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As filed with the Securities and Exchange Commission on January 18, 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, 1999 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/A
Commission file number 0-20405
IOS CAPITAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2493042
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
31210
1738 Bass Road, Macon, Georgia (Zip Code)
(Address of principal executive
offices)
(912) 471-2300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of common stock, par value $.01 per share, outstanding
as of December 28, 1999 was 1,000, all of which were owned by IKON Office
Solutions, Inc.
Registered debt outstanding as of December 28, 1999 was $1,022,850,000.
Documents incorporated by reference:
None
The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing with the reduced
disclosure format contemplated thereby.
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TABLE OF CONTENTS
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Page No.
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PART I
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 6
ITEM 3. LEGAL PROCEEDINGS.......................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 7
ITEM 6. SELECTED FINANCIAL DATA.................................... 7
ITEM 7. FINANCIAL INFORMATION...................................... 7
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................... 13
ITEM 11. EXECUTIVE COMPENSATION..................................... 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................. 13
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PART I
Item 1. Business
General
IOS Capital, Inc. ("IOS Capital" or the "Company"), formerly known as IKON
Capital, Inc., was formed in 1987 to provide lease financing to customers of
IKON Office Solutions, Inc. ("IKON"). The Company's offices are located at
1738 Bass Road, Macon, Georgia, 31210 (telephone number 912-471-2300). The
Company is a wholly-owned subsidiary of IKON.
IKON is a public company headquartered in Malvern, Pennsylvania and is the
largest independent distribution network of office equipment in North America.
IKON has nearly 1,000 locations in the United States, Canada, the United
Kingdom, Germany, France, Denmark, Ireland and Mexico. IKON provides products
and services to meet business communication needs, including copiers and
printers, color solutions, distributed printing, outsourcing services, imaging
and legal oursourcing solutions, as well as network design and consulting,
application development and technology training. IKON's fiscal 1999 revenues
were $5.5 billion.
The Company is engaged in the business of arranging lease financing
exclusively for office equipment marketed by IKON'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 the 1999 fiscal year, 67% 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 62% of the equipment financed by the Company
represents copiers, 17% fax machines, and 21% 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
difference resulting from any such variances from IOS Capital's standard
rates.
The Company's customer base (which consists of the end users of the
equipment) is widely dispersed, with the ten largest customers representing
less than 7.5% of the Company's total lease portfolio. The typical new lease
financed by the Company averages $17,739 and 47 months in duration. Although
94% of the leases are scheduled for regular monthly payments, customers are
also offered quarterly, semi-annual, and other customized payment terms. In
connection with its leasing activities, the Company performs billing,
collection, property and sales tax filings, and provides quotes on equipment
upgrades and lease-end notification. The Company also provides certain
financial reporting services to the IKON marketplaces, such as a monthly
report of marketplace increases in leasing activity and related statistics.
IKON and the Company were previously parties to the 1994 Support Agreement,
pursuant to which IKON agreed to make payments to the Company, if necessary,
to enable the Company to maintain (i) a ratio of income before interest
expense and taxes to interest expense of 1.25 times and (ii) a minimum
consolidated tangible net worth of $1.00 at all times. On October 22, 1996,
IKON and the Company replaced the 1994 Support Agreement with a new support
agreement (the "1996 Support Agreement"). The 1996 Support Agreement is
identical to the 1994 Support Agreement except that the 1996 Support Agreement
requires 100% ownership of the Company by IKON, limits the leverage of debt to
equity to a maximum of 6 to 1, and requires that IKON obtain the consent of
two-thirds of the debtholders as a condition to assignment (see "Relationship
with IKON Office Solutions").
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Types of Leases
The lease portfolio of the Company includes direct financing leases and
funded leases. Direct financing leases are contractual obligations between the
Company and the IKON customer and represent the majority of the Company's
lease portfolio. Funded leases are contractual obligations between the IKON
marketplace and the IKON customer which have been financed by the Company.
Funded leases represented approximately 19% of the Company's leases as of
September 30, 1999. The IKON marketplaces have assigned to the Company, with
full recourse, their rights under the underlying contracts including the right
to receive lease and rental payments as well as a security interest in the
related equipment.
Direct financing leases and funded leases are structured as either tax
leases (from the Company's perspective) or conditional sales contracts,
depending on the customer's (or, for funded leases, the IKON marketplace's)
needs. The customer (or the IKON marketplace for funded leases) decides which
of the two structures is desired. Under either structure, the total cost of
the equipment to the customer (or to the IKON marketplace) is substantially
the same (assuming the exercise of the purchase option).
Tax Leases
Tax leases represented 96% of the Company's total lease portfolio as of
September 30, 1999. The Company or the IKON marketplace is considered to be
the owner of the equipment for tax purposes during the life of these leases
and receives the tax benefit associated with equipment depreciation. Tax
leases are structured with a fair market value purchase option. Generally, the
customer may return the equipment, continue to rent the equipment or purchase
the equipment for its fair market value at the end of the lease.
Each tax lease has a stated equipment residual value generally ranging from
0% to 25% of retail price, depending on model and term. As of September 30,
1999, the average equipment residual value for all leases in the Company's
portfolio was 8.2%. Upon early termination of the lease or at the normal end
of the lease term, the Company charges the IKON marketplace for the stated
residual position, if any, and the equipment is returned to the IKON
marketplace. Any gain or loss on the equipment's residual value is realized by
the IKON marketplace.
Conditional Sales Contracts
Conditional sales contracts account for the remaining 4% of the total leases
in the Company's portfolio. Under these arrangements, the customer is
considered to be the owner of the equipment for tax purposes and would receive
any tax benefit associated with equipment depreciation. Each conditional sales
contract has a stated residual value of 0%. Conditional sales contracts are
customarily structured with higher monthly lease payments than the tax leases
and have a $1 purchase option for the equipment at lease-end. Thus, because of
the higher monthly payments, the after-tax cost of the equipment to the
customer (or, for funded leases, to the IKON marketplace) under a conditional
sales contract is substantially the same as under a tax lease (assuming the
exercise of the purchase option). Although the customer has the option of
returning or continuing to rent the equipment at lease-end, the customer
almost always exercises the $1 purchase option at the end of the lease term.
Leased Equipment
The Company also offers, from time to time, financing of the cost of office
equipment that the IKON marketplaces maintain in inventory for short-term
rental to customers. This category of leased equipment also includes equipment
currently rented to customers where the rental agreements are considered to be
cancelable by the customer, based on the terms and conditions of the rental
contracts in effect. Under current operating
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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.
Support Agreements
1. The 1996 Support Agreement
The 1996 Support Agreement between the Company and IKON provides that IKON
will make a cash payment to the Company (or an investment in the form of
equity or subordinated notes) as needed to comply with two requirements: i)
that the Company will maintain a pre-tax interest coverage ratio (income
before interest expense and taxes divided by interest expense) so that the
Company's pre-tax income plus interest expense will not be less than 1.25
times interest expense, and ii) that the Company will maintain a minimum
tangible net worth of $1.00. The agreement also provides that IKON will
maintain 100% direct or indirect ownership of the Company.
Pursuant to the indentures and other documentation governing debt incurred
after June 1, 1994, the Company is not permitted to amend or terminate the
1996 Support Agreement unless: (a) all of the outstanding debt of the Company
is repaid, or (b) approval of two-thirds of the debtholders (not including
IKON, the Company, or their affiliates) for all amounts outstanding covered by
the 1996 Support Agreement (generally, all debt entered into after June 1,
1994) is obtained.
2. The 1994 Support Agreement
The Company and IKON were previously parties to the 1994 Support Agreement,
dated as of June 1, 1994, which contained terms identical to those contained
in the 1996 Support Agreement, except that the 1994 Support Agreement did not
contain the requirement that IKON maintain 100% of ownership of the Company,
did not limit the leverage of debt to equity to a maximum of 6 to 1, and did
not contain the requirement that IKON obtain the consent of two-thirds of the
debtholders as a condition to assignment. Except for these three new
requirements, which are included in the 1996 Support Agreement, all of the
other provisions of the 1996 Support Agreement are identical to those
previously included in the 1994 Support Agreement. The 1994 Support Agreement
was replaced by the 1996 Support Agreement after the Company obtained in
writing from Moody's Investors Services and Standard & Poor's Rating Group
confirmation that the Company's debt rating would not be downgraded as a
result of the foregoing new requirements.
Cash Management Program
The Company participates in IKON's domestic Cash Management program. Under
this program, the Company has an account with IKON through which cash in
excess of current operating requirements is temporarily placed on deposit.
Similarly, amounts are periodically borrowed from IKON. Interest is paid (or
charged) by IKON on these amounts. The Company was in a net average deposit
condition with IKON during 1999, 1998 and 1997 and earned interest income of
approximately $6.0 million, $5.3 million and $5.4 million, respectively.
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Management Fee
Included in general and administrative expenses are corporate overhead
expenses charged by IKON of $552,000 in fiscal years 1999, 1998 and 1997.
These corporate charges represent management's estimate of costs incurred by
IKON on behalf of IOS Capital.
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 $260 million at the end of fiscal 1999. IKON pays the Company
interest on these tax deferrals which arise from tax deferrals on intercompany
sales. In fiscal years 1999, 1998 and 1997, interest was earned by the Company
at a rate consistent with the Company's weighted average outside borrowing
rate of interest. Under this method, the Company earned interest at an average
rate of 6.6% in fiscal 1999 totaling $16.8 million, 6.5% in fiscal 1998
totaling $15.7 million and 6.6% in fiscal 1997 totaling $12.1 million.
Lease Bonus Program
The Company sponsored a lease bonus subsidy program which provided
incentives to IKON marketplaces when IKON customers lease equipment from the
Company. 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, 1998 and 1997, bonus payments made to IKON
marketplaces or IKON totaled $12.0 million, $16.4 million and $9.8 million,
respectively. Effective October 1, 1999, the Company and IKON agreed to
terminate this program.
Credit Policies and Loss Experience
Prior to October 1, 1998, each IKON marketplace was responsible for
developing and maintaining a formal credit policy that governs credit
practices and procedures. In addition, the credit practices of the individual
IKON marketplaces were consistent with IKON's overall policies for leasing and
credit approval. 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 the new process, which was implemented in 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 had full recourse to the IKON
marketplace for any lease which became past due by 120 days or more. Excluding
the effect of recoveries, the gross value of leases charged back to IKON
marketplaces was $79.2 million in fiscal 1999, $98.8 million in fiscal 1998
and $51.6 million in fiscal 1997. For fiscal 1999, 1998 and 1997, the gross
chargebacks represented 3.0%, 3.9% and 2.7%, respectively, of the average
portfolio balances during the year. Effective October 1, 1999, the Company
began a shared recourse arrangement with the IKON marketplaces. This
arrangement provides for net losses resulting from lease defaults to be shared
equally between the Company and the IKON marketplaces. As of the date of this
policy change, related lease default reserves were transferred from the IKON
Marketplaces to the Company.
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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 reserves based on its loss experience (including $275 million 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, reserves for credit losses will be maintained by
the Company consistent with the policy change noted above.
During fiscal 1999 and 1998, accounts classified as current (less than 30
days past due) ranged from 89% to 92% of the total portfolio balance on a
monthly basis. The aging of the Company's lease portfolio receivables at
September 30, 1999 (excluding $275 million of net lease receivables sold under
an asset securitization agreement being serviced by the Company) was as
follows:
<TABLE>
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(dollars in millions)
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Current........................................... $ 2,554.0 89.6%
Over 30 days...................................... 168.2 5.9%
Over 60 days...................................... 79.8 2.8%
Over 90 days...................................... 48.5 1.7%
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$ 2,850.5 100.0%
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Less:
Unearned interest................................ (448.9)
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$ 2,401.6
============
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Funding
Effective July 1, 1994, the Company commenced a medium term note program of
$500 million which was fully subscribed as of July 1995. On June 30, 1995, the
Company increased the amount available to be offered under this medium term
note program by $1 billion and on May 21, 1997, the Company further increased
the amount available by $2 billion. The program allows the Company to offer to
the public from time to time medium term notes having an aggregate initial
offering price not exceeding the total program amount. These notes are offered
at varying maturities of nine months or more from their dates of issue and may
be subject to redemption at the option of the Company, in whole or in part,
prior to the maturity date in conjunction with meeting specified provisions.
Interest rates are determined based on market conditions at the time of
issuance. As of September 30, 1999, $1,242.9 million of medium term notes were
outstanding with a weighted average interest rate of 6.5%.
In December 1998, the Company entered into an asset securitization
transaction whereby it sold $366.6 million in direct financing lease
receivables for $250 million in cash and a retained interest in the remainder.
The agreement is for an initial three year term with certain renewal
provisions and is 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 million. The terms of the agreement
require that the Company continue to service the lease portfolio. The Company
recognized a pretax gain of $14.3 million 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.
The Company had additional asset securitization agreements for $275 million
of eligible direct financing receivables. These agreements were also
structured as revolving securitizations, whereby additional leases can be sold
as collections reduce the previously sold interests. During fiscal 1999,
collections reduced previously sold interests on these two agreements and the
$250 million transaction, described above, by $152.1 million.
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The Company sold an additional $152.1 million in net eligible direct financing
leases and recognized pretax gains of $12.2 million for fiscal year 1999. On
October 7, 1999, these leases were repurchased with a portion of the proceeds
received from the issuance of $700 million of leased-backed notes.
On May 19, 1999, IKON Receivables, LLC (an affiliate of the Company)
publicly issued approximately $752 million of lease backed notes (the "Notes")
under a $1.825 billion shelf registration statement. Class A-1 Notes totaling
$305 million have a stated interest rate of 5.11%, Class A-2 Notes totaling
$62 million have a stated interest rate of 5.60%, Class A-3 Notes totaling
$304 million have a stated interest rate of 5.99% and Class A-4 Notes totaling
$81 million have a stated interest rate of 6.23%. The transaction was
structured using two special purpose limited liability companies: IKON
Receivables-1, LLC, of which the Company is the sole member, and IKON
Receivables, LLC, of which IKON Receivables-1, LLC is the sole member. The
Company contributed to IKON Receivables-1, LLC a pool of office equipment
leases or contracts and related assets (the "1999-1 Asset Pool"), and IKON
Receivables-1, LLC transferred them (other than equipment) to IKON
Receivables, LLC, which is the issuer of the Notes. The Notes are secured by
the Asset Pool and the payments on the Notes are made from payments on the
leases. The Company received approximately $749 million in net proceeds from
the sale of the Notes and used $250 million of that amount to repurchase
previously sold assets in connection with the asset securitization transaction
completed in December 1998. The repurchased assets were contributed to IKON
Receivables-1, LLC as part of the 1999-1 Asset Pool. Restricted cash on the
balance sheet represents cash that has been collected on the lease receivables
in the Asset Pool, which must be used to repay the Notes.
On October 7, 1999, IKON Receivables, LLC (an affiliate of the Company)
publicly issued approximately $700 million of lease backed notes (the "1999-2
Notes") under the $1.825 billion shelf registration statement noted above.
Class A-1 Notes totaling $236 million have a stated interest rate of 6.14125%,
Class A-2 Notes totaling $51 million have a stated interest rate of 6.31%,
Class A-3a Notes totaling $100 million have a stated interest rate of 6.59%,
Class A-3b Notes totaling $241 million have a variable interest rate and Class
A-4 Notes totaling $72 million have a stated interest rate of 6.88%. The Class
A-3b Notes pay interest at a rate of LIBOR plus 0.36% (which we have fixed at
6.58% through an interest rate swap). The transaction was structured the same
as the 1999-1 Notes described above. The Notes are secured by a pool of office
equipment leases or contracts and related assets ("the 1999-2 Asset Pool") and
the payments on the Notes are made from payments on the leases. The Company
received approximately $697 million in net proceeds from the sale of the 1999-
2 Notes and used $275 million of that amount to repurchase previously sold
leases. The repurchased leases were contributed as part of the 1999-2 Asset
Pool.
Employees
At September 30, 1999, the Company had approximately 302 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
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the customer, reducing the likelihood that the customer will contact outside
funding sources. There is a communications network between the Company and the
IKON marketplaces to allow prompt transmittal of customer and product
information. Contract documentation is straightforward and clearly written, so
that financings are completed quickly and to the customer's satisfaction.
Finally, both the Company and the IKON marketplaces are firmly committed to
providing excellent customer service over the duration of the contract.
Certain states have enacted retail installment sales or installment loan
statutes relating to consumer credit, the terms of which vary from state to
state. The Company does not generally extend consumer credit as defined in
those statutes.
The financing activities of the Company are dependent upon sales or leases
of office equipment by the IKON marketplaces, who are subject to substantial
competition by both independent office equipment dealers and the direct sales
forces of office equipment manufacturers. IKON is the largest independent
distribution network of office equipment in North America. IKON marketplaces
compete on the basis of quality of service and ability to provide value added
document services.
Item 2. Properties
The Company's operations are located in Macon, Georgia and occupy
approximately 70,000 square feet. In addition, IKON utilizes approximately
27,000 square feet in adjacent facilities owned by the Company for a
corporate- wide data center and financial processing center. The Company uses
its facility for normal operating activities such as lease processing,
customer service, billing and collections. Certain specialized services (such
as legal, accounting, treasury, tax and audit services) are also performed for
the Company at IKON's corporate headquarters located in Malvern, Pennsylvania.
The Company's facilities are deemed adequate by management to conduct the
Company's business.
Any additional information called for by this item has been omitted pursuant
to General Instruction I(2)(d).
Item 3. Legal Proceedings
A number of ordinary course legal proceedings are pending against the
Company. However, there are no material pending legal proceedings to which the
Company is a party (or to which any of its property is subject). To the
Company's knowledge, no material legal proceedings are contemplated by
governmental authorities against the Company or any of its properties.
Item 4. Submission of Matters to a Vote of Security Holders
No response to this item is required.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
All outstanding shares of the Company's common stock are currently owned by
IKON Office Solutions, Inc. Therefore, there is no market for the Company's
common stock. The company paid IKON a $30 million dividend in fiscal 1999. No
dividends were paid in fiscal 1998 or 1997. 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).
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Item 7. Financial Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Pursuant to General Instruction I(2)(a) of Form 10-K, the following analysis
of the results of operations is presented in lieu of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Impact of Year 2000
State of Readiness. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs or hardware that have date-sensitive
software or embedded technology (non-IT systems) may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The potential for a problem
exists with all computer hardware and software, as well as in products with
embedded technology; copiers and fax machines; security and HVAC systems;
voice/telephony systems; elevators, etc.
IKON has appointed a Year 2000 Corporate Compliance Team, which has prepared
a compliance program for all business units, including the Company, and is
responsible for coordination and inspecting compliance activities in all
business units. The compliance program requires all business units and
locations in every country to inventory potentially affected systems and
products, assess risk, take any required corrective actions, test and certify
compliance. IKON's Year 2000 Testing and Certification Guidelines delineate
the Year 2000 compliance process, testing and quality assurance guidelines,
certification and reporting processes and contingency planning. An independent
consulting company has reviewed the compliance program.
Costs. The Company has used both internal and external resources to
reprogram or replace, test and implement its IT and non-IT systems for Year
2000 modifications. The Company does not separately track the internal costs
incurred on the Year 2000 project. Such costs are principally payroll and
related costs for internal IT personnel. The Company's total cost of the Year
2000 project, excluding these internal costs, is approximately $1.2 million
and is being funded through operating cash flows. Of the total estimated
project cost, approximately $0.2 million is attributable to the purchase of
new software and hardware and has been capitalized. Through October 31, 1999,
IOS Capital has incurred approximately $1.1 million ($0.9 million expensed and
$0.2 million capitalized), related to its Year 2000 project. Remaining amounts
are to be incurred early in the first quarter of fiscal 2000.
Risks. Management believes, based on the information currently available to
it, that the most reasonably likely worst case scenario that could be caused
by technology failures relating to Year 2000 could pose a significant threat
not only to the Company, IKON, its customers and suppliers, but to all
businesses. Risks include:
. Legal risks, including customer, supplier, employee or shareholder
lawsuits over failure to deliver contracted services, product failure,
or health and safety issues.
. Loss of revenues due to failure to meet customer quality expectations.
. Increased operational costs due to manual processing, data corruption or
disaster recovery.
. Inability to bill or invoice.
The cost of the project and the date on which IKON and the Company believe
it will complete the Year 2000 modifications are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the
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availability and costs of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Contingency Plans. IKON's Guidelines require that contingency plans be
developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. Contingency plans
are currently being developed and completed.
Fiscal 1999 Compared with Fiscal 1998
Comparative summarized results of operations for the fiscal years ended
September 30, 1999 and 1998 are set forth in the table below. This table also
shows the increase in the dollar amounts of major revenue and expense items
between periods, as well as the related percentage change.
<TABLE>
<CAPTION>
Fiscal Year
Ended September 30 Increase (Decrease)
------------------- ----------------------
1999 1998 Amount Percent
--------- --------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Lease finance income.............. $ 225,647 $ 223,131 $ 2,516 1.1%
Rental income..................... 39,483 38,749 734 1.9%
Interest on IKON income tax
deferral......................... 16,764 15,734 1,030 6.5%
Other income...................... 17,076 11,653 5,423 46.5%
--------- --------- ----------
298,970 289,267 9,703 3.4%
Expenses:
Interest.......................... 114,961 109,737 5,224 4.8%
General and administrative........ 67,226 72,938 (5,712) (7.8)%
--------- --------- ----------
182,187 182,675 (488) (.3)%
Gain on sale of lease receivables... 26,454 2,724 23,730 871.1%
--------- --------- ----------
Income before taxes................. 143,237 109,316 33,921 31.0%
Provision for income taxes.......... 54,910 46,194 8,716 18.9%
--------- --------- ----------
Net income.......................... $ 88,327 $ 63,122 $ 25,205 39.9%
========= ========= ==========
</TABLE>
Revenues
Total revenues increased $9.7 million or 3.4% in fiscal 1999 from fiscal
1998. Approximately $2.5 million of this increase in revenues was a result of
increased lease finance income due to continued growth in the portfolio of
direct financing and funded leases, adjusted for the effects of the asset
securitizations. The lease portfolio, net of lease receivables that were sold
in asset securitization transactions, increased 6.7% from September 30, 1998
to September 30, 1999.
Office equipment placed on rental by the IKON marketplaces to customers with
cancelable terms may be purchased by the Company. During fiscal 1999 and 1998,
IOS Capital purchased operating lease equipment of $23.8 million and $64.0
million, respectively. Operating leases contributed $39.5 million in rental
income to total revenues during fiscal 1999 compared to $38.7 million in
fiscal 1998.
The Company earns interest income on the deferred tax liabilities of the
IKON marketplaces associated with leases funded through the Company at a rate
consistent with the Company's weighted average outside borrowing rate of
interest. The Company's average rate was 6.6% for fiscal 1999 and 6.5% for
fiscal 1998. The deferred tax base upon which these payments are calculated
decreased 4.1% to $260 million at September 30, 1999 from $271 million at
September 30, 1998. Due to an increase in the average rate and an increase in
the average
9
<PAGE>
deferred tax liability balance, interest income on deferred taxes rose $1.0
million or 6.5% when comparing fiscal 1999 to fiscal 1998.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1998. 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 $5.4 million or 46.5%, when comparing fiscal
1999 to fiscal 1998. 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 6.4%, with $1,865.8 million outstanding at
September 30, 1999. The Company paid a weighted average interest rate on all
borrowings for fiscal 1999 of 6.6% compared to 6.5% for fiscal 1998. Primarily
as a result of the increased average borrowings, interest expense grew by $5.2
million or 4.8%, when comparing fiscal 1999 to fiscal 1998. At September 30,
1999, the Company's debt to equity ratio including amounts due to IKON was 5.0
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, 1999, approximately $1.2 billion of medium
term notes were outstanding under these programs with a weighted average
interest rate of 6.5%, while approximately $1.1 billion remains available
under this program.
At September 30, 1999, the Company had no outstanding notes payable to
banks, compared to $100 million at September 30, 1998 with a weighted average
interest rate of 6.0%.
The Company has filed a $1.825 billion shelf registration statement for
lease backed notes. The Company, through its affiliate IKON Receivables LLC,
issued lease-backed notes under this shelf of approximately $752 million on
May 19, 1999 at an average interest rate of 5.7%. On October 7, 1999, an
additional $700 million of lease-backed notes were issued leaving
approximately $373 million currently available under the noted shelf
registration statement. (See "Business--Funding")
Total general and administrative expenses decreased by $5.7 million or 7.8%,
when comparing fiscal 1999 to fiscal 1998. The general and administrative
expense category for fiscal 1999 includes depreciation expense on leased
equipment totaling $33.6 million compared to $32.7 million in fiscal 1998. In
addition, lease bonus subsidy payments included in the general and
administrative expense categories were approximately $4.4 million less in
fiscal 1999 than in fiscal 1998. Excluding the effects of increased
depreciation expense on operating leases and lease bonus subsidy payments,
remaining general and administrative expenses decreased approximately $2.2
million or 9.2%, when comparing fiscal 1999 to fiscal 1998.
Gain on Sale of Lease Receivables
In December 1998, the Company entered into an asset securitization
transaction whereby it sold $366.6 million in direct financing lease
receivables for $250 million 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 $250 million. The terms of the agreement require that
the Company will continue to service the lease portfolio. The Company
recognized a pretax gain of $14.3 million during the first quarter of fiscal
1999 on this agreement. On May 25, 1999, the Company repurchased leases sold
under this agreement with the proceeds from the lease-backed notes. As a
result of the repurchase, the $250 million commitment remains available.
10
<PAGE>
The Company had additional asset securitization agreements for $275 million
of eligible direct financing receivables. These agreements were also
structured as revolving securitizations, whereby additional leases can be sold
as collections reduce the previously sold interests. During fiscal 1999,
collections reduced previously sold interests on these two agreements and the
$250 million transaction, described above, by $152.1 million. The Company sold
an additional $152.1 million in net eligible direct financing leases and
recognized pretax gains of $12.2 million for fiscal year 1999.
Income Before Taxes
Income before taxes increased by $33.9 million or 31.0%, when comparing
pretax earnings for fiscal 1999 to fiscal 1998. This increase in income before
taxes was essentially the effect of higher earnings on a larger portfolio
base, gains from asset securitization transactions and decreased general and
administrative expenses, partially offset by higher borrowing costs due to the
increase in average debt to fund the lease portfolio.
Provision for Income Taxes
Income taxes for fiscal 1999 increased by $8.7 million or 18.9% over fiscal
1998. The increase in income taxes is directly attributable to the increase in
income before taxes in fiscal 1999 as compared to fiscal 1998 and a drop in
the effective tax rate. During fiscal 1999, the Company's effective income tax
rate was 38.3%, as compared to 42.3% in fiscal 1998, due to the use of state
net operating loss carryforwards in fiscal 1999.
Fiscal 1998 Compared with Fiscal 1997
Comparative summarized results of operations for the fiscal years ended
September 30, 1998 and 1997 are set forth in the table below. This table also
shows the increase in the dollar amounts of major revenue and expense items
between periods, as well as the related percentage change.
<TABLE>
<CAPTION>
Fiscal Year
Ended September 30 Increase (Decrease)
------------------- ----------------------
1998 1997 Amount Percent
--------- --------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Lease finance income............... $ 223,131 $ 170,505 $ 52,626 30.9%
Rental income...................... 38,749 24,012 14,737 61.4%
Interest on IKON income tax
deferral.......................... 15,734 12,134 3,600 29.7%
Other income....................... 11,653 7,638 4,015 52.6%
--------- --------- -----------
289,267 214,289 74, 978 35.0%
Expenses:
Interest........................... 109,737 83,536 26,201 31.4%
General and administrative......... 72,938 61,790 11,148 18.0%
--------- --------- -----------
182,675 145,326 37,349 25.7%
Gain on sale of lease receivables.... 2,724 2,602 122 4.7%
--------- --------- -----------
Income before taxes.................. 109,316 71,565 37,751 52.8%
Provision for income taxes........... 46,194 28,984 17,210 59.4%
--------- --------- -----------
Net income........................... $ 63,122 $ 42,581 $ 20,541 48.2%
========= ========= ===========
</TABLE>
11
<PAGE>
Revenues
Total revenues increased $75.0 million or 35.0% in fiscal 1998 from fiscal
1997. Approximately 70.2% or $52.6 million of this increase in revenues was a
result of increased lease finance income due to continued growth in the
portfolio of direct financing and funded leases. The lease portfolio, net of
lease receivables that were sold in asset securitization transactions,
increased 22.4% from September 30, 1997 to September 30, 1998.
Office equipment placed on rental by the IKON marketplaces to customers with
cancelable terms may be purchased by the Company. During fiscal 1998 and 1997,
IOS Capital purchased operating lease equipment of $64.0 million and $48.5
million, respectively. Operating leases contributed $38.7 million in rental
income to total revenues during fiscal 1998 compared to $24.0 million in
fiscal 1997.
The Company earns interest income on the deferred tax liabilities of the
IKON marketplaces associated with leases funded through the Company at a rate
consistent with the Company's weighted average outside borrowing rate of
interest. The Company's average rate was 6.5% for fiscal 1998 compared to 6.6%
for fiscal 1997. In addition, the deferred tax base upon which these payments
are calculated increased 23.7% to $271 million at September 30, 1998 from $219
million at September 30, 1997. Primarily as a result of the increased deferred
tax liabilities, interest income on deferred taxes rose $3.6 million or 29.7%
when comparing fiscal 1998 to fiscal 1997.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1997. The growth in other income from fees is primarily due to the increased
size of the lease portfolio upon which these fees are based. Overall, fee
income from these sources grew by $4.0 million or 52.6%, when comparing fiscal
1998 to fiscal 1997.
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
banks and the issuance of medium term notes in the public market increased by
24.4%, with $1,949.8 million outstanding at September 30, 1998. The Company
paid a weighted average interest rate on all borrowings for fiscal 1998 of
6.5% compared to 6.6% for fiscal 1997. Primarily as a result of the increased
borrowings, interest expense grew by $26.2 million or 31.4%, when comparing
fiscal 1998 to fiscal 1997. At September 30, 1998, the Company's debt to
equity ratio was 5.8 to 1. On August 14, 1998, Standard and Poor's lowered its
credit rating one level on the Company and IKON to "BBB+" from "A-" and
Moody's Investor Service lowered its credit ratings one level on the Company
and IKON to "Baal" from "A3".
During May 1997, the Company completed the filing of a medium term note
registration in the amount of $2 billion, designed to meet the Company's
anticipated portfolio funding needs into fiscal 1999. This new note program
was structured similar to the original $500 million medium term note program
that was filed in June 1994 and the $1 billion medium term note program that
was filed in June 1995 which was used to meet the Company's portfolio funding
needs during the period July 1994 to June 1997. The medium term note program
allows for the issuance of medium term notes in the public markets with
varying maturities of nine months or more from their dates of issuance,
through four nationally recognized investment firms. At September 30, 1998,
approximately $1.8 billion of medium term notes were outstanding under these
programs with a weighted average interest rate of 6.5%, while approximately
$1.1 billion remains available under this program.
At September 30, 1998, the Company had outstanding notes payable to banks of
$100 million, with a weighted average interest rate of 6.0%, compared to $25
million at September 30, 1997 at 6.5%.
Total general and administrative expenses increased by $11.1 million or
18.0%, when comparing fiscal 1998 to fiscal 1997. The general and
administrative expense category for fiscal 1998 includes depreciation expense
on leased equipment totaling $32.7 million compared to $19.8 million in fiscal
1997. In addition, lease bonus
12
<PAGE>
subsidy payments included in the general and administrative expense categories
were approximately $6.6 million more in fiscal 1998 than in fiscal 1997.
Excluding the effects of increased depreciation expense on operating leases
and lease bonus subsidy payments, remaining general and administrative
expenses decreased approximately $8.3 million or 25.9%, when comparing fiscal
1998 to fiscal 1997. This decrease is due to cost controls initiated within
the company.
Gain on Sale of Lease Receivables
The company has asset securitization agreements for $275 million of eligible
direct financing lease receivables. As collections reduce previously sold
interests, new leases can be sold up to the agreement amount. During fiscal
1998, collections reduced previously sold interests by approximately $106.1
million on these two agreements. The Company sold an additional $106.1 million
in net eligible direct financing leases during fiscal 1998 and recognized a
pretax gain of $2.7 million.
Income Before Taxes
Income before taxes increased by $37.8 million or 52.8%, when comparing
pretax earnings for fiscal 1998 to fiscal 1997. This increase in income before
taxes was essentially the effect of higher earnings on a larger portfolio base
increased general and administrative expenses, partially offset by higher
borrowing costs due to the increase in debt to fund the lease portfolio.
Provision for Income Taxes
Income taxes for fiscal 1998 increased by $17.2 million or 59.4% over fiscal
1997. The increase in income taxes is directly attributable to the increase in
income before taxes in fiscal 1998 as compared to fiscal 1997. During fiscal
1998, the Company's effective income tax rate was 42.3%, as compared to 40.5%
in fiscal 1997.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
(No response to this item is required.)
----------------
Item 8. Financial Statements and Supplementary Data
The financial statements of IOS Capital, Inc. are submitted herewith on
Pages F-1 through F-11 of this report.
Quarterly Data
The following table shows comparative summarized unaudited quarterly results
for fiscal 1999 and 1998.
<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
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
1998
Lease finance income.... $51,479 $54,787 $56,904 $59,961 $223,131
Interest expense........ 25,865 27,208 27,382 29,282 109,737
Income before income
taxes.................. 23,354 26,296 29,691 29,975 109,316
Net income.............. 13,779 15,514 17,220 16,609 63,122
</TABLE>
13
<PAGE>
Any additional information required by this item has been omitted pursuant
to General Instruction I(2)(a) of Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Russell Slack, age 41, has been President of IOS Capital since 1999. He
joined the company in 1996 as Vice President of Portfolio Quality. His
experience includes over 15 years in equipment leasing.
Harry G. Kozee, age 44, has been Vice President--Finance of the Company
since 1993. He joined the Company in 1991 and was promoted to Controller in
1992.
William S. Urkiel, age 54, sole director, has been Chief Financial Officer
and Senior Vice-President of IKON since 1999. Prior to joining IKON, he was
Corporate Vice President and Chief Financial Officer, AMP, Inc. (1997-1998);
Corporate Controller, AMP Inc. (1995-1996); Senior Managing Director and Chief
Financial Officer, IBM Japan (1994). He was named a Director of the Company on
May 10, 1999.
Item 11. Executive Compensation
The information called for by this item has been omitted pursuant to General
Instruction I(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item has been omitted pursuant to General
Instruction I(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
See Item 1 hereof for information concerning the relationship between the
Company, IKON and the IKON marketplaces.
Any additional information required by this item has been omitted pursuant
to General Instruction I(2)(c) of Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................... F-1
Balance Sheets at September 30, 1999 and 1998.......................... F-2
Statements of Income for Fiscal Years Ended September 30, 1999, 1998
and 1997.............................................................. F-3
Statements of Changes in Shareholder's Equity for Fiscal Years Ended
September 30, 1999, 1998 and 1997..................................... F-4
Statements of Cash Flows for Fiscal Years Ended September 30, 1999,
1998 and 1997......................................................... F-5
Notes to Financial Statements.......................................... F-6
</TABLE>
14
<PAGE>
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.
(b) Exhibits
<TABLE>
<C> <S>
3.1 Articles of Incorporation of the Company, filed on May 4, 1994 as
Exhibit 3.1 to the Company's Registration Statement on Form 10, are
incorporated herein by reference.
3.2 Bylaws of the Company, filed on May 4, 1994 as Exhibit 3.2 to the
Company's Registration Statement on Form 10, are incorporated herein
by reference.
4.1 Form of Fixed Rate Note and Floating Rate Note with respect to the
Company's Medium Term Note Program, filed as Exhibit 4 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1994, is
Incorporated herein by reference.
4.2 Pursuant to Regulation S-K item 601 (b)(4)(iii), the Company agrees
to furnish to the Commission, Upon request, a copy of instruments
defining the rights of holders of long term debt of the Company.
10.1 Support Agreement, dated as of October 22, 1996, between the Company
and Alco Standard Corporation, filed as Exhibit 10.4 to the
Company's Form 8-K dated November 12, 1996, is incorporated herein
by reference.
10.2 Amended and Restated Receivables Transfer Agreement dated as of
March 31, 1997, among IKON Funding, Inc., IKON Capital, Inc., Twin
Towers, Inc. and Deutsche Bank AG, New York Branch, filed as Exhibit
10.10 to IKON's 10-K for the fiscal year ended September 30, 1997,
is incorporated herein by reference.
10.3 First Tier Transfer Agreement dated as of March 31, 1997 between
IKON Capital and IKON Funding, Inc., filed as Exhibit 10.11 to
IKON's Form 10-K for the fiscal year ended September 30, 1997 is
incorporated herein by reference.
10.4 Receivables Transfer Agreement dated as of September 30, 1996 among
IKON Funding, Inc., IKON Capital, Inc., Old Line Funding Corp. and
Royal Bank of Canada, filed as Exhibit 4.1 to IKON's Form 10-K for
the fiscal year ended September 30, 1996, is incorporated herein by
reference. Amendment 1 to Receivables Transfer Agreement, dated as
of October 7, 1997, filed as Exhibit 10.7 to IKON's Form 10-K for
the fiscal year ended September 30, 1997, is incorporated herein by
reference.
10.5 Transfer Agreement dated as of September 30, 1996, filed as Exhibit
4.3 to IKON's Form 10-K for the fiscal year ended September 30,
1996, is incorporated herein by reference.
10.6 Indenture dated as of July 1, 1995 between the Company and Chase
Manhattan Bank, N.A. (formerly Chemical Bank, N.A.), as Trustee,
filed as Exhibit 10.8 to IKON's Form 10-K for the fiscal year ended
September 30, 1996, is incorporated herein by reference.
10.7 Indenture dated as of July 1, 1994 between the Company and Nations
Bank, N.A., as Trustee, filed as Exhibit 4 to the Company's
Registration Statement No. 33-53779 on Form S-3, is incorporated
herein by reference.
10.8 Distribution Agreement dated as of June 4, 1997, between the Company
and various distribution agents, filed as Exhibit 10.13 to IKON's
Form 10-K for the fiscal year ended September 30, 1997, is
incorporated herein by reference.
10.9 Distribution Agreement dated as of June 30, 1995 between the Company
and various distribution agents, filed as Exhibit 10.21 to IKON's
10-K for the fiscal year ended September 30, 1995, is incorporated
herein by reference.
10.10 Distribution Agreement dated July 1, 1994, filed as Exhibit 1 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1994 is
incorporated herein by reference.
</TABLE>
15
<PAGE>
<TABLE>
<C> <S>
10.11 Federal Income Tax Allocation Agreement, filed on May 4, 1994 as
Exhibit 10.1 to the Company's Registration Statement on Form 10, is
incorporated herein by reference.
12* Ratio of Earnings to Fixed Charges
21* Subsidiaries of the Registrant
23* Auditors' Consent
24* Powers of Attorney; certified resolution re: Powers of Attorney
27 Financial Data Schedule
</TABLE>
- --------
*As previously filed
(c) Reports on Form 8-K.
On July 28, 1999, the registrant filed a Current Report on Form 8-K to file,
under Item 5 of the form, information contained in a press release of its
parent, IKON, dated July 28, 1999 concerning IKON's earnings for the fiscal
quarter and nine-month period ended June 30, 1999.
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 on 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 uncertainties and risks which apply to both the Company and
IKON, include, but are not limited to; risks and uncertainties relating to
conducting operations in a competitive environment; delays, difficulties,
management transitions and employment issues associated with consolidation of,
and/or changes in business operations managing the integration of existing and
acquired companies risks and uncertainties associated with existing or future
vendor relationships; 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.
16
<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/A for the fiscal year
ended September 30, 1999 to be signed on its behalf by the undersigned,
thereunto duly authorized.
IOS CAPITAL, INC.
Date: January 18, 2000
/s/ Harry G. Kozee
By: _________________________________
(Harry G. Kozee)
Vice President--Finance
17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
IKON Office Solutions, Inc.
We have audited the accompanying consolidated balance sheets of IOS Capital,
Inc. (a wholly-owned subsidiary of IKON Office Solutions, Inc.) as of
September 30, 1999 and 1998, and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended September 30, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IOS Capital,
Inc. at September 30, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
_____________________________________
Ernst & Young LLP
Philadelphia, Pennsylvania
October 25, 1999, execpt for the fourth
paragraph of note 4, as to which the date is December 9, 1999
F-1
<PAGE>
IOS CAPITAL, INC.
BALANCE SHEETS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
September 30
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets
Investments in leases (notes 3 and 4):
Direct financing leases.............................. $2,310,663 $2,002,012
Less: Unearned income................................ (374,279) (343,211)
---------- ----------
1,936,384 1,658,801
Funded leases, net................................... 465,188 592,827
---------- ----------
2,401,572 2,251,628
Cash................................................... 1,335 2,621
Restricted Cash........................................ 29,625
Accounts receivable.................................... 76,805 63,066
Due from IKON Office Solutions, Inc. (note 3).......... 52,060
Prepaid expenses and other assets...................... 10,018 14,224
Leased equipment--operating rentals at cost, less
accumulated depreciation of:
1999--$51,055; 1998--$43,411........................... 59,681 76,551
Property and equipment at cost, less accumulated
depreciation of:
1999--$7,384; 1998--$5,596 (note 2).................... 10,395 11,491
---------- ----------
Total assets........................................ $2,589,431 $2,471,641
========== ==========
Liabilities and Shareholder's equity Liabilities:
Accounts payable and accrued expenses.................. $ 65,204 $ 59,206
Accrued interest..................................... 23,481 33,467
Due to IKON Office Solutions......................... 112,649
Notes payable to banks (note 5)...................... 100,000
Medium term notes (note 5)........................... 1,242,850 1,849,750
Lease-backed notes (note 5).......................... 622,948
Deferred income taxes (note 7)....................... 129,869 95,115
---------- ----------
Total liabilities................................... 2,197,001 2,137,538
Shareholder's equity:
Common stock--$.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital.................................. 149,415 149,415
Retained earnings.................................... 243,015 184,688
---------- ----------
Total shareholder's equity.......................... 392,430 334,103
---------- ----------
Total liabilities and shareholder's equity.......... $2,589,431 $2,471,641
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Lease finance income (note 2)........................ $225,647 $223,131 $170,505
Rental income........................................ 39,483 38,749 24,012
Interest on IKON income tax deferrals (note 3)....... 16,764 15,734 12,134
Other income......................................... 17,076 11,653 7,638
-------- -------- --------
298,970 289,267 214,289
Expenses:
Interest (note 3).................................... 114,961 109,737 83,536
General and administrative........................... 67,226 72,938 61,790
-------- -------- --------
182,187 182,675 145,326
Gain on sale of lease receivables (note 4)........... 26,454 2,724 2,602
-------- -------- --------
Income before income taxes........................... 143,237 109,316 71,565
Provision for income taxes (note 7).................. 54,910 46,194 28,984
-------- -------- --------
Net income........................................... $ 88,327 $ 63,122 $ 42,581
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Contributed Retained
Stock Capital Earnings Total
------ ----------- -------- --------
<S> <C> <C> <C> <C>
Balance at October 1, 1996............... * 112,415 78,985 191,400
Net income............................... 42,581 42,581
Capital contributions from IKON.......... 32,000 32,000
-------- -------- --------
Balance at September 30, 1997............ * 144,415 121,566 265,981
Net Income............................... 63,122 63,122
Capital contributions from IKON.......... 5,000 5,000
-------- -------- --------
Balance at September 30, 1998............ * 149,415 184,688 334,103
Net Income............................... 88,327 88,327
Dividend to IKON......................... (30,000) (30,000)
-------- -------- --------
Balance at September 30, 1999............ $ * $149,415 $243,015 $392,430
==== ======== ======== ========
</TABLE>
- --------
* Amount is less than one thousand dollars.
See accompanying notes.
F-4
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net income............................. $ 88,327 $ 63,122 $ 42,581
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 35,390 34,579 17,209
Provision for deferred taxes......... 34,754 30,938 20,209
Gain on sale of lease receivables.... (26,454) (2,724) (2,602)
Changes in operating assets and
liabilities:
Accounts receivable................. (13,739) (7,477) (7,255)
Prepaid expenses and other assets... 23,299 1,936 4,748
Accounts payable and accrued
expenses........................... 4,275 8,188 6,697
Accrued interest.................... (9,986) 5,682 6,915
----------- ----------- -----------
Net cash provided by operating
activities............................ 135,866 134,244 88,502
----------- ----------- -----------
Investing activities
Purchases of equipment for rental,
net................................. (16,732) (58,308) (35,577)
Purchases of property and equipment,
net................................. (691) (1,038) (6,676)
Investment in leases:
Additions............................ (1,535,165) (1,676,712) (1,618,984)
Cancellations........................ 349,732 362,725 275,751
Collections.......................... 894,785 795,663 473,157
Proceeds from sale................... 402,098 106,144 281,270
Repurchase of leases sold............ (250,000)
----------- ----------- -----------
Net cash used by investing activities.. (155,973) (471,526) (631,059)
----------- ----------- -----------
Financing activities
Proceeds from bank borrowings........ 300,000
Payments on bank borrowings.......... (100,000) (225,000) (33,000)
Proceeds from issuance of medium term
notes............................... 523,500 853,350
Payments on medium term notes........ (606,900) (216,000) (281,000)
Proceeds from issuance of lease-
backed notes........................ 749,331
Payments on lease-backed notes....... (128,694)
Deposit to restricted cash........... (29,625)
Capital contributed by IKON.......... 5,000 32,000
Dividend to IKON..................... (30,000)
----------- ----------- -----------
Net cash (used in) provided by
financing activities.................. (145,888) 387,500 571,350
----------- ----------- -----------
(Decrease) increase in cash and amounts
due to IKON........................... (166,955) 50,218 28,793
Cash and Due from (to) IKON at
beginning of period................... 54,681 4,463 (24,330)
----------- ----------- -----------
Cash and Due (to) from IKON at end of
period................................ $ (111,314) $ 54,681 $ 4,463
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business
IOS Capital, Inc. (the "Company"), a wholly-owned subsidiary of IKON Office
Solutions, Inc. ("IKON"), is engaged in the business of arranging lease
financing exclusively for office equipment marketed by IKON's marketplaces
("IKON 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. Currently 62% of the equipment
financed by the Company represents copiers, 17% fax machines, and 21% 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.
Restricted Cash
Restricted cash on the balance sheet represents cash which has been
collected on the lease receivables in the Asset Pool, which must be used to
repay the Notes.
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
F-6
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the Company has computed and disclosed
the fair value of its notes payable (Note 5) and interest rate swaps.
Pending Accounting Change
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
will require us to recognize all derivatives as either assets or liabilities
and measure the instruments at fair value. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We intend to
adopt the standard on October 1, 2000. We do not believe the effect of
adoption will be material.
Interest Rate Swap Agreements
The Company uses interest rate swap agreements for purposes other than
trading and they are treated as off-balance sheet items. Interest rate swap
agreements are used by the Company to modify variable rate obligations to
fixed rate obligations, thereby reducing the exposure to market rate
fluctuations. The interest rate swap agreements are designated as hedges, and
effectiveness is determined by matching the principal balance and terms with
that specific obligation. Such an agreement involves the exchange of amounts
based on fixed interest rates for amounts based on variable interest rates
over the life of the agreement without an exchange of the notional amount upon
which payments are based. The differential to be paid or received as interest
rates change is accounted for on the accrual method of accounting. Gains and
losses on terminations of interest rate swap agreements are deferred and
amortized over the remaining term of the original contract life of the
terminated swap agreement. In the event of early extinguishment of the
obligation, any realized or unrealized gain or loss from the swap would be
recognized in income at the time of extinguishment. Fair values for the
Company's interest rate swaps (off- balance sheet instruments) are estimated
to be ($725,000) and ($3,782,000) in fiscal 1999 and 1998, respectively, based
on termination of the agreements.
3. Agreements between IOS Capital and IKON
Cash Management Program
The Company participates in IKON's domestic cash management program. Under
this program, the Company has an account with IKON wherein cash temporarily in
excess of current operating requirements earns interest at rates established
by IKON. Similarly, amounts are periodically borrowed from IKON, with interest
charged at market rates on borrowed funds. The Company was in a net average
deposit position with IKON during 1999, 1998 and 1997 and earned interest
income of $5,956,000, $5,290,000 and $5,404,000 respectively (included in
interest expense). The Company considers its account with IKON to represent a
cash balance. Accordingly, the accompanying Statements of Cash Flows includes
the changes in Cash and "Due from (to) IKON".
Management Fee
Included in general and administrative expenses are corporate overhead
expenses charged by IKON of $552,000 in fiscal years 1999, 1998 and 1997.
These corporate charges represent management's estimate of costs incurred by
IKON on behalf of IOS Capital.
F-7
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Interest on IKON Income Tax Deferrals
The Company charges IKON interest on IKON's income tax deferrals associated
with the Company's leasing transactions. Such charges were calculated at 6.6%
in 1999 and 1997 and 6.5% in 1998.
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, 1998 and 1997, 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 resulting from lease defaults to be shared equally. Lease default
reserves will be transferred from the IKON marketplaces to the Company
effective October 1, 1999 and will be maintained at the Company. Provisions
for lease defaults will be shared between the Company and the IKON
marketplaces.
The 1996 Support Agreement
The 1996 Support Agreement between the Company and IKON provides that IKON
will make a cash payment to the Company (or an investment in the form of
equity or subordinated notes) as needed to comply with certain requirements.
This agreement does not contain a requirement that the IKON marketplaces
repurchase all defaulted lease contracts.
4. Investments in Leases
The Company's funded leases include certain internal lease portfolios and
non-cancelable rental contracts for IKON marketplaces, which have been
financed by the Company. Under the terms of these financing arrangements, the
IKON marketplace maintains the contractual relationship with the third-party
customer. The IKON marketplaces have assigned to the Company, with full
recourse, their rights under the underlying contracts including the right to
receive lease and rental payments and a security interest in the related
equipment.
At September 30, 1999, aggregate future minimum payments to be received,
including guaranteed residual values, for each of the succeeding fiscal years
under direct financing and funded leases are as follows (in thousands):
<TABLE>
<CAPTION>
Direct
Financing Funded
Leases Leases
---------- --------
<S> <C> <C>
2000................................................. $ 832,481 $194,491
2001................................................. 682,810 159,524
2002................................................. 469,005 109,573
2003................................................. 245,867 57,441
2004................................................. 80,500 18,807
---------- --------
2,310,663 539,836
Less unearned interest............................... (374,279) (74,648)
---------- --------
$1,936,384 $465,188
========== ========
</TABLE>
F-8
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In December 1998, the Company entered into an asset securitization
transaction whereby it sold $366.6 million in direct financing lease
receivables for $250 million 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 $250 million. The terms of the agreement require that
the Company will continue to service the lease portfolio. The Company
recognized a pretax gain of $14.3 million during the first quarter of fiscal
1999 on this agreement. On May 25, 1999, the Company repurchased leases sold
under this agreement with the proceeds from the lease-backed notes. As a
result of the repurchase, the $250 million commitment remains available.
On December 9, 1999, the Company transferred an additional $311,381,604 in
financing lease receivables for $247,600,000 in cash in connection with this
revolving asset securitization.
The Company had entered into asset securitization agreements for
$275,000,000 of eligible direct financing lease receivables. These agreements
were also structured as revolving securitizations, whereby additional leases
can be sold as collections reduce the previously sold interests. During fiscal
1999, collections reduced previously sold interests on these two agreements
and the $250,000,000 transaction, described above, by $152,098,000. The
Company sold an additional $152,098,000 in net eligible direct financing
leases and recognized pretax gains of $12.2 million for fiscal year 1999. On
October 7, 1999, these leases were repurchased with a portion of proceeds
received from the issuance of $700,000,000 of leased-backed notes.
The changes in the servicing liabilities relating to the asset
securitization agreements for the fiscal years ended September 30, 1999 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Beginning of period........................................ $8,243 $8,248
Additions.................................................. 2,459 3,454
Less: Amortization....................................... . (3,789) (3,459)
------ ------
Balance at September 30.................................... $6,913 $8,243
====== ======
</TABLE>
5. Notes Payable to Banks, Medium Term Notes and Leased-Backed Notes
There are no outstanding notes payable to banks at September 30, 1999.
On May 19, 1999, IKON Receivables, LLC (an affiliate of the Company)
publicly issued approximately $752 million of lease backed notes (the "Notes")
under a $1.825 billion shelf registration statement. Class A-1 Notes totaling
$304,474,000 have a stated interest rate of 5.11%, Class A-2 Notes totaling
$61,579,000 have a stated interest rate of 5.60%, Class A-3 Notes totaling
$304,127,000 have a stated interest rate of 5.99% and Class A-4 Notes totaling
$81,462,000 have a stated interest rate of 6.23%. The transaction was
structured using two special purpose limited liability companies: IKON
Receivables- 1, LLC, of which the Company is the sole member, and IKON
Receivables, LLC, of which IKON Receivables- 1, LLC is the sole member. The
Company contributed to IKON Receivables-1, LLC a pool of office equipment
leases or contracts and related assets (the "Asset Pool"), and IKON
Receivables-1, LLC transferred them (other than equipment) to IKON
Receivables, LLC, which is the issuer of the Notes. The Notes are secured by
the Asset Pool and the payments on the Notes are made from payments on the
leases. The Company received approximately $749 million in net proceeds from
the sale of the Notes and used $250 million of that amount to repurchase
previously sold assets in connection with the asset securitization transaction
completed in December 1998. The repurchased assets were contributed as part of
the Asset Pool. Restricted cash on the balance sheet represents cash that has
been collected on the lease receivables in the Asset Pool, which must be used
to repay the Notes.
F-9
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On May 21, 1997, the Company increased the amount available to be offered
under its medium term notes program to $3,500,000,000 or the equivalent
thereof in foreign currency. The program allows the Company to offer to the
public from time to time medium term notes having an aggregate initial
offering price not exceeding the total program amount. These notes are offered
at varying maturities of nine months or more from their dates of issue and may
be subject to redemption at the option of the Company, in whole or in part,
prior to the maturity date in conjunction with meeting specified provisions.
Interest rates are determined based on market conditions at the time of
issuance. As of September 30, 1999, $1,242,850,000 of medium term notes are
outstanding with a weighted average interest rate of 6.5% and $1,123,250,000
remains available under the program.
The Company must comply with certain restrictive covenants under the terms
of its loan agreements. The Company agrees to maintain earnings before fixed
charges of not less than 1.25 times fixed charges and a tangible net worth of
not less than $1.
Interest paid amounted to $124,947,000, $104,055,000 and $76,621,000 for the
fiscal years ended September 30, 1999, 1998 and 1997, respectively.
At September 30, 1999 and 1998, the fair value of the Company's notes
payable to banks, medium term notes and lease-backed notes is estimated to be
$1,805,722,000 and $1,937,762,000, respectively, using a discounted cash flow
analysis.
Future maturities of all medium term notes and lease-backed notes
outstanding at September 30, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 2000..................................................... $ 945,163
2001............................................................ 672,018
2002............................................................ 203,813
2003............................................................ 44,804
----------
$1,865,798
==========
</TABLE>
On October 7, 1999, IKON Receivables, LLC (an affiliate of the Company)
publicly issued approximately $700 million of lease backed notes (the"1999-2
Notes") under a $1.825 billion shelf registration statement. Class A-1 Notes
totaling $235,326,000 have a stated interest rate of 6.14125%, Class A-2 Notes
totaling $51,100,000 have a stated interest rate of 6.31%, Class A-3a Notes
totaling $100,000,000 have a stated interest rate of 6.59%, Class A-3b Notes
totaling $240,891,000 have a variable interest rate and Class A-4 Notes
totaling $72,278,000 have a stated interest rate of 6.88%. The Class A-3b
Notes pay interest at a rate of LIBOR plus 0.36% (which we have fixed at 6.58%
through an interest rate swap). The transaction was structured using two
special purpose limited liability companies: IKON Receivables- 1, LLC, of
which the Company is the sole member, and IKON Receivables, LLC, of which IKON
Receivables- 1, LLC is the sole member. The Company contributed to IKON
Receivables-1, LLC a pool of office equipment leases or contracts and related
assets (the "1999-2 Asset Pool"), and IKON Receivables- 1, LLC transferred
them (other than equipment) to IKON Receivables, LLC, which is the issuer of
the Notes. The Notes are secured by the 1999-2 Asset Pool and the payments on
the Notes are made from payments on the leases. The Company received
approximately $697 million in net proceeds from the sale of the 1999-2 Notes
and used $275 million of that amount to repurchase previously sold leases. The
repurchased leases were contributed as part of the 1999-2 Asset Pool. Future
maturities, based on contractual maturity of leases, of the 1999-2 Notes are
$252,700,000, $193,944,770, $143,174,200, $88,815,390, and $20,960,620 in
fiscal 2000, 2001, 2002, 2003 and 2004, respectively.
F-10
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Lease Commitments
Total rent expense under all operating leases aggregated $1,842,000 in 1999,
$2,018,000 in 1998 and $1,857,000 in 1997. At September 30, 1999, future
minimum payments under noncancelable operating leases with initial or
remaining terms of more than one year were: 2000--$567,000; 2001--$567,000;
2002--$240,000.
7. Income Taxes
Taxable income of the Company is included in the consolidated federal income
tax return of IKON and all estimated tax payments and refunds, if any, are
made through IKON. The provision for income taxes was determined as if the
Company was a separate taxpayer.
Provision for income taxes:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(in thousands)
Current Deferred Current Deferred Current Deferred
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal...................... $19,389 $30,324 $15,221 $22,542 $8,230 $16,418
State........................ 767 4,430 35 8,396 545 3,791
------- ------- ------- ------- ------ -------
Income Taxes................. $20,156 $34,754 $15,256 $30,938 $8,775 $20,209
======= ======= ======= ======= ====== =======
</TABLE>
The components of deferred income tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
September 30
--------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities.................................... $ 0 $ 498
Net operating loss and alternative minimum tax credit
carryforwards......................................... 94,357 94,115
--------- ---------
Total deferred tax assets............................ 94,357 94,613
Valuation allowance.................................... 3,661 5,063
--------- ---------
Net deferred tax assets.............................. 90,696 89,550
Deferred tax liabilities:
Other, net............................................. (163) 0
Depreciation........................................... (2,394) (2,154)
Lease income recognition............................... (218,008) (182,511)
--------- ---------
Total deferred tax liabilities....................... (220,565) (184,665)
--------- ---------
Net deferred tax liabilities........................... $(129,869) $ (95,115)
========= =========
</TABLE>
Net operating loss carryforwards consist primarily of federal carryforwards
of approximately $39,720,000 which will expire in 2018. Credit carryforwards
consist principally of federal and state alternative minimum tax credits of
approximately $76,793,000 (with no expiration date).
F-11
<PAGE>
IOS CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the effective income tax rate were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Taxes at federal statutory rate......................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 3.6 7.7 5.8
Other................................................... (0.3) (0.4) (0.3)
----- ----- -----
Effective income tax rate............................... 38.3% 42.3% 40.5%
===== ===== =====
</TABLE>
The Company made net income tax payments, including amounts paid to IKON, of
$16,976,000, $5,446,000 and $1,427,000 in fiscal years 1999, 1998 and 1997,
respectively.
8. Pension and Stock Purchase Plan
The Company participates in IKON's defined benefit pension plan covering the
majority of its employees. The Company's policy is to fund pension costs as
accrued. Pension expense recorded in 1999, 1998 and 1997 was $197,000,
$131,000 and $121,000, 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 six different investment funds.
The Company contributes an amount equal to two-thirds of the employees'
investments, up to 6% of regular compensation, for a maximum company match of
4%. All Company contributions are invested in IKON's common shares. Employees
vest in a percentage of the Company's contribution after two years of service,
with full vesting at the completion of five years of service. IKON also
charges the Company for costs related to a similar plan for eligible
management employees. The Company's cost of the plans amounted to $186,000,
$377,000 and $362,000 in 1999, 1998 and 1997, respectively.
F-12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IOS CAPITAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,335,000
<SECURITIES> 0
<RECEIVABLES> 2,478,377,000<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 128,515,000<F2>
<DEPRECIATION> 58,439,000<F2>
<TOTAL-ASSETS> 2,589,431,000
<CURRENT-LIABILITIES> 0
<BONDS> 1,865,798,000
0
0
<COMMON> 0<F3>
<OTHER-SE> 392,430,000
<TOTAL-LIABILITY-AND-EQUITY> 2,589,431,000
<SALES> 0
<TOTAL-REVENUES> 298,970,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 67,226,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,961,000
<INCOME-PRETAX> 143,237,000
<INCOME-TAX> 54,910,000
<INCOME-CONTINUING> 88,327,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,327,000
<EPS-BASIC> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1>INCLUDE NET INVESTMENTS IN LEASES OF $2,401,572,000 AND OTHER ACCOUNTS
RECEIVABLE.
<F2>INCLUDES LEASED EQUIPMENT OF COST - $110,735,790; ACCUMULATED DEPRECIATION -
$51,055,000.
<F3>COMMON STOCK, $.01 PAR VALUE, 1,000 SHARES OUTSTANDING. SINCE TOTAL IS LESS
THAN $1,000, ZERO IS REPORTED.
<F4>NOT REQUIRED AS THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY.
</FN>
</TABLE>
