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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 December 31, 2005
 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(State or other jurisdiction of
incorporation or organization)
    
    23-0334400(I.R.S. Employer
Identification No.)70 Valley Stream Parkway
Malvern, Pennsylvania(Address of principal executive offices)
    
    19355(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  DECEMBER 31, 2005 AND SEPTEMBER 30, 2005 (UNAUDITED)
    
    7CONSOLIDATED STATEMENTS OF INCOME  THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 (UNAUDITED)
    
    8CONSOLIDATED STATEMENTS OF CASH FLOWS  THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 (UNAUDITED)
    
    9NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    
    10-20ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    21-31ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    31ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    31-33PART II  OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    34ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    34ITEM 3.
    

DEFAULTS
UPON SENIOR SECURITIES
    
    34ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    34ITEM 5.
    

OTHER
INFORMATION
    
    34ITEM 6.
    
    EXHIBITS
    
    34SIGNATURESCertification 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
   
    
    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 implementation of an enterprise-wide information technology
platform in our North American and European markets, our infrastructure and productivity
initiatives; and
    
    economic, legal and political issues associated with international operations.
 RISK FACTORS
 The intense competition in our industry could result in reduced profitability and loss of market share for us.
  3




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A deterioration in our relationships with our suppliers or in the financial condition of our suppliers could adversely affect 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.
  We continue to implement substantial changes to our information systems. These actions could
disrupt our business.
  5




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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)
 December 31, 2005
    
    
    September 30, 2005AssetsCash and cash equivalents
    
    $
    265,754
    
    
    $
    373,705Restricted cash
    
    
    18,277
    
    
    
    18,272Accounts
receivable, less allowances of: December 31, 2005 - $11,201; September 30, 2005
- $12,284
    
    
    694,115
    
    
    
    678,313Lease receivables, less allowances of: December 31, 2005 - $3,062; September 30, 2005 -
$2,560
    
    
    302,936
    
    
    
    317,928Inventories
    
    
    262,761
    
    
    
    241,470Prepaid expenses and other current assets
    
    
    37,711
    
    
    
    42,660Deferred taxes
    
    
    55,708
    
    
    
    55,566Total current assets
    
    
    1,637,262
    
    
    
    1,727,914Long-term lease receivables, less allowances of: December 31, 2005 - $4,289; September
30, 2005 - $4,053
    
    
    424,384
    
    
    
    503,281Equipment on operating leases, net of accumulated depreciation of: December 31, 2005 -
$77,940; September 30, 2005 - $76,774
    
    
    96,690
    
    
    
    101,614Property and equipment, net of accumulated depreciation of: December 31, 2005 - $307,810;
September 30, 2005 - $306,656
    
    
    140,011
    
    
    
    144,309Goodwill
    
    
    1,258,623
    
    
    
    1,277,785Other assets
    
    
    79,712
    
    
    
    76,916Total Assets
    
    $
    3,636,682
    
    
    $
    3,831,819LiabilitiesCurrent portion of corporate debt
    
    $
    1,060
    
    
    $
    1,137Current portion of non-corporate debt
    
    
    265,214
    
    
    
    299,359Trade accounts payable
    
    
    175,962
    
    
    
    211,783Accrued salaries, wages and commissions
    
    
    72,603
    
    
    
    94,614Deferred revenues
    
    
    114,767
    
    
    
    111,890Taxes payable
    
    
    87,582
    
    
    
    79,458Other accrued expenses
    
    
    123,358
    
    
    
    139,099Total current liabilities
    
    
    840,546
    
    
    
    937,340Long-term corporate debt
    
    
    674,799
    
    
    
    728,156Long-term non-corporate debt
    
    
    185,394
    
    
    
    225,307Deferred taxes
    
    
    29,814
    
    
    
    20,853Other long-term liabilities
    
    
    323,124
    
    
    
    349,819Commitments and contingencies (Note 9)Shareholders EquityCommon stock, no par value: authorized 300,000 shares; issued: December 31, 2005 
150,725 shares; September 30, 2005 - 150,140 shares; outstanding: December 31, 2005 
134,256 shares; September 30, 2005 -135,750 shares
    
    
    1,036,034
    
    
    
    1,030,462Series 12 preferred stock, no par value: authorized 480 shares; none issued or outstandingRetained earnings
    
    
    770,673
    
    
    
    755,864Accumulated other comprehensive loss
    
    
    (52,640
    )
    
    
    (65,426
    )Cost of common shares in treasury: December 31, 2005  16,469 shares; September 30, 2005
- 14,390 shares
    
    
    (171,062
    )
    
    
    (150,556
    )Total Shareholders Equity
    
    
    1,583,005
    
    
    
    1,570,344Total Liabilities and Shareholders Equity
    
    $
    3,636,682
    
    
    $
    3,831,819
 See notes to condensed consolidated financial statements.
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IKON OFFICE SOLUTIONS, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 (in thousands, except per share data)
 Three Months Ended December 312005
    
    
    2004RevenuesEquipment
    
    $
    424,989
    
    
    $
    407,414Customer service and supplies
    
    
    371,223
    
    
    
    378,230Managed and professional services
    
    
    176,382
    
    
    
    179,232Rental and fees
    
    
    40,427
    
    
    
    43,864Other
    
    
    29,842
    
    
    
    76,7061,042,863
    
    
    
    1,085,446Cost of RevenuesEquipment
    
    
    323,243
    
    
    
    290,248Customer service and supplies
    
    
    199,053
    
    
    
    208,809Managed and professional services
    
    
    131,646
    
    
    
    135,051Rental and fees
    
    
    12,798
    
    
    
    12,322Other
    
    
    13,930
    
    
    
    45,541680,670
    
    
    
    691,971Gross ProfitEquipment
    
    
    101,746
    
    
    
    117,166Customer service and supplies
    
    
    172,170
    
    
    
    169,421Managed and professional services
    
    
    44,736
    
    
    
    44,181Rental and fees
    
    
    27,629
    
    
    
    31,542Other
    
    
    15,912
    
    
    
    31,165362,193
    
    
    
    393,475Selling and administrative
    
    
    313,987
    
    
    
    348,908Gain on divestiture of business
    
    
    4,924
    
    
    
    Restructuring
    
    
    (152
    )
    
    
    Operating Income
    
    
    53,282
    
    
    
    44,567Loss from early extinguishment of debt
    
    
    1,650
    
    
    
    Interest income
    
    
    2,571
    
    
    
    928Interest expense
    
    
    13,798
    
    
    
    13,731Income from continuing operations before taxes on income
    
    
    40,405
    
    
    
    31,764Taxes on income
    
    
    12,773
    
    
    
    10,892Income from continuing operations
    
    
    27,632
    
    
    
    20,872Discontinued Operations:Operating income (loss)
    
    
    19
    
    
    
    (1,861
    )Tax (expense) benefit
    
    
    (8
    )
    
    
    735Net income (loss) from discontinued operations
    
    
    11
    
    
    
    (1,126
    )Net income
    
    $
    27,643
    
    
    $
    19,746Basic Earnings (Loss) Per Common ShareContinuing operations
    
    $
    0.21
    
    
    $
    0.15Discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Net income
    
    $
    0.21
    
    
    $
    0.14Diluted Earnings (Loss) Per Common ShareContinuing operations
    
    $
    0.21
    
    
    $
    0.14Discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Net income
    
    $
    0.21
    
    
    $
    0.14
    *Cash dividends per common share
    
    $
    0.04
    
    
    $
    0.04
 
 *
    
    The sum of the earnings per share amounts do not equal the total due to rounding. See notes to condensed consolidated financial statements.
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IKON OFFICE SOLUTIONS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Three Months Ended December 312005
    
    
    2004Cash Flows from Operating ActivitiesNet income
    
    $
    27,643
    
    
    $
    19,746Net income (loss) from discontinued operations
    
    
    11
    
    
    
    (1,126
    )Income from continuing operations
    
    
    27,632
    
    
    
    20,872Additions (deductions) to reconcile net income to net cash used in operating activities:Depreciation
    
    
    17,251
    
    
    
    19,092Amortization
    
    
    1,097
    
    
    
    946Gain on divestiture of business
    
    
    (4,924
    )
    
    
    Provision for losses on accounts receivable
    
    
    97
    
    
    
    3,361Deferred income taxes
    
    
    (7,289
    )
    
    
    (34,093
    )Provision for lease default reserves
    
    
    802
    
    
    
    288Stock-based compensation expense
    
    
    2,551
    
    
    
    2,627Pension expense
    
    
    16,844
    
    
    
    10,938Loss from early extinguishment of debt
    
    
    1,650
    
    
    
    Changes in operating assets and liabilities, net of divestiture of businesses:Increase in accounts receivable
    
    
    (20,214
    )
    
    
    (21,048
    )Increase in inventories
    
    
    (17,328
    )
    
    
    (52,972
    )Decrease in prepaid expenses and other current assets
    
    
    2,509
    
    
    
    8,733Decrease in accounts payable, deferred revenues and accrued expenses
    
    
    (56,615
    )
    
    
    (50,597
    )Other
    
    
    (722
    )
    
    
    1,992Net cash used in continuing operations
    
    
    (36,659
    )
    
    
    (89,861
    )Net cash used in discontinued operations
    
    
    (2,114
    )
    
    
    (2,626
    )Net cash used in operating activities
    
    
    (38,773
    )
    
    
    (92,487
    )Cash Flows from Investing ActivitiesProceeds from the divestiture of business (Note 5)
    
    
    19,128
    
    
    
    Expenditures for property and equipment
    
    
    (3,611
    )
    
    
    (4,848
    )Expenditures for equipment on operating leases
    
    
    (7,371
    )
    
    
    (13,856
    )Proceeds from sale of property and equipment
    
    
    633
    
    
    
    643Proceeds from sale of equipment on operating leases
    
    
    2,823
    
    
    
    975Proceeds from the sale of lease receivables (Note 7)
    
    
    51,142
    
    
    
    61,428Lease receivables  additions
    
    
    (94,180
    )
    
    
    (88,159
    )Lease receivables  collections
    
    
    122,389
    
    
    
    136,106Other
    
    
    (734
    )
    
    
    (3,804
    )Net cash provided by investing activities
    
    
    90,219
    
    
    
    88,485Cash Flows from Financing ActivitiesShort-term corporate debt repayments, net
    
    
    (29
    )
    
    
    (91
    )Repayment of other borrowings
    
    
    (3,752
    )
    
    
    (1,981
    )Proceeds from issuance of long-term corporate debt
    
    
    
    
    
    
    230Debt issuance costs
    
    
    (821
    )
    
    
    Long-term corporate debt repayments
    
    
    (54,482
    )
    
    
    (57,496
    )Non-corporate debt  issuances
    
    
    18,432
    
    
    
    5,926Non-corporate debt  repayments
    
    
    (87,358
    )
    
    
    (103,905
    )Dividends paid
    
    
    (5,249
    )
    
    
    (5,667
    )(Increase) decrease in restricted cash
    
    
    (5
    )
    
    
    311Proceeds from stock option exercises
    
    
    5,283
    
    
    
    712Tax benefit relating to stock plans
    
    
    2,962
    
    
    
    354Purchase of treasury shares
    
    
    (33,392
    )
    
    
    (21,916
    )Net cash used in financing activities
    
    
    (158,411
    )
    
    
    (183,523
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (986
    )
    
    
    6,815Net decrease in cash and cash equivalents
    
    
    (107,951
    )
    
    
    (180,710
    )Cash and cash equivalents at beginning of the year
    
    
    373,705
    
    
    
    472,951Cash and cash equivalents at end of the period
    
    $
    265,754
    
    
    $
    292,241
 See notes to condensed consolidated financial statements.
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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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WeightedShares
    
    
    Average PriceOutstanding at September 30, 2005
    
    
    12,504
    
    
    $
    11.46Granted
    
    
    1,167
    
    
    
    10.81Exercised
    
    
    (1,246
    )
    
    
    10.32Cancelled
    
    
    (240
    )
    
    
    24.04Outstanding at December 31, 2005
    
    
    12,185
    
    
    $
    11.89Exercisable at December 31, 2005
    
    
    9,272
    *
 
 *
    
    3,607 of the 9,272 options exercisable at December 31, 2005 are in-the-money.  Three Months Ended December 312005
    
    
    2004Expected dividend yield (1)
    
    
    1.5
    %
    
    
    1.5
    %Expected volatility rate (2)
    
    
    55.1
    %
    
    
    54.2
    %Expected lives (3)
    
    5.0 years
    
    5.0 yearsRisk-free interest rate (4)
    
    
    4.4
    %
    
    
    3.5
    %
 
 (1)
    
    Dividend yield assumption is based on the Companys history and expectation of future
dividend payouts.(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. 4. RECENT ACCOUNTING STANDARDS
  11




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5. SALE OF BUSINESS
  6. NOTES PAYABLE AND LONG-TERM DEBT
 Long-term Debt
  12




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December 31,
    
    
    September 30,2005
    
    
    2005Bond issues
    
    $
    354,872
    
    
    $
    354,850Convertible subordinated notes
    
    
    
    
    
    
    53,242Notes payable
    
    
    319,835
    
    
    
    319,835Miscellaneous notes, bonds, mortgages and capital lease obligations
    
    
    1,152
    
    
    
    1,366675,859
    
    
    
    729,293Less: current maturities
    
    
    1,060
    
    
    
    1,137$
    674,799
    
    
    $
    728,156
  December 31,
    
    
    September 30,2005
    
    
    2005Lease-backed notes
    
    $
    262,776
    
    
    $
    332,233Asset securitization conduit financing
    
    
    121,057
    
    
    
    124,122Notes payable to banks
    
    
    8,363
    
    
    
    9,422Debt supporting unsold residual value
    
    
    58,412
    
    
    
    58,889450,608
    
    
    
    524,666Less: current maturities
    
    
    265,214
    
    
    
    299,359$
    185,394
    
    
    $
    225,307
   Asset Securitization Conduit Financing Agreements
  Debt Supporting Unsold Residual Value
   
    
    We have transferred $36,973 of lease receivables to GE for which we have retained certain
risks of ownership at December 31, 2005;
    
    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 December 31, 2005, we had
recorded $9,537 of debt and associated residual value; and
    
    We have $10,384 of debt related to equipment on operating leases that has been funded by
GE.
 Credit Facility
  13




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Loss from the Early Extinguishment of Debt
  Letters of Credit
  Interest Payments
  7. SALE OF LEASE RECEIVABLES
   8. GOODWILL
  IKON North
    
    
    IKONAmerica
    
    
    Europe
    
    
    TotalGoodwill at September 30, 2005
    
    $
    958,037
    
    
    $
    319,748
    
    
    $
    1,277,785Sale of business
    
    
    
    
    
    
    (12,511
    )
    
    
    (12,511
    )Translation adjustment
    
    
    130
    
    
    
    (6,781
    )
    
    
    (6,651
    )Goodwill at December 31, 2005
    
    $
    958,167
    
    
    $
    300,456
    
    
    $
    1,258,623
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9. CONTINGENCIES
      15




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10. SHARE REPURCHASES
  11. COMPREHENSIVE INCOME
  Three Months EndedDecember 312005
    
    
    2004Net income
    
    $
    27,643
    
    
    $
    19,746Foreign currency translation adjustments
    
    
    (11,867
    )
    
    
    49,227(Loss) gain on derivative financial
instruments, net of tax benefit
(expense) of: $75 and $(170) for the
three months ended December 31, 2005 and
2004, respectively
    
    
    (131
    )
    
    
    265Minimum pension liability adjustment
    
    
    24,784
    *
    
    
    Total comprehensive income
    
    $
    40,429
    
    
    $
    69,238
 
 *
    
    As a result of freezing the U.S. Plans (discussed in note 14). 12. EARNINGS PER COMMON SHARE
  16




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Three Months EndedDecember 312005
    
    
    2004Numerator:Numerator for basic earnings per common share  income from continuing operations
    
    $
    27,632
    
    
    $
    20,872Effect of dilutive securities:Interest expense on Convertible Notes, net of taxes
    
    
    88
    
    
    
    2,248Numerator for diluted earnings per common share  net income from continuing operations
    
    $
    27,720
    
    
    $
    23,120Denominator:Denominator for basic earnings per common share  weighted average common shares
    
    
    133,141
    
    
    
    141,477Effect of dilutive securities:Convertible Notes
    
    
    770
    
    
    
    19,295Employee stock awards
    
    
    435
    
    
    
    420Employee stock options
    
    
    512
    
    
    
    1,110Dilutive potential common shares
    
    
    1,717
    
    
    
    20,825Denominator for diluted earnings per common share  adjusted weighted average common
shares and assumed conversions
    
    
    134,858
    
    
    
    162,302Basic earnings per common share from continuing operations
    
    $
    0.21
    
    
    $
    0.15Diluted earnings per common share from continuing operations
    
    $
    0.21
    
    
    $
    0.14
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13. SEGMENT REPORTING
   CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalThree Months Ended December 31, 2005Revenues:Equipment
    
    $
    375,723
    
    
    $
    49,266
    
    
    $
    
    
    
    $
    424,989Customer service and supplies
    
    
    336,668
    
    
    
    34,555
    
    
    
    
    
    
    
    371,223Managed and professional services
    
    
    162,824
    
    
    
    13,558
    
    
    
    
    
    
    
    176,382Rental and fees
    
    
    39,027
    
    
    
    1,400
    
    
    
    
    
    
    
    40,427Other
    
    
    13,274
    
    
    
    16,568
    
    
    
    
    
    
    
    29,842Total revenues
    
    
    927,516
    
    
    
    115,347
    
    
    
    
    
    
    
    1,042,863Gain on divestiture of business
    
    
    
    
    
    
    4,924
    
    
    
    
    
    
    
    4,924Restructuring
    
    
    (152
    )
    
    
    
    
    
    
    
    
    
    
    (152
    )Operating income (loss)
    
    
    99,258
    
    
    
    12,523
    
    
    
    (58,499
    )
    
    
    53,282Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    1,650Interest income
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    2,571Interest expense
    
    
    
    
    
    
    
    
    
    
    13,798
    
    
    
    13,798Income from continuing operations before taxes on income
    
    $
    99,258
    
    
    $
    12,523
    
    
    $
    (71,376
    )
    
    $
    40,405Three Months Ended December 31, 2004Revenues:Equipment
    
    $
    355,724
    
    
    $
    51,690
    
    
    $
    
    
    
    $
    407,414Customer service and supplies
    
    
    341,610
    
    
    
    36,620
    
    
    
    
    
    
    
    378,230Managed and professional services
    
    
    164,089
    
    
    
    15,143
    
    
    
    
    
    
    
    179,232Rental and fees
    
    
    42,570
    
    
    
    1,294
    
    
    
    
    
    
    
    43,864Other
    
    
    37,154
    
    
    
    39,552
    
    
    
    
    
    
    
    76,706Total revenues
    
    
    941,147
    
    
    
    144,299
    
    
    
    
    
    
    
    1,085,446Operating income (loss)
    
    
    97,505
    
    
    
    6,915
    
    
    
    (59,853
    )
    
    
    44,567Interest income
    
    
    
    
    
    
    
    
    
    
    928
    
    
    
    928Interest expense
    
    
    
    
    
    
    
    
    
    
    13,731
    
    
    
    13,731Income from continuing operations before taxes on income
    
    $
    97,505
    
    
    $
    6,915
    
    
    $
    (72,656
    )
    
    $
    31,764
  14. PENSION PLANS
   18




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##### Table of Contents



Three Months Ended December 312005
    
    
    2004U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.Plans
    
    
    Plans
    
    
    Plans
    
    
    PlansService cost
    
    $
    8,721
    
    
    $
    1,189
    
    
    $
    7,033
    
    
    $
    1,067Interest cost on projected benefit obligation
    
    
    8,417
    
    
    
    1,115
    
    
    
    8,107
    
    
    
    966Expected return on assets
    
    
    (7,803
    )
    
    
    (1,027
    )
    
    
    (7,502
    )
    
    
    (940
    )Amortization of net obligation
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Amortization of prior service cost
    
    
    47
    
    
    
    (51
    )
    
    
    142
    
    
    
    2Recognized net actuarial loss
    
    
    2,978
    
    
    
    397
    
    
    
    1,892
    
    
    
    162Curtailment
    
    
    2,852
    
    
    
    
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    15,212
    
    
    $
    1,632
    
    
    $
    9,672
    
    
    $
    1,266
  15. RESTRUCTURING
   CashBalance
    
    
    Fiscal 2006
    
    
    Payments
    
    
    BalanceSeptember 30, 2005
    
    
    Adjustments*
    
    
    Fiscal 2006
    
    
    December 31, 2005Severance
    
    $
    1,975
    
    
    $
    (216
    )
    
    $
    (899
    )
    
    $
    860Contractual commitments
    
    
    1,452
    
    
    
    70
    
    
    
    (268
    )
    
    
    1,254Contract termination
    
    
    123
    
    
    
    
    
    
    
    (53
    )
    
    
    70Total
    
    $
    3,550
    
    
    $
    (146
    )
    
    $
    (1,220
    )
    
    $
    2,184
 
 *
    
    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 three months ended December 31, 2005 were not material to our consolidated
financial statements.   Remainder ofFiscal 2006
    
    
    Fiscal 2007
    
    
    Fiscal 2008
    
    
    Beyond
    
    
    TotalProjected PaymentsSeverance
    
    $
    860
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    860Contractual commitments
    
    
    420
    
    
    
    323
    
    
    
    247
    
    
    
    264
    
    
    
    1,254Contract termination
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Total
    
    $
    1,350
    
    
    $
    323
    
    
    $
    247
    
    
    $
    264
    
    
    $
    2,184
  16. DISCONTINUED OPERATIONS
  19




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##### Table of Contents



Three Months Ended December 31,2005
    
    
    2004Revenues
    
    $
    
    
    
    $
    11,525Operating income (loss)
    
    
    19
    
    
    
    (1,861
    )Tax (expense) benefit
    
    
    (8
    )
    
    
    735Net income (loss) from discontinued operations
    
    $
    11
    
    
    $
    (1,126
    )
  17. FINANCIAL INSTRUMENTS
  20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 OVERVIEW
   
    
    operational leverage;
    
    core growth; and
    
    capital structure.
      21




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##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended December 31, 2005 Compared to the Three Months Ended December 31, 2004
 Equipment
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    424,989
    
    
    $
    407,414
    
    
    $
    17,575
    
    
    
    4.3
    %Cost of revenue
    
    
    323,243
    
    
    
    290,248
    
    
    
    32,995
    
    
    
    11.4
    %Gross profit
    
    $
    101,746
    
    
    $
    117,166
    
    
    $
    (15,420
    )
    
    
    (13.2
    )%Gross profit %
    
    
    23.9
    %
    
    
    28.8
    %
    22




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##### Table of Contents



Customer Service and Supplies
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    371,223
    
    
    $
    378,230
    
    
    $
    (7,007
    )
    
    
    (1.9
    )%Cost of revenue
    
    
    199,053
    
    
    
    208,809
    
    
    
    (9,756
    )
    
    
    (4.7
    )%Gross profit
    
    $
    172,170
    
    
    $
    169,421
    
    
    $
    2,749
    
    
    
    1.6
    %Gross profit %
    
    
    46.4
    %
    
    
    44.8
    %
  
    
    Office Black & White MIF increased approximately 7% with a slight decline, less than 1%, in copy volume;
    
    Production Black & White MIF and copy volumes increased approximately 9% and 10%, respectively;
    
    Color MIF and copy volumes increased approximately 27% and 40%, respectively; and
    
    Analog MIF and copy volumes decreased approximately 31% and 42%, respectively,
consistent with the ongoing market transition from analog to digital technology.
   Managed and Professional Services
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    176,382
    
    
    $
    179,232
    
    
    $
    (2,850
    )
    
    
    (1.6)
    %Cost of revenue
    
    
    131,646
    
    
    
    135,051
    
    
    
    (3,405
    )
    
    
    (2.5
    )Gross profit
    
    $
    44,736
    
    
    $
    44,181
    
    
    $
    555
    
    
    
    1.3
    %Gross profit %
    
    
    25.4
    %
    
    
    24.7
    %
  23




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##### Table of Contents



Rental and Fees
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    40,427
    
    
    
    $
    43,864
    
    
    $
    (3,437
    )
    
    
    (7.8
    )%Cost of revenue
    
    
    12,798
    
    
    
    
    12,322
    
    
    
    476
    
    
    
    3.9Gross profit
    
    $
    27,629
    
    
    
    $
    31,542
    
    
    $
    (3,913
    )
    
    
    (12.4
    )%Gross profit %
    
    
    68.3
    %
    
    
    
    71.9
    %
   Other
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeFinance income
    
    $
    19,072
    
    
    $
    30,806
    
    
    $
    (11,734
    )
    
    
    (38.1
    )%Other
    
    
    10,770
    
    
    
    45,900
    
    
    
    (35,130
    )
    
    
    (76.5
    )%Total other revenue
    
    $
    29,842
    
    
    $
    76,706
    
    
    $
    (46,864
    )
    
    
    (61.1)
    %Finance interest expense
    
    $
    4,612
    
    
    $
    7,889
    
    
    $
    (3,277
    )
    
    
    (41.5
    )%Other
    
    
    9,318
    
    
    
    37,652
    
    
    
    (28,334
    )
    
    
    (75.3
    )%Total cost of other revenue
    
    $
    13,930
    
    
    $
    45,541
    
    
    $
    (31,611
    )
    
    
    (69.4
    )Finance income gross profit
    
    $
    14,460
    
    
    $
    22,917
    
    
    $
    (8,457
    )
    
    
    (36.9
    )%Other gross profit
    
    
    1,452
    
    
    
    8,248
    
    
    
    (6,796
    )
    
    
    (82.4
    )%Total other gross profit
    
    $
    15,912
    
    
    $
    31,165
    
    
    $
    (15,253
    )
    
    
    (48.9)
    %Finance income
    
    
    75.8
    %
    
    
    74.4
    %Other
    
    
    13.5
    %
    
    
    18.0
    %Gross profit %
    
    
    53.3
    %
    
    
    40.6
    %
  Selling and Administrative Expenses
 2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeSelling and administrative expenses
    
    $
    313,987
    
    
    $
    348,908
    
    
    $
    34,921
    
    
    
    (10.0
    )%Selling and administrative expenses as a % of revenue
    
    
    30.1
    %
    
    
    32.1
    %
   24




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##### Table of Contents




    
    A decrease of $11,602 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 $11,480 in selling expense due to geographic consolidation and headcount reductions;
    
    A decrease of approximately $8,019 related to the sale of businesses during fiscal 2005 and October 2005;
    
    A decrease of $2,684 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;
    
    An increase in pension costs of $3,278 compared to fiscal 2005, which includes the
curtailment charge related to the freezing of our U.S. Pension Plan. However, beginning in
the second quarter of fiscal 2006 pension expense will decrease as a
result of this freeze.
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
    
    
    $ Change
    
    
    %ChangeGain on divestiture of business
    
    $
    4,924
    
    
    $
    
    
    
    $
    4,924
    
    
    
    N/ARestructuring
    
    
    (152
    )
    
    
    
    
    
    
    (152
    )
    
    
    N/ALoss from early extinguishment of debt
    
    
    1,650
    
    
    
    
    
    
    
    1,650
    
    
    
    N/AInterest income
    
    
    2,571
    
    
    
    928
    
    
    
    1,643
    
    
    
    177.0Interest expense
    
    
    13,798
    
    
    
    13,731
    
    
    
    67
    
    
    
    0.5Taxes on income
    
    
    12,773
    
    
    
    10,892
    
    
    
    1,881
    
    
    
    17.3Income from continuing operations
    
    
    27,632
    
    
    
    20,872
    
    
    
    6,760
    
    
    
    32.4Diluted earnings per common share  continuing operations
    
    $
    0.21
    
    
    $
    0.14
    
    
    $
    0.07
    
    
    
    50.0
       25




---



##### Table of Contents



Review of Business Segments
  CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalThree Months Ended December 31, 2005Revenues:Equipment
    
    $
    375,723
    
    
    $
    49,266
    
    
    $
    
    
    
    $
    424,989Customer service and supplies
    
    
    336,668
    
    
    
    34,555
    
    
    
    
    
    
    
    371,223Managed and professional services
    
    
    162,824
    
    
    
    13,558
    
    
    
    
    
    
    
    176,382Rental and fees
    
    
    39,027
    
    
    
    1,400
    
    
    
    
    
    
    
    40,427Other
    
    
    13,274
    
    
    
    16,568
    
    
    
    
    
    
    
    29,842Total Revenues
    
    
    927,516
    
    
    
    115,347
    
    
    
    
    
    
    
    1,042,863Gain on divestiture of business
    
    
    
    
    
    
    4,924
    
    
    
    
    
    
    
    4,924Restructuring
    
    
    (152
    )
    
    
    
    
    
    
    
    
    
    
    (152
    )Operating income (loss)
    
    
    99,258
    
    
    
    12,523
    
    
    
    (58,499
    )
    
    
    53,282Loss from early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    1,650Interest income
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    2,571Interest expense
    
    
    
    
    
    
    
    
    
    
    13,798
    
    
    
    13,798Income from continuing operations before taxes on income
    
    $
    99,258
    
    
    $
    12,523
    
    
    $
    (71,376
    )
    
    $
    40,405Three Months Ended December 31, 2004Revenues:Equipment
    
    $
    355,724
    
    
    $
    51,690
    
    
    $
    
    
    
    $
    407,414Customer service and supplies
    
    
    341,610
    
    
    
    36,620
    
    
    
    
    
    
    
    378,230Managed and professional services
    
    
    164,089
    
    
    
    15,143
    
    
    
    
    
    
    
    179,232Rental and fees
    
    
    42,570
    
    
    
    1,294
    
    
    
    
    
    
    
    43,864Other
    
    
    37,154
    
    
    
    39,552
    
    
    
    
    
    
    
    76,706Total Revenues
    
    
    941,147
    
    
    
    144,299
    
    
    
    
    
    
    
    1,085,446Operating income (loss)
    
    
    97,505
    
    
    
    6,915
    
    
    
    (59,853
    )
    
    
    44,567Interest income
    
    
    
    
    
    
    
    
    
    
    928
    
    
    
    928Interest expense
    
    
    
    
    
    
    
    
    
    
    13,731
    
    
    
    13,731Income from continuing operations before taxes on income
    
    $
    97,505
    
    
    $
    6,915
    
    
    $
    (72,656
    )
    
    $
    31,764
  IKON North America
  26




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##### Table of Contents



IKON Europe
  Corporate and Eliminations
  27




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##### Table of Contents



Restructuring
   CashBalance
    
    
    Fiscal 2006
    
    
    Payments
    
    
    BalanceSeptember 30, 2005
    
    
    Adjustments*
    
    
    Fiscal 2006
    
    
    December 31, 2005Severance
    
    $
    1,975
    
    
    $
    (216
    )
    
    $
    (899
    )
    
    $
    860Contractual commitments
    
    
    1,452
    
    
    
    70
    
    
    
    (268
    )
    
    
    1,254Contract termination
    
    
    123
    
    
    
    
    
    
    
    (53
    )
    
    
    70Total
    
    $
    3,550
    
    
    $
    (146
    )
    
    $
    (1,220
    )
    
    $
    2,184
 
    Remainder ofFiscal 2006
    
    
    Fiscal 2007
    
    
    Fiscal 2008
    
    
    Beyond
    
    
    TotalProjected PaymentsSeverance
    
    $
    860
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    860Contractual commitments
    
    
    420
    
    
    
    323
    
    
    
    247
    
    
    
    264
    
    
    
    1,254Contract termination
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Total
    
    $
    1,350
    
    
    $
    323
    
    
    $
    247
    
    
    $
    264
    
    
    $
    2,184
  FINANCIAL CONDITION AND LIQUIDITY
 Cash Flows and Liquidity
  2006Cash used in operating activities
    
    $
    (38,773
    )Cash provided by investing activities
    
    
    90,219Cash used in financing activities
    
    
    (158,411
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (986
    )Decrease in cash and cash equivalents
    
    
    (107,951
    )Cash and cash equivalents at beginning of the year
    
    
    373,705Cash and cash equivalents at end of period
    
    $
    265,754
 Operating Cash Flows
  28




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##### Table of Contents



Investing Cash Flows
  Financing Cash Flows
  Debt Structure
  December 31,
    
    
    September 30,2005
    
    
    2005Bond issues
    
    $
    354,872
    
    
    $
    354,850Convertible subordinated notes
    
    
    
    
    
    
    53,242Notes payable
    
    
    319,835
    
    
    
    319,835Miscellaneous notes, bonds, mortgages and capital lease obligations
    
    
    1,152
    
    
    
    1,366675,859
    
    
    
    729,293Less: current maturities
    
    
    1,060
    
    
    
    1,137$
    674,799
    
    
    $
    728,156
  December 31,
    
    
    September 30,2005
    
    
    2005Lease-backed notes
    
    $
    262,776
    
    
    $
    332,233Asset securitization conduit financing
    
    
    121,057
    
    
    
    124,122Notes payable to banks
    
    
    8,363
    
    
    
    9,422Debt supporting unsold residual value
    
    
    58,412
    
    
    
    58,889450,608
    
    
    
    524,666Less: current maturities
    
    
    265,214
    
    
    
    299,359$
    185,394
    
    
    $
    225,307
   29




---



##### Table of Contents



Asset Securitization Conduit Financing Agreements
  Debt Supporting Unsold Residual Value
   
    
    We have transferred $36,973 of lease receivables to GE for which we have retained certain
risks of ownership at December 31, 2005;
    
    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 December 31, 2005, we had
recorded $9,537 of debt and associated residual value; and
    
    We have $10,384 of debt related to equipment on operating leases that has been funded by
GE.
 Credit Facility
   Loss from the Early Extinguishment of Debt
  30




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##### Table of Contents



Letters of Credit
  Liquidity Outlook
    RECENT ACCOUNTING STANDARDS
  
 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
   31




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##### Table of Contents



Material Weakness in Internal Control Over Financial Reporting
   Managements Remediation Initiatives
   
    
    realigning responsibilities to ensure direct accountability for all customer billing;
    
    synchronizing service contract initialization and termination with equipment installation and removal;
    
    creating a quality assurance function to test contract set-up and termination;
    
    improving our meter reading collection process and reducing reliance on meter estimates; and
    
    standardizing our issue resolution process across all IKON locations in North America.
  
    
    establishing a service billing organization structure and appointing a vice president of service billing operations;
    
    conducting tests of contract set-up procedures at each of our North American billing centers;
    
    using actual service billing data from our service provider in lieu of estimated amounts; and
    
    initializing a pilot program designed to assess the accuracy of estimated meter reads.
   32




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
   33




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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
    
    Program
    
    the Program (2)October 1, 2005  October 31, 2005
    
    
    1,658
    
    
    $
    9.87
    
    
    
    1,658
    
    
    $
    69,447November 1, 2005  November 30, 2005
    
    
    1,155
    
    
    
    10.01
    
    
    
    1,155
    
    
    
    57,888December 1, 2005  December 31, 2005
    
    
    512
    
    
    
    10.48
    
    
    
    512
    
    
    
    52,5143,325
    
    
    $
    10.01
    
    
    
    3,325
    
    
    $
    52,514
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 a)
    
    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
 34




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##### Table of Contents



SIGNATURES
    By:
    
    /s/ ROBERT F. WOODS(Robert F. Woods)
     Senior Vice President and
Chief              Financial Officer

        (Principal Financial Officer)
 35