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, 1998 or [ ] Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
Commission file number 1-5964
IKON OFFICE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
OHIO 23-0334400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 834, Valley Forge, Pennsylvania 19482
(Address of principal executive offices)
(Zip Code)
(610) 296-8000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
* Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1998.
Common Stock, no par value 135,396,257 shares
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--March 31, 1998
and September 30, 1997
Consolidated Statements of Income--Three and six months
ended March 31, 1998 and March 31, 1997
Consolidated Statements of Cash Flows--Three and six
months ended March 31, 1998 and March 31, 1997
Notes to Consolidated Financial Statements--
March 31, 1998
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition and Liquidity
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
March 31 September 30
ASSETS 1998 1997
Current Assets
Cash $ 23,503 $ 21,341
Accounts receivable, net 818,272 765,660
Finance receivables, net 762,368 670,784
Inventories 497,111 442,207
Prepaid expenses 113,893 101,294
Deferred taxes 122,122 124,520
------------------ -----------------
Total current assets 2,337,269 2,125,806
------------------ -----------------
Investments and Long-Term Receivables 12,789 17,508
Long-Term Finance Receivables, net 1,533,319 1,331,372
Equipment on Operating Leases, net 107,528 101,900
Property and Equipment, at cost 498,637 462,360
Less accumulated depreciation 232,925 222,815
------------------ -----------------
265,712 239,545
------------------ -----------------
Other Assets
Goodwill 1,374,752 1,348,133
Miscellaneous 159,667 159,622
------------------ -----------------
1,534,419 1,507,755
------------------ -----------------
$ 5,791,036 $ 5,323,886
================== =================
See notes to consolidated financial statements.
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
March 31 September 30
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
Current Liabilities
Current portion of long-term debt $ 57,846 $ 60,794
Current portion of long-term debt, finance subsidiaries 402,827 251,711
Notes payable 113,203 266,979
Trade accounts payable 206,733 206,547
Accrued salaries, wages and commissions 88,761 110,628
Deferred revenues 205,192 208,612
Other accrued expenses 286,377 268,511
--------------- ---------------
Total current liabilities 1,360,939 1,373,782
--------------- ---------------
Long-Term Debt 745,862 490,235
Long-Term Debt, Finance Subsidiaries 1,587,527 1,494,043
Deferred Taxes 352,409 330,996
Other Long-Term Liabilities 155,590 153,182
Shareholders' Equity
Series BB conversion preferred stock, no par value:
3,877 depositary shares issued and outstanding 290,170 290,170
Common stock, no par value:
Authorized 300,000 shares
Issued 135,705 shares 677,681 677,681
Retained earnings 634,118 574,646
Foreign currency translation adjustment (1,007) (728)
Cost of common shares in treasury: 3/98 - 422 shares;
9/97 - 2,401 shares (12,253) (60,121)
--------------- ---------------
1,588,709 1,481,648
--------------- ---------------
$ 5,791,036 $ 5,323,886
=============== ===============
See notes to consolidated financial statements.
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
Three Months Ended Six Months Ended
March 31 March 31
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues
Net sales $ 793,965 $ 722,197 $ 1,522,070 $ 1,351,624
Service and rentals 570,066 502,648 1,145,888 965,909
Finance income 74,580 53,015 144,910 100,761
------------ ------------ ------------ ------------
1,438,611 1,277,860 2,812,868 2,418,294
------------ ------------ ------------ ------------
Costs and Expenses
Cost of goods sold 513,780 461,696 981,980 863,742
Service and rental costs 286,365 248,157 571,648 467,203
Finance interest expense 33,522 23,370 64,268 43,381
Selling and administrative 500,306 441,733 988,397 845,309
Transformation costs 20,192 61,190 39,711 75,533
------------ ------------ ------------ ------------
1,354,165 1,236,146 2,646,004 2,295,168
------------ ------------ ------------ ------------
Operating income 84,446 41,714 166,864 123,126
Interest expense 16,243 11,605 33,272 19,806
------------ ------------ ------------ ------------
Income from continuing operations before taxes
and extraordinary loss 68,203 30,109 133,592 103,320
Taxes on income 28,917 15,494 57,322 44,046
------------ ------------ ------------ ------------
Income from continuing operations before
extraordinary loss 39,286 14,615 76,270 59,274
Discontinued operations 20,151
------------ ------------ ------------ ------------
Income before extraordinary loss 39,286 14,615 76,270 79,425
Extraordinary loss from early extinguishment
of debt, net of tax benefit (12,156)
------------ ------------ ------------ ------------
Net Income 39,286 14,615 76,270 67,269
Less: Preferred Dividends 4,885 4,885 9,770 9,770
------------ ------------ ------------ ------------
Available to Common Shareholders $ 34,401 $ 9,730 $ 66,500 $ 57,499
============ ============ ============ ============
Basic and Diluted Earnings Per Share
Continuing Operations $ 0.25 $ 0.07 $ 0.49 $ 0.37
Discontinued Operations $ 0.15
Extraordinary loss $ (0.09)
------------ ------------ ------------ ------------
$ 0.25 $ 0.07 $ 0.49 $ 0.43
============ ============ ============ ============
See notes to consolidated financial statements.
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
March 31
-------------------------------------
1998 1997
-------------------------------------
Operating Activities
Income from continuing operations before extraordinary loss $ 76,270 $ 59,274
Additions (deductions) to reconcile income from continuing
operations before extraordinary loss to net cash
provided by operating activities of continuing operations
Depreciation 66,126 50,418
Amortization 32,277 22,730
Provisions for losses on accounts receivable 14,111 11,339
Provision for deferred taxes 31,000 30,000
Writeoff of fixed assets related to transformation 2,157 23,311
Changes in operating assets and liabilities, net of effects from
acquisitions and divestitures:
Increase in accounts receivable (53,320) (82,394)
Increase in inventories (48,197) (81,428)
Increase in prepaid expenses (15,251) (34,154)
Increase in accounts payable, deferred
revenues and accrued expenses 965 47,907
Miscellaneous (4,855) 1,372
-------------- -------------
Net cash provided by operating activities of continuing operations 101,283 48,375
Net cash provided by operating activities of
discontinued operations 24,176
-------------- -------------
Net cash provided by operating activities 101,283 72,551
Investing activities
Proceeds from the sale of property and equipment 12,215 19,106
Payments received on long-term receivables 3,792 4,999
Payments made on deferred liabilities (5,180) (13,442)
Cost of companies acquired, net of cash acquired (39,859) (99,856)
Expenditures for property and equipment (67,351) (32,557)
Expenditures for equipment on operating leases (42,883) (44,819)
Purchase of miscellaneous assets (3,015) (9,509)
Finance subsidiaries receivables - additions (728,789) (741,735)
Finance subsidiaries receivables - collections 379,240 303,913
-------------- -------------
Net cash used in investing activities of continuing operations (491,830) (613,900)
Net cash used in investing activities of discontinued operations (38,058)
-------------- -------------
Net cash used in investing activities (491,830) (651,958)
Financing activities
Payments of short-term borrowings, net (149,799) (131,380)
Proceeds from issuance of long-term debt 259,333 39,878
Proceeds from option exercises and sale of treasury shares 15,584 33,134
Proceeds from sale of finance subsidiaries lease receivables 52,271 51,407
Proceeds from discontinued operations 553,183
Long-term debt repayments (8,190) (316,784)
Finance subsidiaries debt - additions 399,600 427,688
Finance subsidiaries debt - repayments (155,000) (76,000)
Dividends paid (20,523) (33,815)
Purchase of treasury shares (567) (2,415)
-------------- -------------
Net cash provided by financing activities of continuing operations 392,709 544,896
Net cash provided by financing activities of discontinued operations 13,882
-------------- -------------
Net cash provided by financing activities 392,709 558,778
-------------- -------------
Net increase (decrease) in cash 2,162 (20,629)
Cash at beginning of year 21,341 46,056
-------------- -------------
Cash at end of period $ 23,503 $ 25,427
============== =============
See notes to consolidated financial statements.
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
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 accruals) 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 for the year ended September 30, 1997.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Note 2: Debt
On January 16, 1998, the Company's credit agreement with several
banks was amended to increase the amount available from $400 million to $600
million and to extend the termination to January 16, 2003. There were no other
significant changes to the terms of the agreement.
On October 27, 1997, the Company completed a $250 million
underwritten public debt offering consisting of $125 million 6.75% notes due
November 1, 2004 and $125 million 7.3% notes due November 1, 2027. The 6.75%
notes were sold at a discount to yield 6.794% and carry a make-whole call
provision with a five basis-points premium. The 7.3% notes were also sold at a
discount to yield 7.344% and carry a make-whole call provision with a 15
basis-points premium. The proceeds of the offering were used to repay short-term
borrowings.
Note 3: Discontinued Operations
Discontinued operations of the Company represent the operations of
Unisource Worldwide, Inc. ("Unisource"), which was spun off as a separate public
company on December 31, 1996. The results of discontinued operations, included
in the Company's results of operations for the six months ended March 31, 1997,
are as follows (in thousands):
Three Months Ended
December 31, 1996
Revenues $1,728,533
==========
Income before taxes $ 34,743
Tax expense 14,592
----------
Net income $ 20,151
==========
In December 1996, Unisource repaid $553.5 million of intercompany debt
outstanding with the Company and the Unisource stock was distributed to IKON
shareholders. Equity of the Company was reduced by $952.3 million, which
represented the equity of Unisource at December 31, 1996.
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
MARCH 31, 1998
Note 4: Extraordinary Loss on Early Extinguishment of Debt
On December 2, 1996, Unisource borrowed under its new credit facility
to repay $553.5 million of intercompany debt with the Company. The Company
prepaid debt in the amount of $514 million from these funds. Early repayment of
this debt resulted in certain prepayment penalties. Total prepayment penalties
of $18.7 million and related tax benefits of $6.5 million are reflected as an
extraordinary loss on early extinguishment of debt on the Statement of Income
for the six months ended March 31, 1997.
Note 5: Transformation Costs
In September 1995, the Company announced its transformation program to
change its organization into a more cohesive and efficient network by building a
uniform information technology system and implementing best practices for
critically important management functions throughout the IKON companies. In
March 1997, the Company announced that it was accelerating the transformation
program. As a result, the Company began to separately disclose these costs as a
component of operating expenses on the Statement of Income. The Company expects
to substantially complete the transformation program by the end of fiscal 1998.
The transformation involves a variety of activities which the Company believes
will significantly lower administrative costs and improve gross margins through
the creation of marketplace-focused field operations with greater attention to
customer sales and service. These activities include consolidating purchasing,
inventory control, logistics and other activities into thirteen customer service
centers in the U.S., establishing a single financial processing center, building
a common information technology system, adopting a common name and common
benefit programs. Transformation costs in the first six months of fiscal 1998 of
$39.7 million relate principally to severance and other employee-related costs,
including temporary labor ($28.7 million), facility consolidation costs,
including lease buyouts and write-offs of leasehold improvements ($6.7 million)
and technology conversion costs ($4.3 million). Transformation costs of $75.5
million for the first six months of fiscal 1997 consist primarily of severance
and other employee-related costs, including temporary labor and costs related to
consultants assisting in the transformation ($26.5 million), facility
consolidation costs, including lease buyouts and write-offs of leasehold
improvements ($7.8 million), technology conversion costs, including write-off of
the SAP computer platform pilot ($30.9 million) and costs incurred to adopt the
IKON Office Solutions name worldwide ($10.3 million).
Note 6: Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations (in thousands):
For the fiscal quarter ended 3/31/98 3/31/97
Numerator:
Income from continuing operations $ 39,286 $ 14,615
Preferred stock dividends 4,885 4,885
------------- ------------
Numerator for continuing operations
basic earnings per share - income
available to common shareholders 34,401 9,730
Effect of dilutive securities:
Convertible loan notes 77 81
------------- ------------
Numerator for continuing operations
diluted earnings per share - income
available to common shareholders
after assumed conversions $ 34,478 $ 9,811
============= ============
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
MARCH 31, 1998
Note 6: Earnings Per Share (continued)
Denominator:
Weighted average shares 134,853 134,797
Contingently issuable shares 121
------------- ------------
Denominator for basic earnings per
share - weighted average shares 134,974 134,797
Effect of dilutive securities:
Additional contingently issuable shares 141
Employee stock options 929 1,461
Convertible loan notes 258 287
------------- ------------
Dilutive potential common shares 1,328 1,748
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 136,302 136,545
============= ============
Basic earnings per share from
continuing operations $0.25 $0.07
===== =====
Diluted earnings per share from
continuing operations $0.25 $0.07
===== =====
For the six months ended 3/31/98 3/31/97
Numerator:
Income from continuing operations $ 76,270 $ 59,274
Preferred stock dividends 9,770 9,770
------------- ------------
Numerator for continuing operations
basic earnings per share - income
available to common shareholders 66,500 49,504
Effect of dilutive securities:
Convertible loan notes 155 166
------------- ------------
Numerator for continuing operations
diluted earnings per share - income
available to common shareholders
after assumed conversions $ 66,655 $ 49,670
============= ============
Denominator:
Weighted average shares 134,284 133,723
Contingently issuable shares 60
------------- ------------
Denominator for basic earnings per
share - weighted average shares 134,344 133,723
Effect of dilutive securities:
Additional contingently issuable shares 202
Employee stock options 845 1,504
Convertible loan notes 258 259
------------- ------------
Dilutive potential common shares 1,305 1,763
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 135,649 135,486
============= ============
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
MARCH 31, 1998
Note 6: Earnings Per Share (continued)
Basic earnings per share from
continuing operations $0.49 $0.37
===== =====
Diluted earnings per share from
continuing operations $0.49 $0.37
===== =====
Options to purchase 2,074,130 shares of common stock at $32.66 per
share to $62.10 per share were outstanding during the second quarter of fiscal
1998 but were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
of the common shares and, therefore, the effect would be antidilutive.
The Company's Series BB conversion preferred stock is excluded from the
diluted calculation because the effect of adding 9,682,144 shares and deleting
the preferred dividends to reflect assumed conversion would be antidilutive. In
accordance with the terms of the Series BB preferred stock, the Company expects
to convert the Series BB preferred stock to common stock effective October 1,
1998.
Item 2: Management's Discussion and Analysis of Results of Operations and
Financial Condition and Liquidity
Operations of the Company consist of IKON, which sells, rents and
leases photocopiers, digital printers and other automated office equipment for
use in both traditional and integrated office environments. IKON also provides
outsourcing and imaging services and offers consulting, design, computer
networking and technology training for the networked office environment.
Results of Operations
The discussion of the results of operations reviews the continuing
operations of the Company as contained in the Consolidated Statements of Income.
Three and Six Months Ended March 31, 1998
Compared with the Three and Six Months Ended March 31, 1997
Revenues and income before taxes for the second quarter and
year-to-date of fiscal 1998 compared to the second quarter and year-to-date of
fiscal 1997 were as follows:
Three Months Ended Six Months Ended
March 31 % March 31 %
1998 1997 Change 1998 1997 Change
(in millions)
REVENUES $1,439 $1,278 12.6% $2,813 $2,418 16.3%
====== ====== ====== ======
INCOME BEFORE TAXES:
Operating income, excluding
transformation costs $104.6 $102.9 1.7% $206.6 $198.6 4.0%
Transformation costs (20.2) (61.2) (39.7) (75.5)
------ ------ ----- -----
Operating income 84.4 41.7 166.9 123.1
Interest expense (16.2) (11.6) (33.3) (19.8)
------ ------ ----- -----
$68.2 $30.1 126.6% $133.6 $103.3 29.3%
===== ===== ====== ======
SECOND QUARTER:
The Company's second quarter revenues increased $161 million, or 12.6%
over the second quarter of fiscal 1997, of which $98 million relates to current
and prior year acquisitions and $63 million to base companies' internal growth.
The Company's worldwide internal revenue growth was 5% in the second quarter of
fiscal 1998 compared to 9% in the first quarter of fiscal 1998. Although
revenues were ahead of the same period last year, second quarter fiscal 1998
results fell short of expectations. The shortfall is isolated to the Company's
North American copier business and is the result of three major factors - 1)
issues related to the ongoing transformation process; 2) competitive pricing
pressures which have reduced margins on the equipment side of the business; and
3) product rationalization -- focusing on the products that provided the best
solutions for our customers. Given these issues, the expected internal revenue
growth rate for the remainder of the fiscal year has been revised downward to 5%
to 7%. Revenues from the Company's operations outside the U.S. were $190 million
for the second quarter of fiscal 1998 compared to $167 million for the same
period of the prior fiscal year. The Company's European operations accounted for
$16 million of the increase, primarily from acquisitions, while Canadian
revenues increased $4 million as a result of acquisitions, net of negative
internal growth in the second quarter. Other foreign operations revenue
increased $3 million in the second quarter of fiscal 1998 compared to the second
quarter of fiscal 1997.
The Company's operating income increased by $42.7 million compared to
the prior year's quarter. However, excluding transformation costs, operating
income increased 1.7% to $104.6 million for the second quarter of fiscal 1998
compared to $102.9 million in the prior year. Finance subsidiaries contributed
21.3% of the Company's operating income before transformation costs in the
second quarter of fiscal 1998 compared to 13.5% in the second quarter of fiscal
1997. The Company's operating margins were 5.9% in the second quarter of fiscal
1998, compared to 3.3% in the second quarter of fiscal 1997. Excluding
transformation costs, the Company's operating margins were 7.3% in the second
quarter of fiscal 1998, compared to 8.1% in the second quarter of fiscal 1997.
Excluding transformation costs, the Company's second quarter fiscal 1998
operating margins were consistent with the last two quarters.
Costs associated with the Company's transformation program decreased
$41 million in the second quarter of fiscal 1998 compared to the second quarter
of fiscal 1997. Second quarter 1997 transformation costs included the write-off
of capitalized costs related to the abandoned SAP computer pilot program of $23
million and costs incurred to adopt the IKON Office Solutions name worldwide of
$9 million. Other technology conversion costs, severance and other employee
costs and facility consolidation costs decreased $9 million in the second
quarter of fiscal 1998 compared to the second quarter of fiscal 1997.
Operating income from foreign operations was $10.6 million for the
second quarter of fiscal 1998, down $1.6 million from $12.2 million for the
second quarter of fiscal 1997. European operations increased by $3.8 million in
the second quarter, while Canadian operating income decreased $6.4 million, the
impact of negative internal revenue growth. Other foreign operations increased
$1.0 million in the second quarter of fiscal 1998. There was no material effect
of foreign currency exchange rate fluctuations on the results of operations in
the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997.
SIX MONTHS:
The Company's revenues for the six months ended March 31, 1998
increased $395 million, or 16.3% over the first six months of fiscal 1997, of
which $227 million relates to current and prior year acquisitions and $168
million to base companies' internal growth. Revenues from the Company's
operations outside the U.S. were $367 million for the first six months of fiscal
1998 compared to $314 million for the same period of the prior fiscal year. The
Company's European operations accounted for $30 million of the increase, while
Canadian revenues increased $18 million, both primarily from acquisitions. Other
foreign operations revenue increased $5 million in the first six months of
fiscal 1998 compared to the first six months of fiscal 1997.
For the six months ended March 31, 1998, the Company's operating income
increased by $43.8 million compared to the prior year. However, excluding
transformation costs, operating income increased 4.0% to $206.6 million for the
first six months of fiscal 1998 compared to $198.6 million in the prior year.
Finance subsidiaries contributed 21.0% of the Company's operating income before
transformation costs in the first six months of fiscal 1998 compared to 14.3% in
the first six months of fiscal 1997. The Company's operating margins were 5.9%
in the first six months of fiscal 1998, compared to 5.1% in the first six months
of fiscal 1997. Excluding transformation costs, the Company's operating margins
were 7.4% in the first six months of fiscal 1998, compared to 8.2% in the first
six months of fiscal 1997.
Costs associated with the Company's transformation program decreased
approximately $36 million in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997. The first six months of fiscal 1997
transformation costs included the write-off of capitalized costs related to the
abandoned SAP computer pilot program of $23 million and costs incurred to adopt
the IKON Office Solutions name worldwide of $10 million. Other technology
conversion costs, severance and other employee costs and facility consolidation
costs decreased a net $3 million in the first six months of fiscal 1998 compared
to the same period in the prior year.
Operating income from foreign operations was $23.2 million for the six
months ended March 31, 1998, up $1.1 million from the prior year's six month
period. European operations increased by $5.2 million in the first six months,
while Canadian operating income decreased $5.9 million and other foreign
operations increased $1.8 million in the first six months of fiscal 1998. There
was no material effect of foreign currency exchange rate fluctuations on the
results of operations in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997.
Acquisitions
In the second quarter of fiscal 1998, the Company completed 10
acquisitions, bringing total year-to-date acquisitions to 27. Of the 27
companies acquired this fiscal year, seven were outsourcing and imaging
companies, nine were systems integration companies and 11 were traditional
copier companies. The focus of acquisition activity for fiscal 1998 will be to
continue to build a presence in Europe and expand capability in technology
services and outsourcing/imaging.
Other
Interest expense increased $4.6 million in the second quarter of fiscal
1998 and $13.5 million year-to-date. The increased expense is due to higher debt
levels from investment in working capital, acquisitions and the share repurchase
program which began in the third quarter of fiscal 1997.
Income before taxes increased by $38.1 million in the second quarter
and $30.3 million year-to-date over the prior year, primarily reflecting the
combined result of internal revenue growth from base companies, along with
earnings contributed by acquisitions, plus a decrease in transformation costs,
net of increased interest costs. The effective income tax rate for the first six
months of fiscal 1998 is 42.9% compared with 42.6% for the comparative period in
fiscal 1997.
The Company used the proceeds of a December 2, 1996 intercompany debt
repayment of $553.5 million from its discontinued operation, Unisource, to
prepay $514 million of corporate debt. The Company recorded an extraordinary
charge of $12.2 million after tax ($18.7 million pretax) in the first quarter of
fiscal 1997 primarily for prepayment penalties relating to its early
extinguishment of certain corporate debt.
Earnings per common share, assuming dilution, increased from $.07 per
share for the second quarter of fiscal 1997 to $.25 per share for the second
quarter of fiscal 1998. Excluding transformation costs, earnings per common
share, assuming dilution, decreased 5.4% from $.37 per share for the second
quarter of fiscal 1997 to $.35 per share in the second quarter of fiscal 1998.
Year-to-date, earnings per share from continuing operations, assuming dilution,
increased from $.37 per share for the first six months of fiscal 1997 to $.49
per share for the first six months of fiscal 1998. Excluding transformation
costs, year-to-date earnings per share from continuing operations, assuming
dilution, decreased 6.8% from $.73 per share for the first six months of fiscal
1997 to $.68 per share in the first six months of fiscal 1998. Including income
from discontinued operations and the extraordinary loss on the extinguishment of
debt, year-to-date earnings per share, assuming dilution, of the Company were
$.79 for the first six months of fiscal 1997.
Financial Condition and Liquidity
Net cash provided by operating activities for the first six months of
fiscal 1998 was $101 million. During the same period, the Company used $492
million in cash for investing activities, which included net finance subsidiary
activity of $350 million, acquisition activity at a cash cost of $40 million and
capital expenditures for property and equipment of $67 million and capital
expenditures for equipment on operating leases of $43 million. Investing
activities were funded by cash from operations and financing activities. Cash
provided by financing activities includes $101 million net increase in corporate
debt and $245 million increase in finance subsidiaries debt. Debt, excluding
finance subsidiaries, was $917 million at March 31, 1998, an increase of $99
million from the debt balance at September 30, 1997 of $818 million. The debt to
capital ratio, excluding finance subsidiaries, was 36.6% at March 31, 1998
compared to 35.6% at September 30, 1997. The Company has established goals to
reduce working capital and related debt levels.
On January 16, 1998, the Company amended its December 16, 1996 credit
agreement to increase the borrowing limit from $400 million to $600 million. As
of March 31, 1998, short-term borrowings supported by the agreement totaled $101
million. In October 1997, the Company completed a $250 million two tranche
underwritten public offering consisting of $125 million 6.75% notes due November
1, 2004 and $125 million 7.3% notes due November 1, 2027. The 6.75% notes were
sold at a discount to yield 6.794% and carry a make-whole call provision with a
five basis-points premium. The 7.3% notes were also sold at a discount to yield
7.344% and carry a make-whole call provision with a 15 basis-points premium. The
proceeds of the offering were used to repay short-term borrowings. The Company
also has $700 million available for either stock or debt offerings under its
shelf registration statement.
Finance subsidiaries debt grew by $244.6 million from September 30,
1997, a result of increased leasing activity. During the six months ended March
31, 1998, the U.S. finance subsidiary issued an additional $193.5 million under
its medium term notes program, net of repayments. At March 31, 1998, $1.7
billion of medium term notes were outstanding with a weighted interest rate of
6.5%, while $1.3 billion remains available under this program. Under its $275
million asset securitization programs, the U.S. finance subsidiary sold $52.3
million in direct financing leases during the first six months of fiscal 1998,
replacing those leases liquidated and leaving the amount of contracts sold
unchanged. On April 30, 1998, the Company entered into a CN$175 million asset
securitization agreement for direct financing lease receivables of its Canadian
finance subsidiary. CN$70 million (approximately $49 million) of direct
financing leases were sold under this agreement on April 30, 1998.
The Company filed shelf registrations for 10 million shares of common
stock in April 1997 and 5 million shares of common stock in March 1996. Shares
issued under these registration statements are being used for acquisitions.
Approximately 5.3 million shares have been issued under these shelf
registrations through March 31, 1998, leaving 9.7 million shares available for
issuance.
On April 17, 1997, the Company announced that it may repurchase from
time to time as much as five percent of the outstanding IKON common stock in
open market transactions. Through fiscal 1997, the Company repurchased 4.4
million common shares for $109.7 million. There were no shares repurchased under
this program during the first six months of fiscal 1998.
The Company believes that its operating cash flow together with unused
bank credit facilities and other financing arrangements will be sufficient to
finance current operating requirements including capital expenditures,
acquisitions, dividends, stock repurchases and costs associated with the
Company's transformation program. For the remainder of the fiscal year, the
Company expects to incur $25 million to $40 million of expense to substantially
complete its transformation initiatives.
Forward-Looking Information
This document contains, and other materials filed or to be filed by the
Company with the Commission which are incorporated by reference herein, as well
as information included in oral statements or other written statements made or
to be made by the Company, contain or will contain or include, disclosures which
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the 1934 Exchange Act.
Such forward-looking statements address, among other things, strategic
initiatives (including plans for enhancing the Company's business through new
acquisitions, information technology systems, sales strategies, market growth
plans, margin enhancement initiatives, capital expenditures and financing
sources). Such forward-looking information is based upon management's current
plans or expectations and is 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. These uncertainties and risks include,
but are not limited to, those relating to successfully managing an aggressive
program to acquire and integrate new companies, including companies with
technical services and products that are relatively new to the Company, and also
including companies outside the U.S., which present additional risks relating to
international operations; risks and uncertainties relating to conducting
operations in a competitive environment; delays, difficulties, technological
changes, management transitions and employment issues associated with a
large-scale transformation project; debt service requirements (including
sensitivity to fluctuations in interest rates); and general economic conditions.
As a consequence, current plans, anticipated actions and future financial
condition and results may differ from those expressed in any forward-looking
statements made by or on behalf of the Company.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On January 22, 1998, the Company held its annual meeting of
shareholders, at which nine directors were elected to hold office until the
election of their successors:
For Withheld
James R. Birle 102,514,041 9,930,874
Philip E. Cushing 102,399,043 10,045,872
Kurt E. Dinkelacker 102,452,665 9,992,250
William F. Drake, Jr. 102,484,802 9,960,113
Thomas P. Gerrity 102,475,176 9,969,739
Frederick S. Hammer 102,421,194 10,023,721
Barbara Barnes Hauptfuhrer 102,500,741 9,944,174
Richard A. Jalkut 102,499,819 9,945,096
John E. Stuart 102,232,220 10,212,695
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
On March 6, 1998, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, as an exhibit to the
report, the effect of adoption of SFAS 128 on the Annual Report
on Form 10-K for the fiscal year ended September 30, 1997 and the
related restatement of earnings per share therein, so that such
information may be incorporated by reference into Registration
Statements filed on Forms S-3 and S-8 filed subsequent to the 8-K
filing.
On April 24, 1998, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, the press release dated
April 22, 1998, which reported its earnings for the fiscal
quarter ended March 31, 1998, provided earnings estimates for the
remainder of the registrant's 1998 fiscal year and provided
additional information regarding its business, acquisitions and
transformation process.
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 14, 1998 /s/ Michael J. Dillon
Michael J. Dillon
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibit Number
(27) Financial Data Schedule