<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1997
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X]Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1997 or
[_]Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
FORM 10-K
COMMISSION FILE NUMBER 0-20405
----------------
IKON CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2493042
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1738 BASS ROAD, MACON, GEORGIA 31210
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(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 24, 1997 was 1,000, all of which were owned by IKON Office
Solutions, Inc.
Registered debt outstanding as of December 12, 1997 was $1,705,750,000.
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.
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<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
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PAGE NO.
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ITEM 1. BUSINESS................................................... 3
ITEM 2. PROPERTIES................................................. 9
ITEM 3. LEGAL PROCEEDINGS.......................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 10
ITEM 6. SELECTED FINANCIAL DATA.................................... 10
ITEM 7. FINANCIAL INFORMATION...................................... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 15
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
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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. ("IKON"). The Company's offices are
located at 1738 Bass Road, Macon, Georgia, 31210 (telephone number 912-471-
2300). The Company is a wholly-owned subsidiary of IKON.
IKON is a public company headquartered in Malvern, Pennsylvania. On June 19,
1996, IKON announced that it would split its two operating units into
independent companies by spinning off its paper products and supply systems
distribution group, Unisource Worldwide Inc., as a separate publicly owned
company effective December 31, 1996. Continuing operations of IKON consist of
the largest network of independent copier and office equipment marketplaces in
North America and the United Kingdom, with locations in 50 states, eight
Canadian provinces, in Europe and in Mexico. IKON also provides equipment
services and supplies, outsourcing and imaging services, such as mailroom and
copy center management, specialized document copying services and electronic
imaging and file conversion. IKON also offers network consulting and design,
hardware and software product interfaces, computer networking, technology
training and software solutions for the networked office environment. IKON's
fiscal 1997 revenues from continuing operations were $5.1 billion.
The Company is engaged in the business of arranging lease financing
exclusively for office equipment marketed by IKON's office equipment
marketplaces ("IKON marketplaces"), 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 1997 fiscal year, 69%
of new equipment sold by IKON marketplaces 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 74% of the equipment financed by the Company
represents copiers, 17% fax machines, and 9% 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 with standard lease rates for use in customer
quotes. However, IKON marketplaces may charge the customer more or less than
IKON Capital's standard rates, and the IKON marketplace 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 $17,000 in amount and 45 months in duration.
Although 97% 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 marketplaces, such as a
monthly report of marketplace increases in leasing activity and related
statistics.
IKON and the Company were previously parties to the 1994 Support Agreement,
pursuant to which IKON 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,
IKON and the Company replaced the 1994 Support Agreement
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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 IKON, limits the
leverage of debt to equity to a maximum of 6 to 1, and requires that IKON
obtain the consent of two-thirds of the debtholders as a condition to
assignment (see "Relationship with IKON Office Solutions"). In addition, the
Company and IKON are currently parties to a 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 IKON 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 marketplaces 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 IKON intend to terminate the 1991 Maintenance and Operating Agreements.
Although the IKON marketplaces are not subject to a repurchase obligation
under the terms of the 1996 Support Agreement (as they are under the 1991
Operating Agreement), IKON and the Company presently intend to continue such
repurchase practice. (See "Relationship with IKON Office Solutions" 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
marketplace and the IKON customer which have been financed by the Company.
Funded leases represented approximately 26% of the Company's leases as of
September 30, 1997. The IKON marketplaces have assigned to the Company, with
full recourse, their rights under the underlying contracts 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 marketplace's)
needs. The customer (or the IKON marketplace 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 marketplace) is substantially
the same (assuming the exercise of the purchase option).
Tax Leases
Tax leases represented 96% of the Company's total lease portfolio as of
September 30, 1997. The Company or the IKON marketplace 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 25% of retail price, depending on model and term. As of September 30,
1997, the average equipment residual value for all leases in the Company's
portfolio was 6.8%. Upon early termination of the lease or at the normal end
of the lease term, the Company charges the IKON marketplace for the stated
residual position, if any, and the equipment is returned to the IKON
marketplace. Any gain or loss on the equipment's residual value is realized by
the IKON marketplace.
Conditional Sales Contracts
Conditional sales contracts account for the remaining 4% 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
4
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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 after-tax cost of the
equipment to the customer (or, for funded leases, to the IKON marketplace)
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 marketplaces maintain in inventory for short-term
rental to customers. This category of leased equipment also includes 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 marketplaces at its current book value.
RELATIONSHIP WITH IKON OFFICE SOLUTIONS, INC.
The Company, as the captive finance subsidiary of IKON, derives its customer
base from the business sourced by its affiliates within IKON. There are
several agreements and programs between the Company and IKON, which are
described below.
Support Agreements
The Company and IKON 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 IKON 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 IKON maintain 100% of ownership of the Company,
did not limit the leverage of debt to equity to a maximum of 6 to 1, and did
not contain the requirement that IKON obtain the consent of two-thirds of the
debtholders as a condition to assignment. Except for these three new
requirements, which are included in the 1996 Support Agreement, all of the
other provisions of the 1996 Support Agreement, described below, are identical
to those previously included in the 1994 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 IKON 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. The remaining
loan agreement will mature in August 1998, at which time the Company and IKON
intend to terminate the 1991 Maintenance and Operating Agreements.
1. THE 1996 SUPPORT AGREEMENT
The 1996 Support Agreement between the Company and IKON provides that IKON
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
5
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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 IKON 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
IKON, 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 below, the
1996 Support Agreement does not contain a requirement that the IKON
marketplaces repurchase all defaulted lease contracts. The 1996 Support
Agreement does not include the repurchase requirement because the Company and
IKON 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 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 marketplaces to the Company would not be material to
the Company's future results of operations. The Company's (and IKON's) present
intention, however, is to continue the repurchase arrangement with the IKON
marketplaces as currently in effect.
2. THE 1991 MAINTENANCE AND OPERATING AGREEMENTS
The 1991 Maintenance Agreement provides that IKON 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 IKON. 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 IKON of $32 million in 1997, $30 million
in 1996 and $29 million in 1995.
The 1991 Operating Agreement requires the IKON marketplaces 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. The remaining loan agreement will mature in August
1998, at which time the Company and IKON intend to terminate the 1991
Maintenance and Operating Agreements.
Cash Management Program
The Company participates in IKON's domestic Cash Management program. Under
this program, the Company has an account with IKON through which cash in
excess of current operating requirements is temporarily placed on deposit.
Similarly, amounts are periodically borrowed from IKON. Interest is paid (or
6
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charged) by IKON on these amounts. The Company was in a net average deposit
condition with IKON during 1997, 1996 and 1995 and earned interest income of
approximately $5.4 million, $2.9 million and $1.5 million, respectively.
Management Fee
The Company is charged a management fee by IKON 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
each of fiscal years 1997, 1996 and 1995.
Federal Income Tax Allocation Agreement
IKON 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 IKON. IKON 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 IKON's consolidated federal income tax return.
Interest on Income Tax Deferrals
The Company provides substantial tax benefits to IKON through the use of the
installment sales method on equipment financed through the Company. Taxes
deferred by IKON due to this tax treatment totaled a cumulative amount of
approximately $349 million at the end of fiscal 1997. IKON pays the Company
interest on the portion of these tax deferrals (approximately $219 million at
the end of fiscal 1997) which arise from tax deferrals on intercompany sales.
In fiscal years 1997, 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
6.6% in fiscal 1997 totaling $12.1 million, 6.8% in fiscal 1996 totaling $8.7
million and 6.7% in fiscal 1995 totaling $5.9 million.
Lease Bonus Program
The Company sponsored a lease bonus subsidy program which provided
incentives to IKON marketplaces when IKON customers lease equipment from the
Company. 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. Payments under this program
can be reduced or eliminated at any time by joint agreement of the Company and
IKON. During fiscal 1997, 1996 and 1995, bonus payments made to IKON
marketplaces or IKON totaled $9.8 million, $6.9 million and $7.3 million,
respectively.
Credit Policies and Loss Experience
Each IKON marketplace 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 marketplaces must be consistent with
IKON's overall policies for leasing and credit approval.
The Company presently has full recourse to the IKON marketplace 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 marketplaces was
$51.6 million in fiscal 1997, $29.9 million in fiscal 1996 and $20.9 million
in fiscal 1995. For fiscal 1997, 1996 and 1995, the gross chargebacks
represented 2.7%, 2.3% and 2.4%, respectively, of the average portfolio
balances during the year.
Reserves for credit losses are maintained by the IKON marketplaces and IKON.
On a monthly basis, the Company reports the respective net investment value of
the lease portfolio to each IKON marketplace so the IKON marketplace can
properly accrue the credit loss reserve balance. In accordance with IKON
policy, each IKON marketplace must maintain aggregate reserves of at least 3%
of the IKON marketplace's total portfolio
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(including $275 million of net leases sold under an asset securitization
agreement being serviced by the Company). Reserves maintained for fiscal 1997
and 1996, as a percentage of the leasing portfolio at fiscal year end, were
3.4% and 3.8%, respectively.
Delinquencies remained at a consistent level for fiscal 1997 and 1996.
During this two-year period, accounts classified as current (less than 30 days
past due) ranged from 85% to 89% of the total portfolio balance on a monthly
basis. The aging of the Company's lease portfolio receivables at September 30,
1997 (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.................................................. $ 1,981.5 89.4%
Over 30 days............................................. 120.0 5.4%
Over 60 days............................................. 67.7 3.1%
Over 90 days............................................. 46.2 2.1%
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$ 2,215.4 100.0%
=========
Less:
Unearned interest...................................... (376.0)
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$ 1,839.4
===========
</TABLE>
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 fixed
through interest rate swap contracts. (See Note 5 to the Company's Financial
Statements on page F-9 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 6
hereof for a description of the 1991 Maintenance and Operating Agreements). As
of September 30, 1997, the amounts outstanding under these note agreements
totaled $25 million.
Prior to July 1994, the only other funding sources for the Company were
capital contributions and advances received from IKON. As of September 30,
1997, the Company's total shareholder's equity was $266.0 million, of which
$144.4 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 and on May 21, 1997, the Company further increased
the amount available by $2 billion. 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, 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, 1997, $1,542.3 million of medium term notes were
outstanding with a weighted average interest rate of 6.6%.
The Company has entered into asset securitization agreements for $275
million of eligible direct financing lease receivables that expire in March
1998 ($125 million) and September 1998 ($150 million). The agreements contain
limited recourse provisions which require the Company to assign an additional
undivided interest in
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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. In fiscal 1997, the Company sold an
additional $103.4 million in leases, replacing leases paid/collected during
the year and recognized pretax gains of $2.6 million. Under the terms of the
sales agreements, the Company will continue to service the lease portfolios
sold.
EMPLOYEES
At September 30, 1997, the Company had approximately 261 employees. Employee
relations are considered to be good.
PROPRIETARY MATTERS
Other than the "IKON Capital" trade name and service mark, the Company has
no names, trademarks, trade names, or service marks which are used in the
conduct of its business. The Company has been sued by a third party who has
alledged that the Company's use of the name "IKON Capital" infringes on its
proprietary rights. The parties are presently in settlement discussions and
the Company believes that the lawsuit may be resolved shortly. The Company
does not believe that the outcome of such settlement discussions (or a
judicial determination adverse to the Company in a court of law) would have a
material adverse effect on the Company's operations taken as a whole.
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 marketplaces offer financing by
the Company at the time equipment is leased or sold to the customer, reducing
the likelihood that the customer will contact outside funding sources. There
is a communications network between the Company and the IKON marketplaces 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 marketplaces 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 marketplaces, 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. IKON marketplaces 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 70,000 square feet. In addition, IKON utilizes approximately
27,000 square feet in adjacent facilities owned by the Company for a
corporate-wide data center and financial processing center. The Company uses
its 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 IKON's corporate headquarters located in Malvern, Pennsylvania.
The Company's facilities are deemed adequate by management to conduct the
Company's business.
Any additional information called for by this item has been omitted pursuant
to General Instruction J(2)(d).
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ITEM 3. LEGAL PROCEEDINGS
A number of ordinary course legal proceedings are pending against the
Company. However, 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 any of 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. Therefore, there is no market for the Company's
common stock. No dividends were paid in fiscal 1997, 1996 or 1995. The Company
and IKON will, from time to time, determine the appropriate capitalization for
the Company, which will, in part, affect any future payment of dividends to
IKON 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).
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.
YEAR 2000 COSTS
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred. The Company is assessing the extent of the necessary
modifications to its computer software.
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FISCAL 1997 COMPARED WITH FISCAL 1996
Comparative summarized results of operations for the fiscal years ended
September 30, 1997 and 1996 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)
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1997 1996 AMOUNT PERCENT
--------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Lease finance income.............. $ 170,505 $ 121,148 $ 49,357 40.7%
Rental income..................... 24,012 14,607 9,405 64.4%
Interest on IKON income tax defer-
ral.............................. 12,134 8,677 3,457 39.8%
Other income...................... 7,638 6,692 946 14.1%
--------- --------- ----------
214,289 151,124 63,165 41.8%
Expenses:
Interest.......................... 83,536 60,255 23,281 38.6%
General and administrative........ 61,790 41,927 19,863 47.4%
--------- --------- ----------
145,326 102,182 43,144 42.2%
Gain on sale of lease receivables... 2,602 5,720 (3,118) (54.5%)
--------- --------- ----------
Income before taxes................. 71,565 54,662 16,903 30.9%
Provision for income taxes.......... 28,984 23,150 5,834 25.2%
--------- --------- ----------
Net income.......................... $ 42,581 $ 31,512 $ 11,069 35.1%
========= ========= ==========
</TABLE>
Revenues
Total revenues increased $63.2 million or 41.8% in fiscal 1997 from fiscal
1996. Approximately 78.1% or $49.4 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. The lease portfolio, net of lease
receivables that were sold in asset securitization transactions, increased
47.1% from September 30, 1996 to September 30, 1997.
Office equipment placed on rental by the IKON marketplaces to customers with
cancelable terms may be purchased by the Company. During fiscal 1997 and 1996,
IKON Capital purchased operating lease equipment of $48.5 million and $27.3
million, respectively. Operating leases contributed $24.0 million in rental
income to total revenues during fiscal 1997 compared to $14.6 million in
fiscal 1996.
The Company earns interest income on the deferred tax liabilities of the
IKON marketplaces associated with 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 6.6% for fiscal 1997 compared to 6.8%
for fiscal 1996. In addition, the deferred tax base upon which these payments
are calculated increased 39.5% to $219 million at September 30, 1997 from $157
million at September 30, 1996. As a result of the increased deferred tax
balances, net of the decrease in interest rates, interest income on deferred
taxes rose $3.5 million or 39.8% when comparing fiscal 1997 to fiscal 1996.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1996. 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 $946,000 or 14.1%, when comparing fiscal
1997 to fiscal 1996.
11
<PAGE>
Expenses
Average borrowings to finance the lease portfolio increased by 52.5%, to
$1,416.9 million. The Company paid a weighted average interest rate on all
borrowings for fiscal 1997 of 6.6% compared to 6.8% for fiscal 1996. As a
result of increased borrowings and a decrease in the Company's overall
weighted average interest rate, interest expense grew by $23.3 million or
38.6%, when comparing fiscal 1997 to fiscal 1996. At September 30, 1997, the
Company's debt to equity ratio was 5.9 to 1.
During May 1997, the Company completed the filing of a medium term note
registration in the amount of $2 billion, designed to meet the Company's
anticipated portfolio funding needs into fiscal 1999. This new note program
was structured similar to the original $500 million medium term note program
that was filed in June 1994 and the $1 billion medium term note program that
was filed in June 1995 which was used to meet the Company's portfolio funding
needs during the period July 1994 to June 1997. The medium term note program
allows for the issuance of medium term notes in the public markets with
varying maturities of nine months or more from their dates of issuance,
through four nationally recognized investment firms. At September 30, 1997,
approximately $1.5 billion of medium term notes were outstanding under these
programs with a weighted average interest rate of 6.6%, while approximately
$1.6 billion remains available under this program.
At September 30, 1997, the Company had outstanding notes payable to banks of
$25 million, with a weighted average rate of 6.6%, compared to $58 million at
September 30, 1996.
Total general and administrative expenses grew by $19.9 million or 47.4%,
when comparing fiscal 1997 to fiscal 1996. However, the general and
administrative expense category for fiscal 1997 includes depreciation expense
on leased equipment totaling $19.8 million compared to $13.4 million in fiscal
1996. In addition, lease bonus subsidy payments were approximately $2.9
million more in fiscal 1997 than in fiscal 1996. Excluding the effects of
increased depreciation expense on operating leases and lease bonus subsidy
payments, remaining general and administrative expenses grew approximately
$10.5 million or 48.4%, when comparing fiscal 1997 to fiscal 1996. This
increase is attributable to the growth in the lease portfolio.
Gain on Sale of Lease Receivables
The Company has asset securitization agreements for $275 million of eligible
direct financing lease receivables that expire in March 1998 ($125 million)
and September 1998 ($150 million). As collections reduce previously sold
interests, new leases can be sold up to the agreement amount. During fiscal
1997, collections reduced previously sold interests by approximately $103.4
million on these two agreements. The Company sold an additional $103.4 million
in net eligible direct financing leases during fiscal 1997 and recognized a
pretax gain of $2.6 million.
Income Before Taxes
Income before taxes grew by $16.9 million or 30.9%, when comparing pretax
earnings for fiscal 1997 to fiscal 1996. This increase in income before taxes
was essentially the effect of higher earnings on a larger portfolio base, net
of increased general and administrative expenses, partially offset by higher
borrowing costs due to the increase in debt to fund the lease portfolio.
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 1997 were approximately $2.6
million on a pretax basis. Excluding the effect of the securitization gains
from pretax income for both fiscal years 1997 and 1996, pretax income grew by
$20.0 million or 40.9% in fiscal 1997 from fiscal 1996.
12
<PAGE>
Provision for Income Taxes
Income taxes for fiscal 1997 increased by $5.8 million or 25.2% over fiscal
1996. The increase in income taxes is directly attributable to the increase in
income before taxes in fiscal 1997 as compared to fiscal 1996. During fiscal
1997, the Company's effective income tax rate was 40.5%, as compared to 42.4%
in fiscal 1996.
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 IKON 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
September 30, 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 marketplaces whereby office equipment placed on rental to customers
with cancelable terms may be purchased by the Company. In preceding years,
this equipment was financed by the respective IKON marketplace instead of the
leasing Company. During fiscal 1996 and 1995, the Company purchased operating
lease equipment of $27.3 million and $33.6 million, respectively. Operating
leases contributed $14.6 million in rental income 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 marketplaces 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 compared to 6.7% for fiscal 1995. In addition, the deferred tax
base upon which these payments are calculated increased 40.3% to $157 million
at September 30, 1996 from $112 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.
13
<PAGE>
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 IKON, 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 varying maturities of nine months or more from their dates of issuance,
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 marketplaces 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.
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 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.
14
<PAGE>
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%.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(No response to this item is required.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of IKON Capital, Inc. are submitted herewith on
Pages F-1 through F-11 of this report.
QUARTERLY DATA
The following table shows comparative summarized quarterly results for
fiscal 1997 and 1996.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Lease finance income.... $36,900 $40,657 $44,494 $48,454 $170,505
Interest expense........ 17,626 19,602 22,075 24,233 83,536
Income before income
taxes.................. 16,190 16,727 18,210 20,438 71,565
Net income.............. 9,552 9,869 10,744 12,416 42,581
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
</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 46, has been President of the Company since 1989. He
joined IKON (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 marketplaces) in 1983. He served as
Vice President of Acme Business Products (an IKON company) from 1984 to 1988
and became Vice President of IKON Capital in 1988.
HARRY G. KOZEE, age 42, has been Vice President--Finance of the Company
since 1993. He joined the Company in 1991 and was promoted to Controller in
1992.
KURT E. DINKELACKER, age 44, was appointed the sole director of the Company
in 1995. He has served as Executive Vice President and Chief Financial Officer
of IKON from 1997 to the present and from 1993 to 1995. He served as President
and Chief Operating Officer of IKON from 1995 to 1997.
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, IKON and the IKON marketplaces.
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, 1997 and 1996.......................... F-2
Statements of Income for Fiscal Years Ended September 30, 1997, 1996
and 1995.............................................................. F-3
Statements of Changes in Shareholder's Equity for Fiscal Years Ended
September 30, 1997, 1996 and 1995..................................... F-4
Statements of Cash Flows for Fiscal Years Ended September 30, 1997,
1996 and 1995......................................................... 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 Amended and Restated Receivables Transfer Agreement dated as of March
31, 1997, among IKON Funding, Inc., IKON Capital, Inc., Twin Towers,
Inc. and Deutsche Bank AG, New York Branch, filed as Exhibit 10.10 to
IKON's 10-K for the fiscal year ended September 30, 1997, is
incorporated herein by reference.
10.3 First Tier Transfer Agreement dated as of March 31, 1997 between IKON
Capital and IKON Funding, Inc., filed as Exhibit 10.11 to IKON's Form
10-K for the fiscal year ended September 30, 1997 is incorporated herein
by reference.
10.4 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 IKON's Form 10-K for the fiscal year
ended September 30, 1996, is incorporated herein by reference. Amendment
1 to Receivables Transfer Agreement, dated as of October 7, 1997, filed
as Exhibit 10.7 to IKON's Form 10-K for the fiscal year ended September
30, 1997, is incorporated herein by reference.
10.5 Transfer Agreement dated as of September 30, 1996, filed as Exhibit 4.3
to IKON's Form 10-K for the fiscal year ended September 30, 1996, is
incorporated herein by reference.
10.6 Indenture dated as of July 1, 1995 between the Company and Chase
Manhattan Bank, N.A. (formerly Chemical Bank, N.A.), as Trustee, filed
as Exhibit 10.8 to IKON's Form 10-K for the fiscal year ended September
30, 1996, is 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 as of June 4, 1997, between the Company and
various distribution agents, filed as Exhibit 10.13 to IKON's Form 10-K
for the fiscal year ended September 30, 1997, is incorporated herein by
reference.
10.9 Distribution Agreement dated as of June 30, 1995 between the Company and
various distribution agents, filed as Exhibit 10.21 to IKON's 10-K for
the fiscal year ended September 30, 1995, is incorporated herein by
reference.
10.10 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.
10.11 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.
10.12 Maintenance Agreement, dated as of August 15, 1991, between the Company
and IKON, filed on May 4, 1994 as Exhibit 10.2 to the Company's
Registration Statement on Form 10, is incorporated herein by reference.
10.13 Operating Agreement, dated as of August 15, 1991, between the Company
and IKON, 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 July 17, 1997, the Company filed a Current Report on Form 8-K to file,
under Item 5 of the form, information contained in a press release issued by
its parent, IKON Office Solutions, Inc. ("IKON") concerning IKON's earnings
for the fiscal quarter ended June 30, 1997.
On October 22, 1997, the Company filed a Current Report on Form 8-K to file,
under Item 5 of the form, information contained in a press release issued by
its parent, IKON, concerning IKON's earnings for the fiscal quarter and fiscal
year ended September 30, 1997.
FORWARD LOOKING INFORMATION
This Report includes or incorporates by reference information which may
constitute forward-looking statements about the Registrant or IKON made
pursuant to the safe harbor provisions of the federal securities laws.
Although the Registrant believes the expectations contained in such forward-
looking statements are reasonable, no assurances can be given that such
expectations will prove correct. Such forward-looking information is based on
the Registrant's or IKON's current plans or expectations, and is subject to
risks and uncertainties that could significantly affect the Registrant's
and/or IKON's current plans, anticipated actions and future financial
condition and results. These uncertainties and risks include, but are not
limited to, those relating to IKON's successful management of an aggressive
program to acquire and integrate new companies, including companies with
technical services and products that are relatively new to IKON, and also
including companies outside the United States, which present additional risks
relating to international operations; risks and uncertainites (applicable to
both the Registrant and IKON) relating to conducting operations in a
competitive environment; delays, difficulties, technological changes,
management transitions and employment issues (applicable to both the
Registrant and IKON) associated with a large-scale transformation project;
debt service requirements (applicable to both the Registrant and IKON),
including sensitivity to fluctuation in interest rates; and general economic
conditions. As a consequence, current plans, anticipated actions and future
financial condition and results may differ materially from those expressed in
any forward-looking statements made by or on behalf of the Registrant or IKON.
18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
IKON Office Solutions, Inc.
We have audited the accompanying balance sheets of IKON Capital, Inc. (a
wholly-owned subsidiary of IKON Office Solutions, Inc.) as of September 30,
1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
_____________________________________
Ernst & Young LLP
Philadelphia, Pennsylvania
October 15, 1997
F-1
<PAGE>
IKON CAPITAL, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Investments in leases (notes 3 and 4):
Direct financing leases.............................. $1,640,559 $1,140,851
Less: Unearned income................................ (286,769) (203,459)
---------- ----------
1,353,790 937,392
Funded leases, net................................... 485,658 313,250
---------- ----------
1,839,448 1,250,642
Accounts receivable.................................... 55,589 48,334
Due from IKON Office Solutions, Inc. (note 3).......... 4,463 --
Prepaid expenses and other assets...................... 13,436 15,582
Leased equipment--operating rentals at cost, less
accumulated depreciation of: 1997--$33,598; 1996--
$17,624............................................... 50,945 31,341
Property and equipment at cost, less accumulated
depreciation of: 1997--$3,771; 1996--$2,536 (note 2).. 12,330 6,889
---------- ----------
Total assets....................................... $1,976,211 $1,352,788
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses................ $ 51,018 $ 42,538
Accrued interest..................................... 27,785 20,870
Due to IKON Office Solutions, Inc. (note 3).......... -- 24,330
Notes payable to banks (note 5)...................... 25,000 58,000
Medium term notes (note 5)........................... 1,542,250 969,900
Deferred income taxes (note 7)....................... 64,177 45,750
---------- ----------
Total liabilities.................................. 1,710,230 1,161,388
Shareholder's equity:
Common stock--$.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital.................................. 144,415 112,415
Retained earnings.................................... 121,566 78,985
---------- ----------
Total shareholder's equity......................... 265,981 191,400
---------- ----------
Total liabilities and shareholder's equity............. $1,976,211 $1,352,788
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
IKON CAPITAL, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30
--------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Lease finance income (note 2)...................... $170,505 $121,148 $76,528
Rental income...................................... 24,012 14,607 7,029
Interest on IKON income tax deferrals (note 3)..... 12,134 8,677 5,933
Other income....................................... 7,638 6,692 4,618
-------- -------- -------
214,289 151,124 94,108
Expenses:
Interest (note 3).................................. 83,536 60,255 36,400
General and administrative......................... 61,790 41,927 26,566
-------- -------- -------
145,326 102,182 62,966
Gain on sale of lease receivables (note 4)........... 2,602 5,720 1,194
-------- -------- -------
Income before income taxes........................... 71,565 54,662 32,336
Provision for income taxes (note 7):
Current............................................ 8,775 (20,797) 9,675
Deferred........................................... 20,209 43,947 4,801
-------- -------- -------
28,984 23,150 14,476
-------- -------- -------
Net income....................................... $ 42,581 $ 31,512 $17,860
======== ======== =======
</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, 1994................ $ $ 53,415 $ 29,613 $ 83,028
Net income................................ 17,860 17,860
Capital contribution from IKON............ 29,000 -- 29,000
---- -------- -------- --------
Balance at September 30, 1995............. 82,415 47,473 129,888
Net income................................ 31,512 31,512
Capital contributions from IKON........... 30,000 -- 30,000
---- -------- -------- --------
Balance at September 30, 1996............. 112,415 78,985 191,400
Net income................................ 42,581 42,581
Capital contributions from IKON........... 32,000 -- 32,000
---- -------- -------- --------
Balance at September 30, 1997............. $ * $144,415 $121,566 $265,981
==== ======== ======== ========
</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
--------------------------------
1997 1996 1995
----------- -------- ---------
<S> <C> <C> <C>
Operating activities
Net income.................................. $ 42,581 $ 31,512 $ 17,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 17,209 14,029 6,470
Provision for deferred taxes.............. 20,209 43,947 4,801
Gain on sale of lease receivables......... (2,602) (5,720) (1,194)
Changes in operating assets and liabili-
ties:
Accounts receivable..................... (7,255) (21,687) (8,947)
Prepaid expenses and other assets....... 4,748 (2,214) (1,770)
Accounts payable and accrued expenses... 6,697 (397) 13,451
Accrued interest........................ 6,915 8,321 7,207
----------- -------- ---------
Net cash provided by operating activities... 88,502 67,791 37,878
----------- -------- ---------
Investing activities
Purchases of equipment for rental, net.... (35,577) (19,456) (31,159)
Purchases of property and equipment, net.. (6,676) (2,896) (1,800)
Direct financing leases:
Additions................................. (1,196,799) (883,887) (622,855)
Cancellations............................. 203,843 145,326 100,397
Collections............................... 473,157 290,904 195,009
Proceeds from sale........................ 103,401 202,712 66,677
Funded leases:
Additions................................. (422,185) (268,368) (142,949)
Cancellations............................. 71,908 35,587 23,042
Collections............................... 177,869 98,480 44,756
----------- -------- ---------
Net cash used by investing activities....... (631,059) (401,598) (368,882)
----------- -------- ---------
Financing activities
Proceeds from bank borrowings............. -- 60,000 25,000
Payments on bank borrowings............... (33,000) (175,000) (182,000)
Proceeds from issuance of medium term
notes.................................... 853,350 397,900 497,000
Payments on medium term notes............. (281,000) (30,000) --
Capital contributed by IKON............... 32,000 30,000 29,000
----------- -------- ---------
Net cash provided by financing activities... 571,350 282,900 369,000
----------- -------- ---------
Increase (decrease) in amounts due from
IKON....................................... 28,793 (50,907) 37,996
Due (to) from IKON at beginning of period... (24,330) 26,577 (11,419)
----------- -------- ---------
Due from (to) IKON at end of period......... $ 4,463 $(24,330) $ 26,577
=========== ======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
IKON Capital, Inc. (the "Company"), a wholly-owned subsidiary of IKON Office
Solutions, Inc. ("IKON"), is engaged in the business of arranging lease
financing exclusively for office equipment marketed by IKON marketplaces,
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.
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
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" (SFAS 107), 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 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 (Note 5) and interest rate swaps.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Accounting Change
FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (SFAS 125), was adopted effective
January 1, 1997. As a result, the Company has modified its agreements to meet
the new requirements to enable it to continue recognizing transfers of certain
receivables to special-purpose entities as sales, therefore, SFAS 125 did not
have a material effect on the Company's financial statements.
F-6
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Swap Agreements
The Company uses interest rate swap agreements for purposes other than
trading and they are treated as off-balance sheet items. Interest rate swap
agreements are used by the Company to modify variable rate obligations to
fixed rate obligations, thereby reducing the exposure to market rate
fluctuations. The interest rate swap agreements are designated as hedges, and
effectiveness is determined by matching the principal balance and terms with
that specific obligation. Such an agreement involves the exchange of amounts
based on fixed interest rates for amounts based on variable interest rates
over the life of the agreement without an exchange of the notional amount upon
which payments are based. The differential to be paid or received as interest
rates change is accounted for on the accrual method of accounting. Gains and
losses on terminations of interest rate swap agreements are deferred and
amortized over the remaining term of the original contract life of the
terminated swap agreement. In the event of early extinguishment of the
obligation, any realized or unrealized gain or loss from the swap would be
recognized in income at the time of extinguishment. Fair values for the
Company's interest rate swaps (off-balance sheet instruments) are estimated to
be ($400,000) and ($768,000) in fiscal 1997 and 1996, respectively, based on
termination of the agreements.
3. AGREEMENTS BETWEEN IKON CAPITAL AND IKON
Cash Management Program
The Company participates in IKON's domestic cash management program. Under
this program, the Company has an account with IKON wherein cash temporarily in
excess of current operating requirements earns interest at rates established
by IKON. Similarly, amounts are periodically borrowed from IKON, with interest
charged at market rates on borrowed funds. The Company was in a net average
deposit position with IKON during 1997, 1996 and 1995 and earned interest
income of $5,404,000, $2,870,000 and $1,545,000 respectively (included in
interest expense). The Company considers its account with IKON to represent
its cash balance. Accordingly, the accompanying Statements of Cash Flows
present the changes in the caption "Due from (to) IKON".
Management Fee
Included in general and administrative expenses are corporate overhead
expenses charged by IKON of $552,000 in fiscal years 1997, 1996 and 1995.
These corporate charges represent management's estimate of costs incurred by
IKON on behalf of IKON Capital.
Interest on IKON Income Tax Deferrals
The Company charges IKON interest on IKON's income tax deferrals associated
with the Company's leasing transactions. Such charges were calculated at 6.6%
in 1997, 6.8% in 1996 and 6.7% in 1995.
The 1991 Maintenance and Operating Agreements
The Maintenance Agreement between the Company and IKON provides that IKON
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 marketplaces, the Operating Agreement requires the IKON marketplace
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, 1997,
F-7
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1996 and 1995, 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 IKON provides that IKON
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 marketplaces
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 IKON, however, is to continue
the repurchase arrangement with the IKON marketplaces as currently in effect.
4. INVESTMENTS IN LEASES
The Company's funded leases include certain internal lease portfolios and
non-cancelable rental contracts for IKON marketplaces, which have been
financed by the Company. Under the terms of these financing arrangements, the
IKON marketplace maintains the contractual relationship with the third-party
customer. The IKON marketplaces have assigned to the Company, with full
recourse, their rights under the underlying contracts including the right to
receive lease and rental payments and a security interest in the related
equipment.
At September 30, 1997, 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>
1998............................................... $ 562,836 $197,216
1999............................................... 473,953 166,071
2000............................................... 336,449 117,891
2001............................................... 191,286 67,026
2002............................................... 76,035 26,642
---------- --------
1,640,559 574,846
Less unearned interest............................. (286,769) (89,188)
---------- --------
$1,353,790 $485,658
========== ========
</TABLE>
The Company has entered into asset securitization agreements for
$275,000,000 of eligible direct financing lease receivables that expire in
March 1998 ($125,000,000) and September 1998 ($150,000,000). The 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. In fiscal year 1997, the Company sold an additional $103,401,000 in
leases, replacing leases paid/collected during the year. Under the terms of
the sales agreements, the Company will continue to service the lease
portfolio.
F-8
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The changes in the servicing liabilities relating to the asset
securitization agreements for the fiscal years ended September 30, 1997 and
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Beginning of period.................................... $ 8,467 $ 4,187
Additions.............................................. 3,170 6,050
Less: Amortization..................................... (3,389) (1,770)
------- -------
Balance at September 30................................ $ 8,248 $ 8,467
======= =======
</TABLE>
The estimated fair value of the servicing liabilities aggregated $7,485,000
at September 30, 1997 and $7,587,000 at September 30, 1996.
5. NOTES PAYABLE TO BANKS AND MEDIUM TERM NOTES
The note payable at September 30, 1997 bears interest at a fixed rate of
6.56% and matures on August 21, 1998. Notes payable outstanding at September
30, 1996 of $58,000,000 had a weighted average interest rate of 6.0%.
On May 21, 1997, the Company increased the amount available to be offered
under its medium term notes program by $2,000,000,000 to $3,500,000,000 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, 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, 1997, $1,542,250,000 of medium term
notes are outstanding with a weighted average interest rate of 6.63% and
$1,646,750,000 remains available under the program.
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 $76,621,000, $51,934,000 and $29,193,000 for the
fiscal years ended September 30, 1997, 1996 and 1995, respectively.
At September 30, 1997 and 1996, the fair value of the Company's notes
payable to banks and medium term notes is estimated to be $1,575,535,000 and
$1,027,028,000, respectively, using a discounted cash flow analysis.
Future maturities of all notes payable and medium term notes outstanding at
September 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1998................................................... $ 241,000
1999.......................................................... 606,900
2000.......................................................... 299,350
2001.......................................................... 363,000
2002.......................................................... 57,000
----------
$1,567,250
==========
</TABLE>
F-9
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASE COMMITMENTS
Total rent expense under all operating leases aggregated $1,857,000 in 1997,
$1,239,000 in 1996 and $955,000 in 1995. At September 30, 1997, future minimum
payments under noncancelable operating leases with initial or remaining terms
of more than one year were: 1998-$1,979,000; 1999-$1,637,000; 2000-$809,000.
7. INCOME TAXES
Taxable income of the Company is included in the consolidated federal income
tax return of IKON and all estimated tax payments and refunds, if any, are
made through IKON. The provision for income taxes was determined as if the
Company was a separate taxpayer.
Provision for income taxes:
FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ------------------ ----------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal.................... $8,230 $16,418 $(20,289) $37,057 $9,417 $ 893
State...................... 545 3,791 (508) 6,890 258 3,908
------ ------- -------- ------- ------ ------
Income Taxes............... $8,775 $20,209 $(20,797) $43,947 $9,675 $4,801
====== ======= ======== ======= ====== ======
</TABLE>
The components of deferred income tax assets and liabilities were as
follows:
SEPTEMBER 30 (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities.................................. $ 744 $ 277
Net operating loss and alternative minimum tax credit
carryforwards....................................... 68,577 36,827
--------- --------
Total deferred tax assets.......................... 69,321 37,104
Valuation allowance.................................. 2,359 4,586
--------- --------
Net deferred tax assets............................ 66,962 32,518
Deferred tax liabilities:
Depreciation......................................... (1,190) (77)
Lease income recognition............................. (129,949) (78,191)
--------- --------
Total deferred tax liabilities..................... (131,139) (78,268)
--------- --------
Net deferred tax liabilities........................... $ (64,177) $(45,750)
========= ========
</TABLE>
Net operating loss carryforwards consist primarily of federal carryforwards
of approximately $61,712,000 which will expire in 2012. Credit carryforwards
consist principally of federal and state alternative minimum tax credits of
approximately $43,428,000 (with no expiration date).
F-10
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the effective income tax rate were as follows:
FISCAL YEAR ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxes at federal statutory rate............................ 35.0% 35.0% 35.0%
State taxes, net of federal benefit........................ 5.8 7.6 8.4
Other...................................................... (0.3) (0.2) 1.4
---- ---- ----
Effective income tax rate.................................. 40.5% 42.4% 44.8%
==== ==== ====
</TABLE>
The Company made net income tax payments (refunds), including amounts paid
(received) to/from IKON, of $1,427,000, ($15,639,000) and $1,862,000 in fiscal
years 1997, 1996 and 1995, respectively.
8. PENSION AND STOCK PURCHASE PLAN
The Company participates in IKON'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 1997, 1996 and 1995 was $121,000, $62,000
and $43,000, respectively.
The majority of the Company's employees were eligible to participate in
IKON'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 IKON'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
IKON'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. IKON also charges the Company for costs related to a
similar plan for eligible management employees. The Company's cost of the
stock participation plans amounted to $362,000, $240,000 and $195,000 in 1997,
1996 and 1995, respectively.
F-11
<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, 1997 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED.
IKON Capital, Inc.
Date: December 24, 1997
/s/ Harry G. Kozee
By___________________________________
(HARRY G. KOZEE) VICE PRESIDENT--
FINANCE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
FORM 10-K HAS BEEN SIGNED BELOW ON DECEMBER 24, 1997 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/ Harry G. Kozee Vice President--Finance (Principal
- - ------------------------------------- Financial Officer and Principal
(HARRY G. KOZEE) Accounting Officer)
*Kurt E. Dinkelacker Director
- - -------------------------------------
(KURT E. DINKELACKER)
*By his signature set forth below, Harry G. Kozee, 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/ Harry G. Kozee December 24, 1997
- - -------------------------------------
(HARRY G. KOZEE)
<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 Amended and Restated Receivables Transfer Agreement dated
as of March 31, 1997, among IKON Funding, Inc., IKON
Capital, Inc., Twin Towers, Inc. and Deutsche Bank AG, New
York Branch, filed as Exhibit 10.10 to IKON's 10-K for the
fiscal year ended September 30, 1997, is incorporated
herein by reference.
10.3 First Tier Transfer Agreement dated as of March 31, 1997
between IKON Capital and IKON Funding, Inc., filed as
Exhibit 10.11 to IKON's Form 10-K for the fiscal year
ended September 30, 1997 is incorporated herein by
reference.
10.4 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 IKON's Form 10-K for the fiscal year ended
September 30, 1996, is incorporated herein by reference.
Amendment 1 to the Receivables Transfer Agreement dated as
of October 7, 1997, filed as Exhibit 10.7 to IKON's Form
10-K for the fiscal year ended September 30, 1997, is
incorporated herein by reference.
10.5 Transfer Agreement dated as of September 30, 1996, filed
as Exhibit 4.3 to IKON's Form 10-K for the fiscal year
ended September 30, 1996, is incorporated herein by
reference.
10.6 Indenture dated as of July 1, 1995 between the Company and
Chase Manhattan Bank, N.A. (formerly Chemical Bank, N.A.),
as Trustee, filed as Exhibit 10.8 to IKON's Form 10-K for
the fiscal year ended September 30, 1996, is 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 as of June 4, 1997, between
the Company and various distribution agents, filed as
Exhibit 10.13 to IKON's Form 10-K for the fiscal year
ended September 30, 1997, is incorporated herein by
reference.
10.9 Distribution Agreement dated as of June 30, 1995 between
the Company and various distribution agents, filed as
Exhibit 10.21 to IKON's 10-K for the fiscal year ended
September 30, 1995, is incorporated herein by reference.
10.10 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.
10.11 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE PAGE
----------- ----- ----
<C> <S> <C>
10.12 Maintenance Agreement, dated as of August 15, 1991,
between the Company and IKON, filed on May 4, 1994 as
Exhibit 10.2 to the Company's Registration Statement on
Form 10, is incorporated herein by reference.
10.13 Operating Agreement, dated as of August 15, 1991, between
the Company and IKON, 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
-----------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings
Income from continuing operations $ 42,581 $ 31,512 $17,860 $15,631 $ 9,336
Add:
Provision for income taxes........................ 28,984 23,150 14,476 9,794 6,218
Fixed charges..................................... 89,560 63,538 38,263 25,673 22,807
------ ------ ------ ------ ------
Earnings, as adjusted(A)............................... $161,125 $118,200 $70,599 $51,098 $38,361
======== ======== ======= ======= =======
Fixed charges
Other interest expense, including interest on capital
leases.............................................. $88,941 $63,125 $37,945 $25,559 $22,701
Estimated interest component of rental expense......... 619 413 318 114 106
------- ------- ------- ------- -------
Total fixed charges(B)................................. $89,560 $63,538 $38,263 $25,673 $22,807
======= ======= ======= ======= =======
Ratio of earnings to fixed charges
(A) divided by (B)..................................... 1.8 1.9 1.8 2.0 1.7
=== === === === ===
</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. 333-27141) of IKON Capital, Inc. and in the related Prospectus of
our report dated October 15, 1997, with respect to the financial statements of
IKON Capital, Inc. included in this Annual Report (Form 10-K) for the year ended
September 30, 1997.
/s/ Ernst & Young LLP
------------------------
Philadelphia, Pennsylvania
December 24, 1997
<PAGE>
POWER OF ATTORNEY
The undersigned certifies that he is an Officer of IKON Capital, Inc. ("IKON
Capital").
The undersigned hereby appoints each of Michael J. Dillon and Harry G. Kozee
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 24th day of December, 1997.
/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 Michael J. Dillon and Harry G. Kozee
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 24th day of December, 1997.
/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 6, 1997, 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 Michael J. Dillon and Harry G. Kozee 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 24th day of December,
1997.
/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-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,895,037,000<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 100,644,000<F2>
<DEPRECIATION> 37,369,000<F2>
<TOTAL-ASSETS> 1,976,211,000
<CURRENT-LIABILITIES> 0
<BONDS> 1,567,250,000
0
0
<COMMON> 0<F3>
<OTHER-SE> 265,981,000
<TOTAL-LIABILITY-AND-EQUITY> 1,976,211,000
<SALES> 0
<TOTAL-REVENUES> 214,289,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 61,790,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,536,000
<INCOME-PRETAX> 71,565,000
<INCOME-TAX> 28,984,000
<INCOME-CONTINUING> 42,581,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,581,000
<EPS-PRIMARY> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1>INCLUDES NET INVESTMENTS IN LEASES OF $1,839,448,000 AND OTHER ACCOUNTS
RECEIVABLE.
<F2>INCLUDES LEASED EQUIPMENT OF: COST - $84,543,000; ACCUMULATED DEPRECIATION -
$33,598,000
<F3>COMMON STOCK, $.01 PAR VALUE, 1,000 SHARES OUTSTANDING. SINCE TOTAL IS LESS
THAN $1,000,ZERO IS REPORTED.
<F4>NOT REQUIRED AS THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY.
</FN>
</TABLE>
