<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1996
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Annual report pursuant in section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1996 or
[_] Transition]report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period to
FORM 10-K
COMMISSION FILE NUMBER 0-20405
----------------
IKON CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 23-2493042
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1738 BASS ROAD, MACON, GEORGIA 31210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(912) 471-2300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of common stock, par value $.01 per share, outstanding
as of December 20 was 1,000, all of which were indirectly owned by Alco
Standard Corporation.
Registered debt outstanding as of December 20, 1996 was $1,138,900,000.
Documents incorporated by reference:
NONE
The registrant meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K and is therefore filing with the reduced
disclosure format contemplated thereby.
===============================================================================
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE NO.
--------
<C> <S> <C>
ITEM 1. BUSINESS................................................... 3
ITEM 2. PROPERTIES................................................. 9
ITEM 3. LEGAL PROCEEDINGS.......................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 9
ITEM 6. SELECTED FINANCIAL DATA.................................... 9
ITEM 7. FINANCIAL INFORMATION...................................... 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................... 16
ITEM 11. EXECUTIVE COMPENSATION..................................... 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................... 16
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
IKON Capital, Inc. ("IKON Capital" or the "Company") formerly known as Alco
Capital Resource, Inc., was formed in 1987 to provide lease financing to
customers of IKON Office Solutions, Inc., formerly known as Alco Office
Products, the office products segment of Alco Standard Corporation ("Alco").
The Company's offices are located at 1738 Bass Road, Macon, Georgia, 31210
(telephone number 912-471-2300). The Company is a wholly-owned indirect
subsidiary of Alco.
Alco is a public company headquartered in Valley Forge, Pennsylvania. On
June 19, 1996, Alco announced that it would split its two operating units into
independent companies by spinning off its paper and supply systems
distribution group, Unisource Worldwide Inc., as a separate publicly owned
company by the end of calendar year 1996. Continuing operations of Alco
consist of IKON Office Solutions, Inc. ("IKON"). IKON is the largest
independent copier distribution network in North America and the United
Kingdom, with locations in 48 states, six Canadian provinces and in Europe.
IKON also provides equipment services and supplies and specialized document
copying services. Alco's fiscal 1996 revenues from continuing operations were
$4.1 billion.
The Company is engaged in the business of arranging lease financing
exclusively for office equipment marketed by IKON's wholly-owned office
equipment dealers ("IKON dealers"), which sell and service copier equipment
and facsimile machines. The ability to offer lease financing on this equipment
through IKON Capital is considered a competitive marketing advantage which
more closely ties IKON to its customer base. During the 1996 fiscal year, 61%
of new equipment sold by IKON dealers was financed through the Company. The
Company and IKON will seek to increase this percentage in the future, as
leasing enhances the overall profit margin on equipment and is considered an
important customer retention strategy.
The equipment financed by the Company consists of copiers, facsimile
machines, and related accessories and peripheral equipment, the majority of
which are produced by major office equipment manufacturers including Canon,
Oce, Ricoh, and Sharp. Currently 76% of the equipment financed by the Company
represents copiers, 18% fax machines, and 6% other equipment. Although
equipment models vary, IKON is increasingly focusing its marketing efforts on
the sale of higher segment equipment, such as copiers which produce 50 or more
impressions per minute.
The Company provides IKON dealers with standard lease rates for use in
customer quotes. However, IKON dealers may charge the customer more or less
than IKON Capital's standard rates, and the IKON dealer would absorb any
difference resulting from any such variances from IKON Capital's standard
rates.
The Company's customer base (which consists of the end users of the
equipment) is widely dispersed, with the ten largest customers representing
less than 2% of the Company's total lease portfolio. The typical new lease
financed by the Company averages $14,800 in amount and 44 months in duration.
Although 96% of the leases are scheduled for regular monthly payments,
customers are also offered quarterly, semi-annual, and other customized
payment terms. In connection with its leasing activities, the Company performs
billing, collection, property and sales tax filings, and provides quotes on
equipment upgrades and lease-end notification. The Company also provides
certain financial reporting services to the IKON dealers, such as a monthly
report of dealer increases in leasing activity and related statistics.
Alco and the Company entered into a support agreement on June 1, 1994 (the
"1994 Support Agreement") pursuant to which Alco agreed to make payments to
the Company, if necessary, to enable the Company to maintain (i) a ratio of
income before interest expense and taxes to interest expense of 1.25 times and
(ii) a minimum consolidated tangible net worth of $1.00 at all times. On
October 22, 1996, Alco and the Company replaced the 1994 Support Agreement
with a new support agreement (the "1996 Support Agreement"). The 1996 Support
Agreement is identical to the 1994 Support Agreement except that the 1996
Support Agreement requires 100% ownership of the Company by Alco, and limits
the leverage to a maximum of 6 to 1 (see "Relationship with Alco Standard
Corporation"). In addition, the Company and Alco are currently parties to a
3
<PAGE>
maintenance agreement dated August 15, 1991 (the "1991 Maintenance Agreement")
and an operating agreement dated August 15, 1991, (the "1991 Operating
Agreement") (collectively, the "1991 Maintenance and Operating Agreements")
which require Alco to make payments to the Company, if necessary, to meet a
specified minimum fixed charge coverage ratio and a maximum debt-to-equity
ratio. In addition, the 1991 Operating Agreement requires the IKON dealers to
repurchase all defaulted lease contracts.
The Company has agreed not to amend the 1991 Maintenance and Operating
Agreements without the consent of certain lenders under loan agreements
scheduled to expire no later than August 1998. In September 1998, the Company
and Alco intend to terminate the 1991 Maintenance and Operating Agreements.
Although the IKON dealers are not subject to a repurchase obligation under the
terms of the 1996 Support Agreement (as they are under the 1991 Operating
Agreement), Alco and the Company presently intend to continue such repurchase
obligation. (See "Relationship with Alco Standard Corporation" below).
TYPES OF LEASES
The lease portfolio of the Company includes direct financing leases and
funded leases. Direct financing leases are contractual obligations between the
Company and the IKON customer and represent the majority of the Company's
lease portfolio. Funded leases are contractual obligations between the IKON
dealer and the IKON customer which have been financed by the Company.
Funded leases represented approximately 25% of the Company's leases as of
September 30, 1996. The IKON dealers have assigned to the Company, with full
recourse, their rights under the funded leases including the right to receive
lease and rental payments as well as a security interest in the related
equipment.
Direct financing leases and funded leases are structured as either tax
leases (from the Company's perspective) or conditional sales contracts,
depending on the customer's (or, for funded leases, the IKON dealer's) needs.
The customer (or the IKON dealer for funded leases) decides which of the two
structures is desired. Under either structure, the total cost of the equipment
to the customer (or to the IKON dealer) is substantially the same (assuming
the exercise of the purchase option).
Tax Leases
Tax leases represented 95% of the Company's total lease portfolio as of
September 30, 1996. The Company or the IKON dealer is considered to be the
owner of the equipment for tax purposes during the life of these leases and
receives the tax benefit associated with equipment depreciation. Tax leases
are structured with a fair market value purchase option. Generally, the
customer may return the equipment, continue to rent the equipment or purchase
the equipment for its fair market value at the end of the lease.
Each tax lease has a stated equipment residual value generally ranging from
0% to 10%. As of September 30, 1996, the average equipment residual value for
all leases in the Company's portfolio was 5.7%. Upon early termination of the
lease or at the normal end of the lease term, the Company charges the IKON
dealer for the stated residual position, if any, and the equipment is returned
to the IKON dealer. Any gain or loss on the equipment's residual value is
realized by the IKON dealer.
Conditional Sales Contracts
Conditional sales contracts account for the remaining 5% of the total leases
in the Company's portfolio. Under these arrangements, the customer is
considered to be the owner of the equipment for tax purposes and would receive
any tax benefit associated with equipment depreciation. Each conditional sales
contract has a stated residual value of 0%. Conditional sales contracts are
customarily structured with higher monthly lease payments than the tax leases
and have a $1 purchase option for the equipment at lease-end. Thus, because of
the higher monthly payments, the cost of the equipment to the customer (or,
for funded leases, to the IKON dealer) under a conditional sales contract is
substantially the same as under a tax lease (assuming the exercise of the
purchase option). Although the customer has the option of returning or
continuing to rent the equipment at lease-end, the customer almost always
exercises the $1 purchase option at the end of the lease term.
Leased Equipment
The Company also offers from time to time financing of the cost of office
equipment that the IKON dealers maintain in inventory for short-term rental to
customers. This category of leased equipment also includes
4
<PAGE>
equipment currently rented to customers where the rental agreements are
considered to be cancelable by the customer, based on the terms and conditions
of the rental contracts in effect. Under operating guidelines in effect, any
equipment not physically on rental to customers for a period exceeding 120
continuous days must be repurchased by the IKON dealers at its current book
value.
RELATIONSHIP WITH ALCO STANDARD CORPORATION
The Company, as the captive finance subsidiary of Alco, derives its customer
base from the business sourced by its affiliates within Alco (the IKON
dealers). There are several agreements and programs between the Company and
Alco, which are described below.
Support Agreements
The Company and Alco are parties to an agreement (the "1996 Support
Agreement") dated as of October 22, 1996. The Company's agreements with
noteholders and other lenders generally include covenants that it will not
amend the 1996 Support Agreement except under certain circumstances. (See
"1996 Support Agreement", below).
The Company and Alco were previously parties to the 1994 Support Agreement,
dated as of June 1, 1994, which contained terms identical to those contained
in the 1996 Support Agreement, except that the 1994 Support Agreement did not
contain the requirement that Alco maintain 100% of ownership of the Company
and did not contain the requirement that Alco obtain the consent of two-thirds
of the debtholders as a condition to assignment. Except for these two new
requirements, which are included in the 1996 Support Agreement, all of the
other provisions of the 1994 Support Agreement remain in effect in the 1996
Support Agreement. The 1994 Support Agreement was replaced by the 1996 Support
Agreement after the Company obtained in writing from Moody's Investors
Services and Standard & Poor's Rating Group confirmation that the Company's
debt rating would not be downgraded as a result of the foregoing new
requirements.
The Company and Alco are also parties to a Maintenance Agreement dated
August 15, 1991 and an Operating Agreement dated August 15, 1991 (the "1991
Maintenance and Operating Agreements"), which are further described below. The
Company has generally agreed with its lenders pursuant to loan agreements
entered into before June 1, 1994 that it will not amend the 1991 Maintenance
and Operating Agreements without each such lender's consent. Such loan
agreements will mature over the next several years, with the latest maturity
occurring in August 1998, at which time the Company and Alco intend to
terminate the 1991 Maintenance and Operating Agreements.
1. THE 1996 SUPPORT AGREEMENT
The 1996 Support Agreement between the Company and Alco provides that Alco
will make a cash payment to the Company (or an investment in the form of
equity or subordinated notes) as needed to comply with two requirements: i)
that the Company will maintain a pre-tax interest coverage ratio (income
before interest expense and taxes divided by interest expense) so that the
Company's pre-tax income plus interest expense will not be less than 1.25
times interest expense, and ii) that the Company will maintain a minimum
tangible net worth of $1.00. The agreement also provides that Alco will
maintain 100% direct or indirect ownership of the Company.
Pursuant to the indentures and other documentation governing debt incurred
after June 1, 1994, the Company is not permitted to amend or terminate the
1996 Support Agreement unless: (a) all of the outstanding debt of the Company
is repaid, or (b) approval of two-thirds of the debtholders (not including
Alco, the Company, or their affiliates) for all amounts outstanding covered by
the 1996 Support Agreement (generally, all debt entered into after June 1,
1994) is obtained.
Unlike the 1991 Operating Agreement, which is further described on page 6,
the 1996 Support Agreement does not contain a requirement that the IKON
dealers repurchase all defaulted lease contracts. The 1996 Support Agreement
does not include the repurchase requirement because the Company and Alco wish
to preserve the flexibility, on a prospective basis, to allow the credit risk
for defaulted contracts to remain with the Company. In such event, the credit
decision and reserves for defaulted contracts would become the responsibility
of the
5
<PAGE>
Company. If the Company were responsible for the credit risk and costs
associated with defaulted contracts, the Company would increase its current
lease rates in order to offset these increased costs. Consequently, the
Company believes that the impact of any future shift of the credit risk from
the IKON dealers to the Company would not be material to the Company's future
results of operations. The Company's (and Alco's) present intention, however,
is to continue the repurchase arrangement with the IKON dealers as currently
in effect.
2. THE 1991 MAINTENANCE AND OPERATING AGREEMENTS
The 1991 Maintenance Agreement provides that Alco will make a cash payment
to the Company (or an investment in the form of equity or subordinated notes)
as needed in amounts sufficient to meet a specified minimum fixed charge
coverage ratio and a maximum debt-to-equity ratio. Earnings before fixed
charges (primarily interest) must be at least 1.3 times fixed charges. The
Company has satisfied this requirement independently without requiring payment
or an investment from Alco. The Company's debt-to-equity ratio is limited to 6
to 1 according to the terms of the Maintenance Agreement. The Company must
also maintain minimum tangible net worth of not less than $1.00.
Pursuant to the terms of the 1991 Maintenance Agreement, the Company
received capital contributions from Alco of $30 million in 1996, $29 million
in 1995 and $8.3 million in 1994.
The 1991 Operating Agreement requires the IKON dealers to repurchase all
defaulted lease contracts. A default is defined in the 1991 Operating
Agreement as any receivable which is past due for 120 days or is otherwise
reasonably declared uncollectible by the Company. The repurchase amount is
identified as the net book value of a lease on the default date.
The 1991 Maintenance and Operating Agreements provide for modification or
amendment with both parties' consent and provide for cancellation by either
party upon 90 days written notice. The Company has generally agreed with its
lenders in loan agreements entered into prior to June 1, 1994, however, that
it will not amend the 1991 Maintenance and Operating Agreements without each
such lender's consent. Such loan agreements are scheduled to expire over the
next several years, with the latest maturity occurring in August 1998, at
which time the Company and Alco intend to terminate the 1991 Maintenance and
Operating Agreements.
Cash Management Program
The Company participates in Alco's domestic Cash Management program. Under
this program, the Company has an account with Alco through which cash in
excess of current operating requirements is temporarily placed on deposit.
Similarly, amounts are periodically borrowed from Alco. Interest is paid (or
charged) by Alco on these amounts. The Company was in a net deposit condition
with Alco during 1996 and 1995 and earned interest income of approximately
$2.9 million and $1.5 million, respectively. The Company was a net borrower in
1994, incurring net interest costs of $496,000 under this program.
Management Fee
The Company is charged a management fee by Alco to cover certain corporate
overhead expenses. These charges are included as general and administrative
expenses in the Company's financial statements and amounted to $552,000 in
1996 and 1995, and $396,000 in 1994.
Federal Income Tax Allocation Agreement
Alco and the Company participate in a Federal Income Tax Allocation
Agreement dated June 30, 1989, in which the Company consents to the filing of
consolidated federal income tax returns with Alco. Alco agrees to collect from
or pay to the Company its allocated share of any consolidated federal income
tax liability or refund applicable to any period for which the Company is
included in Alco's consolidated federal income tax return.
6
<PAGE>
Interest on Income Tax Deferrals
The Company provides substantial tax benefits to Alco through the use of the
installment sales method on equipment financed through the Company. Taxes
deferred by Alco due to this tax treatment totaled a cumulative amount of
approximately $235 million at the end of fiscal 1996. Alco pays the Company
interest on the portion of these tax deferrals (approximately $157 million at
the end of fiscal 1996) which arise from tax deferrals on intercompany sales.
In fiscal 1996 and 1995, interest was earned by the Company at a rate
consistent with the Company's weighted average outside borrowing rate of
interest. Under this method, the Company earned interest at an average rate of
6.8% in 1996 totaling $8.7 million and at an average rate of 6.7% in 1995
totaling $5.9 million. In fiscal 1994, interest was earned by the Company at a
rate of 6.0% and totaled $3.8 million.
Lease Bonus Program
The Company sponsored a lease bonus subsidy program which provided
incentives to IKON dealers when IKON customers lease equipment from the
Company. Payments under this program can be reduced or eliminated at any time
by joint agreement of the Company and Alco. During fiscal 1996, 1995 and 1994,
bonus payments were calculated on the basis of the IKON dealer's increase in
the percentage of equipment sales leased through the Company, and totaled $6.9
million, $7.3 million and $8.8 million, respectively. Effective October 1,
1996, the Company changed the focus of the bonus subsidy program to reimburse
IKON for third party lease payoffs incurred when buying out the equipment
leases of a competitor.
Credit Policies and Loss Experience
Each IKON dealer is responsible for developing and maintaining a formal
credit policy that governs credit practices and procedures. In addition, the
credit practices of the individual IKON dealers must be consistent with Alco's
overall policies for leasing and credit approval.
The Company presently has full recourse to the IKON dealer for any lease
which becomes past due by 120 days or more. Excluding the effect of
recoveries, the gross value of leases charged back to IKON dealers was $29.9
million in fiscal 1996, $20.9 million in fiscal 1995 and $14.4 million in
fiscal 1994. For fiscal 1996, 1995 and 1994, the gross chargebacks represented
2.3%, 2.4% and 2.7%, respectively, of the average portfolio balances during
the year.
Reserves for credit losses are maintained by the IKON dealers and IKON. On a
monthly basis, the Company reports the respective net investment value of the
lease portfolio to each IKON dealer so the IKON dealer can properly accrue the
credit loss reserve balance. In accordance with IKON policy, each IKON dealer
must maintain aggregate reserves of at least 3% of the IKON dealer's total
portfolio (including $275 million of net leases sold under an asset
securitization agreement being serviced by the Company). Reserves maintained
for fiscal 1996 and 1995, as a percentage of the leasing portfolio at fiscal
year end, were 4.6% and 4.3%, respectively.
Delinquencies remained at a consistent level for fiscal 1996 and 1995.
During this two-year period, accounts classified as current (less than 30 days
past due) ranged from 86% to 89% of the total portfolio balance on a monthly
basis. The aging of the Company's lease portfolio receivables at September 30,
1996 (excluding $275 million of net lease receivables sold under an asset
securitization agreement being serviced by the Company) was as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Current........................................................ $1,304.3 86.5%
Over 30 days................................................... 107.1 7.1%
Over 60 days................................................... 54.3 3.6%
Over 90 days................................................... 42.2 2.8%
-------- ------
$1,507.9 100.0%
======
Less:
Unearned interest............................................ (257.3)
--------
$1,250.6
========
</TABLE>
7
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FUNDING
Prior to July 1994, the majority of the Company's debt funding was through
privately placed term notes with banks and an insurance company. The Company
follows a policy of matching the maturities of borrowed funds to the average
life of the leases being financed in order to minimize the impact of interest
rate changes on its operations. All notes carry terms of one to three years
and are either at fixed interest rates or have had the interest rate risk
eliminated through interest rate swap contracts. (See Note 5 to the Company's
Financial Statements on page F-8 hereof). Covenants in the note agreements
entered into before July 1994 include a minimum fixed charge coverage
requirement of 1.3 times fixed charges and a maximum debt-to-equity ratio of 6
to 1. Also, there is a covenant in each such note agreement which requires
each lender's consent to any amendment to the 1991 Maintenance and Operating
Agreements (see page 5 hereof for a description of the 1991 Maintenance and
Operating Agreements). As of September 30, 1996, the amounts outstanding under
these note agreements totaled $58 million.
Prior to July 1994, the only other funding sources for the Company were
capital contributions and advances received from Alco. As of September 30,
1996, the Company's total shareholder's equity was $191.4 million, of which
$112.4 million consisted of contributed capital.
Effective July 1, 1994, the Company commenced a medium term note program of
$500 million which was fully subscribed as of July 1995. On June 30, 1995, the
Company increased the amount available to be offered under this medium term
note program by $1 billion or the equivalent thereof in foreign currency. The
program allows the Company to offer to the public from time to time medium
term notes having an aggregate initial offering price not exceeding the total
program amount. These notes are offered at varying maturities of nine months
or more from their dates of issue and may be subject to redemption at the
option of the Company or repayment at the option of the holder, in whole or in
part, prior to the maturity date in conjunction with meeting specified
provisions. Interest rates are determined based on market conditions at the
time of issuance. As of September 30, 1996, $969.9 million of medium term
notes were outstanding with a weighted average interest rate of 6.8%.
In September 1996, the Company entered into a new agreement, which expires
in September 1997, to sell, under an asset securitization program, an
undivided ownership interest in $150 million of eligible direct financing
lease receivables. This new agreement is in addition to an existing $125
million asset securitization agreement dated September 23, 1994, which expires
in March 1997, but which is expected to be extended. Both agreements contain
limited recourse provisions which require the Company to assign an additional
undivided interest in leases to cover any potential losses to the purchaser
due to uncollectible leases. As collections reduce previously sold interests,
new leases can be sold up to the agreement amount. The weighted average
interest rate on the 1994 agreement, which is partially fixed by two interest
rate swap agreements totaling a principal/notional amount of $60 million, is
6.7% at September 30, 1996. In fiscal 1996, the Company sold an additional
$52.7 million in leases, replacing leases liquidated during the year, under
the 1994 agreement and $150 million in leases under the 1996 agreement and
recognized pretax gains of $5.7 million. Under the terms of the sales
agreements, the Company will continue to service the lease portfolios sold.
EMPLOYEES
At September 30, 1996, the Company had approximately 212 employees. Employee
relations are considered to be excellent.
COMPETITION AND GOVERNMENT REGULATION
The finance business in which the Company is engaged is highly competitive.
Competitors include leasing companies, commercial finance companies,
commercial banks and other financial institutions.
The Company competes primarily on the basis of financing rates, customer
convenience and quality customer service. IKON dealers offer financing by the
Company at the time equipment is leased or sold to the
8
<PAGE>
customer, reducing the likelihood that the customer will contact outside
funding sources. There is a communications network between the Company and the
IKON dealers to allow prompt transmittal of customer and product information.
Contract documentation is straightforward and clearly written, so that
financings are completed quickly and to the customer's satisfaction. Finally,
both the Company and the IKON dealers are firmly committed to providing
excellent customer service over the duration of the contract.
Certain states have enacted retail installment sales or installment loan
statutes relating to consumer credit, the terms of which vary from state to
state. The Company does not generally extend consumer credit as defined in
those statutes.
The financing activities of the Company are dependent upon sales or leases
of office equipment by the IKON dealers, who are subject to substantial
competition by both independent office equipment dealers and the direct sales
forces of office equipment manufacturers. IKON is the largest network of
independent copier and office equipment dealers in North America and in the
United Kingdom, and represents the only independent distribution network with
national scope. IKON dealers compete on the basis of price, quality of service
and product performance.
ITEM 2. PROPERTIES
The Company's operations are located in Macon, Georgia and occupy
approximately 37,000 square feet. The Company uses this facility for normal
operating activities such as lease processing, customer service, billing and
collections. Certain specialized services (such as legal, accounting,
treasury, tax and audit services) are also performed for the Company at Alco's
corporate headquarters located in Valley Forge, Pennsylvania. The Company's
facilities are deemed adequate by management to conduct the Company's
business. The Company has begun construction on a facility adjacent to the
current facility which will occupy 60,000 square feet. The Company anticipates
completion in May 1997.
Any additional information called for by this item has been omitted pursuant
to General Instruction J(2)(d).
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party (or to which any of its property is subject). To the Company's
knowledge, no material legal proceedings are contemplated by governmental
authorities against the Company or its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No response to this item is required.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All outstanding shares of the Company's common stock are currently owned by
IKON Office Solutions, Inc., which is a subsidiary of Alco. Therefore, there
is no market for the Company's common stock. No dividends were paid in fiscal
1996 or 1995, however, the Company paid a dividend of $7 million to its parent
in the fourth quarter of fiscal 1994. The Company and Alco will, from time to
time, determine the appropriate capitalization for the Company, which will, in
part, affect any future payment of dividends to Alco or capital contributions
to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item has been omitted pursuant to General
Instruction J(2)(a).
9
<PAGE>
ITEM 7. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pursuant to General Instruction J(2)(a) of Form 10-K, the following analysis
of the results of operations is presented in lieu of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
FISCAL 1996 COMPARED WITH FISCAL 1995
Comparative summarized results of operations for the fiscal years ended
September 30, 1996 and 1995 are set forth in the table below. This table also
shows the increase in the dollar amounts of major revenue and expense items
between periods, as well as the related percentage change.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED SEPTEMBER 30 INCREASE (DECREASE)
------------------ --------------------
1996 1995 AMOUNT PERCENT
--------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Lease finance income................ $ 121,148 $ 76,528 $ 44,620 58.3%
Rental income....................... 14,607 7,029 7,578 107.8%
Interest on Alco income tax
deferral........................... 8,677 5,933 2,744 46.2%
Other income........................ 6,692 4,618 2,074 44.9%
--------- -------- ----------
151,124 94,108 57,016 60.6%
Expenses:
Interest............................ 60,255 36,400 23,855 65.5%
General and administrative.......... 41,927 26,566 15,361 57.8%
--------- -------- ----------
102,182 62,966 39,216 62.3%
Gain on sale of lease receivables..... 5,720 1,194 4,526 379.1%
--------- -------- ----------
Income before taxes................... 54,662 32,336 22,326 69.0%
Provision for income taxes............ 23,150 14,476 8,674 59.9%
--------- -------- ----------
Net income............................ $ 31,512 $ 17,860 $ 13,652 76.4%
========= ======== ==========
</TABLE>
Revenues
Total revenues increased $57.0 million or 60.6% in fiscal 1996 from fiscal
1995. Approximately 78.3% or $44.6 million of this increase in revenues was a
result of increased lease finance income due to growth in the portfolio of
direct financing and funded leases. During the twelve-month period from
October 1, 1995 to September 30, 1996, the portfolio grew at a 43.5% rate, net
of lease receivables that were sold in asset securitization transactions.
In October 1994, the Company began offering an operating lease product to
the IKON dealer network, whereby office equipment placed on long term rental
to customers could be funded through the Company. In preceding years, this
equipment was funded by the respective IKON dealer instead of the leasing
Company. During fiscal 1996 and 1995, IKON Capital funded $27.3 million and
$33.6 million, respectively. Operating leases contributed $14.6 million in
rental income to total revenues during fiscal 1996 compared to $7.0 million in
1995. The increase in revenue is attributable to 1996 representing a full year
of income on the rental assets.
In both fiscal 1996 and 1995, the Company earned interest income on the
deferred taxes on the IKON dealers books resulting from leases funded through
the Company at a rate consistent with the Company's weighted average outside
borrowing rate of interest. The Company's average rate was 6.8% for fiscal
1996
10
<PAGE>
compared to 6.7% for fiscal 1995. In addition, the deferred tax base upon
which these payments are calculated increased 40.3% to $157.0 million at
September 30, 1996 from $111.9 million at September 30, 1995. As a result of
the increased deferred tax balances, interest income on deferred taxes rose
$2.7 million or 46.2% when comparing fiscal 1996 to fiscal 1995.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged in fiscal
1996 from fiscal 1995. The growth in other income from fees is primarily due
to the increased size of the lease portfolio upon which these fees are based.
Overall, fee income from these sources grew by $2.1 million or 44.9%, when
comparing fiscal 1996 to fiscal 1995.
Expenses
During fiscal 1996, average borrowings to finance the lease portfolio
increased by 55.9%, to $929.1 million. The Company paid a weighted average
interest rate on all borrowings for fiscal 1996 of 6.8% compared to 6.7% for
fiscal 1995. Due to the combined effect of increased borrowings and an
increase in the Company's overall weighted average interest rate, interest
expense grew by $23.9 million or 65.5%, when comparing fiscal 1996 to fiscal
1995. At September 30, 1996, the Company's debt to equity ratio, including
intercompany amounts owed to Alco, was 5.5 to 1.
During June 1995, the Company completed the filing of a medium term note
registration in the amount of $1 billion, designed to meet the Company's
anticipated portfolio funding needs into fiscal 1997. This new note program
was structured similar to the original $500 million medium term note program
that was filed in June 1994 which was used to meet the Company's portfolio
funding needs during the period July 1994 to June 1995. The medium term note
program allows for the issuance of medium term notes in the public markets
with maturities ranging from nine months up to ten years, through four
nationally recognized investment firms. At September 30, 1996, $969.9 million
of medium term notes were outstanding under these two programs with a weighted
average interest rate of 6.8%.
At September 30, 1996, the Company had outstanding notes payable to banks of
$58 million, with a weighted average rate of 6.0%, compared to $173 million at
September 30, 1995.
Total general and administrative expenses grew by $15.4 million or 57.8%,
when comparing fiscal 1996 to fiscal 1995. However, the general and
administrative expense category for fiscal 1996 includes depreciation expense
on leased equipment totaling $13.4 million compared to $5.9 million in fiscal
1995. In addition, lease bonus subsidy payments to IKON dealers were
approximately $425,000 less in fiscal 1996 than in fiscal 1995, due to a
reduction in the bonus subsidy payout percentage.
Excluding the effects of the addition of approximately $7.5 million of
depreciation expense on operating leases in fiscal 1996 over fiscal 1995 and
the reduction of approximately $425,000 in lease bonus payments in fiscal 1996
from fiscal 1995, remaining general and administrative expenses grew
approximately $8.3 million or 62.5%, when comparing fiscal 1996 to fiscal
1995. This increase includes $1.9 million in expenses related to new leasing
software implemented in May 1996. Additionally, the company developed a lease
marketing network with costs of $1.0 million. After excluding these expenses,
general and administrative expenses grew $5.4 million or 40.4%.
Gain on Sale of Lease Receivables
In September 1996, the Company entered into an asset securitization
transaction whereby the Company sold an undivided ownership interest in an
additional $150 million in eligible direct financing lease receivables. This
agreement was structured as a revolving securitization so that as collections
reduce previously sold interests in this new pool of leases, additional leases
can be sold up to $150 million. The Company recognized a pretax gain of $4.5
million in fiscal 1996 on this agreement.
11
<PAGE>
Under the asset securitization program entered into in September 1994, the
Company sold an undivided ownership interest in $125 million of eligible
direct financing lease receivables. This agreement, which expires in March
1997 but is expected to be renewed, was also structured as a revolving
securitization. Under this program, new leases can be sold up to $125 million.
During fiscal 1996, collections reduced previously sold interests by
approximately $52.7 million. The Company sold an additional $52.7 million in
net eligible direct financing leases and recognized a pretax gain of $1.2
million.
Income Before Taxes
Income before taxes grew by $22.3 million or 69.0%, when comparing pretax
earnings for fiscal 1996 to fiscal 1995. This increase in income before taxes
was essentially the effect of higher earnings on a larger portfolio base,
supplemented by strong growth in interest income on deferred taxes and in
other income.
At the end of fiscal 1996, the Company entered into an additional $150
million asset securitization program and recognized a pretax gain on sale of
approximately $4.5 million during fiscal 1996 in addition to the $1.2 million
of 1996 pretax securitization gains related to the 1994 agreement. As
mentioned above, securitization gains in fiscal 1995 were approximately $1.2
million on a pretax basis. Excluding the effect of the securitization gains
from pretax income for both fiscal years 1996 and 1995, pretax income grew by
$17.8 million or 57.2% in fiscal 1996 from fiscal 1995.
Provision for Income Taxes
The approximate $8.7 million or 59.9% increase in income taxes in fiscal
1996 from fiscal 1995 is directly attributable to the higher net income before
taxes in fiscal 1996 as compared to fiscal 1995. During fiscal 1996, the
Company's effective income tax rate was 42.4%, as compared to 44.8% in fiscal
1995. Excluding the valuation adjustment recorded in fiscal 1995 relating to
certain stated deferred tax items, the 1995 effective tax rate would have been
42.8%.
FISCAL 1995 COMPARED WITH FISCAL 1994
Comparative summarized results of operations for the fiscal years ended
September 30, 1995 and 1994 are set forth in the table below. This table also
shows the increase in the dollar amounts of major revenue and expense items
between periods, as well as the related percentage change.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED SEPTEMBER 30 INCREASE (DECREASE)
------------------- ----------------------
1995 1994 AMOUNT PERCENT
--------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Lease finance income.............. $76,528 $61,297 $15,231 24.8%
Rental income..................... 7,029 7,029
Interest on Alco income tax
deferrals........................ 5,933 3,753 2,180 58.1
Other income...................... 4,618 3,061 1,557 50.9
--------- --------- ----------
94,108 68,111 25,997 38.2
Expenses:
Interest.......................... 36,400 25,559 10,841 42.4
General and administrative........ 26,566 20,829 5,737 27.5
--------- --------- ----------
62,966 46,388 16,578 35.7
--------- --------- ----------
Gain on sale of lease receivables... 1,194 3,702 (2,508) (67.7)
--------- --------- ----------
Income before income taxes and
cumulative effect of change in
accounting principle............... 32,336 25,425 6,911 27.2
Provision for income taxes.......... 14,476 9,794 4,682 47.8
--------- --------- ----------
Income before cumulative effect of
change in accounting principle..... 17,860 15,631 2,229 14.3
Cumulative effect of change in
accounting for income taxes........ 140 (140)
--------- --------- ----------
Net income.......................... $17,860 $15,771 $ 2,089 13.2
========= ========= ==========
</TABLE>
12
<PAGE>
Revenues
Total revenues increased $26 million or 38.2% in fiscal 1995 from fiscal
1994. Approximately 58.6% or $15.2 million of this increase in revenues was a
result of increased lease finance income due to growth in the portfolio of
direct financing and funded leases. During the twelve-month period from
October 1, 1994 to September 30, 1995, the portfolio grew at a 62.7% rate, net
of lease receivables that were sold in asset securitization transactions.
Effective October 1, 1994, the Company began offering a new operating lease
program to the IKON dealer network, whereby office equipment placed on rental
with a customer, with cancellable terms, could be funded through the Company
and rented back to the IKON dealer. In prior years, this equipment was funded
by the respective IKON dealer instead of the Company. At September 30, 1995,
equipment with a net book value of $25.2 million was leased under this
program. This new funding program contributed $7 million in rental income
during fiscal 1995.
Effective October 1, 1995, management decided to revert back to the prior
year strategy for funding this equipment where the majority of equipment, with
the exception of large transactions generally exceeding $250,000 in amount,
would once again be funded by the respective IKON dealer, instead of through
the Company.
During fiscal 1995, Alco changed the interest rate on deferred taxes, so
that the Company earns interest at a rate consistent with the Company's
weighted average outside borrowing rate of interest. This change resulted in
an average interest rate of 6.7% for fiscal 1995 compared to 6% for fiscal
1994. In addition, the deferred tax base upon which interest payments are
calculated increased 46.9% to $111.9 million at September 30, 1995 from $76.2
million at September 30, 1994. Due to the combined effect of the increased
rate of interest and the increased deferred tax balances, interest income on
deferred taxes rose $2.2 million or 58.1% when comparing fiscal 1995 to fiscal
1994.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged in fiscal
1995 from fiscal 1994. The growth in other income from fees is primarily due
to the increased size of the lease portfolio upon which these fees are based.
Overall, fee income from these sources grew by $1.6 million or 50.9%, when
comparing fiscal 1995 to fiscal 1994.
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
major banks and the issuance of medium term notes in the public markets grew
by 30.4%, to average borrowings of $596 million during fiscal 1995, from
average borrowings of $457 million during fiscal 1994. Due to the combined
effect of increased borrowing to fund the portfolio and an increase in the
Company's overall weighted average interest rate on all borrowings, interest
expense grew by $10.8 million or 42.4%, when comparing fiscal 1995 to fiscal
1994. For comparative purposes, the Company's combined weighted average
interest rate on all borrowings for fiscal 1995 was 6.7% as compared to 5.8%
for fiscal 1994. At September 30, 1995, the Company's debt to equity ratio,
including intercompany amounts due from Alco, was 5.8 to 1.
During June 1995, the Company completed the filing of a new medium term note
registration in the amount of $1 billion, designed to meet the Company's
anticipated portfolio funding needs over the next eighteen to twenty-four
months. This new note program was structured similar to the original $500
million medium term note program that was filed in June 1994, which was used
to meet the Company's portfolio funding needs during the period from July 1994
to June 1995. The new program allows for the issuance of medium term notes in
the public market with maturities of at least nine months, through four
nationally recognized investment firms. At September 30, 1995, $602 million of
medium term notes were outstanding under these two programs with a weighted
average interest rate of 7.0%.
13
<PAGE>
Loans through major banks declined by $157 million to $173 million
outstanding at September 30, 1995, from $330 million outstanding at September
30, 1994, at a weighted average rate of 5.6%.
Total general and administrative expenses grew by $5.7 million or 27.5%,
when comparing fiscal 1995 to fiscal 1994. However, the general and
administrative expense category for fiscal 1995 includes depreciation expense
on leased equipment totaling $5.9 million. There is no comparable depreciation
expense included in general and administrative expenses for fiscal 1994. In
addition, lease bonus subsidy payments to IKON dealers were approximately $1.5
million less in fiscal 1995 than in fiscal 1994, due to a reduction in the
bonus subsidy percentage.
Excluding the effects of the addition of approximately $5.9 million of
depreciation expense on operating leases in fiscal 1995 and the reduction of
approximately $1.5 million in lease bonus payments in fiscal 1995, remaining
general and administrative expenses grew approximately $1.3 million, when
comparing fiscal 1995 to fiscal 1994. There have been no significant changes
in the portfolio servicing costs of the Company in fiscal 1995 from fiscal
1994; therefore, the increase in general and administrative expenses between
these two fiscal years is a direct result of the growth of the lease service
portfolio.
Gain on Sale of Lease Receivables
Under an asset securitization program entered into in September 1994 the
Company sold an undivided ownership interest in $125 million of eligible
direct financing lease receivables. This agreement, which expires in March
1997, but is expected to be renewed, was structured as a revolving
securitization so that as collections reduce previously sold interests, new
leases can be sold up to $125 million. During fiscal 1995, collections reduced
previously sold interests by approximately $66.7 million. The Company sold an
additional $66.7 million in net eligible direct financing leases and
recognized gains of $1.2 million.
Income Before Taxes
Income before taxes grew by $6.9 million or 27.2%, when comparing pretax
earnings for fiscal 1995 to fiscal 1994. This increase in income before taxes
was essentially the effect of higher earnings on a larger portfolio base, that
was supplemented by strong growth in interest income on deferred taxes and in
other income. In addition, income before taxes was positively effected by a
slower growth rate in general and administrative expenses during fiscal 1995
than was experienced in fiscal 1994.
At the end of fiscal 1994, the Company entered into its existing $125
million asset securitization program and recognized a pretax gain on sale of
approximately $3.7 million during fiscal 1994. As mentioned above,
securitization gains in fiscal 1995 were approximately $1.2 million on a
pretax basis. Excluding the effect of the securitization gains from pretax
income for both fiscal years 1995 and 1994, pretax income grew by 43.4% in
fiscal 1995 from fiscal 1994.
Provision for Income Taxes
Approximately $3.6 million of the increase in income taxes in fiscal 1995
from fiscal 1994 is directly attributable to the higher net income before
taxes in fiscal 1995 as compared to fiscal 1994, while $1.1 million relates to
a valuation allowance recorded in fiscal 1995 for certain state deferred tax
items. During fiscal 1995, the Company's effective federal and state income
tax rate was 44.8%, as compared to 38.5% (excluding the cumulative effect
adjustment) in fiscal 1994. Excluding the valuation allowance adjustment, the
fiscal 1995 effective tax rate was 42.8%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of IKON Capital, Inc. are submitted herewith on
Pages F-1 through F-10 of this report.
14
<PAGE>
QUARTERLY DATA
The following table shows comparative summarized quarterly results for
fiscal 1996 and 1995.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Lease finance income............... $25,360 $28,180 $32,025 $35,583 $121,148
Interest expense................... 13,417 13,696 15,564 17,578 60,255
Income before income taxes......... 10,434 11,463 13,545 19,220(1) 54,662
Net income......................... 6,156 6,763 7,992 10,601(1) 31,512
1995
Lease finance income............... $16,183 $17,614 $20,051 $22,680 $ 76,528
Interest expense................... 7,051 8,149 9,752 11,448 36,400
Income before income taxes......... 6,907 7,120 8,377 9,932 32,336
Net income......................... 4,213 4,437 5,071 4,139 17,860
</TABLE>
- --------
(1) Includes $4.5 million gain on additional sale of lease receivables of $150
million.
Any additional information required by this item has been omitted pursuant
to General Instruction J(2)(a) of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
RICHARD P. MAIER, age 45, has been President of the Company since 1989. He
joined Alco (the Company's parent) in 1981 as Controller of the Alco
Automotive Group and was promoted to Division Controller of IKON Office
Solutions (which includes all of the IKON dealers) in 1983. He served as Vice
President of Acme Business Products (an IKON dealer) from 1984 to 1988 and
became Vice President of Alco Capital in 1988.
ROBERT M. KEARNS II, age 43, has been Vice President of the Company since
1993. He was appointed Senior Vice President and Chief Financial Officer of
IKON Office Solutions in October 1996. He was Vice President--Finance of IKON
from 1993 to 1996. From 1983 through 1993, Mr. Kearns was Vice President--
Finance of Copyrite, an IKON dealer located in Indianapolis, Indiana which was
acquired by Alco in 1988.
KURT E. DINKELACKER, age 43, was appointed the sole director of the Company
and President of IKON Office Solutions in 1995. He has also served as an
Executive Vice President of Alco since 1993. From 1993 to 1995, he was Chief
Financial Officer of Alco, and was Executive Vice President--Finance of IKON
Office Solutions from 1991 to 1993.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item has been omitted pursuant to General
Instruction J(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item has been omitted pursuant to General
Instruction J(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 hereof for information concerning the relationship between the
Company, Alco and the IKON dealers.
Any additional information required by this item has been omitted pursuant
to General Instruction J(2)(c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................... F-1
Balance Sheets at September 30, 1996 and 1995.......................... F-2
Statements of Income for Fiscal Years Ended September 30, 1996, 1995
and 1994.............................................................. F-3
Statements of Changes in Shareholder's Equity for the Fiscal Years
Ended September 30, 1996, 1995 and 1994............................... F-4
Statements of Cash Flows for Fiscal Years Ended September 30, 1996,
1995 and 1994......................................................... F-5
Notes to Financial Statements.......................................... F-6
</TABLE>
Financial Statements and Schedules other than those listed above are omitted
because the required information is included in the financial statements or
the notes thereto or because they are inapplicable.
16
<PAGE>
(b) Exhibits
<TABLE>
<C> <S>
3.1 Articles of Incorporation of the Company, filed on May 4, 1994 as
Exhibit 3.1 to the Company's Registration Statement on Form 10, are
incorporated herein by reference.
3.2 Bylaws of the Company, filed on May 4, 1994 as Exhibit 3.2 to the
Company's Registration Statement on Form 10, are incorporated herein by
reference.
4.1 Form of Fixed Rate Note and Floating Rate Note with respect to the
Company's Medium-Term Note Program, filed as Exhibit 4 to the Company's
Form 10-Q for the fiscal quarter ended June 30, 1994, is incorporated
herein by reference.
4.2 Pursuant to Regulation S-K item 601 (b)(4)(iii), the Company agrees to
furnish to the Commission, upon request, a copy of instruments defining
the rights of holders of long-term debt of the Company.
10.1 Support Agreement, dated as of October 22, 1996, between the Company and
Alco Standard Corporation, filed as Exhibit 10.4 to the Company's Form
8-K dated November 12, 1996, is incorporated herein by reference.
10.2 Receivables Transfer Agreement dated as of September 30, 1996 among IKON
Funding, Inc., IKON Capital, Inc., Old Line Funding Corp. and Royal Bank
of Canada, filed as Exhibit 4.1 to Alco Standard Corporation's Form 10-K
for the fiscal year ended September 30, 1996, is incorporated herein by
reference.
10.3 Transfer Agreement dated as of September 30, 1996, filed as Exhibit 4.3
to Alco Standard Corporation's Form 10-K for the fiscal year ended
September 30, 1996, is incorporated herein by reference.
10.4 Indenture dated as of July 1, 1995 between the Company and Chemical
Bank, N.A., as Trustee, filed as Exhibit 10.23 to Alco Standard
Corporation's Form 10-K for the fiscal year ended September 30, 1995, is
incorporated herein by reference.
10.5 Distribution Agreement dated as of June 30, 1995 between the Company and
various distribution agents, filed as Exhibit 10.21 to Alco Standard
Corporation's 10-K for the fiscal year ended September 30, 1995, is
incorporated herein by reference.
10.6 Receivables Transfer Agreement dated September 23, 1994, portions of
which contain confidential material, filed as Exhibit 10.21 to Alco
Standard Corporation's Form 10-K/A for the fiscal year ended September
30, 1994, filed on March 17, 1995, is incorporated herein by reference.
First Amendment dated as of September 15, 1995 and Second Amendment
dated as of March 15, 1996 to Receivables Transfer Agreement, filed as
Exhibit 10.20 to Alco Standard Corporation's Report on Form 10-Q for the
quarter ended March 31, 1996, are incorporated herein by reference.
10.7 Indenture dated as of July 1, 1994 between the Company and Nations Bank,
N.A., as Trustee, filed as Exhibit 4 to the Company's Registration
Statement No. 33-53779 on Form S-3, is incorporated herein by reference.
10.8 Distribution Agreement dated July 1, 1994, filed as Exhibit 1 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1994 is
incorporated herein by reference.
10.9 Federal Income Tax Allocation Agreement, filed on May 4, 1994 as Exhibit
10.1 to the Company's Registration Statement on Form 10, is incorporated
herein by reference.
10.10 Maintenance Agreement, dated as of August 15, 1991, between the Company
and Alco Standard Corporation, filed on May 4, 1994 as Exhibit 10.2 to
the Company's Registration Statement on Form 10, is incorporated herein
by reference.
10.11 Operating Agreement, dated as of August 15, 1991, between the Company
and Alco Standard Corporation, filed on May 4, 1994 as Exhibit 10.3 to
the Company's Registration Statement on Form 10, is incorporated herein
by reference.
12 Ratio of Earnings to Fixed Charges
23 Auditors' Consent
24 Powers of Attorney; certified resolution re: Powers of Attorney
27 Financial Data Schedule
</TABLE>
17
<PAGE>
(c) Reports on Form 8-K.
On August 2, 1996, the Company filed a Current Report on Form 8-K to file
under Item 5 a press release issued by its parent, Alco Standard Corporation,
describing the long-term growth goals of IKON and Unisource as presented at an
investors' conference and describing the expected capitalization and dividend
policy of Unisource and IKON after the Unisource spin-off.
On November 12, 1996, the Company filed a Current Report on Form 8-K to file
under Item 5 the 1996 Support Agreement between Alco Standard Corporation and
the Company and to report that Alco Standard Corporation had declared a
special dividend consisting of 100% of the common stock of Unisource
Worldwide, Inc., payable on December 31, 1996 to shareholders of record of
Alco common stock on December 13, 1996.
18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Alco Standard Corporation
We have audited the accompanying balance sheets of IKON Capital, Inc. (a
wholly-owned subsidiary of Alco Standard Corporation) as of September 30, 1996
and 1995, and the related statements of income, changes in shareholder's
equity, and cash flows for each of the three years in the period ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IKON Capital, Inc. at
September 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
_____________________________________
Ernst & Young LLP
Philadelphia, Pennsylvania
October 16, 1996
F-1
<PAGE>
IKON CAPITAL INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1995
---------- --------
<S> <C> <C>
ASSETS
Investments in leases (notes 3 and 4):
Direct financing leases.................................... $1,140,851 $824,876
Less: Unearned income...................................... (203,459) (132,428)
---------- --------
937,392 692,448
Funded leases, net......................................... 313,250 178,948
---------- --------
1,250,642 871,396
Accounts receivable.......................................... 48,334 26,647
Due from Alco Standard Corporation (note 3).................. -- 26,577
Prepaid expenses and other assets............................ 15,582 7,648
Leased equipment--Operating rentals at cost, less accumulated
depreciation of 1996--$17,624; 1995-- $5,912................ 31,341 25,247
Property and equipment at cost, less accumulated depreciation
of: 1996--$2,536; 1995--$1,869 (note 2)..................... 6,889 4,660
---------- --------
Total assets............................................. $1,352,788 $962,175
========== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses...................... $ 42,538 $ 43,080
Accrued interest........................................... 20,870 12,549
Due to Alco Standard Corporation (note 3).................. 24,330 --
Notes payable to Banks (note 5)............................ 58,000 173,000
Medium Term Notes (note 5)................................. 969,900 602,000
Deferred income taxes (note 7)............................. 45,750 1,658
---------- --------
Total liabilities........................................ 1,161,388 832,287
Shareholder's equity:
Common Stock--$.01 par value, 1,000 shares authorized,
issued, and outstanding
Contributed capital........................................ 112,415 82,415
Retained earnings.......................................... 78,985 47,473
---------- --------
Total shareholder's equity............................... 191,400 129,888
---------- --------
Total liabilities and shareholder's equity................... $1,352,788 $962,175
========== ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
IKON CAPITAL, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30
-------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Lease finance income (note 2)..................... $121,148 $76,528 $61,297
Rental income..................................... 14,607 7,029 --
Interest on Alco income tax deferrals (note 3).... 8,677 5,933 3,753
Other income...................................... 6,692 4,618 3,061
-------- ------- -------
151,124 94,108 68,111
Expenses:
Interest (note 3)................................. 60,255 36,400 25,559
General and administrative ....................... 41,927 26,566 20,829
-------- ------- -------
102,182 62,966 46,388
Gain on sale of lease receivables (note 4).......... 5,720 1,194 3,702
-------- ------- -------
Income before income taxes and cumulative effect of
change in accounting principle..................... 54,662 32,336 25,425
Provision for income taxes (note 7):
Current........................................... (20,797) 9,675 16,617
Deferred.......................................... 43,947 4,801 (6,823)
-------- ------- -------
23,150 14,476 9,794
-------- ------- -------
Income before cumulative effect of change in
accounting principle............................... 31,512 17,860 15,631
Cumulative effect of change in accounting for income
taxes (note 7)..................................... -- -- 140
-------- ------- -------
Net income...................................... $ 31,512 $17,860 $15,771
======== ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
IKON CAPITAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- -------- --------
<S> <C> <C> <C> <C>
Balance at October 1, 1993................ $ $ 45,115 $20,842 $ 65,957
Net income................................ 15,771 15,771
Capital contribution from Alco............ 8,300 8,300
Dividend paid to Alco--$7.00 per share.... (7,000) (7,000)
--- -------- ------- --------
Balance at September 30, 1994............. 53,415 29,613 83,028
Net income................................ 17,860 17,860
Capital contributions from Alco........... 29,000 29,000
--- -------- ------- --------
Balance at September 30, 1995............. 82,415 47,473 129,888
Net income................................ 31,512 31,512
Capital contributions from Alco........... 30,000 30,000
--- -------- ------- --------
Balance at September 30, 1996............. $ * $112,415 $78,985 $191,400
=== ======== ======= ========
</TABLE>
- --------
* Amount is less than one thousand dollars.
See accompanying notes.
F-4
<PAGE>
IKON CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30
-----------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income......................... $ 31,512 $ 17,860 $ 15,771
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.... 14,029 6,470 368
Cumulative effect of change in
accounting principle............ -- -- (140)
Provision for deferred taxes..... 43,947 4,801 (6,823)
Gain on sale of lease
receivables..................... (5,720) (1,194) (3,702)
Changes in operating assets and
liabilities:
Accounts receivable............ (21,687) (8,947) (7,837)
Prepaid expenses and other
assets........................ (2,214) (1,770) (873)
Accounts payable and accrued
expenses...................... (397) 13,451 16,547
Accrued interest............... 8,321 7,207 5
--------- -------- --------
Net cash provided by operating
activities........................ 67,791 37,878 13,316
--------- -------- --------
Investing activities
Purchases of equipment for
rental, net..................... (19,456) (31,159) --
Purchases of property and
equipment, net.................. (2,896) (1,800) (3,109)
Direct financing leases:
Additions........................ (883,887) (622,855) (396,218)
Cancellations.................... 145,326 100,397 58,946
Collections...................... 290,904 195,009 176,092
Proceeds from sale............... 202,712 66,677 125,000
Funded leases:
Additions........................ (268,368) (142,949) (73,791)
Cancellations.................... 35,587 23,042 10,978
Collections...................... 98,480 44,756 35,515
--------- -------- --------
Net cash used by investing
activities........................ (401,598) (368,882) (66,587)
--------- -------- --------
Financing activities
Proceeds from bank borrowings.... 60,000 25,000 148,000
Payments on bank borrowings...... (175,000) (182,000) (213,000)
Proceeds from issuance of medium
term notes...................... 397,900 497,000 105,000
Payments on medium term notes.... (30,000) -- --
Contributed capital.............. 30,000 29,000 8,300
Dividends paid................... -- -- (7,000)
--------- -------- --------
Net cash provided by financing
activities........................ 282,900 369,000 41,300
--------- -------- --------
(Decrease) increase in amounts due
from Alco......................... (50,907) 37,996 (11,971)
Due from (to) Alco at beginning of
period............................ 26,577 (11,419) 552
--------- -------- --------
Due (to) from Alco at end of
period............................ $ (24,330) $ 26,577 $(11,419)
========= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
IKON Capital, Inc. (the "Company"), an indirect wholly-owned subsidiary of
Alco Standard Corporation ("Alco"), is engaged in the business of arranging
lease financing exclusively for office equipment marketed by IKON Office
Solutions ("IKON") dealers, which sell and service copier equipment and
facsimile machines.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
notes. Actual results could differ from those estimates and assumptions.
Revenue Recognition
Unearned lease finance income is amortized into revenue using the effective
interest method over the term of the lease agreements or non-cancelable rental
contracts.
Property and Equipment
Property and equipment, including leased equipment, is carried on the basis
of cost. Depreciation is principally computed using the straight-line method
over the estimated useful lives of the assets.
Income Taxes
The Company's deferred tax expense and the related liability are primarily
the result of the difference between the financial statement and income tax
treatment of direct financing leases.
Fair Value Disclosures
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the Company has computed and disclosed the fair value of its
notes payable and interest rate swaps (Note 5).
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Pending Accounting Change
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which establishes accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a financial components
approach that focuses on control. SFAS No. 125 is effective for
F-6
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The Company does not believe the effect of
adoption will be material.
Interest Rate Swap Agreements
The Company has entered into several interest rate swap agreements as a
means of managing its interest rate exposure. These agreements have the effect
of converting certain of the Company's variable rate obligations to fixed rate
obligations. Net amounts paid or received are reflected as adjustments to
interest expense.
3. AGREEMENTS BETWEEN IKON CAPITAL AND ALCO
Cash Management Program
The Company participates in Alco's domestic cash management program. Under
this program, the Company has an account with Alco wherein cash temporarily in
excess of current operating requirements earns interest at rates established
by Alco. Similarly, amounts are periodically borrowed from Alco, with interest
charged at market rates on borrowed funds. The Company was in a net deposit
position with Alco during 1996 and 1995 and earned interest income of
$2,870,000 and $1,545,000 respectively (included in interest expense). The
Company was a net borrower during fiscal year 1994 and incurred net interest
costs of $496,000 under this program. The Company considers its account with
Alco to represent its cash balance. Accordingly, the accompanying Statements
of Cash Flows present the changes in the caption "Due from (to) Alco".
Management Fee
Included in general and administrative expenses are corporate overhead
expenses charged by Alco of $552,000 in fiscal years 1996 and 1995 and
$396,000 in fiscal year 1994. These corporate charges represent management's
estimate of costs incurred by Alco on behalf of IKON Capital.
Interest on Alco Income Tax Deferrals
The Company charges Alco interest on Alco's income tax deferrals associated
with the Company's leasing transactions. Such charges were calculated at 6.8%
in 1996, 6.7% in 1995 and 6% in 1994.
The 1991 Maintenance and Operating Agreements
The Maintenance Agreement between the Company and Alco provides that Alco
will pay fees and make capital contributions to the Company in amounts
sufficient to meet the restrictive financial covenants included in the
Company's loan agreements (Note 5).
In the event of default of any lease on equipment purchased by the Company
from IKON dealers, the Operating Agreement requires the IKON dealer to
repurchase the equipment at the net investment value of the lease on the
default date. Default is defined by the Operating Agreement as any receivable
becoming 120 days past due or otherwise being reasonably declared
uncollectible by the Company. At September 30, 1996, 1995 and 1994, all of the
Company's accounts receivable and direct financing leases, including residual
values, were subject to such repurchase terms. In view of the foregoing terms
of the Operating Agreement, the Company has made no provision in the
accompanying financial statements for uncollectible receivables.
The 1996 Support Agreement
The 1996 Support Agreement between the Company and Alco provides that Alco
will make a cash payment to the Company (or an investment in the form of
equity or subordinated notes) as needed to comply with certain requirements.
This agreement does not contain a requirement that the IKON dealers repurchase
all defaulted lease contracts. In such event, the credit decision and reserves
for defaulted contracts would become the responsibility of the Company. The
present intent of the Company and Alco, however, is to continue the repurchase
arrangement with the IKON dealers as currently in effect.
F-7
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS IN LEASES
The Company's funded leases include certain internal lease portfolios and
non-cancelable rental contracts for IKON dealers, which have been financed by
the Company. Under the terms of these financing arrangements, the IKON dealer
maintains the contractual relationship with the third-party customer. The IKON
dealers have assigned to the Company, with full recourse, their rights under
the funded leases, including the right to receive lease and rental payments
and a security interest in the related equipment.
At September 30, 1996, aggregate future minimum payments to be received,
including guaranteed residual values, for each of the succeeding fiscal years
under direct financing and funded leases are as follows (in thousands):
<TABLE>
<CAPTION>
DIRECT
FINANCING FUNDED
LEASES LEASES
--------- --------
<S> <C> <C>
1997............................................... $ 403,897 $129,973
1998............................................... 333,648 107,367
1999............................................... 232,134 74,700
2000............................................... 122,619 39,459
2001............................................... 48,553 15,625
--------- --------
1,140,851 367,124
Less unearned interest............................. (203,459) (53,874)
--------- --------
$ 937,392 $313,250
========= ========
</TABLE>
In September 1996, IKON Capital entered into a new agreement which expires
in September 1997, to sell, under an asset securitization program, an
undivided ownership interest in $150,000,000 of eligible direct financing
lease receivables. The September 1994 agreement for $125,000,000 expires in
March 1997, but is expected to be renewed. Both agreements contain limited
recourse provisions which require the Company to assign an additional amount
of undivided interest in leases as a reserve to cover any potential losses to
the purchaser due to uncollectible leases. As collections reduce previously
sold interests, new leases can be sold up to the agreement amount. The
weighted average interest rate on the 1994 agreement, which is partially fixed
by two interest rate swap agreements totaling a principal/notional amount of
$60,000,000 is 6.7% at September 30, 1996. In fiscal year 1996, the Company
sold an additional $52,712,000 in leases, replacing leases liquidated during
the year under the 1994 agreement and $150,000,000 in leases under the 1996
agreement. Under the terms of the sales agreements, the Company will continue
to service the lease portfolio.
5. NOTES PAYABLE TO BANKS AND MEDIUM TERM NOTES
Notes payable at September 30, 1996 bear interest at rates ranging from
5.18% to 6.56% (4.69% to 6.56% at September 30, 1995) and mature on various
dates through August 21, 1998. The weighted average interest rate for the
notes outstanding at September 30, 1996 was 6.0% (5.59% at September 30,
1995).
On June 30, 1995, the Company increased the amount available to be offered
under its medium term notes program to $1,500,000,000 or the equivalent
thereof in foreign currency. The program allows the Company to offer to the
public from time to time medium term notes having an aggregate initial
offering price not exceeding the total program amount. These notes are offered
at varying maturities of nine months or more from their dates of issue and may
be subject to redemption at the option of the Company or repayment at the
option of the holder, in whole or in part, prior to the maturity date in
conjunction with meeting specified provisions. Interest rates are determined
based on market conditions at the time of issuance. As of September 30, 1996,
$969,900,000 of medium term notes are outstanding with a weighted average
interest rate of 6.76%.
F-8
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company must comply with certain restrictive covenants under the terms
of its loan agreements. For loan agreements entered into before July 1, 1994,
the Company agrees to maintain earnings before fixed charges (primarily
interest) of not less than 1.3 times fixed charges, a ratio of debt to
tangible net worth not exceeding 6 to 1 and tangible net worth not less than
$1. For loan agreements (and medium-term notes) entered into after July 1,
1994, the Company agrees to maintain earnings before fixed charges of not less
than 1.25 times fixed charges and a tangible net worth of not less than $1.
Interest paid amounted to $51,934,000, $29,193,000 and $25,554,000 for the
fiscal years ended September 30, 1996, 1995 and 1994, respectively.
At September 30, 1996 and 1995, the fair value of the Company's notes
payable to banks and medium term notes is estimated to be $1,027,028,000 and
$782,029,000, respectively, using a discounted cash flow analysis. Fair values
for the Company's interest rate swaps (off-balance sheet instruments) are
estimated to be ($768,000) and ($1,747,000) in fiscal 1996 and 1995,
respectively, based on termination of the agreements.
Future maturities of all notes payable and medium term notes outstanding at
September 30, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1997................................................. $ 314,000
1998........................................................ 241,000
1999........................................................ 292,900
2000........................................................ 140,000
2001........................................................ 40,000
----------
$1,027,900
==========
</TABLE>
6. LEASE COMMITMENTS
Total rent expense under all operating leases aggregated $1,239,000 in 1996,
$955,000 in 1995, and $342,000 in 1994. At September 30, 1996, future minimum
payments under noncancellable operating leases with initial or remaining terms
of more than one year were: 1997-$646,000; 1998-$320,000.
7. INCOME TAXES
Taxable income of the Company is included in the consolidated federal income
tax return of Alco and all estimated tax payments and refunds, if any, are
made through Alco. The provision for income taxes was determined as if the
Company was a separate taxpayer. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" effective
October 1, 1993. The cummulative effect of adopting SFAS No. 109 was to
increase net income by $140,000 in fiscal 1994. As permitted under SFAS No.
109, prior years' financial statements were not restated.
Provision for income taxes:
FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ---------------- ----------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal................ $(20,289) $37,057 $9,417 $ 893 $15,994 $(7,308)
State.................. (508) 6,890 258 3,908 623 485
-------- ------- ------ ------ ------- -------
Income Taxes........... $(20,797) $43,947 $9,675 $4,801 $16,617 $(6,823)
======== ======= ====== ====== ======= =======
</TABLE>
F-9
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax assets and liabilities were as follows:
SEPTEMBER 30 (IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
Deferred tax assets: -------- -------
<S> <C> <C>
Nondeductible reserves ................................. $ 277 $ 944
Net operating loss and alternative minimum tax credit
carryforwards.......................................... 36,827 33,381
-------- -------
Total deferred tax assets............................. 37,104 34,325
Valuation allowance..................................... 4,586 1,110
-------- -------
Net deferred tax assets............................... 32,518 33,215
<CAPTION>
Deferred tax liabilities:
<S> <C> <C>
Depreciation............................................ (77) (163)
Lease income recognition................................ (78,191) (34,710)
-------- -------
Total deferred tax liabilities........................ (78,268) (34,873)
-------- -------
Net deferred tax liabilities.............................. $(45,750) $(1,658)
======== =======
</TABLE>
The components of the effective income tax rate were as follows:
FISCAL YEAR ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Taxes at federal statutory rate............................ 35.0% 35.0% 35.0%
State taxes, net of federal benefit........................ 7.6 8.4 4.4
Other...................................................... (0.2) 1.4 (1.4)
---- ---- ----
Effective income tax rate.................................. 42.4% 44.8% 38.0%
==== ==== ====
</TABLE>
The Company made net income tax payments (refunds), including amounts paid
(received) from Alco, of ($15,639,000), $1,862,000 and $3,432,000 in fiscal
years 1996, 1995 and 1994, respectively.
8. PENSION AND STOCK PURCHASE PLAN
The Company participates in Alco's defined benefit pension plan covering the
majority of its employees. The Company's policy is to fund pension costs as
accrued. Pension expense recorded in 1996, 1995 and 1994 was $62,000, $43,000,
and $33,600, respectively.
The majority of the Company's employees were eligible to participate in
Alco's Stock Participation Plan under which they were permitted to invest 2%
to 6% of regular compensation before taxes. The Company contributed an amount
equal to two-thirds of the employees' investments and all amounts were
invested in Alco's common shares. Effective October 2, 1995, the Stock
Participation Plan was replaced by a Retirement Savings Plan (RSP). The RSP
allows employees to invest 1% to 16% of regular compensation before taxes in
six different investment funds. The Company contributes an amount equal to
two-thirds of the employees' investments, up to 6% of regular compensation,
for a maximum company match of 4%. All Company contributions are invested in
Alco's common shares. Employees vest in a percentage of the Company's
contribution after two years of service, with full vesting at the completion
of five years of service. In fiscal 1995, Alco charged the Company for costs
related to a similar plan for eligible management employees. In prior years,
this cost was paid by Alco. The Company's cost of the stock participation
plans amounted to $240,000, $195,000 and $98,100 in 1996, 1995 and 1994,
respectively.
F-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED.
Ikon Capital, Inc.
Date: December 30, 1996
/s/ Robert M. Kearns
By___________________________________
(ROBERT M. KEARNS)
VICE PRESIDENT--FINANCE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
FORM 10-K HAS BEEN SIGNED BELOW ON DECEMBER 30, 1996 BY THE FOLLOWING PERSONS
ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURES TITLE
*Richard P. Maier President (Principal Executive
- ------------------------------------- Officer)
(RICHARD P. MAIER)
/s/ Robert M. Kearns Vice President--Finance (Principal
- ------------------------------------- Financial Officer and Principal
(ROBERT M. KEARNS) Accounting Officer)
*Kurt E. Dinkelacker Director
- -------------------------------------
(KURT E. DINKELACKER)
*By his signature set forth below, Robert M. Kearns, pursuant to duly
executed Powers of Attorney duly filed with the Securities and Exchange
Commission, has signed this Form 10-K on behalf of the persons whose
signatures are printed above, in the capacities set forth opposite their
respective names.
/s/ Robert M. Kearns December 30, 1996
- -------------------------------------
(ROBERT M. KEARNS)
<PAGE>
IKON CAPITAL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE PAGE
----------- ----- ----
<C> <S> <C>
3.1 Articles of Incorporation of the Company, filed on May 4,
1994 as Exhibit 3.1 to the Company's Registration Statement
on Form 10, are incorporated herein by reference.
3.2 Bylaws of the Company, filed on May 4, 1994 as Exhibit 3.2
to the Company's Registration Statement on Form 10, are
incorporated herein by reference.
4.1 Form of Fixed Rate Note and Floating Rate Note with respect
to the Company's Medium-Term Note Program, filed as Exhibit
4 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1994, is incorporated herein by reference.
4.2 Pursuant to Regulation S-K item 601 (b)(4)(iii), the
Company agrees to furnish to the Commission, upon request,
a copy of instruments defining the rights of holders of
long-term debt of the Company.
10.1 Support Agreement, dated as of October 22, 1996, between
the Company and Alco Standard Corporation, filed as Exhibit
10.4 to the Company's Form 8-K dated November 12, 1996, is
incorporated herein by reference.
10.2 Receivables Transfer Agreement dated as of September 30,
1996 among IKON Funding, Inc., IKON Capital, Inc., Old Line
Funding Corp. and Royal Bank of Canada, filed as Exhibit
4.1 to Alco Standard Corporation's Form 10-K for the fiscal
year ended September 30, 1996, is incorporated herein by
reference.
10.3 Transfer Agreement dated as of September 30, 1996, filed as
Exhibit 4.3 to Alco Standard Corporation's Form 10-K for
the fiscal year ended September 30, 1996, is incorporated
herein by reference.
10.4 Indenture dated as of July 1, 1995 between the Company and
Chemical Bank, N.A., as Trustee, filed as Exhibit 10.23 to
Alco Standard Corporation's Form 10-K for the fiscal year
ended September 30, 1995, is incorporated herein by
reference.
10.5 Distribution Agreement dated as of June 30, 1995 between
the Company and various distribution agents, filed as
Exhibit 10.21 to Alco Standard Corporation's 10-K for the
fiscal year ended September 30, 1995, is incorporated
herein by reference.
10.6 Receivables Transfer Agreement dated September 23, 1994,
portions of which contain confidential material, filed as
Exhibit 10.21 to Alco Standard Corporation's Form
10-K/A for the fiscal year ended September 30, 1994, filed
on March 17, 1995, is incorporated herein by reference.
First Amendment dated as of September 15, 1995 and Second
Amendment dated as of March 15, 1996 to Receivables
Transfer Agreement, filed as Exhibit 10.20 to Alco Standard
Corporation's Report on Form 10-Q for the quarter ended
March 31, 1996 are incorporated herein by reference.
10.7 Indenture dated as of July 1, 1994 between the Company and
Nations Bank, N.A., as Trustee, filed as Exhibit 4 to the
Company's Registration Statement No. 33-53779 on Form S-3,
is incorporated herein by reference.
10.8 Distribution Agreement dated July 1, 1994, filed as Exhibit
1 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1994 is incorporated herein by reference.
10.9 Federal Income Tax Allocation Agreement, filed on May 4,
1994 as Exhibit 10.1 to the Company's Registration
Statement on Form 10, is incorporated herein by reference.
10.10 Maintenance Agreement, dated as of August 15, 1991, between
the Company and Alco Standard Corporation, filed on May 4,
1994 as Exhibit 10.2 to the Company's Registration
Statement on Form 10, is incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE PAGE
----------- ----- ----
<C> <S> <C>
10.11 Operating Agreement, dated as of August 15, 1991 between
the Company and Alco Standard Corporation, filed on May 4,
1994 as Exhibit 10.3 to the Company's Registration
Statement on Form 10, is incorporated herein by reference.
12 Ratio of Earnings to Fixed Charges
23 Auditors' Consent
24 Powers of Attorney; certified resolution re: Powers of
Attorney
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 12
IKON CAPITAL, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations $ 31,512 $17,860 $15,631 $ 9,336 $ 6,547
Add:
Provision for income taxes........ 23,150 14,476 9,794 6,218 4,033
Fixed charges..................... 63,538 38,263 25,673 22,807 20,146
-------- ------- ------- ------- -------
Earnings, as adjusted(A)............ $118,200 $70,599 $51,098 $38,361 $30,726
======== ======= ======= ======= =======
FIXED CHARGES
Other interest expense, including
interest on capital leases......... $63,125 $37,945 $25,559 $22,701 $20,068
Estimated interest component of
rental expense..................... 413 318 114 106 78
-------- ------- ------- ------- -------
Total fixed charges(B).............. $63,538 $38,263 $25,673 $22,807 $20,146
======== ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES
(A) divided by (B).................. 1.9 1.8 2.0 1.7 1.5
=== === === === ===
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-59227) of IKON Capital, Inc. and in the related Prospectus of
our report dated October 16, 1996, with respect to the financial statements of
IKON Capital, Inc. included in this Annual Report (Form 10-K) for the year
ended September 30, 1996.
/s/ Ernst & Young LLP
_____________________________________
Philadelphia, Pennsylvania
December 30, 1996
<PAGE>
POWER OF ATTORNEY
The undersigned certifies that he is an Officer of IKON Capital, Inc. ("IKON
Capital").
The undersigned hereby appoints each of O. Gordon Brewer, Jr., Michael J.
Dillon and Robert M. Kearns as his attorneys-in-fact, each with the power of
substitution, to execute on his behalf the foregoing report under the
Securities Act of 1934 and all amendments for filing with the Securities and
Exchange Commission ("SEC"), and to do all such other acts and execute all
such other documents which said attorneys-in-fact may deem necessary or
desirable.
Dated this 30th day of December, 1996.
/s/ Richard P. Maier
_____________________________________
<PAGE>
POWER OF ATTORNEY
The undersigned certifies that he is the sole Director of IKON Capital, Inc.
("IKON Capital").
The undersigned hereby appoints each of O. Gordon Brewer, Jr., Michael J.
Dillon and Robert M. Kearns as his attorneys-in-fact, each with the power of
substitution, to execute on his behalf the foregoing report under the
Securities Act of 1934 and all amendments for filing with the Securities and
Exchange Commission ("SEC"), and to do all such other acts and execute all
such other documents which said attorneys-in-fact may deem necessary or
desirable.
Dated this 30th day of December, 1996.
/s/ Kurt E. Dinkelacker
_____________________________________
<PAGE>
CERTIFICATION
I, Karin M. Kinney, Secretary of IKON Capital, Inc. do hereby certify that
the following resolutions were duly passed by the Board of Directors of the
corporation on November 8, 1996, and that such resolutions are, as of the date
hereof, in full force and effect:
RESOLVED, that each of the officers and directors of the corporation is
hereby authorized to appoint O. Gordon Brewer, Jr., Michael J. Dillon and
Robert M. Kearns as his or her attorneys-in-fact on behalf of each of them
each attorney-in-fact with the power of substitution, to execute on such
officer's or director's behalf, one or more registration statements and
annual reports of the corporation for filing with the Securities and
Exchange Commission ("SEC"), and any and all amendments to said documents
which said attorney may deem necessary or desirable to enable the
corporation to register the offering of debt securities and to further
enable the corporation to file such reports as are necessary under Section
13 or 15(d) of the Securities Exchange Act of 1934 and such other documents
as are necessary to comply with all rules, regulations or requirements of
the SEC in respect thereto; and
FURTHER RESOLVED, that any officer of the corporation is hereby
authorized to do and perform, or cause to be done or performed, any and all
things and to execute and deliver any and all agreements, certificates,
undertakings, documents or instruments necessary or appropriate in order to
carry out the purpose and intent of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of December,
1996.
/s/ Karin M. Kinney
_____________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IKON CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,298,976,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 58,390,000
<DEPRECIATION> 20,160,000
<TOTAL-ASSETS> 1,352,788,000
<CURRENT-LIABILITIES> 0
<BONDS> 1,027,900,000
0
0
<COMMON> 0
<OTHER-SE> 191,400,000
<TOTAL-LIABILITY-AND-EQUITY> 1,352,788,000
<SALES> 0
<TOTAL-REVENUES> 151,124,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 41,927,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,255,000
<INCOME-PRETAX> 54,662,000
<INCOME-TAX> 23,150,000
<INCOME-CONTINUING> 31,512,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,512,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
