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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 March 31, 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
    
    (I.R.S. Employerincorporation or organization)
    
    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  MARCH 31, 2006 AND SEPTEMBER 30, 2005 (UNAUDITED)
    
    
    7CONSOLIDATED STATEMENTS OF INCOME  THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
    
    
    8CONSOLIDATED STATEMENTS OF CASH FLOWS  SIX MONTHS ENDED MARCH 31, 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
    
    
    42-43SIGNATURESAsset Purchase Agreement with GEAmended and Restated Program Agreement with GECertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification 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
   
    
    risks and uncertainties relating to conducting operations in a competitive environment
and a changing industry;
    
    risks and uncertainties associated with existing or future supplier relationships;
    
    risks and uncertainties associated with 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;
    
    risks associated with new technologies;
    
    our ability to remediate our material weakness in billing and achieve effective
internal control over financial reporting;
    
    risks associated with the 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)
 March 31, 2006
    
    
    September 30, 2005AssetsCash and cash equivalents
    
    $
    311,653
    
    
    $
    373,705Restricted cash
    
    
    637
    
    
    
    18,272Accounts receivable, less allowances of: March 31,
2006  $9,780; September 30, 2005
 $12,284
    
    
    643,555
    
    
    
    678,313Lease receivables, less allowances of: March
31, 2006  $1,725; September 30, 2005 
$2,560
    
    
    94,972
    
    
    
    317,928Inventories
    
    
    263,238
    
    
    
    241,470Prepaid expenses and other current assets
    
    
    25,288
    
    
    
    42,660Deferred taxes
    
    
    55,128
    
    
    
    55,566Assets held for sale
    
    
    382,223
    
    
    
    Total current assets
    
    
    1,776,694
    
    
    
    1,727,914Long-term lease receivables, less allowances
of: March 31, 2006  $4,475; September 30,
2005  $4,053
    
    
    246,442
    
    
    
    503,281Equipment on operating leases, net of
accumulated depreciation of: March 31, 2006
 $73,026; September 30, 2005  $76,774
    
    
    79,555
    
    
    
    101,614Property and equipment, net of accumulated
depreciation of: March 31, 2006  $305,375;
September 30, 2005  $306,656
    
    
    145,322
    
    
    
    144,309Goodwill
    
    
    1,265,311
    
    
    
    1,280,578Other assets
    
    
    73,312
    
    
    
    74,123Total Assets
    
    $
    3,586,636
    
    
    $
    3,831,819LiabilitiesCurrent portion of corporate debt
    
    $
    1,309
    
    
    $
    1,137Current portion of non-corporate debt
    
    
    131,852
    
    
    
    299,359Trade accounts payable
    
    
    202,856
    
    
    
    211,783Accrued salaries, wages and commissions
    
    
    80,249
    
    
    
    94,614Deferred revenues
    
    
    107,374
    
    
    
    111,890Taxes payable
    
    
    77,006
    
    
    
    79,458Other accrued expenses
    
    
    120,203
    
    
    
    139,099Liabilities held for sale
    
    
    205,292
    
    
    
    Total current liabilities
    
    
    926,141
    
    
    
    937,340Long-term corporate debt
    
    
    674,736
    
    
    
    728,156Long-term non-corporate debt
    
    
    68,630
    
    
    
    225,307Deferred taxes
    
    
    9,913
    
    
    
    20,853Other long-term liabilities
    
    
    319,004
    
    
    
    349,819Commitments and contingencies (Note 9)Shareholders EquityCommon stock, no par value: authorized
300,000 shares; issued: March 31, 2006 
149,310 shares; September 30, 2005  149,310
shares; outstanding: March 31, 2006  131,288 shares; September 30, 2005  134,920 shares
    
    
    1,040,176
    
    
    
    1,030,462Series 12 preferred stock, no par value: authorized 480 shares; none issued or
outstandingRetained earnings
    
    
    787,494
    
    
    
    755,864Accumulated other comprehensive loss
    
    
    (44,928
    )
    
    
    (65,426
    )Cost of common shares in treasury: March 31,
2006  18,022 shares; September 30, 2005 
14,390 shares
    
    
    (194,530
    )
    
    
    (150,556
    )Total Shareholders Equity
    
    
    1,588,212
    
    
    
    1,570,344Total Liabilities and Shareholders Equity
    
    $
    3,586,636
    
    
    $
    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
    
    
    Six Months EndedMarch 31
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesEquipment
    
    $
    460,748
    
    
    $
    444,068
    
    
    $
    885,737
    
    
    $
    851,481Customer service and supplies
    
    
    361,383
    
    
    
    362,752
    
    
    
    732,606
    
    
    
    740,982Managed and professional services
    
    
    185,470
    
    
    
    174,916
    
    
    
    361,852
    
    
    
    354,148Rental and fees
    
    
    43,248
    
    
    
    43,039
    
    
    
    83,675
    
    
    
    86,903Other
    
    
    29,660
    
    
    
    67,498
    
    
    
    59,502
    
    
    
    144,2041,080,509
    
    
    
    1,092,273
    
    
    
    2,123,372
    
    
    
    2,177,718Cost of RevenuesEquipment
    
    
    343,405
    
    
    
    322,098
    
    
    
    666,648
    
    
    
    612,346Customer service and supplies
    
    
    206,679
    
    
    
    210,547
    
    
    
    405,732
    
    
    
    419,356Managed and professional services
    
    
    136,366
    
    
    
    127,844
    
    
    
    268,012
    
    
    
    262,895Rental and fees
    
    
    12,975
    
    
    
    11,512
    
    
    
    25,773
    
    
    
    23,834Other
    
    
    15,757
    
    
    
    38,059
    
    
    
    29,687
    
    
    
    83,600715,182
    
    
    
    710,060
    
    
    
    1,395,852
    
    
    
    1,402,031Gross ProfitEquipment
    
    
    117,343
    
    
    
    121,970
    
    
    
    219,089
    
    
    
    239,135Customer service and supplies
    
    
    154,704
    
    
    
    152,205
    
    
    
    326,874
    
    
    
    321,626Managed and professional services
    
    
    49,104
    
    
    
    47,072
    
    
    
    93,840
    
    
    
    91,253Rental and fees
    
    
    30,273
    
    
    
    31,527
    
    
    
    57,902
    
    
    
    63,069Other
    
    
    13,903
    
    
    
    29,439
    
    
    
    29,815
    
    
    
    60,604365,327
    
    
    
    382,213
    
    
    
    727,520
    
    
    
    775,687Selling and administrative
    
    
    314,827
    
    
    
    347,541
    
    
    
    628,814
    
    
    
    696,449Gain on divestiture of business
    
    
    105
    
    
    
    1,901
    
    
    
    5,029
    
    
    
    1,901Asset impairment and restructuring
    
    
    17
    
    
    
    11,709
    
    
    
    (135
    )
    
    
    11,709Operating income
    
    
    50,588
    
    
    
    24,864
    
    
    
    103,870
    
    
    
    69,430Loss from early extinguishment of debt
    
    
    
    
    
    
    1,734
    
    
    
    1,650
    
    
    
    1,734Interest income
    
    
    2,365
    
    
    
    2,360
    
    
    
    4,936
    
    
    
    3,288Interest expense
    
    
    (13,315
    )
    
    
    (12,868
    )
    
    
    (27,113
    )
    
    
    (26,599
    )Income from continuing operations
before taxes on income
    
    
    39,638
    
    
    
    12,622
    
    
    
    80,043
    
    
    
    44,385Taxes on income
    
    
    14,270
    
    
    
    4,873
    
    
    
    27,043
    
    
    
    15,764Income from continuing operations
    
    
    25,368
    
    
    
    7,749
    
    
    
    53,000
    
    
    
    28,621Discontinued Operations:Operating loss
    
    
    (51
    )
    
    
    (14,339
    )
    
    
    (32
    )
    
    
    (16,200
    )Tax benefit
    
    
    21
    
    
    
    5,664
    
    
    
    13
    
    
    
    6,399Net loss from discontinued operations
    
    
    (30
    )
    
    
    (8,675
    )
    
    
    (19
    )
    
    
    (9,801
    )Net income (loss)
    
    $
    25,338
    
    
    $
    (926
    )
    
    $
    52,981
    
    
    $
    18,820Basic Earnings (Loss) Per Common ShareContinuing operations
    
    $
    0.19
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    $
    0.20Discontinued operations
    
    
    0.00
    
    
    
    (0.06
    )
    
    
    0.00
    
    
    
    (0.07
    )Net income (loss)
    
    $
    0.19
    
    
    $
    (0.01
    )*
    
    $
    0.40
    
    
    $
    0.13Diluted Earnings (Loss) Per Common ShareContinuing operations
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.39
    
    
    $
    0.20Discontinued operations
    
    
    0.00
    
    
    
    (0.06
    )
    
    
    0.00
    
    
    
    (0.07
    )Net income (loss)
    
    $
    0.19
    
    
    $
    (0.01
    )
    
    $
    0.39
    
    
    $
    0.13Cash dividends per common share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    0.08
 
 *
    
    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)
 Six Months Ended March 312006
    
    
    2005Cash Flows from Operating ActivitiesNet income
    
    $
    52,981
    
    
    $
    18,820Net loss from discontinued operations
    
    
    (19
    )
    
    
    (9,801
    )Income from continuing operations
    
    
    53,000
    
    
    
    28,621Additions (deductions) to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    36,119
    
    
    
    37,405Amortization
    
    
    2,033
    
    
    
    2,692Gain from divestiture of business
    
    
    (5,029
    )
    
    
    (1,901
    )Loss on disposal of property and equipment
    
    
    1,458
    
    
    
    2,306Provision for losses on accounts receivable
    
    
    7,288
    
    
    
    6,931Restructuring and asset impairment charges
    
    
    (135
    )
    
    
    11,709Deferred income taxes
    
    
    (27,750
    )
    
    
    (66,626
    )Provision for lease default reserves
    
    
    1,086
    
    
    
    988Stock-based compensation expense
    
    
    5,084
    
    
    
    5,307Pension expense
    
    
    21,820
    
    
    
    21,880Loss from early extinguishment of debt
    
    
    1,650
    
    
    
    1,734Changes in operating assets and liabilities, net of divestiture of businesses:(Increase) decrease in accounts receivable
    
    
    (1,418
    )
    
    
    37,822(Increase) decrease in inventories
    
    
    (22,321
    )
    
    
    12,377Decrease in prepaid expenses and other current assets
    
    
    14,463
    
    
    
    17,691Decrease in accounts payable
    
    
    (6,165
    )
    
    
    (90,942
    )(Decrease) increase in deferred revenue
    
    
    (4,101
    )
    
    
    2,429Decrease in accrued expenses
    
    
    (44,971
    )
    
    
    (35,284
    )Increase in taxes payable
    
    
    10,143
    
    
    
    12,783Decrease in accrued restructuring
    
    
    (1,300
    )
    
    
    (905
    )Other
    
    
    140
    
    
    
    728Net cash provided by continuing operations
    
    
    41,094
    
    
    
    7,745Net cash used in discontinued operations
    
    
    (846
    )
    
    
    (2,928
    )Net cash provided by operating activities
    
    
    40,248
    
    
    
    4,817Cash Flows from Investing ActivitiesProceeds from the divestiture of business (Note 5)
    
    
    19,575
    
    
    
    5,330Expenditures for property and equipment
    
    
    (18,517
    )
    
    
    (14,387
    )Expenditures for equipment on operating leases
    
    
    (12,211
    )
    
    
    (25,038
    )Proceeds from the sale of equipment on operating leases
    
    
    15,572
    
    
    
    5,627Proceeds from the sale of lease receivables (Note 7)
    
    
    92,865
    
    
    
    139,392Lease receivables  additions
    
    
    (186,542
    )
    
    
    (195,189
    )Lease receivables  collections
    
    
    238,495
    
    
    
    266,079Other
    
    
    (1,246
    )
    
    
    (2,673
    )Net cash provided by continuing operations
    
    
    147,991
    
    
    
    179,141Net cash provided by discontinued operations
    
    
    
    
    
    
    88Net cash provided by investing activities
    
    
    147,991
    
    
    
    179,229Cash Flows from Financing ActivitiesShort-term corporate debt repayments, net
    
    
    (30
    )
    
    
    (182
    )Repayment of other borrowings
    
    
    (3,754
    )
    
    
    (3,439
    )Proceeds from issuance of long-term corporate debt
    
    
    
    
    
    
    886Debt issuance costs
    
    
    (984
    )
    
    
    Long-term corporate debt repayments
    
    
    (54,460
    )
    
    
    (104,031
    )Non-corporate debt  issuances
    
    
    7,256
    
    
    
    16,965Non-corporate debt  repayments
    
    
    (134,298
    )
    
    
    (199,727
    )Dividends paid
    
    
    (10,614
    )
    
    
    (11,298
    )Decrease in restricted cash
    
    
    1,489
    
    
    
    2,978Proceeds from stock option exercises
    
    
    13,758
    
    
    
    2,743Tax benefit relating to stock plans
    
    
    4,997
    
    
    
    789Purchase of treasury shares
    
    
    (68,975
    )
    
    
    (34,240
    )Net cash used in financing activities
    
    
    (245,615
    )
    
    
    (328,556
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (4,676
    )
    
    
    4,845Net decrease in cash and cash equivalents
    
    
    (62,052
    )
    
    
    (139,665
    )Cash and cash equivalents at beginning of the year
    
    
    373,705
    
    
    
    472,951Cash and cash equivalents at end of the period
    
    $
    311,653
    
    
    $
    333,286
 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
    
    
    1,226
    
    
    
    10.90Exercised
    
    
    (2,350
    )
    
    
    11.48Cancelled
    
    
    (758
    )
    
    
    29.34Outstanding at March 31, 2006
    
    
    10,622
    
    
    $
    11.36Exercisable at March 31, 2006
    
    
    7,811
    *
 
 *
    
    6,254 of the 7,811 options exercisable at March 31, 2006 have a market value in excess of
the strike price.  Three Months Ended March 31
    
    
    Six Months Ended March 312006
    
    
    2005
    
    
    2006
    
    
    2005Expected dividend yield (1)
    
    
    1.3
    %
    
    
    1.5
    %
    
    
    1.5
    %
    
    
    1.5
    %Expected volatility rate (2)
    
    
    54.7
    %
    
    
    53.7
    %
    
    
    55.1
    %
    
    
    54.1
    %Expected lives (3)
    
    5.0 years
    
    
    5.0 years
    
    
    5.0 years
    
    
    5.0 yearsRisk-free interest rate (4)
    
    
    4.6
    %
    
    
    4.0
    %
    
    
    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
    
    
    
    
    
    
    Number
    
    
    Weighted-
    
    
    AverageOutstanding
    
    
    Average
    
    
    Remaining
    
    
    Aggregate
    
    
    Exercisable at
    
    
    Average
    
    
    Remaining
    
    
    AggregateRange of
    
    
    at March 31,
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsic
    
    
    March 31,
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicExercise Prices
    
    
    2006
    
    
    Price
    
    
    Life
    
    
    Value
    
    
    2006
    
    
    Price
    
    
    Life
    
    
    Value$
    2.35    9.10
    
    
    
    2,782
    
    
    $
    5.95
    
    
    
    5.87
    
    
    $
    23,087
    
    
    
    2,619
    
    
    $
    5.76
    
    
    
    5.83
    
    
    $
    22,2289.11  10.90
    
    
    
    3,149
    
    
    
    10.61
    
    
    
    7.92
    
    
    
    11,475
    
    
    
    1,345
    
    
    
    10.39
    
    
    
    6.49
    
    
    
    5,19510.91  14.25
    
    
    
    3,134
    
    
    
    11.39
    
    
    
    6.43
    
    
    
    8,965
    
    
    
    2,290
    
    
    
    11.52
    
    
    
    5.70
    
    
    
    6,26014.26  46.59
    
    
    
    1,557
    
    
    
    22.50
    
    
    
    2.21
    
    
    
    
    
    
    
    1,557
    
    
    
    22.50
    
    
    
    2.21
    
    
    
    
 Stock Awards
    4. RECENT ACCOUNTING STANDARDS
   12




---



##### Table of Contents



5. SALE OF BUSINESS
   6. NOTES PAYABLE AND LONG-TERM DEBT
 Long-term Debt
  March 31,
    
    
    September 30,2006
    
    
    2005Bond issues
    
    $
    354,894
    
    
    $
    354,850Convertible subordinated notes
    
    
    
    
    
    
    53,242Notes payable
    
    
    319,835
    
    
    
    319,835Miscellaneous notes, bonds, mortgages and capital lease obligations
    
    
    1,316
    
    
    
    1,366676,045
    
    
    
    729,293Less: current maturities
    
    
    1,309
    
    
    
    1,137$
    674,736
    
    
    $
    728,156
  March 31,
    
    
    September 30,2006
    
    
    2005Lease-backed notes*
    
    $
    
    
    
    $
    332,233Asset securitization conduit financing
    
    
    127,147
    
    
    
    124,122Notes payable to banks
    
    
    7,641
    
    
    
    9,422Debt supporting unsold residual value
    
    
    65,694
    
    
    
    58,889200,482
    
    
    
    524,666Less: current maturities
    
    
    131,852
    
    
    
    299,359$
    68,630
    
    
    $
    225,307
 13




---



##### Table of Contents



*
    
    The lease-backed notes have been classified as held for sale on the consolidated balance
sheet at March 31, 2006 as the result of the Retained U.S. Portfolio Sale in April 2006. (See
Note 18).   Debt Supporting Unsold Residual Value
   
    
    we have transferred $44,853 of lease receivables to GE for which we have retained
certain risks of ownership at March 31, 2006;
    
    we have transferred lease receivables to GE for which we have retained certain risks
of ownership due mainly to the performance features discussed above. 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 March 31, 2006, we had
recorded $10,694 of debt and associated residual value; and
    
    we have $8,629 of debt related to equipment on operating leases that has been funded
by GE.
 Credit Facility
  14




---



##### Table of Contents



Asset Securitization Conduit Financing Agreements
  Lines of Credit
  Interest Payments
  7. SALE OF LEASE RECEIVABLES
   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
    
    
    (225
    )
    
    
    (2,531
    )
    
    
    (2,756
    )Goodwill at March 31, 2006
    
    $
    960,605
    
    
    $
    304,706
    
    
    $
    1,265,311
  15




---



##### Table of Contents



9. CONTINGENCIES
     16




---



##### Table of Contents



10. SHARE REPURCHASES
  17




---



##### Table of Contents



11. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedMarch 31
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    25,338
    
    
    $
    (926
    )
    
    $
    52,981
    
    
    $
    18,820Foreign currency translation adjustments
    
    
    5,783
    
    
    
    (17,670
    )
    
    
    (6,084
    )
    
    
    31,557(Loss) gain on derivative financial
instruments, net of tax benefit
(expense) of: $56 and $(45) for the
three months ended March 31, 2006 and
2005, respectively; $131 and $(214) for
the six months ended March 31, 2006 and
2005, respectively
    
    
    (97
    )
    
    
    117
    
    
    
    (228
    )
    
    
    382Minimum pension liability adjustment
    
    
    2,026
    *
    
    
    
    
    
    
    26,810
    *
    
    
    Total comprehensive income (loss)
    
    $
    33,050
    
    
    $
    (18,479
    )
    
    $
    73,479
    
    
    $
    50,759
 
 *
    
    As a result of freezing the U.S. Plans and one of our Non-U.S. Plans (discussed in Note 14). 12. EARNINGS PER COMMON SHARE
  Three Months Ended
    
    
    Six Months EndedMarch 31
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Numerator for basic earnings per common share  income
from continuing operations
    
    $
    25,368
    
    
    $
    7,749
    
    
    $
    53,000
    
    
    $
    28,621Effect of dilutive securities:Interest expense on Convertible Notes, net of taxes
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    Numerator for diluted earnings per common share  net
income from continuing operations
    
    $
    25,368
    
    
    $
    7,749
    
    
    $
    53,088
    
    
    $
    28,621Denominator:Denominator
for basic earnings per common share 
weighted average common shares
    
    
    132,506
    
    
    
    140,404
    
    
    
    132,827
    
    
    
    140,941Effect of dilutive securities:Convertible Notes
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    Employee stock awards
    
    
    550
    
    
    
    323
    
    
    
    492
    
    
    
    372Employee stock options
    
    
    977
    
    
    
    902
    
    
    
    745
    
    
    
    1,006Dilutive potential common shares
    
    
    1,527
    
    
    
    1,225
    
    
    
    1,626
    
    
    
    1,378Denominator
for diluted earnings per common share 
adjusted weighted average common shares and assumed
conversions
    
    
    134,033
    
    
    
    141,629
    
    
    
    134,453
    
    
    
    142,319Basic earnings per common share from continuing operations
    
    $
    0.19
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    $
    0.20Diluted earnings per common share from continuing operations
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.39
    
    
    $
    0.20
  18




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##### Table of Contents



13. SEGMENT REPORTING
   *CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalThree Months Ended March 31, 2006Revenues:Equipment
    
    $
    407,819
    
    
    $
    52,929
    
    
    $
    
    
    
    $
    460,748Customer service and supplies
    
    
    324,513
    
    
    
    36,870
    
    
    
    
    
    
    
    361,383Managed and professional services
    
    
    172,407
    
    
    
    13,063
    
    
    
    
    
    
    
    185,470Rental and fees
    
    
    41,976
    
    
    
    1,272
    
    
    
    
    
    
    
    43,248Other
    
    
    11,839
    
    
    
    17,821
    
    
    
    
    
    
    
    29,660Total revenues
    
    
    958,554
    
    
    
    121,955
    
    
    
    
    
    
    
    1,080,509(Loss) gain on divestiture of business
    
    
    (234
    )
    
    
    339
    
    
    
    
    
    
    
    105Restructuring and asset impairment
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Operating income (loss)
    
    
    90,728
    
    
    
    6,462
    
    
    
    (46,602
    )
    
    
    50,588Interest income
    
    
    
    
    
    
    
    
    
    
    2,365
    
    
    
    2,365Interest expense
    
    
    
    
    
    
    
    
    
    
    (13,315
    )
    
    
    (13,315
    )Income from continuing operations
before taxes on income
    
    $
    90,728
    
    
    $
    6,462
    
    
    $
    (57,552
    )
    
    $
    39,638Three Months Ended March 31, 2005Revenues:Equipment
    
    $
    392,526
    
    
    $
    51,542
    
    
    $
    
    
    
    $
    444,068Customer service and supplies
    
    
    326,224
    
    
    
    36,528
    
    
    
    
    
    
    
    362,752Managed and professional services
    
    
    160,393
    
    
    
    14,523
    
    
    
    
    
    
    
    174,916Rental and fees
    
    
    41,772
    
    
    
    1,267
    
    
    
    
    
    
    
    43,039Other
    
    
    28,167
    
    
    
    39,331
    
    
    
    
    
    
    
    67,498Total revenues
    
    
    949,082
    
    
    
    143,191
    
    
    
    
    
    
    
    1,092,273Gain on divestiture of business
    
    
    1,901
    
    
    
    
    
    
    
    
    
    
    
    1,901Restructuring and asset impairment
    
    
    10,447
    
    
    
    
    
    
    
    1,262
    
    
    
    11,709Operating income (loss)
    
    
    73,316
    
    
    
    7,861
    
    
    
    (56,313
    )
    
    
    24,864Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,734
    
    
    
    1,734Interest income
    
    
    
    
    
    
    
    
    
    
    2,360
    
    
    
    2,360Interest expense
    
    
    
    
    
    
    
    
    
    
    (12,868
    )
    
    
    (12,868
    )Income from continuing operations
before taxes on income
    
    $
    73,316
    
    
    $
    7,861
    
    
    $
    (68,555
    )
    
    $
    12,622
 19




---



##### Table of Contents



*CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalSix Months Ended March 31, 2006Revenues:Equipment
    
    $
    783,542
    
    
    $
    102,195
    
    
    $
    
    
    
    $
    885,737Customer service and supplies
    
    
    661,181
    
    
    
    71,425
    
    
    
    
    
    
    
    732,606Managed and professional services
    
    
    335,231
    
    
    
    26,621
    
    
    
    
    
    
    
    361,852Rental and fees
    
    
    81,003
    
    
    
    2,672
    
    
    
    
    
    
    
    83,675Other
    
    
    25,113
    
    
    
    34,389
    
    
    
    
    
    
    
    59,502Total revenues
    
    
    1,886,070
    
    
    
    237,302
    
    
    
    
    
    
    
    2,123,372(Loss) gain on divestiture of business
    
    
    (233
    )
    
    
    5,262
    
    
    
    
    
    
    
    5,029Restructuring and asset impairment
    
    
    (135
    )
    
    
    
    
    
    
    
    
    
    
    (135
    )Operating income (loss)
    
    
    189,986
    
    
    
    18,985
    
    
    
    (105,101
    )
    
    
    103,870Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    1,650Interest income
    
    
    
    
    
    
    
    
    
    
    4,936
    
    
    
    4,936Interest expense
    
    
    
    
    
    
    
    
    
    
    (27,113
    )
    
    
    (27,113
    )Income from continuing operations
before taxes on income
    
    $
    189,986
    
    
    $
    18,985
    
    
    $
    (128,928
    )
    
    $
    80,043Six Months Ended March 31, 2005Revenues:Equipment
    
    $
    748,249
    
    
    $
    103,232
    
    
    $
    
    
    
    $
    851,481Customer service and supplies
    
    
    667,835
    
    
    
    73,147
    
    
    
    
    
    
    
    740,982Managed and professional services
    
    
    324,482
    
    
    
    29,666
    
    
    
    
    
    
    
    354,148Rental and fees
    
    
    84,342
    
    
    
    2,561
    
    
    
    
    
    
    
    86,903Other
    
    
    65,321
    
    
    
    78,883
    
    
    
    
    
    
    
    144,204Total revenues
    
    
    1,890,229
    
    
    
    287,489
    
    
    
    
    
    
    
    2,177,718(Loss) on divestiture of business
    
    
    1,901
    
    
    
    
    
    
    
    
    
    
    
    1,901Restructuring and asset impairment
    
    
    10,447
    
    
    
    
    
    
    
    1,262
    
    
    
    11,709Operating income (loss)
    
    
    170,822
    
    
    
    14,776
    
    
    
    (116,168
    )
    
    
    69,430Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,734
    
    
    
    1,734Interest income
    
    
    
    
    
    
    
    
    
    
    3,288
    
    
    
    3,288Interest expense
    
    
    
    
    
    
    
    
    
    
    (26,599
    )
    
    
    (26,599
    )Income from continuing operations
before taxes on income
    
    $
    170,822
    
    
    $
    14,776
    
    
    $
    (141,213
    )
    
    $
    44,385
 
 *
    
    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
   20




---



##### Table of Contents



Three Months Ended March 312006
    
    
    2005U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.Plans
    
    
    Plans
    
    
    Plans
    
    
    PlansService cost
    
    $
    
    
    
    $
    1,203
    
    
    $
    7,033
    
    
    $
    1,071Interest cost on projected benefit obligation
    
    
    8,021
    
    
    
    1,122
    
    
    
    8,107
    
    
    
    974Expected return on assets
    
    
    (7,777
    )
    
    
    (1,034
    )
    
    
    (7,502
    )
    
    
    (949
    )Amortization of net obligation
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Amortization of prior service cost
    
    
    
    
    
    
    (51
    )
    
    
    142
    
    
    
    2Recognized net actuarial loss
    
    
    2,310
    
    
    
    398
    
    
    
    1,892
    
    
    
    164Curtailment
    
    
    
    
    
    
    776
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    2,554
    
    
    $
    2,423
    
    
    $
    9,672
    
    
    $
    1,271
 Six Months Ended March 312006
    
    
    2005U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.Plans
    
    
    Plans
    
    
    Plans
    
    
    PlansService cost
    
    $
    8,721
    
    
    $
    2,392
    
    
    $
    14,066
    
    
    $
    2,138Interest cost on projected benefit obligation
    
    
    16,438
    
    
    
    2,238
    
    
    
    16,214
    
    
    
    1,940Expected return on assets
    
    
    (15,580
    )
    
    
    (2,062
    )
    
    
    (15,004
    )
    
    
    (1,889
    )Amortization of net obligation
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    19Amortization of prior service cost
    
    
    47
    
    
    
    (102
    )
    
    
    284
    
    
    
    3Recognized net actuarial loss
    
    
    5,288
    
    
    
    795
    
    
    
    3,784
    
    
    
    325Curtailment
    
    
    2,852
    
    
    
    776
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    17,766
    
    
    $
    4,054
    
    
    $
    19,344
    
    
    $
    2,536
  15. RESTRUCTURING
   CashBalance
    
    
    Fiscal 2006
    
    
    Payments
    
    
    BalanceSeptember 30, 2005
    
    
    Adjustments*
    
    
    Fiscal 2006
    
    
    March 31, 2006Severance
    
    $
    1,975
    
    
    $
    (257
    )
    
    $
    (1,323
    )
    
    $
    395Contractual commitments
    
    
    1,452
    
    
    
    320
    
    
    
    (552
    )
    
    
    1,220Contract termination
    
    
    123
    
    
    
    
    
    
    
    (53
    )
    
    
    70Total
    
    $
    3,550
    
    
    $
    63
    
    
    $
    (1,928
    )
    
    $
    1,685
 
 *
    
    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 six months ended March 31, 2006 were not material to our
consolidated financial statements. 21




---



##### Table of Contents



Remainder ofFiscal 2006
    
    
    Fiscal 2007
    
    
    Fiscal 2008
    
    
    Beyond
    
    
    TotalProjected PaymentsSeverance
    
    $
    395
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    395Contractual commitments
    
    
    302
    
    
    
    361
    
    
    
    267
    
    
    
    290
    
    
    
    1,220Contract termination
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Total
    
    $
    767
    
    
    $
    361
    
    
    $
    267
    
    
    $
    290
    
    
    $
    1,685
  16. DISCONTINUED OPERATIONS
  Three Months Ended March 31,
    
    
    Six Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    8,555
    
    
    $
    
    
    
    $
    20,079Operating loss
    
    
    (51
    )
    
    
    (14,339
    )
    
    
    (32
    )
    
    
    (16,200
    )Tax benefit
    
    
    21
    
    
    
    5,664
    
    
    
    13
    
    
    
    6,399Net loss from discontinued operations
    
    $
    (30
    )
    
    $
    (8,675
    )
    
    $
    (19
    )
    
    $
    (9,801
    )
  17. FINANCIAL INSTRUMENTS
  18. ASSETS AND LIABILITIES HELD FOR SALE
    22




---



##### Table of Contents



CarryingAmountAssetsRestricted cash
    
    $
    16,145Accounts receivable
    
    
    28,273Lease receivable
    
    
    326,374Equipment on operating leases
    
    
    11,431Assets held for sale
    
    $
    382,223LiabilitiesTrade accounts payable
    
    $
    2,932Other accrued expenses
    
    
    321Non-corporate debt
    
    
    202,039Liabilities held for sale
    
    $
    205,292
 19. SUBSEQUENT EVENTS
   23




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##### Table of Contents



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




---



##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005
 Summary of Consolidated Results
  Reportable Segments
  25




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##### Table of Contents



CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations*
    
    
    TotalThree Months Ended March 31, 2006Revenues:Equipment
    
    $
    407,819
    
    
    $
    52,929
    
    
    $
    
    
    
    $
    460,748Customer service and supplies
    
    
    324,513
    
    
    
    36,870
    
    
    
    
    
    
    
    361,383Managed and professional services
    
    
    172,407
    
    
    
    13,063
    
    
    
    
    
    
    
    185,470Rental and fees
    
    
    41,976
    
    
    
    1,272
    
    
    
    
    
    
    
    43,248Other
    
    
    11,839
    
    
    
    17,821
    
    
    
    
    
    
    
    29,660Total revenues
    
    
    958,554
    
    
    
    121,955
    
    
    
    
    
    
    
    1,080,509Gross Profit:Equipment
    
    
    99,010
    
    
    
    18,333
    
    
    
    
    
    
    
    117,343Customer service and supplies
    
    
    144,798
    
    
    
    9,906
    
    
    
    
    
    
    
    154,704Managed and professional services
    
    
    47,644
    
    
    
    1,460
    
    
    
    
    
    
    
    49,104Rental and fees
    
    
    29,185
    
    
    
    1,088
    
    
    
    
    
    
    
    30,273Other
    
    
    7,764
    
    
    
    6,139
    
    
    
    
    
    
    
    13,903Total Gross Profit
    
    
    328,401
    
    
    
    36,926
    
    
    
    
    
    
    
    365,327(Loss)gain on divestiture of business
    
    
    (234
    )
    
    
    339
    
    
    
    
    
    
    
    105Restructuring and asset impairment
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Operating income (loss)
    
    
    90,728
    
    
    
    6,462
    
    
    
    (46,602
    )
    
    
    50,588Interest income
    
    
    
    
    
    
    
    
    
    
    2,365
    
    
    
    2,365Interest expense
    
    
    
    
    
    
    
    
    
    
    (13,315
    )
    
    
    (13,315
    )Income from continuing operations
before taxes on income
    
    $
    90,728
    
    
    $
    6,462
    
    
    $
    (57,552
    )
    
    $
    39,638Three Months Ended March 31, 2005Revenues:Equipment
    
    $
    392,527
    
    
    $
    51,541
    
    
    $
    
    
    
    $
    444,068Customer service and supplies
    
    
    326,224
    
    
    
    36,528
    
    
    
    
    
    
    
    362,752Managed and professional services
    
    
    160,393
    
    
    
    14,523
    
    
    
    
    
    
    
    174,916Rental and fees
    
    
    41,772
    
    
    
    1,267
    
    
    
    
    
    
    
    43,039Other
    
    
    28,167
    
    
    
    39,331
    
    
    
    
    
    
    
    67,498Total revenues
    
    
    949,083
    
    
    
    143,190
    
    
    
    
    
    
    
    1,092,273Gross profit:Equipment
    
    
    105,053
    
    
    
    16,917
    
    
    
    
    
    
    
    121,970Customer service and supplies
    
    
    141,727
    
    
    
    10,478
    
    
    
    
    
    
    
    152,205Managed and professional services
    
    
    45,320
    
    
    
    1,752
    
    
    
    
    
    
    
    47,072Rental and fees
    
    
    30,444
    
    
    
    1,083
    
    
    
    
    
    
    
    31,527Other
    
    
    16,246
    
    
    
    13,193
    
    
    
    
    
    
    
    29,439Total gross profit
    
    
    338,790
    
    
    
    43,423
    
    
    
    
    
    
    
    382,213Gain on divestiture of business
    
    
    1,901
    
    
    
    
    
    
    
    
    
    
    
    1,901Restructuring and asset impairment
    
    
    10,447
    
    
    
    
    
    
    
    1,262
    
    
    
    11,709Operating income (loss)
    
    
    73,316
    
    
    
    7,861
    
    
    
    (56,313
    )
    
    
    24,864Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,734
    
    
    
    1,734Interest income
    
    
    
    
    
    
    
    
    
    
    2,360
    
    
    
    2,360Interest expense
    
    
    
    
    
    
    
    
    
    
    (12,868
    )
    
    
    (12,868
    )Income from continuing operations
before taxes on income
    
    $
    73,316
    
    
    $
    7,861
    
    
    $
    (68,555
    )
    
    $
    12,622
 
 *
    
    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
    
    $
    460,748
    
    
    $
    444,068
    
    
    $
    16,680
    
    
    
    3.8
    %Cost of revenue
    
    
    343,405
    
    
    
    322,098
    
    
    
    21,307
    
    
    
    6.6
    %Gross profit
    
    $
    117,343
    
    
    $
    121,970
    
    
    $
    (4,627
    )
    
    
    (3.8
    )%Gross profit %
    
    
    25.5
    %
    
    
    27.5
    %
 26




---



##### Table of Contents



Customer Service and Supplies
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    361,383
    
    
    $
    362,752
    
    
    $
    (1,369
    )
    
    
    (0.4
    )%Cost of revenue
    
    
    206,679
    
    
    
    210,547
    
    
    
    (3,868
    )
    
    
    (1.8
    )%Gross profit
    
    $
    154,704
    
    
    $
    152,205
    
    
    $
    2,499
    
    
    
    1.6
    %Gross profit %.
    
    
    42.8
    %
    
    
    42.0
    %
   27




---



##### Table of Contents



Managed and Professional Services
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    185,470
    
    
    $
    174,916
    
    
    $
    10,554
    
    
    
    6.0
    %Cost of revenue
    
    
    136,366
    
    
    
    127,844
    
    
    
    8,522
    
    
    
    6.7
    %Gross profit
    
    $
    49,104
    
    
    $
    47,072
    
    
    $
    2,032
    
    
    
    4.3
    %Gross profit %
    
    
    26.5
    %
    
    
    26.9
    %
    Rental and Fees
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    43,248
    
    
    $
    43,039
    
    
    $
    209
    
    
    
    0.5
    %Cost of revenue
    
    
    12,975
    
    
    
    11,512
    
    
    
    1,463
    
    
    
    12.7
    %Gross profit
    
    $
    30,273
    
    
    $
    31,527
    
    
    $
    (1,254
    )
    
    
    (4.0
    )%Gross profit %
    
    
    70.0
    %
    
    
    73.3
    %
 28




---



##### Table of Contents



Other Revenue
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeFinance income
    
    $
    16,497
    
    
    $
    27,659
    
    
    $
    (11,162
    )
    
    
    (40.4
    )%Other
    
    
    13,163
    
    
    
    39,839
    
    
    
    (26,676
    )
    
    
    (67.0
    )%Total other revenue
    
    $
    29,660
    
    
    $
    67,498
    
    
    $
    (37,838
    )
    
    
    (56.1
    )%Finance interest expense
    
    $
    3,840
    
    
    $
    7,006
    
    
    $
    (3,166
    )
    
    
    (45.2
    )%Other
    
    
    11,917
    
    
    
    31,053
    
    
    
    (19,136
    )
    
    
    (61.6
    )%Total cost of other revenue
    
    $
    15,757
    
    
    $
    38,059
    
    
    $
    (22,302
    )
    
    
    (58.6
    )%Finance income gross profit
    
    $
    12,657
    
    
    $
    20,653
    
    
    $
    (7,996
    )
    
    
    (38.7
    )%Other gross profit
    
    
    1,246
    
    
    
    8,786
    
    
    
    (7,540
    )
    
    
    (85.8
    )%Total other gross profit
    
    $
    13,903
    
    
    $
    29,439
    
    
    $
    (15,536
    )
    
    
    (52.8
    )%Finance income gross profit %
    
    
    76.7
    %
    
    
    74.7
    %Other gross profit%
    
    
    9.5
    %
    
    
    22.1
    %Total gross profit %
    
    
    46.9
    %
    
    
    43.6
    %
  Selling and Administrative Expenses
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeSelling and administrative expenses
    
    $
    314,827
    
    
    $
    347,541
    
    
    $
    (32,714
    )
    
    
    (9.4
    )%Selling and administrative expenses as a % of revenue
    
    
    29.1
    %
    
    
    31.8
    %
   
    
    a decrease of $12,902 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 $6,556 related to the sale of businesses during fiscal
2005 and October 2005;
 29




---



##### Table of Contents




    
    a decrease of $5,040 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;
    
    a decrease of $4,994 in consulting and other fees related primarily to lower fees
incurred in our effort to comply with Sarbanes Oxley;
    
    a decrease in pension costs of $4,186 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; and
    
    an increase of $6,827 in selling expense due to higher commissions and benefit costs
partially offset by geographic consolidation and headcount reductions.
  Other
 2006
    
    
    2005
    
    
    $ ChangeGain on divestiture of business
    
    $
    105
    
    
    $
    1,901
    
    
    $
    (1,796
    )Asset impairment and restructuring
    
    
    17
    
    
    
    11,709
    
    
    
    (11,692
    )Loss from early extinguishment of debt
    
    
    
    
    
    
    1,734
    
    
    
    (1,734
    )Interest income
    
    
    2,365
    
    
    
    2,360
    
    
    
    5Interest expense
    
    
    13,315
    
    
    
    12,868
    
    
    
    447Taxes on income
    
    
    14,270
    
    
    
    4,873
    
    
    
    9,397Income from continuing operations
    
    
    25,368
    
    
    
    7,749
    
    
    
    17,619Diluted earnings per common share  continuing operations
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.14
      30




---



##### Table of Contents



Six Months Ended March 31, 2006 Compared to the Six Months Ended March 31, 2005
 Summary of Consolidated Results
  CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations*
    
    
    TotalSix Months Ended March 31, 2006Revenues:Equipment
    
    $
    783,542
    
    
    $
    102,195
    
    
    $
    
    
    
    $
    885,737Customer service and supplies
    
    
    661,181
    
    
    
    71,425
    
    
    
    
    
    
    
    732,606Managed and professional services
    
    
    335,231
    
    
    
    26,621
    
    
    
    
    
    
    
    361,852Rental and fees
    
    
    81,003
    
    
    
    2,672
    
    
    
    
    
    
    
    83,675Other
    
    
    25,113
    
    
    
    34,389
    
    
    
    
    
    
    
    59,502Total revenues
    
    
    1,886,070
    
    
    
    237,302
    
    
    
    
    
    
    
    2,123,372Gross profit:Equipment
    
    $
    183,519
    
    
    
    35,570
    
    
    
    
    
    
    $
    219,089Customer service and supplies
    
    
    306,614
    
    
    
    20,260
    
    
    
    
    
    
    
    326,874Managed and professional services
    
    
    90,222
    
    
    
    3,618
    
    
    
    
    
    
    
    93,840Rental and fees
    
    
    55,563
    
    
    
    2,339
    
    
    
    
    
    
    
    57,902Other
    
    
    17,298
    
    
    
    12,517
    
    
    
    
    
    
    
    29,815Total gross profit
    
    
    653,216
    
    
    
    74,304
    
    
    
    
    
    
    
    727,520(Loss)gain on divestiture of business
    
    
    (233
    )
    
    
    5,262
    
    
    
    
    
    
    
    5,029Restructuring and asset impairment
    
    
    (135
    )
    
    
    
    
    
    
    
    
    
    
    (135
    )Operating income (loss)
    
    
    189,986
    
    
    
    18,985
    
    
    
    (105,101
    )
    
    
    103,870Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    1,650Interest income
    
    
    
    
    
    
    
    
    
    
    4,936
    
    
    
    4,936Interest expense
    
    
    
    
    
    
    
    
    
    
    (27,113
    )
    
    
    (27,113
    )Income from continuing operations
before taxes on income
    
    $
    189,986
    
    
    $
    18,985
    
    
    $
    (128,928
    )
    
    $
    80,043Six Months Ended March 31, 2005Revenues:Equipment
    
    $
    748,250
    
    
    $
    103,231
    
    
    $
    
    
    
    $
    851,481Customer service and supplies
    
    
    667,835
    
    
    
    73,147
    
    
    
    
    
    
    
    740,982Managed and professional services
    
    
    324,482
    
    
    
    29,666
    
    
    
    
    
    
    
    354,148Rental and fees
    
    
    84,342
    
    
    
    2,561
    
    
    
    
    
    
    
    86,903Other
    
    
    65,321
    
    
    
    78,883
    
    
    
    
    
    
    
    144,204
 31




---



##### Table of Contents



CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations*
    
    
    TotalTotal revenues
    
    
    1,890,230
    
    
    
    287,488
    
    
    
    
    
    
    
    2,177,718Gross profit:Equipment
    
    
    206,035
    
    
    
    33,100
    
    
    
    
    
    
    
    239,135Customer service and supplies
    
    
    299,666
    
    
    
    21,960
    
    
    
    
    
    
    
    321,626Managed and professional services
    
    
    87,599
    
    
    
    3,654
    
    
    
    
    
    
    
    91,253Rental and fees
    
    
    60,885
    
    
    
    2,184
    
    
    
    
    
    
    
    63,069Other
    
    
    35,283
    
    
    
    25,321
    
    
    
    
    
    
    
    60,604Total gross profit
    
    
    689,468
    
    
    
    86,219
    
    
    
    
    
    
    
    775,687Gain on divestiture of business
    
    
    1,901
    
    
    
    
    
    
    
    
    
    
    
    1,901Restructuring and asset impairment
    
    
    10,447
    
    
    
    
    
    
    
    1,262
    
    
    
    11,709Operating income (loss)
    
    
    170,822
    
    
    
    14,776
    
    
    
    (116,168
    )
    
    
    69,430Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,734
    
    
    
    1,734Interest income
    
    
    
    
    
    
    
    
    
    
    3,288
    
    
    
    3,288Interest expense
    
    
    
    
    
    
    
    
    
    
    (26,599
    )
    
    
    (26,599
    )Income from continuing operations
before taxes on income
    
    $
    170,822
    
    
    $
    14,776
    
    
    $
    (141,213
    )
    
    $
    44,385
 
 *
    
    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
    
    $
    885,737
    
    
    $
    851,481
    
    
    $
    34,256
    
    
    
    4.0
    %Cost of revenue
    
    
    666,648
    
    
    
    612,346
    
    
    
    54,302
    
    
    
    8.9
    %Gross profit
    
    $
    219,089
    
    
    $
    239,135
    
    
    $
    (20,046
    )
    
    
    (8.4
    )%Gross profit %
    
    
    24.7
    %
    
    
    28.1
    %
   32




---



##### Table of Contents



Customer Service and Supplies
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    732,606
    
    
    $
    740,982
    
    
    $
    (8,376
    )
    
    
    (1.1
    )%Cost of revenue
    
    
    405,732
    
    
    
    419,356
    
    
    
    (13,624
    )
    
    
    (3.2
    )%Gross profit
    
    $
    326,874
    
    
    $
    321,626
    
    
    $
    5,248
    
    
    
    1.6
    %Gross profit %
    
    
    44.6
    %
    
    
    43.4
    %
   Managed and Professional Services
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    361,852
    
    
    $
    354,148
    
    
    $
    7,704
    
    
    
    2.2
    %Cost of revenue
    
    
    268,012
    
    
    
    262,895
    
    
    
    5,117
    
    
    
    1.9
    %Gross profit
    
    $
    93,840
    
    
    $
    91,253
    
    
    $
    2,587
    
    
    
    2.8
    %Gross profit %
    
    
    25.9
    %
    
    
    25.8
    %
   33




---



##### Table of Contents



Rental and Fees
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    83,675
    
    
    $
    86,903
    
    
    $
    (3,228
    )
    
    
    (3.7
    )%Cost of revenue
    
    
    25,773
    
    
    
    23,834
    
    
    
    1,939
    
    
    
    8.1
    %Gross profit
    
    $
    57,902
    
    
    $
    63,069
    
    
    $
    (5,167
    )
    
    
    (8.2
    )%Gross profit %
    
    
    69.2
    %
    
    
    72.6
    %
   Other Revenue
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeFinance income
    
    $
    35,570
    
    
    $
    58,465
    
    
    $
    (22,895
    )
    
    
    (39.2
    )%Other
    
    
    23,932
    
    
    
    85,739
    
    
    
    (61,807
    )
    
    
    (72.1
    )%Total other revenue
    
    $
    59,502
    
    
    $
    144,204
    
    
    $
    (84,702
    )
    
    
    (58.7
    )%Finance interest expense
    
    $
    8,451
    
    
    $
    14,894
    
    
    $
    (6,443
    )
    
    
    (43.3
    )%Other
    
    
    21,236
    
    
    
    68,706
    
    
    
    (47,470
    )
    
    
    (69.1
    )%Total cost of other revenue
    
    $
    29,687
    
    
    $
    83,600
    
    
    $
    (53,913
    )
    
    
    (64.5
    )%Finance income gross profit
    
    $
    27,119
    
    
    $
    43,571
    
    
    $
    (16,452
    )
    
    
    (37.8
    )%Other gross profit
    
    
    2,696
    
    
    
    17,033
    
    
    
    (14,337
    )
    
    
    (84.2
    )%Total other gross profit
    
    $
    29,815
    
    
    $
    60,604
    
    
    $
    (30,789
    )
    
    
    (50.8
    )%Finance income gross profit %
    
    
    76.2
    %
    
    
    74.5
    %Other gross profit %
    
    
    11.3
    %
    
    
    19.9
    %Total gross profit %
    
    
    50.1
    %
    
    
    42.0
    %
  Selling and Administrative Expenses
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeSelling and administrative expenses
    
    $
    628,814
    
    
    $
    696,449
    
    
    $
    (67,635
    )
    
    
    (9.7
    )%Selling and administrative expenses as a % of revenue
    
    
    29.6
    %
    
    
    32.0
    %
   
    
    a decrease of $25,696 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 the first quarter of fiscal 2006;
    
    a decrease of $4,314 in selling expense due to geographic consolidation and headcount
reductions;
    
    a decrease of approximately $14,572 related to the sale of businesses during fiscal
2005 and October 2005;
 34




---



##### Table of Contents




    
    a decrease of $7,725 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; and
    
    a decrease of $2,838 in consulting and other fees related primarily to lower fees
incurred in our effort to comply with Sarbanes Oxley.
 Other
 2006
    
    
    2005
    
    
    $ ChangeGain on divestiture of business
    
    $
    5,029
    
    
    $
    1,901
    
    
    $
    3,128Asset impairment and restructuring
    
    
    (135
    )
    
    
    11,709
    
    
    
    (11,844
    )Loss from early extinguishment of debt
    
    
    1,650
    
    
    
    1,734
    
    
    
    (84
    )Interest income
    
    
    4,936
    
    
    
    3,288
    
    
    
    1,648Interest expense
    
    
    27,113
    
    
    
    26,599
    
    
    
    514Taxes on income
    
    
    27,043
    
    
    
    15,764
    
    
    
    11,279Income from continuing operations
    
    
    53,000
    
    
    
    28,621
    
    
    
    24,379Diluted earnings per common share  continuing operations
    
    $
    0.39
    
    
    $
    0.20
    
    
    $
    0.19
       35




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##### Table of Contents



Restructuring
   CashBalance
    
    
    Fiscal 2006
    
    
    Payments
    
    
    BalanceSeptember 30, 2005
    
    
    Adjustments*
    
    
    Fiscal 2006
    
    
    March 31, 2006Severance
    
    $
    1,975
    
    
    $
    (257
    )
    
    $
    (1,323
    )
    
    $
    395Contractual commitments
    
    
    1,452
    
    
    
    320
    
    
    
    (552
    )
    
    
    1,220Contract termination
    
    
    123
    
    
    
    
    
    
    
    (53
    )
    
    
    70Total
    
    $
    3,550
    
    
    $
    63
    
    
    $
    (1,928
    )
    
    $
    1,685
 
 *
    
    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 six months ended March 31, 2006 were not material to our
consolidated financial statements.   Remainder ofFiscal 2006
    
    
    Fiscal 2007
    
    
    Fiscal 2008
    
    
    Beyond
    
    
    TotalProjected PaymentsSeverance
    
    $
    395
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    395Contractual commitments
    
    
    302
    
    
    
    361
    
    
    
    267
    
    
    
    290
    
    
    
    1,220Contract termination
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Total
    
    $
    767
    
    
    $
    361
    
    
    $
    267
    
    
    $
    290
    
    
    $
    1,685
 
 *
    
    All contractual commitment amounts related to leases are shown net of projected sublease income.
Projected sublease income was $1,059 at March 31, 2006. FINANCIAL CONDITION AND LIQUIDITY
 Cash Flows and Liquidity
  2006Cash provided by operating activities
    
    $
    40,248Cash provided by investing activities
    
    
    147,991Cash used in financing activities
    
    
    (245,615
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (4,676
    )Decrease in cash and cash equivalents
    
    
    (62,052
    )Cash and cash equivalents at beginning of the year
    
    
    373,705Cash and cash equivalents at end of period
    
    $
    311,653
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##### Table of Contents



Operating Cash Flows
  Investing Cash Flows
  Financing Cash Flows
  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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Managements Remediation Initiatives
   
    
    established a service billing organization structure and appointed a vice president
of service billing operations;
    
    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; and
    
    initialized a pilot program designed to assess the accuracy of estimated meter reads.
  
    
    a fully-staffed service billing organization under a newly aligned organization
structure, with improvement in employee turnover at our North American billing centers;
    
    significant reduction in contract set-up errors as quality improves at each of our
North American billing centers;
    
    an expanded program designed to assess the accuracy of estimated meter reads; and
    
    significant 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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##### Table of Contents



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
  Total Number
    
    
    Approximateof Shares
    
    
    Dollar ValuePurchased
    
    
    of Shares thatTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced
    
    
    Purchased UnderPeriod
    
    Purchased (1)
    
    
    per Share
    
    
    Repurchase Plan
    
    
    the Repurchase Plan (2)January 1, 2006  January 31, 2006
    
    
    143
    
    
    $
    11.60
    
    
    
    143
    
    
    $
    50,845February 1, 2006  February 28, 2006
    
    
    941
    
    
    
    12.37
    
    
    
    941
    
    
    
    189,198March 1, 2006  March 31, 2006
    
    
    1,618
    
    
    
    13.73
    
    
    
    1,618
    
    
    
    166,9892,702
    
    
    $
    13.14
    
    
    
    2,702
    
    
    $
    166,989
 
 (1)
    
    As of March 31, 2006, we repurchased a total of 21,206 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 March 31, 2006, we had utilized $233,011 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
 2.1
    
    Asset Purchase Agreement with GE
dated as of April 1, 2006, between IKON and General Electric
Capital Corporation.10.1
    
    Amended and Restated Program
Agreement with GE dated as of April 1, 2006, by and among IKON,
General Electric Capital Corporation and GE Capital Information
Technology Solutions, Inc.
 42




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##### Table of Contents



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
 43




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##### Table of Contents



SIGNATURES
  IKON OFFICE SOLUTIONS, INC.Date: May 4, 2006By:
    
    /s/ ROBERT F. WOODS(Robert F. Woods)
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
 44