-----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, Iww327UTOvG58axGUgZkIHtiC+2USuRGhP/L69lhN0VMqvHVAbBuJpwiYfGmLc7S S5RCrrVurSCSWelvk3R9ig== 0000950159-97-000198.txt : 19970813 0000950159-97-000198.hdr.sgml : 19970813 ACCESSION NUMBER: 0000950159-97-000198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-05964 FILM NUMBER: 97656787 BUSINESS ADDRESS: STREET 1: P O BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 2152968000 MAIL ADDRESS: STREET 1: 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 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 June 30, 1997 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______ Commission file number 1-5964 IKON OFFICE SOLUTIONS, INC. (Exact name of registrant as specified in its charter) OHIO 23-0334400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. Box 834, Valley Forge, Pennsylvania 19482 (Address of principal executive offices) (Zip Code) (610) 296-8000 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No * Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No * Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 1997. Common Stock, no par value 132,830,027 shares INDEX IKON OFFICE SOLUTIONS, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets--June 30, 1997 and September 30, 1996 Consolidated Statements of Income--Three months ended June 30, 1997 and June 30, 1996 and Nine months ended June 30, 1997 and June 30, 1996 Consolidated Statements of Cash Flows--Nine months ended June 30, 1997 and June 30, 1996 Notes to Consolidated Financial Statements-- June 30, 1997 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition and Liquidity PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES PART I. FINANCIAL INFORMATION Item 1: Financial Statements (unaudited) IKON OFFICE SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS ( in thousands )
June 30 September 30 ASSETS 1997 1996 Current Assets Cash $24,664 $46,056 Accounts receivable, net 722,843 513,378 Finance receivables, net 618,579 435,434 Inventories 468,448 350,774 Prepaid expenses 113,068 80,352 Deferred taxes 96,133 83,161 ---------- ---------- Total current assets 2,043,735 1,509,155 ---------- ---------- Investments and Long-Term Receivables 21,167 48,165 Long-Term Finance Receivables, net 1,220,914 878,324 Equipment on Operating Leases, net 97,630 95,043 Property and Equipment, at cost 416,500 358,234 Less accumulated depreciation 207,624 169,416 ---------- ---------- 208,876 188,818 ---------- ---------- Other Assets Goodwill 1,319,058 1,087,210 Miscellaneous 144,838 88,679 ---------- ---------- 1,463,896 1,175,889 ---------- ---------- Net Assets of Discontinued Operations 1,489,201 ---------- ---------- $5,056,218 $5,384,595 ========== ==========
See notes to consolidated financial statements. IKON OFFICE SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS ( in thousands )
June 30 September 30 LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 Current Liabilities Current portion of long-term debt $58,784 $62,697 Current portion of long-term debt, finance subsidiaries 375,737 314,000 Notes payable 273,532 186,462 Trade accounts payable 189,502 123,571 Accrued salaries, wages and commissions 100,051 101,632 Deferred revenues 205,580 200,225 Other accrued expenses 242,922 269,400 ----------- ----------- Total current liabilities 1,446,108 1,257,987 ----------- ----------- Long-Term Debt 491,293 721,923 Long-Term Debt, Finance Subsidiaries 1,289,504 813,026 Deferred Taxes 259,278 191,272 Other Long-Term Liabilities 132,315 144,883 Shareholders' Equity Series BB conversion preferred stock, no par value: 3,877 depositary shares issued and outstanding 290,170 290,170 Common stock, no par value: Authorized 300,000 shares Issued 6/97 -135,705 shares; 9/96 - 131,930 shares 670,908 1,305,413 Retained earnings 559,986 701,771 Foreign currency translation adjustment (2,135) (25,187) Cost of common shares in treasury: 6/97 - 3,230 shares; 9/96 - 374 shares (81,209) (16,663) ----------- ----------- 1,437,720 2,255,504 ----------- ----------- $5,056,218 $5,384,595 =========== ===========
See notes to consolidated financial statements. IKON OFFICE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except earnings per share)
Three Months Ended Nine Months Ended June 30 June 30 1997 1996 1997 1996 Revenues Net sales $751,481 $615,245 $2,134,861 $1,715,263 Service and rentals 505,375 403,794 1,439,528 1,152,285 Finance income 59,450 40,086 160,211 107,517 ----------- ----------- ----------- ----------- 1,316,306 1,059,125 3,734,600 2,975,065 ----------- ----------- ----------- ----------- Costs and Expenses Cost of goods sold 475,897 387,266 1,350,623 1,114,398 Service and rental costs 251,838 194,553 707,288 552,290 Finance interest expense 26,350 17,334 69,731 48,073 Selling and administrative 474,541 372,148 1,320,619 1,022,093 Transformation costs 22,961 5,628 98,494 11,931 ----------- ----------- ----------- ----------- 1,251,587 976,929 3,546,755 2,748,785 ----------- ----------- ----------- ----------- Operating income 64,719 82,196 187,845 226,280 Interest expense 12,089 9,435 31,895 25,942 ----------- ----------- ----------- ----------- Income from continuing operations before taxes and extraordinary loss 52,630 72,761 155,950 200,338 Taxes on income 22,502 29,105 66,548 79,259 ----------- ----------- ----------- ----------- Income from continuing operations before extraordinary loss 30,128 43,656 89,402 121,079 Discontinued operations (20,143) 20,151 34,717 ----------- ----------- ----------- ----------- Income before extraordinary loss 30,128 23,513 109,553 155,796 Extraordinary loss from early extinguishment of debt, net of tax benefit (12,156) ----------- ----------- ----------- ----------- Net Income 30,128 23,513 97,397 155,796 Less: Preferred Dividends 4,885 4,885 14,655 17,434 ----------- ----------- ----------- ----------- Available to Common Shareholders $25,243 $18,628 $82,742 $138,362 =========== =========== =========== =========== Earnings (Loss) Per Share (1) Continuing Operations $0.19 $0.30 $0.56 $0.82 Discontinued Operations $(0.16) $0.15 $0.28 Extraordinary loss $(0.09) ----------- ----------- ----------- ----------- $0.19 $0.14 $0.62 $1.10 =========== =========== =========== ===========
(1) See Exhibit 11 for computation of earnings per share. See notes to consolidated financial statements. IKON OFFICE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended June 30 1997 1996 Operating Activities Income from continuing operations before extraordinary loss $89,402 $121,079 Additions (deductions) to reconcile income from continuing operations before extraordinary loss to net cash provided by operating activities of continuing operations Depreciation 77,335 58,775 Amortization 34,737 23,571 Provisions for losses on accounts receivable 18,385 12,594 Provision for deferred taxes 58,000 50,817 Writeoff of assets related to transformation 24,183 Changes in operating assets and liabilities, net of effects from acquisitions and divestitures: Increase in accounts receivable (175,078) (70,670) Increase in inventories (105,960) (44,473) Increase in prepaid expenses (34,241) (61,528) Increase in accounts payable, deferred revenues and accrued expenses 7,162 68,869 Miscellaneous 10,453 (3,782) ----------- ----------- Net cash provided by operating activities of continuing operations 4,378 155,252 Net cash provided by operating activities of discontinued operations 24,174 132,965 ----------- ----------- Net cash provided by operating activities 28,552 288,217 Investing activities Proceeds from the sale of property and equipment 25,878 29,163 Payments made on long-term liabilities (19,501) Cost of companies acquired, net of cash acquired (128,772) (123,733) Expenditures for property and equipment (128,630) (85,782) Purchase of miscellaneous assets (10,585) (15,891) Finance subsidiaries receivables - additions (1,092,435) (691,842) Finance subsidiaries receivables - collections 477,994 282,967 ----------- ----------- Net cash used in investing activities of continuing operations (876,051) (605,118) Net cash used in investing activities of discontinued operations (38,058) (237,241) ----------- ----------- Net cash used in investing activities (914,109) (842,359) Financing activities Proceeds from short-term borrowings, net 84,210 5,023 Proceeds from issuance of long-term debt 36,662 429,522 Proceeds from option exercises and sale of treasury shares 39,348 46,053 Proceeds from sale of finance subsidiaries lease receivables 77,251 39,571 Proceeds from (payments to) discontinued operations 553,700 (152,427) Long-term debt repayments (322,971) (100,473) Finance subsidiaries debt - additions 697,215 439,743 Finance subsidiaries debt - repayments (159,000) (121,232) Dividends paid (43,978) (68,630) Purchase of treasury shares (112,154) (59,512) ----------- ----------- Net cash provided by financing activities of continuing operations 850,283 457,638 Net cash provided by financing activities of discontinued operations 13,882 104,276 ----------- ----------- Net cash provided by financing activities 864,165 561,914 ----------- ----------- Net (decrease) increase in cash (21,392) 7,772 Cash at beginning of year 46,056 66,413 ----------- ----------- Cash at end of period $24,664 $74,185 =========== ===========
See notes to consolidated financial statements. IKON OFFICE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1996. Certain prior year amounts have been reclassified to conform with the current year presentation. Note 2: Debt On December 16, 1996, the Company entered into a credit agreement with several banks under which it may borrow up to $400 million. This multicurrency facility replaces a $500 million credit facility which was due to expire December 1, 1999 and a $100 million credit facility which was canceled on December 2, 1996. The reduced credit commitment reflects the spin-off of the Unisource business which was effective December 31, 1996 (see note 3). The new agreement, which expires December 15, 2001, includes a facility fee of 8 basis points per annum on the commitment, based upon the Company's current long-term debt rating. The agreement provides that loans may be made under either domestic or Eurocurrency notes at rates computed under a selection of rate formulas including prime or Eurocurrency rates. Note 3: Discontinued Operations and Spin-off On June 19, 1996, the Company announced that it would separate Unisource Worldwide, Inc. ("Unisource"), its printing and imaging and supply systems distribution business from IKON Office Solutions, Inc. ("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 of one share of common stock, $.001 par value, of Unisource for every two shares of Alco stock owned on December 13, 1996. The distribution resulted in 100% of the outstanding shares of Unisource common stock being distributed to Alco shareholders by December 31, 1996. The Company has accounted for Unisource as a discontinued operation for all periods presented in these financial statements. The Company recorded a charge against earnings of $50 million in the third quarter of fiscal 1996 for restructuring activities at Unisource. In addition, an $18 million charge against earnings was recorded in the third quarter of fiscal 1996 for costs associated with the disposition of Unisource consisting primarily of investment banking fees, legal and accounting fees, filing fees and employee termination costs directly related to the spin-off. Prior year amounts have also been restated to reflect the allocation of corporate interest and other corporate expenses to the discontinued operations of the Company. IKON OFFICE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) JUNE 30, 1997 Note 3: Discontinued Operations and Spin-off (Continued) The results of discontinued operations, included in the Company's results of operations through December 31, 1996, are as follows (in thousands): Three Months Ended Nine Months Ended June 30 June 30 1996 1997 1996 Revenues $1,748,732 $1,728,533 $5,211,718 =========== =========== =========== Income (loss) before taxes (including $50 million restructuring charge and $18 million disposition charge in 1996) $(23,821) $34,743 $66,574 Tax expense (benefit) (3,678) 14,592 31,857 ----------- ----------- ----------- Net income (loss) $(20,143) $20,151 $34,717 =========== =========== =========== The unusual effective tax rates of 15.4% and 47.9% for the three months and nine months ended June 30, 1996, respectively, result primarily from the impact of certain nondeductible components of the disposition charge. Absent such impact, the estimated effective tax rate for Unisource was approximately 39.5%. The net carrying value at September 30, 1996 of the assets to be distributed to shareholders consisted of (in thousands): Working capital $750,792 Net property and equipment 224,168 Other assets 637,062 Long-term debt and other liabilities (122,821) ----------- Unisource equity and intercompany debt $1,489,201 =========== In December 1996, Unisource repaid $553.5 million of intercompany debt outstanding with the Company and the Unisource stock was distributed to Alco shareholders. Equity of the Company was reduced by $952.3 million, which was the equity of Unisource at December 31, 1996. Note 4: Extraordinary Loss on Early Extinguishment of Debt On December 2, 1996, Unisource borrowed under its new credit facility to repay $553.5 million of intercompany debt with the Company. The Company prepaid debt in the amount of $514 million from these funds. Early repayment of this debt resulted in certain prepayment penalties. Total prepayment penalties of $18.7 million and related tax benefits of $6.5 million are reflected as an extraordinary loss on early extinguishment of debt on the Statement of Income for the nine months ended June 30, 1997. Note 5: Name Change At their annual meeting on January 23, 1997, the shareholders voted to change the name of the Company from Alco Standard Corporation to IKON Office Solutions, Inc., the name previously used by Alco's remaining operating unit. The name change was effective immediately and the Company's ticker symbol was changed from ASN to IKN effective January 27, 1997. IKON OFFICE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) JUNE 30, 1997 Note 6: Transformation Costs At the end of fiscal 1995, the Company announced its transformation program to change its organization into a more cohesive and efficient network by building a uniform information technology system and implementing best practices for critically important management functions throughout the IKON companies. In March 1997, the Company announced that it was accelerating the transformation program. As a result, the Company began to separately disclose these costs as a component of operating expenses on the Statement of Income. The Company expects to complete the transformation program by the end of fiscal 1998. The transformation involves a variety of activities which the Company believes will significantly lower administrative costs and improve margins. 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 creating marketplace-focused field operations with greater attention to customer sales and services. Costs charged to transformation expense relate principally to the write off of the abandoned SAP computer platform, severance and other employee related costs, costs related to consultants assisting with the transformation, facility consolidation costs, including lease buyouts and write-offs of leasehold improvements, and costs incurred in connection with the adoption of the IKON name worldwide. Note 7: Pending Accounting Change In February 1997, the FASB issued Statement No. 128 (FAS 128), "Earnings Per Share", which simplifies the standards for computing earnings per share (EPS). It replaces the presentation of primary EPS with the presentation of basic and diluted EPS. It also requires dual presentation of basic and diluted EPS. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is not permitted. The Company does not believe the effect of adoption will be material on EPS previously presented. Item 2: Management's Discussion and Analysis of Results of Operations and Financial Condition and Liquidity On June 19, 1996, the Company announced that it would split its two operating units into independent companies by spinning off Unisource, its paper 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 consist of IKON, which sells, rents and leases photocopiers, digital printers and other automated office equipment for use in both traditional and integrated office environments. IKON also provides outsourcing and imaging services and offers consulting, design, computer networking and technology training for the networked office environment. On January 23, 1997, shareholders of the Company voted to change the name of the Company from Alco Standard Corporation to IKON Office Solutions, Inc. Results of Operations The discussion of the results of operations reviews the continuing operations of the Company as contained in the Consolidated Statements of Income. Three and Nine Months Ended June 30, 1997 Compared with the Three and Nine Months Ended June 30, 1996 Revenues and income before taxes for the third quarter and year-to-date of fiscal 1997 compared to the third quarter and year-to-date of fiscal 1996 were as follows:
Three Months Ended Nine Months Ended June 30 % June 30 % 1997 1996 Change 1997 1996 Change (in millions) REVENUES $1,316 $1,059 24.3% $3,735 $2,975 25.5% ====== ====== ====== ====== INCOME BEFORE TAXES: Operating income, excluding transformation costs $87.7 $87.8 (0.1%) $286.3 $238.2 20.2% Transformation costs (23.0) (5.6) (98.5) (11.9) ------ ----- ----- ----- Operating income 64.7 82.2 187.8 226.3 Interest expense (12.1) (9.4) (31.9) (26.0) ------ ----- ----- ----- $52.6 $72.8 (27.7%) $155.9 $200.3 (22.2%) ===== ===== ====== ======
THIRD QUARTER: The Company's third quarter revenues increased $257 million, or 24.3% over the third quarter of fiscal 1996, of which $153 million relates to current and prior year acquisitions and $104 million to base companies' internal growth. The Company's worldwide internal revenue growth was 10% in the third quarter of fiscal 1997 compared to 12% in the second quarter of fiscal 1997. The internal revenue growth rate was lower than expected as a result of 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. Revenues from the Company's operations outside the U.S. were $169 million for the third quarter of fiscal 1997 compared to $135 million for the same period of the prior fiscal year. The Company's European operations accounted for $6 million of the increase, which consisted of revenue declines in the U.K. of $8 million offset by revenue increases in other European operations, while Canadian revenues increased $24 million as a result of acquisitions and internal growth in base companies. A fiscal 1996 Mexican acquisition added $4 million of revenue to the third quarter of fiscal 1997. The Company's operating income decreased by $17.5 million compared to the prior year's quarter. However, excluding transformation costs, operating income was essentially flat at $87.7 million for the third quarter of fiscal 1997 compared to $87.8 million in the prior year. Operating income for the third quarter was lower than expected due to: 1) lower sales productivity in certain copier marketplaces as a result of the transformation initiative, and 2) increased operating expenses resulting from the transformation process. Finance subsidiaries contributed 18.3% of the Company's operating income before transformation costs in the third quarter of fiscal 1997 compared to 13.3% in the third quarter of fiscal 1996. The Company's operating margins were 4.9% in the third quarter of fiscal 1997, compared to 7.8% in fiscal 1996. Excluding transformation costs, the Company's operating margins were 6.7% in the third quarter of fiscal 1997, compared to 8.3% in the third quarter of fiscal 1996. Costs associated with the Company's transformation program increased $17.3 million in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996, primarily relating to employee severance agreements ($5 million), temporary labor ($2 million) and facility consolidations ($5 million). Operating income from foreign operations was $12.8 million for the three months ended June 30, 1997, down $.5 million from the prior year's quarter. European operations posted a $2.0 million decline in operating income in the third quarter, relating primarily to revenue declines in the U.K., while Canadian operating income increased $1.4 million and the Mexican operation added $.1 million of operating income in the third quarter of fiscal 1997. There was no material effect of foreign currency exchange rate fluctuations on the results of operations in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996. NINE MONTHS: The Company's nine month revenues increased $760 million, or 25.5% over the first nine months of fiscal 1996, of which $408 million relates to current and prior year acquisitions and $352 million to base companies' internal growth. The Company's worldwide internal revenue growth was 12% in the first nine months of fiscal 1997. Revenues from the Company's operations outside the U.S. were $483 million for the first nine months of fiscal 1997 compared to $393 million for the same period of the prior fiscal year. The Company's European operations accounted for $9 million of the increase, which consisted of revenue declines in the U.K. of $36 million offset by revenue increases in other European operations, while Canadian revenues increased $71 million as a result of acquisitions and internal growth in base companies and the fiscal 1996 Mexican acquisition added $10 million of revenue to the first nine months of fiscal 1997. Transformation costs increased $86.6 million for the nine months ended June 30, 1997 compared to the prior year, and was primarily due to the write-off of costs associated with the SAP computer platform that was abandoned during the second quarter ($28 million), employee severance agreements ($12 million), outside consultants ($2 million), temporary labor ($8 million), facility consolidations ($13 million) and costs incurred in connection with the adoption of the IKON name worldwide ($10 million). The Company's operating income decreased by $38.5 million compared to the prior year's first nine months. Excluding transformation costs, operating income increased 20.2% in the first nine months of fiscal 1997 to $286.3 million from $238.2 million in the first nine months of fiscal 1996. Finance subsidiaries contributed 15.5% of the Company's operating income before transformation costs in the first nine months of fiscal 1997 compared to 12.2% in the first nine months of fiscal 1996. The Company's operating margins were 5.0% in the first nine months of fiscal 1997, compared to 7.6% in fiscal 1996. Excluding transformation costs, operating margins were 7.7% for the first nine months of fiscal 1997 compared to 8.0% in the first nine months of fiscal 1996. Operating income from foreign operations was $34.9 million for the nine months ended June 30, 1997, down $4.3 million from the prior year's first nine months. European operations posted a $9.0 million decline in operating income in the first nine months of fiscal 1997, relating primarily to revenue declines in the U.K. Canadian operating income increased $4.6 million and a fourth quarter fiscal 1996 Mexican acquisition added $.1 million of operating income. There was no material effect of foreign currency exchange rate fluctuations on the results of operations in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. Acquisitions In the third quarter of fiscal 1997, the Company completed 17 acquisitions, bringing total year-to-date acquisitions to 64. Of the 17 companies acquired, seven were outsourcing and imaging companies, four were systems integration companies and six were traditional copier companies. This year, as part of its total solutions strategy, IKON has emphasized the acquisition of systems integration and outsourcing companies to build its capabilities in these areas. Other Interest expense increased $2.7 million in the third quarter of fiscal 1997, and $5.9 million year-to-date. The increased expense is due to higher debt levels in fiscal 1997 when adjusted for the Unisource intercompany debt repayment made in December 1996. Income before taxes decreased by $20.1 million in the third quarter and $44.4 million year-to-date over 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 year-to-date is 42.7% compared with 39.6% for the comparative period in fiscal 1996. The Company recorded an extraordinary charge of $12.2 million after tax in the first quarter of fiscal 1997 relating to its early extinguishment of certain corporate debt. 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 pretax charge of $18.7 million is primarily for prepayment penalties and has a related tax benefit of $6.5 million. Earnings per share from continuing operations decreased from $.30 per share for the third quarter of fiscal 1996 to $.19 per share for the third quarter of fiscal 1997. Excluding transformation costs, earnings per share from continuing operations decreased 6.3% from $.32 per share for the third quarter of fiscal 1996 to $.30 per share in the third quarter of fiscal 1997. Including a loss from discontinued operations, earnings per share of the Company were $.14 for the third quarter ended June 30, 1996. Year-to-date, earnings per share from continuing operations, excluding the extraordinary charge, decreased from $.82 per share for the first nine months of fiscal 1996 to $.56 per share for the first nine months of fiscal 1997. Excluding transformation costs, earnings per share from continuing operations would have increased 17.0% from $.88 per share for the first nine months of fiscal 1996 to $1.03 per share for the first nine months of 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 of the Company were $.62 for the nine months ended June 30, 1997 compared to $1.10 (which includes $.28 for discontinued operations) for the nine months ended June 30, 1996. Weighted average shares of 133.6 million for the quarter ended June 30, 1997 were 2.6 million shares greater than the 131.0 million for the quarter ended June 30, 1996, primarily the result of stock issued for acquisitions (6.1 million weighted average shares), net of treasury share repurchases (3.7 million weighted shares). Financial Condition and Liquidity Net cash provided by operating activities of continuing operations for the first nine months of fiscal 1997 was $4 million, primarily the result of net income from continuing operations before the extraordinary loss, plus noncash charges to income, offset by increases in working capital. During the same period, the Company used $876 million in cash for investing activities, which included finance subsidiary activity of $614 million, acquisition activity at a cash cost of $129 million and capital expenditures of $129 million. Investing activities were funded primarily through financing activities. Cash provided by financing activities included $554 million of intercompany debt repaid by Unisource which was used primarily to prepay corporate debt of the Company and $538 million of additional net funding for finance subsidiaries. Financing activities also included $112 million use of cash for the purchase of treasury shares. Debt, excluding finance subsidiaries, was $824 million at June 30, 1997, a decrease of $147 million from the continuing operations debt balance at September 30, 1996 of $971 million. The debt to capital ratio was 36.4% at June 30, 1997 compared to 31.4% at September 30, 1996 and 29.3% at March 31, 1997. The increased debt to capital ratio at the end of June reflects the effects of higher working capital, which the Company is currently managing to lower levels as the transformation proceeds, and the share repurchase program. On December 16, 1996, the Company entered into a credit agreement with several banks under which it may borrow up to $400 million. This credit facility replaces a $500 million credit facility which was due to expire December 1999 and a $100 million credit facility which was canceled on December 2, 1996. The reduced credit commitment reflects the spin-off of the Unisource business which was effective December 31, 1996. As of June 30, 1997, short-term borrowings totaled $256 million, leaving $144 million available under the $400 million credit facility. The Company also has $450 million available for either stock or debt offerings under its shelf registration statement filed November 1995. Finance subsidiaries debt grew by $538 million from September 30, 1996, a result of increased leasing activity. During the nine months ended June 30, 1997, IKON Capital issued an additional $632 million under its $3.5 billion medium term notes program which began in July 1994 (including the new shelf registration filed in May 1997 for $2 billion of medium term notes). At June 30, 1997, $1.5 billion of medium term notes were outstanding with a weighted interest rate of 6.7%, leaving $1.9 billion available under this program. The new registration statement has essentially the same provisions as the existing program. Under its $275 million asset securitization programs, IKON Capital sold $77.3 million in direct financing leases during the first nine months of fiscal 1997, replacing those leases liquidated and leaving the amount of contracts sold unchanged. The Company filed shelf registrations for 10 million shares of common stock in January 1996 and 5 million shares of common stock in March 1996. A new shelf registration was filed on April 10, 1997 for an additional 10 million shares. Shares issued under these registration statements are being used for acquisitions. Approximately 13.3 million shares have been issued under these shelf registrations through June 30, 1997, leaving 11.7 million shares available for issuance. On April 17, 1997, the Company announced that it may repurchase from time to time as much as five percent of the outstanding IKON common stock in open market transactions. Through June 30, 1997, the Company repurchased 4.4 million common shares for $109.7 million. Approximately 2.3 million shares may still be acquired by the Company in open market transactions under this program. The Company believes that its operating cash flow together with unused bank credit facilities and other financing arrangements will be sufficient to finance current operating requirements including capital expenditures, acquisitions, dividends, stock repurchases and costs associated with the Company's transformation program. The Company estimates the total remaining costs of its transformation program to be from $70 million to $100 million, excluding capital costs of $90 million to $100 million. Quarterly transformation costs are expected to be in the range of $5 million to $30 million for the next five quarters. Forward-looking Information This document contains, and other materials filed or to be filed by the Company with the Commission which are incorporated by reference herein, as well as information included in oral statements or other written statements made or to be made by the Company, contain or will contain or include, disclosures which are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 1934 Exchange Act. Such forward-looking statements address, among other things, strategic initiatives (including plans for enhancing the Company's business through new acquisitions, information technology systems, sales strategies, market growth plans, margin enhancement initiatives, capital expenditures and financing sources). Such forward-looking information is based upon management's current plans or expectations and is subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. These uncertainties and risks include, but are not limited to, those relating to successfully managing an aggressive program to acquire and integrate new companies, including companies with technical services and products that are relatively new to the Company, and also including companies outside the U.S., which present additional risks relating to international operations; risks and uncertainties relating to conducting operations in a competitive environment; delays, difficulties, technological changes, management transitions and employment issues associated with a large-scale transformation project; debt service requirements (including sensitivity to fluctuations in interest rates); and general economic conditions. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following Exhibits are furnished pursuant to Item 601 of Regulation S-K: Exhibit No. (11) Computations of Earnings per Share Exhibit No. (27) Financial Data Schedule (b) Reports on Form 8-K On April 18, 1997, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, the earnings for the fiscal quarter ended March 31, 1997, the announcement of certain management changes, and the announcement that it may repurchase from time to time as much as 5 percent of its outstanding shares in open market transactions. On April 24, 1997, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, a Press Release stating that it was unaware of any reason its stock, which recently had traded down sharply, should be under pressure. The Press Release also stated that IKON's business is strong and that the Company knows of no material developments concerning its business or financial statements which have not been publicly disclosed. On June 19, 1997, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, a summary description of its amended Rights Agreement which was adopted as of June 18, 1997, and which amends the previous agreement that was scheduled to expire on February 10, 1998. A copy of the amended and restated Rights Agreement dated as of June 18, 1997, was filed as Exhibit 4.1 on Item 7(c) of the form. On June 25, 1997, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, a Press Release announcing that earnings for the third quarter ending June 30, 1997 would be lower than expected, due to short-term issues related to the acceleration of its business transformation process. On July 17, 1997, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, the earnings for the fiscal quarter ended June 30, 1997. 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 August 12, 1997 /s/ Michael J. Dillon Michael J. Dillon Vice President and Controller (Chief Accounting Officer) INDEX TO EXHIBITS Exhibit Number (11) Computations of Earnings per Share (27) Financial Data Schedule EX-11 2 EXHIBIT 11 IKON OFFICE SOLUTIONS, INC. COMPUTATIONS OF EARNINGS PER SHARE (in thousands, except earnings (loss) per share)
1997 1996 Fully Fully Primary Diluted(1) Primary Diluted(1) Three Months June 30 Average Shares Outstanding Common shares 132,781 132,781 128,905 128,905 Convertible loan notes 287 373 Options 771 771 2,050 2,067 --------- --------- --------- --------- Total shares 133,552 133,839 130,955 131,345 ========= ========= ========= ========= Income Continuing Operations $30,128 $30,211 $43,656 $43,733 Discontinued Operations (20,143) (20,143) --------- --------- --------- --------- Net income 30,128 30,211 23,513 23,590 Less: Preferred dividends 4,885 4,885 4,885 4,885 --------- --------- --------- --------- Net income available to common shareholders $25,243 $25,326 $18,628 $18,705 ========= ========= ========= ========= Earnings Per Share Continuing Operations $0.19 $0.19 $0.30 $0.30 Discontinued Operations (0.16) (0.16) ========= ========= ========= ========= Earnings Per Share $0.19 $0.19 $0.14 $0.14 ========= ========= ========= ========= Nine Months Ended June 30 Average Shares Outstanding Common shares 133,410 133,410 124,332 124,332 Preferred stock Senior Securities 3,202 Convertible loan notes 268 373 Options 1,259 1,319 1,872 1,968 --------- --------- --------- --------- Total shares 134,669 134,997 126,204 129,875 ========= ========= ========= ========= Income Continuing Operations $89,402 $89,651 $121,079 $121,308 Discontinued Operations 20,151 20,151 34,717 34,717 --------- --------- --------- --------- Income before extraordinary loss 109,553 109,802 155,796 156,025 Extraordinary loss on extinguishment of debt (12,156) (12,156) --------- --------- --------- --------- Net Income 97,397 97,646 155,796 156,025 Less:Preferred Dividends 14,655 14,655 17,434 14,655 --------- --------- --------- --------- Net income available to common shareholders $82,742 $82,991 $138,362 $141,370 ========= ========= ========= ========= Earnings Per Share Continuing Operations $0.56 $0.56 $0.82 $0.82 Discontinued Operations 0.15 0.15 0.28 $0.27 Extraordinary Loss (0.09) (0.09) ========= ========= ========= ========= Earnings Per Share $0.62 $0.62 $1.10 $1.09 ========= ========= ========= =========
(1) This calculation is submitted in accordance with Regulation S-K item 601 (b) (11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-27 3
5 This schedule contains summary financial information extracted from the consolidated financial statements of IKON Office Solutions, Inc. and subsidiaries and is qualified in its entirety by reference to such financial statements. 0000003370 IKON OFFICE SOLUTIONS INC 9-MOS SEP-30-1997 JUN-30-1997 24,644,000 0 770,354,000 47,551,000 468,448,000 2,043,735,000 681,945,000 375,439,000 5,056,218,000 1,446,108,000 1,780,797,000 0 290,170,000 670,908,000 476,642,000 5,056,218,000 2,134,861,000 3,734,600,000 1,350,623,000 2,127,642,000 1,419,113,000 18,385,000 31,895,000 155,950,000 66,548,000 89,402,000 20,151,000 (12,156,000) 0 97,397,000 0.62 0.62 Includes equipment on operating leases, at cost, of $265,445,000 Includes accumulated depreciation for equipment on operating leases of $167,815,000 Includes Finance Subsidiaries interest of $69,731,000 Represents selling, general and administrative expenses and transformation costs. Continuing operations only.
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