Back to GetFilings.com
As filed with the Securities and Exchange Commission on December 30, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2002 or
|
| |
¨ |
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from
to |
Commission file number 0-20405
IOS CAPITAL, LLC
(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) |
Registrant’s telephone number, including area code: (478) 471-2300
Securities registered
pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Registered debt outstanding as of December 30, 2002 was $2,061,659,782.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes
¨ No x
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.
| |
|
|
|
|
| |
| |
|
|
|
Page No.
|
| |
|
PART I |
|
|
| |
| ITEM 1. |
|
|
|
4 |
| |
| ITEM 2. |
|
|
|
12 |
| |
| ITEM 3. |
|
|
|
12 |
| |
| ITEM 4. |
|
|
|
12 |
| |
| |
|
PART II |
|
|
| |
| ITEM 5. |
|
|
|
12 |
| |
| ITEM 7. |
|
|
|
13 |
| |
| ITEM 7A. |
|
|
|
15 |
| |
| ITEM 8. |
|
|
|
16 |
| |
| ITEM 9. |
|
|
|
16 |
| |
| |
|
PART III |
|
|
| |
| ITEM 14. |
|
|
|
17 |
| |
| |
|
PART IV |
|
|
| |
| ITEM 15. |
|
|
|
17 |
* |
|
All amounts contained in this annual report on Form 10-K are in thousands unless otherwise noted. |
2
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 IOS Capital, LLC (the
“Company”) believes the expectations contained in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove correct. Such forward-looking information is based upon management’s current
plans or expectations and is subject to a number of risks and uncertainties that could significantly affect current plans, anticipated actions and the future financial condition and results of the Company and IKON Office Solutions, Inc.
(“IKON”). These risks and uncertainties, which apply to both the Company and IKON, include, but are not limited to, risks and uncertainties relating to: factors which may affect the Company’s ability to collect amounts due from
lessees in order to make payments due in connection with the Company’s lease-backed notes (such as lessee defaults or factors impeding recovery efforts); growth opportunities and increasing market share, productivity and infrastructure
initiatives; earnings, revenue, cash flow, margin, and cost-savings projections; the effect of competitive pressures on equipment sales; expected savings and lower costs from the productivity and infrastructure initiatives; developing and expanding
strategic alliances and partnerships; the impact of e-commerce and e-procurement initiatives; the implementation of e-IKON; anticipated growth rates in the digital and color equipment and outsourcing industries; the effect of foreign currency
exchange risk; the reorganization of the Company’s business segments and the anticipated benefits of operational synergies related thereto; and the Company’s ability to finance its current operations and its growth initiatives. 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.
3
PART I
General
IOS Capital, LLC (“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
manage document workflow and increase efficiency. 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 2002 revenues were approximately $4.8 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 2002, 79% of equipment sold by IKON 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, Hewlett-Packard and Océ. Currently, 85% of the equipment financed by the Company
represents digital copiers (including color copiers), 11% analog copiers, 2% facsimile machines and 2% other equipment.
The Company’s customer base (which consists of end users of the equipment sold by IKON) 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 $20 in amount and 51 months in duration. Although 95% of the leases are scheduled for regular monthly payments, customers are also offered quarterly, semi-annual and annual 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 represented 92% of the Company’s lease portfolio as of September 30, 2002. 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 lease portfolio as of September 30, 2002. 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).
4
Tax Leases
Tax leases represented 97% of the Company’s lease portfolio as of September 30, 2002. 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, 2002, the average equipment residual value for all leases in the
Company’s portfolio was 10.3% of retail price. 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 accounted for the remaining 3% of the leases in the Company’s lease
portfolio as of September 30, 2002. Under these arrangements, the customer is considered to be the owner of the equipment for tax purposes and receives any tax benefit associated with equipment depreciation. Each conditional sales contract has a
stated residual value of 0% of retail price. 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
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 fixed charges, 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 debt holders (not
including IKON or its affiliates) for all amounts outstanding and covered by the 1996 Support Agreement (generally, all debt entered into after June 1, 1994) is obtained.
5
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. The Company was in a net average borrowing position with IKON during fiscal 2002 and 2001
and incurred interest expense of $3,009 and $7,788, respectively, and was in a net average deposit position with IKON during fiscal 2000 and earned interest income of $2,281 (netted against interest expense).
Management Fee
Included in general and administrative expenses are corporate expenses charged by IKON of $2,535, $2,210 and $1,500 in fiscal 2002, 2001 and 2000, respectively. These corporate charges represent management’s estimate of costs
incurred by IKON on behalf of IOSC. The increase in corporate charges in fiscal 2002 compared to fiscal 2001 and fiscal 2000 is due to the increase in legal, treasury, tax and marketing support provided by IKON as a result of the increase in the
Company’s financing activity.
Federal Income Tax Allocation Agreement
IKON and the Company participate in a Federal Income Tax Allocation Agreement dated June 30, 1989, in which the Company consents to the filing of consolidated federal
income tax returns with IKON. IKON agrees to collect from or pay to the Company its allocated share of any consolidated federal income tax liability or refund applicable to any period for which the Company is included in IKON’s consolidated
federal income tax return.
Interest on Income Tax Deferrals
The Company charged IKON interest on IKON’s income tax deferrals associated with the Company’s leasing transactions. Such charges were calculated at 6.7% in
fiscal 2000 totaling $16,773. Effective October 1, 2000, the Company and IKON agreed to terminate this program.
Credit Policies and
Loss Experience
Effective October 1, 1999, the Company began a shared recourse arrangement with the IKON
marketplaces. This arrangement provided for net losses resulting 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.
6
The following table provides a rollforward of changes in the lease default
reserve from October 1, 1999 to September 30, 2002:
| |
|
IOSC
|
|
|
IKON Marketplaces
|
|
Total
|
|
| Balance at October 1, 1999 |
|
$ |
74,305 |
|
|
|
|
|
$ |
74,305 |
|
| Provision |
|
|
20,333 |
|
|
$ |
37,780 |
|
|
58,113 |
|
| Write-offs |
|
|
(70,152 |
) |
|
|
|
|
|
(70,152 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance at September 30, 2000 |
|
|
|
|
|
|
|
|
|
62,266 |
|
| Provision |
|
|
21,413 |
|
|
|
39,767 |
|
|
61,180 |
|
| Write-offs |
|
|
(64,288 |
) |
|
|
|
|
|
(64,288 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance at September 30, 2001 |
|
|
|
|
|
|
|
|
|
59,158 |
|
| Provision |
|
|
21,835 |
|
|
|
41,554 |
|
|
63,389 |
|
| Write-offs |
|
|
(72,726 |
) |
|
|
|
|
|
(72,726 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance at September 30, 2002 |
|
|
|
|
|
|
|
|
$ |
49,821 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Effective October 1, 2002, the shared recourse arrangement with the
IKON marketplaces has been terminated, and the Company will record the entire provision for lease defaults.
During fiscal 2002 and 2001, accounts classified as current (less than 30 days outstanding) ranged from 87% to 93% of the total portfolio balance on a monthly basis. The aging of the Company’s net lease receivables at September
30, 2002 was as follows:
| Current |
|
$ |
3,405,720 |
|
|
93.2 |
% |
| 31-60 days |
|
|
149,822 |
|
|
4.1 |
% |
| 61-90 days |
|
|
54,813 |
|
|
1.5 |
% |
| Over 90 days |
|
|
43,851 |
|
|
1.2 |
% |
| |
|
|
|
|
|
|
|
| |
|
|
3,654,206 |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
| Less: Unearned income |
|
|
(617,721 |
) |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
3,036,485 |
|
|
|
|
| |
|
|
|
|
|
|
|
Funding
The Company may offer notes 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.
During fiscal 2002, the Company repaid $82,000 of 6.30% medium term notes. As of September 30, 2002, the Company had no medium term notes outstanding.
On May 13, 2002, the Company issued $300,000 of convertible subordinated notes (the “Convertible Notes”) with an interest rate of 5.0%, which are due on May 1, 2007. The Convertible Notes can
be converted into shares of IKON common stock at any time before maturity at a conversion price of $15.03 per share. Interest is paid on the Convertible Notes semi-annually beginning November 1, 2002. The Company used the net proceeds to repay loans
due to IKON and for general corporate purposes.
In fiscal 2002, the Company signed promissory notes and pledged
$16,755 of lease receivables for $14,259 of proceeds. During fiscal 2002, the Company repaid $8,381 of the promissory notes. 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. These notes have various interest rates ranging from 6.24% to 8.614% with maturities through July 2007.
7
IOSC has three revolving asset securitization agreements with 364 day terms that
expire in fiscal 2003 with certain renewal provisions. The agreements are structured so that as collections reduce previously pledged or transferred interests in the leases, additional leases can be pledged or transferred up to $705,000. All of the
agreements require that IOSC continue to service the lease portfolio.
During fiscal 2002 and 2001, IOSC entered
into revolving asset securitization transactions whereby it pledged or transferred $716,533 and $703,522, respectively, of finance receivables for $712,411 and $648,500, respectively, in cash. During fiscal 2002, IOSC repaid $593,411 under its
revolving asset securitization conduit financing agreements. Repayments were made with proceeds received from the issuance of the Series 2002-1 Notes described below. In fiscal 2001, IOSC repaid $1,037,795 under its revolving asset securitization
conduit financing agreements. Repayments were made with proceeds from the issuance of the Series 2000-2 and 2001-1 Notes described below.
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 are 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 used the remainder of the proceeds for general corporate purposes.
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, a debt to equity ratio of not more than 6 to 1 and a minimum tangible net worth of one-dollar.
Interest paid amounted to $148,048, $168,574 and $156,974 for the fiscal years ended September 30, 2002, 2001 and 2000, respectively.
At September 30, 2002 and 2001, the fair value of debt outstanding is estimated to be $2,553,006 and $2,200,331, respectively, using a discounted cash flow analysis.
8
IKON Receivables, LLC (a wholly-owned subsidiary of the Company) has issued
Series 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Lease-Backed Notes (collectively, together with the Lease-Backed Notes issued by IKON Receivables Funding LLC, the “Notes”) as described below:
| Series
|
|
Notes
|
|
Issuance Date
|
|
Principal Issuance Amount
|
|
Principal Amount Outstanding at September 30, 2002
|
|
Interest Rate
|
|
Stated Maturity Date
|
| 1999-1 |
|
Class A-l |
|
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 |
|
$ |
23,046 |
|
5.99% |
|
May 2005 |
| |
|
Class A-4 |
|
05/25/99 |
|
|
81,462 |
|
|
81,462 |
|
6.23% |
|
May 2005 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
|
751,642 |
|
|
104,508 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1999-2 |
|
Class A-l |
|
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 |
|
|
19,319 |
|
6.59% |
|
August 2003 |
| |
|
Class A-3b |
|
10/07/99 |
|
|
240,891 |
|
|
46,538 |
|
LIBOR + 0.36% |
|
August 2003 |
| |
|
Class A-4 |
|
10/07/99 |
|
|
72,278 |
|
|
72,278 |
|
6.88% |
|
November 2005 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
|
699,595 |
|
|
138,135 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2000-1 |
|
Class A-l |
|
06/02/00 |
|
|
130,000 |
|
|
|
|
6.99625% |
|
June 2001 |
| |
|
Class A-2 |
|
06/02/00 |
|
|
54,000 |
|
|
|
|
7.51% |
|
March 2002 |
| |
|
Class A-3 |
|
06/02/00 |
|
|
230,000 |
|
|
86,634 |
|
LIBOR + 0.19% |
|
March 2004 |
| |
|
Class A-4 |
|
06/02/00 |
|
|
84,510 |
|
|
84,510 |
|
LIBOR + 0.23% |
|
September 2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
|
498,510 |
|
|
171,144 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2000-2 |
|
Class A-l |
|
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 |
|
|
192,557 |
|
LIBOR + 0.23% |
|
October 2004 |
| |
|
Class A-4 |
|
12/07/00 |
|
|
79,906 |
|
|
79,906 |
|
LIBOR + 0.27% |
|
July 2007 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
|
634,431 |
|
|
272,463 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2001-1 |
|
Class A-l |
|
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 |
|
|
241,592 |
|
LIBOR + 0.23% |
|
January 2006 |
| |
|
Class A-4 |
|
06/28/01 |
|
|
126,200 |
|
|
126,200 |
|
LIBOR + 0.26% |
|
October 2008 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Sub-Total |
|
|
595,200 |
|
|
367,792 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total |
|
$ |
3,179,378 |
|
$ |
1,054,042 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
IKON Receivables Funding, LLC (a wholly-owned subsidiary of the Company) has
issued Series 2002-1 Lease-Backed Notes as described below:
| Series
|
|
Notes
|
|
Issuance Date
|
|
Principal Issuance Amount
|
|
Principal Amount Outstanding at September 30, 2002
|
|
Interest Rate
|
|
|
Stated Maturity Date
|
| 2002-1 |
|
Class A-1 |
|
05/30/02 |
|
$ |
171,000 |
|
$ |
106,424 |
|
2.044 |
% |
|
June 2003 |
| |
|
Class A-2 |
|
05/30/02 |
|
|
|