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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 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
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
----- -----
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 8, 2002.
Common Stock, no par value 143,061,904 shares
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IKON Office Solutions, Inc.
INDEX
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets--December 31, 2001 (unaudited) and
September 30, 2001
Consolidated Statements of Income--Three months ended December
31, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows--Three months ended
December 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 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
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,
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. The Registrant's credit ratings have declined in recent
years; however, the effects of such declines have been mitigated by the
Company's utilization of asset securitizations as a funding source. Asset
securitizations continue to be a viable funding source for the Company and the
Company's present credit ratings permit the Registrant access to the 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 in the United States and Europe, 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 million 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 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
December 31,
2001 September 30,
(in thousands) (unaudited) 2001
- --------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 65,006 $ 80,351
Restricted cash 120,536 128,365
Accounts receivable, less allowances of: December 31, 2001 - $21,006;
September 30, 2001 - $23,510 605,953 641,059
Finance receivables, less allowances of: December 31, 2001 - $24,290;
September 30, 2001 - $24,424 1,177,849 1,171,004
Inventories 339,605 299,776
Prepaid expenses and other current assets 98,335 95,381
Deferred taxes 98,450 98,701
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 2,505,734 2,514,637
- --------------------------------------------------------------------------------------------------------------------------
Long-term finance receivables, less allowances of: December 31, 2001 - $45,110;
September 30, 2001 - $45,360 2,168,622 2,176,205
Equipment on operating leases, net 71,855 71,181
Property and equipment, net 217,047 207,812
Goodwill, net 1,257,779 1,258,112
Other assets 64,797 63,045
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,285,834 $ 6,290,992
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current portion of long-term debt $ 14,604 $ 17,643
Current portion of long-term debt, finance subsidiaries 1,273,876 1,229,631
Notes payable 348,410 183,688
Trade accounts payable 190,046 222,999
Accrued salaries, wages and commissions 79,447 126,280
Deferred revenues 169,181 185,261
Other accrued expenses 296,047 299,624
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,371,611 2,265,126
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt 596,681 599,608
Long-term debt, finance subsidiaries 1,211,379 1,366,108
Deferred taxes 455,077 446,059
Other long-term liabilities 225,120 218,513
Commitments and contingencies
Shareholders' Equity
Common stock, no par value: authorized 300,000 shares; issued: December
31, 2001-150,098 shares; September 30, 2001-150,128 shares;
outstanding: December 31, 2001-142,118 shares; September 30, 2001-
141,776 shares 1,012,064 1,012,302
Series 12 preferred stock, no par value: authorized 480 shares; none
issued or outstanding
Unearned compensation (3,454) (3,745)
Retained earnings 490,301 463,152
Accumulated other comprehensive loss (41,557) (43,484)
Cost of common shares in treasury: December 31, 2001-7,191 shares;
September 30, 2001-7,480 shares (31,388) (32,647)
- --------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,425,966 1,395,578
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,285,834 $ 6,290,992
- --------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
IKON Office Solutions, Inc.
Consolidated Statements of Income
(unaudited)
Three Months Ended
December 31,
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2001 2000
- ------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ 568,997 $ 655,071
Service and rentals 542,923 569,613
Finance income 98,529 93,367
- ------------------------------------------------------------------------------------------------------------
1,210,449 1,318,051
- ------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of goods sold 374,347 434,993
Service and rental costs 327,538 342,054
Finance interest expense 41,165 46,204
Selling and administrative 401,584 449,155
- ------------------------------------------------------------------------------------------------------------
1,144,634 1,272,406
- ------------------------------------------------------------------------------------------------------------
Operating Income 65,815 45,645
Interest Expense 14,511 16,754
- ------------------------------------------------------------------------------------------------------------
Income From Continuing Operations Before Taxes on Income 51,304 28,891
Taxes on Income 18,726 12,712
- ------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 32,578 16,179
Discontinued Operations, net of taxes of $942 1,200
- ------------------------------------------------------------------------------------------------------------
Net Income $ 32,578 $ 17,379
- ------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share
Continuing Operations $ 0.23 $ 0.11
Discontinued Operations 0.01
- ------------------------------------------------------------------------------------------------------------
Net Income $ 0.23 $ 0.12
- ------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share
Continuing Operations $ 0.22 $ 0.11
Discontinued Operations 0.01
- ------------------------------------------------------------------------------------------------------------
Net Income $ 0.22 $ 0.12
- ------------------------------------------------------------------------------------------------------------
Cash Dividends Per Common Share $ 0.04 $ 0.04
See notes to condensed consolidated financial statements.
IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
December 31,
- --------------------------------------------------------------------------------------------------------------------------
(in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 32,578 $ 17,379
Additions (deductions) to reconcile net income to net cash
used in operating activities of continuing operations:
Depreciation 31,798 30,628
Amortization 3,969 14,016
Provision for losses on accounts receivable 3,799 4,872
Provision for deferred income taxes 13,199 7,122
Provision for lease default reserves 16,691 14,846
Changes in operating assets and liabilities, net of effects from
acquisitions and divestitures:
Decrease (increase) in accounts receivable 26,465 (30,625)
Increase in inventories (42,893) (57,543)
Increase in prepaid expenses and other current assets (5,232) (8,213)
Decrease in accounts payable, deferred revenues and accrued expenses (97,052) (80,205)
Decrease in accrued restructuring (4,071) (5,022)
Other 252 1,217
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of continuing operations (20,497) (91,528)
Gain from discontinued operations (2,142)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (20,497) (93,670)
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of companies acquired, net of cash acquired (1,559)
Expenditures for property and equipment (17,852) (23,642)
Expenditures for equipment on operating leases (12,877) (10,323)
Proceeds from sale of property and equipment 1,832 9,344
Proceeds from sale of equipment on operating leases 2,581 3,198
Finance receivables - additions (368,234) (418,734)
Finance receivables - collections 347,067 368,140
Other (6,464) (2,120)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (53,947) (75,696)
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,123 82,556
Short-term borrowings, net 165,972 415,790
Long-term debt repayments (6,229) (98,413)
Finance subsidiaries' debt - issuances 255,680 718,140
Finance subsidiaries' debt - repayments (362,793) (905,880)
Dividends paid (5,675) (5,711)
Decrease (increase) in restricted cash 7,829 (27,738)
Purchase of treasury shares and other 1,505 (7,158)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 57,412 171,586
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,687 (7,944)
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (15,345) (5,724)
Cash and cash equivalents at beginning of year 80,351 78,118
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 65,006 $ 72,394
- --------------------------------------------------------------------------------------------------------------------------
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: 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. In accordance with SFAS 142, the Company has six months from adoption to
complete its initial impairment review. The Company does not expect a material
impairment from our initial impairment review. The Company has identified the
following reporting segments and associated goodwill to be tested for
impairment:
IKON North IKON North
America America Business Sysinct
Copier Outsourcing Imaging (e-business
Business Business IKON Europe Services development) Total
--------------------------------------------------------------------------------------------------
December 31, 2001
Goodwill $861,187 $60,961 $308,845 $18,977 $7,809 $1,257,779
As required by SFAS 142, intangibles with finite lives continue to be amortized.
The Company has non-compete agreements with a net book value of $1,488 at
December 31, 2001, which will be fully amortized during fiscal 2002.
A reconciliation of reported net income adjusted to reflect the adoption of SFAS
142 is provided below:
Three Months Ended
December 31, December 31,
2001 2000
----------------- -----------------
Reported net income $32,578 $17,379
Add-back goodwill amortization, net of taxes of
$233 10,001
----------------- -----------------
Adjusted net income $32,578 $27,380
================= =================
Reported basic earnings per common share $0.23 $0.12
Add-back goodwill amortization 0.07
----------------- -----------------
Adjusted basic earnings per common share $0.23 $0.19
================= =================
Reported diluted earnings per common share $0.22 $0.12
Add-back goodwill amortization 0.07
----------------- -----------------
Adjusted diluted earnings per common share $0.22 $0.19
================= =================
Note 3: Restructuring and Asset Impairment Charges
------------------------------------------
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.
These related reserve adjustments were included in cost of goods sold and
selling and administrative expense in the consolidated statement of income. 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 in the United States and Europe, 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 fiscal 2000, the Company recorded a net restructuring and asset
impairment charge (the "Fiscal 2000 Charge") of $105,168 ($78,940 after-tax, or
$0.53 per share on a diluted basis).
All actions related to the Fiscal 2000 Charge are complete. Severance payments
to terminated employees are made in installments. The remaining balances of the
fiscal 2001 and 2000 severance charges are expected to be paid through fiscal
2003. The charges for contractual commitments relate to lease commitments where
the Company is exiting certain locations and/or businesses. The remaining
balances of the fiscal 2001 and 2000 charges for contractual commitments are
expected to be paid over the next several years.
The employees and locations affected by the Fiscal 2001 Charge described above
are as follows:
Remaining
Employees Employee Employees to
Affected Terminations be Terminated
- --------------------------------------------------------------------------------
Terminations 1,600 (542) 1,058
Remaining
Sites Sites Sites to
Affected Closed be Closed
- --------------------------------------------------------------------------------
Closures 24 (13) 11
The following presents a reconciliation of the original restructuring components
of the Fiscal 2001 Charge and Fiscal 2000 Charge from September 30, 2001 to the
balance remaining at December 31, 2001, which is included in other accrued
expenses on the consolidated balance sheet:
Balance Balance
September 30, Payments December 31,
Fiscal 2001 Restructuring Charge 2001 Fiscal 2002 2001
- -------------------------------------------------------------------------------------------
Severance $ 26,500 $ (1,582) $ 24,918
Contractual commitments 8,000 (789) 7,211
- -------------------------------------------------------------------------------------------
Total $ 34,500 $ (2,371) $ 32,129
- -------------------------------------------------------------------------------------------
Balance Balance
September 30, Payments December 31,
Fiscal 2000 Restructuring Charge 2001 Fiscal 2002 2001
- ---------------------------------------------------------------------------------------------
Severance $ 2,023 $ (459) $ 1,564
Contractual commitments 10,026 (1,241) 8,785
- ---------------------------------------------------------------------------------------------
Total $ 12,049 $ (1,700) $ 10,349
- ---------------------------------------------------------------------------------------------
Note 4: Lease-Backed Notes
------------------
In addition to the $1,797,389 of lease-backed notes outstanding on September 30,
2001, on December 28, 2001, the Company issued $87,011 and re-purchased $12,460
of lease-backed notes (the "Notes") for a net issuance of $74,551. 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.
Note 5: Asset Securitization Conduit Financing
--------------------------------------
During the first quarter of fiscal 2002, the Company pledged or transferred
$189,848 in financing lease receivables for $160,000 in cash in connection with
its revolving asset securitization conduit financing agreements. On December 28,
2001, the Company repaid $70,000 in cash in connection with its issuance of the
Notes described above. As of December 31, 2001, the Company had approximately
$421,500 available under its revolving asset securitization conduit financing
agreements.
Note 6: Comprehensive Income
--------------------
Total comprehensive income is as follows:
Three Months Ended
December 31,
2001 2000
---------------- ---------------
Net income $32,578 $17,379
Foreign currency translation adjustments (2,010) (1,769)
Cumulative effect of change in accounting
principle for derivative and hedging activities
(SFAS 133), net of taxes of $3,778 (5,584)
Net gain (loss) on derivative financial instruments,
net of taxes of: 2002-$2,624; 2001-$3,103 3,937 (4,738)
---------------- ---------------
Total comprehensive income $34,505 $5,288
================ ===============
Minimum pension liability is adjusted at each year end; therefore, there is no
impact on total comprehensive income during interim periods. The balances for
foreign currency translation, minimum pension liability and derivative financial
instruments included in accumulated other comprehensive loss in the consolidated
balance sheets were $(14,406), $(714) and $(26,437), respectively, at December
31, 2001 and $(12,396), $(714) and $(30,374), respectively, at September 30,
2001.
Note 7: 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
December 31,
2001 2000
------------- -------------
Numerator:
Income from continuing operations $32,578 $16,179
============= =============
Denominator:
Denominator for basic earnings per common share - weighted
average common shares 141,885 142,789
------------- -------------
Effect of dilutive securities:
Employee stock awards 446
Employee stock options 4,063 94
------------- -------------
Dilutive potential common shares 4,509 94
------------- -------------
Denominator for diluted earnings per
common share - adjusted weighted average
common shares and assumed conversions 146,394 142,883
------------- -------------
Basic earnings per common share from continuing operations $0.23 $0.11
============= =============
Diluted earnings per common share from continuing operations $0.22 $0.11
============= =============
Options to purchase 6,885 shares of common stock at $10.44 per share to $46.59
per share were outstanding during the first quarter of fiscal 2002 and options
to purchase 8,401 shares of common stock at $4.56 per share to $56.42 per share
were outstanding during the first 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.
Note 8: Segment Reporting
-----------------
The table below presents segment information for the three months ended December
31, 2001 and 2000:
IKON Corporate
North IKON And
America Europe Other Eliminations Total
-------------- -------------- -------------- -------------- --------------
Three Months Ended December 31, 2001
Revenues, excluding finance income $ 981,536 $ 103,143 $ 27,241 $ 1,111,920
Finance income 93,581 4,948 98,529
Operating income (loss) 106,127 5,551 (6,102) $ (39,761) 65,815
Interest expense (14,511) (14,511)
Income before taxes 51,304
Three Months Ended December 31, 2000
Revenues, excluding finance income $ 1,060,037 $ 109,293 $ 55,354 $ 1,224,684
Finance income 88,234 5,133 93,367
Operating income (loss) 87,820 4,900 (5,503) $ (41,572) 45,645
Interest expense (16,754) (16,754)
Income before taxes 28,891
Note 9: Contingencies
-------------
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. involves 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 closed, and dispositive motions must be filed in March,
2002. 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, 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.
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: Financial Instruments
---------------------
As of December 31, 2001, 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 three months
ended December 31, 2001, unrealized net income totaling $3,937 after taxes, was
recorded in accumulated other comprehensive loss.
Note 11: 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.
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 some of
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 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, but are not limited to, the following:
Revenue Recognition. Revenues are recognized when products are delivered to and
accepted by the customer or services are performed. Revenues from service
contracts and rentals are recognized over the term of the contract. The present
value of payments due under sales-type lease contracts is recorded as revenue
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.
Goodwill. IKON evaluates goodwill in accordance with Statement of Financial
Accounting Standards ("SFAS") 142, by comparing expected future discounted cash
flows to the carrying amount of the goodwill. 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.
Reserves. 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 residuals 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 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 December 31, 2001
Compared to the Three Months Ended December 31, 2000
Results of operations for the first quarter of fiscal 2002, compared to the
first quarter of fiscal 2001, were as follows:
Our first quarter revenues decreased by $107,602, or 8.2%, compared to the first
quarter of fiscal 2001. This resulted from decreases in net sales and service
and rentals revenues, offset by an increase in finance income as described
below.
Net sales, which include revenues from the sale of copier/printer equipment,
supplies and technology hardware, decreased by $86,074, or 13.1%, compared to
the first quarter of fiscal 2001. The decrease was primarily due to a decline in
sales of technology hardware and copier/printer equipment. Sales of technology
hardware, such as computers, routers and servers, declined 40% compared to the
first quarter of fiscal 2001 as the Company has de-emphasized sales of these
low-margin products. Sales of copier/printer equipment declined due to ongoing
economic and competitive pressures as well as the Company's strategic focus on
moving from sales of low-end, lower margin products to high-end, higher margin
products, and focusing on larger regional and national accounts.
Service and rentals, which include revenues from the servicing of copier/printer
equipment, outsourcing and other professional services, decreased by $26,690, or
4.7%, compared to the first quarter of fiscal 2001. This was due to a decrease
in outsourcing and other services, partially offset by growth in equipment
service. Revenues from outsourcing and other services declined from the prior
year due to our decision to exit our telephony business, the sale of our
technology education business and targeted downsizing of certain other service
areas such as digital print production. Revenues from facilities management,
which is included in outsourcing, continued to grow and mitigated the decline in
outsourcing.
Finance income increased by $5,162, or 5.5%, compared to the first quarter of
fiscal 2001, primarily due to continued growth in the lease receivables
portfolio. During the first quarter of fiscal 2002, approximately 78% of IKON
North America's copier and equipment revenues were financed by our captive
finance subsidiary, IOS Capital, LLC ("IOSC") compared to approximately 70%
during the first quarter of fiscal 2001.
Overall gross margin was 38.6% compared to 37.5% in the first quarter of fiscal
2001. The gross margin on net sales increased to 34.2% from 33.6% in the first
quarter of fiscal 2001. This reflects the benefit of increased sales of
high-end, higher margin products and focusing sales resources on growth areas
such as production, color, facilities management and professional services. The
gross margin on service and rentals decreased to 39.7% from 39.9% in the first
quarter of fiscal 2001, primarily due to a less favorable revenue mix compared
to the first quarter of fiscal 2001. The gross margin on finance income
increased to 58.2% compared to 50.5% in the first quarter of fiscal 2001,
primarily due to lower average interest rates compared to the first quarter of
fiscal 2001.
Selling and administrative expense as a percent of revenue was 33.2% in the
first quarter of fiscal 2002 compared to 34.1% in the first quarter of fiscal
2001. The elimination of goodwill amortization under SFAS 142 accounted for
approximately $10,000 of the decrease. The remaining decrease is the result of
our decision to exit our telephony business and the sale of our technology
education business; operational infrastructure improvements and continued
centralization of business processes; reduced selling costs due to improvements
in the sales structure; and ongoing expense control measures.
Our operating income increased by $20,170 compared to the first quarter of
fiscal 2001. Our operating margin was 5.4% in the first quarter of fiscal 2002
compared to 3.5% in the first quarter of fiscal 2001.
Interest expense was $14,511 for the first quarter of fiscal 2002 compared to
$16,754 for the first quarter of fiscal 2001. The decrease was due to lower
average outstanding debt combined with lower average short-term interest rates
compared to the first quarter of fiscal 2001.
The effective income tax rate was 36.5% for the first quarter of fiscal 2002
compared to 44% for the first 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 completion of certain tax
planning initiatives during the first quarter of fiscal 2002 also contributed to
the reduced tax rate.
In the first quarter 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 $0.22 in the first quarter of fiscal 2002
compared to $0.12 ($0.11 excluding the after-tax effect of the gain from
discontinued operations) in the first quarter of fiscal 2001. Excluding the
impact of goodwill amortization, diluted earnings per common share for the first
quarter of fiscal 2001 would have been $0.19 ($0.18 excluding the after-tax
effect of the gain from discontinued operations).
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. In accordance with SFAS 142, the Company has six months from adoption to
complete its initial impairment review. The Company does not expect a material
impairment from our initial impairment review. The Company has identified the
following reporting segments and associated goodwill to be tested for
impairment:
IKON North
IKON North America Business Sysinct
America Copier Outsourcing Imaging (e-business
Business Business IKON Europe Services development) Total
-------- -------- ----------- -------- ------------ -----
December 31, 2001
Goodwill $861,187 $60,961 $308,845 $18,977 $7,809 $1,257,779
As required by SFAS 142, intangibles with finite lives continue to be amortized.
The Company has non-compete agreements with a net book value of $1,488 at
December 31, 2001, which will be fully amortized during fiscal 2002.
A reconciliation of reported net income adjusted to reflect the adoption of SFAS
142 is provided below:
Three Months Ended
December 31, December 31,
2001 2000
----------------- -----------------
Reported net income $32,578 $17,379
Add-back goodwill amortization, net of taxes of
$233 10,001
----------------- -----------------
Adjusted net income $32,578 $27,380
================= =================
Reported basic earnings per common share $0.23 $0.12
Add-back goodwill amortization 0.07
----------------- -----------------
Adjusted basic earnings per common share $0.23 $0.19
================= =================
Reported diluted earnings per common share $0.22 $0.12
Add-back goodwill amortization 0.07
----------------- -----------------
Adjusted diluted earnings per common share $0.22 $0.19
================= =================
Review of Business Segments
- ---------------------------
IKON North America
Revenues, excluding finance income, decreased by $78,501, or 7.4%, to $981,536
in the first quarter of fiscal 2002 from $1,060,037 in the first quarter of
fiscal 2001. The decrease was primarily due to a decline in revenue from sales
of technology hardware and low-end copier/printer equipment 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 $5,347, or
6.1%, to $93,581 in the first quarter of fiscal 2002, from $88,234 in the first
quarter of fiscal 2001. The increase was primarily due to growth in the lease
receivables portfolio. Operating income increased by $18,307, or 20.8%, to
$106,127 in the first quarter of fiscal 2002 from $87,820 in the first quarter
of fiscal 2001. The increase was due to higher gross margins on equipment sales
and finance income and reduced selling and administrative costs as discussed
above.
IKON Europe
Revenues, excluding finance income, decreased by $6,150, or 5.6%, to $103,143 in
the first quarter of fiscal 2002 from $109,293 in the first quarter of fiscal
2001. This decrease was due mainly to a decrease in revenues from sales of
technology hardware and copier/printer equipment, offset by growth in
outsourcing. Finance income decreased by $185, or 3.6%, to $4,948 in the first
quarter of fiscal 2002 from $5,133 in the first quarter of fiscal 2001.
Operating income increased by $651, or 13.3%, to $5,551 in the first quarter of
fiscal 2002 from $4,900 in the first quarter of fiscal 2001, due primarily to
the favorable change in revenue mix and ongoing improvements to our operational
infrastructure.
Other
Other revenues decreased by $28,113, or 50.8%, to $27,241 in the first quarter
of fiscal 2002 from $55,354 in the first quarter of fiscal 2001. Our decision to
exit our telephony business and the sale of our technology education business
during the quarter accounted for over 44% of the decline in revenues. A
reduction in large business imaging projects also contributed to the decline.
There was an operating loss of $6,102 in the first quarter of fiscal 2002
compared to an operating loss of $5,503 in the first quarter of fiscal 2001. The
increase in operating loss was due to revenue declining at a faster rate than
reductions in fixed costs related to the businesses we exited in the first
quarter of fiscal 2002.
Restructuring and Asset Impairment Charges
- ------------------------------------------
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.
These related reserve adjustments were included in cost of goods sold and
selling and administrative expense in the consolidated statement of income. 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 in the United States and Europe, 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 fiscal 2000, the Company recorded a net restructuring and asset
impairment charge (the "Fiscal 2000 Charge") of $105,168 ($78,940 after-tax, or
$0.53 per share on a diluted basis).
All actions related to the Fiscal 2000 Charge are complete. Severance payments
to terminated employees are made in installments. The remaining balances of the
fiscal 2001 and 2000 severance charges are expected to be paid through fiscal
2003. The charges for contractual commitments relate to lease commitments where
the Company is exiting certain locations and/or businesses. The remaining
balances of the fiscal 2001 and 2000 charges for contractual commitments are
expected to be paid over the next several years.
The employees and locations affected by the Fiscal 2001 Charge described above
are as follows:
Remaining
Employees Employee Employees to
Affected Terminations be Terminated
- -------------------------------------------------------------------------------
Terminations 1,600 (542) 1,058
Remaining
Sites Sites Sites to
Affected Closed be Closed
- -------------------------------------------------------------------------------
Closures 24 (13) 11
The following presents a reconciliation of the original restructuring components
of the Fiscal 2001 Charge and Fiscal 2000 Charge from September 30, 2001 to the
balance remaining at December 31, 2001, which is included in other accrued
expenses on the consolidated balance sheet:
Balance Balance
September 30, Payments December 31,
Fiscal 2001 Restructuring Charge 2001 Fiscal 2002 2001
- -------------------------------------------------------------------------------------------
Severance $ 26,500 $ (1,582) $ 24,918
Contractual commitments 8,000 (789)
7,211
- -------------------------------------------------------------------------------------------
Total $ 34,500 $ (2,371) $ 32,129
- -------------------------------------------------------------------------------------------
Balance Balance
September 30, Payments December 31,
Fiscal 2000 Restructuring Charge 2001 Fiscal 2002 2001
- ---------------------------------------------------------------------------------------------
Severance $ 2,023 $ (459) $ 1,564
Contractual commitments 10,026 (1,241) 8,785
- ---------------------------------------------------------------------------------------------
Total $ 12,049 $ (1,700) $ 10,349
- ---------------------------------------------------------------------------------------------
Financial Condition and Liquidity
- ---------------------------------
Net cash used by operating activities for the first quarter of fiscal 2002 was
$20,497. During the same period, the Company used $53,947 of cash for investing
activities, which included net finance subsidiary use of $21,167, capital
expenditures for property and equipment of $17,852 and capital expenditures for
equipment on operating leases of $12,877. Cash provided by financing activities
of $57,412, includes repayments of $6,229 of non-finance subsidiaries' long-term
debt and net repayments of $107,113 of finance subsidiaries' debt. Debt,
excluding finance subsidiaries, was $959,695 at December 31, 2001, an increase
of $158,756 from the debt balance of $800,939 at September 30, 2001. Excluding
finance subsidiaries' debt and the impact of short-term loans to and from our
finance subsidiaries, our debt to capital ratio was 31% at both December 31,
2001 and September 30, 2001. Finance subsidiaries' debt is excluded from the
calculation because substantially all of this debt is backed by a portion of the
lease receivables portfolio. Restricted cash on the consolidated balance sheets
primarily represents cash collected on certain finance receivables, which must
be used to repay certain lease-backed notes.
As of December 31, 2001, short-term borrowings under a $600,000 credit agreement
totaled $338,834. 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.
As of December 31, 2001, finance subsidiaries' debt decreased by $110,484 from
September 30, 2001. During the first quarter of fiscal 2002, our finance
subsidiaries repaid $362,793 of debt and received $255,680 from the issuance of
lease-backed notes and other debt instruments. As of December 31, 2001, IOSC,
our Canadian finance subsidiary and our United Kingdom finance subsidiary had
approximately $421,500, CN$37,249 and (pound)20,564 available under their
revolving asset securitization financing agreements. IOSC had $873,350 available
under its medium term notes program. IKON Receivables Funding, LLC, a
wholly-owned subsidiary of IOSC, had $300,000 available under its debt
securities registration statement.
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 December 31, 2001, leaving approximately 6,030 shares
available for issuance.
During the first quarter of fiscal 2002, the Company did not repurchase 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 December 31, 2001:
Payments Due by Period
Less Than
Contractual Obligations Total 1 year 1 - 3 years 4 - 5 years After 5 years
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $611,285 $14,604 $130,393 $55,927 $410,361
Long-Term Debt, Finance
Subsidiaries 2,485,255 1,273,876 1,094,961 116,352 66
Notes Payable 348,410 348,410
Purchase Commitments 36,408 16,017 20,391
Operating Leases 177,761 46,616 59,232 33,684 38,229
Synthetic Leases 41,901 23,901 18,000
- -------------------------------------------------------------------------------------------------------------------------
Total $3,701,020 $1,699,523 $1,328,878 $223,963 $448,656
Payments on long-term debt, finance subsidiaries are made from collections on
our finance receivables. At December 31, 2001, long-term debt, finance
subsidiaries was $2,485,255 and finance receivables were $3,346,471.
Purchase commitments represent future cash payments related to our
implementation of the Oracle e-business suite. Contractual obligations for
future technical support of $18,015 will be expensed over the term of the
contract. The remaining $18,393 is for software and is included in fixed assets
and accrued liabilities as of December 31, 2001.
Synthetic leases are not required to be recorded on the Company's balance sheet.
The payments above represent the contractual obligation due at the end of the
lease period and will be paid from proceeds received from the sale of the
properties related to the synthetic leases. IKON obtains valuations of leased
properties structured as synthetic leases. If market conditions result in a
valuation that is less than the guaranteed residual value of the property, IKON
may be required to record a charge to income. Any current shortfall between the
contractual obligation and the estimated fair value of the leased assets has
been accrued as of December 31, 2001.
Amount of Commitment Expiration Per Period
Less Than
Contractual Obligations Total 1 year 1 - 3 years 4 - 5 years After 5 years
- ------------------------------------------------------------------------------------------------------------------------
Lines of Credit $640,891 $50,891 $590,000
Standby Letters of Credit 25,805 25,805
- ------------------------------------------------------------------------------------------------------------------------
Total $666,696 $76,696 $590,000
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
- --------------------------
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.
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
- ---------------------------
Item 1: Legal Proceedings
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. involves 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 closed, and dispositive motions must be filed in March,
2002. The Company believes that this claim is without merit and is vigorously
defending the suit.
Item 6: Exhibits and Reports on Form 8-K
Reports on Form 8-K
On October 5, 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
October 1, 2001 regarding its results for the fourth quarter of fiscal 2001 and
the acceleration of certain cost saving actions.
On October 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
October 25, 2001 regarding its results for the fourth quarter of fiscal 2001.
On November 6, 2001, the Company filed a Current Report on Form 8-K to file,
under Item 9 of the Form, information to be furnished to analysts and investors
at the Company's Analyst and Investor Conference to be held on November 7, 2001.
On November 7, 2001, the Company filed a Current Report on Form 8-K to file,
under Item 9 of the Form, information to be furnished to analysts and investors
at the Company's Analyst and Investor Conference to be held on November 7, 2001.
On December 17, 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
December 13, 2001 regarding its sale of the Company's technology education unit.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. This report has also been signed by the
undersigned in his capacity as the chief accounting officer of the Registrant.
IKON OFFICE SOLUTIONS, INC.
Date February 14, 2002 /s/ William S. Urkiel
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William S. Urkiel
Senior Vice President and
Chief Financial Officer