Exhibit 13
This year's annual report brings with it an added perspective on IKON: a
marketing brochure we call IKON Evolving. It's a snapshot of a responsive and
forward-looking company--one whose positioning grows directly from the
strategies you'll find outlined in this report.
[GRAPHIC APPEARS HERE]
Financial Highlights
Fiscal Year Ended September 30 (in millions, except per share data) 2000/1/ 1999/2/
- ------------------------------------------------------------------------------------------------------
Operating Results/3/
Revenues $ 5,447 $ 5,436
Operating income 148 151
Income from continuing operations before taxes on income
and extraordinary gain 82 79
Diluted earnings per common share from continuing operations 0.18 0.23
Cash dividends per common share 0.16 0.16
Weighted average diluted common shares outstanding 148 149
Financial Data
Depreciation and amortization 195 197
Capital expenditures 159 156
Working capital 204 186
Total assets 6,363 5,801
Long-term debt/4/ 783 814
Total debt/4/ 826 859
Shareholders' equity 1,441 1,461
Key Ratios
Return on common shareholders' equity 2.0% 2.3%
Total debt to capitalization/4/ 36.4% 37.0%
Net working capital as a percent of revenues/5/ 7.0% 7.1%
At Year-end
Actual common shares outstanding 144 149
Common stock price per share $ 3.9375 $10.6875
1 2000 reflects restructuring and asset impairment charges.
2 1999 reflects shareholder litigation settlement charge.
3 From continuing operations.
4 Excludes finance subsidiaries.
5 Continuing operations excluding finance subsidiaries and corporate working
capital.
Report to Shareholders
James J. Forese
Chairman and Chief Executive Officer
IKON Office Solutions
[GRAPHIC APPEARS HERE]
Fellow Shareholders:
Throughout fiscal 2000 , IKON achieved strong results in a number of areas vital
to our future: we gained market share through strong equipment revenues, further
enhanced our product and service portfolio, and continued progress in improving
our fixed cost structure. However, the year was also marked by a number of
challenges, including a rapid shift in demand for our technology hardware and
services resulting in significant losses in those divisions. In addition, we
began to see a number of unprecedented changes take place within our industry as
our competitors attempted to redirect their strategies to capture the changing
technical environment we operate in today. This more competitive environment
created increased pressure on gross margins in our equipment sales and service
operations.
While external factors present an immediate challenge for IKON, long term
we believe they represent opportunity. Our balance sheet is sound, we have
strategies in place to capture new market opportunities, and the growing
dependence on networked and digital technology in today's operating environment
is an advantage to IKON's status as a true solutions provider.
IKON's revenue of $5.4 billion for fiscal 2000 was essentially flat
compared to the previous year as we continued to reset the revenue baseline for
more profitable growth. Our free cash flow exceeded $200 million, beating our
target for the year - an achievement that will help fuel our investments in new
capabilities that can further sharpen our competitive edge. For the year, IKON
generated net income of $29.1 million, or $.20 per share, including
restructuring charges and special gains. Excluding these charges and gains, the
Company generated net income of $93.1 million, or $.63 per share.
2
As I stated in this letter last year, my main focus since I became IKON's
Chief Executive Officer in July 1998 has been to improve the quality and
consistency of our operating results and enable this Company to capitalize on
the synergies of its size and scope. Our steady progress and continued execution
of our strategies will enable IKON to build an increasingly stronger foundation
to win market share at competitive prices, and to deliver new, higher margin
products and services that leverage IKON's strength as an integrated, services-
based organization. The changes taking place in our operating environment today
also underscore the importance of our commitment to continue investments that
streamline our cost structure, as well as the need to develop new offerings and
relationships that leverage IKON's core competencies.
In fiscal 2001, we will continue to work hard to overcome our
disappointments and build on the many achievements we made in evolving IKON into
a globally competitive force in the business communications industry.
Our technology services operations, which accounted for a loss of more than
$.20 per share in fiscal 2000, are already implementing changes that better
leverage our network technology resources and IKON's vast customer base.
Beginning October 1, 2000, our network integration resources were merged into
IKON North America to better meet our customers' growing needs for more
sophisticated solutions. Additionally, we have reorganized our other technology
offerings into four areas for greater customer focus and operational
accountability: e-Business- which operates under the new name, Sysinct;
Education; Telecommunications Services; and Business Imaging. We believe these
technology resources will prove increasingly valuable in differentiating IKON
from its competitors.
[GRAPHIC APPEARS HERE] Opening new markets: As a provider of products and
services that help businesses communicate, IKON is
selling much more than equipment. New areas
include full-service outsourcing, network
printing, expansion in the production environment,
and web-based document management.
3
As we go forward, IKON must be a leader in providing innovative solutions
and services that enable our customers to communicate business information more
effectively. In financial terms, this means revenue growth through increased
market share and expanded market opportunities, and stronger operating margins
through improved productivity, increased service revenues, and lower fixed
costs.
To this end, we will continue to execute on key strategies designed to
leverage IKON's strengths and position the company for long-term success.
Developing our infrastructure. Infrastructure investments are necessary for
IKON to remain cost competitive and open new avenues for growth. Our
productivity initiatives, such as centralized purchasing, shared service
centers for key administrative functions, and centralized training and
recruiting, made a great contribution to IKON in fiscal 2000, allowing us
to reinvest in our sales and service organizations and in competitive
differentiators such as IKON Online, our e-commerce solution. In addition,
our infrastructure initiatives have improved asset management, including
increased inventory turns, better management of our receivables and
payables, and improved quality of the $2.8 billion lease receivable
portfolio of IOS Capital, IKON's captive leasing subsidiary.
In fiscal 2001, we will continue to enhance our infrastructure by working
with Oracle to fully web-enable IKON through implementation of Oracle's
complete suite of customer relationship management software. In addition,
we will continue to leverage our successful e-commerce initiative, IKON
Online, to improve productivity for our sales and service organization, as
well as for our customers, allowing them to order equipment and supplies
through an online e-catalog as well as perform other administrative
activities. And we will continue to improve our centralized supply chain
operation, focusing on logistics and controls as well as improved asset
management. Essentially, we are revamping our internal systems to leverage
our size and make it easier for customers to do business with IKON.
Building organizational synergy and strength. We have made great progress
in aligning our entire organization, including equipment sales,
outsourcing, and technical support, to leverage existing customer
relationships as well as gain new customers.
During fiscal 2000, we increased our sales force by more than 600 sales
professionals and achieved standardization within our service force, which
adds further strength to our core equipment business.
4
Fiscal 2001 will be devoted to the development of synergy among all of these
units, including the merger of our network integration resources into IKON North
America which commenced at the beginning of this fiscal year. We will also
continue to strengthen IKON through our expanded internal training program,
called IKON University. Today, the program goes beyond sales professionals, and
now also offers comprehensive training to management and service technicians.
Leveraging expanded alliances. Through expanded strategic alliances and
partnerships with leading technology providers, IKON is building the best array
of products and services in the business. During fiscal 2000, we leveraged our
relationship with Canon and Ricoh by launching the Ricoh Aficio 850 and the
Canon imageRUNNER 110, further enhancing our offerings in the production
environment. In addition, we developed alliances with technology companies such
as EFI, Adobe and T/R Systems.
In fiscal 2001, we will be focused on the launching of our network page printer
strategy, which will include our strategic alliance with Hewlett-Packard
announced in October 2000. Through this relationship, IKON added service and
distribution for HP's network printer line to our already strong and growing
portfolio of leading vendors to better meet our customer's requirements in the
higher-end printer space.
Opening new markets with a broader range of solutions. Our infrastructure
savings, operational synergies, and strategic alliances allow IKON to continue
to invest in new markets and new areas of business to help our customers meet
the ever-changing demands of communicating business information. During fiscal
2000, for example, IKON entered the production market for the first time with
the Canon imageRUNNER110 and the Ricoh Aficio 850. Also in fiscal 2000, we
announced Digital Express(R) 2000, our web-based e-procurement solution which
allows customers to better manage documents through our network of digital print
production hubs.
[GRAPHIC APPEARS HERE] Developing our infrastructure: A national
sales model, centralized purchasing, shared
service centers, and centralized training and
recruiting lead a list of recent achievements
designed to serve customers better and to
control costs.
5
Some of IKON's greatest opportunities are in the area of e-procurement. The
importance of this offering to the market is simple--industry analysts are
in accord that the transition to e-procurement will be rapid over the next
few years in all areas of business, which is why IKON has committed to
further investment in this area for fiscal 2001. In addition, we look
forward to continued development of a broader range of integrated solutions
through relationships with industry leaders in digital technology and
document management.
Looking ahead, we believe our sound financial condition and the work we
have done to position IKON as a true solutions provider will benefit us while
our industry continues to face unparalleled turmoil and financial uncertainty.
Throughout the next fiscal year, we will focus on the continued execution of our
strategies, as well as on sustaining and increasing IKON's operating momentum.
We have made critical investments in both products and people over the last
several years, increasing the productivity of our sales and service
organizations, and I expect these investments to continue to drive top-line
growth in fiscal 2001. Fueled initially by the placement of higher-end digital
equipment, revenue growth should expand into our service business as these
higher-end digital placements generate increased usage and more profitable
revenue streams to fund IKON's strategic initiatives.
[GRAPHIC APPEARS HERE] Building organizational synergy: The scope of
IKON's business is truly expansive. To help
ensure that all our efforts combine
effectively, we have integrated our major
areas of domestic operation. Equipment sales
and service, outsourcing, and technology
services are now united under IKON North
America.
6
[GRAPHIC APPEARS HERE] Expanding our products and services
portfolio: Highlights among our many new
offerings include the Canon imageRUNNER 110
and Ricoh Aficio 850, which together position
IKON strongly in the high-volume segments for
the first time.
Also of vital importance to our performance in fiscal 2001 will be our
continued focus on asset management. Cash for reinvestment constitutes the
lifeblood of IKON in terms of this Company's ability to develop the new
solutions and customer support needed for the digital age. We have a strong
recurring revenue base to help us generate cash and we will endeavor to use
those financial resources wisely - renewing and expanding our capabilities as we
take advantage of new growth opportunities to stay fully aligned with
marketplace trends.
At IKON, we believe that now is our time. We have a growing digital
equipment base in higher-end, more profitable segments; we have a growing array
of market-driven, value added services; we have the financial resources needed
to acquire additional capabilities and enhance our skills development as needed;
and we have the opportunity, technical resources, and commitment to further
strengthen our organizational productivity. However, going into 2001, we expect
competitive pressures to increase; and, as a result, we believe that it makes
little sense to be anything but conservative about near-term prospects. At the
same time, I believe it makes sense not only to be optimistic about IKON's long-
term future, but also to recognize that there has perhaps never been a better
time for IKON to take advantage of the marketplace opportunities before us.
Speaking for all my colleagues at IKON, I would like to thank both our
shareholders and our customers for their ongoing trust and loyalty.
/s/ James J. Forese
James J. Forese
Chairman and Chief Executive Officer
7
Table of Contents
Financials
9 Management's Responsibility for Financial Reporting
9 Report of Independent Accountants
10 Financial Review
18 Consolidated Financial Statements
37 Quarterly Financial Summary
38 Corporate Financial Summary
8
Management's Responsibility
for Financial Reporting
The management of IKON Office Solutions, Inc. is responsible for the preparation
and presentation of the financial statements and related financial information
included in this annual report. The financial statements include amounts that
are based on management's best estimates and judgments. These statements have
been prepared in conformity with generally accepted accounting principles
consistently applied and have been audited by PricewaterhouseCoopers LLP,
independent accountants.
Management is also responsible for maintaining systems of internal
accounting controls that are designed to provide reasonable assurance as to the
integrity of the financial records and the protection of corporate assets. IKON
Office Solutions, Inc. supports and manages an active program of auditing to
monitor the proper functioning of its systems. The reports issued under this
program, as well as comment letters from PricewaterhouseCoopers LLP, are
reviewed regularly by the Audit Committee of the Board of Directors, which is
composed of four directors who are not employees of the Company. The Audit
Committee meets periodically with PricewaterhouseCoopers LLP and management to
review audit scope, timing and results.
/s/ James J. Forese
James J. Forese
Chairman and Chief Executive Officer
/s/ William S. Urkiel
William S. Urkiel
Senior Vice President and Chief Financial Officer
Report of Independent Accountants
To the Board of Directors and Shareholders,
IKON Office Solutions, Inc.
In our opinion, the accompanying consolidated balance sheet as of September 30,
2000 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of IKON Office Solutions, Inc. and its subsidiaries at
September 30, 2000, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of September 30, 1999 and for each of the two years in the period
then ended were audited by other independent accountants whose report dated
October 25, 1999, except for the first paragraph of note 8, as to which the date
is November 24, 1999 and the third paragraph of note 4, as to which the date is
December 9, 1999 expressed an unqualified opinion on those statements.
/s/ PricewaterhouseCooper LLP
Philadelphia, Pennsylvania
December 8, 2000
9
Financial Review
IKON Office Solutions, Inc. ("IKON" or the "Company") is a leading provider 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 outsourcing solutions, as well as
network design and consulting, e-business development, telecommunications
services and technology training. References herein to "we", "us" or "our" refer
to IKON and its subsidiaries unless the context specifically requires otherwise.
We have locations throughout the United States, Canada, Mexico and Europe.
Results of Operations
This discussion reviews the results of operations of the Company as reported in
the consolidated statements of operations. All dollar and share amounts are in
thousands.
Fiscal 2000 Compared to Fiscal 1999
Our fiscal 2000 revenues, which include net sales, service and rentals and
finance income, increased by $11,343, or 0.2%, compared to fiscal 1999.
Excluding a $14,333 asset securitization gain in fiscal 1999, revenues increased
by $25,676, or 0.5%. This increase was aided by strong growth in office
equipment sales and facilities management due to investments in expanded product
and service offerings, expanded sales coverage and synergies created through the
integration of business lines. These results were partially offset by a decrease
in revenues associated with the closing or downsizing of underperforming or
non-strategic locations as part of restructuring programs announced during the
year.
Net sales, which includes equipment, technology hardware, supplies and
wholesale equipment, increased by $16,626, or 0.6%, compared to fiscal 1999. The
increase resulted primarily from an increase in equipment sales of $138,652, or
8.2%, offset by a decline in technology hardware, supplies and wholesale
equipment revenues of $122,026, or 11.3%, compared to fiscal 1999. Growth in
equipment sales was primarily due to the addition of approximately 600 sales
representatives during fiscal 2000 and strong placements of digital products
concentrated in our focused areas of color and higher-end, segments 3 to 6
equipment. As of September 30, 2000, 88% of our equipment sales were digital,
compared to 69% at September 30, 1999. As a result, our equipment base has
shifted to 23% digital at September 30, 2000, compared to 13% at September 30,
1999. Mitigating the growth in equipment sales was a decline in hardware
revenues in our technology services business due to a shift in customers' buying
patterns for items such as computers and routers, as customers have begun to
purchase these items directly from manufacturers, combined with the effect of
restructuring programs announced during fiscal 2000 on wholesale equipment and
technology hardware revenues.
Service and rental revenue, which includes equipment service, rentals,
outsourcing and technology related services, decreased by $53,491, or 2.3%. The
decrease resulted primarily from the decline in our technology services revenues
and the closure of non-strategic technology and outsourcing sites associated
with restructuring programs announced during fiscal 2000. Technology services
revenues decreased by $37,987, or 16.2%, compared to fiscal 1999. In addition,
service on equipment declined by $24,609, or 2.1%, from the prior year as the
Company undergoes a shift in its equipment base from low-end, analog product to
higher-end, digital product.
Finance income, excluding the $14,333 asset securitization gain in fiscal
1999, increased by $62,451, or 22.1%, compared to fiscal 1999. The increase is
mainly due to growth in our lease portfolio and a shift in the second quarter of
fiscal 2000 from off-balance sheet treatment to on-balance sheet treatment of
the asset securitizations used to finance our captive leasing business.
Gross margins were 37.1%, compared to 38.2% (38.0% excluding the asset
securitization gain) in fiscal 1999. This decrease is the result of the factors
described below.
The gross margin on equipment sales was 33.3%, compared to 33.0% in fiscal
1999. This increase was mainly due to an increase in higher margin digital and
color equipment revenues compared to fiscal 1999 and the positive impact of
productivity initiatives such as centralized purchasing and inventory control,
which were partially offset by competitive pressures on equipment that increased
in the second half of fiscal 2000 and are anticipated to continue throughout the
next fiscal year.
The gross margin on service and rentals decreased to 39.6%, compared to
41.8% in fiscal 1999. This decrease was mainly due to a less favorable revenue
mix from equipment service and nonrecurring expenditures during fiscal 2000
aimed to improve the productivity of the service force, combined with the impact
of fixed costs associated with lower technology services revenues.
The gross margin on finance income decreased to 51.4% from 55.2% in fiscal
1999, excluding the asset securitization gain, mainly due to increased interest
expense resulting from higher average interest rates compared to fiscal 1999.
Selling and administrative expense as a percent of revenue was 32.8%,
compared to 33.5% (33.6% excluding the impact of the $14,333 asset
securitization gain) in fiscal 1999. The decrease was mainly due to a decline in
administrative expense resulting from restructuring programs and productivity
initiatives, such as centralizing certain key functions, offset by increased
selling expenses associated with our investment in expanded sales coverage, and
new products and services, such as the digital, high-volume market.
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and asset
impairment charge (the "first quarter charge") of $105,340 ($78,479 after-tax,
or $0.52 per share on a basic and diluted basis). These actions addressed
under-performance in certain Technology Services, Business Document Services,
and Business Information Services locations as well as the Company's desire to
strategically position these businesses for integration and profitable growth.
Plans included
Ikon Office Solutions, Inc. and Subsidiaries 10
Financial Review
consolidating or disposing of certain under-performing and non-core locations;
implementing productivity enhancements through the consolidation and
centralization of activities in inventory management, purchasing,
finance/accounting and other administrative functions; and consolidating real
estate through the co-location of business units as well as the disposition of
unproductive real estate. In the fourth quarter of fiscal 2000, the Company
determined that some first quarter restructuring initiatives would not require
the level of spending that had been originally estimated, and certain other
initiatives would not be implemented due to changing business dynamics. Based on
the Company's fourth quarter estimates, $15,961 was reversed from the first
quarter charge and the total amount of the charge was adjusted to $89,379
($66,587 after-tax, or $0.45 per share on a basic and diluted basis). Also, in
the fourth quarter of fiscal 2000, the Company announced plans to address the
changing market conditions impacting Technology Services, IKON North America,
and Outsourcing locations and incurred a total pre-tax restructuring and asset
impairment charge (the "fourth quarter charge") of $15,789 ($12,353 after-tax,
or $0.08 per share on a basic and diluted basis).
The pre-tax components of the restructuring and asset impairment charges in
fiscal 2000 were as follows:
First Adjustment to Adjusted Fourth Total
Quarter First Quarter First Quarter Quarter Fiscal 2000
Type of Charge Charge Charge Charge Charge Charges
- --------------------------------------------------------------------------------------------------------
Restructuring Charge:
Severance $ 16,389 $ (1,784) $ 14,605 $ 6,092 $ 20,697
Contractual Commitments 37,403 (14,177) 23,226 7,326 30,552
- --------------------------------------------------------------------------------------------------------
Total Restructuring Charge 53,792 (15,961) 37,831 13,418 51,249
- --------------------------------------------------------------------------------------------------------
Asset Impairment Charge:
Fixed Assets 12,668 12,668 2,371 15,039
Goodwill and Intangibles 38,880 38,880 38,880
- --------------------------------------------------------------------------------------------------------
Total Asset Impairment Charge 51,548 51,548 2,371 53,919
- --------------------------------------------------------------------------------------------------------
Total Charge $105,340 $ (15,961) $ 89,379 $ 15,789 $ 105,168
- --------------------------------------------------------------------------------------------------------
The employees and locations affected by the charges described above were as
follows:
Remaining
Employees Employee Employees to
Affected Terminations Adjustment be Terminated
- -------------------------------------------------------------------------------
First Quarter Terminations 1,938 (1,000) (538) 400
Fourth Quarter Terminations 380 380
Remaining
Sites Sites Sites to
Affected Closed Adjustment be Closed
- -------------------------------------------------------------------------------
First Quarter Closures 24 (18) (2) 4
Fourth Quarter Closures 5 5
11
Financial Review
The actions related to the first quarter and fourth quarter charges are expected
to be completed by the end of the first quarter in fiscal 2001 and the fourth
quarter in fiscal 2001, respectively.
The following presents a reconciliation of the original components of the
pre-tax first quarter restructuring charge to the balance remaining at September
30, 2000, which is included in other accrued expenses on the consolidated
balance sheet:
Balance Adjustment to Balance
September 30, First Quarter Payments First Quarter September 30,
1999 Charge Fiscal 2000 Charge 2000
- ---------------------------------------------------------------------------------------------------
Severance $ -- $16,389 $10,616 $ (1,784) $ 3,989
Contractual Commitments -- 37,403 12,786 (14,177) 10,440
- ---------------------------------------------------------------------------------------------------
Total $ -- $53,792 $23,402 $ (15,961) $ 14,429
- ---------------------------------------------------------------------------------------------------
The following presents a reconciliation of the original components of the
pre-tax fourth quarter restructuring charge to the balance remaining at
September 30, 2000, which is included in other accrued expenses on the
consolidated balance sheet:
Balance Balance
September 30, Fourth Quarter Payments September 30,
1999 Charge Fiscal 2000 2000
- ------------------------------------------------------------------------------------
Severance $ -- $ 6,092 $ 6,092
Contractual Commitments -- 7,326 $ 41 7,285
- ------------------------------------------------------------------------------------
Total $ -- $ 13,418 $ 41 $ 13,377
- ------------------------------------------------------------------------------------
In fiscal 1999, the Company recorded a charge of $101,106 related to the
settlement of our shareholder class action litigation. During fiscal 2000, we
received $17,000 of insurance proceeds related to the shareholder litigation
settlement.
Our operating income, excluding the $105,168 restructuring and asset
impairment charges in fiscal 2000, the $14,333 asset securitization gain in
fiscal 1999 and the shareholder litigation settlement charge and related
insurance proceeds described above, decreased by $1,306 compared to fiscal 1999.
Our operating margin, excluding the special items noted above, decreased from
4.4% in fiscal 1999 to 4.3% in fiscal 2000 due mainly to the lower overall gross
margin offset by decreased selling and administrative expense as compared to
fiscal 1999, as described above.
In fiscal 2000, we sold certain equity securities that were previously held
for investment purposes and recognized a pre-tax gain of $3,739 on the sale.
Interest expense decreased by $1,404 compared to fiscal 1999 as a result of
lower average debt levels, which was partially offset by higher average interest
rates.
Income from continuing operations before income taxes and extraordinary
gain was $81,833 compared to $79,391 in fiscal 1999. Excluding the special items
noted above, income from continuing operations before income taxes and
extraordinary gain increased by $98 compared to fiscal 1999.
The effective income tax rate was 68.3%, compared to 57.4% in fiscal 1999.
The higher rate in fiscal 2000 is due to the impact of non-deductible goodwill
associated with our asset impairment charges. Excluding the effect of the
restructuring and asset impairment charges, insurance proceeds related to our
shareholder litigation settlement, and the gain on the sale of an investment,
the effective income tax rate was 44.0% in fiscal 2000 compared to 47.1% in
fiscal 1999, excluding the asset securitization gain, a benefit related to
restructuring our European leasing operations and the shareholder litigation
charge. The tax rate reduction was primarily due to the recording of benefits
resulting from legislative changes that facilitated utilization of net operating
losses that previously had a full valuation allowance.
In fiscal 2000, we received from an insurance carrier an amount of $3,691
for certain environmental liability coverage and recorded expense of $1,165 for
health benefits of former employees. Both of these items relate to businesses we
had previously recorded as discontinued operations. The resultant net benefit of
$2,526 ($1,415 after-tax) has been recorded as discontinued operations in the
consolidated statement of operations.
In fiscal 2000, we repurchased $10,000 par value of our 7.30% bonds due
November 1, 2027 for $6,951 and recognized an extraordinary gain of $3,049
($1,707 after-tax).
Diluted earnings per common share were $0.20, compared to $0.23 in fiscal
1999. Excluding the after-tax effect of the fiscal 2000 special items described
above and the gain on the asset securitization and shareholder litigation
settlement charge in fiscal 1999, diluted earnings per common share were $0.63
in fiscal 2000, compared to $0.62 in fiscal 1999. During fiscal 2000, we
repurchased 5,439 shares of common stock.
Review of Business Segments
Our reportable segments are IKON North America and IKON Europe. The IKON North
America segment provides copiers, printers, distributed printing, and other
office equipment and services, as well as facilities management, throughout
North America. This segment also includes our captive finance subsidiaries in
North America. The IKON Europe segment
IKON Office Solutions, Inc. and Subsidiaries 12
provides customers with total office solutions, including copiers and printer
systems, computer networking, distributed printing, facilities management,
hardware and software product interfaces and electronic file conversion
throughout Europe. This segment also includes our captive finance subsidiaries
in Europe. Other includes Business Imaging Services and Technology Services in
North America. Business Imaging Services focuses on electronic file conversion.
Technology Services provides design, planning, and support services for network
platforms and IT integration projects, technology training, telecommunications
services and e-business development.
In fiscal 2000, we made the following changes to our segment reporting as a
result of our restructuring programs: IKON Document Services (included in Other
in fiscal 1999) was split into Business Document Services ("BDS"), Legal
Document Services ("LDS") and Business Imaging Services ("BIS"). BDS and LDS are
aligned with and included in IKON North America and BIS remains in Other. Prior
year results have been reclassified to conform with the current year
presentation.
IKON North America
Revenues, excluding finance income, increased by $82,819, or 2.1%, to $4,115,603
in fiscal 2000 from $4,032,784 in fiscal 1999. The increase was mainly due to
strong growth in net sales due to our focus on higher-end equipment. Finance
income increased by $47,215, or 17.1%, to $323,718 in fiscal 2000 compared to
$276,503 in fiscal 1999. The increase was mainly due to growth in the lease
portfolio and a shift from off-balance sheet treatment to on-balance sheet
treatment of the asset securitizations used to finance our captive leasing
business. This increase was offset by a $14,333 asset securitization gain in
fiscal 1999. Finance interest expense increased by $40,399 in fiscal 2000 due to
higher average interest rates compared to fiscal 1999. Operating income before
restructuring and asset impairment charges, excluding the asset securitization
gain, increased by $64,972 to $438,560 in fiscal 2000 from $373,588 in fiscal
1999. The increase was due mainly to increased total revenue and the improved
management of administrative expenses.
IKON Europe
Revenues, excluding finance income, decreased by $38,696, or 7.7%, to $466,377
in fiscal 2000 from $505,073 in fiscal 1999 due mainly to the negative impact of
foreign currency translation (although significant to this segment, the negative
impact of foreign currency translation was not material on a consolidated basis)
and a decrease in hardware sales in our technology services business offset by
an increase in revenue from the sale of office equipment. Finance income
increased by $993, or 4.8%, to $21,562 in fiscal 2000 from $20,569 in fiscal
1999 due to growth in the lease portfolio. Operating income before restructuring
and asset impairment charges decreased by $3,871 to $24,277 in fiscal 2000 from
$28,148 in fiscal 1999 mainly due to the underperformance of our technology
services business.
Other
Other revenues decreased by $80,988, or 13.5%, to $519,685 in fiscal 2000 from
$600,673 in fiscal 1999. There was an operating loss before restructuring and
asset impairment charges of $45,174 in fiscal 2000 compared to $12,880 in fiscal
1999. The decrease in revenues and operating income was due to a significant
decline in our North American Technology Services systems integration business
as customers' demands have shifted from internal systems deployment and Y2K
migration to external, Internet-based applications and as customers have begun
to purchase hardware directly from manufacturers. The Company has been
repositioning its Technology Services businesses to optimize growth strategies,
including the separation of technology training, telecommunications services and
e-business development into separate functional units in order to better respond
to customer and industry demands in those specialized areas.
There was no material effect of foreign currency exchange rate fluctuations
on the consolidated results of operations in fiscal 2000 compared to fiscal
1999.
As a result of the dynamics of our business, we are reviewing our operating
structure which will result in adjustments to our segment discussion for fiscal
2001. We anticipate the following change: As of October 1, 2000, Technology
Services Network Integration (included in Other in fiscal 2000) will be included
in IKON North America. This is also a result of the restructuring programs
announced during fiscal 2000 and reflects the Company's efforts to provide total
integrated office solutions in North America as are already provided in Europe.
Fiscal 1999 Compared to Fiscal 1998
Our fiscal 1999 revenues decreased by $97,123, or 1.8% compared to fiscal 1998.
Excluding a $14,333 asset securitization gain, overall revenue decreased by
$111,456 compared to fiscal 1998. The decrease in revenues was primarily due to
efforts to improve productivity by eliminating unprofitable revenue streams and
a reduction in the sales force. These actions were taken to build a solid
foundation for growth. Net sales, which includes equipment revenue, decreased by
$137,812, or 4.7%, as a result of a reduction in the sales force of close to
1,000 representatives and de-emphasized market segments, such as wholesale. We
are currently rebuilding our sales force in key growth areas, such as color,
high-volume and outsourcing. Finance income increased by $29,278, or 10.9%, due
to the growth in the lease portfolio and the asset securitization gain.
Excluding the gain, finance income increased by $14,945, or 5.6%.
Gross margins in fiscal 1999, excluding the securitization gain, were 38.0%
of revenues compared to 37.5% in the prior year, excluding special charges.
Gross margins were positively impacted by improved service margins, primarily
generated from our IKON North America operating segment, and negatively by
slightly lower equipment margins due to price pressure on analog equipment
earlier in the fiscal year. Our operating income increased by $154,135 compared
to the prior year. Excluding transformation costs and special charges of
$230,400 in fiscal 1998 and
13
Financial Review
the gain from the asset securitization and shareholder litigation settlement
expense in fiscal 1999 of $86,773, operating income increased by $10,508 to
$237,389 in fiscal 1999 compared to $226,881 in fiscal 1998. This improvement is
due primarily to improved gross margins and improved sales productivity.
Selling and administrative expenses declined as a percentage of revenue
from 35.2% in fiscal 1998 to 33.5% in fiscal 1999. Excluding special charges in
fiscal 1998 and the asset securitization gain in fiscal 1999, selling and
administrative expenses as a percentage of revenue remained relatively the same
in fiscal 1999. During fiscal 1999, IKON initiated a competitiveness and
productivity project ("CaPP") which was designed to identify, through a study of
operations, additional cost saving opportunities for the Company. Several CaPP
initiatives began in fiscal 1999 and will continue throughout the next few
years. These programs include improvements in customer service, inventory,
purchasing and distribution, centralization of marketing and human resources,
and centralization of certain accounting functions into shared service centers.
Interest expense was relatively consistent compared to fiscal 1998. Income
before taxes increased by $153,578 in fiscal 1999 compared to fiscal 1998. Tax
expense for fiscal 1999 includes a one-time tax benefit related to restructuring
our European leasing operations and the shareholder litigation settlement.
Excluding these one-time benefits, the effective tax rate would have been 46.5%.
Diluted earnings per common share increased to $0.23 per share in fiscal 1999
from a loss of $0.76 per share in fiscal 1998. Excluding the after-tax gain on
the asset securitization and the shareholder litigation settlement expense in
fiscal 1999 and the transformation costs and special charges in fiscal 1998,
diluted earnings per common share increased to $0.62 in fiscal 1999 from $0.40
in fiscal 1998.
Diluted weighted average shares outstanding increased by 13,858 in fiscal
1999 primarily as a result of the conversion of the Series BB preferred stock on
October 1, 1998 to common stock (9,682 weighted shares) and the full period
impact of fiscal 1998 common shares issued for acquisitions, plus earnouts
(3,400 weighted shares).
Review of Business Segments
IKON North America
Revenues from external customers and finance income in the IKON North America
segment were $4,309,287 in fiscal 1999 versus $4,552,285 in fiscal 1998. This
decrease of $242,998, or 5.3%, was due mainly to sales force reductions, a step
we felt was necessary in order to improve productivity and build a more
sophisticated customer-specific sales force that will lead our growth
initiatives in the future. Revenues were also impacted by the accelerated
transition from analog to digital, resulting in analog pricing pressure and
lower service volumes in de-emphasized copier segments, as well as the de-
emphasis of the segment's wholesale operations. Included in this segment are
revenues from our Canadian operations and other international locations except
Europe. Canadian revenues decreased by $34,887 or 12.7% and other international
revenues decreased by $4,000 or 17.1%. Operating income was $387,921 compared to
$241,197 in the prior year. This increase was due mainly to higher costs in 1998
due to nonrecurring charges and productivity improvements.
IKON Europe
Revenues, including finance income, from our IKON Europe segment were $525,642
in fiscal 1999 versus $424,888 in fiscal 1998. This increase of $100,754, or
23.7%, is due primarily to the effects of fiscal 1998 and 1999 acquisitions. In
fiscal 1999, we completed 6 acquisitions in Europe. Operating income was $28,148
compared to $31,734 in the prior year. This decrease was due to reduced
equipment margins due to pricing pressures from direct competitors and the
conversion of certain operating rentals to leases at more competitive prices.
Other
Other revenues were $600,673 in 1999 versus $555,552 in 1998. The increase of
$45,121, or 8.1%, was mainly due to the impact of prior year acquisitions.
Operating loss was $12,880 compared to $27,506 in the prior year. This
improvement was due to a $20,000 loss from an asset impairment of a technology
services company involved in software development recorded in fiscal 1998 offset
by underperformance in certain technology services and BIS units in fiscal 1999.
There was no material effect of foreign currency exchange rate fluctuations
on the results of operations in fiscal 1999 compared to fiscal 1998.
Financial Condition and Liquidity
Net cash provided by operating activities in fiscal 2000 was $371,025. During
the same period, the Company used $819,705 of cash in investing activities,
which included net finance subsidiaries' use of $696,558, acquisition activity
at a cash cost of $3,768, capital expenditures for property and equipment of
$113,829 and capital expenditures for equipment on operating leases of $45,160.
Cash provided by financing activities of $526,071 includes $51,257 repayments of
corporate debt and net issuances of $655,081 in finance subsidiaries debt. Debt,
excluding finance subsidiaries, was $825,706 at September 30, 2000, a decrease
of $33,338 from the debt balance at September 30, 1999 of $859,044. Excluding
finance subsidiaries' debt and the impact of short-term loans to our U.S.
finance subsidiary, our debt to capital ratio was 36% at September 30, 2000
compared to 34% at September 30, 1999. The increase in the Company's assets
compared to September 30, 1999 was due mainly to the repurchase of $275,000 of
direct financing lease receivables in the first quarter of fiscal 2000 and a
shift from off-balance sheet to on-balance sheet treatment of our asset
securitizations. Restricted cash on the consolidated balance sheet represents
cash collected on certain lease receivables, which must be used to repay the
lease-backed notes.
As of September 30, 2000, short-term borrowings supported by a $600,000
credit agreement totaled $13,400, leaving $586,600 unused and available. We also
have $700,000 available for stock and/or debt
IKON Office Solutions, Inc. and Subsidiaries 14
offerings under a shelf registration statement filed with the Securities and
Exchange Commission.
Finance subsidiaries' debt increased by $641,190 from September 30, 1999,
as a result of the issuance of lease-backed notes offset by payments on medium
term notes and bank borrowings. During fiscal 2000, our U.S. subsidiary ("IOSC")
repaid $1,477,762 of debt and issued $1,194,849 of lease-backed notes and had
$832,795 of new bank borrowings. At September 30, 2000, $568,500 of medium term
notes were outstanding with a weighted interest rate of 6.6%. In October 1999, a
portion of the cash received from the issuance of the lease-backed notes was
used to repurchase the direct financing leases related to IOSC's previously
existing $275,000 asset securitization program. In December 1999 and January
2000, IOSC entered into a new asset securitization under which it received cash
of $250,000. This amount was repaid in June 2000 when the 2000-1 notes were
issued. Also in June 2000, IOSC entered into a new asset securitization under
which it received cash of $83,000. In September 2000, the Company pledged or
transferred $608,548 in financing lease receivables for $499,795 in cash in
connection with its revolving asset securitization agreements, in a transfer
accounted for as a financing. As of September 30, 2000, the Company had $17,000
available under its revolving asset securitization agreements.
On December 7, 2000, IKON Receivables, LLC publicly issued an additional
$634,431 of lease-backed notes (the "2000-2 Notes") under its shelf registration
statement. Class A-1 Notes totaling $193,532 have a stated interest rate of
6.66125%, Class A-2 Notes totaling $70,193 have a stated interest rate of 6.60%,
Class A-3 Notes totaling $290,800 have a variable rate of LIBOR plus 0.23%
(which has been fixed at 6.475% through an interest rate swap) and Class A-4
Notes totaling $79,906 have a variable rate of LIBOR plus 0.27% (which has been
fixed at 6.475% through an interest rate swap). IOSC received approximately
$633,001 in net proceeds from the sale of the 2000-2 Notes. The 2000-2 Notes are
collateralized by a pool of office equipment leases or contracts and related
assets, and the payments on the 2000-2 Notes are made from payments on the
equipment leases. Future maturities on the 2000-2 Notes are $183,855, $175,834,
$142,492, $89,900 and $42,350 in fiscal 2001, 2002, 2003, 2004 and 2005,
respectively.
We used the proceeds from the issuance of the 2000-2 Notes to pay $450,576
of our 6.6% asset securitization conduit financing debt that was due in fiscal
2001. The long-term portion of the 2000-2 Notes totaling $450,576 has been
reclassified from current portion of long-term debt, finance subsidiaries to
long-term debt, finance subsidiaries in the consolidated balance sheet.
Future maturities of long-term debt finance subsidiaries, after giving
effect for the reclassification described above, are $1,238,950, $726,088,
$428,029, $199,505, $51,685 and $142 in fiscal 2001, 2002, 2003, 2004, 2005 and
thereafter, respectively.
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 September 30, 2000, leaving approximately 6,030 shares
available for issuance.
During fiscal 2000, the Company repurchased approximately 5,439 shares of
common stock for $26,841. At September 30, 2000, the Company had $60,436
available for common stock repurchases under our fiscal 2000 share repurchase
authorization.
The Company believes that its operating cash flow together with unused bank
credit facilities and other financing arrangements will be sufficient to finance
current operating requirements for fiscal 2001, including capital expenditures,
dividends and the remaining accrued costs associated with the Company's
restructuring charges.
Pending Accounting Changes
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and
Hedging Activities" which will be effective for IKON's fiscal 2001. This
standard, as amended, requires that all derivative instruments be recorded on
the balance sheet at their fair value and that changes in fair value be recorded
each period in current earnings or comprehensive income. IKON anticipates that
the adoption of SFAS 133 will result in the recording of a cumulative adjustment
as of October 1, 2000 for the change in accounting required by SFAS 133. This
adjustment is expected to increase current liabilities by approximately $9,400
and other comprehensive loss, net of tax, by approximately $5,600 as of October
1, 2000. No significant effects on future net income are expected as a result of
adopting SFAS 133 because IKON's current hedging instruments are considered to
be highly effective.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. Any change resulting from the application of SAB 101 will be
reported as a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes". In June 2000, the SEC issued SAB No. 101B, "Second
Amendment: Revenue Recognition in Financial Statements". SAB 101B delays the
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. We are required to begin
reporting changes, if any, to our revenue recognition policy in the fourth
quarter of fiscal year 2001. We are currently evaluating the effect, if any, the
adoption of SAB 101 will have on our financial statements.
In March 2000, FASB issued FASB Interpretation (FIN) 44, "Accounting for
Certain Transactions involving Stock Compensation", which clarifies the
application of Accounting Principles Board Opinion 25 for certain issues. The
interpretation was generally effective July 1, 2000, except for certain
provisions which were effective after December 15, 1998. The adoption of FIN 44
did not have a material impact on the Company's financial statements.
15
Financial Review
In October 2000, the Emerging Issues Task Force (EITF) of FASB issued EITF
00-10, "Accounting for Shipping and Handling Fees and Costs", and EITF 00-14,
"Accounting for Certain Sales Incentives". EITF 00-10 addresses the income
statement classification for shipping and handling fees and costs. EITF 00-14
addresses recognition, measurement, and income statement classification for
certain sales incentives including discounts, coupons, rebates, and free
products or services. The Company is currently examining its practices in light
of this interpretive guidance and does not expect a material impact from the
application of EITF 00-10 and EITF 00-14 beginning in the fourth quarter of
fiscal 2001.
Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt. We have no cash flow exposure due to interest rate changes
for long-term debt obligations. We primarily enter into debt obligations to
support general corporate purposes, including acquisitions, capital expenditures
and working capital needs. Finance subsidiaries' long-term debt is used to fund
the lease receivables portfolio. The carrying amounts for cash and cash
equivalents, accounts receivable and notes payable reported in the consolidated
balance sheets approximate fair value.
The table below presents principal amounts and related average interest rates by
year of maturity for our long-term debt obligations at September 30, 2000:
2001 2002 2003 2004 2005 Thereafter
- ---------------------------------------------------------------------------------------------------------
Long-term debt
Fixed rate $ 134,635 $ 7,729 $ 6,567 $ 2,137 $125,128 $ 465,300
Average interest rate 8.6% 9.8% 10.6% 10.5% 7.0% 6.9%
Variable rate $ 41,994
Average interest rate 7.7%
- ---------------------------------------------------------------------------------------------------------
Long-term debt, finance subsidiaries
Fixed rate $1,134,125 $550,254 $285,537 $ 109,605 $ 9,335 $ 142
Average interest rate 6.8% 6.8% 6.8% 6.7% 7.0% 7.5%
Variable rate $ 555,401
Average interest rate 7.3%
- ---------------------------------------------------------------------------------------------------------
Interest rate derivative financial
instruments related to debt
Interest rate swaps:
Pay fixed/receive variable $ 597,395
Average pay rate 7.3%
Average receive rate 6.7%
IKON Office Solutions, Inc. and Subsidiaries 16
The following table presents, as of September 30, 2000, the following
information regarding the interest rate swap agreements to which we are a party:
(i) the notional amount of the agreement, (ii) the fixed interest rate payable
by the Company, (iii) the variable interest rate payable to the Company by the
counterparty under the agreement, (iv) the fair value of the instrument, and (v)
the maturity date of the agreement.
Notional Amount Fixed Interest Rate Variable Interest Rate Fair Value Maturity Date
- -----------------------------------------------------------------------------------------------------------------
C$ 20,000 7.7400% 3 mo. BA + 30 bp $ (52) 10/13/00
C$ 20,000 7.7150% 3 mo. BA + 30 bp $ (52) 10/13/00
C$ 20,000 7.7100% 3 mo. BA + 30 bp $ (52) 10/13/00
C$ 26,526 7.7000% 3 mo. BA + 30 bp $ (68) 10/13/00
C$ 11,722 7.4300% 3 mo. BA + 30 bp $ (24) 11/07/00
$ 240,891 6.6300% LIBOR + 36 bp $ 935 08/15/03
$ 230,000 7.8020% LIBOR + 19 bp $ (3,992) 03/15/04
$ 84,510 7.8200% LIBOR + 23 bp $ (2,535) 09/15/06
- -----------------------------------------------------------------------------------------------------------------
Foreign Exchange Risk
The Company has various non-U.S. operating locations which expose it to foreign
exchange risk. However, translation of foreign financial statements into U.S.
dollars have not had a significant effect on the results of operations. Foreign
denominated intercompany debt borrowed in one currency and repaid in another may
be fixed via currency swap agreements.
The following table presents, as of September 30, 2000, the following
information regarding the currency swap agreements to which we are a party: (i)
the principal amount payable by the Company under the agreement, (ii) the
principal amount receivable by the Company under the agreement, (iii) the fixed
interest rate payable by the Company, (iv) the fixed interest rate receivable by
the Company under the agreement, (v) the fair value of the instrument, and (vi)
the maturity date of the agreement.
Principal Payable Principal Receivable Fixed Rate Payable Fixed Rate Receivable Fair Value Maturity Date
- ---------------------------------------------------------------------------------------------------------------------
C$21,104 GBP 10,000 9.90% 9.35% $(809) 10/13/00
C$21,104 GBP 10,000 9.90% 9.32% $(808) 10/13/00
C$23,214 GBP 11,000 9.90% 9.38% $(794) 10/13/00
C$21,104 GBP 10,000 9.90% 9.37% $(750) 10/13/00
C$11,722 GBP 5,500 9.53% 9.02% $(363) 11/07/00
- ---------------------------------------------------------------------------------------------------------------------
17
Consolidated Statements of Operations
Fiscal Year Ended September 30
- ----------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Revenues
Net sales $2,794,882 $2,778,256 $2,916,068
Service and rentals 2,306,783 2,360,274 2,348,863
Finance income 345,280 297,072 267,794
- ----------------------------------------------------------------------------------------------------------
5,446,945 5,435,602 5,532,725
- ----------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of goods sold 1,864,318 1,861,024 1,942,744
Service and rental costs 1,393,093 1,373,097 1,418,463
Finance interest expense 167,700 126,676 129,148
Selling and administrative 1,785,751 1,823,083 1,947,856
Restructuring charges, net 51,249 78,033
Asset impairment 53,919 20,000
Shareholder litigation (insurance proceeds) settlement (17,000) 101,106
- ----------------------------------------------------------------------------------------------------------
5,299,030 5,284,986 5,536,244
- ----------------------------------------------------------------------------------------------------------
Operating Income (Loss) 147,915 150,616 (3,519)
Gain on Sale of Investment 3,739
Interest Expense 69,821 71,225 70,668
- ----------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations
Before Taxes on Income and Extraordinary Gain 81,833 79,391 (74,187)
Taxes on Income 55,873 45,555 8,863
- ----------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations
Before Extraordinary Gain 25,960 33,836 (83,050)
Discontinued Operations, net of taxes of $1,111 1,415
- ----------------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Gain 27,375 33,836 (83,050)
Extraordinary Gain from Early Extinguishment of Debt,
net of taxes of $1,342 1,707
- ----------------------------------------------------------------------------------------------------------
Net Income (Loss) 29,082 33,836 (83,050)
- ----------------------------------------------------------------------------------------------------------
Less Preferred Dividends 19,540
- ----------------------------------------------------------------------------------------------------------
Net Income (Loss) Available to Common Shareholders $ 29,082 $ 33,836 $ (102,590)
- ----------------------------------------------------------------------------------------------------------
Basic and Diluted Earnings (Loss) Per Common Share
Continuing Operations $ .18 $ .23 $ (.76)
Discontinued Operations .01
Extraordinary Gain .01
- ----------------------------------------------------------------------------------------------------------
Net Income (Loss) $ .20 $ .23 $ (.76)
- ----------------------------------------------------------------------------------------------------------
Cash Dividends Per Common Share $ .16 $ .16 $ .16
See notes to consolidated financial statements.
IKON Office Solutions, Inc. and Subsidiaries 18
Consolidated Balance Sheets
September 30
- ------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 78,118 $ 3,386
Restricted cash 91,914 29,625
Accounts receivable, less allowances of: 2000 - $35,322; 1999 - $43,543 723,051 725,308
Finance receivables, net 1,087,215 887,396
Inventories 321,471 338,947
Prepaid expenses and other current assets 102,196 111,386
Deferred taxes 108,578 137,853
- ------------------------------------------------------------------------------------------------------------------
Total current assets 2,512,543 2,233,901
- ------------------------------------------------------------------------------------------------------------------
Long-Term Finance Receivables, net 2,084,102 1,677,230
Equipment on Operating Leases,
net of accumulated amortization of: 2000 - $144,117; 1999- $157,750 72,595 87,496
Property and Equipment, net 246,006 259,815
Goodwill, net 1,318,197 1,385,295
Other Assets 129,142 157,576
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,362,585 $ 5,801,313
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current portion of long-term debt $ 176,629 $ 95,262
Current portion of long-term debt, finance subsidiaries 1,238,950 974,033
Notes payable 42,216 44,968
Trade accounts payable 226,838 169,763
Accrued salaries, wages and commissions 143,644 128,501
Deferred revenues 195,790 205,654
Other accrued expenses 284,464 311,758
Accrued shareholder litigation settlement 117,652
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,308,531 2,047,591
- ------------------------------------------------------------------------------------------------------------------
Long-Term Debt 606,861 718,814
Long-Term Debt, Finance Subsidiaries 1,405,449 1,029,176
Deferred Taxes 415,656 375,007
Other Long-Term Liabilities 184,996 170,185
Commitments and Contingencies (Note 8)
Shareholders' Equity
Common stock, no par value: authorized 300,000 shares
Issued: 2000 - 150,296 shares; 1999 -149,271 shares
Outstanding: 2000 - 143,826 shares; 1999 - 148,738 shares 1,013,750 1,008,392
Series 12 preferred stock, no par value: authorized 480 shares
Issued and Outstanding: 2000 - 0 shares; 1999 - 0 shares
Unearned compensation (6,814) (5,513)
Retained earnings 468,770 464,150
Accumulated other comprehensive loss (7,773) (4,922)
Cost of common shares in treasury: 2000 - 5,430 shares; 1999 - 53 shares (26,841) (1,567)
- ------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,441,092 1,460,540
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,362,585 $ 5,801,313
- ------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
19
Consolidated Statements of Cash Flows
Fiscal Year Ended September 30
- ------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income (loss) $ 29,082 $ 33,836 $ (83,050)
Additions (deductions) to reconcile net income (loss) to net cash
provided by operating activities of continuing operations:
Depreciation 133,012 134,638 140,101
Amortization 62,082 62,226 62,424
Provisions for losses on accounts receivable 21,631 31,765 47,052
Provision for deferred income taxes 57,409 24,971 9,500
Provision for lease default reserves 61,740 62,790 94,768
Restructuring and asset impairment charges 105,168 20,000
Gain on asset securitization (73) (26,856) (5,064)
Extraordinary gain on early extinguishment of debt (3,049)
Gain on sale of investment (3,739)
Write-off of abandoned software and other assets 5,987
Shareholder litigation settlement 101,106
Changes in operating assets and liabilities, net
of effects from acquisitions and divestitures:
(Increase) decrease in accounts receivable (25,668) 41,154 (43,146)
Decrease in inventories 12,982 93,821 23,078
Decrease in prepaid expenses and other current assets 9,270 22,913 981
Increase (decrease) in accounts payable, deferred
revenues and accrued expenses 49,955 (64,789) 65,702
Decrease in accrued shareholder litigation settlement (117,652)
Decrease in accrued restructuring (21,471)
Other 2,872 2,048 8,124
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of
continuing operations 373,551 519,623 346,457
Gain from discontinued operations (2,526)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 371,025 519,623 346,457
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of companies acquired, net of cash acquired (3,768) (30,065) (82,642)
Expenditures for property and equipment (113,829) (103,462) (119,680)
Expenditures for equipment on operating leases (45,160) (52,382) (92,489)
Proceeds from sale of property and equipment 18,170 19,347 18,907
Proceeds from sale of property and equipment on operating leases 15,390 21,573 19,611
Finance receivables--additions (1,941,479) (1,415,672) (1,574,252)
Finance receivables--collections 1,494,374 968,248 860,889
Proceeds from sale of finance subsidiaries' lease receivables 25,547 467,394 229,359
Repurchase of finance subsidiaries' lease receivables (275,000) (250,000)
Other 6,050 32 (1,000)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (819,705) (374,987) (741,297)
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from:
Issuance of long-term debt 35,340 93,065 262,503
Option exercises and sale of treasury shares 215 5,117 19,911
Repayments of short-term borrowings, net (470) (45,817) (175,704)
Long-term debt repayments (51,257) (51,191) (36,785)
Finance subsidiaries' debt--issuance 2,139,318 866,577 868,483
Finance subsidiaries' debt--repayments (1,484,237) (962,195) (513,417)
Dividends paid (23,708) (23,689) (41,140)
Deposit to restricted cash (62,289) (29,625)
Purchase of treasury shares (26,841) (2,813) (4,013)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 526,071 (150,571) 379,838
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (2,659) 8,358 (5,376)
Net increase (decrease) in cash and cash equivalents 74,732 2,423 (20,378)
Cash and cash equivalents at beginning of year 3,386 963 21,341
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 78,118 $ 3,386 $ 963
==================================================================================================================
See notes to consolidated financial statements.
IKON Office Solutions, Inc. and Subsidiaries 20
Consolidated Statements of Changes in Shareholders' Equity
Fiscal Year Ended September 30 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Shares Amounts Shares Amounts Shares Amounts
- --------------------------------------------------------------------------------------------------------------------------
Series BB Conversion Preferred Stock
Balance, beginning of year 3,877 $ 290,170 3,877 $290,170
Preferred Stock Conversion (3,877) (290,170)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,877 $290,170
- --------------------------------------------------------------------------------------------------------------------------
Common Stock
Balance, beginning of year 149,271 $1,008,392 137,139 $ 689,195 135,705 $677,681
Series BB Preferred Stock Conversion 9,682 290,170
Mergers, acquisitions and other 465 3,500 1,970 21,526 1,434 9,648
Stock awards granted 701 5,172 480 7,603
Stock awards earned (13) (187)
Stock awards cancelled (128) (1,706)
Tax (charge) benefit relating to stock plans (1,421) (102) 1,866
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year 150,296 $1,013,750 149,271 $1,008,392 137,139 $689,195
- --------------------------------------------------------------------------------------------------------------------------
Unearned Compensation
Balance, beginning of year $ (5,513)
Stock awards granted (5,172) $ (7,603)
Amortization 2,165 1,503
Awards cancelled 1,706 587
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (6,814) $ (5,513)
- --------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year $ 464,150 $ 455,089 $575,874
Net income (loss) 29,082 33,836 (83,050)
Cash dividends declared:
Series BB preferred stock, per share:
1998--$5.04 (19,540)
Common stock, per share: 2000 - $.16;
1999--$.16; 1998 - $.16 (23,708) (23,689) (21,600)
Issuance of treasury shares and other (754) (1,086) 3,405
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 468,770 $ 464,150 $455,089
- --------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss
Balance, beginning of year $ (4,922) $ (3,511) $ (1,956)
- --------------------------------------------------------------------------------------------------------------------------
Translation adjustment (4,333) (1,280) (1,264)
Minimum pension liability adjustment 1,482 (131) (291)
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (2,851) (1,411) (1,555)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (7,773) $ (4,922) $ (3,511)
- --------------------------------------------------------------------------------------------------------------------------
Cost of Common Shares in Treasury
Balance, beginning of year 53 $ (1,567) 124 $ (3,655) 2,401 $(60,121)
Purchases 5,439 (26,841) 8 (168) 178 (4,013)
Reissued for:
Exercise of options (41) 1,301 (377) 9,346
Sales to employee stock plans (26) 632 (18) 491 (485) 11,802
Mergers, acquisitions and other (36) 935 (20) 464 (1,593) 39,331
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year 5,430 $ (26,841) 53 $ (1,567) 124 $ (3,655)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss)
Net income (loss) $ 29,082 $ 33,836 $(83,050)
Other comprehensive loss per above (2,851) (1,411) (1,555)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 26,231 $ 32,425 $(84,605)
- --------------------------------------------------------------------------------------------------------------------------
Components of Accumulated Other
Comprehensive Loss
Accumulated translation $ (7,605) $ (3,272) $ (1,992)
Minimum pension liability (168) (1,650) (1,519)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (7,773) $ (4,922) $ (3,511)
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
21
Notes to Consolidated Financial Statements
IKON Office Solutions, Inc. ("IKON" or "the Company") is a leading provider 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 outsourcing solutions, as well as
network design and consulting, e-business development, telecommunications
services and technology training. References herein to "we", "us" or "our" refer
to IKON and its subsidiaries unless the context specifically requires otherwise.
We have locations throughout the United States, Canada, Mexico and Europe.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and notes. Actual results
could differ from those estimates and assumptions.
Revenue Recognition
Revenues are recognized at the time of shipment of products or performance of
services. 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 at the time of shipment. Finance income is recognized
over the related lease term.
Advertising
Advertising costs are expensed the first time the advertisement is run.
Income Taxes
Income taxes are determined in accordance with Statement of Financial Accounting
Standards ("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 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 bases 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.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three
months or less to be cash equivalents.
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.
Property and Equipment
Property and equipment are recorded at cost. The cost and related accumulated
depreciation of assets sold, retired or otherwise disposed of are removed from
the respective accounts, and any resulting gains or losses are included in the
statement of operations. Depreciation is computed for financial reporting
purposes using the straight-line method over the estimated useful lives of the
related assets as follows: equipment on operating leases-- 3-5 years; production
equipment-- 5 years; furniture and office equipment--3-7 years; capitalized
software-- 3-5 years; leasehold improvements--shorter of the asset life or term
of lease; and buildings-- 20 years. Maintenance and repairs are charged to
operations; replacements and betterments are capitalized.
Goodwill
Substantially all goodwill (excess of purchase price over net assets acquired)
is amortized over periods ranging from 25 to 40 years using the straight-line
method. The recoverability of goodwill is evaluated at the operating unit level
by an analysis of operating results and consideration of other significant
events or changes in the business environment. If an operating unit has current
operating losses and based upon projections there is a likelihood that such
operating losses will continue, we will evaluate whether impairment exists on
the basis of undiscounted expected future cash flows from operations before
interest for the remaining amortization period. If impairment exists, the
carrying amount of the goodwill is reduced by the estimated shortfall of cash
flows on a discounted basis. Accumulated amortization of goodwill at September
30, 2000 and 1999 was $228,267 and $186,000, respectively.
Environmental Liabilities
Environmental expenditures that pertain to current operations or to future
revenues are expensed or capitalized consistent with the Company's
capitalization policy for property and equipment. Expenditures that result from
the remediation of an existing condition caused by past operations and that do
not contribute to current or future revenues are expensed. Liabilities are
recognized for remedial activities based on management's best estimate of our
aggregate environmental exposure. Recoveries of expenditures are recognized as
receivables when they are estimable and probable. Estimated liabilities are not
discounted to present value.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of shareholders'
equity. Gains and losses from foreign currency transactions are included in net
income.
IKON Office Solutions, Inc. and Subsidiaries 22
Financial Instruments
Derivative financial instruments are utilized to reduce foreign currency and
interest rate risk. We do not enter into financial instruments for trading or
speculative purposes. Interest rate swap agreements are used as part of our
program to manage the fixed and floating interest rate mix of our total debt
portfolio and related overall cost of borrowing. The interest rate swap
agreements involve the periodic exchange of payments without the exchange of the
notional amount upon which the payments are based. The related amount payable to
or receivable from counterparties is included as an adjustment to accrued
interest in other accrued expenses. The interest rate swap agreements are
designated as hedges. Currency swap agreements are used to manage exposure
relating to certain intercompany debt denominated in one foreign currency that
will be repaid in another foreign currency. Currency swap agreements are
designated as hedges of firm commitments to pay interest and principal on debt,
which would otherwise expose us to foreign currency risk. Currency translation
gains and losses on the principal swapped are offset by corresponding
translation gains and losses on the related foreign denominated assets. Gains
and losses on terminations of interest rate and currency swap agreements are
deferred as an adjustment to the carrying amount of the outstanding obligation
and amortized as an adjustment to interest expense related to the obligation
over the remaining term of the original contract life of the terminated swap
agreement. In the event of early extinguishment of the obligation, any realized
or unrealized gain or loss from the swap would be recognized in the consolidated
statement of operations at the time of extinguishment.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
Pending Accounting Changes
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and
Hedging Activities" which will be effective for IKON's fiscal 2001. This
standard, as amended, requires that all derivative instruments be recorded on
the balance sheet at their fair value and that changes in fair value be recorded
each period in current earnings or comprehensive income. IKON anticipates that
the adoption of SFAS 133 will result in the recording of a cumulative adjustment
as of October 1, 2000 for the change in accounting required by SFAS 133. This
adjustment is expected to increase current liabilities by approximately $9,400
and other comprehensive loss, net of tax, by approximately $5,600 as of October
1, 2000. No significant effects on future net income are expected as a result of
adopting SFAS 133 because IKON's current hedging instruments are considered to
be highly effective.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. Any change resulting from the application of SAB 101 will be
reported as a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes". In June 2000, the SEC issued SAB No. 101B, "Second
Amendment: Revenue Recognition in Financial Statements". SAB 101B delays the
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. We are required to begin
reporting changes, if any, to our revenue recognition policy in the fourth
quarter of fiscal year 2001. We are currently evaluating the effect, if any, the
adoption of SAB 101 will have on our financial statements.
In March 2000, FASB issued FASB Interpretation (FIN) 44, "Accounting for
Certain Transactions involving Stock Compensation", which clarifies the
application of Accounting Principles Board Opinion 25 for certain issues. The
interpretation was generally effective July 1, 2000, except for certain
provisions which were effective after December 15, 1998. The adoption of FIN 44
did not have a material impact on the Company's financial statements.
In October 2000, the Emerging Issues Task Force (EITF) of FASB issued EITF
00-10, "Accounting for Shipping and Handling Fees and Costs", and EITF 00-14,
"Accounting for Certain Sales Incentives". EITF 00-10 addresses the income
statement classification for shipping and handling fees and costs. EITF 00-14
addresses recognition, measurement, and income statement classification for
certain sales incentives including discounts, coupons, rebates, and free
products or services. The Company is currently examining its practices in light
of this interpretive guidance and does not expect a material impact from the
application of EITF 00-10 and EITF 00-14 beginning in the fourth quarter of
fiscal 2001.
2. RESTRUCTURING AND ASSET
IMPAIRMENT CHARGES
In the first quarter of fiscal 2000, the Company announced plans to improve
performance and efficiency and incurred a total pre-tax restructuring and asset
impairment charge (the "first quarter charge") of $105,340 ($78,479 after-tax,
or $0.52 per share on a basic and diluted basis). These actions addressed under-
performance in certain Technology Services, Business Document Services, and
Business Information Services locations as well as the Company's desire to
strategically position these businesses for integration and profitable growth.
Plans included consolidating or disposing of certain under-performing and non-
core locations; implementing productivity enhancements through the consolidation
and centralization of activities in inventory management, purchasing,
finance/accounting and other administrative functions; and consolidating real
estate through the co-location of business units as well as the disposition of
unproductive real estate. In the fourth quarter of fiscal 2000, the Company
determined that some first quarter restructuring initiatives would not require
the level of spending that had been originally estimated, and certain other
initiatives would not be implemented due to changing business dynamics. Based on
the
23
Notes to Consolidated Financial Statements
Company's fourth quarter estimates, $15,961 was reversed from the first quarter
charge and the total amount of the charge was adjusted to $89,379 ($66,587
after-tax, or $0.45 per share on a basic and diluted basis). Also, in the fourth
quarter of fiscal 2000, the Company announced plans to address the changing
market conditions impacting Technology Services, IKON North America, and
Outsourcing locations and incurred a total pre-tax restructuring and asset
impairment charge (the "fourth quarter charge") of $15,789 ($12,353 after-tax,
or $0.08 per share on a basic and diluted basis).
The pre-tax components of the restructuring and asset impairment charges in
fiscal 2000 were as follows:
First Adjustment to Adjusted Fourth Total
Quarter First Quarter First Quarter Quarter Fiscal 2000
Type of Charge Charge Charge Charge Charge Charges
- --------------------------------------------------------------------------------------------------------------------------
Restructuring Charge:
Severance $ 16,389 $ (1,784) $ 14,605 $ 6,092 $ 20,697
Contractual Commitments 37,403 (14,177) 23,226 7,326 30,552
- --------------------------------------------------------------------------------------------------------------------------
Total Restructuring Charge 53,792 (15,961) 37,831 13,418 51,249
- --------------------------------------------------------------------------------------------------------------------------
Asset Impairment Charge:
Fixed Assets 12,668 12,668 2,371 15,039
Goodwill and Intangibles 38,880 38,880 38,880
- --------------------------------------------------------------------------------------------------------------------------
Total Asset Impairment Charge 51,548 51,548 2,371 53,919
- --------------------------------------------------------------------------------------------------------------------------
Total Charge $105,340 $ (15,961) $ 89,379 $ 15,789 $105,168
- --------------------------------------------------------------------------------------------------------------------------
The employees and locations affected by the charges described above were as
follows:
Remaining
Employees Employee Employees to
Affected Terminations Adjustment be Terminated
- --------------------------------------------------------------------------------------------------------------------------
First Quarter Terminations 1,938 (1,000) (538) 400
Fourth Quarter Terminations 380 380
Remaining
Sites Sites Sites to
Affected Closed Adjustment be Closed
- ---------------------------------------------------------------------------------------------------------------------------
First Quarter Closures 24 (18) (2) 4
Fourth Quarter Closures 5 5
The actions related to the first quarter and fourth quarter charges are
expected to be completed by the end of the first quarter in fiscal 2001 and the
fourth quarter in fiscal 2001, respectively.
The following presents a reconciliation of the original components of the
pre-tax first quarter restructuring charge to the balance remaining at September
30, 2000, which is included in other accrued expenses on the consolidated
balance sheet:
Balance Adjustment to Balance
September 30, First Quarter Payments First Quarter September 30,
1999 Charge Fiscal 2000 Charge 2000
- -----------------------------------------------------------------------------------------------------------------------------
Severance $ -- $16,389 $10,616 $ (1,784) $ 3,989
Contractual Commitments -- 37,403 12,786 (14,177) 10,440
- -----------------------------------------------------------------------------------------------------------------------------
Total $ -- $53,792 $23,402 $ (15,961) $ 14,429
- -----------------------------------------------------------------------------------------------------------------------------
The following presents a reconciliation of the original components of the
pre-tax fourth quarter restructuring charge to the balance remaining at
September 30, 2000, which is included in other accrued expenses on the
consolidated balance sheet:
Balance Balance
September 30, Fourth Quarter Payments September 30,
1999 Charge Fiscal 2000 2000
- -----------------------------------------------------------------------------------------------------------------------------
Severance $ -- $ 6,092 $ 6,092
Contractual Commitments -- 7,326 $ 41 7,285
- -----------------------------------------------------------------------------------------------------------------------------
Total $ -- $13,418 $ 41 $13,377
- -----------------------------------------------------------------------------------------------------------------------------
IKON Office Solutions, Inc. and Subsidiaries 24
In October 1996, we purchased a software development company that we
believed to be a strategic fit with our system integration companies. In fiscal
1998, this company experienced operating losses and negative cash flows from
operations. During the third quarter of fiscal 1998, we evaluated projections
that indicated this trend was expected to continue. We concluded that the
carrying amounts of the goodwill and other long-lived assets were not
recoverable, and in accordance with our accounting policy, recorded an
impairment loss of $20,000. This company was closed in fiscal 1999.
In September 1995, we announced a transformation program to change our
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. We completed the
transformation program as of September 30, 1998. The transformation involved a
variety of activities, including 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 for fiscal 1998 of $78,033 relate principally to
severance and other employee-related costs, including temporary labor of
$47,159, facility consolidation costs, including lease buyouts and write-offs of
leasehold improvements of $25,233, and technology conversion costs of $5,641.
Cash of $2,967 was expended during fiscal 2000 reducing the severance and lease
buyout accruals to $2,006 and $3,345, respectively, at September 30, 2000. Cash
of $11,768 was expended during fiscal 1999 reducing the severance and lease
buyout accruals to $3,325 and $4,993, respectively, at September 30, 1999.
3. ACQUISITIONS
We made 2 acquisitions in fiscal 2000 for an aggregate purchase price of $2,132
in cash. Total assets related to fiscal 2000 acquisitions were $2,427, including
goodwill of $2,008. An additional $5,213 was paid and capitalized in fiscal 2000
relating to prior years' acquisitions.
In fiscal 1999, we made 6 acquisitions for an aggregate purchase price of
$19,332 in cash. Total assets related to fiscal 1999 acquisitions were $32,425,
including goodwill of $23,017. An additional $22,454 was paid and capitalized in
fiscal 1999 relating to prior years' acquisitions.
In fiscal 1998, we made 34 acquisitions for an aggregate purchase price of
$99,408 in cash and stock. Total assets related to these acquisitions were
$157,595, including goodwill of $94,769. An additional $29,829 was paid and
capitalized in fiscal 1998 relating to prior years' acquisitions.
All acquisitions were accounted for under the purchase method of accounting
and are included in results of operations from their dates of acquisition.
Certain acquisition agreements contained earn out provisions which provided for
additional payments in cash or stock. Amounts paid under these agreements have
been included in goodwill.
Had the acquisitions been made at the beginning of the fiscal year prior to
their acquisition, unaudited pro forma results from continuing operations would
have been:
Fiscal Year Ended September 30
(unaudited) 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Revenues $5,447,876 $ 5,443,760 $ 5,678,266
Income (loss) from
continuing operations 25,970 34,141 (85,542)
Earnings (loss) per share
from continuing operations:
Basic and Diluted 0.18 0.23 (0.75)
4. FINANCE RECEIVABLES
Our wholly owned finance subsidiaries are engaged in purchasing office equipment
from our marketplaces and leasing the equipment to customers under direct
financing leases.
Components of finance receivables, net, are as follows:
September 30 2000 1999
- ------------------------------------------------------------------------------------------------
Gross receivables $ 3,445,536 $ 2,788,336
Unearned income (576,839) (496,096)
Unguaranteed residuals 377,412 347,170
Lease default reserve (74,792) (74,784)
- ------------------------------------------------------------------------------------------------
Lease receivables 3,171,317 2,564,626
Less: Current portion 1,087,215 887,396
- ------------------------------------------------------------------------------------------------
Long-term finance receivables $ 2,084,102 $ 1,677,230
- ------------------------------------------------------------------------------------------------
At September 30, 2000, future minimum payments to be received under direct
financing leases were: 2001--$1,271,006; 2002--$1,012,259; 2003--$686,372;
2004--$351,995; 2005--$123,174 thereafter--$730; while future minimum lease
payments to be received under operating leases were: 2001--$26,091;
2002--$18,865; 2003--$11,623; 2004--$5,738; 2005--$1,716; thereafter--$4.
In December 1998, our U.S. finance subsidiary IOS Capital, Inc. ("IOSC")
entered into an asset securitization transaction whereby it sold $366,600 in
direct financing lease receivables for $250,000 in cash and a retained interest
in the remainder. The agreement is for an initial three-year term with certain
renewal provisions and was structured as a revolving asset securitization so
that as collections reduce previously sold interests in this new pool of leases,
additional leases can be sold up to $250,000. The terms of the agreement require
that IOSC continue to service the lease portfolio. IOSC recognized a pretax gain
of $14,333 during the first quarter of fiscal 1999 on this agreement. On May 25,
1999, IOSC repurchased the leases sold in this transaction with the proceeds
from the lease-backed notes described in Note 6 to the consolidated financial
statements.
On December 9, 1999, IOSC pledged or transferred $311,382 in financing
lease receivables for $247,600 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing.
25
Notes to Consolidated Financial Statements
On January 20, 2000, IOSC pledged or transferred $2,860 in financing lease
receivables for $2,400 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing. IOSC repaid $250,000
on June 2, 2000 when it issued the 2000-1 Notes described in Note 6 to the
consolidated financial statements. On June 30, 2000, IOSC pledged or transferred
$98,907 in financing lease receivables for $83,000 in cash in connection with
its revolving asset securitization, in a transfer accounted for as a financing.
In September 2000, IOSC pledged or transferred $193,705 in financing lease
receivables for $150,000 in cash in connection with its revolving asset
securitization agreements, in a transfer accounted for as a financing. As of
September 30, 2000, the Company had $17,000 available under this revolving asset
securitization agreement.
In September 2000, IOSC entered into another asset securitization
transaction whereby it sold $414,843 in direct financing lease receivables for
$349,795 in cash and a retained interest in the remainder. The agreement is for
an initial three-year term with certain renewal provisions and was structured as
a revolving asset securitization so that as collections reduce previously sold
interests in this new pool of leases, additional leases can be sold up to
$349,795. The terms of the agreement require that IOSC continue to service the
lease portfolio. As of September 30, 2000, this revolving asset securitization
agreement facility was fully drawn.
IOSC has entered into asset securitization agreements for $275,000 of
eligible direct financing lease receivables that expire in March 2000 ($125,000)
and September 2000 ($150,000). The agreements contain overcollateralization to
cover any potential losses to the purchaser due to uncollectible leases. As
collections reduce previously sold interests, new leases can be sold up to the
agreement amount. In fiscal 1999, IOSC sold an additional $152,098 in leases,
replacing leases paid/collected during the year and recognized pretax gains of
$12,121. On October 7, 1999, these leases were repurchased with a portion of the
proceeds received from the issuance of approximately $700,000 of lease-backed
notes.
The changes in the finance subsidiaries servicing liabilities relating to
the asset securitization agreements for the fiscal years ended September 30,
2000 and 1999, are as follows:
2000 1999
- ----------------------------------------------------------------------
Beginning of period $ 9,606 $ 10,365
Additions 3,841
Less: Impact of repurchase of leases 9,561
Less: Amortization 45 4,600
- ----------------------------------------------------------------------
Balance at September 30 $ -- $ 9,606
- ----------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of:
September 30 2000 1999
- ----------------------------------------------------------------------
Land $ 5,629 $ 6,395
Buildings and leasehold improvements 97,312 92,546
Production equipment 39,540 52,289
Furniture, office equipment and
capitalized software 393,063 384,074
- ----------------------------------------------------------------------
535,544 535,304
Less: accumulated depreciation 289,538 275,489
- ----------------------------------------------------------------------
$246,006 $259,815
- ----------------------------------------------------------------------
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consisted of:
September 30 2000 1999
- ----------------------------------------------------------------------
Notes payable to banks at average
interest rate: 2000 - 8.0%;
1999 - 5.6% $ 41,626 $ 42,427
Other notes payable at average interest
rate: 2000 - 8.9%; 1999 - 8.3% 590 2,541
- ----------------------------------------------------------------------
$ 42,216 $ 44,968
- ----------------------------------------------------------------------
Long-term debt consisted of:
September 30 2000 1999
- ----------------------------------------------------------------------
Bond issue at stated interest rate of
6.75%, net of discount (2000 - $4,287;
1999 - $4,351), due 2025, effective
interest rate of 6.85% $295,713 $295,649
Bond issue at stated interest rate of
6.75%, net of discount (2000 - $194;
1999 - $234), due 2004, effective
interest rate of 6.76% 124,806 124,766
Bond issue at stated interest rate of 7.3%,
net of discount (2000 - $593;
1999 - $652), due 2027, effective
interest rate of 7.34% 114,407 124,348
Bond issue at stated interest rate
of 8.875% due 2001 43,819 43,819
Private placement debt at average
interest rate of 7.2%, due 2005 55,000 55,000
Bank debt at average interest rate of 7.7%,
due 2000 41,994 45,298
Sundry notes, bonds and mortgages
at average interest rate: 2000 - 8.1%;
1999 - 5.9%, due 2000-2005 97,602 104,427
Present value of capital lease obligations
(gross amount: 2000 - $15,444;
1999 - $24,925) 10,149 20,769
- ----------------------------------------------------------------------
783,490 814,076
Less: current maturities 176,629 95,262
- ----------------------------------------------------------------------
$606,861 $718,814
- ----------------------------------------------------------------------
IKON Office Solutions, Inc. and Subsidiaries 26
After giving effect to interest rate swaps, the average effective interest
rate on our long-term bank debt of $41,994 was 7.7% at both September 30, 2000
and 1999 compared to average variable rates of 6.2% and 5.1% at September 30,
2000 and September 30, 1999, respectively.
In the third quarter of fiscal 2000, we repurchased $10,000 par value of our
7.30% bonds due November 1, 2027 and recognized an extraordinary gain of $3,049
($1,707 after-tax), or $0.01 per common share.
Long-term debt, finance subsidiaries consisted of:
September 30 2000 1999
- -------------------------------------------------------------------------
Medium term notes at average
interest rate: 2000 - 6.6%;
1999 - 6.5%, due 2001-2005 $ 568,500 $1,242,850
Lease-backed notes at average
interest rate: 2000 - 6.8%;
1999 - 5.7%, due 2000-2006 1,267,641 622,948
Asset securitization conduit financing
at average interest rate of 6.6%,
due 2000 582,795
Notes payable to banks at average
interest rate: 2000 - 7.4%;
1999 - 7.1%, due 2001-2006 225,463 137,411
- -------------------------------------------------------------------------
2,644,399 2,003,209
Less: current maturities 1,689,526 974,033
- -------------------------------------------------------------------------
$ 954,873 $1,029,176
- -------------------------------------------------------------------------
After giving effect to interest rate swaps on finance subsidiaries debt, the
average effective interest rate on $555,401 of our lease-backed notes was 7.3%
and 5.8% at September 30, 2000 and 1999, respectively, compared to average
variable rates of 6.7% and 5.7% at September 30, 2000 and 1999, respectively.
Long-term debt and long-term debt, finance subsidiaries mature as follows:
Long-Term Long-Term Debt,
Debt Finance
Subsidiaries
- --------------------------------------------------------------------------------
(fiscal year)
2001 $ 176,629 $1,689,526
2002 7,729 550,254
2003 6,567 285,537
2004 2,137 109,605
2005 125,128 9,335
2006 - 2027 465,300 142
Maturities of lease-backed notes are based on contractual maturities of
leases.
On January 16, 1998, our credit agreement with several banks was amended to
increase the amount available from $400,000 to $600,000 and to extend the
termination to January 16, 2003. There were no other significant changes to the
terms of the agreement. The agreement includes a facility fee that could range
from 6.25 to 10.0 basis points per annum on the commitment (8.5 basis points per
annum at September 30, 2000), based upon our current long-term debt rating. The
agreement provides that loans may be made under either domestic or Eurocurrency
notes at rates computed under a selection of rate formulas including prime or
Eurocurrency rates. At September 30, 2000 short-term borrowings supported by the
credit agreement totaled $13,400, leaving $586,600 unused and available.
IOSC may offer notes to the public from time to time under its medium term
notes program. These notes are offered at varying maturities of nine months or
more from their dates of issue and may be subject to redemption at the option of
IOSC, in whole or in part, prior to the maturity date in conjunction with
meeting specified provisions. Interest rates are determined based on market
conditions at the time of issuance.
IKON Receivables, LLC (an affiliate of IOSC) has issued Series 1999-1, 1999-
2, and 2000-1 Lease-Backed Notes as described below:
Issuance Principal Interest Stated
Series Notes Date Issuance Amount Rate Maturity Date
- ----------------------------------------------------------------------------------------------------------------------
1999-1 Class A-1 05/25/99 $ 304,474 5.11% June, 2000
Class A-2 05/25/99 61,579 5.60% May, 2005
Class A-3 05/25/99 304,127 5.99% May, 2005
Class A-4 05/25/99 81,462 6.23% May, 2005
- ----------------------------------------------------------------------------------------------------------------------
Sub-Total 751,642
- ----------------------------------------------------------------------------------------------------------------------
1999-2 Class A-1 10/07/99 235,326 6.14125% Oct, 2000
Class A-2 10/07/99 51,100 6.31% May, 2001
Class A-3a 10/07/99 100,000 6.59% Aug, 2003
Class A-3b 10/07/99 240,891 LIBOR + 0.36% Aug, 2003
Class A-4 10/07/99 72,278 6.88% Nov, 2005
- ----------------------------------------------------------------------------------------------------------------------
Sub-Total 699,595
- ----------------------------------------------------------------------------------------------------------------------
2000-1 Class A-1 06/02/00 130,000 6.99625% June, 2001
Class A-2 06/02/00 54,000 7.51000% March, 2002
Class A-3 06/02/00 230,000 LIBOR + 0.19% March, 2004
Class A-4 06/02/00 84,510 LIBOR + 0.23% Sept, 2006
- ----------------------------------------------------------------------------------------------------------------------
Sub-Total 498,510
- ----------------------------------------------------------------------------------------------------------------------
Total Issued $ 1,949,747
- ----------------------------------------------------------------------------------------------------------------------
27
Notes to Consolidated Financial Statements
IKON Receivables, LLC has issued the following aggregate principal amounts
of Lease-Backed Notes: $751,642 for 1999-1 Notes, $699,595 for 1999-2 Notes and
$498,510 for 2000-1 Notes, (the "Notes") on May 25, 1999, October 7, 1999, and
June 2, 2000, respectively. The Notes were issued pursuant to an Indenture
between IKON Receivables, LLC, IOSC, and Bank of New York (successor in interest
to Harris Trust and Savings Bank), as Indenture Trustee on the 1999-1 Notes and
the 1999-2 Notes, and Bank One Trust Company, as Indenture Trustee on the 2000-1
Notes. The Notes are collateralized by a pool of office equipment leases or
contracts and related assets acquired or originated by IOSC (together with the
equipment financing portion of each periodic lease or rental payment due under
the Leases on or after the related indenture date) (the "Leases") 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 reserve
accounts, overcollateralization accounts and noncancellable insurance policies
from Ambac Assurance Corporation with respect to the Notes.
The Notes bear interest from the related issuance date at the stated rates
specified above. The variable rate 1999-2 Class A-3b, 2000-1 Class A-3 and
2000-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%, respectively,
through interest rate swaps. On each payment date, to the extent funds are
available from the collection of the lease receivables, principal payments will
be made to noteholders in the following priority: (i) to the Class A-1
noteholders only, until the outstanding principal amount on the Class A-1 Notes
has been reduced to zero, then (ii) to the Class A-2 noteholders only, until the
outstanding principal amount on the Class A-2 Notes has been reduced to zero,
then (iii) to the Class A-3 noteholders only, until the outstanding principal
amount on the Class A-3 Notes has been reduced to zero, and then (iv) to the
Class A-4 noteholders, until the outstanding principal amount on the Class A-4
Notes has been reduced to zero. Each class of Notes will be payable in full on
the applicable stated maturity date as indicated above. However, if all payments
are made on the Leases as scheduled, final payment on the Notes will be earlier
than the stated maturity dates. IKON Receivables, LLC may, on any payment date,
redeem the Notes when the total discounted lease balance is less than or equal
to 10% of the total discounted lease balance as of related Indenture date.
IOSC services the Leases pursuant to Assignment and Servicing Agreements by
and among IOSC, as originator and servicer, IKON Receivables-1, LLC, as seller,
and IKON Receivables, LLC, as issuer. IOSC may delegate its servicing
responsibilities to one or more sub-servicers, but such delegation does not
relieve IOSC of its liabilities with respect thereto. IOSC retains possession of
the Leases and related files, and receives a monthly service fee from IKON
Receivables, LLC for servicing the Leases.
Restricted cash on the consolidated balance sheet represents cash that has
been collected on the leases, which must be used to repay the 1999-1, 1999-2 and
2000-1 Notes, respectively.
Capital lease obligations and mortgages are collateralized by property and
equipment that had a net book value of $17,785 at September 30, 2000. Interest
paid, including finance subsidiaries, approximated $257,000, $208,000 and
$186,000 for fiscal years 2000, 1999, and 1998, respectively. Certain components
of our debt balance are subject to debt covenants. The most restrictive of these
covenants is a funded debt to equity calculation as defined by the underlying
agreement.
7. LEASES
Equipment acquired under capital leases is included in property and
equipment in the amount of $49,954 and $51,307 in fiscal 2000 and 1999,
respectively, and the related amounts of accumulated amortization are $32,169
and $32,519 in fiscal 2000 and 1999, respectively. Related obligations are in
long-term debt and related amortization is included in depreciation.
At September 30, 2000, future minimum lease payments under noncancelable
operating leases with initial or remaining terms of more than one year were:
2001--$41,850; 2002--$31,138; 2003--$17,489; 2004--$10,425; 2005--$5,040; and
thereafter--$5,948.
Total rental expense was $104,754, $97,423 and $85,646 in fiscal 2000, 1999
and 1998, respectively.
8. CONTINGENCIES
A series of class action complaints, and a companion derivative lawsuit, were
filed in the United States District Court for the Eastern District of
Pennsylvania on behalf of the Company's shareholders. The plaintiffs alleged
that during the period from January 24, 1996 to August 13, 1998, IKON and
certain current and former principal officers and employee directors publicly
disseminated false and misleading statements concerning the Company's revenue,
profitability and financial condition in violation of the federal securities
law. The Company agreed to settle the case for $111,000. We recorded a charge of
$101,106 in fiscal 1999 for the shareholder litigation settlement, which
consists of a $111,000 settlement plus $10,106 of legal fees offset by $20,000
of insurance proceeds. In fiscal 2000, we received an additional $17,000 of
insurance proceeds. Reflecting payment of a portion of the legal fees, the
consolidated balance sheet at September 30, 1999, includes $117,652 in
accrued shareholder litigation settlement and $16,546 of insurance proceeds
receivable (which is included in prepaid expenses and other current assets). In
fiscal 2000, all amounts were paid and/or received such that the consolidated
balance sheet at September 30, 2000 contains no amounts related to the
settlement. After the District Court approved the settlement, two individuals
who objected to the settlement appealed to the United States Court of Appeals
for the Third Circuit. The objectors have now withdrawn their appeal, so that
the District Court's decision approving the settlement is final.
The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al.
-----------------------------------------------------
contains one claim brought under the Employee Retirement Income Security Act of
1974 ("ERISA"). In connection with that claim, the plaintiffs allege
IKON Office Solutions, Inc. and Subsidiaries 28
that the Company and various individuals violated fiduciary duties under ERISA
based on allegedly improper investments in the Company's stock made through the
Company's Retirement Savings Plan. The court certified a class with respect to
this claim consisting generally of all those participants in the Retirement
Savings Plan after September 30, 1995 and through August 13, 1998, subject to
certain exceptions. Discovery is ongoing, with depositions occurring over the
next several months. To the extent that any of the ERISA class claim survives
the settlement of the federal securities class action lawsuits and companion
derivative suit, the Company believes that said claim is without merit and will
vigorously defend the suit.
The Company is involved in a number of environmental remediation actions to
investigate and clean up certain sites related to its discontinued operations in
accordance with applicable federal and state laws. Uncertainties about the
status of laws and regulations, technology and information related to individual
sites, including the magnitude of possible contamination, the timing and extent
of required corrective actions and proportionate liabilities of other
responsible parties, make it difficult to develop a meaningful estimate of
probable future remediation costs. While the actual costs of remediation at
these sites may vary from management's estimates because of these uncertainties,
the Company has established an accrual for known environmental obligations based
on management's best estimate of the aggregate environmental remediation
exposure on these sites. After consideration of the defenses available to the
Company, the accrual for such exposure and other responsible parties, management
does not believe that its obligations to remediate these sites would have a
material adverse effect on the Company's consolidated financial statements.
There are other contingent liabilities for taxes, guarantees, other
lawsuits, and various other matters occurring in the ordinary course of
business. On the basis of information furnished by counsel and others, and after
consideration of the defenses available to the Company and any related reserves
and insurance coverage, management believes that none of these other
contingencies will materially affect the consolidated financial statements of
the Company.
9. SHAREHOLDERS' EQUITY
At September 30, 1998, we had outstanding 3,877 depositary shares, each
representing 1/100th of a share of Series BB conversion preferred stock with a
cumulative annual dividend of $5.04 per depositary share. On October 1, 1998,
each of the outstanding depositary shares automatically converted into 2.4972
shares of common stock per depositary share resulting in the issuance of 9,682
common shares. The common stock account increased by $290,170 to reflect the
conversion. There was no change to total shareholders' equity.
We have in place a Rights Agreement ("Rights Plan") which expires on June
18, 2007 and provides for an exercise price of $204.00 per preferred stock
purchase right (individually, a "Right," and collectively, the "Rights"). A
Right entitles holders thereof to buy 1/100th of a share of our Series 12
Preferred Stock (the "Preferred Shares").
The Rights Plan provides that the Rights will be exercisable and will trade
separately from shares of our common stock only if a person or group (an
"Acquiring Person") acquires beneficial ownership of 15% or more of the shares
of our common stock or commences a tender or exchange offer that would result in
such a person or group owning 15% or more of the shares of our common stock (a
"Flip-in Event"). Only when one or more of these events occur will shareholders
receive certificates for the Rights.
If any person actually acquires 15% or more of the shares of common stock,
other than through a tender or exchange offer for all shares of common stock
that provides a fair price and other terms for such shares, or if a 15%-or-more
shareholder engages in certain "self-dealing" transactions or engages in a
merger or other business combination in which we survive and shares of our
common stock remain outstanding, the other shareholders will be able to exercise
the Rights and buy shares of our common stock having twice the value of the
exercise price of the Rights. The Rights Plan that allows shareholders, upon
action by a majority of the Continuing Directors (Continuing Directors are, in
general, directors who were members of the Board of Directors prior to a Flip-in
Event), to exercise their Rights for 50% of the shares of common stock otherwise
purchasable upon surrender to us of the Rights so exercised and without other
payment of exercise price.
The Board of Directors can redeem the Rights for $.01 per Right and to
provide that the Rights may only be redeemed by majority vote of the Continuing
Directors.
The Rights, in general, may be redeemed at any time prior to the tenth day
following public announcement that a person has acquired a 15% ownership
position in shares of our common stock.
29
Notes to Consolidated Financial Statements
10. TAXES ON INCOME
Provision for income taxes:
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30 Current Deferred Current Deferred Current Deferred
- ----------------------------------------------------------------------------------------------------------------------
Federal $ (4,229) $ 51,438 $ 12,175 $ 27,569 $ (5,034) $ 781
Foreign 3,449 (1,643) 4,446 (2,056) 2,857 1,350
State 582 6,276 3,963 (542) 1,540 7,369
- ----------------------------------------------------------------------------------------------------------------------
Taxes on income $ (198) $ 56,071 $ 20,584 $ 24,971 $ (637) $ 9,500
- ----------------------------------------------------------------------------------------------------------------------
The components of deferred income tax assets and liabilities, including finance
subsidiaries, were as follows:
September 30 2000 1999
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and lease
income recognition $ 514,696 $ 495,997
Other, net 29,452 25,989
- -----------------------------------------------------------------------------
Total deferred tax liabilities 544,148 521,986
Deferred tax assets:
Accrued liabilities 177,500 228,212
Net operating loss carryforwards 79,382 62,273
Tax credit carryforwards 42,570 57,972
- -----------------------------------------------------------------------------
Total deferred tax assets 299,452 348,457
Valuation allowance 62,382 63,625
- -----------------------------------------------------------------------------
Net deferred tax assets 237,070 284,832
- -----------------------------------------------------------------------------
Net deferred tax liabilities $ 307,078 $ 237,154
- -----------------------------------------------------------------------------
Net operating loss carryforwards consist primarily of state carryforwards
principally expiring in years 2001 through 2019 and federal carryforwards
expiring in years 2001 through 2018. A valuation allowance has been established
against the state carryforwards and other tax credit carryforwards.
Pre-tax income (loss) from domestic and foreign operations was $94,357 and
$(6,949), respectively, in fiscal 2000, $75,500 and $3,891, respectively, in
fiscal 1999 and $(75,383) and $1,196, respectively, in fiscal 1998.
A reconciliation of income tax expense at the U.S. federal statutory income
tax rate to actual income tax expense is as follows:
Fiscal Year Ended September 30 2000 1999 1998
- -----------------------------------------------------------------------------
Tax at statutory rate $28,642 $27,787 $(25,965)
State income taxes, net of
U.S. federal tax benefit 6,654 2,035 8,371
Goodwill 14,000 14,555 14,601
Loss from asset impairment
and acquisition related
charges 11,737 10,807
Foreign including credits (1,603) (1,395) (1,725)
Other (3,557) 2,573 2,774
- -----------------------------------------------------------------------------
$55,873 $45,555 $ 8,863
- -----------------------------------------------------------------------------
Net income tax payments (refunds) for all operations were $7,935, $7,855
and $(4,051) in fiscal 2000, 1999, and 1998, respectively.
Undistributed earnings of the Company's foreign subsidiaries were
approximately $73,000 at September 30, 2000. Those earnings are considered to be
indefinitely reinvested and, therefore, no provision has been recorded for U.S.
federal and state income taxes.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
September 30 2000 1999 1998
- -----------------------------------------------------------------------------
Numerator:
Income (loss) from
continuing operations $ 25,960 $ 33,836 $ (83,050)
Less: Preferred stock
dividends 19,540
- -----------------------------------------------------------------------------
Numerator for continuing
operations basic and
diluted earnings per share
- income (loss) available
to common shareholders $ 25,960 $ 33,836 $ (102,590)
- -----------------------------------------------------------------------------
Denominator:
Denominator for basic
earnings per share -
weighted average shares 148,207 148,673 135,145
Effect of dilutive securities:
Employee stock options 120 140
Contingently issuable shares 190
- -----------------------------------------------------------------------------
Dilutive potential
common shares 120 330
Denominator for diluted
earnings (loss) per share
--adjusted weighted
average shares and
assumed conversions 148,327 149,003 135,145
- -----------------------------------------------------------------------------
Basic and diluted earnings
(loss) per share from
continuing operations $ 0.18 $ 0.23 $ (0.76)
- -----------------------------------------------------------------------------
IKON Office Solutions, Inc. and Subsidiaries 30
For additional disclosures regarding the outstanding preferred stock and
employee stock options, see Notes 9 and 12 to the consolidated financial
statements.
Options to purchase 5,825 and 5,687 shares of common stock were outstanding
during fiscal 2000 and 1999, respectively, 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. Options to purchase 5,972 shares of common
stock were outstanding during fiscal 1998, but were not included in the
computation of diluted loss per share because the effect would be antidilutive.
Our Series BB conversion preferred stock is excluded from the dilutive
calculations in fiscal year 1998 because the effect of adding 9,682 shares and
deleting the preferred dividends to reflect assumed conversions would be
antidilutive.
12. STOCK OPTIONS
Employee stock options are granted at or above the market price at dates of
grant which does not require us to recognize any compensation expense. In
general, these options expire in ten years (twenty years for certain non-
employee director options) and vest over five years. The proceeds of options
exercised are credited to shareholders' equity. As permitted by SFAS 123,
"Accounting for Stock-Based Compensation" we continue to account for our stock
options in accordance with APB 25, "Accounting for Stock Issued to Employees". A
plan for our non-employee directors enables participants to receive their annual
directors' fees in the form of options to purchase shares of common stock at a
discount. The discount is equivalent to the annual directors' fees and is
charged to expense.
Changes in common shares under option were:
Weighted
Shares Average Price
- ----------------------------------------------------------------------------
September 30, 1997 5,575 $ 26.53
Granted 983 27.66
Exercised (377) 15.49
Cancelled (249) 31.76
- ----------------------------------------------------------------------------
September 30, 1998 5,932 27.18
Granted 3,338 14.65
Exercised (80) 11.73
Cancelled (2,489) 25.93
- ----------------------------------------------------------------------------
September 30, 1999 6,701 21.59
Granted 3,872 6.29
Exercised
Cancelled (1,771) 18.48
- ----------------------------------------------------------------------------
September 30, 2000 8,802 $ 15.48
- ----------------------------------------------------------------------------
Available for Grant 5,599
- ----------------------------------------------------------------------------
The following is provided to comply with the disclosure requirements of SFAS
123. If we had elected to recognize compensation expense based on the fair value
at the date of grant for awards in fiscal years 2000, 1999, and 1998, consistent
with the provisions of SFAS 123, our net income (loss) and earnings (loss) per
share would have been reduced (increased) to the following pro forma amounts:
Fiscal Year Ended
September 30 (unaudited) 2000 1999 1998
- ------------------------------------------------------------------------
Income (loss) from
continuing operations
before extraordinary
gain as reported $ 25,960 $ 33,836 $ (83,050)
Pro forma effect (3,905) (3,025) (7,603)
- ------------------------------------------------------------------------
Income (loss) from
continuing operations
before extraordinary gain 22,055 30,811 (90,653)
Income from discontinued
operations, net of taxes 1,415
Extraordinary gain on
early extinguishment
of debt, net of taxes 1,707
- ------------------------------------------------------------------------
Net income (loss) $ 25,177 $ 30,811 $ (90,653)
Basic and diluted earnings
(loss) per share
Continuing operations
as reported $ .18 $ .23 $ (.76)
Pro forma effect (.03) (.02) (.06)
- ------------------------------------------------------------------------
Continuing operations .15 .21 (0.82)
Discontinued operations .01
Extraordinary gain .01
- ------------------------------------------------------------------------
Net Income (Loss) $ .17 $ .21 $ (0.82)
- ------------------------------------------------------------------------
The pro forma effect on net income (loss) may not be representative of the pro
forma effect on net income (loss) of future years because the SFAS 123 method of
accounting for pro forma compensation expense has not been applied to options
granted prior to October 1, 1995.
The weighted-average fair values at date of grant for options granted during
fiscal years 2000, 1999 and 1998 were $6.24, $9.80 and $13.66, respectively, and
were estimated using the Black-Scholes option-pricing model. The following
assumptions were applied for fiscal 2000, 1999 and 1998, respectively: (i)
expected dividend yields of 2.6%, 1.2% and 0.7%, (ii) expected volatility rates
of 49.7%, 47.7% and 46.5%, (iii) expected lives of 6.7 years, 5.7 years and 5.7
years, and (iv) risk-free interest rates applied of 6.3%, 4.5% and 5.7%.
31
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at
September 30, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Number Weighted-Average Weighted-Average Number Weighted-Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 9/30/00 Contractual Life Price at 9/30/00 Price
- ------------------------------------------------------------------------------------------------------------------------------
$ 4.56 - $ 7.50 3,453 9.6 years $ 6.04 7 $ 6.30
7.83 - 16.00 3,047 8.1 14.10 922 13.93
16.31 - 33.47 1,264 6.6 26.55 800 25.90
34.28 - 56.42 1,038 5.5 37.47 765 37.28
13. PENSION AND STOCK PURCHASE PLANS
We sponsor defined benefit pension plans for the majority of our employees. The
benefits generally are based on years of service and compensation. We fund at
least the minimum amount required by government regulations.
The components of net periodic pension cost for the Company-sponsored defined
benefit pension plans are:
Fiscal Year Ended September 30 2000 1999 1998
- ------------------------------------------------------------------------------
Components of Net
Periodic Benefit Cost
Service cost $ 22,377 $ 29,185 $ 21,977
Interest cost on projected
benefit obligation 22,596 21,741 19,710
Expected return on assets (27,378) (25,134) (22,312)
Amortization of net asset (1,248) (1,248) (1,248)
Amortization of prior
service cost 1,513 1,493 1,381
Recognized net actuarial gain (3,285) (52) (1,414)
- ------------------------------------------------------------------------------
Net periodic pension cost 14,575 25,985 18,094
Cost of shutdown benefits 95
- ------------------------------------------------------------------------------
Total pension cost $ 14,575 $ 26,080 $ 18,094
Assumptions used in accounting for the Company-sponsored defined benefit
pension plans were:
2000 1999 1998
- ------------------------------------------------------------------------------
Weighted average
discount rates 8.0% 7.5% 7.0%
Rates of increase in
compensation levels 4.0% 6.0% 5.5%
Expected long-term rate
of return on assets 10.0% 10.0% 10.0%
The funded status and amounts recognized in the Consolidated Balance Sheets for
the Company-sponsored defined benefit pension plans were:
September 30 2000 1999
- ------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 341,165 $ 312,275
Service cost 22,377 29,185
Interest cost 22,596 21,741
Amendments 1,044
Actuarial (gain) loss (52,559) (5,492)
Benefits paid (16,968) (15,561)
Change due to curtailment, settlement
or special termination benefits 95
Translation adjustment (2,593) (246)
- ------------------------------------------------------------------------------
Benefit obligation at end of fiscal year $ 314,018 $ 343,041
- ------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning
of year $ 313,044 $ 285,859
Actual return on plan assets 46,342 37,995
Employer contribution 9,465 2,470
Expenses (2,300)
Benefits paid (16,968) (15,561)
Translation adjustment (3,102) (300)
- ------------------------------------------------------------------------------
Fair value of plan assets at end of fiscal year $ 348,781 $ 308,163
- ------------------------------------------------------------------------------
Funded Status $ 34,764 $ (34,878)
Unrecognized net actuarial (gain) loss (111,299) (47,111)
Unrecognized net obligation (3,749) (4,997)
Unrecognized prior service cost 10,085 14,620
Adjustment to recognize minimum
pension liability (168) (1,650)
- ------------------------------------------------------------------------------
Net amount recognized $ (70,367) $ (74,016)
- ------------------------------------------------------------------------------
Amounts recognized on the consolidated
balance sheet
Accrued benefit obligation $ (77,732) $ (77,574)
Prepaid pension benefit 5,764 3,177
Intangible asset 1,769 2,031
Accumulated other comprehensive loss (168) (1,650)
- ------------------------------------------------------------------------------
Net amount recognized (70,367) $ (74,016)
- ------------------------------------------------------------------------------
IKON Office Solutions, Inc. and Subsidiaries 32
The projected benefit obligation and fair value of plan assets for the
pension plans with projected benefit obligations in excess of plan assets were
$11,448 and $0 at September 30, 2000 and $337,586 and $301,102 at September 30,
1999. The accumulated benefit obligation and fair value of plan assets were
$11,386 and $0, respectively, at September 30, 2000 and $34,053 and $18,936,
respectively, at September 30, 1999.
Substantially all of the plan assets at September 30, 2000, are invested in
listed stocks, including our common stock having a fair value of $4,698.
The majority of our employees were eligible to participate in our
Retirement Savings Plan (RSP). The RSP allows employees to invest 1% to 16% of
regular compensation before taxes in nine different investment funds. We
contribute an amount equal to two-thirds of the employees' investments, up to 6%
of regular compensation, for a maximum company match of 4%. All our
contributions are invested in our common stock. Employees vest in a percentage
of our contribution after two years of service, with full vesting at the
completion of five years of service. Total expense related to the plans was
$29,993, $31,205 and $35,949 in fiscal 2000, 1999 and 1998 respectively.
We have a Long-Term Incentive Compensation Plan (LTIP) pursuant to which
key management employees have been granted performance based cash awards, which
are earned upon achieving predetermined performance objectives during three-year
intervals, and time based restricted stock awards, which are earned upon the
fulfillment of vesting requirements. The value of these performance based awards
is charged to expense over the related plan period. In fiscal 2000, 1999 and
1998, awards which would be payable in cash totaling $0, $1,012 and $7,445,
respectively, were granted to LTIP participants; however, no expense was
recorded related to these awards in fiscal 2000, 1999 or 1998 since performance
objectives were not achieved and as such no amounts were paid. In fiscal 2000
and 1999, stock awards of $5,172 and $7,603, respectively, were granted, $2,165
and $1,503, respectively, were amortized, $1,706 and $587, respectively, were
cancelled and $6,814 and $5,513 were included in unearned compensation at
September 30, 2000 and 1999, respectively.
14. SEGMENT REPORTING
The Company reports information about its operating segments according to the
"management approach". The management approach is based on the way management
organizes the segments within the enterprise for making operating decisions and
assessing performance. Under FASB Statement No. 131, the Company's reportable
segments are IKON North America and IKON Europe. The IKON North America
operating segment provides copiers, printers, distributed printing, and other
office equipment and services, as well as facilities management, throughout
North America. This segment also includes the Company's captive finance
subsidiaries in North America. The IKON Europe operating segment provides
customers with total office solutions, including copiers and printer systems,
computer networking, distributed printing, facilities management, hardware and
software product interfaces and electronic file conversion throughout Europe.
This segment also includes our captive finance subsidiaries in Europe.
Other includes Business Imaging Services and Technology Services in North
America. Business Imaging Services focuses on electronic file conversion.
Technology Services provides design, planning and support services for network
platforms and IT integration projects, technology training, telecommunications
services and e-business development.
During fiscal 2000, we made the following changes to our segment reporting
as a result of our restructuring programs: IKON Document Services (included in
Other in fiscal 1999) was split into Business Document Services ("BDS"), Legal
Document Services ("LDS") and Business Imaging Services ("BIS"). BDS and LDS
are aligned with and included in IKON North America and BIS remains in Other.
Prior year information has been reclassified to reflect these changes.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in Note 1 to the
consolidated financial statements.
33
Notes to Consolidated Financial Statements
The table below presents segment information for the fiscal years ended
September 30, 2000, 1999 and 1998:
IKON North IKON Corporate And
America Europe Other Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000
Revenues, excluding finance income $ 4,115,603 $ 466,377 $ 519,685 $ 5,101,665
Finance income 323,718 21,562 - 345,280
Intersegment revenues 22,361 - 2,952 $ (25,313) -
Finance interest expense 157,779 9,921 167,700
Restructuring and asset
impairment charges, net (32,612) (5,681) (17,556) (49,319) (105,168)
Shareholder litigation insurance proceeds 17,000 17,000
Operating income (loss) 405,948 18,596 (62,730) (213,899) 147,915
Gain on sale of investment 3,739 3,739
Interest expense (69,821) (69,821)
Income from continuing
operations before income taxes
and extraordinary gain 81,833
Year Ended September 30, 1999
Revenues, excluding finance income 4,032,784 505,073 600,673 5,138,530
Finance income 276,503 20,569 - 297,072
Intersegment revenues 15,963 - 2,449 (18,412) -
Finance interest expense 117,380 9,296 126,676
Shareholder litigation settlement (101,106) (101,106)
Operating income (loss) 387,921 28,148 (12,880) (252,573) 150,616
Interest expense (71,225) (71,225)
Income before taxes 79,391
Year Ended September 30, 1998
Revenues, excluding finance income 4,301,930 407,449 555,552 5,264,931
Finance income 250,355 17,439 267,794
Intersegment revenues 18,440 8,350 (26,790) -
Finance interest expense 120,575 8,573 129,148
Transformation costs (78,033) (78,033)
Operating income (loss) 241,197 31,734 (27,506) (248,944) (3,519)
Interest expense (70,668) (70,668)
Loss before taxes (74,187)
IKON Office Solutions, Inc. and Subsidiaries 34
Reconciliation of segment assets, depreciation expense and expenditures for
fixed assets to consolidated assets, depreciation expense and expenditures for
fixed assets for the years ended September 30, 2000, 1999, and 1998 is as
follows:
IKON North IKON
America Europe Other Corporate Total
- -----------------------------------------------------------------------------------------------
Year Ended September 30, 2000
Segment assets $5,024,505 $673,956 $334,498 $329,626 $6,362,585
Depreciation expense 97,163 8,546 13,245 14,058 133,012
Expenditures for fixed assets 106,383 15,594 10,992 26,020 158,989
Year Ended September 30, 1999
Segment assets 4,488,972 703,932 374,966 233,443 5,801,313
Depreciation expense 105,496 9,938 10,097 9,107 134,638
Expenditures for fixed assets 123,598 9,665 15,261 7,320 155,844
Year Ended September 30, 1998
Segment assets 4,470,861 643,295 373,008 275,646 5,762,810
Depreciation expense 111,951 8,781 13,681 5,688 140,101
Expenditures for fixed assets 164,963 14,569 23,167 9,470 212,169
The following is revenue and long-lived asset information by geographic
area for the years ended and as of September 30:
2000 1999 1998
- ---------------------------------------------------------------
Revenues
United States $4,668,899 $4,647,902 $4,806,564
United Kingdom 345,548 367,448 297,527
Canada 257,335 240,703 275,590
Other 175,163 179,549 153,044
- ---------------------------------------------------------------
$5,446,945 $5,435,602 $5,532,725
- ---------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------
Long-lived assets
United States $1,286,758 $1,383,599 $1,457,281
United Kingdom 268,551 274,298 285,674
Canada 100,037 106,506 86,761
Other 103,536 101,466 78,071
- ---------------------------------------------------------------
$1,758,882 $1,865,869 $1,907,787
- ---------------------------------------------------------------
Long-lived assets consist of equipment on operating leases, net property
and equipment, goodwill net of amortization and other assets. Long-term
receivables in the amount of $19,169 in 2000 and $24,313 in 1999 have been
included in other assets on the consolidated balance sheets, but are excluded
from total long-lived assets above.
As a result of the dynamics of our business, we are reviewing our operating
structure which will result in adjustments to our segment discussion for fiscal
2001. We anticipate the following change: As of October 1, 2000, Technology
Services Network Integration (included in Other in fiscal 2000) will be
included in IKON North America. This is also a result of the restructuring
programs announced in fiscal 2000 and reflects the Company's efforts to provide
total integrated office solutions in North America as are already provided in
Europe.
15. GAIN ON SALE OF INVESTMENT
In fiscal 2000, we sold certain equity securities which were held for
investment. As a result of the sale, we recognized a pre-tax gain of $3,739 in
the consolidated statement of operations.
16. DISCONTINUED OPERATIONS
In fiscal 2000, we received from an insurance carrier an amount of $3,691 for
certain environmental liability coverage and recorded expense of $1,165 for
health benefits of former employees. Both of these items relate to businesses we
had previously recorded as discontinued operations. The resultant net benefit of
$2,526 ($1,415 after-tax) has been recorded as discontinued operations in the
consolidated statement of operations.
17. FINANCIAL INSTRUMENTS
We use financial instruments in the normal course of our business, including
derivative financial instruments, for purposes other than trading. These
financial instruments include debt, commitments to extend credit and interest
rate and currency swap agreements. The notional or contractual amounts of these
commitments and other financial instruments are discussed below.
Concentration of Credit Risk
We are subject to credit risk through trade receivables, lease receivables and
short-term cash investments. Credit risk with respect to trade and lease
receivables is minimized because of a large customer base and its geographic
dispersion. Short-term cash investments are placed with high-credit quality
financial institutions and in short duration corporate and government debt
securities funds. By policy, we limit the amount of credit exposure in any one
type of investment instrument.
35
Notes to Consolidated Financial Statements
Interest Rate and Currency Swap Agreements
We have interest rate swap agreements relating to financial instruments of IOSC
having total principal/notional amount of $555,401 and $225,000 at September 30,
2000 and 1999, respectively, with fixed rates from 6.63% to 7.82% at September
30, 2000 and 5.48% to 6.16% at September 30, 1999. We also have Canadian dollar
denominated interest rate swap agreements having a total principal/notional
amount of CN$98,248 and CN$98,248 ($66,740 and $66,966 at September 30, 2000 and
1999, respectively), with fixed rates from 7.43% to 7.74% at both September 30,
2000 and 1999. We are required to make payments to the counterparties at the
fixed rate stated in the agreements and in return we receive payments at
variable rates.
We have interest rate swap agreements relating to financial instruments of
our Canadian finance subsidiary. These swaps have a principal/notional amount of
CN$166,682 ($113,227) and CN$182,294 ($124,252) at both September 30, 2000 and
1999, respectively. We are required to make variable rate payments to
counterparties based on the one-month commercial paper rate plus .25% and
receive payments at the one-month bankers' acceptance rate.
We also entered into cross-currency swap agreements to exchange Canadian
dollars (CN$98,248) for pounds sterling (pound 46,500) at September 30, 2000 and
1999, respectively. We are required to make pounds sterling payments at fixed
rates from 9.53% to 9.90% in exchange for receipt of Canadian dollar payments at
fixed rates from 9.02% to 9.38%.
We are exposed to credit loss in the event of nonperformance by the
counterparties to the swap agreements. However, we do not anticipate
nonperformance by the counterparties.
The following methods and assumptions were used by us in estimating fair
value disclosures for financial instruments.
Cash and Cash Equivalents and Notes Payable
The carrying amounts reported in the consolidated balance sheets approximate
fair value.
Long-Term Debt
The fair value of long-term debt instruments is estimated using a discounted
cash flow analysis. For more information on these instruments, refer to Note 6
to the consolidated financial statements.
Off-Balance-Sheet Instruments
Fair values for our off-balance-sheet instruments (interest rate and currency
swaps) are based on the termination of the agreements.
The carrying amounts and fair values of our financial instruments are as
follows:
September 30 2000 1999
- ----------------------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- ----------------------------------------------------------------------------------------------------------
Long-term debt:
Bond issues $ 578,745 $ 360,887 $ 588,582 $ 473,835
Private placement debt 55,000 37,974 55,000 50,257
Bank debt 41,994 40,039 45,298 45,168
Sundry notes, bonds and mortgages 97,602 90,719 104,427 102,072
Finance subsidiaries' debt 2,644,399 2,387,609 2,003,209 1,939,596
Interest rate and currency swaps (9,362) (12,607)
18. SUBSEQUENT EVENT
On December 7, 2000, IKON Receivables, LLC publicly issued an additional
$634,431 of lease-backed notes (the "2000-2 Notes") under its shelf registration
statement. Class A-1 Notes totaling $193,532 have a stated interest rate of
6.66125%, Class A-2 Notes totaling $70,193 have a stated interest rate of
6.60%, Class A-3 Notes totaling $290,800 have a variable rate of LIBOR plus
0.23% (which has been fixed at 6.475% through an interest rate swap) and Class
A-4 Notes totaling $79,906 have a variable rate of LIBOR plus 0.27% (which has
been fixed at 6.475% through an interest rate swap). IOSC received approximately
$633,001 in net proceeds from the sale of the 2000-2 Notes. The 2000-2 Notes are
collateralized by a pool of office equipment leases or contracts and related
assets, and the payments on the 2000-2 Notes are made from payments on the
equipment leases. Future maturities on the 2000-2 Notes are $183,855, $175,834,
$142,492, $89,900 and $42,350 in fiscal 2001, 2002,2003, 2004 and 2005,
respectively.
We used the proceeds from the issuance of the 2000-2 Notes to pay $450,576
of our 6.6% asset securitization conduit financing debt that was due in fiscal
2001. The long-term portion of the 2000-2 Notes totaling $450,576 has been
reclassified from current portion of long-term debt, finance subsidiaries to
long-term debt, finance subsidiaries in the consolidated balance sheet.
Future maturities of long-term debt finance subsidiaries after giving
effect for the reclassification described above, are $1,238,950, $726,088,
$428,029, $199,505, $51,685 and $142 in fiscal 2001, 2002, 2003, 2004, 2005 and
thereafter, respectively.
36
Quarterly Financial Summary
First Second Third Fourth
(unaudited) Quarter (a) Quarter (b) Quarter (c) Quarter (d) Total
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Revenues $1,316,121 $1,360,866 $1,396,512 $1,373,446 $5,446,945
Gross profit 496,518 502,915 520,269 502,132 2,021,834
Income (loss) from continuing
operations before taxes on income
and extraordinary gain (63,039) 60,730 53,446 30,696 81,833
Net income (loss) $(55,636) $34,853 $31,628 $18,237 $29,082
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $(0.37) $0.23 $0.21 $0.13 $0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $(0.37) $0.23 $0.21 $0.13 $0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends per common share $.04 $.04 $.04 $.04 $.16
Common stock price
High/Low 10 7/8-5 3/8 9 3/8-5 11/16 6 11/16-3 7/8 5 3/4-3 7/8 10 7/8-3 7/8
1999
Revenues $1,376,720 $1,349,979 $1,365,290 $1,343,613 $5,435,602
Gross profit 542,110 508,149 515,802 508,744 2,074,805
Income before taxes 53,600 35,266 50,986 (60,461) 79,391
Net income (loss) $28,676 $22,867 $27,278 $(44,985) $33,836
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $.19 $.15 $.18 $(.30) $.23
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $.19 $.15 $.18 $(.30) $.23
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends per common share $.04 $.04 $.04 $.04 $.16
Common stock price
High/Low 10 11/16- 16 3/8- 15 13/16- 15 15/16- 16 3/8-
6 3/8 8 5/8 11 11/16 10 3/8 6 3/8
(a) First quarter fiscal 2000 results include a $105,340 restructuring charge.
First quarter fiscal 1999 results include a $14,333 gain on an asset
securitization.
(b) Second quarter fiscal 2000 results include $17,000 of shareholder
litigation insurance proceeds.
(c) Third quarter fiscal 2000 results include $3,288 gain on sale of investment
and $3,049 extraordinary gain on early retirement of debt ($1,707 after-tax).
(d) Fourth quarter fiscal 2000 results include a $451 gain on sale of
investment, $(15,961) adjustment to the first quarter charge, $15,789 fourth
quarter restructuring charge and $2,526 benefit from discontinued operations
($1,415 after-tax). Fourth quarter fiscal 1999 results include pre-tax charges
of $101,106 related to a litigation settlement.
|37
Corporate Financial Summary
in millions, except per share data and employees
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Revenue $5,446.9 $5,435.6 $5,532.7 $5,051.8 $4,050.0
Gross profit 2,021.8 2,074.8 2,042.4 1,990.8 1,551.1
Selling and administrative 1,785.8 1,823.1 1,947.9 1,603.3 1,219.6
Operating income (loss) 147.9 150.6 (3.5) 260.6 310.1
Income (loss) before taxes 81.8 79.4 (74.2) 213.1 272.9
Effective income tax rate (%) 68.3 57.4 --(a) 42.6 39.6
Income (loss) 26.0 33.8 (83.1) 122.4 164.9
Earnings (loss) per share
Basic 0.18 0.23 (0.76) 0.77 1.13
Diluted 0.18 0.23 (0.76) 0.77 1.12
Capital Expenditures 159.0 155.8 212.2 193.2 146.6
Depreciation and amortization 195.1 196.9 202.5 156.6 118.6
- -------------------------------------------------------------------------------------------------------------------------
Discontinued Operations and Extraordinary Items
Income $ 3.1 $ 8.0 $ 45.8
Earnings per share
Basic 0.02 0.06 0.37
Diluted 0.02 0.06 0.35
- -------------------------------------------------------------------------------------------------------------------------
Total Operations and Extraordinary Items
Net income (loss) $ 29.1 $ 33.8 $ (83.1) $ 130.4 $ 210.7
Earnings (loss) per share
Basic 0.20 0.23 (0.76) 0.83 1.50
Diluted 0.20 0.23 (0.76) 0.83 1.47
- -------------------------------------------------------------------------------------------------------------------------
Share Activity
Dividends per share $ 0.16 $ 0.16 $ 0.16 $ 0.26 $ 0.56
Per share book value 10.02 9.82 8.30 8.94 14.94
Return on shareholders' equity % 2.0 2.3 (8.8) 7.8 13.8
Weighted average shares (basic) 148.2 148.7 135.1 133.3 125.9
Adjusted weighted average shares (diluted) 148.3 149.0 135.1 134.6 130.4
Shareholders of record 13,783 14,495 14,990 15,089 15,033
- -------------------------------------------------------------------------------------------------------------------------
Supplementary Information
Days sales outstanding (b) 38.3 40.4 44.0 44.5 34.2
Inventory turns (b) 8.3 8.0 6.7 6.3 5.7
Current ratio 1.1 1.1 1.3 1.5 1.2
Pretax return on capital employed % 4.4 4.5 (0.1) 8.5 14.8
Pretax return on capital employed, excluding
finance subsidiaries % 0.9 0.5 (5.0) 10.0 19.0
Working capital $ 204.0 $ 186.3 $ 495.4 $ 752.0 $ 251.2
Total assets 6,362.6 5,801.3 5,762.8 5,323.9 5,384.6
Total debt 3,470.1 2,862.3 2,956.6 2,563.8 2,158.4
% of capitalization 70.7 66.2 67.4 63.4 48.9
Total debt, excluding finance subsidiaries 825.7 859.0 855.9 818.0 1,031.4
% of capitalization 36.4 37.0 37.5 35.6 31.4
Employees (c) 39,600 39,400 43,700 40,900 43,100
- -------------------------------------------------------------------------------------------------------------------------
(a) Not meaningful.
(b) Continuing operations only.
(c) Includes discontinued operations.
Note: Ratios and operating results include the effect of: fiscal 2000 -
restructuring and asset impairment charges ($105,168), shareholder litigation
insurance proceeds ($17,000) and gain on sale of investment ($3,739), operating
income ($84,429), discontinued operations ($1,415 after-tax), extraordinary gain
from early extinguishment of debt ($1,707 after-tax), net income ($64,025),
diluted earnings per share ($0.43) fiscal 1999 - shareholder litigation charge
($101,106) and gain on asset securitization ($14,333), operating income
($86,773), net income ($58,130), diluted earnings per share ($0.39); fiscal 1998
- - transformation and special charges, operating income ($230,400), net income
($156,969), diluted earnings per share ($1.16); fiscal 1997 - transformation
charges, operating income ($126,908), net income ($82,490), diluted earnings per
share ($0.61); fiscal 1996 - transformation charges, operating income ($21,423),
net income ($13,925), diluted earnings per share ($0.11).
IKON Office Solutions, Inc. and Subsidiaries 38
Board of Directors
James J. Forese/4/
Chairman and Chief Executive Officer, IKON Office Solutions, Inc. Mr. Forese
also serves as a director of American Management Systems and NUI Corporation. He
was elected a director in 1998.
Judith M. Bell/2/
President, Bell Retail Group and Managing Partner, Bell's Market Grill. She is
also a director of Hayden Hays Gallery, Southern Colorado Chapter of the
Arthritis Foundation and a Trustee for El Pomar Foundation. Ms. Bell was elected
in 1998.
James R. Birle/3,4/
Chairman, Resolute Partners, LLC, a private investment firm. He is also director
of Massachusetts Mutual Life Insurance Company, The Connecticut Health and
Education Facilities Authority and Transparency International and Trustee of
Villanova University. Mr. Birle was elected to the Board in 1996.
Philip E. Cushing/1,3/
Group Chief Executive, Vitec Group, plc, a British-based broadcast, video and
photographic camera equipment company. He is also former Group Chief Executive
of Inchcape, plc. Mr. Cushing was elected to the Board in 1997.
Robert M. Furek/2,4/
Former Chairman, State Board of Trustees, Hartford Connecticut School System. He
is also a director of Massachusetts Mutual Life Insurance Company and Partner,
Resolute Partners, LLC, a private investment firm. Mr. Furek was elected to the
Board in 1999.
Thomas R. Gibson/1,3,4/
Chairman and Co-Founder of the Asbury Automotive Group, comprised of almost 100
regional dealership groups headquartered in Stamford, CT. Mr. Gibson was elected
to the Board in 1999.
Richard A. Jalkut/2,4/
Lead Independent Director of the Board of Directors of IKON Office Solutions,
Inc. Mr. Jalkut is President and Chief Executive Officer of PathNet and serves
as a director of HSBC-USA, Home Wireless Networks and DIGEX. He was named a
director in 1996.
Arthur E. Johnson/1,2/
Vice President, Corporate Strategic Development for Lockheed Martin Corporation,
headquartered in Bethesda, MD. Mr. Johnson was elected to the Board in 1999.
Kurt M. Landgraf/1,3/
President, Educational Testing Service. He also serves as Chairman of the Board
of Christiana Care Health Services Inc. and as a director of University of
Delaware Research Foundation and the Delaware Biotechnology Institute. Landgraf
was elected to the Board in 2000.
Marilyn M. Ware/2/
Chairman of the Board and Chairman of the Executive Committe, American Water
Works Company, Inc. She is also a director of CIGNA Corporation. Ware was
elected to the Board in 2000.
1 Investment Committee
2 Human Resources
3 Audit Committee
4 Executive Committee
39
Corporate Officers
James J. Forese
Chairman and Chief Executive Officer
David M. Gadra
Senior Vice President and Chief Information Officer
Dennis P. LeStrange
Senior Vice President--North America
Don H. Liu
Senior Vice President, General Counsel and Secretary
Barbara A. Pellow
Senior Vice President, Marketing
Beth B. Sexton
Senior Vice President, Human Resources
William S. Urkiel
Senior Vice President and Chief Financial Officer
Stephen R. LaHood
Vice President, Supply Chain
David Mills
Vice President--Europe
Carlyle Singer
Vice President and Controller
Andrew S. Twadell
Vice President, Internal Audit
J.F. Quinn
Treasurer
IKON Office Solutions, Inc. and Subsidiaries 40