 414 (414) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,932 (804) (538) 590 (590) -
- ------------------------------------------------------------------------------------------------------------------------------------
The locations affected by the charges for fiscal 2001 and fiscal 2000 were as
follows:
ADJUSTMENT TO REMAINING
SITES SITES FISCAL 2000 SITES TO
SITE CLOSURES AFFECTED CLOSED CHARGE BE CLOSED
- -----------------------------------------------------------------------------------------------------------
Fiscal 2001 Charge 24 (21) - 3
Fourth Quarter Fiscal 2000 Charge 5 (5) - -
First Quarter Fiscal 2000 Charge 24 (22) (2) -
Note 5: Unsecured Credit Facility
On May 24, 2002, the Company obtained a new $300,000 unsecured credit facility
(the "New Credit Facility") with a group of lenders. The New Credit Facility
replaces our $600,000 credit facility that was to expire in January 2003 (the
"Old Credit Facility"). Revolving loans are available, with certain
sub-limits, to IOS Capital, LLC, IKON's leasing subsidiary in the United
States; IKON Capital, PLC, IKON's leasing subsidiary in the United Kingdom;
and IKON Capital, Inc., IKON's leasing subsidiary in Canada. The New Credit
Facility contractually matures on May 24, 2005. As of June 30, 2002, the
Company has no borrowings outstanding under the New Credit Facility. The New
Credit Facility also provides support for letters of credit for the Company
and its subsidiaries. As of June 30, 2002, letters of credit supported by the
New Credit Facility amounted to $21,418. The remaining amount available under
the New Credit Facility for borrowings or letters of credit is $278,582 as of
June 30, 2002.
The New Credit Facility contains affirmative and negative covenants, including
limitations on certain fundamental changes, investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends, intercompany loans and certain restricted
payments. The New Credit Facility does not affect our ability to continue to
securitize receivables. In addition, unless the Company achieves certain
ratings on its long and short term senior, unsecured debt (as defined) or has
not redeemed or defeased $250,000 of IOSC's 9.75% Notes due June 15, 2004, all
loans under the New Credit Facility mature on December 15, 2003. Cash
dividends may be paid on common stock subject to certain limitations. The New
Credit Facility also contains certain financial covenants including (i)
corporate leverage ratio; (ii) consolidated interest expense ratio; (iii)
consolidated asset test ratios; and (iv) limitations on capital expenditures.
The New Credit Facility contains defaults customary for facilities of this
type. Failure to be in compliance with any material provision of the New
Credit Facility could have a material adverse effect on our liquidity,
financial position and results of operations.
Note 6: Lease-Backed Notes
In addition to the $1,797,389 of lease-backed notes outstanding on September
30, 2001, on December 28, 2001, IOS Capital, LLC ("IOSC"), IKON's leasing
subsidiary in the United States, and IKON issued $87,011 and repurchased
$12,460 of lease-backed notes (the "Notes") for a net issuance of $74,551. The
repurchased amount was sold on May 24, 2002 for $10,806. The Notes have a
stated maturity of September 15, 2008 and pay an average yield of 5.06%. The
Notes are collateralized by a pool of office equipment leases or contracts,
(the "Leases") and related assets, acquired or originated by the Company
(together with the equipment financing portion of each periodic lease or
rental payment due under the Leases on or after the related transfer date) and
all related casualty payments, retainable deposits and termination payments.
Payments on the Notes are made from payments on the Leases. The Notes have
certain credit enhancement features available to noteholders, including a
reserve account and an overcollateralization account. On May 30, 2002, IKON
Receivables Funding, LLC ("Receivables Funding"), a wholly-owned subsidiary of
IOSC, issued $634,800 of lease-backed notes (the "2002-1 Notes") pursuant to a
shelf registration statement filed with the Securities and Exchange
Commission. The 2002-1 Notes consist of Class A-1 Notes totaling $171,000 with
a stated interest rate of 2.044%, Class A-2 Notes totaling $46,000 with a
stated interest rate of 2.91%, Class A-3 Notes totaling $266,400 with a stated
interest rate of 3.90% and Class A-4 Notes totaling $151,400 with a stated
interest rate of 4.68%. The 2002-1 Notes are collateralized by a pool of
office equipment leases or contracts and related assets and the payments on
the 2002-1 Notes are made from payments received on the equipment leases. IOSC
repaid $597,279 of lease-backed notes during the first nine months of fiscal
2002.
Note 7: Asset Securitization Conduit Financing
During the nine months ended June 30, 2002, IOSC pledged or transferred
$519,589 in financing lease receivables for $449,911 in cash in connection
with its revolving asset securitization conduit financing agreements. IOSC
repaid $593,411 in connection with its issuance of the Notes described above.
As of June 30, 2002, IOSC had approximately $581,692 available under revolving
asset securitization conduit financing agreements.
Note 8: Convertible Subordinated Notes
On May 13, 2002, IOSC issued $300,000 of convertible subordinated notes (the
"Convertible Notes") with an interest rate of 5.0%, which are due on May 1,
2007. The convertible notes can be converted into shares of IKON common stock
at any time before maturity at a conversion price of $15.03 per share.
Interest will be paid on the convertible notes semi-annually beginning
November 1, 2002. IOSC used the net proceeds to repay loans due to IKON and
for general corporate purposes.
Note 9: Comprehensive Income
Total comprehensive income is as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- ------------------------------------
2002 2001 2002 2001
------------- ------------- ---------------- ----------------
Net income $43,142 $26,002 $111,011 $60,111
Foreign currency translation adjustments 2,371 3,315 (1,865) (3,732)
Cumulative effect of change in accounting
principle for derivative and hedging activities
(SFAS 133), net of tax benefit of $3,778 (5,584)
Net (loss) gain on derivative financial instruments,
net of tax (benefit) expense of: $(1,570) and
$1,065 for the three months ended June 30, 2002
and 2001, respectively; $5,430 and $(7,155) for
the nine months ended June 30, 2002 and 2001,
respectively (2,355) 1,597 8,146 (10,816)
------------- ------------- ---------------- ----------------
Total comprehensive income $43,158 $30,914 $117,292 $39,979
============= ============= ================ ================
Minimum pension liability is adjusted at each fiscal year end; therefore,
there is no impact on total comprehensive income during interim periods. The
balances for foreign currency translation, minimum pension liability and
derivative financial instruments included in accumulated other comprehensive
loss in the consolidated balance sheets were $(14,261), $(714) and $(22,228),
respectively, at June 30, 2002 and $(12,396), $(714) and $(30,374),
respectively, at September 30, 2001.
Note 10: Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings
per common share from continuing operations:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------ ------------- -------------- -------------
Numerator:
Numerator for basic earnings per common share -
income from continuing operations $43,142 $26,002 $111,011 $58,911
------------ ------------- -------------- -------------
Effect of dilutive securities:
Interest expense on Convertible Notes, net of tax 1,264 1,264
------------ ------------- -------------- -------------
Numerator for diluted earnings per common
share - income from continuing operations plus
assumed conversion $44,406 $26,002 $112,275 $58,911
------------ ------------- -------------- -------------
Denominator:
Denominator for basic earnings per common share
- weighted average common shares 143,867 141,546 142,901 142,121
------------ ------------- -------------- -------------
Effect of dilutive securities:
Convertible Notes 10,748 3,583
Employee stock awards 469 402 451 88
Employee stock options 3,511 3,483 3,983 1,773
------------ ------------- -------------- -------------
Dilutive potential common shares 14,728 3,885 8,017 1,861
------------ ------------- -------------- -------------
Denominator for diluted earnings per
common share - adjusted weighted average
common shares and assumed conversions 158,595 145,431 150,918 143,982
------------ ------------- -------------- -------------
Basic earnings per common share from continuing
operations $0.30 $0.18 $0.78 $0.41
============ ============= ============== =============
Diluted earnings per common share from
continuing operations $0.28 $0.18 $0.74 $0.41
============ ============= ============== =============
The Company accounts for the effect of the Convertible Notes in the diluted
earnings per common share calculation using the "if converted" method. Under
that method, the Convertible Notes are assumed to be converted to shares
(weighted for the number of days outstanding in the period) at a conversion
price of $15.03, and interest expense, net of taxes, related to the
Convertible Notes is added back to net income.
Options to purchase 6,497 shares of common stock at $11.45 per share to $46.59
per share were outstanding during the third quarter of fiscal 2002 and options
to purchase 4,982 shares of common stock at $7.50 per share to $56.42 per
share were outstanding during the third quarter of fiscal 2001, but were not
included in the computation of diluted earnings per common share because the
options' prices were greater than the average market price of the common
shares; therefore, the effect would be antidilutive.
Options to purchase 6,497 shares of common stock at $11.45 per share to $46.59
per share were outstanding during the first nine months of fiscal 2002 and
options to purchase 7,508 shares of common stock at $5.39 per share to $56.42
per share were outstanding during the first nine months of fiscal 2001, but
were not included in the computation of diluted earnings per common share
because the options' prices were greater than the average market price of the
common shares; therefore, the effect would be antidilutive.
Note 11: Segment Reporting
The table below presents segment information for the three months ended
June 30, 2002 and 2001:
IKON Corporate
North IKON And
America Europe Other Eliminations Total
------------- ------------ ---------- -------------- --------------
THREE MONTHS ENDED JUNE 30, 2002
Net sales $ 536,565 $ 61,496 $ 637 $ 598,698
Services 480,618 35,924 10,662 527,204
Finance income 87,592 5,122 92,714
Operating income (loss) 129,157 5,689 (785) $ (51,077) 82,984
Interest expense (12,955) (12,955)
Income before taxes 70,029
THREE MONTHS ENDED JUNE 30, 2001
Net sales $ 562,264 $ 66,852 $ 12,742 $ 641,858
Services 502,961 36,379 38,401 577,741
Finance income 86,683 4,875 91,558
Operating income (loss) 115,723 7,612 (5,636) $ (52,921) 64,778
Interest expense (18,345) (18,345)
Income before taxes 46,433
The table below presents segment information for the nine months ended
June 30, 2002 and 2001:
IKON Corporate
North IKON And
America Europe Other Eliminations Total
------------- ------------ ---------- -------------- --------------
NINE MONTHS ENDED JUNE 30, 2002
Net sales $ 1,553,328 $ 198,135 $ 7,673 $ 1,759,136
Services 1,457,570 111,676 41,365 1,610,611
Finance income 264,508 14,984 279,492
Operating income (loss) 354,352 16,640 (9,112) $ (143,419) 218,461
Interest expense (41,551) (41,551)
Income before taxes 176,910
NINE MONTHS ENDED JUNE 30, 2001
Net sales $ 1,741,189 $ 219,638 $ 40,821 $ 2,001,648
Services 1,501,143 105,027 115,764 1,721,934
Finance income 251,617 15,235 266,852
Operating income (loss) 287,394 17,503 (19,819) $ (125,658) 159,420
Interest expense (54,222) (54,222)
Income before taxes 105,198
Note 12: Contingencies
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. (the
"Claim") involves a claim brought under the Employee Retirement Income
Security Act of 1974 ("ERISA"). In connection with the Claim, the plaintiffs
allege that the Company and various individuals violated fiduciary duties
under ERISA based on allegedly improper investments in the Company's stock
made through the Company's Retirement Savings Plan (the "Plan"). The court
certified a class with respect to the Claim consisting generally of all those
participants in the Plan after September 30, 1995 and through August 13, 1998,
subject to certain exceptions.
On May 14, 2002, the Company announced that, subject to court approval, it
reached an agreement to settle the Claim. The Company is not making any
monetary payment to the class to settle the lawsuit, and the settlement does
not reflect any admission of liability by the Company. The Company has agreed
to make certain modifications to its Plan in order to allow participants
greater flexibility with respect to investment of the employer match portion
of their individual accounts. Under the settlement, employees who have been
with the Company for at least two years will be permitted to allocate Company
matching funds in investment options other than IKON stock, subject to vesting
schedules. The court held a hearing on the final approval of the settlement on
August 8, 2002 and issued a Memorandum and Order on August 9, 2002 approving
the settlement. Plaintiffs' counsel petitioned the court for an award of their
fees and costs of litigation, to which the Company filed certain objections.
Pursuant to an October 11, 2002 court Order, the Company paid Plaintiffs'
counsel's fees and costs in the amount of $6,375. The court's August 9, 2002
Order approving the settlement is final, and the matter is completely
resolved.
The Company is involved in a number of environmental remediation actions to
investigate and clean up certain sites related to its discontinued operations
in accordance with applicable federal and state laws. Uncertainties about the
status of laws and regulations, technology and information related to
individual sites, including the magnitude of possible contamination, the
timing and extent of required corrective actions and proportionate liabilities
of other responsible parties, make it difficult to develop a meaningful
estimate of probable future remediation costs. While the actual costs of
remediation at these sites may vary from management's estimates because of
these uncertainties, the Company has accrued $8,413 as of June 30, 2002 for
its environmental liabilities, and the accrual is based on management's best
estimate of the aggregate environmental remediation exposure. The measurement
of environmental liabilities is based on an evaluation of currently available
facts with respect to each individual site and considers factors such as
existing technology, presently enacted laws and regulations, prior experience
in remediation of contaminated sites and any studies performed for a site. As
assessments and remediation progress at individual sites, these liabilities
are reviewed and adjusted to reflect additional technical and legal
information that becomes available. After consideration of the defenses
available to the Company, the accrual for such exposure, insurance coverage
and other responsible parties, management does not believe that its
obligations to remediate these sites would have a material adverse effect on
the Company's consolidated financial statements.
The accruals for environmental liabilities are reflected in the consolidated
balance sheet as part of other accrued liabilities. The Company has not
recorded any potential third party recoveries. The Company is indemnified by
an environmental contractor performing remedial work at a site in Bedford
Heights, OH. The contractor has agreed to indemnify the Company from cost
overruns associated with the plan of remediation. Further, the Company has
cost sharing arrangements in place with other potentially responsible parties
("PRP's") at sites located in Rockford, IL and Barkhamsted, CT. The
cost-sharing agreement for the Barkhamsted, CT site relates to apportionment
of expenses associated with non-time critical removal actions and operation
and maintenance work, such as capping the landfill, maintaining the landfill,
fixing erosion rills and gullies, maintaining site security, maintaining
vegetative growth on the landfill cap and groundwater monitoring. Under the
agreement, the Company and other PRP's agreed to reimburse Rural Refuse
Disposal District No. 2, a Connecticut Municipal Authority, for 50% of these
costs. The Company currently pays a 4.54% share of these costs. The
cost-sharing arrangement for the Rockford, IL site relates to apportioning the
costs of a Remedial Investigation/Feasibility Study and certain operation and
maintenance work, such as fencing the site, removing waste liquids and
sludges, capping a former surface impoundment and demolishing certain
buildings. Under this arrangement, the Company pays 5.12% of these costs.
During the nine months ended June 30, 2002 and the fiscal years ended
September 30, 1999 - 2001, the Company did not incur any expenses for
environmental capital projects. During the nine months ended June 30, 2002 and
the fiscal years ended September 30, 1999 - 2001, the Company incurred various
expenses in conjunction with its obligations under consent decrees, orders,
voluntary remediation plans, settlement
agreements and to comply with environmental laws and regulations. For the nine
months ended June 30, 2002, the expenses were $2,264. For the fiscal years
ending September 30, 2001, 2000 and 1999, these expenses were $1,919, $817 and
$608, respectively. All expenses were charged against the related
environmental accrual. The Company will continue to incur expenses in order to
comply with its obligations under consent decrees, orders, voluntary
remediation plans, settlement agreements and to comply with, environmental
laws and regulations.
The Company has an accrual related to black lung and worker's compensation
liabilities relating to the operations of a former subsidiary, Barnes & Tucker
Company ("Barnes & Tucker"). Barnes & Tucker owned and operated coal mines
throughout Pennsylvania. IKON sold Barnes & Tucker in 1986. In connection with
the sale, IKON entered into a Financing Agreement with Barnes & Tucker whereby
IKON agreed to reimburse Barnes & Tucker for 95% of all costs and expenses
incurred by Barnes & Tucker for black lung and worker's compensation
liabilities, until said liabilities were extinguished. From 1986 through 2000,
IKON reimbursed Barnes & Tucker in accordance with the terms of the Financing
Agreement. In 2000, Barnes & Tucker filed for bankruptcy protection under
Chapter 11. The bankruptcy court approved a plan of reorganization which
created a black lung trust and a worker's compensation trust to handle the
administration of all black lung and worker's compensation claims relating to
Barnes & Tucker. IKON now reimburses the trusts for 95% of the costs and
expenses incurred by the trusts for black lung and worker's compensation
claims. As of June 30, 2002 and September 30, 2001, the Company's accrual for
black lung and worker's compensation liabilities related to Barnes & Tucker
was $17,200 and $18,155, respectively.
There are other contingent liabilities for taxes, guarantees, other lawsuits
and various other matters occurring in the ordinary course of business. On the
basis of information furnished by counsel and others, and after consideration
of the defenses available to the Company and any related reserves and
insurance coverage, management believes that none of these other contingencies
will materially affect the consolidated financial statements of the Company.
Note 13: Financial Instruments
As of June 30, 2002, all of the Company's derivatives designated as hedges are
interest rate swaps which qualify for evaluation using the "short cut" method
for assessing effectiveness. As such, there is an assumption of no
ineffectiveness. The Company uses interest rate swaps to fix the interest
rates on its variable rate classes of lease-backed notes, which results in a
lower cost of capital than if we had issued fixed rate notes. During the nine
months ended June 30, 2002, an unrealized gain totaling $8,146 after taxes,
was recorded in accumulated other comprehensive loss.
Note 14: Pending Accounting Changes
In June 2001, the FASB approved SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses accounting for legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to expense
over the asset's useful life. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The Company is currently evaluating the impact of the
adoption of this statement, but does not expect a material impact from the
adoption of SFAS 143 on our consolidated financial statements.
In August 2001, the FASB approved SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and APB 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 requires an
impairment loss to be recognized only if the carrying amounts of long-lived
assets to be held and used are not recoverable from their expected
undiscounted future cash flows. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company is currently evaluating the
impact of the adoption of this statement, but does not expect a material
impact from the adoption of SFAS 144 on our consolidated financial statements.
In May 2002, the FASB approved SFAS 145, "Rescission of SFAS 4, 44, and 64,
Amendment of SFAS 13, and Technical Corrections as of April 2002." SFAS 145
rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, SFAS 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds SFAS 44,
"Accounting for Intangible Assets of Motor Carriers." SFAS 145 amends SFAS 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
145 related to the rescission of SFAS 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does
not meet the criteria in APB 30 for classification as an extraordinary item
shall be reclassified. The provisions in paragraphs 8 and 9(c) of SFAS 145
related to SFAS 13 shall be effective for transactions occurring after May 15,
2002. All other provisions of SFAS 145 shall be effective for financial
statements issued on or after May 15, 2002. Early application of all
provisions is encouraged. The Company is currently evaluating the impact of
the adoption of this statement, but does not expect a material impact from the
adoption of SFAS 145 on our consolidated financial statements.
In June 2002, the FASB approved SFAS 146, "Accounting for Exit or Disposal
Activities". SFAS 146 addresses accounting for costs to terminate contracts
that are not capital leases, costs to consolidate facilities or relocate
employees and termination benefits. SFAS 146 requires that the fair value of a
liability for penalties for early contract termination be recognized when the
entity effectively terminates the contract. The fair value of a liability for
other contract termination costs should be recognized when an entity ceases
using the rights conveyed by the contract. The liability for one-time
termination benefits should be accrued ratably over the future service period
based on when employees are entitled to receive the benefits and a minimum
retention period. SFAS 146 will be effective for disposal activities initiated
after December 31, 2002. The Company is currently evaluating the impact of the
adoption of this statement, but does not expect a material impact from the
adoption of SFAS 146 on our consolidated financial statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All dollar and share amounts are in thousands.
IKON Office Solutions, Inc. ("IKON" or "the Company") is one of the world's
leading providers of products and services that help businesses communicate.
IKON provides customers with total business solutions for every office,
production and outsourcing need, including copiers and printers, color
solutions, distributed printing, facilities management, imaging and legal
document solutions, as well as network design and consulting and e-business
development. IKON has locations worldwide, including locations in the United
States, Canada, Mexico and Europe. References herein to "we", "us" or "our"
refer to IKON and its subsidiaries unless the context specifically requires
otherwise.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified below the
accounting principles critical to our business and results of operations. We
determined the critical principles by considering accounting policies that
involve the most complex or subjective decisions or assessments. We state
these accounting policies in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to the consolidated
financial statements contained in our Annual Report on Form 10-K/A for our
fiscal year ended September 30, 2001, as amended, and at relevant sections in
this discussion and analysis. In addition, we believe our most critical
accounting policies include the following:
Revenue Recognition. We install the majority of the equipment we sell.
Revenues for company-installed copier/printer equipment and technology
hardware, included in net sales, are recognized upon receipt of a signed sales
contract and "delivery and acceptance" certificate. The "delivery and
acceptance" certificate confirms that the product has been delivered,
installed, accepted, is in good working condition, and is satisfactory for the
intended purposes. Revenues for customer installed copier/printer equipment
and technology hardware, included in net sales, are recognized upon receipt of
a sales contract and delivery. The Company does not offer any equipment
warranties in addition to those which are provided by the equipment
manufacturer. Revenues for sales of supplies are recognized at time of
shipment following the placement of an order from a customer. Revenues for
monthly equipment service and facilities management service are recognized in
the month in which the service is performed. Revenues for other services and
rentals are recognized in the period performed. The present value of payments
due under sales-type lease contracts is recorded as revenue within net sales
and cost of goods sold is charged with the book value of the equipment when
products are delivered to and accepted by the customer. Finance income is
recognized over the related lease term.
Supporting the Company's objective to provide complete solutions to its
customers, the Company generally sells a service agreement when copier/printer
equipment is sold. The typical agreement includes a minimum number of copies
for a base service fee plus an overage charge for any copies in excess of the
minimum. Revenue for each element of a bundled contract is derived from our
national price lists for equipment and service. The national price list for
equipment includes a price range between the manufacturers' suggested retail
price ("MSRP") and the minimum price for which our sales force is permitted to
sell equipment. The price list for equipment is updated monthly to reflect any
vendor-communicated changes in MSRP and any changes in the fair value for
which equipment is being sold to customers. The national price list for
service reflects the price of service charged to customers. The price list for
service is updated quarterly to reflect new service offerings and any changes
in the competitive environment affecting the fair value for which service is
being provided to customers. The national price list, therefore, is
representative of the fair value of each element of a bundled agreement when
it is sold unaccompanied by the other elements.
Revenue for a bundled contract is first allocated to service revenue using the
fair value per our national price list. The remaining revenue is allocated to
equipment revenue and finance income based on a net present value calculation
utilizing an appropriate interest rate that considers the creditworthiness of
the customer and costs of financing. The equipment revenue is compared to the
national price list. If the equipment revenue falls within the price range
per the national price list, no adjustment is required. If the equipment
revenue is not within the price range per the national price list, service and
equipment revenues are proportionately adjusted while holding the interest
rate constant, so that both service and equipment revenues fall within the
price range per the national price list.
Goodwill. IKON evaluates goodwill in accordance with Statement of Financial
Accounting Standards ("SFAS") 142. SFAS 142 prescribes a two-step method for
determining goodwill impairment. In the first step, we determine the fair
value of the reporting unit using expected future discounted cash flows. If
the net book value of the reporting unit exceeds the fair value, we would then
perform the second step of the impairment test which requires allocation of
the reporting unit's fair value to all of its assets and liabilities in a
manner similar to a purchase price allocation, with any residual fair value
being allocated to goodwill. The fair value of the goodwill is then compared
to its carrying amount to determine impairment. If future discounted cash
flows are less favorable than those anticipated, goodwill may be impaired.
Inventories. Inventories are stated at the lower of cost or market using the
average cost or specific identification methods and consist of finished goods
available for sale. IKON writes down its inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of
inventory and estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those anticipated, inventory adjustments may be required.
Allowances for Receivables. IKON maintains allowances for doubtful accounts
and lease defaults for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of IKON's
customers were to deteriorate, resulting in an impairment of their ability to
make required payments, changes to our allowances may be required.
Income Taxes. Income taxes are determined in accordance with SFAS 109, which
requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
income tax liabilities and assets are determined based on the difference
between financial statement and tax basis of liabilities and assets using
enacted tax rates in effect for the year in which the differences are expected
to reverse. SFAS 109 also provides for the recognition of deferred tax assets
if it is more likely than not that the assets will be realized in future
years. A valuation allowance has been established for deferred tax assets for
which realization is not likely. In assessing the valuation allowance, IKON
has considered future taxable income and ongoing prudent and feasible tax
planning strategies. However, in the event that IKON determines the value of a
deferred tax asset has fluctuated from its net recorded amount, an adjustment
to the deferred tax asset would be necessary.
Pension. Certain assumptions are used in the calculation of the actuarial
valuation of our Company-sponsored defined benefit pension plans. These
assumptions include the weighted average discount rate, rates of increase in
compensation levels and expected long-term rates of return on assets. If
actual results are less favorable than those assumed, additional pension
expense may be required.
Residual Values. IKON estimates the residual value of equipment sold under
sales-type leases. Our residual values are based on the dollar value of the
equipment. Residual values generally range between 0% to 25% of retail price,
depending on equipment model and lease term. We evaluate residual values
quarterly for impairment. Changes in market conditions could cause actual
residual values to differ from estimated values, which could accelerate
write-down of the value of the equipment.
Our preparation of this Quarterly Report on Form 10-Q/A and other financial
statements filed with the SEC requires us to make estimates and assumptions
that affect amounts reported in the consolidated financial statements and
notes. Actual results could differ from those estimates and assumptions.
RESULTS OF OPERATIONS
- ---------------------
This discussion reviews the results of operations of the Company as reported
in the consolidated statements of income.
THREE MONTHS ENDED JUNE 30, 2002
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2001
Results of operations for the third quarter of fiscal 2002, compared to the
third quarter of fiscal 2001, were as follows:
Our third quarter revenues decreased by $92,541, or 7.1%, compared to the
third quarter of fiscal 2001. This resulted primarily from the impact of our
actions to exit, sell or downsize certain non-strategic businesses during
fiscal 2002. Excluding the impact of these downsizing actions, revenues for
the quarter were down less than 2%.
Net sales, which includes revenues from the sale of copier/printer equipment,
supplies and technology hardware, decreased by $43,160, or 6.7%, compared to
the third quarter of fiscal 2001. More than half of the decrease, or
approximately $23,000, was attributable to a decline in sales of
technology-related hardware, down approximately 30% from the prior year. The
Company has been de-emphasizing this low-margin revenue stream, choosing
instead to redirect its technical capabilities to support the growing service
opportunities in document management and digital connectivity. Excluding the
impact of technology-related hardware, net sales were down approximately 3%.
In sales of copier/printer equipment, which were down less than 2%, or
approximately $8,000, from the prior year, the Company's performance remained
strong in the high-end, segment 5 & 6 market, with over 30% growth compared to
the third quarter of fiscal 2001, including growth in sales of production
monochrome and color devices. Sales of lower-end copier/printer equipment
declined by approximately 15% and supply sales declined by approximately 10%,
or $12,500, compared to the prior year, a reflection of the strategies the
Company has employed to shift its sales focus to more profitable and strategic
offerings, as well as ongoing economic and competitive pressures.
Services, which primarily includes revenues from the servicing of
copier/printer equipment, outsourcing and other services, decreased by
$50,537, or 8.7%, compared to the third quarter of fiscal 2001. Outsourcing
and other service offerings continued to be impacted by our actions to exit,
sell or downsize certain non-strategic businesses during fiscal 2002, which
accounted for approximately $47,000 of the decline. Excluding the impact of
these downsizing actions, outsourcing and other services were flat for the
quarter. The Company's installed equipment base continues to generate strong
revenues from the servicing of copier/printer equipment, which grew
approximately 1% from the prior year as the base continues to undergo a shift
from analog to digital technology, and the Company's focus on expanding its
product mix to higher-end devices.
Finance income increased by $1,156, or 1.3%, compared to the third quarter of
fiscal 2001. Finance income is generated by IKON's wholly-owned leasing
subsidiaries. IOS Capital, LLC ("IOSC"), IKON's leasing subsidiary in the
United States, accounted for approximately 93% of IKON's finance income for
the third quarter of fiscal 2002. Effective as of the third quarter of fiscal
2002, income generated through IOSC's administrative infrastructure, such as
syndication fees, late fees and other processing-related revenue, will be
reported as Services rather than Finance Income. Costs associated with these
income generating activities have been reclassified from Selling and
Administrative Expenses to Services Costs. There is no impact to operating
income, net income or earnings per share as a result of this change.
The following revenue and expense amounts have been reclassified:
Revenue* Expense**
------- -------
Quarter ended June 30, 2002 $4,894 $676
Quarter ended June 30, 2001 $6,079 $631
*Amounts have been reclassified from Finance Income to Services Revenue.
**Amounts have been reclassified from Selling and Administrative Expenses to
Services Costs.
Overall gross margin was unchanged at 39.7% for the third quarter of fiscal
2002 and 2001. The gross margin on net sales decreased to 34.7% from 36.1% in
the third quarter of fiscal 2001. This was primarily due to the decline in
supply sales gross margins resulting from the decrease in supply sales
described above. The gross margin on services increased to 42.2% from 41.4% in
the third quarter of fiscal 2001. This increase is primarily due to stronger
margins on equipment service, reflecting increased productivity of our service
technicians combined with an increasingly more efficient digital service base.
The gross margin on finance income increased to 57.8% from 54.4% in the third
quarter of fiscal 2001, primarily due to the effect of a higher average
portfolio yield and lower average borrowing rates compared to the third
quarter of fiscal 2001.
Selling and administrative expense as a percent of revenue was 32.9% in the
third quarter of fiscal 2002 compared to 34.8% in the third quarter of fiscal
2001, representing a decrease of $55,232, or 12.1%. The decrease resulted from
improved productivity, centralization and consolidation initiatives, the
downsizing or elimination of unprofitable businesses, lower selling costs due
to lower sales of equipment, improvements in the sales organization
infrastructure, and the elimination of approximately $10 million of goodwill
amortization under SFAS 142.
Our operating income increased by $18,206 compared to the third quarter of
fiscal 2001. Our operating margin was 6.8% in the third quarter of fiscal 2002
compared to 4.9% (5.7% assuming the impact of not amortizing goodwill) in the
third quarter of fiscal 2001. Operating margin is calculated as operating
income divided by total revenue.
Interest expense was $12,955 in the third quarter of fiscal 2002 compared to
$18,345 in the third quarter of fiscal 2001. The decrease was due to lower
average outstanding debt combined with lower average short-term borrowing
rates compared to the third quarter of fiscal 2001.
The effective income tax rate was 38.4% in the third quarter of fiscal 2002
compared to 44.0% in the third quarter of fiscal 2001. The income tax rate
reduction is primarily due to the cessation of goodwill amortization, the
majority of which was non-deductible for tax purposes, as a result of our
adoption of SFAS 142 effective October 1, 2001. The third quarter effective
tax rate reflects a cumulative increase in the tax provision to achieve a year
to date effective tax rate of 37.25%. The effective tax rate was increased
from that used for the first half of fiscal 2002, due to the inability to
record tax benefits on losses incurred in foreign jurisdictions.
Diluted earnings per common share were $0.28 in the third quarter of fiscal
2002 compared to $0.18 in the third quarter of fiscal 2001. The diluted
earnings per common share calculation for the third quarter of fiscal 2002
reflects the impact of the 5% Convertible Subordinated Notes (the "Convertible
Notes") due 2007 issued by IOSC on May 13, 2002. The Company accounts for the
effect of the Convertible Notes in the diluted earnings per common share
calculation using the "if converted" method. Under that method, the
Convertible Notes are assumed to be converted to shares (weighted for the
number of days outstanding in the period) at a conversion price of $15.03, and
interest expense, net of taxes, related to the Convertible Notes is added back
to net income. Assuming the impact of not amortizing goodwill, diluted
earnings per common share in the third quarter of fiscal 2001 would have been
$0.25.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
142. SFAS 142 supercedes APB 17, Intangible Assets, and primarily addresses
accounting for goodwill and intangible assets subsequent to their acquisition.
The provisions of SFAS 142 are effective for fiscal years beginning after
December 15, 2001, with early adoption permitted. The most significant changes
made by SFAS 142 were: (1) goodwill and indefinite lived intangible assets
will no longer be amortized, (2) goodwill will be tested for impairment at
least annually at the reporting unit level, (3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually, and
(4) the amortization period of intangible assets with finite lives will no
longer be limited to forty years. Effective October 1, 2001, the Company
adopted SFAS 142, which requires that goodwill not be amortized, but instead
tested at least annually for impairment. An impairment charge will be
recognized only when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. The Company calculates fair value
using a discounted cash flow model. As of March 31, 2002, the Company
completed its initial impairment review and determined that no impairment
charge was required. The Company has identified the following reporting units
and associated goodwill:
IKON North IKON North
America America Business Sysinct
Copier Outsourcing Imaging (e-business
Business Business IKON Europe Services development) Total
---------------- ---------------- --------------- ---------------- ---------------- ----------------
June 30, 2002
Goodwill $866,434 $70,927 $294,749 $9,011 $2,996 $1,244,117
Changes in the goodwill balance since September 30, 2001 are attributable to
foreign currency translation adjustments.
As of June 30, 2002, there are no intangible assets that are required to be
amortized by SFAS 142.
A reconciliation of reported net income adjusted to reflect the adoption of
SFAS 142 is provided below:
Three Months Ended
------------------------------
June 30, June 30,
2002 2001
------------- -------------
Reported net income $43,142 $26,002
Add-back goodwill amortization, net of taxes of $236 10,102
------------- -------------
Adjusted net income $43,142 $36,104
============= =============
Reported basic earnings per common share $0.30 $0.18
Add-back goodwill amortization 0.07
------------- -------------
Adjusted basic earnings per common share $0.30 $0.25
============= =============
Reported diluted earnings per common share $0.28 $0.18
Add-back goodwill amortization 0.07
------------- -------------
Adjusted diluted earnings per common share $0.28 $0.25
============= =============
REVIEW OF BUSINESS SEGMENTS
- ---------------------------
IKON NORTH AMERICA
Revenues, excluding finance income, decreased by $48,042, or 4.5%, to
$1,017,183 in the third quarter of fiscal 2002 from $1,065,225 in the third
quarter of fiscal 2001. The decrease was primarily due to a decline in sales
of technology-related hardware and lower end copier/printer equipment
reflecting our strategy to de-emphasize certain low margin products as well as
ongoing economic and competitive pressures. This decrease was slightly offset
by increases in revenue from after-market equipment service, facilities
management and the sale of high-end, segment 5 and 6 copier/printer equipment.
Finance income increased by $909, or 1.0%, to $87,592 in the third quarter of
fiscal 2002, from $86,683 in the third quarter of fiscal 2001. The increase
was primarily due to growth in the lease receivables portfolio and longer
average lease terms. Operating income increased by $13,434, or 11.6%, to
$129,157 in the third quarter of fiscal 2002 from $115,723 in the third
quarter of fiscal 2001. The increase was due to higher gross margins on
services and finance income and reduced selling and administrative costs as
discussed above.
IKON EUROPE
Revenues, excluding finance income, decreased by $5,811, or 5.6%, to $97,420
in the third quarter of fiscal 2002 from $103,231 in the third quarter of
fiscal 2001. This decrease was due mainly to a decrease in sales of
technology-related hardware and a decline in after-market equipment service
revenues. Finance income increased by $247, or 5.1%, to $5,122 in the third
quarter of fiscal 2002 from $4,875 in the third quarter of fiscal 2001.
Operating income decreased by $1,923, or 25.3%, to $5,689 in the third quarter
of fiscal 2002 from $7,612 in the third quarter of fiscal 2001. Excluding a
$1,700 gain related to the sale of certain real estate in the UK in fiscal
2001, operating income decreased by $223, or 2.9%, due to ongoing economic and
competitive pressures, particularly in France, as well as declines in
after-market equipment service.
OTHER
Other revenues decreased by $39,844, or 77.9%, to $11,299 in the third quarter
of fiscal 2002 from $51,143 in the third quarter of fiscal 2001. The decline
is primarily due to the downsizing, sale, and closure of certain non-strategic
businesses such as telephony and technology education. There was an operating
loss of $785 in the third quarter of fiscal 2002 compared to an operating loss
of $5,636 in the third quarter of fiscal 2001. The decrease in operating loss
reflects the impact of the actions described above concerning the removal of
certain non-strategic businesses to improve operating margin performance.
NINE MONTHS ENDED JUNE 30, 2002
COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2001
Results of operations for the nine months ended June 30, 2002, compared to the
nine months ended June 30, 2001, were as follows:
Our revenues decreased by $341,195, or 8.6%, compared to the nine months ended
June 30, 2001. This resulted primarily from the impact of our actions to exit,
sell or downsize certain non-strategic businesses during fiscal 2002 which
accounted for approximately
$200,000 of the decline. Excluding the impact of these downsizing actions,
revenues for the first nine months of fiscal 2002 were down approximately 3.5%.
Net sales, which includes revenues from the sale of copier/printer equipment,
supplies and technology hardware, decreased by $242,512, or 12.1%, compared to
the nine months ended June 30, 2001. Approximately 4.3%, or $87,000, of the
decrease was attributable to a decline in sales of technology-related
hardware. The Company has been de-emphasizing sales of technology-related
hardware as part of its margin improvement strategy, choosing instead to
redirect its technical capabilities to services that support other customer
opportunities, including document management and digital connectivity.
Excluding the impact of technology-related hardware, net sales were down
approximately 7.8%. This decrease was due to a decline in supply sales of
approximately 9%, or $36,000, and a decline in sales of copier/printer
equipment of approximately 9%, or $120,000, resulting from the Company's
strategic shift from sales of lower-end, lower margin equipment to higher-end,
higher margin equipment as well as ongoing economic and competitive pressures.
The Company's performance remained strong in the high-end, segment 5 & 6
market with over 30% growth compared to the first nine months of fiscal 2001.
In addition, the Company continues to focus on larger regional and national
accounts that entail a longer sales cycle. Supply sales declined due to the
customer benefits digital technology provides in terms of product reliability
and efficiency.
Services, which includes revenues from the servicing of copier/printer
equipment, outsourcing and other services, decreased by $111,323, or 6.5%,
compared to the nine months ended June 30, 2001. This was due to a decrease in
outsourcing and other services. Revenues from outsourcing and other services
declined from the prior year due primarily to the downsizing, sale, and
closure of certain non-strategic businesses during fiscal 2002, which
accounted for approximately $110,000 of the decline. Revenue from facilities
management services, one of the Company's key outsourcing offerings, increased
by 1% and offset some of the decline.
Finance income increased by $12,640, or 4.7%, compared to the nine months
ended June 30, 2001, primarily due to continued growth in the lease
receivables portfolio. Finance income is generated by IKON's wholly-owned
leasing subsidiaries. IOSC accounted for approximately 93% of IKON's finance
income for the nine months ended June 30, 2002. Approximately 79% of IKON
North America's copier and equipment revenues were financed by IOSC during the
nine months ended June 30, 2002 compared to approximately 74% during the nine
months ended June 30, 2001. Effective as of the third quarter of fiscal 2002,
income generated through IOSC's administrative infrastructure, such as
syndication fees, late fees and other processing-related revenue, will be
reported as Services rather than within Finance Income. Costs associated with
these income generating activities have been reclassified from Selling and
Administrative Expenses to Services Costs. There is no impact on operating
income, net income or earnings per share as a result of this change.
The following revenue and expense amounts have been reclassified:
Revenue* Expense**
------- -------
Nine months ended June 30, 2002 $15,933 $1,982
Nine months ended June 30, 2001 $18,139 $1,813
*Amounts have been reclassified from Finance Income to Services Revenue.
**Amounts have been reclassified from Selling and Administrative Expenses to
Services Costs.
Overall gross margin was 38.9% compared to 38.1% in the nine months ended June
30, 2001. The gross margin on net sales was 34.3% compared to 34.8% in the
nine months ended June 30, 2001. The gross margin on services increased to
40.7% from 40.1% in the nine months ended June 30, 2001, primarily due to
stronger margins on equipment service which reflects the improved productivity
of our service technicians. The gross margin on finance income increased to
58.0% from 50.4% in the nine months ended June 30, 2001, primarily due to the
effect of a higher average portfolio yield and lower average borrowing rates
compared to the nine months ended June 30, 2001. The average financing rates
on our lease receivables were 11.05%, 11.11% and 10.45% for the nine months
ended June 30, 2002, and the fiscal years ended September 30, 2001 and 2000,
respectively. Additionally, our average cost of funds on our lease receivables
was 6.28%, 6.66% and 7.04% for the nine months ended June 30, 2002, and the
fiscal years ended September 30, 2001 and 2000, respectively.
Selling and administrative expense as a percent of revenue was 33.0% in the
nine months ended June 30, 2002 compared to 34.1% in the nine months ended
June 30, 2001. The decrease of $160,016, or 11.7%, resulted from improved
productivity, centralization and consolidation initiatives, the downsizing or
elimination of unprofitable businesses, decreased selling costs due to lower
sales of equipment, improvements in the sales organization infrastructure, and
the elimination of goodwill amortization which accounted for approximately
$30,000 of the decrease.
Operating income increased by $59,041 compared to the nine months ended June
30, 2001. Our operating margin was 6.0% in the nine months ended June 30, 2002
compared to 4.0% (4.8% assuming the impact of not amortizing goodwill) in the
nine months ended June 30, 2001. Operating income is calculated as operating
income divided by total revenue.
Interest expense was $41,551 in the nine months ended June 30, 2002 compared
to $54,222 in the nine months ended June 30, 2001. The decrease was due to
lower average outstanding debt combined with lower average short-term
borrowing rates compared to the nine months ended June 30, 2001.
The effective income tax rate was 37.3% in the nine months ended June 30, 2002
compared to 44.0% in the nine months ended June 30, 2001. The income tax rate
reduction is primarily due to the cessation of goodwill amortization, the
majority of which was
non-deductible for tax purposes, as a result of our adoption of SFAS 142
effective October 1, 2001. The completion of certain tax planning initiatives
during the first quarter of fiscal 2002 also contributed to the reduced tax
rate. The initiatives completed include the conversion of IOS Capital, Inc. to
a limited liability company (LLC) and the designation of the IKON Stock Fund
in the Company's Retirement Savings Plan as an employee stock ownership plan
(ESOP). The conversion to an LLC allows the Company, for state income tax
purposes, to combine current year taxable income and losses that were
previously reported separately, which results in the reduction of state income
taxes. The ESOP designation allows the Company to deduct dividends on IKON
common stock that participants and beneficiaries in the Company's Retirement
Savings Plan can elect to receive in cash.
In the first nine months of fiscal 2001, we recognized a gain of $2,142
($1,200 after-tax) related to net favorable dispositions of environmental
matters at locations we had previously accounted for as discontinued
operations.
Diluted earnings per common share were $0.74 in the nine months ended June 30,
2002 compared to $0.42 ($0.41 excluding the after-tax effect of the gain from
discontinued operations) in the nine months ended June 30, 2001. The diluted
earnings per common share calculation for the first nine months of fiscal 2002
reflects the impact of the Convertible Notes. The Company accounts for the
effect of the Convertible Notes in the diluted earnings per common share
calculation using the "if converted" method. Under that method, the
Convertible Notes are assumed to be converted to shares (weighted for the
number of days outstanding in the period) at a conversion price of $15.03, and
interest expense, net of taxes, related to the Convertible Notes is added back
to net income. Assuming the impact of not amortizing goodwill, diluted
earnings per common share for the nine months ended June 30, 2001 would have
been $0.63 ($0.62 excluding the after-tax effect of the gain from discontinued
operations).
A reconciliation of reported net income adjusted to reflect the adoption of
SFAS 142 is provided below:
Nine Months Ended
------------------------------------
June 30, June 30,
2002 2001
---------------- ----------------
Reported net income $111,011 $60,111
Add-back goodwill amortization, net of taxes of $711 30,468
---------------- ----------------
Adjusted net income $111,011 $90,579
================ ================
Reported basic earnings per common share $0.78 $0.42
Add-back goodwill amortization 0.21
---------------- ----------------
Adjusted basic earnings per common share $0.78 $0.63
================ ================
Reported diluted earnings per common share $0.74 $0.42
Add-back goodwill amortization 0.21
---------------- ----------------
Adjusted diluted earnings per common share $0.74 $0.63
================ ================
REVIEW OF BUSINESS SEGMENTS
- ---------------------------
IKON NORTH AMERICA
Revenues, excluding finance income, decreased by $231,434, or 7.1%, to
$3,010,898 for the first nine months of fiscal 2002 from $3,242,332 for the
first nine months of fiscal 2001. The decrease was primarily due to a decline
in sales of technology-related hardware and lower-end copier/printer equipment
as a result of strategic initiatives to de-emphasize sales of certain low
margin products as well as ongoing economic and competitive pressures. This
decrease was slightly offset by increases in revenue from facilities
management and the sale of high-end, segment 5 and 6 copier/printer equipment.
Finance income increased by $12,891, or 5.1%, to $264,508 for the first nine
months of fiscal 2002 from $251,617 for the first nine months of fiscal 2001.
The increase was primarily due to growth in the lease receivables portfolio
and longer average lease terms. Operating income increased by $66,958, or
23.3%, to $354,352 for the first nine months of fiscal 2002 from $287,394 for
the first nine months of fiscal 2001. The increase was due to higher gross
margins on services and finance income and reduced selling and administrative
costs as discussed above.
IKON EUROPE
Revenues, excluding finance income, decreased by $14,854, or 4.6%, to $309,811
for the first nine months of fiscal 2002 from $324,665 for the first nine
months of fiscal 2001. This decrease was due mainly to declines in sales of
technology-related hardware and in the service after-market for copier/printer
equipment, offset by growth in outsourcing. Finance income decreased by $251,
or 1.6%, to $14,984 for the first nine months of fiscal 2002 from $15,235 for
the first nine months of fiscal 2001. Operating income decreased by $863, or
4.9%, to $16,640 for the first nine months of fiscal 2002 from $17,503 for the
first nine months of fiscal 2001. Excluding a $1,700 gain related to the sale
of certain real estate in the UK in fiscal 2001, operating income increased by
$837, or 4.8%, due primarily to ongoing improvements to our operational
infrastructure.
OTHER
Other revenues decreased by $107,547, or 68.7%, to $49,038 for the first nine
months of fiscal 2002 from $156,585 for the first nine months of fiscal 2001.
The decline is primarily due to the downsizing, sale, and closure of certain
non-strategic businesses such as telephony, technology education and other
technology-related operations. There was an operating loss of $9,112 for the
first nine months of fiscal 2002 compared to an operating loss of $19,819 for
the first nine months of fiscal 2001. The decrease in operating loss reflects
the impact of the actions described above concerning the removal of certain
non-strategic businesses to improve operating margin performance.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
- ------------------------------------------
In the fourth quarter of fiscal 2001, the Company announced the acceleration
of certain cost cutting and infrastructure improvements (as described below)
and recorded a pre-tax restructuring and asset impairment charge of $60,000,
and reserve adjustments related primarily to the exit of the Company's
telephony operations of $5,300. The related reserve adjustments were included
in cost of goods sold for the write-off of obsolete inventory and selling and
administrative expense for the write-off of accounts receivable in the
consolidated statement of income. The asset impairments included fixed asset
write-offs totaling $6,078 as follows: $100 from technology services
businesses closures; $897 from digital print center business closures; $338
from digital print center business sales; and $4,743 relating to IKON
infrastructure. The asset impairments also included goodwill write-offs
totaling $19,422 as follows: $955 from technology services business
closures; $6,591 from digital print center business sales; and $11,876
relating to telephony business sales. The Company developed this plan as part
of our continuing effort to streamline IKON's infrastructure to increase
future productivity, and to address economic changes within specific
marketplaces. This resulted in a charge of $65,300 ($49,235 after-tax, or
$0.34 per share on a diluted basis). These actions addressed the sale of the
Company's telephony operations and the closing of twelve non-strategic digital
print centers as the Company shifts its focus from transactional work toward
contract print work and the support of major accounts. These actions also
addressed further downsizing of operational infrastructures throughout the
organization as the Company leverages and intensifies prior standardization
and centralization initiatives. These actions included the ongoing
centralization and consolidation of many selling and administrative functions,
including marketplace consolidation, supply chain, finance, customer service,
sales support and the realignment of sales coverage against our long-term
growth objectives. Additionally, the Company recorded an asset impairment
charge of $3,582 ($3,300 after-tax, or $0.02 per share on a diluted basis)
related to the sale of the Company's technology education operations. The
asset impairments included fixed asset write-offs totaling $828. The asset
impairments also included goodwill write-offs totaling $2,754. Therefore, the
aggregate charge recorded in fiscal 2001 (the "Fiscal 2001 Charge") was
$68,882 ($52,535 after-tax, or $0.36 per share on a diluted basis). The Fiscal
2001 Charge and the related actions taken resulted in a decline of
approximately $85,000 in revenues and an increase in operating income of
approximately $33,000 for the nine months ended June 30, 2002 compared to the
nine months ended June 30, 2001 as a result of the actions described above.
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and
asset impairment charge (the "First Quarter 2000 Charge") of $105,340 ($78,479
after-tax, or $0.52 per share on a basic and diluted basis). The asset
impairments included fixed asset write-offs totaling $12,668 as follows: $631
from technology services integration and education business closures; $2,530
from technology services integration and education business downsizing; $1,269
from digital print center business closures; $588 from digital print center
business downsizing; $1,405 from document services excess equipment; $1,244
from a technology services business sale; and $5,001 relating to IKON
infrastructure. The asset impairments included goodwill write-offs totaling
$38,880 as follows: $3,279 from technology services integration business
sales; $10,156 from technology services integration and education business
closures; $9,566 from digital print center business closures; $14,950 from a
technology services business sale; and $929 relating to an IKON Europe
closure. These actions addressed under-performance in certain technology
services operations, business document services, and business information
services locations as well as the Company's desire to strategically position
these businesses for integration and profitable growth. Plans included
consolidating or disposing of certain under-performing and non-core locations;
implementing productivity enhancements through the consolidation and
centralization of activities in inventory management, purchasing,
finance/accounting and other administrative functions; and consolidating real
estate through the co-location of business units as well as the disposition of
unproductive real estate. In the fourth quarter of fiscal 2000, the Company
determined that some first quarter restructuring initiatives would not require
the level of spending that had been originally estimated, and certain other
initiatives would not be implemented due to changing business dynamics.
Previously targeted sites were maintained based on their potential for
improvement as well as their relationship to IKON's overall strategic
direction. As a result of our integration efforts, locations originally
identified for sale or closure will be combined with other IKON businesses. As
a result, $15,961 was reversed from the First Quarter 2000 Charge, and the
total amount of the First Quarter 2000 Charge was reduced to $89,379 ($66,587
after-tax, or $0.45 per share on a basic and diluted basis). The components of
the reversal were: 538 fewer positions eliminated reduced severance by $1,784,
real estate lease payments reduced by $13,426, and contractual commitments
reduced by $751. The severance reversal resulted from successfully negotiating
business sales whereby employees assumed positions with the acquiring
companies, higher-than-expected voluntary resignations, and our decision not
to implement certain supply chain and shared service center consolidation
efforts. The real estate lease payment reversal was primarily the result of
our decision not to close certain sites. Also, in the fourth quarter of fiscal
2000, the Company announced other specific actions designed to address the
changing market conditions impacting technology services, IKON North America,
and outsourcing locations and incurred a total pre-tax restructuring and asset
impairment charge (the "Fourth Quarter 2000 Charge") of $15,789 ($12,353
after-tax, or $0.08 per share on a basic and diluted basis). The asset
impairments consisted of fixed asset write-offs totaling $2,371 as
follows: $1,371 from technology services integration and education business
closures; $721 from digital print center business closures; and $279 relating
to IKON
infrastructure. The First Quarter 2000 Charge (as reduced) and Fourth Quarter
2000 Charge and the related actions taken resulted in a net fiscal 2000 charge
(the "Fiscal 2000 Charge") of $105,168 ($78,940 after-tax, or $0.53 per share
on a basic and diluted basis). The Fiscal 2000 Charge resulted in a decline in
revenue of approximately $34,000 and an increase in operating income of
approximately $63,000 in fiscal 2001, as compared to fiscal 2000.
The pre-tax components of the restructuring and asset impairment charges for
fiscal 2001 and fiscal 2000 were as follows:
FISCAL FOURTH QUARTER FIRST QUARTER
2001 FISCAL 2000 FISCAL 2000
TYPE OF CHARGE CHARGE CHARGE CHARGE
- ---------------------------------------------------------------------------------------------------------------------------
Restructuring Charge:
Severance $ 26,500 $ 6,092 $14,605
Leasehold termination costs 5,534 6,685 20,265
Contractual commitments 2,466 641 2,961
- ---------------------------------------------------------------------------------------------------------------------------
Total Restructuring Charge 34,500 13,418 37,831
- ---------------------------------------------------------------------------------------------------------------------------
Asset Impairment Charge:
Fixed assets 6,906 2,371 12,668
Goodwill and intangibles 22,176 - 38,880
- ---------------------------------------------------------------------------------------------------------------------------
Total Asset Impairment Charge 29,082 2,371 51,548
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 63,582 $15,789 $ 89,379
- ---------------------------------------------------------------------------------------------------------------------------
The Company calculated the asset and goodwill impairments as required by SFAS
121 "Accounting for the Impairment of Long-Lived Assets and Assets to Be
Disposed of." The proceeds received for businesses that were sold were not
sufficient to cover the fixed asset and goodwill balances. As such, those
balances were written-off. Goodwill directly associated with businesses that
were closed was also written-off.
The following presents a reconciliation of the original restructuring
components of the Fiscal 2001 Charge and First Quarter 2000 Charge and Fourth
Quarter 2000 Charge to the balance remaining at June 30, 2002, which is
included in other accrued expenses on the consolidated balance sheet:
FISCAL PAYMENTS BALANCE PAYMENTS BALANCE
2001 FISCAL SEPTEMBER 30, FISCAL JUNE 30,
FISCAL 2001 RESTRUCTURING CHARGE CHARGES 2001 2001 2002 2002
- -------------------------------------------------------------------------------------------------------------------------------
Severance $ 26,500 - $ 26,500 $(9,223) $ 17,277
Leasehold termination costs 5,534 - 5,534 (1,166) 4,368
Contractual commitments 2,466 - 2,466 (1,129) 1,337
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 34,500 - $ 34,500 $(11,518) $ 22,982
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE BALANCE BALANCE
FOURTH QUARTER FISCAL 2000 FISCAL 2000 PAYMENTS SEPTEMBER 30, PAYMENTS SEPTEMBER 30, PAYMENTS JUNE 30,
RESTRUCTURING CHARGE CHARGES FISCAL 2000 2000 FISCAL 2001 2001 FISCAL 2002 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Severance $ 6,092 - $ 6,092 $(4,763) $ 1,329 $(632) $ 697
Leasehold termination costs 6,685 $ (41) 6,644 (1,843) 4,801 (1,296) 3,505
Contractual commitments 641 - 641 (301) 340 (198) 142
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 13,418 $ (41) $ 13,377 $(6,907) $ 6,470 $(2,126) $ 4,344
- -----------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENT TO BALANCE BALANCE BALANCE
FIRST QUARTER FISCAL 2000 FISCAL 2000 PAYMENTS FISCAL 2000 SEPTEMBER 30, PAYMENTS SEPTEMBER 30, PAYMENTS JUNE 30,
RESTRUCTURING CHARGE CHARGES FISCAL 2000 CHARGE 2000 FISCAL 2001 2001 FISCAL 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Severance $16,389 $(10,616) $ (1,784) $ 3,989 $ (3,295) $ 694 $ (322) $ 372
Leasehold termination costs 33,691 (10,052) (13,426) 10,213 (5,328) 4,885 (2,246) 2,639
Contractual commitments 3,712 (2,734) (751) 227 (227) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 53,792 $(23,402) $(15,961) $14,429 $(8,850) $ 5,579 $(2,568) $ 3,011
- ------------------------------------------------------------------------------------------------------------------------------------
The projected reductions of the remaining balances of the Fiscal 2001 Charge,
Fourth Quarter Fiscal 2000 Charge and First Quarter 2000 Charge are as
follows:
FISCAL 2001 PROJECTED REDUCTIONS FY 2002 FY 2003 FY 2004 FY 2005 BEYOND TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Severance $9,478 $6,508 $1,214 $77 - $17,277
Real estate lease contracts 2,117 1,420 504 327 - 4,368
Other contractual commitments 1,307 30 - - - 1,337
- ------------------------------------------------------------------------------------------------------------------------------
Total $12,902 $7,958 $1,718 $404 - $22,982
- ------------------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER FISCAL 2000
PROJECTED REDUCTIONS FY 2002 FY 2003 FY 2004 FY 2005 BEYOND TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Severance $ 585 $ 112 - - - $ 697
Real estate lease contracts 557 1,230 $838 $259 $621 3,505
Other contractual commitments 142 - - - - 142
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,284 $1,342 $838 $259 $621 $4,344
- ------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER FISCAL 2000
PROJECTED REDUCTIONS FY 2002 FY 2003 FY 2004 FY 2005 BEYOND TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Severance $ 17 $ 355 - - - $ 372
Real estate lease contracts 1,025 1,114 $337 $163 - 2,639
Other contractual commitments - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,042 $1,469 $337 $163 - $3,011
- ------------------------------------------------------------------------------------------------------------------------------
The Company determined its probable sublease income through the performance of
local commercial real estate market valuations by our external regional real
estate brokers. All lease termination amounts are shown net of projected
sublease income. Projected sublease income was $3,366, $180 and $9,957 for
the Fiscal 2001 Charge, Fourth Quarter Fiscal 2000 Charge and First Quarter
Fiscal 2000 Charge, respectively.
All actions related to our restructurings are complete. Severance payments to
terminated employees are made in installments. The charges for contractual
commitments relate to real estate lease contracts where the Company has exited
certain locations and is required to make payments over the remaining lease
term.
The employees affected by the charges for fiscal 2001 and fiscal 2000 were as
follows:
REMAINING
ADJUSTMENT TO EMPLOYEES TO
FISCAL 2001 EMPLOYEES EMPLOYEE FISCAL 2001 BE TERMINATED
HEADCOUNT REDUCTIONS AFFECTED TERMINATIONS CHARGE AS OF JUNE 30, 2002
- -----------------------------------------------------------------------------------------------------------------------
Telephony 101 (101) - -
Education 17 (17) - -
Technology Businesses 94 (76) - 18
Digital Print Centers 190 (174) - 16
Infrastructure & Other 1,198 (908) - 290
- -----------------------------------------------------------------------------------------------------------------------
Total 1,600 (1,276) - 324
- -----------------------------------------------------------------------------------------------------------------------
REMAINING REMAINING
EMPLOYEES TO EMPLOYEES TO
EMPLOYEE ADJUSTMENT TO BE TERMINATED EMPLOYEE BE TERMINATED
FOURTH QUARTER FISCAL 2000 EMPLOYEES TERMINATIONS FISCAL 2000 AT SEPTEMBER 30, TERMINATIONS AT SEPTEMBER 30,
HEADCOUNT REDUCTIONS AFFECTED FISCAL 2000 CHARGE 2000 FISCAL 2001 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Education & Integration 130 - - 130 (130) -
Digital Print Centers 137 - - 137 (137) -
Infrastructure & Other 119 - - 119 (119) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total 386 - - 386 (386) -
- ----------------------------------------------------------------------------------------------------------------------------------
REMAINING REMAINING
EMPLOYEES TO EMPLOYEES TO
EMPLOYEE ADJUSTMENT TO BE TERMINATED EMPLOYEE BE TERMINATED
FIRST QUARTER FISCAL 2000 EMPLOYEES TERMINATIONS FISCAL 2000 AT SEPTEMBER 30, TERMINATIONS AT SEPTEMBER 30,
HEADCOUNT REDUCTIONS AFFECTED FISCAL 2000 CHARGE 2000 FISCAL 2001 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Education & Integration 434 (329) (80) 25 (25) -
Technology Businesses 238 (35) (70) 133 (133) -
Digital Print Centers 323 (189) (116) 18 (18) -
Infrastructure & Other 937 (251) (272) 414 (414) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,932 (804) (538) 590 (590) -
- ----------------------------------------------------------------------------------------------------------------------------------
The locations affected by the charges for fiscal 2001 and fiscal 2000 were as
follows:
ADJUSTMENT TO REMAINING
SITES SITES FISCAL 2000 SITES TO
SITE CLOSURES AFFECTED CLOSED CHARGE BE CLOSED
- -----------------------------------------------------------------------------------------------------------
Fiscal 2001 Charge 24 (21) - 3
Fourth Quarter Fiscal 2000 Charge 5 (5) - -
First Quarter Fiscal 2000 Charge 24 (22) (2) -
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Net cash provided by operating activities for the first nine months of fiscal
2002 was $248,925. During the same period, the Company used $214,600 of cash
for investing activities, which included net finance subsidiary use of
$98,310, capital expenditures for property and equipment of $78,833 and
capital expenditures for equipment on operating leases of $63,216. Cash used
in financing activities of $31,282, includes net repayments of $9,258 of
non-finance subsidiaries' long-term debt, net issuances of $174,450 of finance
subsidiaries' debt and net repayments of $178,376 of short-term debt.
Debt, excluding finance subsidiaries, was $615,933 at June 30, 2002, a
decrease of $185,006 from the debt balance of $800,939 at September 30, 2001.
Excluding finance subsidiaries' debt, our debt to capital ratio was 29% at
June 30, 2002 compared to 36.5% at September 30, 2001. Finance subsidiaries'
debt is excluded from the calculation because a significant amount of this
debt is backed by a portion of the lease receivables portfolio. Including
finance subsidiaries' debt, our debt to capital ratio was 69.2% at June 30,
2002 compared to 70.9% at September 30, 2001.
Restricted cash on the consolidated balance sheets primarily represents the
cash that has been collected on the leases that are pledged as collateral for
lease-backed notes. This cash must be segregated within two business days into
a trust account and the cash is used to pay the principal and interest on
lease-backed notes as well as any associated administrative expenses. The
level of restricted cash is impacted from one period to the next by the volume
of leases pledged as collateral on the lease-backed notes and timing of
collections on such leases.
IKON's provision for losses on accounts receivable was $5,090, $7,758 and
$21,631, respectively, and write-offs, net of recoveries, were $11,477,
$19,570 and $29,852, respectively, for the nine months ended June 30, 2002 and
the years ended September 30, 2001 and 2000. IKON's policy is to calculate its
allowance as a percentage of accounts receivable aged greater than 150 days
plus an additional allowance for any amount that the Company has specifically
identified as potential bad debts. The decreases in the provision and
write-offs from fiscal 2000 through the nine months ended June 30, 2002 were
primarily due to improved processes related to collections of accounts
receivable as described below.
In fiscal 2000, IKON standardized its accounts receivable collection
processes. IKON's write-offs of accounts receivable, net of recoveries,
decreased to $29,852 and the percentage of accounts receivable aged greater
than 150 days decreased to 4.9% at September 30, 2000, primarily due to the
improved collection processes. During fiscal 2001, IKON began to centralize
its accounts receivable collection function. As a result, write-offs of
accounts receivable, net of recoveries, decreased to $19,570 and the
percentage of accounts receivable aged greater than 150 days decreased to 4.4%
at September 30, 2001. During the first nine months of fiscal 2002, IKON
continued to focus on improving its accounts receivable collection procedures
and launched its first centralized customer care center which consolidates
service capabilities such as dispatch, customer service and supply sales into
one center. As a result, write-offs of accounts receivable, net of recoveries,
decreased to $11,477. The percentage of accounts receivable aged greater than
150 days increased to 4.5% at June 30, 2002.
IKON's days sales outstanding, on trade accounts receivable, increased from 49
days at September 30, 2001 to 51 days at June 30, 2002.
On May 24, 2002, we obtained a new $300,000 unsecured credit facility (the
"New Credit Facility") with a group of lenders. The New Credit Facility
replaces our $600,000 credit facility that was to expire in January 2003 (the
"Old Credit Facility"). Revolving loans are available, with certain
sub-limits, to IOS Capital, LLC, IKON's leasing subsidiary in the United
States; IKON Capital, PLC, IKON's leasing subsidiary in the United Kingdom;
and IKON Capital, Inc., IKON's leasing subsidiary in Canada. The New Credit
Facility contractually matures on May 24, 2005. As of June 30, 2002, the
Company has no borrowings outstanding under the New Credit Facility. The New
Credit Facility also provides support for letters of credit for the Company
and its subsidiaries. As of June 30, 2002, letters of credit supported by the
New Credit Facility amounted to $21,418. The remaining amount available under
the New Credit Facility for borrowings or letters of credit is $278,582 as of
June 30, 2002.
The New Credit Facility contains affirmative and negative covenants, including
limitations on certain fundamental changes, investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends, intercompany loans and certain restricted
payments. The New Credit Facility does not affect our ability to continue to
securitize receivables. In addition, unless the Company achieves certain
ratings on its long and short term senior, unsecured debt (as defined) or has
not redeemed or defeased $250,000 of IOSC's 9.75% Notes due June 15, 2004, all
loans under the New Credit Facility mature on December 15, 2003. Cash
dividends may be paid on common stock subject to certain limitations. The New
Credit Facility also contains certain financial covenants including (i)
corporate leverage ratio; (ii) consolidated interest expense ratio; (iii)
consolidated asset test ratios; and (iv) limitations on capital expenditures.
The New Credit Facility contains defaults customary for facilities of this
type. Failure to be in compliance with any material provision of the New
Credit Facility could have a material adverse effect on our liquidity,
financial position and results of operations.
As of June 30, 2002, finance subsidiaries' debt increased by $184,592 from
September 30, 2001. During the nine months ended June 30, 2002, our finance
subsidiaries repaid $1,347,815 of debt and received $1,522,265 from the
issuance of lease-backed notes and other debt instruments. As of June 30,
2002, IOSC, IKON Capital, PLC and IKON Capital, Inc. had approximately
$655,000, (pound)20,539 and CN$41,928 available under their revolving asset
securitization conduit financing agreements.
On May 13, 2002, IOSC issued $300,000 of convertible subordinated notes (the
"Convertible Notes") with an interest rate of 5.0%, which are due on May 1,
2007. The Convertible Notes can be converted into shares of IKON common stock
at any time before maturity at a conversion price of $15.03 per share.
Interest will be paid on the convertible notes semi-annually beginning
November 1, 2002.
On May 30, 2002, IKON Receivables Funding, LLC (a wholly-owned subsidiary of
IOSC) issued $634,800 of lease-backed notes (the "2002-1 Notes") pursuant to a
shelf registration statement filed with the Securities and Exchange
Commission. The 2002-1 Notes are comprised of Class A-1 Notes totaling
$171,000 with a stated interest rate of 2.044%, Class A-2 Notes totaling
$46,000 with a stated interest rate of 2.91%, Class A-3 Notes totaling
$266,400 with a stated interest rate of 3.90% and Class A-4 Notes totaling
$151,400 with a stated interest rate of 4.68%. The 2002-1 Notes are
collateralized by a pool of office equipment leases or contracts and related
assets and the payments on the 2002-1 Notes are made from payments received on
the equipment leases.
The Company uses interest rate swaps to fix the interest rates on its variable
rate classes of lease-backed notes, which results in a lower cost of capital
than if we had issued fixed rate notes. During the nine months ended June 30,
2002, unrealized gains totaling $8,146 after taxes, were recorded in
accumulated other comprehensive loss. As of June 30, 2002, all of the
Company's derivatives designated as hedges are interest rate swaps which
qualify for evaluation using the "short cut" method for assessing
effectiveness. As such, there is an assumption of no ineffectiveness.
During the first nine months of fiscal 2002, the Company repurchased 21 shares
of its common stock. From time to time, the Retirement Savings Plan of the
Company may acquire shares of the common stock of the Company in open market
transactions or from treasury shares held by the Company.
The following summarizes IKON's significant contractual obligations and
commitments as of June 30, 2002:
Payments Due by Period
Less Than
Contractual Obligations Total 1 year 1 - 3 years 4 - 5 years After 5 years
- -------------------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Long-Term Debt $608,382 $13,067 $129,302 $55,612 $410,401
Long-Term Debt, Finance
Subsidiaries 2,780,331 1,065,323 1,268,130 446,852 26
Notes Payable 7,551 7,551
Purchase Commitments 26,214 14,058 12,156
Operating Leases 247,318 45,226 94,324 53,550 54,218
Synthetic Leases 42,484 24,033 264 18,187
- -------------------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Total $3,712,280 $1,169,258 $1,504,176 $574,201 $464,645
Payments on long-term debt, finance subsidiaries generally are made from
collections on our finance receivables. At June 30, 2002, long-term debt,
finance subsidiaries was $2,780,331 and finance receivables were $3,411,986.
Purchase commitments represent future cash payments related to our
implementation of the Oracle e-business suite. Contractual obligations for
future technical support of $15,650 will be expensed over the term of the
contract. The remaining $10,564 is for software and is included in fixed
assets and accrued liabilities as of June 30, 2002.
On November 21, 2001, IKON entered into a synthetic lease agreement totaling
$18,659 for the purpose of leasing its corporate headquarters in Malvern,
Pennsylvania (the "Corporate Lease"). Under the terms of the Corporate Lease,
IKON is required to occupy the facility for a term of five years from the
agreement date. The Corporate Lease also provides for a residual value
guarantee and includes a purchase option at the lessor's original cost of the
property. If IKON terminates the Corporate Lease prior to the end of the lease
term, IKON is obligated to purchase the leased property at a price equal to
the remaining lease balance. Because IKON is required to only pay the yield
due on the Corporate Lease, IKON's nominal rental rate under the Corporate
Lease is different from what IKON would be required to pay under a market
rental rate. The Corporate Lease contains one financial covenant that requires
IKON to meet a funded debt to total capitalization ratio test. The test
requires IKON's total funded debt to not exceed fifty percent of IKON's total
capitalization. A failure to maintain the covenant would constitute a default
pursuant to the Corporate Lease and would permit the Lessor to either require
IKON to purchase the leased property for the then-current lease balance,
terminate IKON's right of possession of the leased property, or sell the
leased property and apply the proceeds to the current lease balance. IKON
obtains valuations of the leased properties on a regular basis. If market
conditions result in a valuation that is less than the guaranteed residual
value of the property, IKON records a charge to income. As of June 30, 2002
and September 30, 2001, the accrued shortfall between the contractual
obligation and the estimated fair value of the leased assets under the
Corporate Lease equaled $400.
On January 16, 1998, IKON entered into a synthetic lease agreement totaling
$23,901 (the "Lease") for the purpose of leasing certain real property for the
Company's use. The Lease expires on January 16, 2003 and IKON will not renew
or refinance the Lease. The Company intends to acquire or transfer the leased
properties prior to the lease termination. Under the terms of the Lease, IKON
will occupy the facilities for a term of five years from the agreement date
(subject to certain permitted renewals). The Lease also provides for a
residual value guarantee and includes a purchase option at the lessor's
original cost of the properties. If IKON terminates the Lease prior to the end
of the lease term, IKON is obligated to purchase the leased properties at a
price equal to the remaining lease balance. Because IKON is required to only
pay the yield due on the Lease, IKON's nominal rental rate under the Lease is
different from what IKON would be required to pay under a market rental rate.
The Lease contains one financial covenant that requires IKON to meet a funded
debt to total capitalization ratio test. The test requires IKON's total funded
debt to not exceed fifty percent of IKON's total capitalization. A failure to
maintain the covenant would constitute a default under the Lease and would
permit the Lessor to either terminate IKON's right of possession of the leased
property, declare the outstanding lease balance due, or enforce the lessor's
lien on the leased property. IKON obtains valuations of the leased properties
on a regular basis. If market conditions result in a valuation that is less
than the guaranteed residual value of the property, IKON records a charge to
income. As of June 30, 2002, the accrued shortfall between the contractual
obligation and the estimated fair value of the leased assets under the Lease
equaled $13,387. As of September 30, 2001, the accrued shortfall between the
contractual obligation and the estimated fair value of the leased assets under
the Lease equaled $10,543.
The Company has certain commitments available to it in the form of lines of
credit and standby letters of credit. As of June 30, 2002, the Company had
$292,796 available under lines of credit and $27,336 available under standby
letters of credit. All commitments expire within one year.
The Company believes that its operating cash flow together with unused bank
credit facilities and other financing arrangements will be sufficient to
finance current operating requirements for fiscal 2002, including capital
expenditures, dividends and the remaining accrued costs associated with the
Company's restructuring charges.
PENDING ACCOUNTING CHANGES
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In June 2001, the FASB approved SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses accounting for legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to expense
over the asset's useful life. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The Company is currently evaluating the impact of the
adoption of this statement, but does not expect a material impact from the
adoption of SFAS 143 on our consolidated financial statements.
In August 2001, the FASB approved SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and
APB 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 requires an
impairment loss to be recognized only if the carrying amounts of long-lived
assets to be held and used are not recoverable from their expected
undiscounted future cash flows. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company is currently evaluating the
impact of the adoption of this statement, but does not expect a material
impact from the adoption of SFAS 144 on our consolidated financial statements.
In May 2002, the FASB approved SFAS 145, "Rescission of SFAS 4, 44, and 64,
Amendment of SFAS 13, and Technical Corrections as of April 2002." SFAS 145
rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, SFAS 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds SFAS 44,
"Accounting for Intangible Assets of Motor Carriers." SFAS 145 amends SFAS 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
145 related to the rescission of SFAS 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does
not meet the criteria in APB 30 for classification as an extraordinary item
shall be reclassified. The provisions in paragraphs 8 and 9(c) of SFAS 145
related to SFAS 13 shall be effective for transactions occurring after May 15,
2002. All other provisions of SFAS 145 shall be effective for financial
statements issued on or after May 15, 2002. Early application of all
provisions is encouraged. The Company is currently evaluating the impact of
the adoption of this statement, but does not expect a material impact from the
adoption of SFAS 145 on our consolidated financial statements.
In June 2002, the FASB approved SFAS 146, "Accounting for Exit or Disposal
Activities". SFAS 146 addresses accounting for costs to terminate contracts
that are not capital leases, costs to consolidate facilities or relocate
employees and termination benefits. SFAS 146 requires that the fair value of a
liability for penalties for early contract termination be recognized when the
entity effectively terminates the contract. The fair value of a liability for
other contract termination costs should be recognized when an entity ceases
using the rights conveyed by the contract. The liability for one-time
termination benefits should be accrued ratably over the future service period
based on when employees are entitled to receive the benefits and a minimum
retention period. SFAS 146 will be effective for disposal activities initiated
after December 31, 2002. The Company is currently evaluating the impact of the
adoption of this statement, but does not expect a material impact from the
adoption of SFAS 146 on our consolidated financial statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK:
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt. We have no cash flow exposure due to interest rate changes
for long-term debt obligations as the Company uses interest rate swaps to fix
the interest rates on our variable rate classes of lease-backed notes and
other debt obligations. We primarily enter into debt obligations to support
general corporate purposes, including capital expenditures, working capital
needs and acquisitions. Finance subsidiaries' long-term debt is used primarily
to fund the lease receivables portfolio. The carrying amounts for cash and
cash equivalents, accounts receivable and notes payable reported in the
consolidated balance sheets approximate fair value. Additional disclosures
regarding interest rate risk are set forth in the Company's 2001 Annual Report
on Form 10-K/A filed with the Securities and Exchange Commission.
FOREIGN EXCHANGE RISK:
The Company has various non-U.S. operating locations which expose it to
foreign currency exchange risk. Foreign denominated intercompany debt borrowed
in one currency and repaid in another may be fixed via currency swap
agreements. Additional disclosures regarding foreign exchange risk are set
forth in the Company's 2001 Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission.
PART II. OTHER INFORMATION
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ITEM 1: LEGAL PROCEEDINGS
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. (the
"Claim") involves a claim brought under the Employee Retirement Income
Security Act of 1974 ("ERISA"). In connection with the Claim, the plaintiffs
allege that the Company and various individuals violated fiduciary duties
under ERISA based on allegedly improper investments in the Company's stock
made through the Company's Retirement Savings Plan (the "Plan"). The court
certified a class with respect to the Claim consisting generally of all those
participants in the Plan after September 30, 1995 and through August 13, 1998,
subject to certain exceptions.
On May 14, 2002, the Company announced that, subject to court approval, it
reached an agreement to settle the Claim. The Company is not making any
monetary payment to the class to settle the lawsuit, and the settlement does
not reflect any admission of liability by the Company. The Company has agreed
to make certain modifications to its Plan in order to allow participants
greater flexibility with respect to investment of the employer match portion
of their individual accounts. Under the settlement, employees who have been
with the Company for at least two years will be permitted to allocate Company
matching funds in investment options
other than IKON stock, subject to vesting schedules. The court held a hearing
on the final approval of the settlement on August 8, 2002 and issued a
Memorandum and Order on August 9, 2002 approving the settlement. Plaintiffs'
counsel petitioned the court for an award of their fees and costs of
litigation, to which the Company filed certain objections. Pursuant to an
October 11, 2002 court Order, the Company paid Plaintiffs' counsel's fees and
costs in the amount of $6,375. The court's August 9, 2002 Order approving the
settlement is final, and the matter is completely resolved.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2002, IOSC issued the following securities
in a transaction which was not registered under the Securities Act of 1933, as
amended (the "Act").
(1) 5% Convertible Subordinated Notes due 2007
a) Securities Sold: On May 13, 2002, IOSC issued and sold $300,000
5% convertible subordinated notes with an interest rate of 5%
which are due May 1, 2007 (the "Convertible Notes").
b) Underwriters and Other Purchasers: The Convertible Notes were
sold to Deutsche Banc Securities, J.P. Morgan Securities Inc.,
and Bank of America Securities LLC, as initial purchasers.
c) Consideration: The aggregate offering price was $300,000,
reflecting 100% of the aggregate principal amount of the
Convertible Notes plus accrued interest from the issue date.
The initial purchasers acquired the Convertible Notes at a
purchase price of 97.5% of the aggregate principal amount of
the Convertible Notes plus accrued interest from the issue
date.
d) Exemption from Registration: Exemption from registration under
the Act was claimed based upon Rule 144A and Regulation S.
e) Terms of Conversion: The Convertible Notes may be converted
into shares of IKON common stock at any time before maturity at
a conversion price of $15.03 per share.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 4.1* Indenture dated as of May 13, 2002 between the Company, IOSC
and Deutsche Bank Trust Company Americas, as Trustee.
Exhibit 4.2* Registration Rights Agreement dated May 13, 2002 between the
Company, Deutsche Bank Securities, Inc., Banc of America
Securities LLC and JP Morgan Securities Inc.
Exhibit 99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* As previously filed
b) Reports on Form 8-K
On April 29, 2002, the Company filed a Current Report on Form 8-K to file,
under Item 5 of the Form, information contained in its press release dated
April 25, 2002 regarding its results for the second quarter of fiscal 2002.
On May 7, 2002, the Company filed a Current Report on Form 8-K to file, under
Item 9 of the Form, balance sheet and cash flow statements, intended to be
considered in the context of its SEC filings regarding financial statements
for the second quarter of fiscal 2002.
On May 29, 2002, the Company filed a Current Report on Form 8-K to file, under
Item 5 of the Form, information contained in its press release dated May 28,
2002 regarding the completion of a $300 million unsecured revolving credit
facility dated May 24, 2002.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by
the undersigned, thereunto duly authorized. This amended report has also been
signed by the undersigned in his capacity as the chief accounting officer of
the Registrant.
IKON OFFICE SOLUTIONS, INC.
Date December 20, 2002 /s/ William S. Urkiel
----------------- ---------------------
William S. Urkiel
Senior Vice President and
Chief Financial Officer
CERTIFICATIONS
I, Matthew J. Espe, President and Chief Executive Officer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A for the
period ended June 30, 2002 of IKON Office Solutions, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this Quarterly Report, fairly presents, in
all material respects, the financial condition, results of operations and cash
flows of IKON Office Solutions, Inc.
Date: December 20, 2002
/s/ Matthew J. Espe
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Matthew J. Espe
President and Chief Executive Officer
I, William S. Urkiel, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A for the
period ended June 30, 2002 of IKON Office Solutions, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this Quarterly Report, fairly presents, in
all material respects, the financial condition, results of operations and cash
flows of IKON Office Solutions, Inc.
Date: December 20, 2002
/s/ William S. Urkiel
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William S. Urkiel
Senior Vice President and Chief Financial Officer