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IOS CAPITAL, INC.
FORM 10-K
SEPTEMBER 30, 1998
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1998
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(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, 1998 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
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IOS CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2493042
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1738 BASS ROAD, MACON, GEORGIA 31210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(912) 471-2300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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 23, 1998 was 1,000, all of which were owned by IKON Office
Solutions, Inc.
Registered debt outstanding as of December 18, 1998 was $1,714,750,000.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing with the reduced
disclosure format contemplated thereby.
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TABLE OF CONTENTS
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PAGE NO.
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PART I
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 6
ITEM 3. LEGAL PROCEEDINGS.......................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 7
ITEM 6. SELECTED FINANCIAL DATA.................................... 7
ITEM 7. FINANCIAL INFORMATION...................................... 7
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................... 13
ITEM 11. EXECUTIVE COMPENSATION..................................... 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................. 13
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PART I
ITEM 1. BUSINESS
GENERAL
IOS Capital, Inc. ("IOS Capital" or the "Company"), formerly known as IKON
Capital, 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 operating
the largest network of independent copier and office equipment marketplaces in
North America and the United Kingdom. IKON has over 800 locations in the
United States, Canada, the United Kingdom, Germany, France, Denmark, and
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 1998 revenues were $5.6
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 IOS Capital is considered a competitive marketing advantage which more
closely ties IKON to its customer base. During the 1998 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 and Ricoh. Currently 70% of the equipment financed by the Company
represents copiers, 17% fax machines, and 13% 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
IOS Capital's standard rates, and the IKON marketplace would absorb any
difference resulting from any such variances from IOS 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 2.5% of the Company's total lease portfolio. The typical new lease
financed by the Company averages $17,900 in amount and 46 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 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
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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").
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, 1998. 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, 1998. 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,
1998, the average equipment residual value for all leases in the Company's
portfolio was 7.8%. 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 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
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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. Effective October 1, 1998, the Company intends to
limit the funding to select accounts.
RELATIONSHIP WITH IKON OFFICE SOLUTIONS, INC.
The Company, as a 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
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 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.
The Company's current practice is to require the IKON marketplaces to
repurchase all defaulted lease contracts (defined as any receivable which is
past due for more than 120 days or is otherwise reasonably declared
uncollectible by the Company). However, the 1996 Support Agreement does not
contain a requirement for such repurchases by the IKON marketplaces 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 is to continue the repurchase arrangement with the
IKON marketplaces as currently in effect.
2. THE 1994 SUPPORT AGREEMENT
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 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.
3
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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 charged) by IKON on these amounts. The Company was in a net average
deposit condition with IKON during 1998, 1997 and 1996 and earned interest
income of approximately $5.3 million, $5.4 million and $2.9 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 1998, 1997 and 1996.
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 $366 million at the end of fiscal 1998. IKON pays the Company
interest on the portion of these tax deferrals (approximately $271 million at
the end of fiscal 1998) which arise from tax deferrals on intercompany sales.
In fiscal years 1998, 1997 and 1996, 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
6.5% in fiscal 1998 totaling $15.7 million, 6.6% in fiscal 1997 totaling
$12.1 million and 6.8% in fiscal 1996 totaling $8.7 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 1998, 1997 and 1996, bonus payments made to IKON
marketplaces or IKON totaled $16.4 million, $9.8 million and $6.9 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. Effective October 1,
1998, the Company began the implementation of a national credit review process
for lease transactions submitted to it for funding. Under the new process,
which is expected to be fully implemented by April 1999, the Company will
approve the credit for all the lease transactions prior to funding the IKON
marketplaces.
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
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marketplaces was $98.8 million in fiscal 1998, $51.6 million in fiscal 1997
and $29.9 million in fiscal 1996. For fiscal 1998, 1997 and 1996, the gross
chargebacks represented 3.9%, 2.7% and 2.3%, 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 (including $275 million of net
leases sold under an asset securitization agreement being serviced by the
Company). Reserves maintained for fiscal 1998 and 1997, as a percentage of the
leasing portfolio at fiscal year end, were 3.4%.
Delinquencies remained at a consistent level for fiscal 1998 and 1997.
During this two-year period, accounts classified as current (less than 30 days
past due) ranged from 85% to 91% of the total portfolio balance on a monthly
basis. The aging of the Company's lease portfolio receivables at September 30,
1998 (excluding $275 million of net lease receivables sold under an asset
securitization agreement being serviced by the Company) was as follows:
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(DOLLARS IN MILLIONS)
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Current........................................... $ 2,452.6 90.8%
Over 30 days...................................... 144.7 5.4%
Over 60 days...................................... 66.2 2.4%
Over 90 days...................................... 37.0 1.4%
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$2,700.5 100.0%
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Less:
Unearned interest............................... (448.9)
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$ 2,251.6
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FUNDING
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, 1998, $1,849.8 million of medium term notes were
outstanding with a weighted average interest rate of 6.5%.
The Company has entered into asset securitization agreements for $275
million of eligible direct financing lease receivables that expire in March
1999 ($125 million) and September 1999 ($150 million). The agreements contain
limited recourse provisions which require the Company to assign an additional
undivided interest in leases to cover any potential losses to the purchaser
due to uncollectible leases. As collections reduce previously sold interests,
new leases can be sold up to the agreement amount. In fiscal 1998, the Company
sold an additional $106.1 million in leases, replacing leases paid/collected
during the year and recognized pretax gains of $2.7 million. Under the terms
of the sales agreements, the Company will continue to service the lease
portfolios sold.
EMPLOYEES
At September 30, 1998, the Company had approximately 310 employees. Employee
relations are considered to be good.
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PROPRIETARY MATTERS
Other than the "IOS 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.
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 I(2)(d).
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.
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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 1998, 1997 or 1996. 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 I(2)(a).
ITEM 7. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pursuant to General Instruction I(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.
IMPACT OF YEAR 2000
State of Readiness. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs or hardware that have date-sensitive
software or embedded technology (non-IT systems) may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The potential for a problem
exists with all computer hardware and software, as well as in products with
embedded technology; copiers and fax machines; security and HVAC systems;
voice/telephony systems; elevators, etc.
IKON has appointed a Year 2000 Corporate Compliance Team, which has prepared
a compliance program for all business units, including the Company, and is
responsible for coordination and inspecting compliance activities in all
business units. The compliance program requires all business units and
locations in every country to inventory potentially affected systems and
products, assess risk, take any required corrective actions, test and certify
compliance. IKON's Year 2000 Testing and Certification Guidelines delineate
the Year 2000 compliance process, testing and quality assurance guidelines,
certification and reporting processes and contingency planning. An independent
consulting company has reviewed the compliance program and any appropriate
recommendations have been implemented. All internal IT systems and non-IT
systems have been inventoried. The Company has completed the assessment phase
of its Year 2000 project. The remediation phase is 80% complete and the
testing phase is 40% complete. The Company anticipates completing the Year
2000 project no later than October 31, 1999, which is prior to any anticipated
material impact on its operating systems.
Costs. The Company will use both internal and external resources to
reprogram or replace, test and implement its IT and non-IT systems for Year
2000 modifications. The Company does not separately track the internal costs
incurred on the Year 2000 project. Such costs are principally payroll and
related costs for its internal IT personnel. The total cost of the Year 2000
project, excluding these internal costs, is estimated at $1.4 million and is
being funded through operating cash flows, all of which will be expensed as
incurred. To date, the Company has expensed approximately $570,000 related to
its Year 2000 project.
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Risks. Management believes, based on the information currently available to
it, that the most reasonably likely worst case scenario that could be caused
by technology failures relating to Year 2000 could pose a significant threat
not only to the Company, IKON, its customers and suppliers, but to all
businesses. Risks include:
. Legal risks, including customer, supplier, employee or shareholder
lawsuits over failure to deliver contracted services, product failure,
or health and safety issues.
. Loss of revenues due to failure to meet customer quality expectations.
. Increased operational costs due to manual processing, data corruption or
disaster recovery.
. Inability to bill or invoice.
The cost of the project and the date on which IKON and the Company believe
it will complete the Year 2000 modifications are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and costs of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
Contingency Plans. IKON's Guidelines require that contingency plans be
developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. The Company and IKON
expect to have contingency plans in place by October 31, 1999. In addition,
IKON is forming a rapid response team as part of its IT group that will
respond to any operational problems during the Year 2000 date change period.
FISCAL 1998 COMPARED WITH FISCAL 1997
Comparative summarized results of operations for the fiscal years ended
September 30, 1998 and 1997 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)
------------------- ---------------------
1998 1997 AMOUNT PERCENT
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Lease finance income................ $ 223,131 $ 170,505 $ 52,626 30.9%
Rental income....................... 38,749 24,012 14,737 61.4%
Interest on IKON income tax defer-
ral................................ 15,734 12,134 3,600 29.7%
Other income........................ 11,653 7,638 4,015 52.6%
--------- --------- ----------
289,267 214,289 74, 978 35.0%
Expenses:
Interest............................ 109,737 83,536 26,201 31.4%
General and administrative.......... 72,938 61,790 11,148 18.0%
--------- --------- ----------
182,675 145,326 37, 349 25.7%
Gain on sale of lease receivables..... 2,724 2,602 122 4.7%
--------- --------- ----------
Income before taxes................... 109,316 71,565 37,751 52.8%
Provision for income taxes............ 46,194 28,984 17,210 59.4%
--------- --------- ----------
Net income............................ $ 63,122 $ 42,581 $ 20,541 48.2%
========= ========= ==========
</TABLE>
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Revenues
Total revenues increased $75.0 million or 35.0% in fiscal 1998 from fiscal
1997. Approximately 70.2% or $52.6 million of this increase in revenues was a
result of increased lease finance income due to continued 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 22.4% from September 30, 1997 to September 30, 1998.
Office equipment placed on rental by the IKON marketplaces to customers with
cancelable terms may be purchased by the Company. During fiscal 1998 and 1997,
IOS Capital purchased operating lease equipment of $64.0 million and $48.5
million, respectively. Operating leases contributed $38.7 million in rental
income to total revenues during fiscal 1998 compared to $24.0 million in
fiscal 1997.
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 6.5% for fiscal 1998 compared to 6.6%
for fiscal 1997. In addition, the deferred tax base upon which these payments
are calculated increased 23.7% to $271 million at September 30, 1998 from $219
million at September 30, 1997. Primarily as a result of the increased deferred
tax liabilities, interest income on deferred taxes rose $3.6 million or 29.7%
when comparing fiscal 1998 to fiscal 1997.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1997. 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 $4.0 million or 52.6%, when comparing fiscal
1998 to fiscal 1997.
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
banks and the issuance of medium term notes in the public market increased by
24.4%, with $1,949.8 million outstanding at September 30, 1998. The Company
paid a weighted average interest rate on all borrowings for fiscal 1998 of
6.5% compared to 6.6% for fiscal 1997. Primarily as a result of the increased
borrowings, interest expense grew by $26.2 million or 31.4%, when comparing
fiscal 1998 to fiscal 1997. At September 30, 1998, the Company's debt to
equity ratio was 5.8 to 1. On August 14, 1998, Standard and Poor's lowered its
credit rating one level on the Company and IKON to "BBB+" from "A-" and
Moody's Investor Service lowered its credit ratings one level on the Company
and IKON to "Baal" from "A3".
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, 1998,
approximately $1.8 billion of medium term notes were outstanding under these
programs with a weighted average interest rate of 6.5%, while approximately
$1.1 billion remains available under this program.
At September 30, 1998, the Company had outstanding notes payable to banks of
$100 million, with a weighted average interest rate of 6.0%, compared to $25
million at September 30, 1997 at 6.5%.
Total general and administrative expenses increased by $11.1 million or
18.0%, when comparing fiscal 1998 to fiscal 1997. The general and
administrative expense category for fiscal 1998 includes depreciation expense
on leased equipment totaling $32.7 million compared to $19.8 million in fiscal
1997. In addition, lease bonus subsidy payments included in the general and
administrative expense categories were approximately $6.6 million more in
fiscal 1998 than in fiscal 1997. Excluding the effects of increased
depreciation expense on operating
9
<PAGE>
leases and lease bonus subsidy payments, remaining general and administrative
expenses decreased approximately $8.3 million or 25.9%, when comparing fiscal
1998 to fiscal 1997. This decrease is due to recent cost controls initiated
within the company.
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 1999 ($125 million)
and September 1999 ($150 million). Both of these agreements are expected to be
renewed. As collections reduce previously sold interests, new leases can be
sold up to the agreement amount. During fiscal 1998, collections reduced
previously sold interests by approximately $106.1 million on these two
agreements. The Company sold an additional $106.1 million in net eligible
direct financing leases during fiscal 1998 and recognized a pretax gain of
$2.7 million.
Income Before Taxes
Income before taxes increased by $37.8 million or 52.8%, when comparing
pretax earnings for fiscal 1998 to fiscal 1997. 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.
Provision for Income Taxes
Income taxes for fiscal 1998 increased by $17.2 million or 59.4% over fiscal
1997. The increase in income taxes is directly attributable to the increase in
income before taxes in fiscal 1998 as compared to fiscal 1997. During fiscal
1998, the Company's effective income tax rate was 42.3%, as compared to 40.5%
in fiscal 1997.
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)
------------------- ---------------------
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>
10
<PAGE>
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,
IOS 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.
Expenses
Average borrowings to finance the lease portfolio increased by 52.5%, to
$1,567.3 million at September 30, 1997. 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 remained 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.
11
<PAGE>
Gain on Sale of Lease Receivables
The Company has asset securitization agreements for $275 million of eligible
direct financing lease receivables. 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.
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.
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 IOS Capital, Inc. are submitted herewith on
Pages F-1 through F-11 of this report.
QUARTERLY DATA
The following table shows comparative summarized unaudited quarterly results
for fiscal 1998 and 1997.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998
Lease finance income.... $51,479 $54,787 $56,904 $59,961 $223,131
Interest expense........ 25,865 27,208 27,382 29,282 109,737
Income before income
taxes.................. 23,354 26,296 29,691 29,975 109,316
Net income.............. 13,779 15,514 17,220 16,609 63,122
<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
</TABLE>
Any additional information required by this item has been omitted pursuant
to General Instruction I(2)(a) of Form 10-K.
12
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
RICHARD P. MAIER, age 47, 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 included 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 IOS Capital in 1988.
HARRY G. KOZEE, age 43, 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 45, 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 I(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 I(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 I(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, 1998 and 1997........................ F-2
Statements of Income for Fiscal Years Ended September 30, 1998, 1997
and 1996............................................................ F-3
Statements of Changes in Shareholder's Equity for Fiscal Years Ended
September 30, 1998, 1997 and 1996................................... F-4
Statements of Cash Flows for Fiscal Years Ended September 30, 1998,
1997 and 1996....................................................... 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.
13
<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.
12 Ratio of Earnings to Fixed Charges
</TABLE>
14
<PAGE>
<TABLE>
<C> <S>
21 Subsidiaries of the Registrant
23 Auditors' Consent
24 Powers of Attorney; certified resolution re: Powers of Attorney
27 Financial Data Schedule
</TABLE>
(c) Reports on Form 8-K.
On July 10, 1998, the registrant filed a Current Report on Form 8-K to
file, under Item 5 of the form, the press release dated July 9, 1998 of its
parent, IKON, announcing the appointment of James J. Forese as IKON's
President, Chief Executive Officer and a member of the Board of Directors.
IKON also announced that Richard A. Jalkut, a director of IKON since 1996,
was appointed Non-executive Chairman. John E. Stuart, who had served as
IKON's Chairman, President and Chief Executive Officer, resigned all
positions with IKON.
On August 5, 1998, the registrant filed a Current Report on Form 8-K to
file, under Item 5 of the form, the press release dated August 4, 1998 of
its parent, IKON, stating that IKON is in the process of conducting the
full review of operations previously announced and that IKON's third
quarter results will be announced on August 14, 1998.
On November 5, 1998, the registrant filed a Current Report on Form 8-K to
file, under Item 5 of the form, information contained in a press release of
its parent, IKON, dated November 4, 1998 concerning IKON's earnings for the
fiscal quarter and year ended September 30, 1998.
FORWARD LOOKING INFORMATION
This Report includes or incorporates by reference information which may
constitute forward-looking statements about the Registrant or IKON within the
meaning 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 a number of 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 successfully managing the integration of acquired 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 consolidation of business operations;
risks and uncertainties relating to potential Year 2000 deficiencies
associated with internal systems (applicable to both the Registrant and IKON)
and IKON's distributed products; risks and uncertainties relating to material
litigations; 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.
15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
IKON Office Solutions, Inc.
We have audited the accompanying consolidated balance sheets of IOS Capital,
Inc. (a wholly-owned subsidiary of IKON Office Solutions, Inc.) as of
September 30, 1998 and 1997, and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended September 30, 1998. 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 consolidated financial position of IOS Capital,
Inc. at September 30, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
November 3, 1998, except for
note 9, as to which the
date is December 11, 1998
F-1
<PAGE>
IOS CAPITAL, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Investments in leases (notes 3 and 4):
Direct financing leases.............................. $2,002,012 $1,640,559
Less: Unearned income................................ (343,211) (286,769)
---------- ----------
1,658,801 1,353,790
Funded leases, net................................... 592,827 485,658
---------- ----------
2,251,628 1,839,448
Cash................................................... 2,621 --
Accounts receivable.................................... 63,066 55,589
Due from IKON Office Solutions, Inc. (note 3).......... 52,060 4,463
Prepaid expenses and other assets...................... 14,224 13,436
Leased equipment--operating rentals at cost, less
accumulated depreciation of:
1998--$43,411; 1997--$33,598.......................... 76,551 50,945
Property and equipment at cost, less accumulated
depreciation of:
1998--$5,596; 1997--$3,771 (note 2)................... 11,491 12,330
---------- ----------
Total assets..................................... $2,471,641 $1,976,211
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses................ $ 59,206 $ 51,018
Accrued interest..................................... 33,467 27,785
Notes payable to banks (note 5)...................... 100,000 25,000
Medium term notes (note 5)........................... 1,849,750 1,542,250
Deferred income taxes (note 7)....................... 95,115 64,177
---------- ----------
Total liabilities................................ 2,137,538 1,710,230
Shareholder's equity:
Common stock--$.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital.................................. 149,415 144,415
Retained earnings.................................... 184,688 121,566
---------- ----------
Total shareholder's equity....................... 334,103 265,981
---------- ----------
Total liabilities and shareholder's equity....... $2,471,641 $1,976,211
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Lease finance income (note 2)..................... $223,131 $170,505 $121,148
Rental income..................................... 38,749 24,012 14,607
Interest on IKON income tax deferrals (note 3).... 15,734 12,134 8,677
Other income...................................... 11,653 7,638 6,692
-------- -------- --------
289,267 214,289 151,124
Expenses:
Interest (note 3)................................. 109,737 83,536 60,255
General and administrative........................ 72,938 61,790 41,927
-------- -------- --------
182,675 145,326 102,182
Gain on sale of lease receivables (note 4).......... 2,724 2,602 5,720
-------- -------- --------
Income before income taxes.......................... 109,316 71,565 54,662
Provision for income taxes (note 7):
Current........................................... 15,256 8,775 (20,797)
Deferred.......................................... 30,938 20,209 43,947
-------- -------- --------
46,194 28,984 23,150
-------- -------- --------
Net income...................................... $ 63,122 $ 42,581 $ 31,512
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
IOS 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, 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
Net Income............................... 63,122 63,122
Capital contributions from IKON.......... 5,000 -- 5,000
-------- -------- --------
Balance at September 30, 1998............ $ * $149,415 $184,688 $334,103
===== ======== ======== ========
</TABLE>
- --------
*Amount is less than one thousand dollars.
See accompanying notes.
F-4
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30
----------------------------------
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Operating activities
Net income................................ $ 63,122 $ 42,581 $ 31,512
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 34,579 17,209 14,029
Provision for deferred taxes............ 30,938 20,209 43,947
Gain on sale of lease receivables....... (2,724) (2,602) (5,720)
Changes in operating assets and liabili-
ties:
Accounts receivable................... (7,477) (7,255) (21,687)
Prepaid expenses and other assets..... 1,936 4,748 (2,214)
Accounts payable and accrued expenses. 8,188 6,697 (397)
Accrued interest...................... 5,682 6,915 8,321
----------- ---------- ---------
Net cash provided by operating activities. 134,244 88,502 67,791
----------- ---------- ---------
Investing activities
Purchases of equipment for rental, net.. (58,308) (35,577) (19,456)
Purchases of property and equipment,
net.................................... (1,038) (6,676) (2,896)
Direct financing leases:
Additions............................... (1,312,251) (1,196,799) (883,887)
Cancellations........................... 283,881 203,843 145,326
Collections............................. 617,215 473,157 290,904
Proceeds from sale...................... 106,144 103,401 202,712
Funded leases:
Additions............................... (364,461) (422,185) (268,368)
Cancellations........................... 78,844 71,908 35,587
Collections............................. 178,448 177,869 98,480
----------- ---------- ---------
Net cash used by investing activities..... (471,526) (631,059) (401,598)
----------- ---------- ---------
Financing activities
Proceeds from bank borrowings........... 300,000 -- 60,000
Payments on bank borrowings............. (225,000) (33,000) (175,000)
Proceeds from issuance of medium term
notes.................................. 523,500 853,350 397,900
Payments on medium term notes........... (216,000) (281,000) (30,000)
Capital contributed by IKON............. 5,000 32,000 30,000
----------- ---------- ---------
Net cash provided by financing activities. 387,500 571,350 282,900
----------- ---------- ---------
Increase (decrease) in cash and amounts
due from IKON............................ 50,218 28,793 (50,907)
Due from (to) IKON at beginning of period. 4,463 (24,330) 26,577
----------- ---------- ---------
Cash and due from (to) IKON at end of pe-
riod..................................... $ 54,681 $ 4,463 $ (24,330)
=========== ========== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
1.BUSINESS
IOS 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. The Company
changed its name from IKON Capital, Inc. to IOS Capital, Inc. on January 22,
1998.
2.SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of IOS Capital, Inc. include the
accounts of the Company and its wholly-owned subsidiary, after elimination of
all intercompany transactions, accounts and profits.
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.
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 SFAS 125 requirements to enable it to continue recognizing transfers of
certain receivables as sales, therefore, the adoption of SFAS 125 did not have
a material effect on the Company's financial statements.
F-6
<PAGE>
IOS 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 ($3,782,000) and ($400,000) in fiscal 1998 and 1997, respectively, based on
termination of the agreements.
3.AGREEMENTS BETWEEN IOS 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 1998, 1997 and 1996 and earned interest
income of $5,290,000, $5,404,000 and $2,870,000 respectively (included in
interest expense). The Company considers its account with IKON to represent a
cash balance. Accordingly, the accompanying Statements of Cash Flows includes
the changes in Cash and "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 1998, 1997 and 1996.
These corporate charges represent management's estimate of costs incurred by
IKON on behalf of IOS 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 6.5%
in 1998, 6.6% in 1997, and 6.8% in 1996.
Lease Defaults
The Company and IKON currently follow an operating arrangement that
requires, in the event of default, the IKON marketplace to repurchase the
equipment at the net investment value of the lease on the default date.
Default is defined as any receivable becoming 120 days past due or otherwise
being reasonably declared uncollectible by the Company. At September 30, 1998,
1997 and 1996, 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 agreement, the Company has made no provision in the
accompanying financial statements for uncollectible receivables.
F-7
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, 1998, 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>
1999................................................. $ 697,181 $243,257
2000................................................. 579,441 202,175
2001................................................. 412,402 143,893
2002................................................. 227,498 79,378
2003................................................. 85,490 29,829
---------- --------
2,002,012 698,532
Less unearned interest............................... (343,211) (105,705)
---------- --------
$1,658,801 $592,827
========== ========
</TABLE>
The Company has entered into asset securitization agreements for
$275,000,000 of eligible direct financing lease receivables that expire in
March 1999 ($125,000,000) and September 1999 ($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 1998, the Company sold an additional $106,144,000 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.
The changes in the servicing liabilities relating to the asset
securitization agreements for the fiscal years ended September 30, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Beginning of period........................................ $8,248 $8,467
Additions.................................................. 3,454 3,170
Less: Amortization......................................... (3,459) (3,389)
------ ------
Balance at September 30.................................... $8,243 $8,248
====== ======
</TABLE>
F-8
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5.NOTES PAYABLE TO BANKS AND MEDIUM TERM NOTES
Notes payable outstanding at September 30, 1998 of $100,000,000 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, 1998, $1,849,750,000 of medium term
notes are outstanding with a weighted average interest rate of 6.5% and
$1,123,250,000 remains available under the program.
The Company must comply with certain restrictive covenants under the terms
of its loan agreements. 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 $104,055,000, $76,621,000 and $51,934,000 for the
fiscal years ended September 30, 1998, 1997 and 1996, respectively.
At September 30, 1998 and 1997, the fair value of the Company's notes
payable to banks and medium term notes is estimated to be $1,937,762,000 and
$1,575,535,000, respectively, using a discounted cash flow analysis.
Future maturities of all notes payable and medium term notes outstanding at
September 30, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1999..................................................... $ 706,900
2000............................................................ 674,350
2001............................................................ 486,500
2002............................................................ 82,000
2003............................................................ 0
----------
$1,949,750
==========
</TABLE>
6.LEASE COMMITMENTS
Total rent expense under all operating leases aggregated $2,018,000 in 1998,
$1,857,000 in 1997 and $1,239,000 in 1996. At September 30, 1998, future
minimum payments under noncancelable operating leases with initial or
remaining terms of more than one year were: 1999--$1,059,000; 2000--$425,000;
2001--$43,000.
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.
F-9
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Provision for income taxes:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ------------------
(IN THOUSANDS)
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal.............. $15,221 $22,542 $8,230 $16,418 $(20,289) $37,057
State................ 35 8,396 545 3,791 (508) 6,890
------- ------- ------ ------- -------- -------
Income Taxes......... $15,256 $30,938 $8,775 $20,209 $(20,797) $43,947
======= ======= ====== ======= ======== =======
</TABLE>
The components of deferred income tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities............................... $ 498 $ 744
Net operating loss and alternative minimum tax
credit carryforwards............................. 94,115 68,577
--------- ---------
Total deferred tax assets....................... 94,613 69,321
Valuation allowance............................... 5,063 2,359
--------- ---------
Net deferred tax assets......................... 89,550 66,962
Deferred tax liabilities:
Depreciation...................................... (2,154) (1,190)
Lease income recognition.......................... (182,511) (129,949)
--------- ---------
Total deferred tax liabilities.................. (184,665) (131,139)
--------- ---------
Net deferred tax liabilities........................ $ (95,115) $ (64,177)
========= =========
</TABLE>
Net operating loss carryforwards consist primarily of federal carryforwards
of approximately $89,610,000 which will expire in 2018. Credit carryforwards
consist principally of federal and state alternative minimum tax credits of
approximately $57,688,000 (with no expiration date).
The components of the effective income tax rate were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Taxes at federal statutory rate....................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit................... 7.7 5.8 7.6
Other................................................. (0.4) (0.3) (0.2)
----- ----- -----
Effective income tax rate............................. 42.3% 40.5% 42.4%
===== ===== =====
</TABLE>
The Company made net income tax payments (refunds), including amounts paid
(received) to/from IKON, of $5,446,000, $1,427,000 and ($15,639,000) in fiscal
years 1998, 1997 and 1996, 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 1998, 1997 and 1996 was $131,000,
$121,000 and $62,000, respectively.
F-10
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The majority of the Company's employees were eligible to participate in
IKON's 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 plans amounted to $377,000,
$362,000 and $240,000 in 1998, 1997 and 1996, respectively.
9.SUBSEQUENT EVENT
On December 11, 1998 the Company entered into an additional asset
securitization agreement for the sale of $250,000,000 of eligible direct
financing lease receivables that expires in November 2001. As collections
reduce previously sold interests, new leases can be sold up to the agreement
amount.
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, 1998 to be signed on its behalf by the undersigned, thereunto
duly authorized.
IOS Capital, Inc.
Date: December 23, 1998 By /s/ Harry G. Kozee
-------------------------------------
(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 23, 1998 by the following persons
on behalf of the registrant and in the capacities indicated.
SIGNATURES TITLE
*Richard P. Maier
- ------------------------------------- President (Principal Executive
(Richard P. Maier) Officer)
/s/ Harry G. Kozee
- ------------------------------------- Vice President--Finance (Principal
(Harry G. Kozee) Financial Officer and Principal
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 23, 1998
- -------------------------------------
(Harry G. Kozee)
<PAGE>
IOS CAPITAL, INC.
1738 Bass Road
Macon, Georgia 31210
<PAGE>
IOS CAPITAL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
------- -----
<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 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
------- -----
<C> <S>
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.
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23 Auditors' Consent
24 Powers of Attorney; certified resolution re: Powers of Attorney
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 12
IOS CAPITAL, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations. $ 63,122 $ 42,581 $ 31,512 $17,860 $15,631
Add:
Provision for income taxes...... 46,194 28,984 23,150 14,476 9,794
Fixed charges................... 115,699 89,560 63,538 38,263 25,673
-------- -------- -------- ------- -------
Earnings, as adjusted(A).......... $225,015 $161,125 $118,200 $70,599 $51,098
======== ======== ======== ======= =======
FIXED CHARGES
Other interest expense, including
interest on capital leases....... $115,026 $ 88,941 $ 63,125 $37,945 $25,559
Estimated interest component of
rental expense................... 673 619 413 318 114
-------- -------- -------- ------- -------
Total fixed charges(B).......... $115,699 $ 89,560 $ 63,538 $38,263 $25,673
======== ======== ======== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES
(A) divided by (B)................ 1.9 1.8 1.9 1.8 2.0
======== ======== ======== ======= =======
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The registrant is IOS Capital, Inc., a Delaware corporation, whose parent is
IKON Office Solutions, Inc. The following sets forth information with respect
to IOS Capital, Inc.'s subsidiaries as of December 18, 1998.
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
% VOTING SECURITIES INCORPORATION OR
SUBSIDIARY OWNED (BY WHOM) ORGANIZATION
- ---------- ------------------- ----------------
<S> <C> <C>
IKON Funding, Inc.......................... 100% IOS Capital Delaware
</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 IOS Capital, Inc. and in the related Prospectus of
our report dated November 3, 1998 (except for Note 9 as to which the date is
December 11, 1998), with respect to the financial statements of IOS Capital,
Inc. included in this Annual Report (Form 10-K) for the year ended September
30, 1998.
/s/ Ernst & Young LLP
----------------------------------------
Philadelphia, Pennsylvania
December 23, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The undersigned certifies that he is an Officer of IOS Capital, Inc. ("IOS
Capital").
The undersigned hereby appoints each of O. Gordon Brewer, Jr., 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 23rd day of December, 1998.
/s/ Richard P. Maier
---------------------------------------
<PAGE>
POWER OF ATTORNEY
The undersigned certifies that he is the sole Director of IOS Capital, Inc.
("IOS Capital").
The undersigned hereby appoints each of O. Gordon Brewer, Jr., 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 23rd day of December, 1998.
/s/ Kurt E. Dinkelacker
---------------------------------------
2
<PAGE>
CERTIFICATION
I, Karin M. Kinney, Secretary of IOS Capital, Inc. do hereby certify that
the following resolutions were duly passed by the Board of Directors of the
corporation on November 8, 1996, and that such resolutions are, as of the date
hereof, in full force and effect:
RESOLVED, that each of the officers and directors of the corporation is
hereby authorized to appoint O. Gordon Brewer, Jr., Michael J. Dillon and
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 23rd day of December,
1998.
/s/ Karin M. Kinney
---------------------------------------
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF IOS CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 2,621,000
<SECURITIES> 0
<RECEIVABLES> 2,314,694,000<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 137,049,000<F2>
<DEPRECIATION> 49,007,000<F2>
<TOTAL-ASSETS> 2,471,641,000
<CURRENT-LIABILITIES> 0
<BONDS> 1,949,750,000
0
0
<COMMON> 0<F3>
<OTHER-SE> 334,103,000
<TOTAL-LIABILITY-AND-EQUITY> 2,471,641,000
<SALES> 0
<TOTAL-REVENUES> 289,267,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 72,938,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,737,000
<INCOME-PRETAX> 109,316,000
<INCOME-TAX> 46,194,000
<INCOME-CONTINUING> 63,122,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,122,000
<EPS-PRIMARY> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1>INCLUDES NET INVESTMENTS IN LEASES OF $2,251,628,000 AND OTHER ACCOUNTS
RECEIVABLE.
<F2>INCLUDES LEASED EQUIPMENT OF: COST - $119,962,000;ACCUMULATED DEPRECIATION -
$43,411,000.
<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>
