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Financial Report
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Table of Contents
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28 Management's Responsibility for Financial Reporting
28 Report of Ernst & Young LLP, Independent Auditors
29 Financial Review
34 Consolidated Financial Statements
49 Quarterly Financial Summary
50 Corporate Financial Summary
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twenty seven.
IKON Office Solutions, Inc. and Subsidiaries
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 Ernst & Young LLP, independent
auditors.
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 Ernst & Young LLP, are reviewed regularly by the
Audit Committee of the Board of Directors, which is composed of seven directors
who are not employees of the Company. The Audit Committee meets periodically
with Ernst & Young LLP and management to review audit scope, timing and results.
FPO
/s/ James J. Forese
James J. Forese
President and Chief Executive Officer
FPO
/s/ Kurt E. Dinkelacker
Kurt E. Dinkelacker
Executive Vice President and
Chief Financial Officer
Report of Ernst & Young LLP,
Independent Auditors
To the Board of Directors and Shareholders, IKON Office Solutions, Inc.
We have audited the accompanying consolidated balance sheets of IKON Office
Solutions, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended September 30,
1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IKON Office Solutions, Inc. and subsidiaries at September 30, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.
FPO
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 3, 1998
twenty eight.
IKON Office Solutions, Inc. and Subsidiaries
Financial Review
On June 19, 1996, the Company announced that it would split its two operating
units into independent companies by spinning off Unisource, its paper products
and supply systems distribution group, as a separate publicly owned company. The
Company accomplished the transaction through a U.S. tax-free distribution of
Unisource stock to Company shareholders on December 31, 1996. As a result of the
spin-off of Unisource, the Company has accounted for Unisource as a discontinued
operation. Continuing operations of the Company sell, rent and lease
photocopiers, digital printers and other automated office equipment for use in
both traditional and integrated office environments. The Company also provides
outsourcing and imaging services and offers consulting, design, computer
networking and technology training for the networked office environment.
Results of Operations
Revenues and income (loss) before taxes from continuing operations for fiscal
years ended September 30, 1998, 1997, and 1996 and the percentage change for
1998 versus 1997 and 1997 versus 1996 were:
(in millions) 1998 1997 % Change 1997 1996 % Change
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Revenues $5,629 $5,128 9.8% $5,128 $4,100 25.1%
===========================================================================================================================
Income (loss) before taxes:
Operating income, excluding
transformation costs $ 74.5 $ 387.5 (80.8)% $ 387.5 $ 331.5 16.9%
Transformation costs (78.0) (126.9) (126.9) (21.4)
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Operating income (loss) (3.5) 260.6 (101.3)% 260.6 310.1 (16.0%)
Interest expense (70.7) (47.5) (47.5) (37.2)
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$(74.2) $ 213.1 (134.8)% $ 213.1 $ 272.9 (21.9%)
===========================================================================================================================
Fiscal 1998 Compared to Fiscal 1997
The Company's fiscal 1998 revenues increased $501 million, or 9.8% over fiscal
1997. Net sales, which includes equipment revenue, increased $171 million or 6%.
Equipment revenues have been impacted by increasing competition, which is
driving sales prices down, although the Company continues to maintain its market
share. As a result of the acceleration of the shift from black and white analog
product to digital product during fiscal 1998, prices are falling for black and
white analog sales. Service and rental revenue increased $247 million or 12%.
This increase resulted from increases in equipment service revenue, outsourcing
and systems integration consulting. Finance income increased $83 million, or
37%, due to the growth in the lease portfolio.
Revenues from the Company's operations outside the U.S. were $735 million for
fiscal 1998 compared to $661 million for the prior fiscal year. The Company's
European operations accounted for $53 million of the increase, while Canadian
revenues increased $10 million and other foreign operations revenues increased
$11 million in fiscal 1998 compared to fiscal 1997. In fiscal 1998, the Company
completed 34 acquisitions with trailing year revenues of $231 million. Of the 34
companies acquired this fiscal year, 10 were outsourcing and imaging companies,
11 were technology services companies and 13 were traditional copier companies.
Acquisition activity has been put on hold for at least six months in North
America as management concentrates on improving operations.
The Company's operating income decreased by $264.1 million compared to the
prior year. Excluding transformation costs, operating income decreased $313
million to $74.5 million in fiscal 1998 compared to $387.5 million in the prior
year. The Company completed an in-depth review of its operations during August
1998 and determined that it was necessary and appropriate to take charges to
earnings totaling $110 million on a pretax basis. These adjustments relate to
the following four areas: (1) Increases to accounting estimates for lease
default reserves of $28 million and accounts receivable reserves of $20 million.
The increase in lease default reserves is a result of recent trends in customer
defaults, especially in the print-for-pay customer segment of the business. The
increase in the accounts receivable reserve relates primarily to certain
business units which are experiencing billing and collection issues relating to
systems conversion and consolidation of operating locations, (2) A $20 million
loss from an asset impairment in a technology services company involved in
high-end software development, (3) $35 million of adjustments related to the
breakdown in the execution of internal controls at four operating units, and (4)
$7 million of adjustments at other operating units. In addition, operating
income includes $40.4 million of charges relating to the closing of
underperforming branches, executive severance packages, and the settlement of
lawsuits. Gross margins in fiscal 1998 were 36.9% of revenues, compared to 39.2%
in the prior year. Gross margins are lower this year due to increasing price
competition in the high-end black and white and new digital products, increased
lease default provisions and because the lower margin outsourcing and technology
services businesses have become a larger part of the revenue mix. The Company
expects gross margins to continue to be impacted by increased price competition
and the shift in revenue mix. Selling and administrative expense as a percent of
revenue was
twenty nine.
IKON Office Solutions, Inc. and Subsidiaries
35.2% in fiscal 1998 compared to 31.6% in fiscal 1997. The percentage increase
was due to fiscal 1998 revenues that were below planned amounts without
corresponding reductions in selling and administrative costs, and the charges of
$40.4 million. The Company intends to reduce the selling and administrative
expense to revenue relationship by focusing on increased sales productivity and
implementation of an expense reduction program.
Operating income from foreign operations was $12.1 million in fiscal 1998, a
decrease of $15.1 million from $27.2 million in fiscal 1997. European operating
income increased by $5.5 million, while Canadian operating income decreased
$25.6 million. Other foreign operations increased $5 million in fiscal 1998.
There was no material effect of foreign currency exchange rate fluctuations on
the results of operations in fiscal 1998 compared to fiscal 1997.
Costs associated with the Company's transformation program decreased $49
million in fiscal 1998 compared to fiscal 1997. Severance and other employee
costs, including temporary labor, decreased $7 million, facility consolidation
costs, including lease buyouts and write-off of leasehold improvements,
increased $1 million, technology conversion costs decreased $32 million,
primarily resulting from the fiscal 1997 write-off of costs associated with the
SAP computer platform that was abandoned ($30 million) and there were no
significant costs incurred in fiscal 1998 with the adoption of the IKON name
which were $11 million in fiscal 1997.
Interest expense increased $23.2 million in fiscal 1998 due to higher debt
levels from investment in fixed assets, acquisitions and the share repurchase
program which began in the third quarter of fiscal 1997. Income before taxes
decreased by $287.3 million in fiscal 1998 compared to fiscal 1997, as a result
of the unusual charges, decreasing gross margins and increasing selling and
administrative expenses and interest expense, offset by lower transformation
expenses in fiscal 1998. Tax expense for fiscal 1998 was $8.9 million on the
loss before taxes of $74.2 million. The unusual relationship between income tax
expense and income (loss) before taxes is the result of the impact of
non-tax-deductible items (primarily goodwill amortization and loss from asset
impairment) combined with a loss before income taxes.
Earnings per common share from continuing operations, assuming dilution,
decreased from $.77 per share in fiscal 1997 to a loss of $.76 per share in
fiscal 1998. Excluding transformation costs, earnings per common share from
continuing operations, assuming dilution, decreased from $1.38 per share in
fiscal 1997 to a loss of $.38 per share in fiscal 1998. Including earnings per
share from discontinued operations and the extraordinary loss on the
extinguishment of debt, earnings per share, assuming dilution, of the Company
were $.83 in fiscal 1997. There was no significant change in the weighted
average shares, assuming dilution, in fiscal 1998 compared to fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
The Company's revenues increased approximately $1 billion, or 25.1% in fiscal
1997 compared to fiscal 1996, of which $554 million relates to current and
prior-year acquisitions and $474 million to base companies' internal growth.
Revenues from the Company's operations outside the U.S. were $661 million in
fiscal 1997 compared to $540 million in fiscal 1996. The Company's European
operations accounted for $15 million of the increase, while Canadian revenues
increased $93 million as a result of acquisitions and internal growth in base
companies. Other foreign operations added $13 million of revenue in fiscal 1997.
The Company's worldwide internal revenue growth was 12% in fiscal 1997 compared
to 14% in fiscal 1996. The internal revenue growth has been negatively impacted
by short-term issues related to the acceleration of the Company's transformation
initiative and its impact on operations both in the U.S. and U.K. In fiscal
1997, IKON completed 89 acquisitions with annualized trailing revenues of $528
million. Of the companies acquired, 27 were outsourcing and imaging companies,
28 were technology services companies and 34 were traditional copier companies.
In fiscal 1997, as part of its total solutions strategy, IKON emphasized the
acquisition of technology services and outsourcing companies to build its
capabilities in these areas.
The Company's operating income decreased by $49.5 million compared to the
prior year. However, excluding transformation costs, operating income increased
$56 million, or 16.9% over the prior year. Operating income from foreign
operations was $27.2 million for fiscal 1997 compared to $59 million in the
prior year. European operations posted a $28.3 million decline in operating
income in fiscal 1997, relating primarily to revenue declines in the U.K. and
transformation costs. Canadian operating income decreased $3.1 million and other
foreign operations decreased $.4 million. These declines are also primarily the
result of transformation costs. There was no material effect of foreign currency
exchange rate fluctuations on the results of operations in fiscal 1997 compared
to fiscal 1996. Finance subsidiaries contributed 23.5% of IKON's operating
income in fiscal 1997 compared to 15.1% in fiscal 1996. The Company's operating
margins were 5.1% in fiscal 1997 compared to 7.6% in fiscal 1996. Excluding
transformation costs, the Company's operating margins were 7.6% in fiscal 1997,
compared to 8.1% in fiscal 1996.
Costs associated with the Company's transformation program increased $105
million in fiscal 1997 compared to fiscal 1996, primarily relating to the
write-off of costs associated with the SAP computer platform that was abandoned
during the second quarter and technology conversion costs ($36 million),
severance and other employee-related costs, including temporary labor and costs
related to consultants assisting with the transformation ($35 million), facility
consolidations costs, including lease buyouts and write-offs of leasehold
improvements ($23 million) and costs incurred in connection with the adoption of
the IKON name worldwide ($11 million).
thirty.
IKON Office Solutions, Inc. and Subsidiaries
Interest expense increased $10.3 million in fiscal 1997, primarily the result
of increased borrowing levels when adjusted for the Unisource intercompany debt
repayment made in December 1996. Income from continuing operations before taxes
decreased by $59.8 million from the prior year, primarily reflecting the
combined result of internal growth from base companies along with earnings
contributed by acquisitions, net of increased transformation and interest costs.
The effective income tax rate is 42.6% in fiscal 1997 compared to 39.6% in
fiscal 1996. The Company used the proceeds of a December 2, 1996 $553.5 million
intercompany debt repayment from its discontinued operation, Unisource, to
prepay $514 million of corporate debt. The Company recorded an extraordinary
charge of $12.2 million after tax ($18.7 million pretax) in the first quarter of
fiscal 1997 primarily for prepayment penalties relating to its early
extinguishment of certain corporate debt.
Earnings per share, assuming dilution, from continuing operations, excluding
the extraordinary charge, decreased from $1.12 per share in fiscal 1996 to $.77
per share in fiscal 1997. Excluding transformation costs, earnings per share,
assuming dilution, from continuing operations would have increased 13.1% from
$1.22 per share in fiscal 1996 to $1.38 per share in fiscal 1997. Including the
loss per share of $.09 on the extraordinary charge and the earnings per share of
$.15 on discontinued operations, earnings per share, assuming dilution, were
$.83 for fiscal 1997 compared to $1.47 (which includes $.35 for discontinued
operations) for fiscal 1996. Weighted average shares, assuming dilution, of
134.6 million in fiscal 1997 were 4.2 million shares greater than the 130.4
million weighted average shares in fiscal 1996, primarily the result of stock
issued for acquisitions (5.8 million weighted shares), net of treasury share
repurchases (2.4 million weighted shares).
Discontinued Operations
The Company spun off Unisource, its paper products and supply systems
distribution group, at the end of the first quarter of fiscal 1997. Revenues of
Unisource increased $13 million or .7% in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996. This change was due to increases
associated with current and prior-year acquisitions of $152 million, which were
offset by revenue declines of $139 million in base operations. The decline in
base operations was principally due to an estimated decrease in average paper
prices of 17% compared to the same period in fiscal 1996. The price deflation
was partially offset by volume gains in the base operations. Income before
income taxes decreased $8.5 million to $34.7 million for the first quarter of
fiscal 1997 compared to $43.3 million in the first quarter of fiscal 1996. This
decrease is primarily related to price decreases, net of volume increases in
base operations and operating income contributed by acquisitions, plus
additional interest expense of $3.5 million in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996.
Impact of Year 2000
State of Readiness. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive software or
embedded technology (non-IT systems) may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The potential for a problem exists with
all computer hardware and software, as well as in products with embedded
technology: copiers and fax machines; security and HVAC systems; voice/telephony
systems; elevators, etc.
The Company has appointed a Year 2000 Corporate Compliance Team, which has
prepared an international compliance program for the Company and is responsible
for coordinating and inspecting compliance activities in all business units. The
compliance program requires all business units and locations in every country to
inventory potentially affected systems and products, assess risk, take any
required corrective actions, test and certify compliance. The Company's Year
2000 Testing and Certification Guidelines delineate the Year 2000 compliance
process, testing and quality assurance guidelines, certification and reporting
processes and contingency planning. An independent consulting company has
reviewed the compliance program and any appropriate recommendations have been
implemented. All internal IT systems and non-IT systems have been inventoried.
The Company has completed the assessment phase of its Year 2000 project.
Remediation and testing phases have begun at all locations and are complete on
systems at business units covering approximately 10% of the Company's
consolidated revenue. The Company anticipates completing the Year 2000 project
no later than October 31, 1999, which is prior to any anticipated material
impact on its operating systems.
Product warranties and certification are being sought from vendors and
suppliers. The Company has obtained product "Year 2000 Statements" from national
vendors including Canon, Oce, Ricoh and Sharp.
Costs. The Company will use both internal and external resources to reprogram
or replace, test and implement its IT and non-IT systems for Year 2000
modifications. The Company does not separately track the internal costs incurred
on the Year 2000 project. Such costs are principally payroll and related costs
for its internal IT personnel. The total cost of the Year 2000 project,
excluding these internal costs, is estimated at $11.4 million and is being
funded through operating cash flows. Of the total estimated project cost,
approximately $2.4 million is attributable to the purchase of new software which
will be capitalized. The remaining $9.0 million will be expensed as incurred. To
date, the Company has incurred approximately $1.1 million ($971,000 expensed and
$157,000 capitalized) related to its Year 2000 project.
thirty one.
IKON Office Solutions, Inc. and Subsidiaries
Risks. Management believes, based on the information currently available to
it, that the most reasonably likely worst case scenario that could be caused by
technology failures relating to Year 2000 could pose a significant threat not
only to IKON, its customers and suppliers, but to all businesses. Risks include:
.Legal risks, including customer, supplier, employee or shareholder lawsuits
over failure to deliver contracted services, product failure, or health and
safety issues.
.Loss of sales due to failure to meet customer quality expectations or
inability to ship products.
.Increased operational costs due to manual processing, data corruption or
disaster recovery.
.Inability to bill or invoice.
The Company has taken steps to limit the scope of product and service
warranties to customers to June 30, 2000 and to either the replacement of
noncompliant products or to reimbursement of the cost of the product or service
provided. With respect to products sold by the Company prior to the inclusion of
such limited warranties, differing interpretations of the warranties included
with such products will likely result in litigation against the Company. The
Company is not able to assess the impact of such litigation at this time.
The Company is engaged in the provision of certain Year 2000 services to
customers, whereby the Company evaluates the Year 2000 compliance of customers'
software and hardware, and works with customers to find solutions to Year 2000
problems. The Company has taken steps to limit its warranties with respect to
the Company's provision of such services.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived using numerous assumptions of future events, including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Contingency Plans. The Company's Guidelines require that contingency plans be
developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. The Company expects to
have its contingency plans in place by October 31, 1999. In addition, the
Company is forming a rapid response team as part of its IT group that will
respond to any operational problems during the Year 2000 date change period.
Financial Condition and Liquidity
Net cash provided by operating activities for fiscal 1998 was $269 million.
During the same period, the Company used $896 million in cash for investing
activities, which included net finance subsidiary activity of $638 million,
acquisition activity at a cash cost of $83 million, capital expenditures for
property and equipment of $120 million and capital expenditures for equipment on
operating leases of $92 million. Cash provided by financing activities was
primarily the result of debt issuances by finance subsidiaries.
Debt, excluding finance subsidiaries, was $856 million at
September 30, 1998, an increase of $38 million from the debt balance at
September 30, 1997 of $818 million. At September 30, 1998, debt as a percentage
of capitalization, excluding finance subsidiaries, was 37.5%, compared to 35.6%
in the prior year, while the current ratio was 1.3 to 1. The Company has
established goals to reduce working capital and related debt levels. At the end
of fiscal 1998, the Company's commitments for capital expenditures were
approximately $8.3 million, most of which are expected to be expended during
fiscal 1999 and relate to IT initiatives.
On January 16, 1998, the Company amended its December 16, 1996 credit
agreement to increase the borrowing limit from $400 million to $600 million and
to extend the termination to January 16, 2003. As of September 30, 1998,
short-term borrowings supported by the agreement totaled $64 million. In October
1997, the Company completed a $250 million two tranche underwritten public
offering consisting of $125 million 6.75% notes due November 1, 2004 and $125
million 7.3% notes due November 1, 2027. The 6.75% notes were sold at a discount
to yield 6.794% and carry a make-whole call provision with a five basis-points
premium. The 7.3% notes were also sold at a discount to yield 7.344% and carry a
make-whole call provision with a 15 basis-points premium. The proceeds of the
offering were used to repay short-term borrowings. The Company has $700 million
available at September 30, 1998 for either stock or debt offerings under its
shelf registration statement.
Finance subsidiaries' debt grew by $355 million from September 30, 1997, a
result of increased leasing activity. During fiscal 1998, the U.S. finance
subsidiary issued an additional $308 million under its medium term notes
program, net of repayments. At September 30, 1998, $1.8 billion of medium term
notes were outstanding with a weighted average interest rate of 6.5%, while $1.1
billion remains available under this program. Under its $275 million asset
securitization programs, the U.S. finance subsidiary sold $106 million in direct
financing leases during fiscal 1998, replacing those leases liquidated and
leaving the amount of contracts sold unchanged. On April 30, 1998, the Company
entered into a CN$175 million asset securitization agreement for direct
financing lease receivables of its Canadian finance subsidiary. CN$172 million
(approximately $135 million) of direct financing leases were sold under this
agreement in fiscal 1998.
The Company filed shelf registrations for 10 million shares of common stock in
April 1997 and 5 million shares of common stock in March 1996. Shares issued
under these registration statements are being used for acquisitions.
Approximately 7 million shares have been issued under these shelf registrations
through September 30, 1998, leaving 8 million shares available for issuance.
On April 17, 1997, the Company announced that it may repurchase from time to
time as much as 5% of the outstanding IKON common stock in open market
transactions. Through September 30, 1997, the Company repurchased 4.4 million
common shares for $109.7 million. An additional 150,000 shares were repurchased
under this program in fiscal 1998 for $3.4 million.
thirty two.
IKON Office Solutions, Inc. and Subsidiaries
The Company and certain principal officers and directors were named as
defendants in fourteen purported class action complaints filed on behalf of
purchasers of the Company's common stock during the class period from October
15, 1997 through August 13, 1998. The complaints allege violations of securities
laws during the class period. Management believes the lawsuits are without merit
and that the outcome will not have a material adverse effect on the financial
position or overall trends in the results of operations of the Company. However,
due to the inherent uncertainties of litigation, the Company cannot accurately
predict the ultimate outcome of litigation. An unfavorable outcome of litigation
could have an adverse impact on the Company's financial condition and results of
operations.
The Company believes that its operating cash flow together with unused bank
credit facilities and other financing arrangements will be sufficient to finance
current operating requirements including capital expenditures, acquisitions,
dividends and stock repurchases.
Market Risk
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's long-term debt. The Company
has no cash flow exposure due to interest rate changes for long-term debt
obligations. The Company primarily enters 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. For interest rate swaps, the table presents
notional amounts and weighted average interest rates by contractual maturity
dates using September 30, 1998 variable rates. The carrying amounts for cash,
accounts receivable, long-term receivables 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 the Company's long-term debt obligations:
(in thousands) 1999 2000 2001 2002 2003 Thereafter
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt
Fixed rate $56,358 $ 7,865 $ 52,308 $ 4,835 $2,065 $600,190
Average interest rate 8.0% 10.7% 8.8% 8.0% 7.9% 7.0%
Variable rate $ 45,121
Average interest rate 4.8%
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, finance subsidiaries
Fixed rate $726,159 $474,893 $533,374 $111,396 $29,815
Average interest rate 6.3% 6.7% 6.7% 6.6% 7.6%
Variable rate $225,000
Average interest rate 5.4%
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate derivative financial
instruments related to debt
Interest rate swaps:
Pay fixed/receive variable $270,121
Average pay rate 6.4%
Average receive rate 5.3%
===========================================================================================================================
Foreign Exchange Risk. The Company does not have significant foreign exchange
risk. Foreign denominated intercompany debt borrowed in one currency and repaid
in another is fixed via currency swap agreements. Gains and losses resulting
from the remeasurement of foreign financial statements into U.S. dollars did not
have a significant effect on the results of operations for fiscal years 1998,
1997 or 1996.
thirty three.
IKON Office Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
Fiscal Year Ended September 30
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $3,012,006 $2,841,561 $ 2,381,151
Service and rentals 2,310,114 2,063,186 1,560,915
Finance income 306,543 223,686 157,707
- ---------------------------------------------------------------------------------------------------------------------------
5,628,663 5,128,433 4,099,773
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Costs and Expenses
Cost of goods sold 2,038,682 1,828,883 1,552,183
Service and rental costs 1,385,780 1,190,277 915,032
Finance interest expense 129,148 98,664 68,043
Selling and administrative 1,980,539 1,623,135 1,233,036
Loss from asset impairment 20,000
Transformation costs 78,033 126,908 21,423
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5,632,182 4,867,867 3,789,717
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (3,519) 260,566 310,056
Interest Expense 70,668 47,453 37,179
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Income (Loss) from Continuing Operations Before Taxes
and Extraordinary Loss (74,187) 213,113 272,877
Income Taxes 8,863 90,751 107,984
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Income (Loss) from Continuing Operations
Before Extraordinary Loss (83,050) 122,362 164,893
Discontinued Operations 20,151 45,848
- ---------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Loss (83,050) 142,513 210,741
Extraordinary Loss from Early Extinguishment of Debt,
net of tax benefit (12,156)
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (83,050) 130,357 210,741
Less Preferred Dividends 19,540 19,540 22,319
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Available to Common Shareholders $ (102,590) $ 110,817 $ 188,422
===========================================================================================================================
Earnings (Loss) Per Share
Continuing operations $ (.76) $ .77 $ 1.13
Discontinued operations .15 .37
Extraordinary loss (.09)
- ---------------------------------------------------------------------------------------------------------------------------
$ (.76) $ .83 $ 1.50
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share, assuming dilution
Continuing operations $ (.76) $ .77 $ 1.12
Discontinued operations .15 .35
Extraordinary loss (.09)
- ---------------------------------------------------------------------------------------------------------------------------
$ (.76) $ .83 $ 1.47
===========================================================================================================================
Cash Dividends Per Share of Common Stock $ .16 $ .26 $ .56
See notes to consolidated financial statements.
thirty four.
IKON Office Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 963 $ 21,341
Accounts receivable, less allowances of: 1998-$63,591; 1997-$54,192 793,934 765,660
Finance receivables, net 822,569 670,784
Inventories 431,837 442,207
Prepaid expenses 97,534 101,294
Deferred taxes 112,609 124,520
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Total current assets 2,259,446 2,125,806
- ---------------------------------------------------------------------------------------------------------------------------
Investments and Long-Term Receivables 25,109 17,508
Long-Term Finance Receivables, net 1,556,454 1,331,372
Equipment on Operating Leases, net of accumulated amortization of:
1998-$158,315; 1997-$167,464 110,891 101,900
Property and Equipment, net 260,106 239,545
Goodwill 1,387,390 1,348,133
Other Assets 149,400 159,622
- ---------------------------------------------------------------------------------------------------------------------------
$5,748,796 $5,323,886
===========================================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt $ 56,358 $ 60,794
Current portion of long-term debt, finance subsidiaries 726,159 251,711
Notes payable 87,180 266,979
Trade accounts payable 245,520 206,547
Accrued salaries, wages and commissions 115,101 110,628
Deferred revenues 211,824 208,612
Other accrued expenses 312,711 268,511
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,754,853 1,373,782
- ---------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 712,384 490,235
Long-Term Debt, Finance Subsidiaries 1,374,478 1,494,043
Deferred Taxes 325,488 330,996
Other Long-Term Liabilities 154,305 153,182
Shareholders' Equity
Series BB conversion preferred stock, no par value:
3,877,200 depositary shares issued and outstanding 290,170 290,170
Common stock, no par value: authorized 300,000,000 shares;
issued 1998-137,139,000 shares; 1997-135,705,000 shares 689,195 677,681
Retained earnings 453,570 574,646
Foreign currency translation adjustment (1,992) (728)
Cost of common shares in treasury: 1998-124,000 shares;
1997-2,401,000 shares (3,655) (60,121)
- ---------------------------------------------------------------------------------------------------------------------------
1,427,288 1,481,648
- ---------------------------------------------------------------------------------------------------------------------------
$5,748,796 $5,323,886
===========================================================================================================================
See notes to consolidated financial statements.
thirty five.
IKON Office Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Fiscal Year Ended September 30 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Shares Amounts Shares Amounts Shares Amounts
- ---------------------------------------------------------------------------------------------------------------------------
Series AA Convertible Preferred Stock
Balance, beginning of year 4,025 $ 201,924
Dividend accretion 503
Preferred stock conversion (4,025) (202,427)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year
===========================================================================================================================
Series BB Conversion Preferred Stock 3,877 $290,170 3,877 $ 290,170 3,877 $ 290,170
===========================================================================================================================
Common Stock
Balance, beginning of year 135,705 $ 677,681 131,930 $1,305,413 116,136 $ 643,998
Series AA preferred stock conversion 8,198 368,382
Mergers, acquisitions and other 1,434 9,648 3,775 145,265 7,596 285,836
Unisource spin-off (779,770)
Tax benefit relating to stock plans 1,866 6,773 7,197
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year 137,139 $ 689,195 135,705 $ 677,681 131,930 $1,305,413
===========================================================================================================================
Retained Earnings
Balance, beginning of year $574,646 $ 701,771 $ 781,536
Net income (loss) (83,050) 130,357 210,741
Cash dividends declared:
Series AA preferred stock,
per share: 1996-$.719 (2,779)
Series BB preferred stock,
per share: $5.04 (19,540) (19,540) (19,540)
Common stock, per share: 1998-$.16;
1997-$.26; 1996-$.56 (21,600) (34,640) (70,010)
Pooled companies, prior to merger (177)
Series AA preferred stock conversion (199,108)
Unisource spin-off (210,071)
Credits from issuance of
treasury shares and other 3,114 6,769 1,108
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $453,570 $ 574,646 $ 701,771
===========================================================================================================================
Foreign Currency Translation Adjustment
Balance, beginning of year $ (728) $ (25,187) $ (21,540)
Translation adjustment (1,264) (4,659) (3,647)
Unisource spin-off 29,118
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (1,992) $ (728) $ (25,187)
===========================================================================================================================
Cost of Common Shares in Treasury
Balance, beginning of year 2,401 $(60,121) 374 $ (16,663) 118 $ (4,726)
Purchases 178 (4,013) 4,486 (112,192) 2,004 (86,084)
Reissued for:
Exercise of options (377) 9,346 (50) 1,471 (395) 17,287
Sales to employee stock plans (485) 11,802 (501) 16,438 (534) 23,710
Mergers, acquisitions and other (1,593) 39,331 (1,908) 50,825
Series AA preferred stock conversion (819) 33,150
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year 124 $ (3,655) 2,401 $ (60,121) 374 $ (16,663)
===========================================================================================================================
See notes to consolidated financial statements.
thirty six.
IKON Office Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Fiscal Year Ended September 30
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Income (loss) from continuing operations $ (83,050) $ 122,362 $ 164,893
Additions (deductions) to reconcile net income (loss)
from continuing operations to net cash provided
by operating activities of continuing operations:
Depreciation 140,101 108,037 84,447
Amortization 62,424 48,555 34,107
Provisions for losses on accounts receivable 47,052 25,724 18,296
Provision for deferred income taxes 9,500 92,063 62,174
Write-off of abandoned software and other assets
due to transformation 5,987 25,342
Loss from asset impairment 20,000
Changes in operating assets and liabilities, net
of effects from acquisitions and divestitures:
Increase in accounts receivable (43,741) (202,790) (83,783)
Decrease (increase) in inventories 20,926 (70,189) (41,445)
Increase in prepaid expenses (391) (21,699) (52,733)
Increase in accounts payable, deferred
revenues and accrued expenses 85,531 37,125 77,430
Miscellaneous 4,964 8,986 4,475
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of
continuing operations 269,303 173,516 267,861
Net cash provided by operating activities of
discontinued operations 24,176 205,914
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 269,303 197,692 473,775
Investing Activities
Cost of companies acquired, net of cash acquired (82,642) (155,907) (171,804)
Expenditures for property and equipment (119,680) (118,015) (108,566)
Expenditures for equipment on operating rental (92,489) (75,223) (38,068)
Proceeds from sale of property and equipment 38,518 35,980 34,482
Purchase of miscellaneous assets (1,000) (10,678) (19,054)
Finance receivables--additions (1,509,900) (1,459,102) (1,005,270)
Finance receivables--collections 871,555 651,025 389,384
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of
continuing operations (895,638) (1,131,920) (918,896)
Net cash used in investing activities of
discontinued operations (38,058) (201,356)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (895,638) (1,169,978) (1,120,252)
Financing Activities
Proceeds from:
Issuance of long-term debt 265,345 35,605 439,149
Option exercises and sale of treasury shares 19,911 43,807 55,084
Sale of finance subsidiaries' lease receivables 229,359 103,401 202,713
Issuance (repayment) of short-term borrowings, net (175,895) 75,388 (69,883)
Long-term debt repayments (42,704) (328,702) (74,546)
Finance subsidiaries' debt--issuance 888,185 932,728 515,673
Finance subsidiaries' debt--repayments (533,091) (314,000) (206,232)
Dividends paid (41,140) (54,180) (91,826)
Purchase of treasury shares (4,013) (112,192) (86,084)
Proceeds from (payments to) discontinued operations 551,834 (53,370)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities of
continuing operations 605,957 933,689 630,678
Net cash provided by (used in) financing
activities of discontinued operations 13,882 (4,558)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 605,957 947,571 626,120
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (20,378) (24,715) (20,357)
Cash at beginning of year 21,341 46,056 66,413
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 963 $ 21,341 $ 46,056
- ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
thirty seven.
IKON Office Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
IKON Office Solutions, Inc. (IKON or the Company) is a leading office technology
company, providing customers with total office solutions including copier and
printing systems, computer networking, print-on-demand services, copy center
management, hardware and software product interfaces and electronic file
conversion. IKON has locations throughout the United States and Canada and in
Europe (primarily in the United Kingdom), which comprise the largest network of
independent copier and office equipment dealers in North America and in the
United Kingdom. The Company's name was changed from Alco Standard Corporation
(Alco) to IKON Office Solutions, Inc. effective January 23, 1997.
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. Significant intercompany
accounts and transactions have been eliminated in consolidation. The spin-off of
Unisource Worldwide, Inc. (Unisource), the Company's paper products and supply
systems distribution business, was completed on December 31, 1996, as discussed
in Note 6. All of the following notes, unless otherwise stated, reflect data on
a continuing operations basis.
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 revenues 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.
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.
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, the Company 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 at September 30, 1998 and
1997 was $143,000,000 and $103,000,000, respectively.
Depreciation
Properties and equipment are depreciated over their useful lives by the
straight-line method.
Foreign Currency Translation
Assets and liabilities of all material 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.
Accounting Changes
In February 1997, the FASB issued Statement No. 128,
"Earnings Per Share" (SFAS 128), which simplified the standards for computing
earnings per share (EPS). SFAS 128 was effective for the first quarter of fiscal
1998 and all prior period EPS amounts have been restated. The Company has
presented basic and diluted EPS and disclosed the computations in Note 14. The
effect of adoption was not material on EPS of any prior period.
Pending Accounting Changes
In June 1997, the FASB issued Statements No. 130, "Reporting Comprehensive
Income" (SFAS 130), and No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in the financial statements. SFAS 131 establishes
new standards for reporting information about operating segments. Both SFAS 130
and 131 will be adopted in fiscal 1999.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132), which is an
amendment of FASB Statements No. 87, 88 and 106. SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures required under FASB Statements No.
87, 88 and 106. SFAS 132 will be adopted in fiscal 1999.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires the Company to recognize all derivatives as either assets or
liabilities and measure the instruments at fair value. The Company intends to
adopt the standard on October 1, 1999. The Company does not believe the effect
of adoption will be material.
thirty eight.
IKON Office Solutions, Inc. and Subsidiaries
1. Significant Accounting Policies (continued)
Interest Rate and Currency Swap Agreements
The Company uses interest rate and currency swap agreements for purposes other
than trading and they are treated as off-balance sheet items. Interest rate swap
agreements are used by the Company to modify variable rate obligations to fixed
rate obligations, thereby reducing the exposure to market rate fluctuations. The
interest rate swap agreements are designated as hedges, and effectiveness is
determined by matching the principal balance and terms with that specific
obligation. Such an agreement involves the exchange of amounts based on fixed
interest rates for amounts based on variable interest rates over the life of the
agreement without an exchange of the notional amount upon which payments are
based. The differential to be paid or received as interest rates change is
accounted for on the accrual method of accounting. The related amount payable to
or receivable from counterparties is included as an adjustment to accrued
interest in other accrued expenses. 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 the Company 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 income at the time of extinguishment.
Business Segment Information
As a result of the spin-off of Unisource, the Company operates in a single
industry segment. The Company provides its customers with integrated solutions
for copier, office equipment, outsourcing and networking needs.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
2. Loss on Asset Impairment
In October 1996, the Company purchased a software development company that it
believed to be a strategic fit with its systems integration companies. In fiscal
1998, this company began to experience operating losses and negative cash flows
from operations. During the third quarter of fiscal 1998, management evaluated
projections that indicated this trend was expected to continue. Management
concluded that the carrying amounts of the goodwill and other long-lived assets
were not recoverable and, in accordance with the Company's accounting policy,
recorded an impairment loss of $20,000,000.
3. Transformation Costs
In September 1995, the Company announced its transformation program to change
its organization into a more cohesive and efficient network by building a
uniform information technology system and implementing best practices for
critically important management functions throughout the IKON companies. The
Company has substantially completed the transformation program as of September
30, 1998. The transformation involves a variety of activities that the Company
believes will ultimately lower administrative costs and improve gross margins
through the creation of marketplace-focused field operations with greater
attention to customer sales and services. These activities include consolidating
purchasing, inventory control, logistics and other activities into thirteen
customer service centers in the U.S., establishing a single financial processing
center, building a common information technology system, adopting a common name
and common benefit programs.
Transformation costs were as follows:
Fiscal Year Ended September 30
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Severance and other
employee-related costs $ 47,159 $ 53,866 $ 18,702
Facility consolidation costs 25,233 24,738 1,293
Technology conversion
costs and other 5,641 37,297 1,428
Costs incurred to adopt the
IKON name worldwide 11,007
- --------------------------------------------------------------------------------
$ 78,033 $126,908 $ 21,423
================================================================================
Severance and other employee-related costs include temporary labor and
consultants assisting with the transformation. Facility consolidation costs
include lease buyouts and write-offs of leasehold improvements. Technology
conversion costs include the write-off of costs related to the abandoned SAP
computer pilot program in fiscal 1997 and other technology conversion costs.
The September 30, 1998 balance sheet includes a severance accrual for 227
employees totaling $9,310,000 and a facility consolidation accrual of
$10,776,000.
thirty nine.
IKON Office Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Mergers
During the second quarter of fiscal 1996, the Company completed two mergers
accounted for as poolings-of-interests by issuing common stock for all of the
shares of Legal Copies International, Inc. and JMM Enterprises, Inc. Total
common shares issued in connection with these mergers were 3,953,990.
Components of the operating results from continuing operations for periods
prior to the merger were:
Three Months Ended
December 31, 1995
(in thousands) (unaudited)
- --------------------------------------------------------------------------
Revenues
IKON Office Solutions, Inc. $852,396
Pooled companies 48,183
- --------------------------------------------------------------------------
$900,579
==========================================================================
Income from continuing operations
IKON Office Solutions, Inc. $ 35,186
Pooled companies 1,751
- --------------------------------------------------------------------------
$ 36,937
==========================================================================
5. Acquisitions
The Company made 34 acquisitions in fiscal 1998 for an aggregate purchase price
of $99,408,000 in cash and stock. Total assets related to fiscal 1998
acquisitions were $157,595,000, including goodwill of $94,769,000. In addition,
$29,829,000 was paid and capitalized in fiscal 1998 relating to prior years'
acquisitions.
In fiscal 1997, the Company made 89 acquisitions for an aggregate purchase
price of $317,864,000 in cash and stock. Total assets related to these
acquisitions were $438,954,000, including goodwill of $277,209,000. An
additional $9,608,000 was paid and capitalized in fiscal 1997 relating to prior
years' acquisitions.
In addition to the mergers described in Note 4, the Company made 97
acquisitions in fiscal 1996 for an aggregate purchase price of $358,568,000 in
cash, notes and stock. Total assets related to these 97 acquisitions were
$499,729,000, including goodwill of $313,495,000. The Company also issued
486,304 common shares for an acquisition accounted for as a pooling-of-interests
whose results of operations were included from the beginning of the fiscal year.
An additional $4,086,000 was paid and capitalized in fiscal 1996 relating to
prior years' acquisitions.
All acquisitions, unless otherwise noted, are included in results of
operations from their dates of acquisition.
Had the purchase 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
(in thousands except per share data)
(unaudited) 1998 1997 1996
- -----------------------------------------------------------------------------
Revenues $ 5,744,054 $ 5,561,592 $4,961,482
Income (loss) from
continuing operations (82,552) 131,545 180,934
Earnings (loss) per share
from continuing operations
Basic (.75) .81 1.19
Diluted (.75) .80 1.17
- -----------------------------------------------------------------------------
6. Discontinued Operations
On June 19, 1996, the Company announced that it would separate Unisource, its
paper products and supply systems distribution business from IKON, its office
solutions business, with each business operating as a stand-alone, publicly
traded company. In order to effect the separation of these businesses, the
Company declared a dividend payable to holders of record of Alco common stock at
the close of business on December 13, 1996 (the Record Date) of one share of
common stock, $.001 par value, of Unisource common stock, for every two shares
of Alco stock owned on the Record Date. The distribution resulted in 100% of the
outstanding shares of Unisource common stock being distributed to Alco
shareholders on December 31, 1996. The Internal Revenue Service issued a ruling
letter which provided that, except for any cash received in lieu of fractional
shares, the spin-off of Unisource was tax-free to Alco and to Alco's U.S.
shareholders.
In conjunction with the separation of their businesses, Unisource and the
Company entered into various agreements that address the allocation of assets
and liabilities between them and define their relationship after the separation,
including a Distribution Agreement (Distribution Agreement), a Benefits
Agreement (Benefits Agreement) and a Tax Sharing and Indemnification Agreement
(Tax Sharing Agreement). The Distribution Agreement provides for, among other
things, the principal transactions required to effect the Distribution, the
conditions to the Distribution, the allocation between the Company and Unisource
of certain assets and liabilities and cooperation by the Company and Unisource
in the provision of information and certain facilities necessary to perform the
administrative functions incident to their respective businesses. The
Distribution Agreement includes cross-indemnification provisions pursuant to
which Unisource and the Company indemnify each other for damages that may arise
out of a breach of their respective obligations under the agreement. Under the
Benefits Agreement, Unisource's obligation to provide benefits includes all
obligations with respect to Unisource employees under pension plans, savings
plans and multiemployer plans, welfare plans (retiree medical plans),
supplemental benefit plans, certain deferred compensation plans, incentive
plans, stock-based plans and other plans covering Unisource employees and
includes liabilities that arose while the individuals were employed by Alco. The
Benefits Agreement requires the Company to reimburse Unisource for a portion of
any payments made by Unisource to former Unisource employees under Alco's 1985,
1991 and 1994 deferred compensation plans.
forty.
IKON Office Solutions, Inc. and Subsidiaries
6. Discontinued Operations (continued)
Unisource assumed certain Alco pension plans covering Unisource employees, and
assets and liabilities attributable to Unisource employees under Alco's
participating companies pension plan and Alco's 401(k) plan have been
transferred to new Unisource pension and 401(k) plans, respectively. Under the
Tax Sharing Agreement, Unisource will bear its respective share of (i) the
Company's federal consolidated income tax liability (or benefit), (ii) any
unitary state income tax liability, and (iii) the Company's consolidated
personal property tax liability for all tax periods that end before or that
include the Distribution Date. Unisource is responsible for paying any tax
liabilities arising for any tax return that it files separately. If any tax year
ending before or including the Distribution Date is subsequently examined by the
IRS, and an adjustment results from such examination, then Unisource's share of
the Company's additional federal consolidated income tax liability (or benefit
for that tax year) will be computed and agreed to by the parties. The Tax
Sharing Agreement generally provides that in the event either the Company or
Unisource takes any action inconsistent with, or fails to take any action
required by, or in accordance with the qualification of the Distribution as
tax-free, then the Company or Unisource, as the case may be, will be liable for
and indemnify and hold the other harmless from any tax liability resulting from
such action.
The Company has accounted for Unisource as a discontinued operation in fiscal
1997 and 1996. Prior-year amounts for Unisource have been restated to reflect
interest and other expenses allocated by the Company. Unisource has been charged
corporate interest expense based on the relationship of its net assets to total
Company net assets, excluding corporate debt, in amounts of $7,203,000 in the
first quarter of fiscal 1997 and $29,572,000 in fiscal 1996. The Company
recorded a charge against earnings of $50,000,000 in the third quarter of fiscal
1996 for restructuring activities at Unisource. The charge included facility
closures costs of $33,000,000 and severance costs for approximately 900
employees of $17,000,000 associated with the announced regional realignment from
ten to five regions in the United States and facilities mergers in the U.S. and
Canada. An $18,000,000 charge against earnings was recorded in the third quarter
of fiscal 1996 for costs associated with the spin-off of Unisource consisting
primarily of investment banking fees, legal and accounting fees, filing fees and
employee termination costs directly related to the spin-off.
The results of discontinued operations were:
Three Months Ended Fiscal Year Ended
(in thousands) December 31, 1996 September 30, 1996
- ------------------------------------------------------------------------------
Revenues (Unisource) $ 1,728,533 $ 7,022,808
==============================================================================
Income before taxes
Unisource (including $50,000
restructuring charge in 1996) 34,743 103,003
Spin-off costs (18,000)
- ------------------------------------------------------------------------------
34,743 85,003
Tax expense (benefit)
Unisource 14,592 43,005
Spin-off costs (3,850)
- ------------------------------------------------------------------------------
14,592 39,155
Net income
Unisource 20,151 59,998
Spin-off costs (14,150)
- ------------------------------------------------------------------------------
$ 20,151 $ 45,848
==============================================================================
In December 1996, Unisource repaid $553,500,000 of intercompany debt outstanding
with the Company and the Unisource common stock was distributed to Alco
shareholders. Equity of the Company was reduced by $960,723,000, which was the
equity of Unisource at December 31, 1996, adjusted for post-closing tax and
pension adjustments.
7. Finance Receivables
The Company's wholly owned finance subsidiaries are engaged in purchasing office
equipment from Company dealers and leasing the equipment to customers under
direct financing leases.
Components of finance receivables, net, are as follows:
September 30 (in thousands) 1998 1997
- --------------------------------------------------------------------------------
Gross receivables $2,688,736 $2,311,263
Unearned income (496,735) (426,979)
Unguaranteed residuals 284,543 194,639
Allowance for doubtful accounts (97,521) (76,767)
- --------------------------------------------------------------------------------
Lease receivables 2,379,023 2,002,156
Less: Current portion 822,569 670,784
- --------------------------------------------------------------------------------
Long-term lease receivables $1,556,454 $1,331,372
================================================================================
At September 30, 1998, future minimum payments to be received under direct
financing leases were: 1999-$924,431,000; 2000-$783,506,000; 2001-$556,398,000;
2002-$308,274,000; 2003-$115,289,000; thereafter-$838,000; while future minimum
lease payments to be received under operating leases were: 1999-$42,323,000;
2000-$30,980,000; 2001-$21,117,000; 2002-$10,977,000; 2003-$3,973,000;
thereafter-$1,000.
IKON's U.S. finance subsidiary has entered into asset securitization
agreements for $275,000,000 of eligible direct financing lease receivables that
expire in March 1999 ($125,000,000) and September 1999 ($150,000,000). The
agreements contain limited recourse provisions that require the finance
subsidiary to assign an additional amount of undivided interest in leases as a
reserve to cover any potential losses to the purchaser due to uncollectible
leases.
forty one.
IKON Office Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
IKON's Canadian finance subsidiary entered into an asset securitization
agreement for up to CN$175,000,000 of eligible direct financing lease
receivables that expires in April 1999. Under the terms of the agreement, there
are limited recourse provisions to cover potential losses to the purchaser.
As collections reduce previously sold interests, new leases can be sold up to
the agreement amount. In fiscal year 1998, the U.S. finance subsidiary sold an
additional $106,144,000 in leases, replacing leases liquidated during the year,
and the Canadian finance subsidiary sold CN$171,664,000 ($134,581,000) in
leases.
The changes in the finance subsidiaries' servicing liabilities relating to the
asset securitization agreements for the fiscal years ended September 30, 1998
and 1997, are as follows:
(in thousands) 1998 1997
- -------------------------------------------------------------------
Beginning of period $ 8,248 $ 8,467
Additions 5,870 3,170
Less: Amortization (3,753) (3,389)
- -------------------------------------------------------------------
Balance at September 30 $10,365 $ 8,248
- -------------------------------------------------------------------
8. Property and Equipment
Property and equipment, at cost, consisted of:
September 30 (in thousands) 1998 1997
- -------------------------------------------------------------------
Land $ 6,718 $ 6,797
Buildings and improvements 94,706 83,294
Furniture and equipment 398,122 372,269
- -------------------------------------------------------------------
499,546 462,360
Less: accumulated depreciation 239,440 222,815
- -------------------------------------------------------------------
Balance at September 30 $260,106 $239,545
===================================================================
9. Notes Payable and Long-Term Debt
Notes payable consisted of:
September 30 (in thousands) 1998 1997
- -------------------------------------------------------------------
Notes payable to banks at
average interest rate 6.1% $82,298 $259,464
Other notes payable at
average interest rate:
1998-6.5%; 1997-8.8% 4,882 7,515
- -------------------------------------------------------------------
$87,180 $266,979
===================================================================
Long-term debt consisted of:
September 30 (in thousands) 1998 1997
- --------------------------------------------------------------------------------
Bond issue at stated interest rate of
6.75%, net of discount (1998-$4,411;
1997-$4,467), due 2025,
effective interest rate of 6.87% $295,589 $295,533
Bond issue at stated interest rate of
6.75%, net of discount (1998-$271),
due 2004, effective interest rate
of 6.794% 124,729
Bond issue at stated interest rate
of 7.3%, net of discount (1998-$659),
due 2027, effective interest rate
of 7.344% 124,341
Bond issue at 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 45,121 71,641
Sundry notes, bonds and mortgages
at average interest rate: 1998-7.2%;
1997-7.7%, due 1999-2005 53,611 52,876
Present value of capital lease obligations
(gross amount: 1998-$28,401;
1997-$36,494) 26,532 32,160
- --------------------------------------------------------------------------------
768,742 551,029
Less current maturities 56,358 60,794
- --------------------------------------------------------------------------------
$712,384 $490,235
================================================================================
After giving effect to interest rate swaps, the average effective interest
rate on the Company's long-term bank debt was 7.7% at both September 30, 1998
and 1997, compared to average stated variable rates of 4.8% and 3.5% at
September 30, 1998 and 1997, respectively.
Long-term debt, finance subsidiaries consisted of:
September 30 (in thousands) 1998 1997
- --------------------------------------------------------------------------------
Medium term notes at average interest
rate: 1998-6.5%; 1997-6.6% $1,849,750 $1,542,250
Notes payable to banks at average
interest rate: 1998-6.9%;
1997-6.4% 250,887 203,504
- --------------------------------------------------------------------------------
2,100,637 1,745,754
Less current maturities 726,159 251,711
- --------------------------------------------------------------------------------
$1,374,478 $1,494,043
================================================================================
After giving effect to interest rate swaps on finance subsidiaries debt issued
during fiscal 1998, the average interest rate on $225,000,000 of the Company's
medium term notes was 6.2% at September 30, 1998, compared to an average
variable rate of 5.4% at September 30, 1998.
forty two.
IKON Office Solutions, Inc. and Subsidiaries
9. Notes Payable and Long-Term Debt
(continued)
Long-term debt and long-term debt, finance subsidiaries mature as follows:
Long-Term Debt,
Finance
(in thousands) Long-Term Debt Subsidiaries
- --------------------------------------------------------------------------------
(fiscal year)
1999 $ 56,358 $726,159
2000 52,986 699,893
2001 52,308 533,374
2002 4,835 111,396
2003 2,065 29,815
2004-2027 600,190
- --------------------------------------------------------------------------------
On December 2, 1996, Unisource borrowed under its new credit facility to repay
$553,500,000 of intercompany debt with the Company. The Company prepaid debt in
the amount of $514,000,000 from these funds. Early repayment of this debt
resulted in certain prepayment penalties. Total prepayment penalties of
$18,701,000 and related tax benefits of $6,545,000 are reflected as an
extraordinary loss on early extinguishment of debt on the Statement of
Operations for fiscal 1997.
On January 16, 1998, the Company's credit agreement with several banks was
amended to increase the amount available from $400,000,000 to $600,000,000 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,
based upon the Company's current long-term debt rating (8.5 basis points per
annum at September 30, 1998). 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, 1998,
short-term borrowings supported by the credit agreement totaled $63,600,000
leaving $536,400,000 unused and available.
The wholly owned U.S. finance subsidiary of the Company 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 the finance subsidiary, 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. At September 30, 1998, $1,123,250,000 is available for
issuance under this program.
The Company is in compliance with all covenants, including financial, for all
loan agreements. Capital lease obligations and mortgages are secured by property
and equipment that had a net book value of $25,758,000 at September 30, 1998.
Interest paid, including finance subsidiaries and corporate interest allocated
to discontinued operations, approximated $186,000,000, $151,000,000 and
$119,000,000 for fiscal years 1998, 1997 and 1996, respectively.
10. Leases
Equipment acquired under capital leases is included in property and equipment in
the amount of $45,416,000 in 1998 and $44,465,000 in 1997 and the related
amounts of accumulated amortization are $19,966,000 in 1998 and $26,021,000 in
1997. Related obligations are in long-term debt and related amortization is
included in depreciation.
At September 30, 1998, future minimum lease payments under noncancelable
operating leases with initial or remaining terms of more than one year were:
1999-$66,099,000; 2000-$53,116,000; 2001-$43,128,000; 2002-$30,307,000;
2003-$19,233,000; thereafter-$28,179,000.
Total rental expense was $85,646,000 in 1998, $81,608,000 in 1997 and
$67,006,000 in 1996.
11. Contingencies
The Company and certain principal officers and directors were named as
defendants in fourteen purported class action complaints filed on behalf of
purchasers of the Company's common stock during the class period from October
15, 1997 through August 13, 1998. The complaints allege violations of securities
laws during the class period. Management believes the lawsuits are without merit
and that the outcome will not have a material adverse effect on the financial
position or overall trends in the results of operations of the Company. However,
due to the inherent uncertainties of litigation, the Company cannot accurately
predict the ultimate outcome of litigation. An unfavorable outcome of litigation
could have an adverse impact on the Company's financial condition and results of
operations.
There are contingent liabilities for taxes, guarantees, other lawsuits,
environmental remediation claims relating to discontinued operations and various
other matters occurring in the ordinary course of business. On the basis of
information furnished by counsel and others, management believes that none of
these contingencies will materially affect the Company.
12. Shareholders' Equity
During the first quarter of fiscal 1996, 432,130 common shares were issued for
Series AA Preferred Stock conversions by holders. On February 9, 1996, the
Company redeemed the balance of its Series AA Preferred Stock for common stock
at the conversion rate of 2.2402 shares of common stock for each depositary
share. Common shares totaling 8,585,423 were issued in connection with this
redemption.
At September 30, 1998, the Company has outstanding 3,877,200 depositary
shares, each representing 1/100th of a share of Series BB conversion preferred
stock. Dividends are cumulative at $5.04 per year per depositary share. The
Series BB preferred stock has one vote per share (equivalent to 1/100th vote per
depositary share) and has a liquidation preference of $77.375 per depositary
share plus an amount equal to accrued and unpaid dividends. Prior to October 1,
1998, each depositary share was convertible at the option of the holder into
2.0468 shares of common stock of the Company. On October 1, 1998,
forty three.
IKON Office Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
each of the outstanding depositary shares automatically converted into 2.4972
shares of common stock per depositary share, resulting in the issuance of
9,682,143 common shares.
IKON amended its Rights Agreement (Rights Plan) as of June 18, 1997. The
Rights Plan, which was scheduled to expire in accordance with its terms on
February 10, 1998, was extended as amended for an additional ten-year term
expiring June 18, 2007. The amendment established a new 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 Series 12 Preferred Stock of the Company (the "Preferred Shares").
The Rights Plan provides that the Rights will be exercisable and will trade
separately from shares of the Company's common stock only if a person or group
(an "Acquiring Person") acquires beneficial ownership of 15% or more of the
shares of the Company's 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
the Company's 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 the Company survives and shares of
its common stock remain outstanding, the other shareholders will be able to
exercise the Rights and buy shares of common stock of the Company having twice
the value of the exercise price of the Rights. A provision has been added to 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 the Company of the Rights so exercised and without other payment of
exercise price.
The Rights Plan was also amended to reduce the price at which the Board of
Directors can redeem the Rights to $.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 common stock of the Company.
================================================================================
13. Income Taxes
Provision for income taxes:
Fiscal Year Ended September 30 (in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
- ----------------------------------------------------------------------------------------------------------------------------
Federal $(5,034) $ 781 $(2,983) $78,770 $21,144 $58,540
Foreign 2,857 1,350 2,032 4,940 13,496 528
State 1,540 7,369 (361) 8,353 11,170 3,106
- ----------------------------------------------------------------------------------------------------------------------------
Taxes on income $ (637) $9,500 $(1,312) $92,063 $45,810 $62,174
- ----------------------------------------------------------------------------------------------------------------------------
forty four.
IKON Office Solutions, Inc. and Subsidiaries
13. Income Taxes (continued)
The components of deferred income tax assets and liabilities, including finance
subsidiaries, were as follows:
September 30 (in thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and lease
income recognition $492,616 $390,444
- --------------------------------------------------------------------------------
Total deferred tax liabilities 492,616 390,444
Deferred tax assets:
Accrued liabilities 160,644 144,324
Net operating loss carryforwards 138,475 28,766
AMT credit carryforwards 34,011 38,792
Other, net 6,723 15,341
- --------------------------------------------------------------------------------
Total deferred tax assets 339,853 227,223
Valuation allowance 60,116 43,255
- --------------------------------------------------------------------------------
Net deferred tax assets 279,737 183,968
- --------------------------------------------------------------------------------
Net deferred tax liabilities $212,879 $206,476
- --------------------------------------------------------------------------------
Net operating loss carryforwards consist primarily of state carryforwards of
$579,000,000 principally expiring in years 1999 through 2018 and federal
carryforwards of $245,000,000 expiring in 2018. A full valuation allowance has
been established against the state carryforwards. 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
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Tax at statutory rate $(25,965) $74,590 $ 95,507
State income taxes, net of
U.S. federal tax benefit 8,371 8,098 9,278
Goodwill 14,601 10,656 5,730
Loss from asset impairment
and acquisition related charges 10,807
Foreign including credits (1,725) (1,279) (818)
Other 2,774 (1,314) (1,713)
- -------------------------------------------------------------------------------
$ 8,863 $90,751 $107,984
- -------------------------------------------------------------------------------
Net income tax payments (refunds) for all operations, including
discontinued, amounted to $(4,051,000) in 1998, $(22,081,000) in 1997, and
$46,231,000 in 1996.
Undistributed earnings of the Company's foreign subsidiaries were
approximately $57,400,000 at September 30, 1998. Those earnings are considered
to be indefinitely reinvested and, therefore, no provision has been recorded for
U.S. federal and state income taxes.
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
September 30 (in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Numerator:
Income (loss) from
continuing operations $(83,050) $122,362 $164,893
Preferred stock dividends 19,540 19,540 22,319
- ------------------------------------------------------------------------------
Numerator for continuing
operations basic earnings
per share--income (loss)
available to common
shareholders (102,590) 102,822 142,574
Effect of dilutive securities:
Series AA preferred
dividend adjustment 2,779
Convertible loan notes 329 307
- ------------------------------------------------------------------------------
329 3,086
Numerator for continuing
operations diluted earnings
per share--income (loss)
available to common
shareholders after assumed
conversions $(102,590) $103,151 $145,660
- ------------------------------------------------------------------------------
Denominator:
Denominator for basic
earnings per share--
weighted average shares 135,145 133,261 125,856
Effect of dilutive securities:
Series AA convertible
preferred stock 2,396
Employee stock options 1,112 1,793
Convertible loan notes 273 374
- --------------------------------------------------------------------------------
Dilutive potential
common shares 1,385 4,563
Denominator for diluted
earnings per share--adjusted
weighted average shares and
assumed conversions 135,145 134,646 130,419
- --------------------------------------------------------------------------------
Basic earnings (loss) per
share from continuing
operations $ (0.76) $ 0.77 $ 1.13
- --------------------------------------------------------------------------------
Diluted earnings (loss) per
share from continuing
operations $ (0.76) $ 0.77 $ 1.12
- --------------------------------------------------------------------------------
For additional disclosures regarding the outstanding preferred stock and
employee stock options, see Notes 12 and 15.
forty five.
Ikon Office Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Options to purchase 5,972,215 shares of common stock at $7.85 per share to
$62.45 per share were outstanding during fiscal 1998 but were not included in
the computation of diluted earnings per share because the effect would be
antidilutive.
The Company's Series BB conversion preferred stock is excluded from the
dilutive calculation because the effect of adding 9,682,143 shares and deleting
the preferred dividends to reflect assumed conversion would be antidilutive.
15. Stock Options
Employee stock options are granted at the market price at dates of grant which
does not require the Company to recognize any compensation expense. These
options expire in ten years and generally vest over five years. The proceeds of
options exercised are credited to shareholders' equity. As permitted by SFAS
123, the Company continues to account for its stock options in accordance with
APB 25. A plan for the Company's nonemployee 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, 1995 4,586,358 $20.07
Granted 1,582,767 43.17
Exercised (813,408) 15.77
Cancelled (72,077) 35.25
- -----------------------------------------------------------------------------
September 30, 1996 5,283,640 27.45
Unisource Spin-off Adjustment 952,043 23.53
Granted 1,395,757 38.96
Exercised (894,601) 16.85
Cancelled
Unisource Spin-off (943,103) 32.34
Other (219,045) 26.39
- -----------------------------------------------------------------------------
September 30, 1997 5,574,691 26.53
Granted 983,614 27.66
Exercised (377,374) 15.49
Cancelled (248,768) 31.76
- -----------------------------------------------------------------------------
September 30, 1998 5,932,163 $27.18
- -----------------------------------------------------------------------------
Available for Grant 3,877,028
=============================================================================
In connection with the separation of Unisource from Alco, stock options that
were not exercised prior to the effective date of the Distribution were
adjusted. Optionholders who remained employees of IKON retained their options to
purchase IKON shares. The number of shares subject to, and the exercise price
of, each IKON option was adjusted based upon a formula that preserved the
inherent intrinsic value and vesting and term provisions of such options.
Optionholders who became employees of Unisource after the Distribution were
given the opportunity to receive options to purchase shares of Unisource common
stock in lieu of their Alco options or had their options cancelled.
The following is provided to comply with the disclosure requirements of SFAS
123. If the Company had elected to recognize compensation costs based on the
fair value at the date of grant for awards in fiscal years 1998, 1997 and 1996,
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
Fiscal year ended September 30
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations before
extraordinary loss $(90,653) $117,615 $162,932
Income from discontinued
operations 19,871 45,116
Income (loss) before
extraordinary loss (90,653) 137,486 208,048
Earnings (loss) per share
Continuing operations $ (.82) $ .73 $ 1.11
Discontinued operations .15 .36
Extraordinary loss (.09)
- --------------------------------------------------------------------------------
Net Income (Loss) $ (.82) $ .79 $ 1.47
- --------------------------------------------------------------------------------
Earnings (loss) per share,
assuming dilution
Continuing operations $ (.82) $ .73 $ 1.10
Discontinued operations .15 .34
Extraordinary loss (.09)
- --------------------------------------------------------------------------------
Net Income (Loss) $ (.82) $ .79 $ 1.44
- --------------------------------------------------------------------------------
The pro forma effect on net income may not be representative of the pro forma
effect on net income 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 1998, 1997 and 1996 were $13.66, $15.49 and $14.75, respectively,
and were estimated using the Black-Scholes option-pricing model. The following
assumptions were applied for periods before the Unisource spin-off, subsequent
to the Unisource spin-off and fiscal 1998, respectively: (i) expected dividend
yields of 1.4%, .6% and .7%, (ii) expected volatility rates of 29.1%, 31.8% and
46.5%, and (iii) expected lives of 5.4 years and 5.7 years (both subsequent to
spin-off and fiscal 1998). The risk-free interest rates applied for fiscal 1998,
1997 and 1996 were 5.7%, 6.4% and 5.9%, respectively.
forty six
IKON Office Solutions, Inc. and Subsidiaries
15. Stock Options (continued)
The following table summarizes information about stock options outstanding at
September 30, 1998:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- -----------------------------------
Number Weighted-Average Weighted-Average Number Weighted-Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 9/30/98 Contractual Life Price at 9/30/98 Price
$ 7.92- $17.13 1,160,564 3.2 years $12.75 1,080,564 $12.82
18.14- 25.12 1,410,748 5.8 21.62 982,127 21.43
26.53- 33.47 1,490,123 8.6 29.04 289,485 29.00
34.28- 38.79 1,333,425 7.5 36.41 472,837 36.25
44.63- 56.42 537,303 8.3 44.91 115,225 45.84
- --------------------------------------------------------------------------------
16. Pension and Stock Purchase Plans
The Company sponsors defined benefit pension plans for the majority of its
employees. The benefits generally are based on years of service and
compensation. The Company funds at least the minimum amount required by
government regulations. The cost of these plans, together with contributions to
defined contribution pension plans ($108,000 in 1998, $861,000 in 1997 and
$1,338,000 in 1996) charged to continuing operations amounted to $18,202,000 for
1998, $17,623,000 for 1997 and $20,215,000 for 1996.
The components of net periodic pension cost for the Company-sponsored defined
benefit pension plans are:
Fiscal Year Ended September 30
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Service cost $21,977 $ 19,208 $ 15,734
Interest cost on projected
benefit obligation 19,710 18,373 7,448
Actual return on plan assets (30,606) (30,949) (15,663)
Net amortization and deferral 7,013 10,130 11,358
- ------------------------------------------------------------------------------
Net pension cost $18,094 $ 16,762 $18,877
- ------------------------------------------------------------------------------
Assumptions used in accounting for the Company-sponsored defined benefit
pension plans were:
1998 1997 1996
- -------------------------------------------------------------------------------
Weighted average
discount rates 7.0% 7.75% 7.75%
Rates of increase in
compensation levels 5.5% 6.25% 6.25%
Expected long-term rate
of return on assets 10.0% 10.00% 10.00%
The funded status and amounts recognized in the Consolidated Balance Sheets
for the Company-sponsored defined benefit pension plans were:
September 30 (in thousands) 1998 1997
- --------------------------------------------------------------------------------
Actuarial present value of
benefit obligations
Vested $229,018 $212,332
- --------------------------------------------------------------------------------
Accumulated $237,233 $218,585
- --------------------------------------------------------------------------------
Projected $312,275 $260,959
Plan assets at fair value 285,859 259,243
- --------------------------------------------------------------------------------
Plan assets less than
projected benefits (26,416) (1,716)
Items not yet recognized
Net gain (26,817) (42,864)
Prior service cost 14,783 12,705
Net asset existing at transition date (6,245) (7,494)
Adjustment required to recognize
minimum liability (4,799) (4,535)
- --------------------------------------------------------------------------------
Net pension liability $(49,494) $(43,904)
- --------------------------------------------------------------------------------
Under the Benefits Agreement with Unisource, the Company assumed certain
benefit obligations and related assets for retirees and terminated vested
employees of Unisource which totaled approximately $105,000,000.
Substantially all of the plan assets at September 30, 1998 are invested in
listed stocks, including common stock of the Company having a fair value of
$8,625,600.
The majority of the Company's employees were eligible to participate in the
Company's Retirement Savings Plan (RSP). The RSP allows employees to invest 1%
to 16% of regular compensation before taxes in six different investment funds.
The Company contributes an amount equal to two-thirds of the employees'
investments, up to 6% of regular compensation, for a maximum Company match of
4%. All Company contributions are invested in the Company's common shares.
Employees vest in a percentage of the Company's contribution after two years of
service, with full vesting at the completion of five years of service. There is
a similar plan for eligible management employees. The cost of the plans charged
to continuing operations amounted to $35,949,000 in 1998, $31,026,000 in 1997
and $23,596,000 in 1996.
The Company has a Long-Term Incentive Compensation Plan (LTIP) that is
intended to motivate, recognize and reward key management employees for long-
term performance. Under the plan, key management employees are granted cash
awards, which are earned upon achieving predetermined performance objectives
during three-year intervals. The value of these awards is charged to expense
over the related plan period. In
forty seven.
IKON Office Solutions, Inc. and Subsidiaries
connection with this plan, the Company expensed $0 in fiscal 1998, $3,111,000 in
fiscal 1997 and $7,500,000 in fiscal 1996.
17. Geographic Information
Revenues, income (loss) before taxes, and identifiable assets by geographic area
from continuing operations for the fiscal years ended September 30 were as
follows:
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues
Domestic $4,893.7 $4,467.6 $3,559.7
Europe 428.7 375.8 360.6
Canada 280.6 270.7 177.7
Other 25.7 14.3 1.8
- --------------------------------------------------------------------------------
Total $5,628.7 $5,128.4 $4,099.8
- --------------------------------------------------------------------------------
Income (Loss) Before Taxes
Domestic $ (15.6) $ 233.4 $ 251.1
Europe 15.5 10.0 38.3
Canada (8.1) 17.5 20.6
Other 4.7 (.3) .1
- --------------------------------------------------------------------------------
Operating (3.5) 260.6 310.1
Interest expense (70.7) (47.5) (37.2)
- --------------------------------------------------------------------------------
Total $ (74.2) $ 213.1 $ 272.9
- --------------------------------------------------------------------------------
Assets
Domestic $4,715.8 $4,340.4 $3,096.2
Europe 707.2 566.3 560.2
Canada 304.6 405.1 227.5
Other 21.2 12.1 11.5
- --------------------------------------------------------------------------------
Total $5,748.8 $5,323.9 $3,895.4
- --------------------------------------------------------------------------------
18. Financial Instruments
The Company uses financial instruments in the normal course of its 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
The Company is 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, the Company limits the amount of credit
exposure in any one type of investment instrument.
Interest Rate and Currency Swap Agreements
The Company has interest rate swap agreements relating to financial instruments
of its U.S. finance subsidiary having total principal/notional amounts of
$300,000,000 and $105,000,000 at September 30, 1998 and 1997, respectively, with
fixed rates from 5.48% to 6.16% at September 30, 1998 and 5.77% to 7.08% at
September 30, 1997. The Company also has Canadian dollar denominated interest
rate swap agreements having a total principal/notional amount of CN$98,248,000
($64,185,000 at September 30, 1998) with fixed rates from 7.43% to 7.74% at
September 30, 1998 and 1997. The Company is required to make payments to the
counterparties at the fixed rates stated in the agreements and in return the
Company receives payments at variable rates.
The Company has interest rate swap agreements relating to financial
instruments of its Canadian finance subsidiary. These swaps have a
principal/notional amount of CN$143,421,000 ($93,700,000) at September 30, 1998.
The Company is 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.
At September 30, 1998 and 1997, the Company also had cross-currency swap
agreements to exchange Canadian Dollars (CN$98,248,000) for pounds sterling
((pound)46,500,000). The Company is required to make pounds sterling payments at
fixed rates from 9.53% to 9.90% in exchange for Canadian dollar payments at
fixed rates from 9.02% to 9.38%.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the swap agreements. However, the Company does not anticipate
nonperformance by the counterparties.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments.
Cash, Notes Payable and Long-Term Receivables
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 9.
Off-Balance-Sheet Instruments
Fair values for the Company's off-balance-sheet instruments (interest rate and
currency swaps) are based on the termination of the agreements.
The carrying amounts and fair values of the Company's financial instruments are
as follows:
1998 1997
September 30 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt:
Bond issues $ 588,478 $ 496,470 $ 339,352 $ 327,869
Private placement debt 55,000 52,789 55,000 55,791
Bank debt 45,121 46,074 71,641 74,269
Sundry notes, bonds and mortgages 53,611 53,029 52,876 54,581
Finance subsidiaries' debt 2,100,637 2,090,472 1,745,754 1,750,298
Interest rate and currency swaps (22,487) (7,183)
forty eight.
IKON Office Solutions, Inc. and Subsidiaries
Quarterly Financial Summary
First Second Third Fourth
(unaudited, in millions except per share data) Quarter Quarter (a) Quarter (b) Quarter (c) Total
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Revenues $1,374.3 $1,431.6 $1,394.7 $1,428.1 $5,628.7
Gross profit 543.2 552.4 489.4 490.1 2,075.1
Transformation costs 19.5 18.2 16.5 23.8 78.0
Income (loss) before taxes 65.4 52.6 (108.5) (83.7) (74.2)
Net income (loss) $ 37.0 $ 30.3 $ (88.7) $ (61.7) $ (83.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ .24 $ .19 $ (.69) $ (.49) $ (.76)
====================================================================================================================================
Diluted earnings (loss) per share $ .24 $ .19 $ (.69) $ (.49) $ (.76)
====================================================================================================================================
Dividends per share $ .04 $ .04 $ .04 $ .04 $ .16
Common stock price
High/Low 31 15/16 - 24 1/2 35 3/16 - 26 36 1/4 - 14 3/8 15 3/4 - 5 1/16 36 1/4 - 5 1/16
1997
Revenues $1,140.4 $1,277.9 $1,316.3 $1,393.8 $5,128.4
Gross profit 451.9 496.9 517.2 544.6 2,010.6
Transformation costs 14.3 61.2 23.0 28.4 126.9
Income before taxes 73.2 30.1 52.6 57.2 213.1
Income (loss)
Continuing operations 44.7 14.6 30.1 33.0 122.4
Discontinued operations 20.2 20.2
Extraordinary loss (12.2) (12.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 52.7 $ 14.6 $ 30.1 $ 33.0 $ 130.4
====================================================================================================================================
Basic earnings (loss) per share
Continuing operations $ .30 $ .07 $ .19 $ .21 $ .77
Discontinued operations .15 .15
Extraordinary loss (.09) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
$ .36 $ .07 $ .19 $ .21 $ .83
====================================================================================================================================
Diluted earnings (loss) per share
Continuing operations $ .30 $ .07 $ .19 $ .21 $ .77
Discontinued operations .15 .15
Extraordinary loss (.09) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
$ .36 $ .07 $ .19 $ .21 $ .83
====================================================================================================================================
Dividends per share $ .14 $ .04 $ .04 $ .04 $ .26
Common stock price
High/Low 52 1/4 - 44 3/8 46 5/8 - 32 1/2 34 7/8 - 20 5/8 29 5/8 - 21 1/2 52 1/4 - 20 5/8
(a) Second quarter fiscal 1998 results include $16,000,000 of unusual
adjustments.
(b) Third quarter fiscal 1998 results include pretax charges for increases to
accounting estimates for lease default and accounts receivable reserves of
$48,000,000 ($28,000,000 for lease defaults and $20,000,000 for accounts
receivable). Also included are a loss of $20,000,000 related to an asset
impairment at a Technology Services company engaged in the development of
high-end custom software applications and other adjustments of approximately
$26,000,000.
(c) Fourth quarter fiscal 1998 results include pretax charges of $40,400,000 for
expenses related to the closing of underperforming branches, executive
severance packages and the settlement of lawsuits.
forty nine.
IKON Office Solutions, Inc. and Subsidiaries
Corporate Financial Summary
Ten-Year
(in millions, except per share data, Compound
shareholders of record, employees) Growth 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Revenues 23.8% $5,628.7 $5,128.4 $4,099.8 $3,091.6
Gross profit 24.4 2,075.1 2,010.6 1,564.5 1,168.3
% of revenues 36.9 39.2 38.2 37.8
Selling and administrative 24.6 1,980.5 1,623.1 1,233.0 956.1
% of gross profit 95.4 80.7 78.8 81.8
Operating income (loss) (3.5) 260.6 310.1 212.2
% of revenues (.1) 5.1 7.6 6.9
Income (loss) before taxes (74.2) 213.1 272.9 190.5
% of revenues (1.3) 4.2 6.7 6.2
Effective income tax rate (%) -- (g) 42.6 39.6 39.6
Income (loss) (83.1) 122.4 164.9 115.0
% of revenues (1.5) 2.4 4.0 3.7
Earnings (loss) per share
Basic (.76) .77 1.13 0.87
Diluted (.76) .77 1.12 0.86
Capital expenditures 23.2 212.2 193.2 146.6 91.1
Depreciation and amortization 23.1 202.5 156.6 118.6 87.4
- ---------------------------------------------------------------------------------------------------------------------------
Discontinued Operations and Extraordinary Items
Income (loss) $8.0 $45.8 $88.7
Earnings (loss) per share
Basic .06 .37 0.78
Diluted .06 .35 0.76
- ---------------------------------------------------------------------------------------------------------------------------
Total Operations and Extraordinary Items
Net income (loss) $(83.1) $130.4 $210.7 $203.7
Earnings (loss) per share
Basic (.76) .83 1.50 1.65
Diluted (.76) .83 1.47 1.62
- ---------------------------------------------------------------------------------------------------------------------------
Share Activity
Dividends per share $0.16 $0.26 $0.56 $0.52
Per share book value 1.7% 8.30 8.94 14.94 12.06
Return on shareholders' equity % (8.8) 7.8 13.8 15.8
Weighted average shares (basic) 135.1 133.3 125.9 114.3
Adjusted weighted average shares (diluted) 135.1 134.6 130.4 116.5
Shareholders of record 14,990 15,089 15,033 15,099
- ---------------------------------------------------------------------------------------------------------------------------
Supplementary Information
Days sales outstanding (e) 44.0 44.5 34.2 33.6
Inventory turns (e) 6.7 6.3 5.7 6.3
Current ratio 1.3 1.5 1.2 1.1
Pretax return on capital employed % (.1) 8.5 14.8 17.1
Pretax return on capital employed, excluding
finance subsidiaries % (5.0) 10.0 19.0 21.1
Working capital 9.2% $504.6 $752.0 $251.2 $144.7
Total assets 17.1 5,748.8 5,323.9 5,384.6 4,110.3
Total debt 27.4 2,956.6 2,563.8 2,158.4 1,499.3
% of capitalization 67.4 63.4 48.9 44.2
Total debt, excluding finance subsidiaries 15.1 855.9 818.0 1,031.4 681.7
% of capitalization 37.5 35.6 31.4 26.5
Serial preferred stock
Employees (f) 42,600 40,900 43,100 39,200
- ---------------------------------------------------------------------------------------------------------------------------
(a) Continuing operations include unrelated businesses sold in 1988.
(b) Excludes the effect of the sale of IMMOS in fiscal 1994 and Unisource
restructuring costs in fiscal 1993.
(c) Includes unusual pretax charges relating to the Hillman Companies of
$10,323,000.
(d) Excludes gain on sale of Alco Health Services Corporation of
pretax - $96,800,000; net income - $61,900,000.
(e) Continuing operations only.
(f) Includes discontinued operations.
(g) Not meaningful.
Note: Unless otherwise noted, ratios and operating results include the effect
of: fiscal 1994 - loss on sale of investment in IMMOS, pretax income
($115,265,000), net income ($95,086,000), diluted earnings per share ($.87);
fiscal 1993 - Unisource restructuring costs, operating income ($175,000,000),
net income ($112,875,000), diluted earnings per share ($1.14).
fifty.
IKON Office Solutions, Inc. and Subsidiaries
1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Revenues $ 2,391.1 $1,723.1 $1,354.2 $1,127.4 $1,018.6 $ 789.3 $667.0(a)
Gross profit 926.7 680.3 550.6 441.1 412.4 311.6 234.0(a)
% of revenues 38.8 39.5 40.7 39.1 40.5 39.5 35.1
Selling and administrative 750.1 561.0 460.8 383.3 378.9 287.7 219.4(a)
% of gross profit 80.9 82.5 83.7 86.9 91.9 92.3 93.8
Operating income (loss) 59.4 116.8 96.5 57.8 28.8 23.9 22.5(a)
% of revenues 2.5 6.8 7.1 5.1 2.8 3.0 3.4
Income (loss) before taxes 43.3 101.4 85.1 40.4 8.3(c) 9.1 10.7(a)
% of revenues 1.8 5.9 6.3 3.6 0.8 1.2 1.6
Effective income tax rate (%) 95.4 39.6 39.4 39.0 40.7 20.0 25.5
Income (loss) 2.0 61.3 51.6 24.6 4.9(c) 7.3 8.0(a)
% of revenues 0.1 3.6 3.8 2.2 0.5 0.9 1.2
Earnings (loss) per share
Basic (0.09) 0.53 0.54 0.27 0.05(c) 0.08 0.08(a)
Diluted (0.09) 0.52 0.53 0.26 0.05 0.08 0.08
Capital expenditures 79.0 64.3 36.9 33.4 40.5 35.1 26.3(a)
Depreciation and amortization 67.4 51.3 42.3 43.1 38.0 32.1 25.3(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Discontinued Operations and
Extraordinary Item
Income (loss) $74.5 ($58.6) $47.5 $94.1 $88.6 $160.2 $103.4
Earnings (loss) per share
Basic 0.68 (0.60) 0.49 1.01 0.97 1.73 1.06
Diluted 0.68 (0.59) 0.49 1.00 0.95 1.69 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operations and Extraordinary Items
Net income (loss) $76.5 $2.6 $99.1 $118.7 $93.5(c) $167.5 $111.4
Earnings (loss) per share
Basic 0.59 (0.07) 1.03 1.28 1.02 1.81 1.14
Diluted 0.59 (0.07) 1.02 1.26 1.00 1.77 1.12
- ------------------------------------------------------------------------------------------------------------------------------------
Share Activity
Dividends per share $ 0.50 $ 0.48 $ 0.46 $ 0.44 $ 0.42 $ 0.38 $ 0.34
Per share book value 10.50 8.55 9.11 8.91 8.20 7.25 6.98
Return on shareholders' equity % 15.1 11.6 11.6 15.0 13.4 16.6(d) 17.1
Weighted average shares (basic) 109.3 97.3 96.3 92.7 91.3 92.5 97.8
Adjusted weighted average shares (diluted) 109.3 98.7 97.7 94.1 93.3 94.5 99.8
Shareholders of record 14,348 13,999 13,726 14,096 14,152 13,410 14,103
- ------------------------------------------------------------------------------------------------------------------------------------
Supplementary Information
Days sales outstanding (e) 30.2 32.9 32.3 33.8 34.8 37.6 37.9
Inventory turns (e) 5.7 5.1 5.2 4.8 4.7 4.3 4.1
Current ratio 1.3 1.1 1.3 1.9 1.7 1.5 2.2
Pretax return on capital employed % 15.9(b) 13.5(b) 15.1 15.3 18.5 19.4(d) 19.2
Pretax return on capital employed, excluding
finance subsidiaries % 18.6(b) 15.8(b) 17.5 17.6 20.9 21.1(d) 20.0
Working capital $171.5 $87.2 $140.4 $299.9 $216.9 $161.9 $209.8
Total assets 2,897.7 2,734.2 1,944.0 1,703.0 1,544.0 1,295.8 1,182.1
Total debt 949.2 1,240.0 805.4 548.1 469.2 391.2 261.5
% of capitalization 40.7 54.5 48.0 39.8 38.3 37.8 27.4
Total debt, excluding finance subsidiaries 484.3 825.7 504.9 327.4 309.6 296.7 209.3
% of capitalization 25.9 44.4 36.6 28.3 29.0 31.5 23.2
Serial preferred stock 0.3 1.6 2.9 4.9 7.4 9.9
Employees (f) 33,100 30,200 24,800 19,800 21,700 20,500 17,900
- ------------------------------------------------------------------------------------------------------------------------------------
fifty one.
IKON Office Solutions, Inc. and Subsidiaries
Board of Directors
James J. Forese /1,4/
President and Chief Executive Officer, IKON Office Solutions, Inc. He was
elected a director in 1998. Mr. Forese also serves as a director of Unisource
Worldwide, Inc., American Management Systems and National Utilities Investor's
Corporation.
Richard A. Jalkut/1,2,3,4/
Non-executive Chairman of the Board of Directors of IKON Office Solutions, Inc.
Mr. Jalkut is also President and Chief Executive Officer of PathNet and serves
as a director of Marine Midland Bank and Home Wireless Networks. He was named a
director in 1996.
Judith M. Bel/2,3,4/
Proprietor, The Men's Shop at the Broadmoor; Co-Proprietor, A Short Story Inc.
and Managing Partner, Bell's Market Grill and Bell Retail Group. 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/1,2,3,4/
Chairman, Resolute Partners, Inc. He is also director of Massachusetts Mutual
Life Insurance Company, Drexel Industries, Inc., The Connecticut Health and
Education Facilities Authority and Transparency International. Mr. Birle was
elected to the Board in 1996.
Philip E. Cushing/2,3,4/
Group Chief Executive of Inchcape PLC. He is also a Non-executive Director of
Bunzl PLC. Mr. Cushing was elected to the Board in 1997.
Kurt E. Dinkelacker/4/
Executive Vice President and Chief Financial Officer, IKON Office Solutions,
Inc. He is a member of the Finance Committee of Crozer-Keystone Health System in
Media, PA. Mr. Dinkelacker was elected to the Board in 1996.
Thomas P. Gerrity/1,2,3,4/
Dean and Professor, The Wharton School of the University of Pennsylvania. Dr.
Gerrity was elected a director in 1998. He also serves as a director of CVS
Corporation, Fannie Mae, Reliance Group Holdings, Inc., Sun Company, Inc. and
Knight Ridder, Inc.
Frederick S. Hammer/2,3,4/
He has been a director since 1986. Mr. Hammer is also Co-Chairman,
Inter-Atlantic Group and is Chairman, Annuity and Life Re (Holdings), Ltd. He
also serves as a director of Medallion Financial Corp. and Tri-Arc Financial
Services.
Barbara Barnes Hauptfuhrer/1,2,3,4/
She has been a director since 1988 and is Chairman of the Independent Directors.
Ms. Hauptfuhrer is also a director of The Vanguard Group of Investment Companies
and of each of the mutual funds in the Group, The Great Atlantic and Pacific Tea
Co., Inc., Knight Ridder, Inc., Massachusetts Mutual Life Insurance Co. and
Raytheon Company.
1 Executive
2 Audit
3 Human Resources Committee
4 Investment Committee
- --------------------------------------------------------------------------------
Corporate Officers
James J. Forese
President and Chief Executive Officer
Kurt E. Dinkelacker
Executive Vice President and Chief Financial Officer
David M. Gadra
Senior Vice President and Chief Information Officer
Lynn B. Graham
Senior Vice President and President, Document Services
Peter W. Shoemaker
Senior Vice President and President, Business Services
Edward C. Groark
Vice President and President, Technology Services
David D. Mills
Vice President and President, IKON Europe
Michael J. Dillon
Vice President and Controller
Michael H. Dudek
Vice President, Finance
Beth B. Sexton
Vice President, Human Resources
Karin M. Kinney
Corporate Counsel and Secretary
J.F. Quinn
Treasurer
fifty two.