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As filed with the Securities and Exchange Commission on December 21, 2001
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, 2001 or
|
|
¨
|
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition
period from to
|
FORM 10-K
Commission file number 0-20405
IOS CAPITAL, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
|
23-2493042 |
(State or Other Jurisdiction of
Incorporation or Organization) |
|
(I.R.S. Employer
Identification No.) |
| |
| 1738 Bass Road, Macon, Georgia |
|
31210 |
| (Address of Principal Executive Offices) |
|
(Zip Code) |
(478) 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 21, 2001 was 1,000, all of
which were owned by IKON Office Solutions, Inc.
Registered debt outstanding of the Company and all wholly-owned subsidiaries as of December 21, 2001 was
$1,855,266,339.
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*
*
|
All amounts contained in the annual report on Form 10-K are in thousands unless otherwise noted.
|
PART I
General
IOS Capital, Inc. (“IOSC” or the “Company”), 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 478-471-2300). The Company is a wholly-owned subsidiary of IKON.
IKON is a public company headquartered in Malvern, Pennsylvania and a leading provider of products and services that
help businesses communicate. IKON provides customers with total business solutions for every office, production and outsourcing need, including copiers and printers, color solutions, distributed printing, facilities management, imaging and legal
document solutions, as well as network design and consulting and e-business development. IKON has locations worldwide, including in the United States, Canada, Mexico, the United Kingdom, France, Germany, Ireland and Denmark. IKON’s fiscal 2001
revenues were approximately $5.3 billion.
The Company is engaged in the business of arranging lease financing primarily for office equipment marketed by
IKON’s U.S. marketplaces. The ability to offer lease financing on equipment through IOSC is considered a competitive marketing advantage which more closely ties IKON to its customer base. During fiscal 2001, 75% 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 Océ. Currently 20% of the equipment financed by the Company represents analog copiers, 63% digital copiers, 12% color copiers, 2%
fax machines and 3% 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 IOSC’s standard rates, and the IKON marketplaces absorb any variances from the standard rates.
The Company’s customer base (which consists of end users of the equipment) is widely dispersed, with the ten
largest customers representing less than 3% of the Company’s total lease portfolio. The typical new lease financed by the Company averages $19 in amount and 51 months in duration. Although 96% of the leases are scheduled for regular monthly
payments, customers are also offered quarterly, semi-annual, annual and other customized payment terms. In connection with its leasing activities, the Company performs billing, collection, property and sales tax filings, and provides quotes on
equipment upgrades and lease-end notification. The Company also provides certain financial reporting services to the IKON marketplaces, such as a monthly report of marketplace leasing activity and related statistics.
Types of Leases
The lease portfolio of the Company includes direct financing leases and funded leases. Direct financing leases are
contractual obligations between the Company and the IKON customer (the “customer”) and represent 92% of the Company’s lease portfolio. Funded leases are contractual obligations between the IKON marketplace and the customer which have
been financed by the Company.
Funded leases represented approximately 8% of the Company’s leases as of September 30, 2001. The IKON marketplaces
have assigned to the Company their rights under the underlying contracts including the right to receive lease and rental payments as well as a security interest in the related equipment.
Direct financing leases and funded leases are structured as either tax leases (from the Company’s perspective) or
conditional sales contracts, depending on the customer’s (or, for funded leases, the IKON marketplace’s) needs. The customer (or the IKON marketplace for funded leases) decides which of the two structures is desired. Under either
structure, the total cost of the equipment to the customer (or to the IKON marketplace) is substantially the same (assuming the exercise of the purchase option).
Tax Leases
Tax leases represented 97% of the Company’s total lease portfolio as of September 30, 2001. 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 at the end of the lease term, the customer may return the equipment, continue to rent the equipment or purchase the equipment for its fair market value.
Each tax lease has a stated equipment residual value generally ranging from 0% to 25% of retail price, depending on
equipment model and lease term. As of September 30, 2001, the average equipment residual value for all leases in the Company’s portfolio was 8.6%. Upon early termination of the lease or at the end of the lease term, the Company charges the IKON
marketplace for the stated residual position, if any, and the equipment is returned to the IKON marketplace. Any gain or loss on the equipment’s residual value is realized by the IKON marketplace.
Conditional Sales Contracts
Conditional sales contracts account for the remaining 3% of the leases in the Company’s total lease portfolio.
Under these arrangements, the customer is considered to be the owner of the equipment for tax purposes and would receive any tax benefit associated with equipment depreciation. Each conditional sales contract has a stated residual value of 0%.
Conditional sales contracts are customarily structured with higher monthly lease payments than the tax leases and have a one-dollar purchase option for the equipment at lease-end. Thus, because of the higher monthly payments, the after-tax cost of
the equipment to the customer (or, for funded leases, to the IKON marketplace) under a conditional sales contract is substantially the same as under a tax lease (assuming the exercise of the purchase option). Although the customer has the option of
returning or continuing to rent the equipment at lease-end, the customer almost always exercises the one-dollar purchase option at the end of the lease term.
Leased Equipment
The Company offers financing for the cost of office equipment that the IKON marketplaces maintain in inventory for
short-term rental to customers. This category of leased equipment also includes equipment currently rented to customers where the rental agreements are considered to be cancelable by the customer, based on the terms and conditions of the rental
contracts in effect. Under current operating guidelines, any equipment not physically on rental to customers for a period exceeding 120 continuous days must be repurchased by the IKON marketplaces at its current book value.
Relationship With IKON Office Solutions, Inc.
There are several agreements and programs between the Company and IKON, which are described below.
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 one-dollar. The
agreement also provides that IKON will maintain 100% direct or indirect ownership of the Company and limits the leverage of debt to equity to a maximum of 6 to 1.
Pursuant to the indentures and other documentation governing debt incurred after June 1, 1994, the Company is not
permitted to amend or terminate the 1996 Support Agreement unless: (a) all of the outstanding debt of the Company is repaid, or (b) approval of two-thirds of the debtholders (not including IKON, the Company, or their affiliates) for all amounts
outstanding covered by the 1996 Support Agreement (generally, all debt entered into after June 1, 1994) is obtained.
Cash Management Program
The Company participates in IKON’s domestic cash management program. Under this program, the Company has an account
with IKON through which cash in excess of current operating requirements is temporarily placed on deposit. Similarly, amounts are periodically borrowed from IKON, with interest paid or charged at market rates on borrowed funds. The Company was in a
net average borrowing position with IKON during fiscal 2001 and paid interest expense of $7,788 and was in a net average deposit position with IKON during fiscal 2000 and 1999 and earned interest income of $2,281 and $5,956, respectively (included
in interest expense).
Management Fee
Included in general and administrative expenses are corporate expenses charged by IKON of $2,210, $1,500 and $552 in
fiscal 2001, 2000 and 1999, respectively. These corporate charges represent management’s estimate of costs incurred by IKON on behalf of IOSC. The increase in corporate charges in fiscal 2001 compared to fiscal 2000 and fiscal 1999 is due to
the increase in legal, treasury, tax and marketing support provided by IKON as a result of the increase in the Company’s financing activity.
Federal Income Tax Allocation Agreement
IKON and the Company participate in a Federal Income Tax Allocation Agreement dated June 30, 1989, in which the Company
consents to the filing of consolidated federal income tax returns with IKON. IKON agrees to collect from or pay to the Company its allocated share of any consolidated federal income tax liability or refund applicable to any period for which the
Company is included in IKON’s consolidated federal income tax return.
Interest on Income Tax Deferrals
The Company provides substantial tax benefits to IKON through the use of the installment sales method on equipment
financed through the Company. Taxes deferred by IKON due to this tax treatment totaled a cumulative amount of approximately $493,000 at the end of fiscal 2000. IKON paid the Company interest on the portion of these tax deferrals which arose from
intercompany sales. In fiscal 2000 and fiscal 1999, interest was earned by the Company at a rate consistent with the Company’s weighted average outside borrowing rate of interest. Under this program, the Company earned interest at an average
rate of 6.7% in fiscal 2000 totaling $16,773 and 6.6% in fiscal 1999 totaling $16,764. Effective October 1, 2000, the Company and IKON agreed to terminate this program.
Lease Bonus Program
The Company sponsored a lease bonus subsidy program which provided incentives to IKON marketplaces when IKON customers
leased equipment from the Company. The focus of the bonus subsidy program was to
reimburse IKON for third party lease payoffs incurred when buying out the equipment leases of a competitor. During fiscal 1999, bonus payments made to IKON marketplaces or IKON totaled $12,000. Effective October 1, 1999, the Company and IKON agreed
to terminate this program.
Credit Policies and Loss Experience
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, all of the Company’s accounts receivable and direct financing leases, including residual values, were subject to such repurchase terms. In view of the foregoing agreement, the Company made no provision in the accompanying
financial statements for uncollectible receivables. Effective October 1, 1999, the Company began a shared recourse arrangement with the IKON marketplaces. This arrangement provides for net losses resultant from lease defaults to be shared equally.
The lease default reserve is maintained at the Company and the provisions for lease default are shared between the Company and the IKON marketplaces. On October 1, 1999, lease default reserves of $74,305 and the related deferred tax liability of
$29,350 were transferred to the Company from the IKON marketplaces. During fiscal 2000, a provision for lease defaults of $58,113 was recorded to increase the reserve. Of this provision, $20,333 was recorded as an expense on the books of the Company
and $37,780 was recorded as an expense on the books of the IKON marketplaces. Lease write-offs of $70,152 were recorded to reduce the reserve. During fiscal 2001, a provision for lease defaults of $61,180 was recorded to increase the reserve. Of
this provision, $21,413 was recorded as an expense on the books of the Company and $39,767 was recorded as an expense on the books of the IKON marketplaces. Lease write-offs of $64,288 were recorded to reduce the reserve. As a result of the above,
the lease default reserve at September 30, 2001 is $59,158.
During fiscal 2001 and 2000, accounts classified as current (less than 30 days outstanding) ranged from 87% to 91% of
the total portfolio balance on a monthly basis. The aging of the Company’s lease portfolio receivables at September 30, 2001 was as follows:
| Current |
|
$3,208,212 |
|
|
89.9 |
% |
| Over 30 days |
|
210,550 |
|
|
5.9 |
% |
| Over 60 days |
|
85,647 |
|
|
2.4 |
% |
| Over 90 days |
|
64,236 |
|
|
1.8 |
% |
| |
|
|
|
|
|
|
| |
|
$3,568,645 |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
| Less: |
|
|
|
|
|
|
| Unearned interest |
|
(589,025 |
) |
|
|
|
| |
|
|
|
|
|
|
| |
|
$2,979,620 |
|
|
|
|
| |
|
|
|
|
|
|
Funding
The Company may offer notes to the public from time to time under its medium term note program. 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, 2001, $82,000 of medium term notes were outstanding with a weighted average interest rate of 6.3% and $1,123,350 remains available under the program.
In fiscal 2001, the Company signed promissory notes and pledged $26,784 of lease receivables for $22,471 of proceeds.
During fiscal 2001, the Company repaid $1,179 of the promissory notes. The notes have various interest rates ranging from 7.12% to 8.61% with maturities through March 2006.
In December 1998, the Company entered into an asset securitization transaction whereby it sold $366,600 in financing
lease receivables for $250,000 in cash and a retained interest in the remainder. The agreement was for an initial three-year term with certain renewal provisions and was structured as a revolving asset securitization so that as collections reduced
previously sold interests in this new pool of leases, additional leases could be sold up to $180,000 ($250,000 in fiscal 2000 and 1999). The terms of the agreement require that the Company continue to service the lease portfolio. The Company
recognized a pre-tax gain of $14,333 in 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. In fiscal 1999, the Company sold an
additional $152,098 in leases, replacing leases paid/collected during the year and recognized pre-tax gains of $12,121. On October 7, 1999, these leases were repurchased with a portion of the proceeds received from the issuance of approximately
$700,000 of lease-backed notes.
On December 9, 1999, the Company pledged or transferred $311,382 in financing lease receivables for $247,600 in cash in
connection with its revolving asset securitization, in a transfer accounted for as a financing. Additionally, in fiscal 2000, the Company pledged or transferred $295,472 in financing lease receivables for $235,400 in cash in connection with its
revolving asset securitization, in a transfer accounted for as a financing. The Company repaid $250,000 on June 2, 2000 when it issued the 2000-1 Notes described below.
In September 2000, the Company entered into a revolving asset securitization whereby it pledged or transferred $414,843
in financing lease receivables for $349,795 in cash and a retained interest in the remainder. The agreement is for an initial three-year term with certain renewal provisions and was structured as a revolving asset securitization so that as
collections reduce previously pledged or transferred interests in this new pool of leases, additional leases can be pledged or transferred up to $225,000. The terms of the agreement require that the Company continue to service the lease
portfolio.
During fiscal 2001, the Company pledged or transferred $539,776 in financing lease receivables for $485,900 in cash in
connection with its revolving asset securitization. Also during fiscal 2001, the Company entered into a new revolving asset securitization. The agreement is for an initial 364-day term with certain renewal provisions and was structured as a
revolving asset securitization so that as collections reduce previously pledged or transferred interests in this new pool of leases, additional leases can be pledged or transferred up to $300,000. The terms of the agreement require that the Company
continue to service the lease portfolio. Under this agreement, the Company pledged or transferred $163,746 in financing lease receivables for $138,600 in cash and a retained interest in the remainder.
As of September 30, 2001, the Company had approximately $511,500 available under its revolving asset securitization
conduit financing agreements.
On June 15, 2001, the Company issued $250,000 of notes with an interest rate of 9.75% (10% yield including the original
issue discount) which is due on June 15, 2004. Interest is paid on the notes semi-annually beginning December 15, 2001. With the net proceeds from the issuance, the Company repaid $150,000 of 6.73% medium term notes due June 15, 2001 and will use
the remainder of the proceeds for general corporate purposes.
The Company filed a shelf registration statement with the Securities and Exchange Commission to register the sale of
$300,000 of lease-backed notes.
IKON Receivables, LLC (a wholly-owned subsidiary) has issued Series 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1
Lease-Backed Notes (collectively, the “Notes”) as described below:
Series
|
|
Notes
|
|
Issuance Date
|
|
Principal
Issuance
Amount
|
|
Interest Rate
|
|
Stated Maturity
Date
|
| 1999-1 |
|
Class A-1 |
|
05/25/99 |
|
$ 304,474 |
|
5.11% |
|
June, 2000 |
| |
|
Class A-2 |
|
05/25/99 |
|
61,579 |
|
5.60% |
|
May, 2005 |
| |
|
Class A-3 |
|
05/25/99 |
|
304,127 |
|
5.99% |
|
May, 2005 |
| |
|
Class A-4 |
|
05/25/99 |
|
81,462 |
|
6.23% |
|
May, 2005 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
751,642 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| 1999-2 |
|
Class A-1 |
|
10/07/99 |
|
235,326 |
|
6.14125% |
|
October, 2000 |
| |
|
Class A-2 |
|
10/07/99 |
|
51,100 |
|
6.31% |
|
May, 2001 |
| |
|
Class A-3a |
|
10/07/99 |
|
100,000 |
|
6.59% |
|
August, 2003 |
| |
|
Class A-3b |
|
10/07/99 |
|
240,891 |
|
LIBOR + 0.36% |
|
August, 2003 |
| |
|
Class A-4 |
|
10/07/99 |
|
72,278 |
|
6.88% |
|
November, 2005 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
699,595 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| 2000-1 |
|
Class A-1 |
|
06/02/00 |
|
130,000 |
|
6.99625% |
|
June, 2001 |
| |
|
Class A-2 |
|
06/02/00 |
|
54,000 |
|
7.51000% |
|
March, 2002 |
| |
|
Class A-3 |
|
06/02/00 |
|
230,000 |
|
LIBOR + 0.19% |
|
March, 2004 |
| |
|
Class A-4 |
|
06/02/00 |
|
84,510 |
|
LIBOR + 0.23% |
|
September, 2006 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
498,510 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| 2000-2 |
|
Class A-1 |
|
12/07/00 |
|
193,532 |
|
6.66125% |
|
December, 2001 |
| |
|
Class A-2 |
|
12/07/00 |
|
70,193 |
|
6.60% |
|
September, 2002 |
| |
|
Class A-3 |
|
12/07/00 |
|
290,800 |
|
LIBOR + 0.23% |
|
October, 2004 |
| |
|
Class A-4 |
|
12/07/00 |
|
79,906 |
|
LIBOR + 0.27% |
|
July, 2007 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
634,431 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| 2001-1 |
|
Class A-1 |
|
06/28/01 |
|
168,000 |
|
3.73375% |
|
July, 2002 |
| |
|
Class A-2 |
|
06/28/01 |
|
41,000 |
|
4.16% |
|
March, 2004 |
| |
|
Class A-3 |
|
06/28/01 |
|
260,000 |
|
LIBOR + 0.23% |
|
January, 2006 |
| |
|
Class A-4 |
|
06/28/01 |
|
126,200 |
|
LIBOR + 0.26% |
|
October, 2008 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
595,200 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| |
|
|
|
Total Issued |
|
$3,179,378 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
The Notes were issued pursuant to an Indenture between IKON Receivables, LLC, IOSC and various Indenture Trustees. The
Notes are collateralized by a pool of office equipment leases or contracts and related assets (the “Leases”) acquired or originated by IOSC (together with the equipment financing portion of each periodic lease or rental payment due under
the Leases on or after the related indenture date) and all related casualty payments, retainable deposits and termination payments. Payments on the Notes are made from payments on the Leases. The Notes have certain credit enhancement features
available to noteholders including reserve accounts, overcollateralization accounts and noncancellable insurance policies from Ambac Assurance Corporation with respect to the Notes. On each payment date, funds available from the collection of lease
receivables will be paid to the noteholders in the order of their priority class.
The Notes bear interest from the related issuance date at the stated rates specified above. The variable rate 1999-2
Class A-3b, 2000-1 Class A-3, 2000-1 Class A-4, 2000-2 Class A-3, 2000-2 Class A-4, 2001-1 Class A-3 and 2001-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%, 6.475%, 6.475%, 4.825% and 5.435%, respectively, through interest rate
swaps.
IOSC services the Leases pursuant to Assignment and Servicing Agreements by and among IOSC, as originator and servicer,
IKON Receivables-1, LLC, as seller, and IKON Receivables, LLC, as issuer. IOSC may delegate its servicing responsibilities to one or more sub-servicers, but such delegation does not relieve IOSC of its liabilities with respect thereto. IOSC retains
possession of the Leases and related files, and receives a monthly service fee from IKON Receivables, LLC for servicing the Leases.
Restricted cash on the consolidated balance sheets primarily represents cash that has been collected on the Leases which
must be used to repay the 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Notes, respectively.
As of September 30, 2001, IKON Receivables, LLC has approximately $271,859 available under the $2,000,000 shelf
registration statement.
Future maturities of the Notes, based on contractual maturities of the Leases for each of the succeeding fiscal years
are as follows:
| |
|
1999-1
Series Notes
|
|
1999-2
Series Notes
|
|
2000-1
Series Notes
|
|
2000-2
Series Notes
|
|
2001-1
Series Notes
|
|
Total
|
| 2002 |
|
$162,195 |
|
$143,174 |
|
$131,100 |
|
$177,872 |
|
$174,866 |
|
$ 789,207 |
| 2003 |
|
52,136 |
|
113,912 |
|
94,636 |
|
142,492 |
|
153,400 |
|
556,576 |
| 2004 |
|
|
|
20,961 |
|
72,679 |
|
89,900 |
|
117,578 |
|
301,118 |
| 2005 |
|
|
|
|
|
5,916 |
|
42,350 |
|
87,078 |
|
135,344 |
| 2006 |
|
|
|
|
|
|
|
|
|
15,144 |
|
15,144 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$214,331 |
|
$278,047 |
|
$304,331 |
|
$452,614 |
|
$548,066 |
|
$1,797,389 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Employees
At September 30, 2001, the Company had approximately 375 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.
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 price, quality of service and product performance.
The Company’s operations are located in Macon, Georgia and occupy approximately 70,000 square feet. In addition,
IKON utilizes approximately 27,000 square feet in adjacent facilities owned by the Company for a corporate-wide data center and local IKON marketplace. The Company uses its facility for normal operating activities such as lease processing, customer
service, billing and collections. Certain specialized services (such as legal, accounting, treasury, tax and audit services) are also performed for the Company at IKON’s corporate headquarters located in Malvern, Pennsylvania. The
Company’s facilities are deemed adequate by management to conduct the Company’s business.
Item 3. Legal Proceedings
A number of ordinary course legal proceedings are pending against the Company. However, there are no material pending
legal proceedings to which the Company is a party (or to which any of its property is subject). To the Company’s knowledge, no material legal proceedings are contemplated by governmental authorities against the Company or any of its
properties.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
All outstanding shares of the Company’s common stock are currently owned by IKON. Therefore, there is no market for
the Company’s common stock. The Company paid IKON dividends of $60,000 and $30,000 in fiscal 2000 and 1999, respectively. No dividends were paid in fiscal 2001. 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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Pursuant to General Instruction I(2)(a) of Form 10-K, the following analysis of the results of operations is presented
in lieu of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Fiscal 2001 Compared with Fiscal 2000
Comparative results of operations for the fiscal years ended September 30, 2001 and 2000 are set forth in the table
below. This table also shows the increase (decrease) in the dollar amounts of revenue and expense items between periods, as well as the related percentage change.
| |
|
Fiscal Year Ended
September 30
|
|
Increase (Decrease)
|
| |
|
2001
|
|
2000
|
|
Amount
|
|
Percent
|
| Revenues: |
| Lease finance income |
|
$321,866 |
|
$280,610 |
|
$ 41,256 |
|
|
14.7% |
| Rental income |
|
31,573 |
|
36,187 |
|
(4,614 |
) |
|
(12.8)% |
| Interest on IKON income tax deferrals |
|
|
|
16,773 |
|
(16,773 |
) |
|
(100)% |
| Other income |
|
23,974 |
|
24,854 |
|
(880 |
) |
|
(3.5)% |
| |
|
|
|
|
|
|
|
|
|
| |
|
377,413 |
|
358,424 |
|
18,989 |
|
|
5.3% |
| Expenses: |
| Interest |
|
166,926 |
|
149,014 |
|
17,912 |
|
|
12.0% |
| Lease default |
|
15,755 |
|
20,333 |
|
(4,578 |
) |
|
(22.5)% |
| General and administrative |
|
57,566 |
|
61,291 |
|
(3,725 |
) |
|
(6.1)% |
| |
|
|
|
|
|
|
|
|
|
| |
|
240,247 |
|
230,638 |
|
9,609 |
|
|
4.2% |
| Gain on sale of lease receivables |
|
|
|
76 |
|
(76 |
) |
|
(100.0)% |
| |
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
137,166 |
|
127,862 |
|
9,304 |
|
|
7.3% |
| Provision for income taxes |
|
52,428 |
|
48,446 |
|
3,982 |
|
|
8.2% |
| |
|
|
|
|
|
|
|
|
|
| Net income |
|
$ 84,738 |
|
$ 79,416 |
|
$ 5,322 |
|
|
6.7% |
| |
|
|
|
|
|
|
|
|
|
Revenues
Total revenues increased by $18,989, or 5.3%, in fiscal 2001 from fiscal 2000. Lease finance income increased by $41,256
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 by
1.0% from September 30, 2000 to September 30, 2001.
Office equipment placed on rental by the IKON marketplaces to customers with cancelable terms may be purchased by the
Company. During fiscal 2001 and 2000, IOSC purchased operating lease equipment of $35,611 and $19,624, respectively. Operating leases contributed $31,573 and $36,187 in rental income to total revenues during fiscal 2001 and 2000,
respectively.
In fiscal 2000, the Company earned interest income on the deferred tax liabilities of the IKON marketplaces associated
with leases funded through the Company at a rate consistent with the Company’s weighted average outside borrowing rate of interest. The Company’s average rate was 6.7% for fiscal 2000. The deferred tax base upon which these payments were
calculated was $251,000 at September 30, 2000. Effective October 1, 2000 the Company and IKON discontinued the policy of paying interest income on the deferred tax liability base.
Other income consists primarily of late payment charges and various billing fees. Overall, fee income from these sources
decreased by $880 or 3.5%, when comparing fiscal 2001 to fiscal 2000.
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 and intercompany borrowings with IKON increased by 2.7%, with $2,526,714 outstanding at September 30, 2001. The Company paid a weighted average
interest rate on all borrowings for fiscal 2001 of 6.4%, compared to 6.7% for fiscal 2000. Primarily as a result of the increased average borrowings, interest expense grew by $17,912, or 12.0%, when comparing fiscal 2001 to fiscal 2000. At September
30, 2001, the Company’s debt to equity ratio was 5.1 to 1.
Total general and administrative expenses decreased by $3,725, or 6.1%, when comparing fiscal 2001 to fiscal 2000. The
general and administrative expense category for fiscal 2001 includes depreciation expense on leased equipment totaling $26,414, compared to $30,233 in fiscal 2000. Excluding the effects of depreciation expense on leased equipment, remaining general
and administrative expenses increased approximately $94, or 0.3%, when comparing fiscal 2001 to fiscal 2000.
Income Before Income Taxes
Income before income taxes for fiscal 2001 increased by $9,304, or 7.3%, compared to fiscal 2000, as a result of the
items described above.
Provision for Income Taxes
&nb