<PAGE>
IOS Capital, Inc.
FORM 10-K
September 30, 2000
<PAGE>
As filed with the Securities and Exchange Commission on December 28, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X]Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 2000 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)
<TABLE>
<S> <C>
DELAWARE 23-2493042
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1738 Bass Road, Macon, Georgia 31210
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 28, 2000 was 1,000, all of which were owned by IKON Office
Solutions, Inc.
Registered debt outstanding of the Company and all wholly owned subsidiaries
as of December 28, 2000 was $2,147,535.
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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<PAGE>
TABLE OF CONTENTS*
<TABLE>
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Page No.
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<C> <S> <C>
PART I
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 8
ITEM 3. LEGAL PROCEEDINGS.......................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 9
ITEM 6. SELECTED FINANCIAL DATA.................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 12
ITEM 11. EXECUTIVE COMPENSATION..................................... 12
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
</TABLE>
* All amounts contained in this annual report on Form 10-K are in thousands
unless otherwise noted.
<PAGE>
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 and is the
largest independent distribution network of office equipment in North America.
IKON has locations in the United States, Canada, Mexico and Europe. IKON
provides customers with total business solutions for every office, production
and outsourcing need, including copiers and printers, color solutions,
distributed printing, facilities management, imaging and legal outsourcing
solutions, as well as network design and consulting, e-business development,
telecommunications services and technology training. IKON's fiscal 2000
revenues were approximately $5.4 billion.
The Company is engaged in the business of arranging lease financing
exclusively for office equipment marketed by IKON's U.S. marketplaces ("IKON
marketplaces"), which sell and service copier equipment, facsimile machines
and other equipment. 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 fiscal 2000, 72% 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,
Ricoh and Oce. Currently 50% of the equipment financed by the Company
represents copiers, 16% fax machines, and 34% other equipment.
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
variances from the standard rates.
The Company's customer base (which consists of end users of the equipment)
is widely dispersed, with the ten largest customers representing less than 16%
of the Company's total lease portfolio. The typical new lease financed by the
Company averages $19 in amount and 48 months in duration. Although 95% 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 leasing
activity and related statistics.
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 (the "customer") and represent the majority of
the Company's lease portfolio. Funded leases are contractual obligations
between the IKON marketplace and the customer which have been financed by the
Company.
1
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Funded leases represented approximately 13% of the Company's leases as of
September 30, 2000. 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 97% of the Company's total lease portfolio as of
September 30, 2000. 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 equipment model and lease term. As of
September 30, 2000, the average equipment residual value for all leases in the
Company's portfolio was 8.0%. 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 3% of the leases in
the Company's total lease 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 one-dollar 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 one-dollar purchase option at the end of
the lease term.
Leased Equipment
The Company also offers 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 current operating guidelines, any equipment not physically on rental to
customers for a period exceeding 120 continuous days must be repurchased by
the IKON marketplaces at its current book value.
Relationship With IKON Office Solutions, Inc.
The Company, as 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.
2
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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 and limits the
leverage of debt to equity to a maximum of 6 to 1.
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.
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
position with IKON during fiscal 2000, 1999 and 1998 and earned interest
income of $2,281, $5,956 and $5,290, respectively.
Management Fee
Included in general and administrative expenses are corporate overhead
expenses charged by IKON of $1,500 in fiscal year 2000 and $552 in both fiscal
1999 and 1998. These corporate charges represent management's estimate of
costs incurred by IKON on behalf of IOS Capital. The increase in corporate
charges in fiscal 2000 is due to the increase in legal, treasury, tax, and
marketing support provided by IKON as a result of the increase in the
Company's financing activity.
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 $493,000 at the end of fiscal 2000. IKON pays the Company
interest on the portion of these tax deferrals which arise from intercompany
sales. In fiscal 2000, 1999 and 1998, 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
6.7% in fiscal 2000 totaling $16,773, 6.6% in fiscal 1999 totaling $16,764 and
6.5% in fiscal 1998 totaling $15,734.
3
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Lease Bonus Program
The Company sponsored a lease bonus subsidy program which provided
incentives to IKON marketplaces when IKON customers leased equipment from the
Company. The focus of the bonus subsidy program was to reimburse IKON for
third party lease payoffs incurred when buying out the equipment leases of a
competitor. During fiscal 1999 and 1998, bonus payments made to IKON
marketplaces or IKON totaled $12,000 and $16,400, respectively. Effective
October 1, 1999, the Company and IKON agreed to terminate this program.
Credit Policies and Loss Experience
On October 1, 1998, the Company began the implementation of a national
credit review process for all lease transactions submitted to the Company for
funding. Under this process, which was fully implemented by April 1999, the
Company approves the credit for all the lease transactions prior to funding
the IKON marketplaces.
Prior to October 1, 1999, the Company and IKON followed an operating
arrangement that required, 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, 1999 and 1998, 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 made no
provision in the accompanying financial statements for uncollectible
receivables. Excluding the effect of recoveries, the gross value of leases
declared uncollectible was $72,500 in fiscal 2000, $79,200 in fiscal 1999 and
$98,800 in fiscal 1998. For fiscal 2000, 1999 and 1998, the gross chargebacks
represented 2.6%, 3.0% and 3.9%, respectively, of the average portfolio
balances during the year.
On October 1, 1999, lease default reserves of $74,305 and the related
deferred tax liability of $29,350 were transferred to the Company from the
IKON marketplaces. During fiscal 2000, a provision for lease defaults of
$58,113 was recorded to increase the reserve. Of this provision, $20,333 was
recorded as an expense on the books of the Company and $37,780 was recorded as
an expense on the books of the IKON marketplaces. Lease write-offs of $70,152
were recorded to reduce the reserve. As a result of the above, the lease
default reserve at September 30, 2000 is $62,266.
Prior to October 1, 1999, reserves for credit losses were maintained by the
IKON marketplaces and IKON. On a monthly basis, the Company reported the
respective net investment value of the lease portfolio to each IKON
marketplace so the IKON marketplace could properly accrue the credit loss
reserve balance. In accordance with IKON policy, each IKON marketplace
maintained aggregate reserves of at least the loss-to-liquidation percentage
of the IKON marketplace's total portfolio (including $275 of net leases sold
under an asset securitization agreement being serviced by the Company).
Reserves maintained for fiscal 1999 and 1998, as a percentage of the leasing
portfolio at fiscal year end, were 2.8% and 3.4% respectively. Effective
October 1, 1999, the Company began a shared recourse arrangement with the IKON
marketplaces. This arrangement provides for net losses resultant from lease
defaults to be shared equally. The lease default reserve is maintained at the
Company and the provisions for lease default are shared between the Company
and the IKON marketplaces.
4
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During fiscal 2000 and 1999, accounts classified as current (less than 30
days outstanding) ranged from 87% to 92% of the total portfolio balance on a
monthly basis. The aging of the Company's lease portfolio receivables at
September 30, 2000 was as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
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<S> <C> <C>
Current.......................................... $ 2,892,387 87.1%
Over 30 days..................................... 252,378 7.6%
Over 60 days..................................... 109,585 3.3%
Over 90 days..................................... 66,415 2.0%
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$ 3,320,765 100.0%
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Less:
Unearned interest.............................. (512,526)
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$ 2,808,239
==============
</TABLE>
Funding
The original amount available to be offered under the Company's medium term
note program is $3,500,000. 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, 2000, $568,500 of medium term notes were
outstanding with a weighted average interest rate of 6.6% and $1,123,350
remains available under the program.
The Company has entered into asset securitization agreements for $275,000 of
eligible direct financing lease receivables that expired in March 2000
($125,000) and September 2000 ($150,000). The agreements contain
overcollateralization to cover any potential losses to the purchaser due to
uncollectible leases. As collections reduce previously sold interests, new
leases could have been sold up to the agreement amount. In fiscal 1999, the
Company sold an additional $152,098 in leases, replacing leases paid/collected
during the year and recognized pretax gains of $12,121. On October 7, 1999,
these leases were repurchased with a portion of the proceeds received from the
issuance of approximately $700,000 of lease-backed notes.
In December 1998, the Company entered into an asset securitization
transaction whereby it sold $366,600 in direct financing lease receivables for
$250,000 in cash and a retained interest in the remainder. The agreement is
for an initial three-year term with certain renewal provisions and was
structured as a revolving asset securitization so that as collections reduce
previously sold interests in this new pool of leases, additional leases can be
sold up to $250,000. The terms of the agreement require that the Company
continue to service the lease portfolio. The Company recognized a pretax gain
of $14,333 during the first quarter of fiscal 1999 on this agreement. On May
25, 1999, the Company repurchased the leases sold in this transaction with the
proceeds from the lease-backed notes described below.
On December 9, 1999, the Company pledged or transferred $311,382 in
financing lease receivables for $247,600 in cash in connection with its
revolving asset securitization, in a transfer accounted for as a financing. On
January 20, 2000, the Company pledged or transferred $2,860 in financing lease
receivables for $2,400 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing. The Company repaid
$250,000 on June 2, 2000 when it issued the 2000-1 Notes described below. On
June 30, 2000, the Company pledged or transferred $98,907 in financing lease
receivables for $83,000 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing. In September 2000,
the Company pledged or transferred $193,705 in financing lease receivables for
$150,000 in cash in connection with its
5
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revolving asset securitization agreements, in a transfer accounted for as a
financing. As of September 30, 2000, the Company had approximately $17,000
available under its revolving asset securitization agreement.
In September 2000, the Company entered into an asset securitization
transaction whereby it sold $414,843 in direct financing lease receivables for
$349,795 in cash and a retained interest in the remainder. The agreement is
for an initial three-year term with certain renewal provisions and was
structured as a revolving asset securitization so that as collections reduce
previously sold interests in this new pool of leases, additional leases can be
sold up to $349,795. The terms of the agreement require that the Company
continue to service the lease portfolio. As of September 30, 2000, this
revolving asset securitization agreement was fully drawn.
IKON Receivables, LLC has issued Series 1999-1, 1999-2, and 2000-1 Lease-
Backed Notes as described below:
<TABLE>
<CAPTION>
Principal Stated
Issuance Issuance Maturity
Series Notes Date Amount Interest Rate Date
------ ---------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1999-1....... Class A-1 05/25/99 $ 304,474 5.11% June, 2000
Class A-2 05/25/99 61,579 5.60% May, 2005
Class A-3 05/25/99 304,127 5.99% May, 2005
Class A-4 05/25/99 81,462 6.23% May, 2005
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Sub-Total 751,642
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1999-2....... Class A-1 10/07/99 235,326 6.14125% Oct, 2000
Class A-2 10/07/99 51,100 6.31% May, 2001
Class A-3a 10/07/99 100,000 6.59% Aug, 2003
Class A-3b 10/07/99 240,891 LIBOR + 0.36% Aug, 2003
Class A-4 10/07/99 72,278 6.88% Nov, 2005
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Sub-Total 699,595
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2000-1....... Class A-1 06/02/00 130,000 6.99625% June, 2001
Class A-2 06/02/00 54,000 7.51000% March, 2002
Class A-3 06/02/00 230,000 LIBOR + 0.19% March, 2004
Class A-4 06/02/00 84,510 LIBOR + 0.23% Sept, 2006
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Sub-Total 498,510
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Total Issued $1,949,747
==========
</TABLE>
IKON Receivables, LLC has issued the following aggregate principal amounts
of Lease-Backed Notes; $751,642 for 1999-1 Notes, $699,595 for 1999-2 Notes
and $498,510 for 2000-1 Notes (the "Notes") on May 25, 1999, October 7, 1999,
and June 2, 2000, respectively. The Notes were issued pursuant to an indenture
between IKON Receivables, LLC, IOS Capital, and Bank of New York (successor in
interest to Harris Trust and Savings Bank), as Indenture Trustee on the 1999-1
Notes and the 1999-2 Notes, and Bank One Trust Company, as Indenture Trustee
on the 2000-1 Notes. The Notes are collateralized by a pool of office
equipment leases or contracts and related assets acquired or originated by IOS
Capital (together with the equipment financing portion of each periodic lease
or rental payment due under the Leases on or after the related indenture date)
(the "Leases"), and all related casualty payments, retainable deposits, and
termination payments. Payments on the Notes are made from payments on the
Leases. The Notes have certain credit enhancement features available to
noteholders including reserve accounts, overcollateralization accounts and
noncancellable insurance policies from Ambac Assurance Corporation with
respect to the Notes.
6
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The Notes bear interest from the related issuance date at the respective
stated rate specified above. The variable rate 1999-2 Class A-3b, 2000-1 Class
A-3 and 2000-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%,
respectively, through interest rate swaps. On each payment date, to the extent
funds are available from the collection of the lease receivables, principal
payments will be made to noteholders in the following priority: (i) to the
Class A-1 noteholders only, until the outstanding principal amount on the
Class A-1 Notes has been reduced to zero, then (ii) to the Class A-2
noteholders only, until the outstanding principal amount on the Class A-2
Notes has been reduced to zero, then (iii) to the Class A-3 noteholders only,
until the outstanding principal amount on the Class A-3 Notes has been reduced
to zero, and then (iv) to the Class A-4 noteholders, until the outstanding
principal amount on the Class A-4 Notes has been reduced to zero. Each class
of Notes will be payable in full on the applicable stated maturity date as
indicated above. However, if all payments are made on the Leases as scheduled,
final payment on the Notes will be earlier than the stated maturity dates.
IKON Receivables, LLC may, on any payment date, redeem the Notes when the
total discounted lease balance is less than or equal to 10% of the total
discounted lease balance as of the related indenture date.
IOS Capital services the Leases pursuant to Assignment and Servicing
Agreements by and among IOS Capital, as originator and servicer, IKON
Receivables-1, LLC, as seller, and IKON Receivables, LLC, as issuer. IOS
Capital may delegate its servicing responsibilities to one or more sub-
servicers, but such delegation does not relieve IOS Capital of its liabilities
with respect thereto. IOS Capital retains possession of the Leases and related
files, and receives a monthly service fee from IKON Receivables, LLC for
servicing the Leases.
Restricted cash on the consolidated balance sheet represents cash that has
been collected on the Leases, which must be used to repay the 1999-1, 1999-2
and 2000-1 Notes, respectively.
As of September 30, 2000, IKON Receivables, LLC has approximately $1,501,490
available under the $2,000,000 shelf registration statement.
Future maturities of the Notes, based on contractual maturities of leases
for each of the succeeding fiscal years are as follows (in thousands):
<TABLE>
<CAPTION>
1999-1 1999-2 2000-1
Series Series Series
Notes Notes Notes Total
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
2001................................. $185,517 $197,551 $139,879 $ 522,947
2002................................. 134,297 143,174 131,100 408,571
2003................................. 52,136 88,815 95,616 236,567
2004................................. 0 20,961 72,679 93,640
2005................................. 0 0 5,916 5,916
-------- -------- -------- ----------
$371,950 $450,501 $445,190 $1,267,641
======== ======== ======== ==========
</TABLE>
During fiscal 2000, income generated from the Leases was $153,097, other
income earned was $4,241, while interest expense was $82,431 and
administrative expenses were $8,794. Principal collections on lease
receivables during fiscal 2000, were $721,855 and the Company repaid $553,412
of principal on the Notes. For the period ended September 30, 1999, income
generated from the Leases was $33,348, other income earned was $501, while
interest expense was $14,702 and administrative expenses were $1,573.
Principal collections on lease receivables for the period ended September 30,
1999, were $115,825 and the Company repaid $128,694 of principal on the Notes.
The Company's portfolio of leases has an average yield of 10.6% at September
30, 2000, while the Company's weighted average cost of debt during fiscal 2000
is 6.8%. This rate differential, in addition to the overcollateralization of
the lease portfolio, gives rise to the 42% net income to revenue relationship.
The differences between income and expense year to year is due to increased
activity in the Company.
7
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Employees
At September 30, 2000, the Company had approximately 350 employees. Employee
relations are considered to be good.
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.
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 local IKON marketplace. 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.
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.
8
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The information called for by this item has been omitted pursuant to General
Instruction I(2)(c) of Form 10-K.
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. Therefore, there is no market for the Company's common stock. The
Company paid IKON dividends of $60,000 and $30,000 in fiscal 2000 and 1999,
respectively. No dividends were paid in fiscal 1998. 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) of Form 10-K.
Item 7. 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.
Fiscal 2000 Compared with Fiscal 1999
Comparative summarized results of operations for the fiscal years ended
September 30, 2000 and 1999 are set forth in the table below. This table also
shows the increase (decrease) 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)
------------------- ----------------------
2000 1999 Amount Percent
--------- --------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Lease finance income............... $ 280,610 $ 225,647 $ 54,963 24.4%
Rental income...................... 36,187 39,483 (3,296) (8.3)%
Interest on IKON income tax
deferrals......................... 16,773 16,764 9 0.1%
Other income....................... 24,854 17,076 7,778 45.5%
--------- --------- ----------
358,424 298,970 59,454 19.9%
Expenses:
Interest........................... 149,014 114,961 34,053 29.6%
Lease default...................... 20,333 20,333
General and administrative......... 61,291 67,226 (5,935) (8.9)%
--------- --------- ----------
230,638 182,187 48,451 26.6%
Gain on sale of lease receivables.... 76 26,454 (26,378) (99.7)%
--------- --------- ----------
Income before taxes.................. 127,862 143,237 (15,375) (10.7)%
Provision for income taxes........... 48,446 54,910 (6,464) (11.8)%
--------- --------- ----------
Net income........................... $ 79,416 $ 88,327 $ (8,911) (10.1)%
========= ========= ==========
</TABLE>
9
<PAGE>
Revenues
Total revenues increased $59,454 or 19.9% in fiscal 2000 from fiscal 1999.
Approximately $54,963 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, adjusted for the effects of the asset
securitizations. The lease portfolio, net of lease receivables that were sold
in asset securitization transactions, increased 1.0% from September 30, 1999
to September 30, 2000.
Office equipment placed on rental by the IKON marketplaces to customers with
cancelable terms may be purchased by the Company. During fiscal 2000 and 1999,
IOS Capital purchased operating lease equipment of $19,624 and $23,792,
respectively. Operating leases contributed $36,187 in rental income to total
revenues during fiscal 2000 compared to $39,483 in fiscal 1999.
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 6.7% for fiscal 2000 and 6.6% for
fiscal 1999. The deferred tax base upon which these payments are calculated
decreased 3.0% to $251,000 at September 30, 2000 from $260,000 at September
30, 1999. Primarily as a result of the increased average rate of deferred tax
liabilities, interest income on deferred taxes rose $9 or .1% when comparing
fiscal 2000 to fiscal 1999.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1999. 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 $7,778 or 45.5%, when comparing fiscal 2000
to fiscal 1999. Effective October 1, 1999 the Company has discontinued its
policy of charging billing fees to the IKON marketplaces.
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
banks and the issuance of medium term notes and lease-backed notes in the
public market increased by 29.6%, with $2,418,936 outstanding at September 30,
2000. The Company paid a weighted average interest rate on all borrowings for
fiscal 2000 of 6.7% compared to 6.6% for fiscal 1999. Primarily as a result of
the increased average borrowings, interest expense grew by $34,053 or 29.6%,
when comparing fiscal 2000 to fiscal 1999. At September 30, 2000, the
Company's debt to equity ratio was 5.9 to 1.
The Company has a medium term note program which 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, 2000, approximately $568,500 of medium term
notes were outstanding under these programs with a weighted average interest
rate of 6.6%, while approximately $1,123,250 remains available under this
program.
At September 30, 2000 and 1999, the Company had no outstanding notes payable
to banks.
Total general and administrative expenses decreased by $5,935 or 8.9%, when
comparing fiscal 2000 to fiscal 1999. The general and administrative expense
category for fiscal 2000 includes depreciation expense on leased equipment
totaling $30,233 compared to $33,602 in fiscal 1999. In addition, lease bonus
subsidy payments included in the general and administrative expense categories
were $0 in fiscal 2000 and $12,003 in fiscal 1999. Excluding the effects of
depreciation expense on leased equipment and lease bonus subsidy payments,
remaining general and administrative expenses increased approximately $9,437
or 43.6%, when comparing fiscal 2000 to fiscal 1999. This increase is due to
the change in portfolio servicing costs associated with the Company's
financing structures.
10
<PAGE>
Gain on Sale of Lease Receivables
In December 1998, the Company entered into an asset securitization
transaction whereby it sold $366,600 in direct financing lease receivables for
$250,000 in cash and a retained interest in the remainder. The agreement is
for an initial three-year term with certain renewal provisions and was
structured as a revolving asset securitization so that as collections reduce
previously sold interests in the pool of leases, additional leases can be sold
up to the agreement amount. The terms of the agreement require that the
Company will continue to service the lease portfolio. The Company recognized a
pretax gain of $14,333 during the first quarter of fiscal 1999 on this
agreement. On May 25, 1999, the Company repurchased leases sold in this
transaction with the proceeds from the lease-backed notes.
The Company has entered into asset securitization agreements for $275,000 of
eligible direct financing lease receivables that expired in March 2000
($125,000) and September 2000 ($150,000). The agreements contain
overcollateralization to cover any potential losses to the purchaser due to
uncollectible leases. As collections reduce previously sold interests, new
leases could have been sold up to the agreement amount. In fiscal 1999, the
Company sold an additional $152,098 in leases, replacing leases paid/collected
during the year and recognized pretax gains of $12,121. On October 7, 1999,
these leases were repurchased with a portion of the proceeds received from the
issuance of approximately $700,000 of lease-backed notes.
Income Before Taxes
Income before taxes decreased by $15,375 or 10.7%, when comparing fiscal
2000 to fiscal 1999. This decrease in income before taxes was attributed to
the addition of lease default expense and the reduction of gain on sale of
lease receivables.
Provision for Income Taxes
Income taxes for fiscal 2000 decreased by $6,464 or 11.8% compared to fiscal
1999. The decrease in income taxes is directly attributable to the decrease in
income before taxes in fiscal 2000 as compared to fiscal 1999 and a decrease
in the effective tax rate. During fiscal 2000, the Company's effective income
tax rate was 37.9%, as compared to 38.3% in fiscal 1999.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company incurs debt to fund the origination of leases for IKON. The
interest rates charged on the debt are determined based on current market
conditions and include variable measures of interest rates such as LIBOR. The
Company monitors interest rates on debt in order to mitigate exposure to
unfavorable variations as compared to the interest rate earned on the pledged
finance lease receivables. The objective in managing this risk is to achieve
fixed-rate financing at the same time the Company establishes the rate to be
received by the Company on the leases. As a result, from time to time interest
rate swaps are utilized to effectively fix the rate on variable rate debt, as
opposed to a direct issuance of fixed rate debt. The risk associated with the
use of interest rate swaps is the possible inability of the counterparties to
meet the terms of their contracts. The Company does not enter into interest
rate swap agreements for trading purposes.
11
<PAGE>
The following table presents, as of September 30, 2000, the following
information regarding the interest rate swap agreements to which we are a
party: (i) the notional amount of the agreement, (ii) the fixed interest rate
payable by the Company, (iii) the variable rate payable by the counterparty
under the agreement, (iv) the fair value of the instrument, and (v) the
maturity of the agreement.
<TABLE>
<CAPTION>
Fixed
Notional Interest Variable Fair Maturity
Amount Rate Interest Rate Value Date
-------- -------- ------------- ------- --------
<S> <C> <C> <C> <C>
$240,891 6.6300% LIBOR + 36 bp $ 935 8/15/03
$230,000 7.8020% LIBOR + 19 bp $(3,992) 3/15/04
$ 84,510 7.8200% LIBOR + 23 bp $(2,535) 9/15/06
</TABLE>
ITEM 8. Financial Statements and Supplementary Data
The financial statements of IOS Capital are submitted herewith on Pages F-1
through F-15 of this report.
Quarterly Data
The following table shows comparative summarized unaudited quarterly results
for fiscal 2000 and 1999.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
2000
Lease finance income.... $69,213 $67,831 $70,778 $72,788 $280,610
Interest expense........ 36,237 36,540 36,875 39,362 149,014
Income before income
taxes.................. 32,084 30,479 32,985 32,314 127,862
Net income.............. 19,250 18,288 19,679 22,199 79,416
</TABLE>
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
1999
Lease finance income.... $60,527 $51,323 $54,513 $59,284 $225,647
Interest expense........ 29,202 26,607 28,339 30,813 114,961
Income before income
taxes.................. 48,484 30,818 32,751 31,184 143,237
Net income.............. 28,121 17,874 21,444 20,888 88,327
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information called for by this item has been omitted pursuant to General
Instruction I(2)(c) of Form 10-K.
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.
12
<PAGE>
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 called for 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)(1) and (2) Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants..................................... F-1
Consolidated Balance Sheets at September 30, 2000 and 1999............. F-3
Consolidated Statements of Income for Fiscal Years Ended September 30,
2000, 1999 and 1998................................................... F-4
Consolidated Statements of Cash Flows for Fiscal Years Ended September
30, 2000, 1999 and 1998............................................... F-5
Consolidated Statements of Changes in Shareholder's Equity for Fiscal
Years Ended September 30, 2000, 1999 and 1998......................... F-6
Notes to Consolidated Financial Statements............................. F-7
</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.
(a)(3) 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.
</TABLE>
13
<PAGE>
<TABLE>
<C> <S>
10.4 Receivables Transfer Agreement dated as of September 30, 1996 among
IKON Funding, Inc., IKON Capital, Inc., Old Line Funding Corp. and
Royal Bank of Canada, filed as Exhibit 4.1 to IKON's Form 10-K for
the fiscal year ended September 30, 1996, is incorporated herein by
reference. Amendment 1 to Receivables Transfer Agreement, dated as
of October 7, 1997, filed as Exhibit 10.7 to IKON's Form 10-K for
the fiscal year ended September 30, 1997, is incorporated herein by
reference.
10.5 Transfer Agreement dated as of September 30, 1996, filed as Exhibit
4.3 to IKON's Form 10-K for the fiscal year ended September 30,
1996, is incorporated herein by reference.
10.6 Indenture dated as of July 1, 1995 between the Company and Chase
Manhattan Bank, N.A. (formerly Chemical Bank, N.A.), as Trustee,
filed as Exhibit 10.8 to IKON's Form 10-K for the fiscal year ended
September 30, 1996, is incorporated herein by reference.
10.7 Indenture dated as of July 1, 1994 between the Company and Nations
Bank, N.A., as Trustee, filed as Exhibit 4 to the Company's
Registration Statement No. 33-53779 on Form S-3, is incorporated
herein by reference.
10.8 Distribution Agreement dated as of June 4, 1997, between the Company
and various distribution agents, filed as Exhibit 10.13 to IKON's
Form 10-K for the fiscal year ended September 30, 1997, is
incorporated herein by reference.
10.9 Distribution Agreement dated as of June 30, 1995 between the Company
and various distribution agents, filed as Exhibit 10.21 to IKON's
10-K for the fiscal year ended September 30, 1995, is incorporated
herein by reference.
10.10 Distribution Agreement dated July 1, 1994, filed as Exhibit 1 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1994 is
incorporated herein by reference.
10.11 Federal Income Tax Allocation Agreement, filed on May 4, 1994 as
Exhibit 10.1 to the Company's Registration Statement on Form 10, is
incorporated herein by reference.
10.12 Receivables Transfer Agreement dated as of September 19, 2000 among
IOS Capital, Inc., IKON Funding-2, LLC, Park Avenue Receivables
Corporation. The Chase Manhattan Bank, as agent and the several
financial institutions party thereto from time to time.
10.13 Transfer Agreement dated as of September 19, 2000 between IKON
Funding-2, LLC and IOS Capital, Inc.
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young, LLP
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On October 26, 2000, the Company filed a Current Report on Form 8-K to file,
under Item 5 of the Form, a press release issued by its parent, IKON,
concerning IKON's anticipated results for the fourth quarter of fiscal year
2000.
On November 13, 2000, the Company filed a Current Report on Form 8-K to
file, under Item 5 of the Form, a press release issued by its parent, IKON,
concerning IKON's earnings for the fourth quarter of fiscal year 2000 and the
fiscal year ended September 30, 2000.
14
<PAGE>
(c) The response to this portion of Item 14 is contained in Item 14(a)(3)
above.
(d) The response to this portion of Item 14 is contained in Items 14(a)(1)
and (2) above.
Forward-Looking Information
This Report includes or incorporates by reference information which may
constitute forward-looking statements within the meaning of the federal
securities laws. Although the Company believes the expectations contained in
such forward-looking statements are reasonable, it can give no assurances that
such expectations will prove correct. Such forward-looking information is
based upon management's current plans or expectations and is subject to a
number of risks and uncertainties that could significantly affect current
plans, anticipated actions and the Company's and/or IKON's future financial
condition and results. These risks and uncertainties, which apply to both the
Company and IKON, include, but are not limited to, risks and uncertainties
relating to: factors which may affect the Company's ability to recoup the full
amount due on the 1999-1, 1999-2 and 2000-1 Leases (such as lessee defaults or
factors impeding recovery efforts); conducting operations in a competitive
environment and a changing industry (which includes technical services and
products that are relatively new to the industry, IKON, and to the Company);
delays, difficulties, management transitions and employment issues associated
with consolidations and/or changes in business operations; managing the
integration of acquired businesses; existing and future vendor relationships;
risks relating to currency exchange; economic, legal and political issues
associated with international operations; the Company's ability to access
capital and its debt service requirements (including sensitivity to
fluctuation in interest rates); and general economic conditions. As a
consequence of these and other risks and uncertainties, 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 Company.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of IKON Office Solutions, Inc.
In our opinion, the accompanying consolidated balance sheet as of September
30, 2000 and the related consolidated statements of income, cash flows and
changes in shareholder's equity, present fairly, in all material respects, the
financial position of IOS Capital, Inc. and its subsidiaries at September 30,
2000, and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
December 8, 2000
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
IKON Office Solutions, Inc.
We have audited the accompanying consolidated balance sheet of IOS Capital,
Inc. (a wholly-owned subsidiary of IKON Office Solutions, Inc.) as of
September 30, 1999, and the related consolidated statements of income, changes
in shareholder's equity, and cash flows for each of the two years in the
period ended September 30, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended September 30,
1999, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
_____________________________________
Ernst & Young LLP
Philadelphia, Pennsylvania
October 25, 1999, except for the first sentence of
the third paragraph of Note 5, as to which the
date is December 9, 1999
F-2
<PAGE>
IOS CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
September 30
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Assets
Investments in leases (Notes 4 and 6):
Direct financing leases, net of lease default reserve
of: 2000-$62,266; 1999-$0........................... $2,899,456 $2,311,820
Less: Unearned income................................ (458,606) (374,269)
---------- ----------
2,440,850 1,937,551
Funded leases, net................................... 367,389 465,188
---------- ----------
2,808,239 2,402,739
Cash................................................... 3,998 1,335
Restricted cash........................................ 91,914 29,625
Accounts receivable.................................... 101,689 76,805
Prepaid expenses and other assets...................... 6,160 10,018
Leased equipment--operating rentals at cost, less
accumulated depreciation of:
2000--$55,595; 1999--$51,055........................... 42,993 59,681
Property and equipment at cost, less accumulated
depreciation of:
2000--$8,981; 1999--$7,384............................. 9,097 10,395
---------- ----------
Total assets....................................... $3,064,090 $2,590,598
========== ==========
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses.................. $ 54,583 $ 65,204
Accrued interest..................................... 15,521 23,481
Security deposits.................................... 744 1,167
Due to IKON Office Solutions, Inc. (Note 3).......... 22,834 112,649
Medium term notes (Note 5)........................... 568,500 1,242,850
Lease-backed notes (Note 5).......................... 1,267,641 622,948
Asset securitization conduit financing (Note 5 )..... 582,795
Deferred income taxes (Note 8)....................... 139,626 129,869
---------- ----------
Total liabilities.................................. 2,652,244 2,198,168
Shareholder's equity:
Common stock--$.01 par value, 1,000 shares
authorized, issued, and Outstanding
Contributed capital.................................. 149,415 149,415
Retained earnings.................................... 262,431 243,015
---------- ----------
Total shareholder's equity......................... 411,846 392,430
---------- ----------
Total liabilities and shareholder's equity......... $3,064,090 $2,590,598
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IOS CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30
--------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Lease finance income (Note 2)........................ $280,610 $225,647 $223,131
Rental income........................................ 36,187 39,483 38,749
Interest on IKON income tax deferrals (Note 3)....... 16,773 16,764 15,734
Other income......................................... 24,854 17,076 11,653
-------- -------- --------
358,424 298,970 289,267
Expenses:
Interest............................................. 149,014 114,961 109,737
Lease default........................................ 20,333
General and administrative........................... 61,291 67,226 72,938
-------- -------- --------
230,638 182,187 182,675
Gain on sale of lease receivables (Note 4)........... 76 26,454 2,724
-------- -------- --------
Income before income taxes........................... 127,862 143,237 109,316
Provision for income taxes (Note 8).................. 48,446 54,910 46,194
-------- -------- --------
Net income........................................... $ 79,416 $ 88,327 $ 63,122
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
IOS CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30
-------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................. $ 79,416 $ 88,327 $ 63,122
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 31,830 35,390 34,579
Provision for deferred taxes......... 39,107 34,754 30,938
Provision for lease default.......... 20,333
Gain on sale of lease receivables.... (76) (26,454) (2,724)
Changes in operating assets and
liabilities:
Increase in accounts receivable.... (24,884) (13,739) (7,477)
Decrease in prepaid expenses and
other assets...................... 12,059 23,299 1,936
(Decrease) increase in accounts
payable and accrued expenses...... (10,621) 4,275 8,188
(Decrease) increase in accrued
interest.......................... (7,960) (9,986) 5,682
----------- ----------- -----------
Net cash provided by operating
activities............................ 139,204 135,866 134,244
----------- ----------- -----------
Cash flows from investing activities
Purchases of equipment for rental.... (19,624) (23,792) (63,984)
Proceeds from terminations of leased
equipment........................... 6,079 7,060 5,676
Purchases of property and equipment.. (420) (813) (1,213)
Proceeds from sale of property and
equipment........................... 122 122 175
Investment in leases:
Additions............................ (1,947,885) (1,535,165) (1,676,712)
Cancellations........................ 298,518 349,732 362,725
Collections.......................... 1,418,013 894,785 795,663
Lease default reserve transfer from
IKON, net of deferred tax........... 44,955
Proceeds from sale................... 923 402,098 106,144
Repurchase of leases sold............ (275,000) (250,000)
----------- ----------- -----------
Net cash used in investing activities.. (474,319) (155,973) (471,526)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from bank borrowings........ 832,795 300,000
Payments on bank borrowings.......... (250,000) (100,000) (225,000)
Proceeds from issuance of medium term
notes............................... 523,500
Payments on medium term notes........ (674,350) (606,900) (216,000)
Proceeds from issuance of lease-
backed notes........................ 1,194,849 749,331
Payments on lease-backed notes....... (553,412) (128,694)
Deposits to restricted cash.......... (62,289) (29,625)
Capital contributed by IKON.......... 5,000
Dividend to IKON..................... (60,000) (30,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities.................. 427,593 (145,888) 387,500
----------- ----------- -----------
Increase (decrease) in cash and amounts
due to IKON........................... 92,478 (165,995) 50,218
Cash and Due (to) from IKON at
beginning of period................... (111,314) 54,681 4,463
----------- ----------- -----------
Cash and Due (to) from IKON at end of
period................................ $ (18,836) $ (111,314) $ 54,681
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
IOS CAPITAL, INC.
CONSOLIDATED 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, 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
Net Income............................... 88,327 88,327
Dividends to IKON........................ (30,000) (30,000)
---- -------- -------- --------
Balance at September 30, 1999............ * 149,415 243,015 392,430
Net Income............................... 79,416 79,416
Dividends to IKON........................ (60,000) (60,000)
---- -------- -------- --------
Balance at September 30, 2000............ * $149,415 $262,431 $411,846
==== ======== ======== ========
</TABLE>
--------
* Amount is less than one thousand dollars.
See notes to consolidated financial statements.
F-6
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
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's U.S.
marketplaces ("IKON's marketplaces"), which sell and service copier equipment,
facsimile machines and other equipment. 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, Ricoh and Oce. At September 30, 2000,
50% of equipment financed by the Company represents copiers, 16% facsimile
machines and 34% other equipment. 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 subsidiaries, 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
F-7
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the Company has computed and disclosed the fair value of its
notes payable and interest rate swaps.
Interest Rate Swap Agreements
The Company uses interest rate swap agreements for purposes other than
trading and which 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.
Pending Accounting Change
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities" which will be effective for IKON's fiscal
2001. This standard, as amended, requires that all derivative instruments be
recorded on the balance sheet at their fair value and that changes in fair
value be recorded each period in current earnings or comprehensive income.
IKON anticipates that the adoption of SFAS 133 will result in the recording of
a cumulative adjustment as of October 1, 2000 for the change in accounting
required by SFAS 133. This adjustment is expected to increase current
liabilities by $5,591 and other comprehensive loss, net of tax, by $3,472 as
of October 1, 2000. No significant effects on future net income are expected
as a result of adopting SFAS 133 because IKON's current hedging instruments
are considered to be highly effective.
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 in excess of
current operating requirements is temporarily placed on deposit. Similarly,
amounts are periodically borrowed from IKON, with interest paid or charged at
market rates on borrowed funds. The Company was in a net average deposit
position with IKON during 2000, 1999 and 1998 and earned interest income of
$2,281, $5,956 and $5,290 respectively (included in interest expense). The
Company considers its account with IKON to represent a cash balance.
Accordingly, the accompanying Consolidated 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 $1,500 in fiscal year 2000, and $552 in both
fiscal years 1999 and 1998. These corporate charges represent management's
estimate of costs incurred by IKON on behalf of IOS Capital.
F-8
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
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 6.7%,
6.6%, and 6.5% in fiscal 2000, 1999 and 1998, respectively.
Lease Defaults
Prior to October 1, 1999, the Company and IKON followed an operating
arrangement that required, 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, 1999 and 1998, 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 made no
provision in the accompanying financial statements for uncollectible
receivables. Effective October 1, 1999, the Company began a shared recourse
arrangement with the IKON marketplaces. This arrangement provides for net
losses resultant from lease defaults to be shared equally. The lease default
reserve is maintained at the Company and the provisions for lease default are
shared between the Company and the IKON marketplaces. On October 1, 1999,
lease default reserves of $74,305 and the related deferred tax liability of
$29,350 were transferred to the Company from the IKON marketplaces. During
fiscal 2000, a provision for lease defaults of $58,113 was recorded to
increase the reserve. Of this provision, $20,333 was recorded as an expense on
the books of the Company and $37,780 was recorded as an expense on the books
of the IKON marketplaces. Lease write-offs of $70,152 were recorded to reduce
the reserve. As a result of the above, the lease default reserve at September
30, 2000 is $62,266.
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.
4. Investments in Leases
The Company's lease portfolio contains direct financing leases and funded
leases. Direct financing leases include non-cancelable lease agreements which
are serviced by the Company. 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.
F-9
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
At September 30, 2000, 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:
<TABLE>
<CAPTION>
Investment
Net Leases Residual in Leases
----------- -------- ----------
<S> <C> <C> <C>
2001.................................... $ 1,118,118 $125,297 $1,243,415
2002.................................... 898,091 100,640 998,731
2003.................................... 608,942 68,237 677,179
2004.................................... 309,103 34,638 343,741
2005.................................... 107,877 12,088 119,965
----------- -------- ----------
$ 3,042,131 $340,900 $3,383,031
Less unearned interest.................. (460,880) (51,646) (512,526)
----------- -------- ----------
2,581,251 289,254 2,870,505
Less lease default reserve.............. (55,992) (6,274) (62,266)
----------- -------- ----------
$ 2,525,259 $282,980 $2,808,239
=========== ======== ==========
</TABLE>
The changes in the servicing liabilities relating to the asset
securitization agreements for the fiscal years ended September 30, 2000 and
1999 are as follows :
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Beginning of period..................................... $ 6,913 $ 8,243
Additions............................................... 21 2,459
Less: Amortization...................................... (66) (3,789)
Less: Payoff of asset securitization agreements October
7, 1999................................................ (6,868) 0
------- -------
Balance at September 30................................. $ 0 $ 6,913
======= =======
</TABLE>
5. Medium Term Notes and Asset Securitization Conduit Financing
The original amount available to be offered under the Company's medium term
note program is $3,500,000. 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, 2000, $568,500 of medium term notes were
outstanding with a weighted average interest rate of 6.6% and $1,123,350
remains available under the program.
The Company has entered into asset securitization agreements for $275,000 of
eligible direct financing lease receivables that expired in March 2000
($125,000) and September 2000 ($150,000). The agreements contain
overcollateralization 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 1999, the
Company sold an additional $152,098 in leases, replacing leases paid/collected
during the year and recognized pretax gains of $12,121. On October 7, 1999,
these leases were repurchased with a portion of the proceeds received from the
issuance of approximately $700,000 of lease-backed notes.
In December 1998, the Company entered into an asset securitization
transaction whereby it sold $366,600 in direct financing lease receivables for
$250,000 in cash and a retained interest in the remainder. The agreement
F-10
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
is for an initial three-year term with certain renewal provisions and was
structured as a revolving asset securitization so that as collections reduce
previously sold interests in this new pool of leases, additional leases can be
sold up to $250,000. The terms of the agreement require that the Company
continue to service the lease portfolio. The Company recognized a pretax gain
of $14,333 during the first quarter of fiscal 1999 on this agreement. On May
25, 1999, the Company repurchased the leases sold in this transaction with the
proceeds from the lease-backed notes described below.
On December 9, 1999, the Company pledged or transferred $311,382 in
financing lease receivables for $247,600 in cash in connection with its
revolving asset securitization, in a transfer accounted for as a financing. On
January 20, 2000, the Company pledged or transferred $2,860 in financing lease
receivables for $2,400 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing. The Company repaid
$250,000 on June 2, 2000 when it issued the 2000-1 Notes described below. On
June 30, 2000, the Company pledged or transferred $98,907 in financing lease
receivables for $83,000 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing. In September 2000,
the Company pledged or transferred $193,705 in financing lease receivables for
$150,000 in cash in connection with its revolving asset securitization
agreements, in a transfer accounted for as a financing. As of September 30,
2000, the Company had approximately $17,000 available under its revolving
asset securitization agreement.
In September 2000, the Company entered into an asset securitization
transaction whereby it sold $414,843 in direct financing lease receivables for
$349,795 in cash and a retained interest in the remainder. The agreement is
for an initial three-year term with certain renewal provisions and was
structured as a revolving asset securitization so that as collections reduce
previously sold interests in this new pool of leases, additional leases can be
sold up to $349,795. The terms of the agreement require that the Company
continue to service the lease portfolio. As of September 30, 2000, this
revolving asset securitization agreement was fully drawn.
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 $156,974, $124,947 and $104,055 for the fiscal
years ended September 30, 2000, 1999 and 1998, respectively.
At September 30, 2000 and 1999, the fair value of the Company's medium term
notes and asset securitization conduit financing is estimated to be $2,201,161
and $1,805,722, respectively, using a discounted cash flow analysis.
Future maturities of all medium term notes and asset securitization conduit
financing outstanding at September 30, 2000 are as follows:
<TABLE>
<S> <C>
Fiscal 2001..................................................... $1,069,295
2002............................................................ 82,000
2003............................................................ 0
2004............................................................ 0
2005............................................................ 0
----------
$1,151,295
==========
</TABLE>
F-11
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
6. Lease--Backed Notes
IKON Receivables, LLC has issued Series 1999-1, 1999-2, and 2000-1 Lease-
Backed Notes as described below:
<TABLE>
<CAPTION>
Principal Stated
Issuance Issuance Maturity
Series Notes Date Amount Interest Rate Date
------ ---------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1999-1....... Class A-1 05/25/99 $ 304,474 5.11% June, 2000
Class A-2 05/25/99 61,579 5.60% May, 2005
Class A-3 05/25/99 304,127 5.99% May, 2005
Class A-4 05/25/99 81,462 6.23% May, 2005
----------
Sub-Total 751,642
==========
1999-2....... Class A-1 10/07/99 235,326 6.14125% Oct, 2000
Class A-2 10/07/99 51,100 6.31% May, 2001
Class A-3a 10/07/99 100,000 6.59% Aug, 2003
Class A-3b 10/07/99 240,891 LIBOR + 0.36% Aug, 2003
Class A-4 10/07/99 72,278 6.88% Nov, 2005
----------
Sub-Total 699,595
==========
2000-1....... Class A-1 06/02/00 130,000 6.99625% June, 2001
Class A-2 06/02/00 54,000 7.51000% March, 2002
Class A-3 06/02/00 230,000 LIBOR + 0.19% March, 2004
Class A-4 06/02/00 84,510 LIBOR + 0.23% Sept, 2006
----------
Sub-Total 498,510
----------
Total Issued $1,949,747
==========
</TABLE>
IKON Receivables, LLC has issued the following aggregate principal amounts
of Lease-Backed Notes; $751,642 for 1999-1 Notes, $699,595 for 1999-2 Notes
and $498,510 for 2000-1 Notes (the "Notes") on May 25, 1999, October 7, 1999,
and June 2, 2000, respectively. The Notes were issued pursuant to an indenture
between IKON Receivables, LLC, IOS Capital, and Bank of New York (successor in
interest to Harris Trust and Savings Bank), as Indenture Trustee on the 1999-1
Notes and the 1999-2 Notes, and Bank One Trust Company, as Indenture Trustee
on the 2000-1 Notes. The Notes, respectively are collateralized by a pool of
office equipment leases or contracts and related assets acquired or originated
by IOS Capital (together with the equipment financing portion of each periodic
lease or rental payment due under the Leases on or after the related indenture
date) (the "Leases"), and all related casualty payments, retainable deposits,
and termination payments. Payments on the Notes are made from payments on the
Leases. The Notes have certain credit enhancement features available to
noteholders including reserve accounts, overcollateralization accounts and
noncancellable insurance policies from Ambac Assurance Corporation with
respect to the Notes.
The Notes bear interest from the related issuance date at the stated rate
specified above. The variable rate 1999-2 Class A3-b, 2000-1 Class A-3 and
2000-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%, respectively,
through interest rate swaps. On each payment date, to the extent funds are
available from the collection of the lease receivables, principal payments
will be made to noteholders in the following priority: (i) to the Class A-1
noteholders only, until the outstanding principal amount on the Class A-1
Notes has been reduced to zero, then (ii) to the Class A-2 noteholders only,
until the outstanding principal
F-12
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
amount on the Class A-2 Notes has been reduced to zero, then (iii) to the
Class A-3 noteholders only, until the outstanding principal amount on the
Class A-3 Notes has been reduced to zero, and then (iv) to the Class A-4
noteholders, until the outstanding principal amount on the Class A-4 Notes has
been reduced to zero. Each class of Notes will be payable in full on the
applicable stated maturity date as indicated above. However, if all payments
are made on the Leases as scheduled, final payment on the Notes will be
earlier than the stated maturity dates. IKON Receivables, LLC may, on any
payment date, redeem the Notes when the total discounted lease balance is less
than or equal to 10% of the total discounted lease balance as of the related
indenture date.
IOS Capital services the Leases pursuant to Assignment and Servicing
Agreements by and among IOS Capital, as originator and servicer, IKON
Receivables-1, LLC, as seller, and IKON Receivables, LLC, as issuer. IOS
Capital may delegate its servicing responsibilities to one or more sub-
servicers, but such delegation does not relieve IOS Capital of its liabilities
with respect thereto. IOS Capital retains possession of the Leases and related
files, and receives a monthly service fee from IKON Receivables, LLC for
servicing the Leases.
Restricted cash on the consolidated balance sheet represents cash that has
been collected on the Leases which must be used to repay the 1999-1, 1999-2
and 2000-1 Notes, respectively.
As of September 30, 2000, IKON Receivables, LLC has approximately $1,501,490
available under the $2,000,000 shelf registration statement.
Future maturities of the Notes, based on contractual maturities of leases
for each of the succeeding fiscal years are as follows (in thousands):
<TABLE>
<CAPTION>
1999-1 1999-2 2000-1
Series Series Series
Notes Notes Notes Total
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
2001................................. $185,517 $197,551 $139,879 $ 522,947
2002................................. 134,297 143,174 131,100 408,571
2003................................. 52,136 88,815 95,616 236,567
2004................................. 0 20,961 72,679 93,640
2005................................. 0 0 5,916 5,916
-------- -------- -------- ----------
$371,950 $450,501 $445,190 $1,267,641
======== ======== ======== ==========
</TABLE>
7. Lease Commitments
Total rent expense under all operating leases aggregated $1,580 in 2000,
$1,842 in 1999 and $2,018 in 1998. At September 30, 2000, future minimum
payments under noncancelable operating leases with initial or remaining terms
of more than one year were: 2001--$601; 2002--$275; 2003--$34.
8. 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-13
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
Provision for income taxes:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30
--------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
(in thousands)
Current Deferred Current Deferred Current Deferred
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal...................... $8,773 $35,836 $19,389 $30,324 $15,221 $22,542
State........................ 567 3,270 767 4,430 35 8,396
------ ------- ------- ------- ------- -------
Income Taxes................. $9,340 $39,106 $20,156 $34,754 $15,256 $30,938
====== ======= ======= ======= ======= =======
</TABLE>
The components of deferred income tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
September 30
--------------------
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Other, net............................................. $ 56
Accrued liabilities.................................... 24,112
Net operating loss and alternative minimum tax credit
carryforwards......................................... 82,444 $94,357
--------- ---------
Total deferred tax assets............................ 106,612 94,357
Valuation allowance.................................... 2,150 3,661
--------- ---------
Net deferred tax assets.............................. 104,462 90,696
Deferred tax liabilities:
Other, net............................................. (163)
Depreciation........................................... (824) (2,394)
Lease income recognition............................... (243,263) (218,008)
--------- ---------
Total deferred tax liabilities....................... (244,087) (220,565)
--------- ---------
Net deferred tax liabilities........................... $(139,625) $(129,869)
========= =========
</TABLE>
The federal net operating loss carryforward from prior years was fully
utilized in the current year. Credit carryforwards consist principally of
federal and state alternative minimum tax credits of approximately $80,296
(with no expiration date).
The components of the effective income tax rate were as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ended
September 30
----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Taxes at federal statutory rate.......................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit...................... 2.8 3.6 7.7
Other.................................................... 0.1 (0.3) (0.4)
---- ---- ----
Effective income tax rate................................ 37.9% 38.3% 42.3%
==== ==== ====
</TABLE>
The Company made net income tax payments, including amounts paid to IKON, of
$20,006, $16,976, and $5,446 in fiscal years 2000, 1999 and 1998,
respectively.
F-14
<PAGE>
IOS CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
9. 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 2000, 1999 and 1998 was $276, $197 and
$131, respectively.
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 nine 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. The Company's
cost of the plans amounted to $214, $186 and $377 in 2000, 1999 and 1998,
respectively.
10. Subsequent Event
On December 7, 2000, IKON Receivables, LLC publicly issued an additional
$634,431 of lease-backed notes (the "2000-2 Notes") under its shelf
registration statement. Class A-1 Notes totaling $193,532 have a stated
interest rate of 6.66125%, Class A-2 Notes totaling $70,193 have a stated
interest rate of 6.60%, Class A-3 Notes totaling $290,800 have a variable rate
of LIBOR plus 0.23% (which has been fixed at 6.475% through an interest rate
swap) and Class A-4 Notes totaling $79,906 have a variable rate of LIBOR plus
0.27% (which has been fixed at 6.475% through an interest rate swap). IOS
Capital received approximately $633,001 in net proceeds from the sale of the
2000-2 Notes. The 2000-2 Notes are collateralized by a pool of office
equipment leases or contracts and related assets and the payments on the 2000-
2 Notes are made from payments on the leases. Future maturities on the 2000-2
Notes are $183,855, $175,834, $142,492, $89,900, $42,350 in fiscal year 2001,
2002, 2003, 2004, and 2005, respectively.
F-15
<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, 2000 to be signed on its behalf by the undersigned, thereunto
duly authorized.
IOS CAPITAL, INC.
Date: December 28, 2000
/s/ Harry G. Kozee
By: _________________________________
(Harry G. Kozee)
Vice President--Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below on December 28, 2000 by the following persons
on behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ Russell Slack President (Principal
____________________________________ Executive Officer )
(Russell Slack)
/s/ Harry G. Kozee Vice President--Finance
____________________________________ (Prinicpal Financial
(Harry G. Kozee) Officer and Principal
Accounting Officer)
/s/ William S. Urkiel Director
____________________________________
(William S. Urkiel)
</TABLE>
<PAGE>
IOS Capital, Inc.
1738 Bass Road
Macon, Georgia 31210
