UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001 or [ ] Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from _____ to _____
Commission file number 1-5964
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IKON OFFICE SOLUTIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 23-0334400
- ----------------------------------- ----------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
P.O. Box 834, Valley Forge, Pennsylvania 19482
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(Address of principal executive offices)
(Zip Code)
(610) 296-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 9, 2001:
Common Stock, no par value 141,403,322 shares
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets--March 31, 2001
(unaudited) and September 30, 2000
Consolidated Statements of Operations--Three and six
months ended March 31, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows--Six months
ended March 31, 2001 and 2000 (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
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
March 31, September 30,
2001 2000
ASSETS (unaudited)
----------- -----------
Current Assets
Cash and cash equivalents $ 117,099 $ 78,118
Restricted cash 130,554 91,914
Accounts receivable, less allowances of: March 31, 2001 - $34,041;
September 30, 2000 - $35,322 694,745 723,051
Finance receivables, net 1,135,721 1,087,215
Inventories 334,409 321,471
Prepaid expenses and other current assets 115,346 102,196
Deferred taxes 108,959 108,578
----------- -----------
Total current assets 2,636,833 2,512,543
----------- -----------
Long-Term Finance Receivables, net 2,116,410 2,084,102
Equipment on Operating Leases, net 68,892 72,595
Property and Equipment, net 240,498 246,006
Goodwill, net 1,300,817 1,318,197
Other Assets 71,617 129,142
----------- -----------
$ 6,435,067 $ 6,362,585
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 59,256 $ 176,629
Current portion of long-term debt, finance subsidiaries 1,433,613 1,238,950
Notes payable 420,546 42,216
Foreign exchange contract payable 60,386
Trade accounts payable 188,365 226,838
Accrued salaries, wages and commissions 127,157 143,644
Deferred revenues 184,413 195,790
Other accrued expenses 282,896 284,464
----------- -----------
Total current liabilities 2,756,632 2,308,531
----------- -----------
Long-Term Debt 605,252 606,861
Long-Term Debt, Finance Subsidiaries 1,023,302 1,405,449
Deferred Taxes 419,413 415,656
Other Long-Term Liabilities 198,202 184,996
Commitments and Contingencies
Shareholders' Equity
Common stock, no par value:
Authorized - 300,000 shares
Issued: March 31, 2001 - 150,272 shares;
September 30, 2000 - 150,296 shares
Outstanding: March 31, 2001 - 141,403 shares;
September 30, 2000 - 143,826 shares 1,013,214 1,013,750
Series 12 preferred stock, no par value: Authorized 480 shares
Issued and Outstanding: March 31, 2001 - 0 shares;
September 30, 2000 - 0 shares
Unearned compensation (5,305) (6,814)
Retained earnings 491,580 468,770
Accumulated other comprehensive loss (32,817) (7,773)
Common shares in treasury, at cost: March 31, 2001 - 7,907 shares;
September 30, 2000 - 5,430 shares (34,406) (26,841)
----------- -----------
1,432,266 1,441,092
----------- -----------
$ 6,435,067 $ 6,362,585
=========== ===========
See notes to condensed consolidated financial statements.
1
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Net sales $ 704,719 $ 708,467 $ 1,359,790 $ 1,360,570
Service and rentals 562,520 571,329 1,132,133 1,154,250
Finance income 93,987 81,070 187,354 162,167
----------- ----------- ----------- -----------
1,361,226 1,360,866 2,679,277 2,676,987
----------- ----------- ----------- -----------
Costs and Expenses
Cost of goods sold 460,619 464,612 895,612 899,325
Service and rental costs 348,891 353,831 690,945 699,269
Finance interest expense 44,363 39,508 90,567 78,960
Selling and administrative 458,356 424,559 907,511 862,782
Restructuring charge 53,792
Asset impairment charge 51,548
----------- ----------- ----------- -----------
1,312,229 1,282,510 2,584,635 2,645,676
----------- ----------- ----------- -----------
Operating income 48,997 78,356 94,642 31,311
Interest expense 19,123 17,626 35,877 33,620
----------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes 29,874 60,730 58,765 (2,309)
Income taxes 13,144 25,877 25,856 18,474
----------- ----------- ----------- -----------
Income (loss) from continuing operations 16,730 34,853 32,909 (20,783)
Discontinued operations, net of income taxes of $942 1,200
----------- ----------- ----------- -----------
Net income (loss) $ 16,730 $ 34,853 $ 34,109 $ (20,783)
=========== =========== =========== ===========
Basic and Diluted Earnings (Loss) Per Common Share
Continuing operations $ 0.12 $ 0.23 $ 0.23 $ (0.14)
Discontinued operations 0.01
----------- ----------- ----------- -----------
Net income (loss) $ 0.12 $ 0.23 $ 0.24 $ (0.14)
=========== =========== =========== ===========
Cash Dividends Per Common Share $ 0.04 $ 0.04 $ 0.08 $ 0.08
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
2
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
March 31,
-------------------------------
2001 2000
----------- -----------
Cash Flows from Operating Activities
Net income (loss) $ 34,109 $ (20,783)
Additions (deductions) to reconcile net income (loss) to net cash
provided by operating activities of continuing operations:
Depreciation 58,333 68,038
Amortization 30,039 32,395
Provision for losses on accounts receivable 8,015 15,421
Provision for deferred income taxes 16,780 14,300
Provision for lease default reserves 31,693 30,950
Gain on asset securitizations (73)
Restructuring and asset impairment charges 105,340
Changes in operating assets and liabilities, net
of effects from acquisitions:
Decrease in accounts receivable 17,023 18,431
Increase in inventories (14,290) (41,711)
(Increase) decrease in prepaid expenses and other current assets (16,804) 4,053
(Decrease) increase in accounts payable, deferred
revenues and accrued expenses (74,218) 2,500
Decrease in accrued shareholder litigation settlement (116,821)
Decrease in accrued restructuring (10,271) (8,074)
Other (1,437) (968)
----------- -----------
Net cash provided by operating activities of continuing operations 78,972 102,998
Discontinued operations 2,142
----------- -----------
Net cash provided by operating activities 81,114 102,998
----------- -----------
Cash Flows from Investing Activities
Cost of companies acquired, net of cash acquired (2,666) (3,745)
Expenditures for property and equipment (50,506) (52,175)
Expenditures for equipment on operating leases (24,833) (22,146)
Proceeds from the sale of property and equipment 18,628 4,248
Proceeds from the sale of equipment on operating leases 6,334 7,369
Finance receivables - additions (922,855) (820,408)
Finance receivables - collections 785,212 685,078
Proceeds from the sale of finance subsidiaries' lease receivables 15,548 16,887
Repurchase of finance subsidiary's lease receivables (275,000)
Other 3,786 (2,832)
----------- -----------
Net cash used in investing activities (171,352) (462,724)
----------- -----------
Cash Flows from Financing Activities
Short-term borrowings, net 489,578 178,824
Proceeds from issuance of long-term debt 34,980 5,556
Long-term debt repayments (146,119) (16,968)
Finance subsidiaries' debt - issuances 1,067,479 948,016
Finance subsidiaries' debt - repayments (1,247,100) (647,788)
Dividends paid (11,367) (11,923)
Deposit to restricted cash (38,640) (46,926)
Purchase of treasury shares and other (7,497) (44)
----------- -----------
Net cash provided by financing activities 141,314 408,747
----------- -----------
Effects of exchange rate changes on cash and cash equivalents (12,095) (1,062)
----------- -----------
Net increase in cash and cash equivalents 38,981 47,959
Cash and cash equivalents at beginning of year 78,118 3,386
----------- -----------
Cash and cash equivalents at end of period $ 117,099 $ 51,345
=========== ===========
See notes to condensed consolidated financial statements.
3
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, 2000. Certain prior year amounts have
been reclassified to conform with the current year presentation.
Note 2: Restructuring and Asset Impairment Charges
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and asset
impairment charge (the "Charge") of $105,340 ($78,479 after-tax, or $0.52 per
share on a basic and diluted basis). 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. As
a result, $15,961 was reversed from the first quarter charge and the total
amount of the Charge was adjusted to $89,379 ($66,587 after-tax, or $0.45 per
share on a basic and diluted basis). Also, in the fourth quarter of fiscal 2000
the Company announced plans 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 of $15,789 ($12,353
after-tax, or $0.08 per share on a basic and diluted basis). The following
presents a reconciliation of the components of the first and fourth quarter
fiscal 2000 pre-tax restructuring and asset impairment charges at September 30,
2000 to the balance remaining at March 31, 2001, which is included in other
accrued expenses on the consolidated balance sheets:
Remaining Remaining
Balance Fiscal Balance
September 30, 2001 March 31,
First Quarter Fiscal 2000 Charge 2000 Payments 2001
----------------------------------------------- ------------------- ------------- -------------------
Severance $3,989 $2,675 $1,314
Contractual Commitments 10,440 3,770 6,670
------------------- ------------- -------------------
Total $14,429 $6,445 $7,984
=================== ============= ===================
Remaining Remaining
Balance Fiscal Balance
September 30, 2001 March 31,
Fourth Quarter Fiscal 2000 Charge 2000 Payments 2001
----------------------------------------------- ------------------- ------------- -------------------
Severance $6,092 $2,762 $3,330
Contractual Commitments 7,285 1,064 6,221
------------------- ------------- -------------------
Total $13,377 $3,826 $9,551
=================== ============= ===================
The remaining balances of the first quarter and fourth quarter severance charges
are expected to be paid through fiscal 2002 and 2003, respectively. The charges
for contractual commitments relate to lease commitments where the Company is
exiting certain locations and/or businesses. The remaining balances of the first
quarter and fourth quarter charges for contractual commitments are expected to
be paid through fiscal 2009 and 2007, respectively.
4
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2: Restructuring and Asset Impairment Charges - continued
Remaining Remaining
Employees to be Employees to be
Terminated as of Fiscal 2001 Terminated as of
September 30, Employee March 31,
2000 Terminations 2001
-------------------------------------------------------------------------------
First Quarter 400 (400) 0
Fourth Quarter 380 (207) 173
Remaining Remaining
Sites to be Sites to be
Closed as of Fiscal 2001 Closed as of
September 30, Sites March 31,
2000 Closed 2001
-------------------------------------------------------------------------------
First Quarter 4 (4) 0
Fourth Quarter 5 (3) 2
Note 3: Adoption of SFAS 133
IKON adopted Statement of Financial Accounting Standards (SFAS) 133, as amended
by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities", on
October 1, 2000. SFAS 133 requires that all derivatives be recorded on the
consolidated balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in earnings or Other Comprehensive Income
(Loss) ("OCI") depending on the type of hedging instrument and the effectiveness
of those hedges. In accordance with the transition provisions of SFAS 133, IKON
recorded a cumulative loss adjustment to OCI of $5,584, after taxes, to
recognize the fair value of its derivatives as of the date of adoption.
All of the derivatives used by IKON as hedges are highly effective as defined by
SFAS 133 because all of the critical terms of the derivatives match those of the
hedged item. All of the derivatives used by IKON have been designated as cash
flow hedges at the time of adoption of SFAS 133 or at the time they were
executed, if later than October 1, 2000. All derivatives are adjusted to their
fair market values at the end of each quarter. Unrealized net gains and losses
for cash flow hedges are recorded in OCI.
As of March 31, 2001, all of IKON'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. IKON uses interest rate swaps to fix the interest rates on our
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 six months ended
March 31, 2001, unrealized net losses totaling $17,997 after taxes were recorded
in OCI, including the $5,584 cumulative effect adjustment as of October 1, 2000.
5
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4: Lease-backed Notes
In addition to the $1,267,641 of lease-backed notes (the "Notes") outstanding at
September 30, 2000, on December 7, 2000, IKON Receivables, LLC (a consolidated
affiliate of our U.S. finance subsidiary, IOS Capital, Inc., "IOSC") issued
$634,431 of lease-backed notes (the "2000-2 Notes") under its $2,000,000 shelf
registration statement filed with the Securities and Exchange Commission. The
2000-2 Notes are comprised of Class A-1 Notes totaling $193,532 have a stated
interest rate of 6.66125%, Class A-2 Notes totaling $70,193 have a stated
interest rate of 6.60%, Class A-3 Notes totaling $290,800 have a variable
interest rate and Class A-4 Notes totaling $79,906 have a variable interest
rate. Class A-3 Notes pay an interest rate of one-month LIBOR plus 0.23% (which
has been fixed at 6.475% through an interest rate swap). Class A-4 Notes pay an
interest rate of one-month LIBOR plus 0.27% (which has been fixed at 6.475%
through an interest rate swap). The 2000-2 Notes are collateralized by a pool of
office equipment leases or contracts and related assets and the payments on the
2000-2 Notes are made from payments received on the equipment leases. The
Company received $633,000 in net proceeds from the sale of the 2000-2 Notes and
used $582,795 of that amount to repay asset securitization conduit financing.
Note 5: Asset Securitization Conduit Financing
On December 7, 2000, the Company repaid $582,795 of asset securitization conduit
financing when it issued the 2000-2 Notes. For the first six months of fiscal
2001, the Company pledged or transferred $341,206 in financing lease receivables
for $280,000 in cash in connection with its revolving asset securitization, in
transfers accounted for as financings.
Additionally, on March 31, 2001, the Company entered into an asset
securitization transaction whereby it pledged or transferred $33,299 in
financing lease receivables for $28,000 in cash and a retained interest in the
remainder. The agreement is for an initial 364-day term with certain renewal
provisions and was structured as a revolving asset securitization so that as
collections reduce previously sold interests in this new pool of leases,
additional leases can be sold up to $300,000. The terms of the agreement require
that the Company continue to service the lease portfolio.
As of March 31, 2001, the Company had approximately $471,500 available under its
revolving asset securitization conduit financing agreements.
Note 6: Comprehensive Income (Loss)
Total comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
---------------- --------------- ---------------- -----------------
Net income (loss) $16,730 $34,853 $34,109 $(20,783)
Foreign currency translation adjustments (5,278) 962 (7,047) (853)
Cumulative effect of change in accounting
principle for derivative and hedging activities
(SFAS 133), net of tax (5,584)
Net loss on derivative financial instruments, net of
tax (7,675) (12,413)
---------------- --------------- ---------------- -----------------
Total comprehensive income (loss) $3,777 $35,815 $9,065 $(21,636)
================ =============== ================ =================
Minimum pension liability is adjusted at each year end, therefore there is no
impact on total comprehensive income (loss) 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 $(14,652), $(168) and $(17,997), respectively,
at March 31, 2001 and $(7,605), $(168) and $0, respectively, at September 30,
2000.
6
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7: Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per common share from continuing operations:
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
--------------- -------------- ---------------- ---------------
Numerator:
Net income (loss) from continuing operations $16,730 $34,853 $32,909 $(20,783)
=============== ============== ================ ===============
Denominator:
Weighted average common shares 141,402 149,283 142,087 149,276
Contingently issuable common shares 14 7
--------------- -------------- ---------------- ---------------
Denominator for basic earnings (loss)
per common share -
weighted average common shares 141,402 149,297 142,087 149,283
--------------- -------------- ---------------- ---------------
Effect of dilutive securities:
Employee stock awards 119
Employee stock options 1,741 295 918
--------------- -------------- ---------------- ---------------
Dilutive potential common shares 1,860 295 918
--------------- -------------- ---------------- ---------------
Denominator for diluted earnings (loss) per
common share - adjusted weighted average
common shares and assumed conversions 143,262 149,592 143,005 149,283
=============== ============== ================ ===============
Basic and diluted earnings (loss) per common share
from continuing operations $0.12 $0.23 $0.23 $(0.14)
=============== ============== ================ ===============
The contingently issuable shares identified above are included in the
computation of basic earnings (loss) per common share for the three and six
months ended March 31, 2000, respectively, because they were earned but not
issued as of March 31, 2000. Options to purchase 8,171 shares of common stock at
$4.30 per share to $56.42 per share were outstanding during the second quarter
of fiscal 2001 and options to purchase 6,304 shares of common stock at $7.50 per
share to $56.42 per share were outstanding during the second quarter of fiscal
2000, but were not included in the computation of diluted earnings per common
share because the options' prices were greater than the average market price of
the common shares and therefore the effect would be antidilutive.
Options to purchase 8,171 shares of common stock at $4.30 per share to $56.42
per share were outstanding during the first six 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
and therefore the effect would be antidilutive. Options to purchase 9,576 shares
of common stock at $4.73 per share to $56.42 per share were outstanding during
the first six months of fiscal 2000, but were not included in the computation of
diluted loss per share because the effect would be antidilutive.
7
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8: Segment Reporting
In the first quarter of fiscal 2001, we made the following change to our segment
reporting as a result of our restructuring program and the changing dynamics of
our business: Technology Services Network Integration (included in Other in
fiscal 2000) is included in IKON North America. Prior year results have been
reclassified to conform with the current year presentation.
The table below presents segment information for the three months ended March
31, 2001 and 2000:
IKON Corporate
North IKON And
America Europe Other Eliminations Total
------------- ----------- ----------- ------------ -------------
Three Months Ended March 31, 2001
Revenues, excluding finance income $1,105,010 $112,141 $50,088 $1,267,239
Finance income 88,760 5,227 93,987
Operating income (loss) 95,821 4,990 (7,865) $(43,949) 48,997
Interest expense (19,123) (19,123)
Income before income taxes 29,874
Three Months Ended March 31, 2000
Revenues, excluding finance income $1,109,635 $121,150 $49,011 $1,279,796
Finance income 75,570 5,500 81,070
Operating income (loss) 106,966 5,954 (8,124) $(26,440) 78,356
Interest expense (17,626) (17,626)
Income before income taxes 60,730
The table below presents segment information for the six months ended March 31,
2001 and 2000:
IKON Corporate
North IKON And
America Europe Other Eliminations Total
------------- ----------- ----------- ------------ -------------
Six Months Ended March 31, 2001
Revenues, excluding finance income $2,165,047 $221,434 $105,442 $2,491,923
Finance income 176,994 10,360 187,354
Operating income (loss) 182,214 9,891 (14,183) $(83,280) 94,642
Interest expense (35,877) (35,877)
Income from continuing operations before
income taxes 58,765
Six Months Ended March 31, 2000
Revenues, excluding finance income $2,167,719 $241,985 $105,116 $2,514,820
Finance income 151,228 10,939 162,167
Operating income (loss) before
restructuring and asset impairment
charge 212,640 11,215 (9,564) $(77,640) 136,651
Restructuring and asset impairment charge (39,810) (4,286) (7,066) (54,178) (105,340)
Operating income (loss) 172,830 6,929 (16,630) (131,818) 31,311
Interest expense (33,620) (33,620)
Loss before income taxes (2,309)
8
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 9: Contingencies
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. contains a
claim brought under the Employee Retirement Income Security Act of 1974
("ERISA"). In connection with that claim, the plaintiffs allege that the Company
and various individuals violated fiduciary duties under ERISA based on allegedly
improper investments in the Company's stock made through the Company's
Retirement Savings Plan. The court certified a class with respect to this claim
consisting generally of all those participants in the Retirement Savings Plan
after September 30, 1995 and through August 13, 1998, subject to certain
exceptions. Discovery is ongoing, with expert depositions occurring over the
next two months. Discovery is set to close June 18, 2001. The Company believes
that this claim is without merit and is vigorously defending the suit.
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 established an accrual for known environmental obligations based
on management's best estimate of the aggregate environmental remediation
exposure on these sites. After consideration of the defenses available to the
Company, the accrual for such exposure 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.
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 10: Pending Accounting Changes
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The SAB
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements. Any
change resulting from the application of SAB 101 will be reported as a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes". In June 2000, the SEC issued SAB No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements". SAB 101B delays the implementation of SAB
101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. We are required to begin reporting changes, if any, to
our revenue recognition policy in the fourth quarter of fiscal year 2001. We are
currently evaluating the effect, if any, the adoption of SAB 101 will have on
our consolidated financial statements.
In October 2000, the Emerging Issues Task Force (EITF) issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs", and EITF 00-14,
"Accounting for Certain Sales Incentives". EITF 00-10 addresses the income
statement classification for shipping and handling fees and costs. EITF 00-14
addresses recognition, measurement, and income statement classification for
certain sales incentives including discounts, coupons, rebates, and free
products or services. The Company is currently examining its practices in light
of this interpretive guidance and does not expect a material impact from the
application of EITF 00-10 and EITF 00-14 beginning in the fourth quarter of
fiscal 2001.
9
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
All dollar and share amounts are in thousands.
The Company 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
outsourcing solutions, as well as network design and consulting, e-business
development, telecommunications services and technology training.
Results of Operations
The discussion reviews the results of operations of the Company as reported in
the consolidated statements of operations.
Three Months Ended March 31, 2001
Compared with the Three Months Ended March 31, 2000
Results of operations for the second quarter of fiscal 2001, compared to the
second quarter of fiscal 2000 were as follows:
Our second quarter revenues were $1,361,226, compared to $1,360,866 in the
second quarter of fiscal 2000. Excluding the impact of foreign currency
translation, revenues increased by $13,674, or 1.0%. This resulted from an
increase in finance income, partially offset by decreases in net sales and
service and rentals revenue as described below.
Net sales from the sale of office and production equipment, supplies and
technology hardware, declined by $3,748, or 0.5%, as continued growth in office
and production equipment sales, particularly copiers and printers, was offset by
decreased revenues from the sale of supplies and low-margin technology hardware,
such as computers, routers and servers. Revenue from the sale of office and
production equipment increased by 3%, compared to the second quarter of fiscal
2000, reflecting our continued success in placing digital products. Our
equipment revenues during the quarter were 93% digital, compared to 81% in the
second quarter of fiscal 2000. Additionally, our segment 5 and 6 (defined as
equipment with minimum output of over 70 pages per minute) equipment placements
increased by 109% compared to the second quarter of fiscal 2000 as a result of
the introduction of new technologies for these segments that were previously not
available to the Company. Color revenues decreased by 15%, compared to the
second quarter of fiscal 2000, due to changes in product mix, as the color
market transitions to lower priced models.
Service and rentals revenue, which represents equipment service, outsourcing,
including facilities management, and technology services, decreased by $8,809,
or 1.5%, compared to the second quarter of fiscal 2000. This was due to a
decrease in equipment service, partially offset by an increase in outsourcing
revenues led by strong growth in facilities management. The decrease in
equipment service was due to a decline in analog copier service revenue that has
not yet been replaced by digital and high-end copier service revenue, as well as
a shift to facilities management contracts. Revenue from outsourcing, which
includes facilities management, off-site digital print services for specialized,
high-volume printing and specialized legal document and imaging services,
increased by 7.5%. This increase was led by double digit growth in facilities
management.
Finance income increased by $12,917, or 15.9%, compared to the second quarter of
fiscal 2000, primarily due to growth in the lease portfolio. During the second
quarter of fiscal 2001 over 70% of IKON North America's copier and equipment
revenues were financed by our captive finance subsidiary, IOS Capital, Inc.
("IOSC").
Overall gross margin was 37.3%, compared to 37.0% in the second quarter of
fiscal 2000. The gross margin on net sales increased to 34.6% from 34.4%,
reflecting the benefit of ongoing productivity initiatives as well as reduced
sales of low-margin technology hardware. The gross margin on service and rentals
decreased to 38.0% from 38.1% in the second quarter of fiscal 2000, primarily
due to a smaller percentage of our revenue coming
10
from equipment service which has higher margins than other service. The gross
margin on finance income increased to 52.8% from 51.3% compared to the second
quarter of fiscal 2000.
Selling and administrative expense as a percent of revenue was 33.7% in the
second quarter of fiscal 2001 compared to 31.2% (32.4% excluding $17,000 of
insurance proceeds related to the shareholder litigation settlement) in the
second quarter of fiscal 2000. The increase was primarily due to committed
investments targeted at making us more profitable and competitive in the
long-term. These investments are targeted at our sales force, centralization
initiatives and new market offerings, which include new products for the
production environment, and Digital Express(R) 2000 and our e-Commerce program.
These increased costs were partially offset by savings and improved cost
controls from prior infrastructure investments, including centralized credit and
purchasing, and shared services.
Our operating income decreased by $29,359, compared to the second quarter of
fiscal 2000. Excluding $17,000 of insurance proceeds received in the second
quarter of fiscal 2000 related to the shareholder litigation settlement, our
operating income decreased by $12,359. Our operating margin was 3.6% in the
second quarter of fiscal 2001, compared to 4.5% in the second quarter of fiscal
2000, excluding the insurance proceeds. The decrease was primarily due to the
higher level of selling and administrative expense partially offset by the
improved overall gross margin described above.
Interest expense increased by $1,497, or 8.5%, due mainly to higher average
borrowings.
The effective income tax rate in the second quarter of fiscal 2001 was 44.0%,
compared to 42.0% in the second quarter of fiscal 2000 excluding insurance
proceeds. The lower tax rate in fiscal 2000 was primarily due to the recording
of benefits resulting from legislative changes that became effective during the
second quarter of fiscal 2000.
Diluted earnings per common share were $0.12 in the second quarter of fiscal
2001, compared to $0.23 in the second quarter of fiscal 2000. Excluding the
after-tax effect of the insurance proceeds in fiscal 2000, diluted earnings per
common share were $0.17 in the second quarter of fiscal 2000.
Review of Business Segments
IKON North America
Revenues, excluding finance income, decreased by $4,625, or 0.4%, to $1,105,010
in the second quarter of fiscal 2001 from $1,109,635 in the second quarter of
fiscal 2000. The decrease was primarily due to a decline in equipment service
and rentals, offset by a 5% increase in revenue from the sale of office and
production equipment, particularly in high end, segments 5 and 6 production
equipment. Finance income increased by $13,190, or 17.5%, to $88,760 in the
second quarter of fiscal 2001, compared to $75,570 in the second quarter of
fiscal 2000. The increase was primarily due to growth in the lease portfolio.
Operating income decreased by $11,145, or 10.4%, to $95,821 in the second
quarter of fiscal 2001 from $106,966 in the second quarter of fiscal 2000. As
described above, the decrease was due mainly to the higher level of committed
investments targeted at making us more profitable and competitive, partially
offset by savings and improved cost controls from prior productivity
initiatives.
IKON Europe
Revenues including finance income decreased by $9,282, or 7.3%. Excluding the
impact of foreign currency translation, revenues increased by $1,384, or 1.2%.
Revenues, excluding finance income, decreased by $9,009, or 7.4%, to $112,141 in
the second quarter of fiscal 2001 from $121,150 in the second quarter of fiscal
2000. This decrease was due mainly to the impact of foreign currency translation
and a decrease in hardware sales in our technology services business, offset by
growth in outsourcing and the sale of office and production equipment. Finance
income decreased by $273, or 5.0%, to $5,227 in the second quarter of fiscal
2001 from $5,500 in the second quarter of fiscal 2000. Operating income
decreased by $964, or 16.2%, to $4,990 in the
11
second quarter of fiscal 2001 from $5,954 in the second quarter of fiscal 2000,
due primarily to the decrease in revenue offset by improved management of
administrative expenses.
Other
Other revenues increased by $1,077, or 2.2%, to $50,088 in the second quarter of
fiscal 2001 from $49,011 in the second quarter of fiscal 2000. There was an
operating loss of $7,865 in the second quarter of fiscal 2001 compared to a loss
of $8,124 in the second quarter of fiscal 2000. Current losses relate primarily
to the Company's Telephony and Business Imaging operations. Telephony has been
impacted by changes in the economic climate and one-time charges to reduce its
cost structure as this business is aligned as a separate unit. Business Imaging
losses relate primarily to the cessation of a large contract in commercial
imaging, as well as investments in Virtual File Room(TM), an IKON e-service.
Six Months Ended March 31, 2001
Compared with the Six Months Ended March 31, 2000
Results of operations for the six months ended March 31, 2001, compared to the
six months ended March 31, 2000 were as follows:
Our revenues increased by $2,290, or 0.1%, compared to the six months ended
March 31, 2000. Excluding the impact of foreign currency translation, revenues
increased by $33,527, or 1.3%. This increase resulted from growth in finance
income offset by decreases in net sales and service and rentals revenue as
described below.
Net sales from the sale of office and production equipment, supplies and
technology hardware, decreased by $780, or 0.1%, as continued growth in revenue
from office and production equipment was offset by a decrease in revenue from
the sale of supplies and technology hardware. Revenue from office and production
equipment increased by 4%, compared to the six months ended March 31, 2000,
reflecting our continued success in placing digital products. Placements of
color products were relatively consistent with the prior year; however, revenues
decreased 10% due to changes in product mix as the color market transitions to
lower priced models. Our net sales growth was slowed by a decrease in supply
sales as well as a decrease in revenue from the sale of technology hardware,
such as computers, routers and servers, in our technology services businesses as
we continue to de-emphasize these low-margin products.
Service and rentals revenue, which represents equipment service, outsourcing,
including facilities management, and technology services, decreased by $22,117,
or 1.9%, compared to the six months ended March 31, 2000. The decrease was
primarily due to a decrease in equipment service and technology services
revenue, partially offset by increased outsourcing revenues which was led by
strong growth in facilities management. The decrease in equipment service was
due to a decrease in analog copier service revenue that has not yet been
replaced by digital and high-end copier service revenue, as well as a shift to
facilities management contracts. Revenue from outsourcing, which includes
facilities management, off-site digital print services for specialized,
high-volume printing and specialized legal document and imaging services,
increased by 6%, compared to the six months ended March 31, 2000.
Finance income increased by $25,187, or 15.5%, compared to the six months ended
March 31, 2000, primarily due to growth in the lease portfolio.
Gross margin was 37.4%, compared to 37.3% in the six months ended March 31,
2000. The gross margin on net sales increased to 34.1% from 33.9%, the increase
was primarily due to the favorable mix of high versus low-end equipment
placements and the decrease in sales of low-margin hardware described above. The
gross margin on service and rentals decreased to 39.0%, compared to 39.4%,
primarily due to the decrease in equipment service revenues, which have a higher
margin than outsourcing and technology revenues. The gross margin on finance
income increased to 51.7% from 51.3%.
12
Selling and administrative expense as a percent of revenue was 33.9% for the six
months ended March 31, 2001, compared to 32.2% (32.9%, excluding the insurance
proceeds related to the shareholder litigation settlement) for the six months
ended March 31, 2000. The increase was primarily due to committed investments
targeted at making us more profitable and competitive in the long-term. These
investments are targeted at our sales force, centralization initiatives and new
market offerings, which include new products for the production environment,
Digital Express and our e-Commerce program. These increased costs were partially
offset by savings and improved cost controls from prior infrastructure
investments, including centralized credit and purchasing, and shared services.
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and asset
impairment charge (the "Charge") of $105,340 ($78,479 after-tax, or $0.52 per
share on a basic and diluted basis). 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. As
a result, $15,961 was reversed from the first quarter charge and the total
amount of the Charge was adjusted to $89,379 ($66,587 after-tax, or $0.45 per
share on a basic and diluted basis). Also, in the fourth quarter of fiscal 2000,
the Company announced plans 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 of $15,789 ($12,353
after-tax, or $0.08 per share on a basic and diluted basis). The following
presents a reconciliation of the components of the first and fourth quarter
fiscal 2000 pre-tax restructuring and asset impairment charges at September 30,
2000 to the balance remaining at March 31, 2001, which is included in other
accrued expenses on the consolidated balance sheets:
Remaining Remaining
Balance Fiscal Balance
September 30, 2001 March 31,
First Quarter Fiscal 2000 Charge 2000 Payments 2001
- ------------------------------------- ------------------ -------------- -------------------
Severance $3,989 $2,675 $1,314
Contractual Commitments 10,440 3,770 6,670
------- ------- -------
Total $14,429 $6,445 $7,984
======= ======= =======
Remaining Remaining
Balance Fiscal Balance
September 30, 2001 March 31,
Fourth Quarter Fiscal 2000 Charge 2000 Payments 2001
- ------------------------------------- ------------------- ------------- -------------------
Severance $6,092 $2,762 $3,330
Contractual Commitments 7,285 1,064 6,221
------- ------- -------
Total $13,377 $3,826 $9,551
======= ======= =======
The remaining balances of the first quarter and fourth quarter severance charges
are expected to be paid through fiscal 2002 and 2003, respectively. The charges
for contractual commitments relate to lease commitments where the Company is
exiting certain locations and/or businesses. The remaining balances of the first
quarter and fourth quarter charges for contractual commitments are expected to
be paid through fiscal 2009 and 2007, respectively.
Remaining
Remaining Employees to be
Employees to be Fiscal 2001 Terminated as of
Terminated as of Employee March 31,
September 30, 2000 Terminations 2001
-----------------------------------------------------------------------------------------
First Quarter 400 (400) 0
Fourth Quarter 380 (207) 173
13
Remaining
Remaining Sites to be
Sites to be Closed as of
Closed as of Fiscal 2001 March 31,
September 30, 2000 Sites Closed 2001
-----------------------------------------------------------------------------------------
First Quarter 4 (4) 0
Fourth Quarter 5 (3) 2
Operating income increased by $63,331, compared to the six months ended March
31, 2000. Excluding the Charge and $17,000 of insurance proceeds related to the
shareholder litigation settlement in fiscal 2000, our operating income decreased
by $25,009. Operating margin was 3.5% in the six months ended March 31, 2001,
compared to 4.5% in the six months ended March 31, 2000, excluding the Charge
and insurance proceeds. The decrease was primarily due to the higher level of
investment spending partially offset by the improved overall gross margin
described above.
Interest expense increased by $2,257, or 6.7%, due to higher average borrowings
in the first six months of fiscal 2001, compared to the first six months of
fiscal 2000.
The effective income tax rate was 44.0% for the six months ended March 31, 2001
and 2000, excluding the Charge and insurance proceeds.
In 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 $0.24 for the six months ended March 31,
2001, compared to a loss of $0.14 per common share for the six months ended
March 31, 2000. Excluding the after-tax effect of the gain from discontinued
operations in fiscal 2001 and the insurance proceeds and the Charge in fiscal
2000, diluted earnings per common share were $0.23 for the six months ended
March 31, 2001, compared to $0.32 for the six months ended March 31, 2000. In
the first six months of fiscal 2001, we repurchased 2,497 shares of common
stock.
Review of Business Segments
In the first six months of fiscal 2001, we made the following change to our
segment reporting as a result of our restructuring programs and the changing
dynamics of our business: Technology Services Network Integration (included in
Other in fiscal 2000) is included in IKON North America. Prior year results have
been reclassified to conform with the current year presentation.
IKON North America
Revenues, excluding finance income, decreased by $2,672, or 0.1%, to $2,165,047
in the first six months of fiscal 2001 from $2,167,719 in the first six months
of fiscal 2000. The decrease was primarily due to a decline in equipment service
and rentals due to the closure of unprofitable or non-strategic locations
associated with the restructuring program announced during the first quarter of
fiscal 2000, offset by an increase in revenue from the sale of office and
production equipment. Finance income increased by $25,766, or 17.0%, to $176,994
in the first six months of fiscal 2001, compared to $151,228 in the first six
months of fiscal 2000. The increase was primarily due to growth in the lease
portfolio. Operating income decreased by $30,426, or 14.3%, to $182,214 in the
first six months of fiscal 2001 from $212,640 in the first six months of fiscal
2000, excluding the Charge. As described above, the decrease was due mainly to
the higher level of committed investments targeted at making us more profitable
and competitive, partially offset by savings and improved cost controls from
prior productivity initiatives.
14
IKON Europe
Revenues including finance income decreased by $21,130, or 8.4%. Excluding the
impact of foreign currency translation, revenues increased by $5,857, or 2.5%.
Revenues, excluding finance income, decreased by $20,551, or 8.5%, to $221,434
in the first six months of fiscal 2001 from $241,985 in the first six months of
fiscal 2000. The decrease was due mainly to the impact of foreign currency
translation and a decrease in hardware sales in our technology services
business, offset by an increase in revenue from the sale of office and
production equipment. Finance income decreased by $579, or 5.3%, to $10,360 in
the first six months of fiscal 2001 from $10,939 in the first six months of
fiscal 2000. Operating income decreased by $1,324, or 11.8%, to $9,891 in the
first six months of fiscal 2001 from $11,215 in the first six months of fiscal
2000, excluding the Charge, primarily due to the decrease in revenue offset by
improved management of administrative expenses.
Other
Other revenues increased by $326, or 0.3%, to $105,442 in the first six months
of fiscal 2001 from $105,116 in the first six months of fiscal 2000. There was
an operating loss of $14,183 in the first six months of fiscal 2001, compared to
a loss of $9,564 in the first six months of fiscal 2000, excluding the Charge.
Increased losses relate primarily to the Company's Telephony and Business
Imaging operations. Telephony has been impacted by changes in the economic
climate and one-time charges to reduce its cost structure as this business is
established as a separate unit. Business Imaging losses relate primarily to the
cessation of a large commercial imaging contract in the first quarter of fiscal
2001 as well as investments in Virtual File Room, an IKON e-service.
Financial Condition and Liquidity
Net cash provided by operating activities for the first six months of fiscal
2001 was $81,114. During the same period, the Company used $171,352 of cash in
investing activities, which included net finance subsidiary use of $122,095,
capital expenditures for property and equipment of $50,506 and capital
expenditures for equipment on operating leases of $24,833. Cash provided by
financing activities of $141,314, includes repayments of $146,119 of non-finance
subsidiaries' long-term debt and net repayments of $179,621 of finance
subsidiaries' debt. Debt, excluding finance subsidiaries, was $1,085,054 at
March 31, 2001, an increase of $259,348 from the debt balance at September 30,
2000 of $825,706. There was an increase of approximately $238,000 due to
short-term corporate borrowings on behalf of our finance subsidiaries combined
with an increase in borrowings for general corporate purposes. Excluding finance
subsidiaries' debt and the impact of short-term loans to and from our finance
subsidiaries' our debt to capital ratio was 36% at March 31, 2001, compared to
39% at March 31, 2000. Restricted cash on the consolidated balance sheets
primarily represents cash collected on certain financing lease receivables,
which must be used to repay the lease-backed notes. The foreign exchange
contract payable represents amounts owed by the Company related to a foreign
currency swap agreement that was settled on April 2, 2001.
As of March 31, 2001, short-term borrowings under a $600,000 credit agreement
totaled $369,570. The Company also has $700,000 available for either stock or
debt offerings under a shelf registration statement filed with the Securities
and Exchange Commission.
Finance subsidiaries debt decreased by $187,484 from September 30, 2000. During
the six months ended March 31, 2001, IOSC repaid $1,193,102 of debt, received
$633,000 from the issuance of lease-backed notes, received $308,000 from asset
securitization conduit financing and received $7,685 from other borrowings. At
March 31, 2001, $287,500 of medium term notes were outstanding with a weighted
interest rate of 6.7%. At March 31, 2001, $1,572,765 of lease-backed notes were
outstanding with a weighted interest rate of 6.8%. At March 31, 2001, IOSC had
$471,500 available under its revolving asset securitization agreements. At March
31, 2001, IOSC's subsidiary, Ikon Receivables, LLC had $867,059 available for
issuance under its asset backed securitization shelf registration statement and
$1,123,350 available for issuance under its debt securities shelf registration
statement.
15
The Company has also filed several shelf registration statements with the
Securities and Exchange Commission to register the sale of 25,000 shares of
common stock. Shares issued under the registration statements may be used for
acquisitions. Approximately 18,970 shares have been issued under these shelf
registrations through March 31, 2001, leaving approximately 6,030 shares
available for issuance.
During the first six months of fiscal 2001, the Company repurchased 2,497 shares
of common stock for $7,654. 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 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 2001, including capital expenditures,
dividends and the remaining accrued costs associated with the Company's
restructuring charges.
Pending Accounting Changes
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The SAB
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements. Any
change resulting from the application of SAB 101 will be reported as a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." In June 2000, the SEC issued SAB No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements." SAB 101B delays the implementation of SAB
101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. We are required to begin reporting changes, if any, to
our revenue recognition policy in the fourth quarter of fiscal year 2001. We are
currently evaluating the effect, if any, the adoption of SAB 101 will have on
our consolidated financial statements.
In October 2000, the Emerging Issues Task Force (EITF) issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs," and EITF 00-14,
"Accounting for Certain Sales Incentives." EITF 00-10 addresses the income
statement classification for shipping and handling fees and costs. EITF 00-14
addresses recognition, measurement, and income statement classification for
certain sales incentives including discounts, coupons, rebates, and free
products or services. The Company is currently examining its practices in light
of this interpretive guidance and does not expect a material impact from the
application of EITF 00-10 and EITF 00-14 beginning in the fourth quarter of
fiscal 2001.
16
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk:
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt. We have no cash flow exposure due to interest rate changes
for long-term debt obligations. We primarily enter into debt obligations to
support general corporate purposes, including acquisitions, capital expenditures
and working capital needs. Finance subsidiaries' long-term debt is used to fund
the lease receivables portfolio. The carrying amounts for cash 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 2000 Annual Report on Form 10-K/A filed
with the Securities and Exchange Commission.
Foreign Exchange Risk:
The Company has various non-U.S. operating locations which expose it to foreign
exchange risk. 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 2000
Annual Report on Form 10-K/A filed with the Securities and Exchange Commission.
Forward-Looking Information
This document includes or incorporates by reference information which
constitutes forward-looking statements within the meaning of the federal
securities laws, including, but not limited to, statements regarding: the impact
of e-commerce initiatives; growth opportunities, productivity initiatives, and
the impact of the Company's revenue, margin, and cost-savings projections;
anticipated growth rates in the digital and color equipment and outsourcing
industries; the effect of foreign exchange risk; the reorganization of the
Company's business segments; and the Company's ability to finance its current
operations and growth initiatives. Although the Company believes such
forward-looking statements are reasonable, based on management's current plans
and expectations, the statements are subject to a number of uncertainties and
risks that could significantly affect current plans, anticipated actions and the
Company's future financial condition and results, and therefore, no assurances
can be given that such statements will prove correct. These uncertainties and
risks include, but are not limited to: conducting operations in a competitive
environment and a changing industry (which includes technical services and
products that are relatively new to the industry and to the Company); delays,
difficulties, management transitions and employment issues associated with
consolidations and/or changes in business operations; managing the integration
of acquired businesses; existing and future vendor relationships; risks relating
to currency exchange; economic, legal and political issues associated with
international operations; the Company's ability to access capital and meet its
debt service requirements (including sensitivity to fluctuation in interest
rates); and general economic conditions. Certain additional risks and
uncertainties are set forth in the Company's 2000 Annual Report on Form 10-K/A
filed with the Securities and Exchange Commission. As a consequence, future
results may differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company.
17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. contains a
claim brought under the Employee Retirement Income Security Act of 1974
("ERISA"). In connection with that claim, the plaintiffs allege that the Company
and various individuals violated fiduciary duties under ERISA based on allegedly
improper investments in the Company's stock made through the Company's
Retirement Savings Plan. The court certified a class with respect to this claim
consisting generally of all those participants in the Retirement Savings Plan
after September 30, 1995 and through August 13, 1998, subject to certain
exceptions. Discovery is ongoing, with expert depositions occurring over the
next two months. Discovery is set to close June 18, 2001. The Company believes
that this claim is without merit and is vigorously defending the suit.
Item 4: Submission of Matters to a Vote of Security Holders
On February 21, 2001, the Company held its annual meeting of
shareholders at which time ten directors were elected to hold
office until the election of their successors.
For Withheld
Judith M. Bell 120,280 10,050
James R. Birle 120,786 9,545
Philip E. Cushing 120,727 9,604
James J. Forese 120,347 9,984
Robert M. Furek 120,801 9,529
Thomas R. Gibson 120,774 9,557
Richard A. Jalkut 120,788 9,543
Arthur E. Johnson 120,648 9,682
Kurt M. Landgraf 120,714 9,616
Marilyn M. Ware 120,581 9,749
Item 6: Exhibits and Reports on Form 8-K
Reports on Form 8-K
On January 31, 2001, 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 January 25, 2001 regarding its results for the
first quarter of fiscal 2001.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. This report has also been signed by the
undersigned in his capacity as the chief accounting officer of the Registrant.
IKON OFFICE SOLUTIONS, INC.
Date May 15, 2001 /s/ William S. Urkiel
-------------------- ------------------------
William S. Urkiel
Senior Vice President and
Chief Financial Officer
19