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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the three months ended June 30, 2006
 Or
 o
    
    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
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)70 Valley Stream ParkwayMalvern, Pennsylvania
    
    19355(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
(610) 296-8000
 
  þ o
  þ o o
 o þ




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##### 



INDEX
 Page No.CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
    
    
    3-6PART I  FINANCIAL INFORMATIONITEM 1.
    
    CONDENSED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS  JUNE 30, 2006 AND SEPTEMBER 30, 2005 (UNAUDITED)
    
    
    7CONSOLIDATED STATEMENTS OF INCOME  THREE AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
    
    
    8CONSOLIDATED STATEMENTS OF CASH FLOWS  NINE MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
    
    
    9NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    
    
    10-23ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
    
    
    24-38ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    39ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    39-41PART II  OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    42ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    42ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    42ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    42ITEM 5.
    
    OTHER INFORMATION
    
    
    42ITEM 6.
    
    EXHIBITS
    
    
    42SIGNATURESCertification of Principal Executive Officer pursuant to Rule 13a-14(a)Certification of Principal Financial Officer pursuant to Rule 13a-14(a)Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
   2




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FORWARD-LOOKING STATEMENTS
   
    
    conducting operations in a competitive environment and a changing industry;
    
    existing or future supplier relationships;
    
    our relationship with General Electric Capital Corporation (GE);
    
    our ability to finance current operations and growth initiatives;
    
    our ability to improve operational efficiency and reduce our administrative costs;
    
    new technologies;
    
    our ability to remediate our material weakness in billing and achieve effective
internal control over financial reporting;
    
    our One Platform Conversion and our infrastructure and productivity initiatives; and
    
    economic, legal and political issues associated with our international operations.
 RISK FACTORS
 The intense competition in our industry could result in reduced profitability and loss of market
share.
  3




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A deterioration in our relationships with our suppliers or in the financial condition of our
suppliers could have a material adverse effect on our liquidity, financial position and results of
operations.
  Our liquidity, financial position and results of operations are dependent on our relationship with
GE.
   Our failure to comply with any material provisions of our secured credit facility could have a
material adverse effect on our liquidity, financial position and results of operations.
  4




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Our failure to improve our operational efficiency and reduce our administrative costs could have a
material adverse effect on our liquidity, financial position and results of operations.
  New technologies may affect our operations, and failures in the transition to new technologies
could adversely affect our business.
  Our system of internal control over financial reporting is currently ineffective due to a material
weakness in our billing processes. If we fail to remediate this material weakness or any material
weaknesses we may discover in the future, we may not be able to accurately report our financial
results or prevent fraud. As a result, our business, brand and operating results could be harmed
or we could fail to meet our reporting obligations.
  5




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We continue to implement substantial changes to our information systems. These actions could
disrupt our business.
  Added risks are associated with our international operations.
  6




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PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements
 IKON OFFICE SOLUTIONS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (unaudited)
 (in thousands)
 June 30, 2006
    
    
    September 30, 2005AssetsCash and cash equivalents
    
    $
    353,845
    
    
    $
    373,705Restricted cash
    
    
    
    
    
    
    18,272Accounts receivable, less allowances of: June
30, 2006 - $9,647; September 30, 2005 -
$12,284
    
    
    660,077
    
    
    
    678,313Lease receivables, less allowances of: June
30, 2006 - $1,408; September 30, 2005 -
$2,560
    
    
    81,612
    
    
    
    317,928Inventories
    
    
    282,023
    
    
    
    241,470Prepaid expenses and other current assets
    
    
    38,482
    
    
    
    42,660Deferred taxes
    
    
    53,232
    
    
    
    55,566Total current assets
    
    
    1,469,271
    
    
    
    1,727,914Long-term lease receivables, less allowances
of: June 30, 2006 - $4,360; September 30,
2005 - $4,053
    
    
    252,675
    
    
    
    503,281Equipment on operating leases, net of
accumulated depreciation of: June 30, 2006 -
$74,300; September 30, 2005 - $76,774
    
    
    83,832
    
    
    
    101,614Property and equipment, net of accumulated
depreciation of: June 30, 2006 - $315,252;
September 30, 2005 - $306,656
    
    
    143,465
    
    
    
    144,309Deferred taxes
    
    
    74,838
    
    
    
    Goodwill
    
    
    1,290,288
    
    
    
    1,280,578Other assets
    
    
    71,328
    
    
    
    74,123Total Assets
    
    $
    3,385,697
    
    
    $
    3,831,819LiabilitiesCurrent portion of corporate debt
    
    $
    980
    
    
    $
    1,137Current portion of non-corporate debt
    
    
    136,998
    
    
    
    299,359Trade accounts payable
    
    
    182,709
    
    
    
    211,783Accrued salaries, wages and commissions
    
    
    100,421
    
    
    
    94,614Deferred revenues
    
    
    112,329
    
    
    
    111,890Taxes payable
    
    
    141,383
    
    
    
    79,458Other accrued expenses
    
    
    108,900
    
    
    
    139,099Payable for divestiture of assets (Note 5)
    
    
    9,682
    
    
    
    Total current liabilities
    
    
    793,402
    
    
    
    937,340Long-term corporate debt
    
    
    593,555
    
    
    
    728,156Long-term non-corporate debt
    
    
    100,242
    
    
    
    225,307Deferred taxes
    
    
    
    
    
    
    20,853Other long-term liabilities
    
    
    264,605
    
    
    
    349,819Commitments and contingencies (Note 9)Shareholders EquityCommon stock, no par value: authorized
300,000 shares; issued: June 30, 2006 
149,310 shares; September 30, 2005 - 149,310
shares; outstanding: June 30, 2006  130,091
shares; September 30, 2005 -134,920 shares
    
    
    1,042,522
    
    
    
    1,030,462Series 12 preferred stock, no par
value: authorized 480 shares; none issued or
outstandingRetained earnings
    
    
    808,421
    
    
    
    755,864Accumulated other comprehensive loss
    
    
    (5,630
    )
    
    
    (65,426
    )Cost of common shares in treasury: June 30,
2006  19,219 shares; September 30, 2005 -
14,390 shares
    
    
    (211,420
    )
    
    
    (150,556
    )Total Shareholders Equity
    
    
    1,633,893
    
    
    
    1,570,344Total Liabilities and Shareholders Equity
    
    $
    3,385,697
    
    
    $
    3,831,819
 See notes to condensed consolidated financial statements
 7




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IKON OFFICE SOLUTIONS, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 (in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesEquipment
    
    $
    445,275
    
    
    $
    440,378
    
    
    $
    1,331,012
    
    
    $
    1,291,859Customer service and supplies
    
    
    361,587
    
    
    
    377,522
    
    
    
    1,094,193
    
    
    
    1,118,504Managed and professional services
    
    
    187,276
    
    
    
    180,386
    
    
    
    549,128
    
    
    
    534,534Rental and fees
    
    
    34,007
    
    
    
    42,578
    
    
    
    117,682
    
    
    
    129,481Other
    
    
    18,752
    
    
    
    57,441
    
    
    
    78,254
    
    
    
    201,6451,046,897
    
    
    
    1,098,305
    
    
    
    3,170,269
    
    
    
    3,276,023Cost of RevenuesEquipment
    
    
    331,065
    
    
    
    335,590
    
    
    
    997,713
    
    
    
    947,936Customer service and supplies
    
    
    196,597
    
    
    
    198,312
    
    
    
    602,329
    
    
    
    617,668Managed and professional services
    
    
    140,232
    
    
    
    131,271
    
    
    
    408,244
    
    
    
    394,166Rental and fees
    
    
    8,596
    
    
    
    13,572
    
    
    
    34,369
    
    
    
    37,406Other
    
    
    12,367
    
    
    
    30,121
    
    
    
    42,054
    
    
    
    113,721688,857
    
    
    
    708,866
    
    
    
    2,084,709
    
    
    
    2,110,897Gross ProfitEquipment
    
    
    114,210
    
    
    
    104,788
    
    
    
    333,299
    
    
    
    343,923Customer service and supplies
    
    
    164,990
    
    
    
    179,210
    
    
    
    491,864
    
    
    
    500,836Managed and professional services
    
    
    47,044
    
    
    
    49,115
    
    
    
    140,884
    
    
    
    140,368Rental and fees
    
    
    25,411
    
    
    
    29,006
    
    
    
    83,313
    
    
    
    92,075Other
    
    
    6,385
    
    
    
    27,320
    
    
    
    36,200
    
    
    
    87,924358,040
    
    
    
    389,439
    
    
    
    1,085,560
    
    
    
    1,165,126Selling and administrative
    
    
    311,035
    
    
    
    340,465
    
    
    
    939,849
    
    
    
    1,036,914Gain on divestiture of businesses and assets
    
    
    6,931
    
    
    
    
    
    
    
    11,960
    
    
    
    1,901Restructuring and asset impairment
    
    
    (129
    )
    
    
    (379
    )
    
    
    (264
    )
    
    
    11,330Operating income
    
    
    54,065
    
    
    
    49,353
    
    
    
    157,935
    
    
    
    118,783Loss from early extinguishment of debt
    
    
    3,866
    
    
    
    
    
    
    
    5,516
    
    
    
    1,734Interest income
    
    
    4,124
    
    
    
    1,855
    
    
    
    9,060
    
    
    
    5,143Interest expense
    
    
    12,245
    
    
    
    13,115
    
    
    
    39,358
    
    
    
    39,714Income from continuing operations before
taxes on income
    
    
    42,078
    
    
    
    38,093
    
    
    
    122,121
    
    
    
    82,478Taxes on income
    
    
    15,207
    
    
    
    12,720
    
    
    
    42,250
    
    
    
    28,484Income from continuing operations
    
    
    26,871
    
    
    
    25,373
    
    
    
    79,871
    
    
    
    53,994Discontinued Operations:Operating income (loss)
    
    
    17
    
    
    
    (3,210
    )
    
    
    (15
    )
    
    
    (19,410
    )Tax (expense) benefit
    
    
    (7
    )
    
    
    1,268
    
    
    
    6
    
    
    
    7,667Net income (loss) from discontinued operations
    
    
    10
    
    
    
    (1,942
    )
    
    
    (9
    )
    
    
    (11,743
    )Net income
    
    $
    26,881
    
    
    $
    23,431
    
    
    $
    79,862
    
    
    $
    42,251Basic Earnings (Loss) Per Common ShareContinuing operations
    
    $
    0.21
    
    
    $
    0.18
    
    
    $
    0.60
    
    
    $
    0.38Discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )
    
    
    0.00
    
    
    
    (0.08
    )Net income
    
    $
    0.21
    
    
    $
    0.17
    
    
    $
    0.60
    
    
    $
    0.30Diluted Earnings (Loss) Per Common ShareContinuing operations
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    0.60
    
    
    $
    0.38Discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )
    
    
    0.00
    
    
    
    (0.07
    )Net income
    
    $
    0.20
    
    
    $
    0.16
    
    
    $
    0.60
    
    
    $
    0.30
    *Cash dividends per common share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.12
 
 *
    
    The sum of the earnings per share amounts do not equal the total due to rounding. See notes to condensed consolidated financial statements
 8




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IKON OFFICE SOLUTIONS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months Ended June 302006
    
    
    2005Cash Flows from Operating ActivitiesNet income
    
    $
    79,862
    
    
    $
    42,251Net loss from discontinued operations
    
    
    (9
    )
    
    
    (11,743
    )Income from continuing operations
    
    
    79,871
    
    
    
    53,994Additions (deductions) to reconcile net income to net cash used in operating activities:Depreciation
    
    
    52,366
    
    
    
    55,068Amortization
    
    
    2,663
    
    
    
    4,316Gain from divestiture of businesses and assets
    
    
    (11,960
    )
    
    
    (1,901
    )Loss on disposal of property and equipment
    
    
    4,017
    
    
    
    2,308Provision for losses on accounts receivable
    
    
    3,823
    
    
    
    11,898Restructuring and asset impairment charges
    
    
    (264
    )
    
    
    11,330Deferred income taxes
    
    
    (108,922
    )
    
    
    (69,766
    )Provision for lease default reserves
    
    
    191
    
    
    
    2,124Stock-based compensation expense
    
    
    7,502
    
    
    
    7,575Pension expense
    
    
    24,973
    
    
    
    32,654Loss from early extinguishment of debt
    
    
    5,516
    
    
    
    1,734Changes in operating assets and liabilities, net of divestiture of businesses:Decrease in accounts receivable
    
    
    15,358
    
    
    
    30,629Increase in inventories
    
    
    (38,313
    )
    
    
    (6,621
    )Increase in prepaid expenses and other current assets
    
    
    (2,555
    )
    
    
    (66
    )Decrease in accounts payable
    
    
    (31,532
    )
    
    
    (84,681
    )Decrease in deferred revenue
    
    
    (2,178
    )
    
    
    (16,563
    )Decrease in accrued expenses
    
    
    (28,424
    )
    
    
    (23,827
    )Contributions to pension plans
    
    
    (63,464
    )
    
    
    (42,604
    )Increase in taxes payable
    
    
    66,279
    
    
    
    10,475Decrease in accrued restructuring
    
    
    (1,493
    )
    
    
    (5,849
    )Other
    
    
    98
    
    
    
    826Net cash used in continuing operations
    
    
    (26,448
    )
    
    
    (26,947
    )Net cash used in discontinued operations
    
    
    (1,158
    )
    
    
    (9,618
    )Net cash used in operating activities
    
    
    (27,606
    )
    
    
    (36,565
    )Cash Flows from Investing ActivitiesProceeds
from the divestiture of businesses and assets (Note 5)
    
    
    251,642
    
    
    
    5,330Expenditures for property and equipment
    
    
    (26,093
    )
    
    
    (22,091
    )Expenditures for equipment on operating leases
    
    
    (27,610
    )
    
    
    (36,151
    )Proceeds from the sale of equipment on operating leases
    
    
    18,346
    
    
    
    14,165Proceeds from the sale of lease receivables (Note 7)
    
    
    145,969
    
    
    
    188,956Lease receivables  additions
    
    
    (264,161
    )
    
    
    (277,560
    )Lease receivables  collections
    
    
    268,412
    
    
    
    398,448Other
    
    
    1,077
    
    
    
    (1,266
    )Net cash
provided by investing activities  continuing operations
    
    
    367,582
    
    
    
    269,831Net cash provided by investing activities  discontinued operations
    
    
    
    
    
    
    1,558Net cash provided by investing activities
    
    
    367,582
    
    
    
    271,389Cash Flows from Financing ActivitiesShort-term corporate debt repayments, net
    
    
    (855
    )
    
    
    (223
    )Repayment of other borrowings
    
    
    (3,792
    )
    
    
    (3,465
    )Proceeds from issuance of long-term corporate debt
    
    
    
    
    
    
    1,450Debt issuance costs
    
    
    (2,304
    )
    
    
    Long-term corporate debt repayments
    
    
    (138,804
    )
    
    
    (104,924
    )Non-corporate debt  issuances
    
    
    7,312
    
    
    
    19,339Non-corporate debt  repayments
    
    
    (142,354
    )
    
    
    (289,037
    )Dividends paid
    
    
    (15,841
    )
    
    
    (16,889
    )Decrease in restricted cash
    
    
    2,127
    
    
    
    3,338Proceeds from stock option exercises
    
    
    18,025
    
    
    
    3,946Tax benefit relating to stock plans
    
    
    4,922
    
    
    
    1,221Purchase of treasury shares
    
    
    (90,816
    )
    
    
    (34,240
    )Other
    
    
    (49
    )
    
    
    Net cash used in financing activities
    
    
    (362,429
    )
    
    
    (419,484
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2,593
    
    
    
    1,040Net decrease in cash and cash equivalents
    
    
    (19,860
    )
    
    
    (183,620
    )Cash and cash equivalents at beginning of the year
    
    
    373,705
    
    
    
    472,951Cash and cash equivalents at end of the period
    
    $
    353,845
    
    
    $
    289,331
 See notes to condensed consolidated financial statements.
 9




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IKON OFFICE SOLUTIONS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  1. BASIS OF PRESENTATION
   2. BOOK OVERDRAFTS
  3. ACCOUNTING FOR STOCK BASED COMPENSATION
  10




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Stock Options
      WeightedShares
    
    
    Average PriceOutstanding at September 30, 2005
    
    
    12,504
    
    
    $
    11.46Granted
    
    
    1,232
    
    
    
    10.91Exercised
    
    
    (2,804
    )
    
    
    11.77Cancelled
    
    
    (809
    )
    
    
    28.46Outstanding at June 30, 2006
    
    
    10,123
    
    
    $
    11.44Exercisable at June 30, 2006
    
    
    7,364
    *
    
    $
    11.69
 
 *
    
    5,723 of the 7,364 options exercisable at June 30, 2006 have a market value in excess of the
strike price.  Three Months Ended June 30
    
    Nine Months Ended June 302006
    
    2005
    
    2006
    
    2005Expected dividend yield (1)
    
    
    1.2
    %
    
    
    1.6
    %
    
    
    1.5
    %
    
    
    1.5
    %Expected volatility rate (2)
    
    
    54.4
    %
    
    
    53.3
    %
    
    
    55.0
    %
    
    
    54.1
    %Expected lives (3)
    
    5.0 years
    
    5.0 years
    
    5.0 years
    
    5.0 yearsRisk-free interest rate (4)
    
    
    5.0
    %
    
    
    3.7
    %
    
    
    4.4
    %
    
    
    3.6
    %
 
 (1)
    
    Dividend yield assumption is based on the Companys history and expectation of future
dividend payouts. 11




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(2)
    
    Expected volatility rate is determined using historical price observations at regular
intervals since 1993 through the respective option date.(3)
    
    The expected life of employee stock options is based on both historical exercise pattern and
from calculating an expected term from the option date to full exercise for the options
granted.(4)
    
    Risk-free interest rate assumption is based upon the interest rates published by the Federal
Reserve for U.S. Treasury Securities with a five-year life.  Options Outstanding
    
    Options ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-Number
    
    Weighted-
    
    Average
    
    
    
    
    
    
    
    
    
    Weighted-
    
    AverageOutstanding
    
    Average
    
    Remaining
    
    Aggregate
    
    Number
    
    Average
    
    Remaining
    
    AggregateRange of
    
    at June 30,
    
    Exercise
    
    Contractual
    
    Intrinsic
    
    Exercisable at
    
    Exercise
    
    Contractual
    
    IntrinsicExercise Prices
    
    2006
    
    Price
    
    Life
    
    Value
    
    June 30, 2006
    
    Price
    
    Life
    
    Value$  2.35    9.10
    
    
    2,612
    
    
    $
    5.92
    
    
    
    5.67
    
    
    $
    14,436
    
    
    
    2,460
    
    
    $
    5.73
    
    
    
    5.64
    
    
    $
    16,8969.11  10.90
    
    
    3,029
    
    
    
    10.60
    
    
    
    7.70
    
    
    
    6,060
    
    
    
    1,250
    
    
    
    10.35
    
    
    
    6.20
    
    
    
    2,81310.91  12.60
    
    
    2,834
    
    
    
    11.33
    
    
    
    6.17
    
    
    
    3,587
    
    
    
    2,012
    
    
    
    11.45
    
    
    
    5.31
    
    
    
    2,30612.61  46.59
    
    
    1,648
    
    
    
    21.87
    
    
    
    2.47
    
    
    
    
    
    
    
    1,642
    
    
    
    21.91
    
    
    
    2.44
    
    
    
    
 Stock Awards
    4. RECENT ACCOUNTING STANDARDS
    12




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5. SALE OF BUSINESSES AND ASSETS
    6. NOTES PAYABLE AND LONG-TERM DEBT
 Long-term Debt
  June 30,
    
    
    September 30,2006
    
    
    2005Bond issues
    
    $
    354,917
    
    
    $
    354,850Convertible subordinated notes
    
    
    
    
    
    
    53,242Notes payable
    
    
    238,631
    
    
    
    319,835Miscellaneous notes, bonds, mortgages and capital lease obligations
    
    
    987
    
    
    
    1,366594,535
    
    
    
    729,293Less: current maturities
    
    
    980
    
    
    
    1,137$
    593,555
    
    
    $
    728,156
 13




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##### Table of Contents



June 30,
    
    
    September 30,2006
    
    
    2005Lease-backed notes
    
    $
    
    
    
    $
    332,233Asset securitization conduit financing
    
    
    135,151
    
    
    
    124,122Notes payable to banks
    
    
    115
    
    
    
    9,422Debt supporting unsold residual value
    
    
    101,974
    
    
    
    58,889237,240
    
    
    
    524,666Less: current maturities
    
    
    136,998
    
    
    
    299,359$
    100,242
    
    
    $
    225,307
    Credit Facility
   14




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##### Table of Contents



Asset Securitization Conduit Financing Agreements
  Lines of Credit
  Interest Payments
  Debt Supporting Certain Lease and Residual Value Guarantees
  
    
    We have transferred $81,393 of lease receivables to GE ($57,088 in the U.S. and
$24,305 in Germany), for which we have retained certain risks of ownership relating to the
assignment of the receivables. As a result, we are required to record an asset and a
corresponding amount of debt representing the present value of the lease receivables on
our balance sheet. In the event GE is unable to recover any lease payments from the
lessee as a result of our retained ownership risk, we would be required to repurchase the
lease receivable. Since the inception of our relationship with GE in 2004, we have not
been required to repurchase any lease receivables under this scenario;
    
    We have transferred lease receivables to GE for which we have retained certain risks
of ownership relating to potential service performance failures. As a result, we are
required to record an asset and a corresponding amount of debt representing the present
value of the residual value related to these lease receivables. At June 30, 2006, we had
recorded $12,724 of debt and associated residual value. This debt will not be repaid
unless required under the applicable lease agreement in the event that an IKON service
performance failure is determined to relieve the lessee of its lease payment obligations.
Since inception of our relationship with GE in 2004, total repurchases of lease
receivables relating to our service performance have averaged approximately $140 per year;
and
    
    We have $7,164 of debt related to equipment on operating leases that has been funded
by GE for which we are required to keep the net book value of the operating leases and a
corresponding amount of debt on our balance sheet until the expiration of the operating
lease agreement.
 7. SALE OF LEASE RECEIVABLES
  15




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##### Table of Contents



8. GOODWILL
  IKON North
    
    
    IKONAmerica
    
    
    Europe
    
    
    TotalGoodwill at September 30, 2005
    
    $
    960,830
    
    
    $
    319,748
    
    
    $
    1,280,578Sale of business
    
    
    
    
    
    
    (12,511
    )
    
    
    (12,511
    )Translation adjustment
    
    
    4,526
    
    
    
    17,695
    
    
    
    22,221Goodwill at June 30, 2006
    
    $
    965,356
    
    
    $
    324,932
    
    
    $
    1,290,288
  9. CONTINGENCIES
   16




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17




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##### Table of Contents



10. SHARE REPURCHASES
  11. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Nine Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    26,881
    
    
    $
    23,431
    
    
    $
    79,862
    
    
    $
    42,251Foreign currency translation adjustments
    
    
    39,332
    
    
    
    (31,353
    )
    
    
    33,248
    
    
    
    204(Loss) gain on derivative financial
instruments, net of tax benefit
(expense) of: $18 and $(102) for the
three months ended June 30, 2006 and
2005, respectively; $149 and $112 for
the nine months ended June 30, 2006 and
2005, respectively
    
    
    (34
    )
    
    
    (177
    )
    
    
    (262
    )
    
    
    205Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    26,810
    *
    
    
    Total comprehensive income (loss)
    
    $
    66,179
    
    
    $
    (8,099
    )
    
    $
    139,658
    
    
    $
    42,660
 
 *
    
    As a result of freezing the U.S. Plans and one of our Non-U.S. Plans (discussed in Note 14). 18




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##### Table of Contents



12. EARNINGS PER COMMON SHARE
  Three Months Ended
    
    
    Nine Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Numerator for basic earnings per common share  income
from continuing operations
    
    $
    26,871
    
    
    $
    25,373
    
    
    $
    79,871
    
    
    $
    53,994Effect of dilutive securities:Interest expense on Convertible Notes, net of taxes
    
    
    
    
    
    
    1,848
    
    
    
    88
    
    
    
    6,072Numerator for diluted earnings per common share  net
income from continuing operations
    
    $
    26,871
    
    
    $
    27,221
    
    
    $
    79,959
    
    
    $
    60,066Denominator:Denominator for basic earnings per common share 
weighted average common shares
    
    
    130,690
    
    
    
    139,826
    
    
    
    132,115
    
    
    
    140,567Effect of dilutive securities:Convertible Notes
    
    
    
    
    
    
    16,306
    
    
    
    260
    
    
    
    17,857Employee stock awards
    
    
    635
    
    
    
    402
    
    
    
    528
    
    
    
    382Employee stock options
    
    
    986
    
    
    
    576
    
    
    
    825
    
    
    
    863Dilutive potential common shares
    
    
    1,621
    
    
    
    17,284
    
    
    
    1,613
    
    
    
    19,102Denominator for diluted earnings per common share 
adjusted weighted average common shares and assumed
conversions
    
    
    132,311
    
    
    
    157,110
    
    
    
    133,728
    
    
    
    159,669Basic earnings per common share from continuing operations
    
    $
    0.21
    
    
    $
    0.18
    
    
    $
    0.60
    
    
    $
    0.38Diluted earnings per common share from continuing operations
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    0.60
    
    
    $
    0.38
    13. SEGMENT REPORTING
  19




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##### Table of Contents



*CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalThree Months Ended June 30, 2006Revenues:Equipment
    
    $
    391,677
    
    
    $
    53,598
    
    
    $
    
    
    
    $
    445,275Customer service and supplies
    
    
    323,348
    
    
    
    38,239
    
    
    
    
    
    
    
    361,587Managed and professional services
    
    
    173,891
    
    
    
    13,385
    
    
    
    
    
    
    
    187,276Rental and fees
    
    
    31,754
    
    
    
    2,253
    
    
    
    
    
    
    
    34,007Other
    
    
    964
    
    
    
    17,788
    
    
    
    
    
    
    
    18,752Total revenues
    
    
    921,634
    
    
    
    125,263
    
    
    
    
    
    
    
    1,046,897Gain on divestiture of businesses and assets
    
    
    6,858
    
    
    
    73
    
    
    
    
    
    
    
    6,931Restructuring and asset impairment
    
    
    (129
    )
    
    
    
    
    
    
    
    
    
    
    (129
    )Operating income
    
    
    86,798
    
    
    
    8,027
    
    
    
    (40,760
    )
    
    
    54,065Loss from early extinguishment of debt, net
    
    
    
    
    
    
    
    
    
    
    3,866
    
    
    
    3,866Interest income
    
    
    
    
    
    
    
    
    
    
    4,124
    
    
    
    4,124Interest expense
    
    
    
    
    
    
    
    
    
    
    12,245
    
    
    
    12,245Income from continuing operations before
taxes on income
    
    $
    86,798
    
    
    $
    8,027
    
    
    $
    (52,747
    )
    
    $
    42,078Three Months Ended June 30, 2005Revenues:Equipment
    
    $
    388,806
    
    
    $
    51,572
    
    
    $
    
    
    
    $
    440,378Customer service and supplies
    
    
    341,038
    
    
    
    36,484
    
    
    
    
    
    
    
    377,522Managed and professional services
    
    
    166,054
    
    
    
    14,332
    
    
    
    
    
    
    
    180,386Rental and fees
    
    
    41,109
    
    
    
    1,469
    
    
    
    
    
    
    
    42,578Other
    
    
    19,191
    
    
    
    38,250
    
    
    
    
    
    
    
    57,441Total revenues
    
    
    956,198
    
    
    
    142,107
    
    
    
    
    
    
    
    1,098,305Restructuring and asset impairment
    
    
    (379
    )
    
    
    
    
    
    
    
    
    
    
    (379
    )Operating income
    
    
    97,569
    
    
    
    8,058
    
    
    
    (56,274
    )
    
    
    49,353Interest income
    
    
    
    
    
    
    
    
    
    
    1,855
    
    
    
    1,855Interest expense
    
    
    
    
    
    
    
    
    
    
    13,115
    
    
    
    13,115Income from continuing operations before
taxes on income
    
    $
    97,569
    
    
    $
    8,058
    
    
    $
    (67,534
    )
    
    $
    38,093
  *CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalNine Months Ended June 30, 2006Revenues:Equipment
    
    $
    1,175,219
    
    
    $
    155,793
    
    
    $
    
    
    
    $
    1,331,012Customer service and supplies
    
    
    984,529
    
    
    
    109,664
    
    
    
    
    
    
    
    1,094,193Managed and professional services
    
    
    509,122
    
    
    
    40,006
    
    
    
    
    
    
    
    549,128Rental and fees
    
    
    112,757
    
    
    
    4,925
    
    
    
    
    
    
    
    117,682Other
    
    
    26,077
    
    
    
    52,177
    
    
    
    
    
    
    
    78,254Total revenues
    
    
    2,807,704
    
    
    
    362,565
    
    
    
    
    
    
    
    3,170,269Gain on divestiture of businesses and assets
    
    
    6,624
    
    
    
    5,336
    
    
    
    
    
    
    
    11,960Restructuring and asset impairment
    
    
    (264
    )
    
    
    
    
    
    
    
    
    
    
    (264
    )Operating income
    
    
    276,785
    
    
    
    27,011
    
    
    
    (145,861
    )
    
    
    157,935Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    5,516
    
    
    
    5,516Interest income
    
    
    
    
    
    
    
    
    
    
    9,060
    
    
    
    9,060Interest expense
    
    
    
    
    
    
    
    
    
    
    39,358
    
    
    
    39,358Income from continuing operations before
taxes on income
    
    $
    276,785
    
    
    $
    27,011
    
    
    $
    (181,675
    )
    
    $
    122,121Nine Months Ended June 30, 2005Revenues:Equipment
    
    $
    1,137,055
    
    
    $
    154,804
    
    
    $
    
    
    
    $
    1,291,859
 20




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##### Table of Contents



*CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalCustomer service and supplies
    
    
    1,008,873
    
    
    
    109,631
    
    
    
    
    
    
    
    1,118,504Managed and professional services
    
    
    490,536
    
    
    
    43,998
    
    
    
    
    
    
    
    534,534Rental and fees
    
    
    125,451
    
    
    
    4,030
    
    
    
    
    
    
    
    129,481Other
    
    
    84,512
    
    
    
    117,133
    
    
    
    
    
    
    
    201,645Total revenues
    
    
    2,846,427
    
    
    
    429,596
    
    
    
    
    
    
    
    3,276,023Gain on divestiture of businesses and assets
    
    
    1,901
    
    
    
    
    
    
    
    
    
    
    
    1,901Restructuring and asset impairment
    
    
    10,068
    
    
    
    
    
    
    
    1,262
    
    
    
    11,330Operating income
    
    
    268,390
    
    
    
    22,834
    
    
    
    (172,441
    )
    
    
    118,783Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,734
    
    
    
    1,734Interest income
    
    
    
    
    
    
    
    
    
    
    5,143
    
    
    
    5,143Interest expense
    
    
    
    
    
    
    
    
    
    
    39,714
    
    
    
    39,714Income from continuing operations before
taxes on income
    
    $
    268,390
    
    
    $
    22,834
    
    
    $
    (208,746
    )
    
    $
    82,478
 
 *
    
    Corporate and Eliminations, which is not treated as a business segment, includes certain
selling and administrative functions such as finance and customer support. 14. PENSION PLANS
    Three Months Ended June 302006
    
    
    2005U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.Plans
    
    
    Plans
    
    
    Plans
    
    
    PlansService cost
    
    $
    231
    
    
    $
    879
    
    
    $
    7,255
    
    
    $
    1,054Interest cost
    
    
    7,702
    
    
    
    1,151
    
    
    
    8,349
    
    
    
    958Expected return on assets
    
    
    (7,777
    )
    
    
    (1,263
    )
    
    
    (8,237
    )
    
    
    (933
    )Amortization of net obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Amortization of prior service cost
    
    
    
    
    
    
    (53
    )
    
    
    142
    
    
    
    2Recognized net actuarial loss
    
    
    1,921
    
    
    
    332
    
    
    
    2,014
    
    
    
    161Net periodic pension cost
    
    $
    2,077
    
    
    $
    1,046
    
    
    $
    9,523
    
    
    $
    1,251
 Nine Months Ended June 302006
    
    
    2005U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.Plans
    
    
    Plans
    
    
    Plans
    
    
    PlansService cost
    
    $
    8,952
    
    
    $
    3,281
    
    
    $
    21,321
    
    
    $
    3,192Interest cost
    
    
    24,140
    
    
    
    3,389
    
    
    
    24,563
    
    
    
    2,897Expected return on assets
    
    
    (23,357
    )
    
    
    (3,319
    )
    
    
    (23,241
    )
    
    
    (2,822
    )Amortization of net obligation
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    28Amortization of prior service cost
    
    
    47
    
    
    
    (155
    )
    
    
    426
    
    
    
    5Recognized net actuarial loss
    
    
    7,209
    
    
    
    1,129
    
    
    
    5,798
    
    
    
    487Curtailment
    
    
    2,852
    
    
    
    787
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    19,843
    
    
    $
    5,130
    
    
    $
    28,867
    
    
    $
    3,787
 21




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##### Table of Contents



15. RESTRUCTURING
   CashBalance
    
    
    Fiscal 2006
    
    
    Payments
    
    
    BalanceSeptember 30, 2005
    
    
    Adjustments*
    
    
    Fiscal 2006
    
    
    June 30, 2006Severance
    
    $
    1,975
    
    
    $
    (416
    )
    
    $
    (1,478
    )
    
    $
    81Contractual commitments
    
    
    1,452
    
    
    
    472
    
    
    
    (975
    )
    
    
    949Contract termination
    
    
    123
    
    
    
    (67
    )
    
    
    (56
    )
    
    
    Total
    
    $
    3,550
    
    
    $
    (11
    )
    
    $
    (2,509
    )
    
    $
    1,030
 
 *
    
    The adjustments in the table above are the result of revising our estimates based on more
recent information, which we did not have at the time the reserve was established. The
adjustments made during the nine months ended June 30, 2006 were not material to our
consolidated financial statements.   Remainder ofFiscal 2006
    
    
    Fiscal 2007
    
    
    Fiscal 2008
    
    
    Beyond
    
    
    TotalProjected PaymentsSeverance
    
    $
    81
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    81Contractual commitments
    
    
    142
    
    
    
    386
    
    
    
    218
    
    
    
    203
    
    
    
    949Contract termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    223
    
    
    $
    386
    
    
    $
    218
    
    
    $
    203
    
    
    $
    1,030
  16. DISCONTINUED OPERATIONS
  Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    491
    
    
    $
    
    
    
    $
    20,570Operating income (loss)
    
    
    17
    
    
    
    (3,210
    )
    
    
    (15
    )
    
    
    (19,410
    )Tax (expense) benefit
    
    
    (7
    )
    
    
    1,268
    
    
    
    6
    
    
    
    7,667Net income (loss) from discontinued operations
    
    $
    10
    
    
    $
    (1,942
    )
    
    $
    (9
    )
    
    $
    (11,743
    )
 22




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17. FOREIGN EARNINGS REPATRIATION
   23




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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 OVERVIEW
    
    
    operational leverage;
    
    core growth; and
    
    balanced capital strategy.
   24




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##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended June 30, 2006 Compared to the Three Months Ended June 30, 2005
 Summary of Consolidated Results
  Reportable Segments
  25




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##### Table of Contents



CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations*
    
    
    TotalThree Months Ended June 30, 2006Revenues:Equipment
    
    $
    391,677
    
    
    $
    53,598
    
    
    $
    
    
    
    $
    445,275Customer service and supplies
    
    
    323,348
    
    
    
    38,239
    
    
    
    
    
    
    
    361,587Managed and professional services
    
    
    173,891
    
    
    
    13,385
    
    
    
    
    
    
    
    187,276Rental and fees
    
    
    31,754
    
    
    
    2,253
    
    
    
    
    
    
    
    34,007Other
    
    
    964
    
    
    
    17,788
    
    
    
    
    
    
    
    18,752Total revenues
    
    
    921,634
    
    
    
    125,263
    
    
    
    
    
    
    
    1,046,897Gross profit:Equipment
    
    
    94,063
    
    
    
    20,147
    
    
    
    
    
    
    
    114,210Customer service and supplies
    
    
    153,571
    
    
    
    11,419
    
    
    
    
    
    
    
    164,990Managed and professional services
    
    
    45,562
    
    
    
    1,482
    
    
    
    
    
    
    
    47,044Rental and fees
    
    
    23,830
    
    
    
    1,581
    
    
    
    
    
    
    
    25,411Other
    
    
    180
    
    
    
    6,205
    
    
    
    
    
    
    
    6,385Total gross profit
    
    
    317,206
    
    
    
    40,834
    
    
    
    
    
    
    
    358,040Gain on divestiture of businesses and assets
    
    
    6,858
    
    
    
    73
    
    
    
    
    
    
    
    6,931Restructuring and asset impairment
    
    
    (129
    )
    
    
    
    
    
    
    
    
    
    
    (129
    )Operating income
    
    
    86,798
    
    
    
    8,027
    
    
    
    (40,760
    )
    
    
    54,065Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    3,866
    
    
    
    3,866Interest income
    
    
    
    
    
    
    
    
    
    
    4,124
    
    
    
    4,124Interest expense
    
    
    
    
    
    
    
    
    
    
    12,245
    
    
    
    12,245Income from continuing operations before
taxes on income
    
    $
    86,798
    
    
    $
    8,027
    
    
    $
    (52,747
    )
    
    $
    42,078Three Months Ended June 30, 2005Revenues:Equipment
    
    $
    388,806
    
    
    $
    51,572
    
    
    $
    
    
    
    $
    440,378Customer service and supplies
    
    
    341,038
    
    
    
    36,484
    
    
    
    
    
    
    
    377,522Managed and professional services
    
    
    166,054
    
    
    
    14,332
    
    
    
    
    
    
    
    180,386Rental and fees
    
    
    41,109
    
    
    
    1,469
    
    
    
    
    
    
    
    42,578Other
    
    
    19,191
    
    
    
    38,250
    
    
    
    
    
    
    
    57,441Total revenues
    
    
    956,198
    
    
    
    142,107
    
    
    
    
    
    
    
    1,098,305Gross profit:Equipment
    
    
    89,166
    
    
    
    15,622
    
    
    
    
    
    
    
    104,788Customer service and supplies
    
    
    168,630
    
    
    
    10,580
    
    
    
    
    
    
    
    179,210Managed and professional services
    
    
    47,522
    
    
    
    1,593
    
    
    
    
    
    
    
    49,115Rental and fees
    
    
    27,687
    
    
    
    1,319
    
    
    
    
    
    
    
    29,006Other
    
    
    13,805
    
    
    
    13,515
    
    
    
    
    
    
    
    27,320Total gross profit
    
    
    346,810
    
    
    
    42,629
    
    
    
    
    
    
    
    389,439Restructuring and asset impairment
    
    
    (379
    )
    
    
    
    
    
    
    
    
    
    
    (379
    )Operating income
    
    
    97,569
    
    
    
    8,058
    
    
    
    (56,274
    )
    
    
    49,353Interest income
    
    
    
    
    
    
    
    
    
    
    1,855
    
    
    
    1,855Interest expense
    
    
    
    
    
    
    
    
    
    
    13,115
    
    
    
    13,115Income from continuing operations before
taxes on income
    
    $
    97,569
    
    
    $
    8,058
    
    
    $
    (67,534
    )
    
    $
    38,093
 
 *
    
    Corporate and eliminations, which is not treated as a reportable segment, includes certain
selling and administrative functions such as finance and customer support. Equipment
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    445,275
    
    
    $
    440,378
    
    
    $
    4,897
    
    
    
    1.1
    %Cost of revenue
    
    
    331,065
    
    
    
    335,590
    
    
    
    (4,525
    )
    
    
    (1.3
    )%Gross profit
    
    $
    114,210
    
    
    $
    104,788
    
    
    $
    9,422
    
    
    
    9.0
    %Gross profit %
    
    
    25.6
    %
    
    
    23.8
    %
 26




---



##### Table of Contents



Customer Service and Supplies
 2006
    
    2005
    
    $ Change
    
    % ChangeRevenue
    
    $
    361,587
    
    
    $
    377,522
    
    
    $
    (15,935
    )
    
    
    (4.2
    )%Cost of revenue
    
    
    196,597
    
    
    
    198,312
    
    
    
    (1,715
    )
    
    
    (0.9
    )%Gross profit
    
    $
    164,990
    
    
    $
    179,210
    
    
    $
    (14,220
    )
    
    
    (7.9
    )%Gross profit %
    
    
    45.6
    %
    
    
    47.5
    %
  27




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##### Table of Contents



Managed and Professional Services
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    187,276
    
    
    $
    180,386
    
    
    $
    6,890
    
    
    
    3.8
    %Cost of revenue
    
    
    140,232
    
    
    
    131,271
    
    
    
    8,961
    
    
    
    6.8
    %Gross profit
    
    $
    47,044
    
    
    $
    49,115
    
    
    $
    (2,071
    )
    
    
    (4.2
    )%Gross profit %
    
    
    25.1
    %
    
    
    27.2
    %
    Rental and Fees
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    34,007
    
    
    $
    42,578
    
    
    $
    (8,571
    )
    
    
    (20.1
    )%Cost of revenue
    
    
    8,596
    
    
    
    13,572
    
    
    
    (4,976
    )
    
    
    (36.7
    )%Gross profit
    
    $
    25,411
    
    
    $
    29,006
    
    
    $
    (3,595
    )
    
    
    (12.4
    )%Gross profit %
    
    
    74.7
    %
    
    
    68.1
    %
 28




---



##### Table of Contents



Other Revenue
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeFinance income
    
    $
    6,496
    
    
    $
    24,899
    
    
    $
    (18,403
    )
    
    
    (73.9
    )%Other
    
    
    12,256
    
    
    
    32,542
    
    
    
    (20,286
    )
    
    
    (62.3
    )%Total other revenue
    
    $
    18,752
    
    
    $
    57,441
    
    
    $
    (38,689
    )
    
    
    (67.4
    )%Finance interest expense
    
    $
    1,355
    
    
    $
    6,139
    
    
    $
    (4,784
    )
    
    
    (77.9
    )%Other
    
    
    11,012
    
    
    
    23,982
    
    
    
    (12,970
    )
    
    
    (54.1
    )%Total cost of other revenue
    
    $
    12,367
    
    
    $
    30,121
    
    
    $
    (17,754
    )
    
    
    (58.9
    )%Finance income gross profit
    
    $
    5,141
    
    
    $
    18,760
    
    
    $
    (13,619
    )
    
    
    (72.6
    )%Other gross profit
    
    
    1,244
    
    
    
    8,560
    
    
    
    (7,316
    )
    
    
    (85.5
    )%Total other gross profit
    
    $
    6,385
    
    
    $
    27,320
    
    
    $
    (20,935
    )
    
    
    (76.6
    )%Finance income gross profit %
    
    
    79.1
    %
    
    
    75.3
    %Other gross profit%
    
    
    10.2
    %
    
    
    26.3
    %Total gross profit %
    
    
    34.0
    %
    
    
    47.6
    %
  Selling and Administrative Expenses
 2006
    
    2005
    
    $ Change
    
    % ChangeSelling and administrative expenses
    
    $
    311,035
    
    
    $
    340,465
    
    
    $
    (29,430
    )
    
    
    (8.6
    )%Selling and administrative expenses as a % of revenue
    
    
    29.7
    %
    
    
    31.0
    %
   
    
    a decrease of $14,028 compared to fiscal 2005 as a result of lower spending for
information technology, travel and other expenses due to spending actions taken during
fiscal 2005 and fiscal 2006;
    
    a decrease of approximately $5,453 related to the sale of businesses during fiscal
2005 and October 2005;
    
    a decrease of $6,505 in consulting and other fees related primarily to lower fees
incurred in our effort to comply with Sarbanes Oxley as well as lower fees from GE related
to the sale of the U.S. Retained Portfolio; and
 29




---



##### Table of Contents




    
    a decrease in pension costs of $4,373 compared to fiscal 2005 as a result of the
freezing of our U.S. and certain non-U.S. Pension Plans. Pension expense is allocated
between selling and administrative expense and cost of revenues based on the number of
employees related to those areas.
  Other Items
 2006
    
    2005
    
    $ ChangeGain on divestiture of businesses and assets
    
    $
    6,931
    
    
    $
    
    
    
    
    6,931Restructuring and asset impairment
    
    
    (129
    )
    
    
    (379
    )
    
    
    250Loss from early extinguishment of debt
    
    
    3,866
    
    
    
    
    
    
    
    3,866Interest income
    
    
    4,124
    
    
    
    1,855
    
    
    
    2,269Interest expense
    
    
    12,245
    
    
    
    13,115
    
    
    
    (870
    )Taxes on income
    
    
    15,207
    
    
    
    12,720
    
    
    
    2,487Income from continuing operations
    
    
    26,871
    
    
    
    25,373
    
    
    
    1,498Diluted earnings per common share  continuing operations
    
    $
    0.20
    
    
    $
    0.17
    
    
    
    0.03
       30




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##### Table of Contents



Nine Months Ended June 30, 2006 Compared to the Nine Months Ended June 30, 2005
 Summary of Consolidated Results
  CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations*
    
    
    TotalNine Months Ended June 30, 2006Revenues:Equipment
    
    $
    1,175,219
    
    
    $
    155,793
    
    
    $
    
    
    
    $
    1,331,012Customer service and supplies
    
    
    984,529
    
    
    
    109,664
    
    
    
    
    
    
    
    1,094,193Managed and professional services
    
    
    509,122
    
    
    
    40,006
    
    
    
    
    
    
    
    549,128Rental and fees
    
    
    112,757
    
    
    
    4,925
    
    
    
    
    
    
    
    117,682Other
    
    
    26,077
    
    
    
    52,177
    
    
    
    
    
    
    
    78,254Total revenues
    
    
    2,807,704
    
    
    
    362,565
    
    
    
    
    
    
    
    3,170,269Gross profit:Equipment
    
    
    277,582
    
    
    
    55,717
    
    
    
    
    
    
    
    333,299Customer service and supplies
    
    
    460,185
    
    
    
    31,679
    
    
    
    
    
    
    
    491,864Managed and professional services
    
    
    135,785
    
    
    
    5,099
    
    
    
    
    
    
    
    140,884Rental and fees
    
    
    79,393
    
    
    
    3,920
    
    
    
    
    
    
    
    83,313Other
    
    
    17,478
    
    
    
    18,722
    
    
    
    
    
    
    
    36,200Total gross profit
    
    
    970,423
    
    
    
    115,137
    
    
    
    
    
    
    
    1,085,560Gain on divestiture of businesses and assets
    
    
    6,624
    
    
    
    5,336
    
    
    
    
    
    
    
    11,960Restructuring and asset impairment
    
    
    (264
    )
    
    
    
    
    
    
    
    
    
    
    (264
    )Operating income
    
    
    276,785
    
    
    
    27,011
    
    
    
    (145,861
    )
    
    
    157,935Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    5,516
    
    
    
    5,516Interest income
    
    
    
    
    
    
    
    
    
    
    9,060
    
    
    
    9,060Interest expense
    
    
    
    
    
    
    
    
    
    
    39,358
    
    
    
    39,358Income from continuing operations before
taxes on income
    
    $
    276,785
    
    
    $
    27,011
    
    
    $
    (181,675
    )
    
    $
    122,121Nine Months Ended June 30, 2005Revenues:Equipment
    
    $
    1,137,055
    
    
    $
    154,804
    
    
    $
    
    
    
    $
    1,291,859Customer service and supplies
    
    
    1,008,873
    
    
    
    109,631
    
    
    
    
    
    
    
    1,118,504Managed and professional services
    
    
    490,536
    
    
    
    43,998
    
    
    
    
    
    
    
    534,534Rental and fees
    
    
    125,451
    
    
    
    4,030
    
    
    
    
    
    
    
    129,481Other
    
    
    84,512
    
    
    
    117,133
    
    
    
    
    
    
    
    201,645Total revenues
    
    
    2,846,427
    
    
    
    429,596
    
    
    
    
    
    
    
    3,276,023Gross profit:Equipment
    
    
    295,199
    
    
    
    48,724
    
    
    
    
    
    
    
    343,923Customer service and supplies
    
    
    468,296
    
    
    
    32,540
    
    
    
    
    
    
    
    500,836Managed and professional services
    
    
    135,121
    
    
    
    5,247
    
    
    
    
    
    
    
    140,368Rental and fees
    
    
    88,573
    
    
    
    3,502
    
    
    
    
    
    
    
    92,075Other
    
    
    49,088
    
    
    
    38,836
    
    
    
    
    
    
    
    87,924Total gross profit
    
    
    1,036,277
    
    
    
    128,849
    
    
    
    
    
    
    
    1,165,126Gain on divestiture of businesses and assets
    
    
    1,901
    
    
    
    
    
    
    
    
    
    
    
    1,901
 31




---



##### Table of Contents



CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations*
    
    
    TotalRestructuring and asset impairment
    
    
    10,068
    
    
    
    
    
    
    
    1,262
    
    
    
    11,330Operating income
    
    
    268,390
    
    
    
    22,834
    
    
    
    (172,441
    )
    
    
    118,783Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,734
    
    
    
    1,734Interest income
    
    
    
    
    
    
    
    
    
    
    5,143
    
    
    
    5,143Interest expense
    
    
    
    
    
    
    
    
    
    
    39,714
    
    
    
    39,714Income from continuing operations before
taxes on income
    
    $
    268,390
    
    
    $
    22,834
    
    
    $
    (208,746
    )
    
    $
    82,478
 
 *
    
    Corporate and eliminations, which is not treated as a reportable segment, includes certain
selling and administrative functions, such as finance and customer support. Equipment
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    1,331,012
    
    
    $
    1,291,859
    
    
    $
    39,153
    
    
    
    3.0
    %Cost of revenue
    
    
    997,713
    
    
    
    947,936
    
    
    
    49,777
    
    
    
    5.3
    %Gross profit
    
    $
    333,299
    
    
    $
    343,923
    
    
    $
    (10,624
    )
    
    
    (3.1
    )%Gross profit %
    
    
    25.0
    %
    
    
    26.6
    %
    Customer Service and Supplies
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    1,094,193
    
    
    $
    1,118,504
    
    
    $
    (24,311
    )
    
    
    (2.2
    )%Cost of revenue
    
    
    602,329
    
    
    
    617,668
    
    
    
    (15,339
    )
    
    
    (2.5
    )%Gross profit
    
    $
    491,864
    
    
    $
    500,836
    
    
    $
    (8,972
    )
    
    
    (1.8
    )%Gross profit %
    
    
    45.0
    %
    
    
    44.8
    %
 32




---



##### Table of Contents



Managed and Professional Services
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    549,128
    
    
    $
    534,534
    
    
    $
    14,594
    
    
    
    2.7
    %Cost of revenue
    
    
    408,244
    
    
    
    394,166
    
    
    
    14,078
    
    
    
    3.6
    %Gross profit
    
    $
    140,884
    
    
    $
    140,368
    
    
    $
    516
    
    
    
    0.4
    %Gross profit %
    
    
    25.7
    %
    
    
    26.3
    %
    Rental and Fees
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    117,682
    
    
    $
    129,481
    
    
    $
    (11,799
    )
    
    
    (9.1
    )%Cost of revenue
    
    
    34,369
    
    
    
    37,406
    
    
    
    (3,037
    )
    
    
    (8.1
    )%Gross profit
    
    $
    83,313
    
    
    $
    92,075
    
    
    $
    (8,762
    )
    
    
    (9.5
    )%Gross profit %
    
    
    70.8
    %
    
    
    71.1
    %
 33




---



##### Table of Contents



Other Revenue
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeFinance income
    
    $
    42,066
    
    
    $
    83,364
    
    
    $
    (41,298
    )
    
    
    (49.5
    )%Other
    
    
    36,188
    
    
    
    118,281
    
    
    
    (82,093
    )
    
    
    (69.4
    )%Total other revenue
    
    $
    78,254
    
    
    $
    201,645
    
    
    $
    (123,391
    )
    
    
    (61.2
    )%Finance interest expense
    
    $
    9,806
    
    
    $
    21,033
    
    
    $
    (11,227
    )
    
    
    (53.4
    )%Other
    
    
    32,248
    
    
    
    92,688
    
    
    
    (60,440
    )
    
    
    (65.2
    )%Total cost of other revenue
    
    $
    42,054
    
    
    $
    113,721
    
    
    $
    (71,667
    )
    
    
    (63.0
    )%Finance income gross profit
    
    $
    32,260
    
    
    $
    62,331
    
    
    $
    (30,071
    )
    
    
    (48.2
    )%Other gross profit
    
    
    3,940
    
    
    
    25,593
    
    
    
    (21,653
    )
    
    
    (84.6
    )%Total other gross profit
    
    $
    36,200
    
    
    $
    87,924
    
    
    $
    (51,724
    )
    
    
    (58.8
    )%Finance income gross profit %
    
    
    76.7
    %
    
    
    74.8
    %Other gross profit %
    
    
    10.9
    %
    
    
    21.6
    %Total gross profit %
    
    
    46.3
    %
    
    
    43.6
    %
  Selling and Administrative Expenses
 2006
    
    2005
    
    $ Change
    
    % ChangeSelling and administrative expenses
    
    $
    939,849
    
    
    $
    1,036,914
    
    
    $
    (97,065
    )
    
    
    (9.4
    )%Selling and administrative expenses as a % of revenue
    
    
    29.6
    %
    
    
    31.7
    %
   
    
    a decrease of $39,724 compared to fiscal 2005 as a result of lower spending for
information technology, travel and other expenses, as well as reductions in headcount due
to spending actions taken during fiscal 2005 and the first quarter of fiscal 2006;
    
    a decrease of $4,949 in selling expense due to geographic consolidation and headcount
reductions;
    
    a decrease of approximately $20,025 related to the sale of businesses during fiscal
2005 and October 2005;
    
    a decrease of $6,952 compared to fiscal 2005 related to rent and facilities expense
as a result of several real estate leases that were not renewed and the termination of
various real estate leases during fiscal 2005;
 34




---



##### Table of Contents




    
    a decrease of $9,343 in consulting and other fees related primarily to lower fees
incurred in our effort to comply with Sarbanes Oxley; and
    
    a decrease in pension costs of $5,281 compared to fiscal 2005 as a result of the
freezing of our U.S. and certain non-U.S. Pension Plans. Pension expense is allocated
between selling and administrative expense and cost of revenues based on the number of
employees related to those areas.
 Other
 2006
    
    2005
    
    $ ChangeGain on divestiture of businesses and assets
    
    $
    11,960
    
    
    $
    1,901
    
    
    $
    10,059Restructuring and asset impairment
    
    
    (264
    )
    
    
    11,330
    
    
    
    (11,594
    )Loss from early extinguishment of debt
    
    
    5,516
    
    
    
    1,734
    
    
    
    3,782Interest income
    
    
    9,060
    
    
    
    5,143
    
    
    
    3,917Interest expense
    
    
    39,358
    
    
    
    39,714
    
    
    
    (356
    )Taxes on income
    
    
    42,250
    
    
    
    28,484
    
    
    
    13,766Income from continuing operations
    
    
    79,871
    
    
    
    53,994
    
    
    
    25,877Diluted earnings per common share  continuing operations
    
    $
    0.60
    
    
    $
    0.38
    
    
    $
    0.22
      35




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##### Table of Contents



Restructuring
   CashBalance
    
    
    Fiscal 2006
    
    
    Payments
    
    
    BalanceSeptember 30, 2005
    
    
    Adjustments*
    
    
    Fiscal 2006
    
    
    June 30, 2006Severance
    
    $
    1,975
    
    
    $
    (416
    )
    
    $
    (1,478
    )
    
    $
    81Contractual commitments
    
    
    1,452
    
    
    
    472
    
    
    
    (975
    )
    
    
    949Contract termination
    
    
    123
    
    
    
    (67
    )
    
    
    (56
    )
    
    
    Total
    
    $
    3,550
    
    
    $
    (11
    )
    
    $
    (2,509
    )
    
    $
    1,030
 
 *
    
    The adjustments in the table above are the result of revising our estimates based on more
recent information, which we did not have at the time the reserve was established. The
adjustments made during the nine months ended June 30, 2006 were not material to our
consolidated financial statements.   Remainder ofFiscal 2006
    
    
    Fiscal 2007
    
    
    Fiscal 2008
    
    
    Beyond
    
    
    TotalProjected PaymentsSeverance
    
    $
    81
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    81Contractual commitments
    
    
    142
    
    
    
    386
    
    
    
    218
    
    
    
    203
    
    
    
    949Contract termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    223
    
    
    $
    386
    
    
    $
    218
    
    
    $
    203
    
    
    $
    1,030
 
 *
    
    All contractual commitment amounts related to leases are shown net of projected sublease income.
Projected sublease income was $591 at June 30, 2006. FINANCIAL CONDITION AND LIQUIDITY
 Cash Flows and Liquidity
  36




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##### Table of Contents



2006Cash used in operating activities
    
    $
    (27,606
    )Cash provided by investing activities
    
    
    367,582Cash used in financing activities
    
    
    (362,429
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2,593Decrease in cash and cash equivalents
    
    
    (19,860
    )Cash and cash equivalents at beginning of the year
    
    
    373,705Cash and cash equivalents at end of period
    
    $
    353,845
 Operating Cash Flows
  Investing Cash Flows
  Financing Cash Flows
  Credit Ratings
  Liquidity Outlook
  37




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RECENT ACCOUNTING STANDARDS
  38




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Foreign Exchange Risk
 
 Item 4. Controls and Procedures
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
    Material Weakness in Internal Control Over Financial Reporting
   39




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##### Table of Contents



Managements Remediation Initiatives
   
    
    established and fully staffed a service billing organization structure;
    
    conducted tests of contract set-up procedures at each of our North American billing centers;
    
    used actual service billing data from our service provider in lieu of estimated amounts;
    
    initialized and subsequently expanded a program designed to assess the accuracy of
estimated meter reads; and
    
    broadened the scope of our standardized issue resolution process to include
additional professionals who are empowered to identify and resolve billing errors.
  
    
    improvement in the timeliness in which we issued invoice adjustments;
    
    continued reduction in contract set-up errors as quality improves at each of our
North American billing centers; and
    
    steady progress in our remediation efforts relating to certain previously identified
deficiencies in the segregation of incompatible duties within the billing function.
   40




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Changes in Internal Control Over Financial Reporting
   41




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity
Securities
  ApproximateTotal Number
    
    
    Dollar Valueof Shares
    
    
    of Shares thatTotal Number
    
    
    Average
    
    
    Purchased as
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Part of
    
    
    Purchased UnderPeriod
    
    Purchased (1)
    
    
    per Share
    
    
    Repurchase Plan
    
    
    the Repurchase Plan (2)April 1, 2006  April 30, 2006
    
    
    564
    
    
    $
    13.76
    
    
    
    564
    
    
    $
    159,232May 1, 2006  May 31, 2006
    
    
    664
    
    
    
    13.04
    
    
    
    664
    
    
    
    150,570June 1, 2006  June 30, 2006
    
    
    424
    
    
    
    12.72
    
    
    
    424
    
    
    
    145,1801,652
    
    
    $
    13.20
    
    
    
    1,652
    
    
    $
    145,180
 
 (1)
    
    As of June 30, 2006, we repurchased a total of 22,858 shares of our common stock pursuant
to the Repurchase Plan adopted by our Board of Directors in March 2004 and publicly
announced in our quarterly report on Form 10-Q filed with the SEC on May 14, 2004.(2)
    
    Our Board of Directors authorized us to repurchase up to $250,000 of our outstanding
common stock under the Repurchase Plan. On February 22, 2006, the Board of Directors
authorized a $150,000 increase to the Repurchase Plan, resulting in a new authorization of
up to $400,000. The Repurchase Plan will remain in effect until the $400,000 repurchase
limit is reached; however, our Board of Directors may discontinue the Repurchase Plan at any
time. As of June 30, 2006, we had utilized $254,820 under the Repurchase Plan (see Note 10
to our condensed consolidated financial statements, for information concerning our share
repurchase activity and how it relates to our Credit Facility). 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
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SIGNATURES
    By:
    
    /s/ ROBERT F. WOODS

(Robert F. Woods)Senior Vice President and ChiefFinancial Officer(Principal Financial Officer)
 43