-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mv4vzHF8EHUTQvx9cj16g+g0pFjA7TKvoduAnHopzmOpDOb/G7l2WNnlnmL6MEG9 txReRse1FSgVR/LxqfkRYA== 0001036050-00-000046.txt : 20000202 0001036050-00-000046.hdr.sgml : 20000202 ACCESSION NUMBER: 0001036050-00-000046 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IOS CAPITAL INC CENTRAL INDEX KEY: 0000922255 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 232493042 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-20405 FILM NUMBER: 509081 BUSINESS ADDRESS: STREET 1: 1738 BASS RD CITY: MACON STATE: GA ZIP: 31210 BUSINESS PHONE: 9124712300 MAIL ADDRESS: STREET 1: 1738 BASS RD CITY: MACON STATE: GA ZIP: 31210 FORMER COMPANY: FORMER CONFORMED NAME: IKON CAPITAL INC DATE OF NAME CHANGE: 19980113 FORMER COMPANY: FORMER CONFORMED NAME: ALCO CAPITAL RESOURCE INC DATE OF NAME CHANGE: 19940425 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K As filed with the Securities and Exchange Commission on January 18, 2000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page No. -------- 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
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"). 1 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 2 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. 3 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. 4 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:
(dollars in millions) ------------------------ 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% ------------ --------- $ 2,850.5 100.0% ========= Less: Unearned interest................................ (448.9) ------------ $ 2,401.6 ============
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. 5 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 6 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. ---------------- 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). 7 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 8 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.
Fiscal Year Ended September 30 Increase (Decrease) ------------------- ---------------------- 1999 1998 Amount Percent --------- --------- ---------- ---------- (dollars in thousands) 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% ========= ========= ==========
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 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 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.
Fiscal Year Ended September 30 Increase (Decrease) ------------------- ---------------------- 1998 1997 Amount Percent --------- --------- ----------- ---------- (dollars in thousands) 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% ========= ========= ===========
11 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 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.
First Quarter Second Quarter Third Quarter Fourth Quarter Total ------------- -------------- ------------- -------------- -------- (in thousands) 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 First Quarter Second Quarter Third Quarter Fourth Quarter Total ------------- -------------- ------------- -------------- -------- (in thousands) 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
13 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
Page ---- 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
14 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 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.
15 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
- -------- *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 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 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 IOS CAPITAL, INC. BALANCE SHEETS (in thousands except share and per share amounts)
September 30 ---------------------- 1999 1998 ---------- ---------- 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 ========== ==========
See accompanying notes. F-2 IOS CAPITAL, INC. STATEMENTS OF INCOME (in thousands)
Fiscal Year Ended September 30 -------------------------- 1999 1998 1997 -------- -------- -------- 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 ======== ======== ========
See accompanying notes. F-3 IOS CAPITAL, INC. STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (in thousands)
Common Contributed Retained Stock Capital Earnings Total ------ ----------- -------- -------- 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 ==== ======== ======== ========
- -------- * Amount is less than one thousand dollars. See accompanying notes. F-4 IOS CAPITAL, INC. STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year Ended September 30 ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
See accompanying notes. F-5 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 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 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):
Direct Financing Funded Leases Leases ---------- -------- 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 ========== ========
F-8 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):
1999 1998 ------ ------ 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 ====== ======
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 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): Fiscal 2000..................................................... $ 945,163 2001............................................................ 672,018 2002............................................................ 203,813 2003............................................................ 44,804 ---------- $1,865,798 ==========
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 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:
Fiscal Year Ended September 30 -------------------------------------------------- 1999 1998 1997 ---------------- ---------------- ---------------- (in thousands) Current Deferred Current Deferred Current Deferred ------- -------- ------- -------- ------- -------- 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 ======= ======= ======= ======= ====== =======
The components of deferred income tax assets and liabilities were as follows:
September 30 -------------------- 1999 1998 --------- --------- (in thousands) 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) ========= =========
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 IOS CAPITAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The components of the effective income tax rate were as follows:
Fiscal Year Ended September 30 ------------------- 1999 1998 1997 ----- ----- ----- 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% ===== ===== =====
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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 12-MOS SEP-30-1999 SEP-30-1999 1,335,000 0 2,478,377,000 0 0 0 128,515,000 58,439,000 2,589,431,000 0 1,865,798,000 0 0 0 392,430,000 2,589,431,000 0 298,970,000 0 0 67,226,000 0 114,961,000 143,237,000 54,910,000 88,327,000 0 0 0 88,327,000 0 0 INCLUDE NET INVESTMENTS IN LEASES OF $2,401,572,000 AND OTHER ACCOUNTS RECEIVABLE. INCLUDES LEASED EQUIPMENT OF COST - $110,735,790; ACCUMULATED DEPRECIATION - $51,055,000. COMMON STOCK, $.01 PAR VALUE, 1,000 SHARES OUTSTANDING. SINCE TOTAL IS LESS THAN $1,000, ZERO IS REPORTED. NOT REQUIRED AS THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY.
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