-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L2NYeIpurXJNJCmoJamxrp5esrjYeE0NTpfqC1rwJzyZFc2eeiCE9/0bWLQJDn07 z0boeatyv+02GHQzhm+YkA== 0000950159-01-500090.txt : 20010516 0000950159-01-500090.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950159-01-500090 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IKON OFFICE SOLUTIONS INC CENTRAL INDEX KEY: 0000003370 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 230334400 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05964 FILM NUMBER: 1635386 BUSINESS ADDRESS: STREET 1: PO BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6102968000 MAIL ADDRESS: STREET 1: PO BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: ALCO STANDARD CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ALCO CHEMICAL CORP DATE OF NAME CHANGE: 19680218 10-Q 1 ikon10q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission file number 1-5964 ------------------------------------------------------ IKON OFFICE SOLUTIONS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 23-0334400 - ----------------------------------- ---------------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) P.O. Box 834, Valley Forge, Pennsylvania 19482 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (610) 296-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 9, 2001: Common Stock, no par value 141,403,322 shares INDEX IKON OFFICE SOLUTIONS, INC. PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Consolidated Balance Sheets--March 31, 2001 (unaudited) and September 30, 2000 Consolidated Statements of Operations--Three and six months ended March 31, 2001 and 2000 (unaudited) Consolidated Statements of Cash Flows--Six months ended March 31, 2001 and 2000 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES IKON OFFICE SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS ( in thousands )
March 31, September 30, 2001 2000 ASSETS (unaudited) ----------- ----------- Current Assets Cash and cash equivalents $ 117,099 $ 78,118 Restricted cash 130,554 91,914 Accounts receivable, less allowances of: March 31, 2001 - $34,041; September 30, 2000 - $35,322 694,745 723,051 Finance receivables, net 1,135,721 1,087,215 Inventories 334,409 321,471 Prepaid expenses and other current assets 115,346 102,196 Deferred taxes 108,959 108,578 ----------- ----------- Total current assets 2,636,833 2,512,543 ----------- ----------- Long-Term Finance Receivables, net 2,116,410 2,084,102 Equipment on Operating Leases, net 68,892 72,595 Property and Equipment, net 240,498 246,006 Goodwill, net 1,300,817 1,318,197 Other Assets 71,617 129,142 ----------- ----------- $ 6,435,067 $ 6,362,585 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 59,256 $ 176,629 Current portion of long-term debt, finance subsidiaries 1,433,613 1,238,950 Notes payable 420,546 42,216 Foreign exchange contract payable 60,386 Trade accounts payable 188,365 226,838 Accrued salaries, wages and commissions 127,157 143,644 Deferred revenues 184,413 195,790 Other accrued expenses 282,896 284,464 ----------- ----------- Total current liabilities 2,756,632 2,308,531 ----------- ----------- Long-Term Debt 605,252 606,861 Long-Term Debt, Finance Subsidiaries 1,023,302 1,405,449 Deferred Taxes 419,413 415,656 Other Long-Term Liabilities 198,202 184,996 Commitments and Contingencies Shareholders' Equity Common stock, no par value: Authorized - 300,000 shares Issued: March 31, 2001 - 150,272 shares; September 30, 2000 - 150,296 shares Outstanding: March 31, 2001 - 141,403 shares; September 30, 2000 - 143,826 shares 1,013,214 1,013,750 Series 12 preferred stock, no par value: Authorized 480 shares Issued and Outstanding: March 31, 2001 - 0 shares; September 30, 2000 - 0 shares Unearned compensation (5,305) (6,814) Retained earnings 491,580 468,770 Accumulated other comprehensive loss (32,817) (7,773) Common shares in treasury, at cost: March 31, 2001 - 7,907 shares; September 30, 2000 - 5,430 shares (34,406) (26,841) ----------- ----------- 1,432,266 1,441,092 ----------- ----------- $ 6,435,067 $ 6,362,585 =========== ===========
See notes to condensed consolidated financial statements. 1
IKON OFFICE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three Months Ended Six Months Ended March 31, March 31, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues Net sales $ 704,719 $ 708,467 $ 1,359,790 $ 1,360,570 Service and rentals 562,520 571,329 1,132,133 1,154,250 Finance income 93,987 81,070 187,354 162,167 ----------- ----------- ----------- ----------- 1,361,226 1,360,866 2,679,277 2,676,987 ----------- ----------- ----------- ----------- Costs and Expenses Cost of goods sold 460,619 464,612 895,612 899,325 Service and rental costs 348,891 353,831 690,945 699,269 Finance interest expense 44,363 39,508 90,567 78,960 Selling and administrative 458,356 424,559 907,511 862,782 Restructuring charge 53,792 Asset impairment charge 51,548 ----------- ----------- ----------- ----------- 1,312,229 1,282,510 2,584,635 2,645,676 ----------- ----------- ----------- ----------- Operating income 48,997 78,356 94,642 31,311 Interest expense 19,123 17,626 35,877 33,620 ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes 29,874 60,730 58,765 (2,309) Income taxes 13,144 25,877 25,856 18,474 ----------- ----------- ----------- ----------- Income (loss) from continuing operations 16,730 34,853 32,909 (20,783) Discontinued operations, net of income taxes of $942 1,200 ----------- ----------- ----------- ----------- Net income (loss) $ 16,730 $ 34,853 $ 34,109 $ (20,783) =========== =========== =========== =========== Basic and Diluted Earnings (Loss) Per Common Share Continuing operations $ 0.12 $ 0.23 $ 0.23 $ (0.14) Discontinued operations 0.01 ----------- ----------- ----------- ----------- Net income (loss) $ 0.12 $ 0.23 $ 0.24 $ (0.14) =========== =========== =========== =========== Cash Dividends Per Common Share $ 0.04 $ 0.04 $ 0.08 $ 0.08 =========== =========== =========== ===========
See notes to condensed consolidated financial statements. 2
IKON OFFICE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended March 31, ------------------------------- 2001 2000 ----------- ----------- Cash Flows from Operating Activities Net income (loss) $ 34,109 $ (20,783) Additions (deductions) to reconcile net income (loss) to net cash provided by operating activities of continuing operations: Depreciation 58,333 68,038 Amortization 30,039 32,395 Provision for losses on accounts receivable 8,015 15,421 Provision for deferred income taxes 16,780 14,300 Provision for lease default reserves 31,693 30,950 Gain on asset securitizations (73) Restructuring and asset impairment charges 105,340 Changes in operating assets and liabilities, net of effects from acquisitions: Decrease in accounts receivable 17,023 18,431 Increase in inventories (14,290) (41,711) (Increase) decrease in prepaid expenses and other current assets (16,804) 4,053 (Decrease) increase in accounts payable, deferred revenues and accrued expenses (74,218) 2,500 Decrease in accrued shareholder litigation settlement (116,821) Decrease in accrued restructuring (10,271) (8,074) Other (1,437) (968) ----------- ----------- Net cash provided by operating activities of continuing operations 78,972 102,998 Discontinued operations 2,142 ----------- ----------- Net cash provided by operating activities 81,114 102,998 ----------- ----------- Cash Flows from Investing Activities Cost of companies acquired, net of cash acquired (2,666) (3,745) Expenditures for property and equipment (50,506) (52,175) Expenditures for equipment on operating leases (24,833) (22,146) Proceeds from the sale of property and equipment 18,628 4,248 Proceeds from the sale of equipment on operating leases 6,334 7,369 Finance receivables - additions (922,855) (820,408) Finance receivables - collections 785,212 685,078 Proceeds from the sale of finance subsidiaries' lease receivables 15,548 16,887 Repurchase of finance subsidiary's lease receivables (275,000) Other 3,786 (2,832) ----------- ----------- Net cash used in investing activities (171,352) (462,724) ----------- ----------- Cash Flows from Financing Activities Short-term borrowings, net 489,578 178,824 Proceeds from issuance of long-term debt 34,980 5,556 Long-term debt repayments (146,119) (16,968) Finance subsidiaries' debt - issuances 1,067,479 948,016 Finance subsidiaries' debt - repayments (1,247,100) (647,788) Dividends paid (11,367) (11,923) Deposit to restricted cash (38,640) (46,926) Purchase of treasury shares and other (7,497) (44) ----------- ----------- Net cash provided by financing activities 141,314 408,747 ----------- ----------- Effects of exchange rate changes on cash and cash equivalents (12,095) (1,062) ----------- ----------- Net increase in cash and cash equivalents 38,981 47,959 Cash and cash equivalents at beginning of year 78,118 3,386 ----------- ----------- Cash and cash equivalents at end of period $ 117,099 $ 51,345 =========== ===========
See notes to condensed consolidated financial statements. 3 IKON OFFICE SOLUTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) (unaudited) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements of IKON Office Solutions, Inc. and subsidiaries (the "Company", "we", or "our") have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the year ended September 30, 2000. Certain prior year amounts have been reclassified to conform with the current year presentation. Note 2: Restructuring and Asset Impairment Charges In the first quarter of fiscal 2000, the Company announced plans to improve performance and efficiency and incurred a total pre-tax restructuring and asset impairment charge (the "Charge") of $105,340 ($78,479 after-tax, or $0.52 per share on a basic and diluted basis). In the fourth quarter of fiscal 2000, the Company determined that some first quarter restructuring initiatives would not require the level of spending that had been originally estimated, and certain other initiatives would not be implemented due to changing business dynamics. As a result, $15,961 was reversed from the first quarter charge and the total amount of the Charge was adjusted to $89,379 ($66,587 after-tax, or $0.45 per share on a basic and diluted basis). Also, in the fourth quarter of fiscal 2000 the Company announced plans to address the changing market conditions impacting Technology Services, IKON North America, and Outsourcing locations and incurred a total pre-tax restructuring and asset impairment charge of $15,789 ($12,353 after-tax, or $0.08 per share on a basic and diluted basis). The following presents a reconciliation of the components of the first and fourth quarter fiscal 2000 pre-tax restructuring and asset impairment charges at September 30, 2000 to the balance remaining at March 31, 2001, which is included in other accrued expenses on the consolidated balance sheets:
Remaining Remaining Balance Fiscal Balance September 30, 2001 March 31, First Quarter Fiscal 2000 Charge 2000 Payments 2001 ----------------------------------------------- ------------------- ------------- ------------------- Severance $3,989 $2,675 $1,314 Contractual Commitments 10,440 3,770 6,670 ------------------- ------------- ------------------- Total $14,429 $6,445 $7,984 =================== ============= =================== Remaining Remaining Balance Fiscal Balance September 30, 2001 March 31, Fourth Quarter Fiscal 2000 Charge 2000 Payments 2001 ----------------------------------------------- ------------------- ------------- ------------------- Severance $6,092 $2,762 $3,330 Contractual Commitments 7,285 1,064 6,221 ------------------- ------------- ------------------- Total $13,377 $3,826 $9,551 =================== ============= ===================
The remaining balances of the first quarter and fourth quarter severance charges are expected to be paid through fiscal 2002 and 2003, respectively. The charges for contractual commitments relate to lease commitments where the Company is exiting certain locations and/or businesses. The remaining balances of the first quarter and fourth quarter charges for contractual commitments are expected to be paid through fiscal 2009 and 2007, respectively. 4 IKON OFFICE SOLUTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 2: Restructuring and Asset Impairment Charges - continued Remaining Remaining Employees to be Employees to be Terminated as of Fiscal 2001 Terminated as of September 30, Employee March 31, 2000 Terminations 2001 ------------------------------------------------------------------------------- First Quarter 400 (400) 0 Fourth Quarter 380 (207) 173 Remaining Remaining Sites to be Sites to be Closed as of Fiscal 2001 Closed as of September 30, Sites March 31, 2000 Closed 2001 ------------------------------------------------------------------------------- First Quarter 4 (4) 0 Fourth Quarter 5 (3) 2 Note 3: Adoption of SFAS 133 IKON adopted Statement of Financial Accounting Standards (SFAS) 133, as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities", on October 1, 2000. SFAS 133 requires that all derivatives be recorded on the consolidated balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in earnings or Other Comprehensive Income (Loss) ("OCI") depending on the type of hedging instrument and the effectiveness of those hedges. In accordance with the transition provisions of SFAS 133, IKON recorded a cumulative loss adjustment to OCI of $5,584, after taxes, to recognize the fair value of its derivatives as of the date of adoption. All of the derivatives used by IKON as hedges are highly effective as defined by SFAS 133 because all of the critical terms of the derivatives match those of the hedged item. All of the derivatives used by IKON have been designated as cash flow hedges at the time of adoption of SFAS 133 or at the time they were executed, if later than October 1, 2000. All derivatives are adjusted to their fair market values at the end of each quarter. Unrealized net gains and losses for cash flow hedges are recorded in OCI. As of March 31, 2001, all of IKON's derivatives designated as hedges are interest rate swaps which qualify for evaluation using the "short cut" method for assessing effectiveness. As such, there is an assumption of no ineffectiveness. IKON uses interest rate swaps to fix the interest rates on our variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the six months ended March 31, 2001, unrealized net losses totaling $17,997 after taxes were recorded in OCI, including the $5,584 cumulative effect adjustment as of October 1, 2000. 5 IKON OFFICE SOLUTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 4: Lease-backed Notes In addition to the $1,267,641 of lease-backed notes (the "Notes") outstanding at September 30, 2000, on December 7, 2000, IKON Receivables, LLC (a consolidated affiliate of our U.S. finance subsidiary, IOS Capital, Inc., "IOSC") issued $634,431 of lease-backed notes (the "2000-2 Notes") under its $2,000,000 shelf registration statement filed with the Securities and Exchange Commission. The 2000-2 Notes are comprised of Class A-1 Notes totaling $193,532 have a stated interest rate of 6.66125%, Class A-2 Notes totaling $70,193 have a stated interest rate of 6.60%, Class A-3 Notes totaling $290,800 have a variable interest rate and Class A-4 Notes totaling $79,906 have a variable interest rate. Class A-3 Notes pay an interest rate of one-month LIBOR plus 0.23% (which has been fixed at 6.475% through an interest rate swap). Class A-4 Notes pay an interest rate of one-month LIBOR plus 0.27% (which has been fixed at 6.475% through an interest rate swap). The 2000-2 Notes are collateralized by a pool of office equipment leases or contracts and related assets and the payments on the 2000-2 Notes are made from payments received on the equipment leases. The Company received $633,000 in net proceeds from the sale of the 2000-2 Notes and used $582,795 of that amount to repay asset securitization conduit financing. Note 5: Asset Securitization Conduit Financing On December 7, 2000, the Company repaid $582,795 of asset securitization conduit financing when it issued the 2000-2 Notes. For the first six months of fiscal 2001, the Company pledged or transferred $341,206 in financing lease receivables for $280,000 in cash in connection with its revolving asset securitization, in transfers accounted for as financings. Additionally, on March 31, 2001, the Company entered into an asset securitization transaction whereby it pledged or transferred $33,299 in financing lease receivables for $28,000 in cash and a retained interest in the remainder. The agreement is for an initial 364-day term with certain renewal provisions and was structured as a revolving asset securitization so that as collections reduce previously sold interests in this new pool of leases, additional leases can be sold up to $300,000. The terms of the agreement require that the Company continue to service the lease portfolio. As of March 31, 2001, the Company had approximately $471,500 available under its revolving asset securitization conduit financing agreements. Note 6: Comprehensive Income (Loss) Total comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 ---------------- --------------- ---------------- ----------------- Net income (loss) $16,730 $34,853 $34,109 $(20,783) Foreign currency translation adjustments (5,278) 962 (7,047) (853) Cumulative effect of change in accounting principle for derivative and hedging activities (SFAS 133), net of tax (5,584) Net loss on derivative financial instruments, net of tax (7,675) (12,413) ---------------- --------------- ---------------- ----------------- Total comprehensive income (loss) $3,777 $35,815 $9,065 $(21,636) ================ =============== ================ =================
Minimum pension liability is adjusted at each year end, therefore there is no impact on total comprehensive income (loss) during interim periods. The balances for foreign currency translation, minimum pension liability and derivative financial instruments included in accumulated other comprehensive loss in the consolidated balance sheets were $(14,652), $(168) and $(17,997), respectively, at March 31, 2001 and $(7,605), $(168) and $0, respectively, at September 30, 2000. 6 IKON OFFICE SOLUTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 7: Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings (loss) per common share from continuing operations:
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 --------------- -------------- ---------------- --------------- Numerator: Net income (loss) from continuing operations $16,730 $34,853 $32,909 $(20,783) =============== ============== ================ =============== Denominator: Weighted average common shares 141,402 149,283 142,087 149,276 Contingently issuable common shares 14 7 --------------- -------------- ---------------- --------------- Denominator for basic earnings (loss) per common share - weighted average common shares 141,402 149,297 142,087 149,283 --------------- -------------- ---------------- --------------- Effect of dilutive securities: Employee stock awards 119 Employee stock options 1,741 295 918 --------------- -------------- ---------------- --------------- Dilutive potential common shares 1,860 295 918 --------------- -------------- ---------------- --------------- Denominator for diluted earnings (loss) per common share - adjusted weighted average common shares and assumed conversions 143,262 149,592 143,005 149,283 =============== ============== ================ =============== Basic and diluted earnings (loss) per common share from continuing operations $0.12 $0.23 $0.23 $(0.14) =============== ============== ================ ===============
The contingently issuable shares identified above are included in the computation of basic earnings (loss) per common share for the three and six months ended March 31, 2000, respectively, because they were earned but not issued as of March 31, 2000. Options to purchase 8,171 shares of common stock at $4.30 per share to $56.42 per share were outstanding during the second quarter of fiscal 2001 and options to purchase 6,304 shares of common stock at $7.50 per share to $56.42 per share were outstanding during the second quarter of fiscal 2000, but were not included in the computation of diluted earnings per common share because the options' prices were greater than the average market price of the common shares and therefore the effect would be antidilutive. Options to purchase 8,171 shares of common stock at $4.30 per share to $56.42 per share were outstanding during the first six months of fiscal 2001, but were not included in the computation of diluted earnings per common share because the options' prices were greater than the average market price of the common shares and therefore the effect would be antidilutive. Options to purchase 9,576 shares of common stock at $4.73 per share to $56.42 per share were outstanding during the first six months of fiscal 2000, but were not included in the computation of diluted loss per share because the effect would be antidilutive. 7 IKON OFFICE SOLUTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 8: Segment Reporting In the first quarter of fiscal 2001, we made the following change to our segment reporting as a result of our restructuring program and the changing dynamics of our business: Technology Services Network Integration (included in Other in fiscal 2000) is included in IKON North America. Prior year results have been reclassified to conform with the current year presentation. The table below presents segment information for the three months ended March 31, 2001 and 2000:
IKON Corporate North IKON And America Europe Other Eliminations Total ------------- ----------- ----------- ------------ ------------- Three Months Ended March 31, 2001 Revenues, excluding finance income $1,105,010 $112,141 $50,088 $1,267,239 Finance income 88,760 5,227 93,987 Operating income (loss) 95,821 4,990 (7,865) $(43,949) 48,997 Interest expense (19,123) (19,123) Income before income taxes 29,874 Three Months Ended March 31, 2000 Revenues, excluding finance income $1,109,635 $121,150 $49,011 $1,279,796 Finance income 75,570 5,500 81,070 Operating income (loss) 106,966 5,954 (8,124) $(26,440) 78,356 Interest expense (17,626) (17,626) Income before income taxes 60,730 The table below presents segment information for the six months ended March 31, 2001 and 2000: IKON Corporate North IKON And America Europe Other Eliminations Total ------------- ----------- ----------- ------------ ------------- Six Months Ended March 31, 2001 Revenues, excluding finance income $2,165,047 $221,434 $105,442 $2,491,923 Finance income 176,994 10,360 187,354 Operating income (loss) 182,214 9,891 (14,183) $(83,280) 94,642 Interest expense (35,877) (35,877) Income from continuing operations before income taxes 58,765 Six Months Ended March 31, 2000 Revenues, excluding finance income $2,167,719 $241,985 $105,116 $2,514,820 Finance income 151,228 10,939 162,167 Operating income (loss) before restructuring and asset impairment charge 212,640 11,215 (9,564) $(77,640) 136,651 Restructuring and asset impairment charge (39,810) (4,286) (7,066) (54,178) (105,340) Operating income (loss) 172,830 6,929 (16,630) (131,818) 31,311 Interest expense (33,620) (33,620) Loss before income taxes (2,309)
8 IKON OFFICE SOLUTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 9: Contingencies The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. contains a claim brought under the Employee Retirement Income Security Act of 1974 ("ERISA"). In connection with that claim, the plaintiffs allege that the Company and various individuals violated fiduciary duties under ERISA based on allegedly improper investments in the Company's stock made through the Company's Retirement Savings Plan. The court certified a class with respect to this claim consisting generally of all those participants in the Retirement Savings Plan after September 30, 1995 and through August 13, 1998, subject to certain exceptions. Discovery is ongoing, with expert depositions occurring over the next two months. Discovery is set to close June 18, 2001. The Company believes that this claim is without merit and is vigorously defending the suit. The Company is involved in a number of environmental remediation actions to investigate and clean up certain sites related to its discontinued operations in accordance with applicable federal and state laws. Uncertainties about the status of laws and regulations, technology and information related to individual sites, including the magnitude of possible contamination, the timing and extent of required corrective actions and proportionate liabilities of other responsible parties, make it difficult to develop a meaningful estimate of probable future remediation costs. While the actual costs of remediation at these sites may vary from management's estimates because of these uncertainties, the Company has established an accrual for known environmental obligations based on management's best estimate of the aggregate environmental remediation exposure on these sites. After consideration of the defenses available to the Company, the accrual for such exposure and other responsible parties, management does not believe that its obligations to remediate these sites would have a material adverse effect on the Company's consolidated financial statements. There are other contingent liabilities for taxes, guarantees, other lawsuits, and various other matters occurring in the ordinary course of business. On the basis of information furnished by counsel and others, and after consideration of the defenses available to the Company and any related reserves and insurance coverage, management believes that none of these other contingencies will materially affect the consolidated financial statements of the Company. Note 10: Pending Accounting Changes In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The SAB summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in the financial statements. Any change resulting from the application of SAB 101 will be reported as a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes". In June 2000, the SEC issued SAB No. 101B, "Second Amendment: Revenue Recognition in Financial Statements". SAB 101B delays the implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We are required to begin reporting changes, if any, to our revenue recognition policy in the fourth quarter of fiscal year 2001. We are currently evaluating the effect, if any, the adoption of SAB 101 will have on our consolidated financial statements. In October 2000, the Emerging Issues Task Force (EITF) issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", and EITF 00-14, "Accounting for Certain Sales Incentives". EITF 00-10 addresses the income statement classification for shipping and handling fees and costs. EITF 00-14 addresses recognition, measurement, and income statement classification for certain sales incentives including discounts, coupons, rebates, and free products or services. The Company is currently examining its practices in light of this interpretive guidance and does not expect a material impact from the application of EITF 00-10 and EITF 00-14 beginning in the fourth quarter of fiscal 2001. 9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations All dollar and share amounts are in thousands. The Company provides customers with total business solutions for every office, production and outsourcing need, including copiers and printers, color solutions, distributed printing, facilities management, imaging and legal outsourcing solutions, as well as network design and consulting, e-business development, telecommunications services and technology training. Results of Operations The discussion reviews the results of operations of the Company as reported in the consolidated statements of operations. Three Months Ended March 31, 2001 Compared with the Three Months Ended March 31, 2000 Results of operations for the second quarter of fiscal 2001, compared to the second quarter of fiscal 2000 were as follows: Our second quarter revenues were $1,361,226, compared to $1,360,866 in the second quarter of fiscal 2000. Excluding the impact of foreign currency translation, revenues increased by $13,674, or 1.0%. This resulted from an increase in finance income, partially offset by decreases in net sales and service and rentals revenue as described below. Net sales from the sale of office and production equipment, supplies and technology hardware, declined by $3,748, or 0.5%, as continued growth in office and production equipment sales, particularly copiers and printers, was offset by decreased revenues from the sale of supplies and low-margin technology hardware, such as computers, routers and servers. Revenue from the sale of office and production equipment increased by 3%, compared to the second quarter of fiscal 2000, reflecting our continued success in placing digital products. Our equipment revenues during the quarter were 93% digital, compared to 81% in the second quarter of fiscal 2000. Additionally, our segment 5 and 6 (defined as equipment with minimum output of over 70 pages per minute) equipment placements increased by 109% compared to the second quarter of fiscal 2000 as a result of the introduction of new technologies for these segments that were previously not available to the Company. Color revenues decreased by 15%, compared to the second quarter of fiscal 2000, due to changes in product mix, as the color market transitions to lower priced models. Service and rentals revenue, which represents equipment service, outsourcing, including facilities management, and technology services, decreased by $8,809, or 1.5%, compared to the second quarter of fiscal 2000. This was due to a decrease in equipment service, partially offset by an increase in outsourcing revenues led by strong growth in facilities management. The decrease in equipment service was due to a decline in analog copier service revenue that has not yet been replaced by digital and high-end copier service revenue, as well as a shift to facilities management contracts. Revenue from outsourcing, which includes facilities management, off-site digital print services for specialized, high-volume printing and specialized legal document and imaging services, increased by 7.5%. This increase was led by double digit growth in facilities management. Finance income increased by $12,917, or 15.9%, compared to the second quarter of fiscal 2000, primarily due to growth in the lease portfolio. During the second quarter of fiscal 2001 over 70% of IKON North America's copier and equipment revenues were financed by our captive finance subsidiary, IOS Capital, Inc. ("IOSC"). Overall gross margin was 37.3%, compared to 37.0% in the second quarter of fiscal 2000. The gross margin on net sales increased to 34.6% from 34.4%, reflecting the benefit of ongoing productivity initiatives as well as reduced sales of low-margin technology hardware. The gross margin on service and rentals decreased to 38.0% from 38.1% in the second quarter of fiscal 2000, primarily due to a smaller percentage of our revenue coming 10 from equipment service which has higher margins than other service. The gross margin on finance income increased to 52.8% from 51.3% compared to the second quarter of fiscal 2000. Selling and administrative expense as a percent of revenue was 33.7% in the second quarter of fiscal 2001 compared to 31.2% (32.4% excluding $17,000 of insurance proceeds related to the shareholder litigation settlement) in the second quarter of fiscal 2000. The increase was primarily due to committed investments targeted at making us more profitable and competitive in the long-term. These investments are targeted at our sales force, centralization initiatives and new market offerings, which include new products for the production environment, and Digital Express(R) 2000 and our e-Commerce program. These increased costs were partially offset by savings and improved cost controls from prior infrastructure investments, including centralized credit and purchasing, and shared services. Our operating income decreased by $29,359, compared to the second quarter of fiscal 2000. Excluding $17,000 of insurance proceeds received in the second quarter of fiscal 2000 related to the shareholder litigation settlement, our operating income decreased by $12,359. Our operating margin was 3.6% in the second quarter of fiscal 2001, compared to 4.5% in the second quarter of fiscal 2000, excluding the insurance proceeds. The decrease was primarily due to the higher level of selling and administrative expense partially offset by the improved overall gross margin described above. Interest expense increased by $1,497, or 8.5%, due mainly to higher average borrowings. The effective income tax rate in the second quarter of fiscal 2001 was 44.0%, compared to 42.0% in the second quarter of fiscal 2000 excluding insurance proceeds. The lower tax rate in fiscal 2000 was primarily due to the recording of benefits resulting from legislative changes that became effective during the second quarter of fiscal 2000. Diluted earnings per common share were $0.12 in the second quarter of fiscal 2001, compared to $0.23 in the second quarter of fiscal 2000. Excluding the after-tax effect of the insurance proceeds in fiscal 2000, diluted earnings per common share were $0.17 in the second quarter of fiscal 2000. Review of Business Segments IKON North America Revenues, excluding finance income, decreased by $4,625, or 0.4%, to $1,105,010 in the second quarter of fiscal 2001 from $1,109,635 in the second quarter of fiscal 2000. The decrease was primarily due to a decline in equipment service and rentals, offset by a 5% increase in revenue from the sale of office and production equipment, particularly in high end, segments 5 and 6 production equipment. Finance income increased by $13,190, or 17.5%, to $88,760 in the second quarter of fiscal 2001, compared to $75,570 in the second quarter of fiscal 2000. The increase was primarily due to growth in the lease portfolio. Operating income decreased by $11,145, or 10.4%, to $95,821 in the second quarter of fiscal 2001 from $106,966 in the second quarter of fiscal 2000. As described above, the decrease was due mainly to the higher level of committed investments targeted at making us more profitable and competitive, partially offset by savings and improved cost controls from prior productivity initiatives. IKON Europe Revenues including finance income decreased by $9,282, or 7.3%. Excluding the impact of foreign currency translation, revenues increased by $1,384, or 1.2%. Revenues, excluding finance income, decreased by $9,009, or 7.4%, to $112,141 in the second quarter of fiscal 2001 from $121,150 in the second quarter of fiscal 2000. This decrease was due mainly to the impact of foreign currency translation and a decrease in hardware sales in our technology services business, offset by growth in outsourcing and the sale of office and production equipment. Finance income decreased by $273, or 5.0%, to $5,227 in the second quarter of fiscal 2001 from $5,500 in the second quarter of fiscal 2000. Operating income decreased by $964, or 16.2%, to $4,990 in the 11 second quarter of fiscal 2001 from $5,954 in the second quarter of fiscal 2000, due primarily to the decrease in revenue offset by improved management of administrative expenses. Other Other revenues increased by $1,077, or 2.2%, to $50,088 in the second quarter of fiscal 2001 from $49,011 in the second quarter of fiscal 2000. There was an operating loss of $7,865 in the second quarter of fiscal 2001 compared to a loss of $8,124 in the second quarter of fiscal 2000. Current losses relate primarily to the Company's Telephony and Business Imaging operations. Telephony has been impacted by changes in the economic climate and one-time charges to reduce its cost structure as this business is aligned as a separate unit. Business Imaging losses relate primarily to the cessation of a large contract in commercial imaging, as well as investments in Virtual File Room(TM), an IKON e-service. Six Months Ended March 31, 2001 Compared with the Six Months Ended March 31, 2000 Results of operations for the six months ended March 31, 2001, compared to the six months ended March 31, 2000 were as follows: Our revenues increased by $2,290, or 0.1%, compared to the six months ended March 31, 2000. Excluding the impact of foreign currency translation, revenues increased by $33,527, or 1.3%. This increase resulted from growth in finance income offset by decreases in net sales and service and rentals revenue as described below. Net sales from the sale of office and production equipment, supplies and technology hardware, decreased by $780, or 0.1%, as continued growth in revenue from office and production equipment was offset by a decrease in revenue from the sale of supplies and technology hardware. Revenue from office and production equipment increased by 4%, compared to the six months ended March 31, 2000, reflecting our continued success in placing digital products. Placements of color products were relatively consistent with the prior year; however, revenues decreased 10% due to changes in product mix as the color market transitions to lower priced models. Our net sales growth was slowed by a decrease in supply sales as well as a decrease in revenue from the sale of technology hardware, such as computers, routers and servers, in our technology services businesses as we continue to de-emphasize these low-margin products. Service and rentals revenue, which represents equipment service, outsourcing, including facilities management, and technology services, decreased by $22,117, or 1.9%, compared to the six months ended March 31, 2000. The decrease was primarily due to a decrease in equipment service and technology services revenue, partially offset by increased outsourcing revenues which was led by strong growth in facilities management. The decrease in equipment service was due to a decrease in analog copier service revenue that has not yet been replaced by digital and high-end copier service revenue, as well as a shift to facilities management contracts. Revenue from outsourcing, which includes facilities management, off-site digital print services for specialized, high-volume printing and specialized legal document and imaging services, increased by 6%, compared to the six months ended March 31, 2000. Finance income increased by $25,187, or 15.5%, compared to the six months ended March 31, 2000, primarily due to growth in the lease portfolio. Gross margin was 37.4%, compared to 37.3% in the six months ended March 31, 2000. The gross margin on net sales increased to 34.1% from 33.9%, the increase was primarily due to the favorable mix of high versus low-end equipment placements and the decrease in sales of low-margin hardware described above. The gross margin on service and rentals decreased to 39.0%, compared to 39.4%, primarily due to the decrease in equipment service revenues, which have a higher margin than outsourcing and technology revenues. The gross margin on finance income increased to 51.7% from 51.3%. 12 Selling and administrative expense as a percent of revenue was 33.9% for the six months ended March 31, 2001, compared to 32.2% (32.9%, excluding the insurance proceeds related to the shareholder litigation settlement) for the six months ended March 31, 2000. The increase was primarily due to committed investments targeted at making us more profitable and competitive in the long-term. These investments are targeted at our sales force, centralization initiatives and new market offerings, which include new products for the production environment, Digital Express and our e-Commerce program. These increased costs were partially offset by savings and improved cost controls from prior infrastructure investments, including centralized credit and purchasing, and shared services. In the first quarter of fiscal 2000, the Company announced plans to improve performance and efficiency and incurred a total pre-tax restructuring and asset impairment charge (the "Charge") of $105,340 ($78,479 after-tax, or $0.52 per share on a basic and diluted basis). In the fourth quarter of fiscal 2000, the Company determined that some first quarter restructuring initiatives would not require the level of spending that had been originally estimated, and certain other initiatives would not be implemented due to changing business dynamics. As a result, $15,961 was reversed from the first quarter charge and the total amount of the Charge was adjusted to $89,379 ($66,587 after-tax, or $0.45 per share on a basic and diluted basis). Also, in the fourth quarter of fiscal 2000, the Company announced plans to address the changing market conditions impacting Technology Services, IKON North America, and Outsourcing locations and incurred a total pre-tax restructuring and asset impairment charge of $15,789 ($12,353 after-tax, or $0.08 per share on a basic and diluted basis). The following presents a reconciliation of the components of the first and fourth quarter fiscal 2000 pre-tax restructuring and asset impairment charges at September 30, 2000 to the balance remaining at March 31, 2001, which is included in other accrued expenses on the consolidated balance sheets:
Remaining Remaining Balance Fiscal Balance September 30, 2001 March 31, First Quarter Fiscal 2000 Charge 2000 Payments 2001 - ------------------------------------- ------------------ -------------- ------------------- Severance $3,989 $2,675 $1,314 Contractual Commitments 10,440 3,770 6,670 ------- ------- ------- Total $14,429 $6,445 $7,984 ======= ======= ======= Remaining Remaining Balance Fiscal Balance September 30, 2001 March 31, Fourth Quarter Fiscal 2000 Charge 2000 Payments 2001 - ------------------------------------- ------------------- ------------- ------------------- Severance $6,092 $2,762 $3,330 Contractual Commitments 7,285 1,064 6,221 ------- ------- ------- Total $13,377 $3,826 $9,551 ======= ======= =======
The remaining balances of the first quarter and fourth quarter severance charges are expected to be paid through fiscal 2002 and 2003, respectively. The charges for contractual commitments relate to lease commitments where the Company is exiting certain locations and/or businesses. The remaining balances of the first quarter and fourth quarter charges for contractual commitments are expected to be paid through fiscal 2009 and 2007, respectively.
Remaining Remaining Employees to be Employees to be Fiscal 2001 Terminated as of Terminated as of Employee March 31, September 30, 2000 Terminations 2001 ----------------------------------------------------------------------------------------- First Quarter 400 (400) 0 Fourth Quarter 380 (207) 173 13 Remaining Remaining Sites to be Sites to be Closed as of Closed as of Fiscal 2001 March 31, September 30, 2000 Sites Closed 2001 ----------------------------------------------------------------------------------------- First Quarter 4 (4) 0 Fourth Quarter 5 (3) 2
Operating income increased by $63,331, compared to the six months ended March 31, 2000. Excluding the Charge and $17,000 of insurance proceeds related to the shareholder litigation settlement in fiscal 2000, our operating income decreased by $25,009. Operating margin was 3.5% in the six months ended March 31, 2001, compared to 4.5% in the six months ended March 31, 2000, excluding the Charge and insurance proceeds. The decrease was primarily due to the higher level of investment spending partially offset by the improved overall gross margin described above. Interest expense increased by $2,257, or 6.7%, due to higher average borrowings in the first six months of fiscal 2001, compared to the first six months of fiscal 2000. The effective income tax rate was 44.0% for the six months ended March 31, 2001 and 2000, excluding the Charge and insurance proceeds. In fiscal 2001, we recognized a gain of $2,142 ($1,200 after-tax) related to net favorable dispositions of environmental matters at locations we had previously accounted for as discontinued operations. Diluted earnings per common share were $0.24 for the six months ended March 31, 2001, compared to a loss of $0.14 per common share for the six months ended March 31, 2000. Excluding the after-tax effect of the gain from discontinued operations in fiscal 2001 and the insurance proceeds and the Charge in fiscal 2000, diluted earnings per common share were $0.23 for the six months ended March 31, 2001, compared to $0.32 for the six months ended March 31, 2000. In the first six months of fiscal 2001, we repurchased 2,497 shares of common stock. Review of Business Segments In the first six months of fiscal 2001, we made the following change to our segment reporting as a result of our restructuring programs and the changing dynamics of our business: Technology Services Network Integration (included in Other in fiscal 2000) is included in IKON North America. Prior year results have been reclassified to conform with the current year presentation. IKON North America Revenues, excluding finance income, decreased by $2,672, or 0.1%, to $2,165,047 in the first six months of fiscal 2001 from $2,167,719 in the first six months of fiscal 2000. The decrease was primarily due to a decline in equipment service and rentals due to the closure of unprofitable or non-strategic locations associated with the restructuring program announced during the first quarter of fiscal 2000, offset by an increase in revenue from the sale of office and production equipment. Finance income increased by $25,766, or 17.0%, to $176,994 in the first six months of fiscal 2001, compared to $151,228 in the first six months of fiscal 2000. The increase was primarily due to growth in the lease portfolio. Operating income decreased by $30,426, or 14.3%, to $182,214 in the first six months of fiscal 2001 from $212,640 in the first six months of fiscal 2000, excluding the Charge. As described above, the decrease was due mainly to the higher level of committed investments targeted at making us more profitable and competitive, partially offset by savings and improved cost controls from prior productivity initiatives. 14 IKON Europe Revenues including finance income decreased by $21,130, or 8.4%. Excluding the impact of foreign currency translation, revenues increased by $5,857, or 2.5%. Revenues, excluding finance income, decreased by $20,551, or 8.5%, to $221,434 in the first six months of fiscal 2001 from $241,985 in the first six months of fiscal 2000. The decrease was due mainly to the impact of foreign currency translation and a decrease in hardware sales in our technology services business, offset by an increase in revenue from the sale of office and production equipment. Finance income decreased by $579, or 5.3%, to $10,360 in the first six months of fiscal 2001 from $10,939 in the first six months of fiscal 2000. Operating income decreased by $1,324, or 11.8%, to $9,891 in the first six months of fiscal 2001 from $11,215 in the first six months of fiscal 2000, excluding the Charge, primarily due to the decrease in revenue offset by improved management of administrative expenses. Other Other revenues increased by $326, or 0.3%, to $105,442 in the first six months of fiscal 2001 from $105,116 in the first six months of fiscal 2000. There was an operating loss of $14,183 in the first six months of fiscal 2001, compared to a loss of $9,564 in the first six months of fiscal 2000, excluding the Charge. Increased losses relate primarily to the Company's Telephony and Business Imaging operations. Telephony has been impacted by changes in the economic climate and one-time charges to reduce its cost structure as this business is established as a separate unit. Business Imaging losses relate primarily to the cessation of a large commercial imaging contract in the first quarter of fiscal 2001 as well as investments in Virtual File Room, an IKON e-service. Financial Condition and Liquidity Net cash provided by operating activities for the first six months of fiscal 2001 was $81,114. During the same period, the Company used $171,352 of cash in investing activities, which included net finance subsidiary use of $122,095, capital expenditures for property and equipment of $50,506 and capital expenditures for equipment on operating leases of $24,833. Cash provided by financing activities of $141,314, includes repayments of $146,119 of non-finance subsidiaries' long-term debt and net repayments of $179,621 of finance subsidiaries' debt. Debt, excluding finance subsidiaries, was $1,085,054 at March 31, 2001, an increase of $259,348 from the debt balance at September 30, 2000 of $825,706. There was an increase of approximately $238,000 due to short-term corporate borrowings on behalf of our finance subsidiaries combined with an increase in borrowings for general corporate purposes. Excluding finance subsidiaries' debt and the impact of short-term loans to and from our finance subsidiaries' our debt to capital ratio was 36% at March 31, 2001, compared to 39% at March 31, 2000. Restricted cash on the consolidated balance sheets primarily represents cash collected on certain financing lease receivables, which must be used to repay the lease-backed notes. The foreign exchange contract payable represents amounts owed by the Company related to a foreign currency swap agreement that was settled on April 2, 2001. As of March 31, 2001, short-term borrowings under a $600,000 credit agreement totaled $369,570. The Company also has $700,000 available for either stock or debt offerings under a shelf registration statement filed with the Securities and Exchange Commission. Finance subsidiaries debt decreased by $187,484 from September 30, 2000. During the six months ended March 31, 2001, IOSC repaid $1,193,102 of debt, received $633,000 from the issuance of lease-backed notes, received $308,000 from asset securitization conduit financing and received $7,685 from other borrowings. At March 31, 2001, $287,500 of medium term notes were outstanding with a weighted interest rate of 6.7%. At March 31, 2001, $1,572,765 of lease-backed notes were outstanding with a weighted interest rate of 6.8%. At March 31, 2001, IOSC had $471,500 available under its revolving asset securitization agreements. At March 31, 2001, IOSC's subsidiary, Ikon Receivables, LLC had $867,059 available for issuance under its asset backed securitization shelf registration statement and $1,123,350 available for issuance under its debt securities shelf registration statement. 15 The Company has also filed several shelf registration statements with the Securities and Exchange Commission to register the sale of 25,000 shares of common stock. Shares issued under the registration statements may be used for acquisitions. Approximately 18,970 shares have been issued under these shelf registrations through March 31, 2001, leaving approximately 6,030 shares available for issuance. During the first six months of fiscal 2001, the Company repurchased 2,497 shares of common stock for $7,654. From time to time, the Retirement Savings Plan of the Company may acquire shares of the common stock of the Company in open market transactions or from treasury shares held by the Company. The Company believes that its operating cash flow together with unused bank credit facilities and other financing arrangements will be sufficient to finance current operating requirements for fiscal 2001, including capital expenditures, dividends and the remaining accrued costs associated with the Company's restructuring charges. Pending Accounting Changes In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The SAB summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in the financial statements. Any change resulting from the application of SAB 101 will be reported as a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." In June 2000, the SEC issued SAB No. 101B, "Second Amendment: Revenue Recognition in Financial Statements." SAB 101B delays the implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We are required to begin reporting changes, if any, to our revenue recognition policy in the fourth quarter of fiscal year 2001. We are currently evaluating the effect, if any, the adoption of SAB 101 will have on our consolidated financial statements. In October 2000, the Emerging Issues Task Force (EITF) issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," and EITF 00-14, "Accounting for Certain Sales Incentives." EITF 00-10 addresses the income statement classification for shipping and handling fees and costs. EITF 00-14 addresses recognition, measurement, and income statement classification for certain sales incentives including discounts, coupons, rebates, and free products or services. The Company is currently examining its practices in light of this interpretive guidance and does not expect a material impact from the application of EITF 00-10 and EITF 00-14 beginning in the fourth quarter of fiscal 2001. 16 Item 3: Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk: Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. We have no cash flow exposure due to interest rate changes for long-term debt obligations. We primarily enter into debt obligations to support general corporate purposes, including acquisitions, capital expenditures and working capital needs. Finance subsidiaries' long-term debt is used to fund the lease receivables portfolio. The carrying amounts for cash and cash equivalents, accounts receivable and notes payable reported in the consolidated balance sheets approximate fair value. Additional disclosures regarding interest rate risk are set forth in the Company's 2000 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. Foreign Exchange Risk: The Company has various non-U.S. operating locations which expose it to foreign exchange risk. Foreign denominated intercompany debt borrowed in one currency and repaid in another may be fixed via currency swap agreements. Additional disclosures regarding foreign exchange risk are set forth in the Company's 2000 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. Forward-Looking Information This document includes or incorporates by reference information which constitutes forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements regarding: the impact of e-commerce initiatives; growth opportunities, productivity initiatives, and the impact of the Company's revenue, margin, and cost-savings projections; anticipated growth rates in the digital and color equipment and outsourcing industries; the effect of foreign exchange risk; the reorganization of the Company's business segments; and the Company's ability to finance its current operations and growth initiatives. Although the Company believes such forward-looking statements are reasonable, based on management's current plans and expectations, the statements are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results, and therefore, no assurances can be given that such statements will prove correct. These uncertainties and risks include, but are not limited to: conducting operations in a competitive environment and a changing industry (which includes technical services and products that are relatively new to the industry and to the Company); delays, difficulties, management transitions and employment issues associated with consolidations and/or changes in business operations; managing the integration of acquired businesses; existing and future vendor relationships; risks relating to currency exchange; economic, legal and political issues associated with international operations; the Company's ability to access capital and meet its debt service requirements (including sensitivity to fluctuation in interest rates); and general economic conditions. Certain additional risks and uncertainties are set forth in the Company's 2000 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. As a consequence, future results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. 17 PART II. OTHER INFORMATION Item 1: Legal Proceedings The matter of Whetman, et al. v. IKON Office Solutions, Inc., et al. contains a claim brought under the Employee Retirement Income Security Act of 1974 ("ERISA"). In connection with that claim, the plaintiffs allege that the Company and various individuals violated fiduciary duties under ERISA based on allegedly improper investments in the Company's stock made through the Company's Retirement Savings Plan. The court certified a class with respect to this claim consisting generally of all those participants in the Retirement Savings Plan after September 30, 1995 and through August 13, 1998, subject to certain exceptions. Discovery is ongoing, with expert depositions occurring over the next two months. Discovery is set to close June 18, 2001. The Company believes that this claim is without merit and is vigorously defending the suit. Item 4: Submission of Matters to a Vote of Security Holders On February 21, 2001, the Company held its annual meeting of shareholders at which time ten directors were elected to hold office until the election of their successors. For Withheld Judith M. Bell 120,280 10,050 James R. Birle 120,786 9,545 Philip E. Cushing 120,727 9,604 James J. Forese 120,347 9,984 Robert M. Furek 120,801 9,529 Thomas R. Gibson 120,774 9,557 Richard A. Jalkut 120,788 9,543 Arthur E. Johnson 120,648 9,682 Kurt M. Landgraf 120,714 9,616 Marilyn M. Ware 120,581 9,749 Item 6: Exhibits and Reports on Form 8-K Reports on Form 8-K On January 31, 2001, the Company filed a Current Report on Form 8-K to file, under Item 5 of the form, information contained in its press release dated January 25, 2001 regarding its results for the first quarter of fiscal 2001. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. This report has also been signed by the undersigned in his capacity as the chief accounting officer of the Registrant. IKON OFFICE SOLUTIONS, INC. Date May 15, 2001 /s/ William S. Urkiel -------------------- ------------------------ William S. Urkiel Senior Vice President and Chief Financial Officer 19 -----END PRIVACY-ENHANCED MESSAGE-----