================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORMForm 10-Q
--------------------------------- (Mark(Mark One)
|X|[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended
March 31,June 30, 2003 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(Exact name of registrant as specified in its charter)
DELAWARE 23-2493042 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1738 Bass Road, Macon, Georgia 31210 (Address of principal executive offices) (Zip Code) Registrant's
| DELAWARE (State or other jurisdiction of incorporation or organization) 1738 Bass Road, Macon, Georgia (Address of principal executive offices) | 23-2493042 (I.R.S.Employer Identification No.) 31210 (Zip Code) |
Registrant’s telephone number, including area code: (478) 471-2300
--------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report: 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|[X] No |_|
[ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_|[ ] No |X|
[X]
Registered debt outstanding as of May 14,August 12 , 2003 was $2,547,204,481.
$2,404,198,974.
The registrant meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing with the reduced format disclosure format contemplated thereby.
================================================================================
1
| Item 1. Item 2. Item 4. | Condensed Consolidated Financial Statements Consolidated Balance Sheets - June 30, 2003 (unaudited) and September 30, 2002 Consolidated Statements of Income - Three and nine months ended June 30, 2003 and 2002 (unaudited) Consolidated Statements of Cash Flows - Nine months ended June 30, 2003 and 2002 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) Management's Discussion and Analysis of Financial Condition and Results of Operations Controls and Procedures | ||
| Item 6. | Exhibits and Reports on Form 8-K | ||
* All amounts contained in this quarterly report on Form 10-Q are in thousands unless otherwise noted.
2
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"“Company” or "IOSC"“IOSC”) 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'smanagement’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"(“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'sCompany’s ability to collect amounts due from lessees in order to make payments due in connection with the Company'sCompany’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'sCompany’s and IKON'sIKON’s business segments and the anticipated benefits of operational synergies related thereto; and the Company's or IKON'sCompany’s and IKON’s ability to finance their 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 or IKON.
3
| June 30, 2003 (unaudited) | September 30, 2002 | |||||||||||||
| Assets | ||||||||||||||
| Investment in leases: | ||||||||||||||
| Direct financing leases, net of lease default reserve of: | ||||||||||||||
| June 30, 2003 - $43,972; September 30, 2002 - $49,821 | $ | 3,519,821 | $ | 3,364,776 | ||||||||||
| Less: Unearned income | (577,702 | ) | (572,865 | ) | ||||||||||
| 2,942,119 | 2,791,911 | |||||||||||||
| Funded leases, net | 142,859 | 244,574 | ||||||||||||
| 3,084,978 | 3,036,485 | |||||||||||||
| Cash | 9,879 | 10,994 | ||||||||||||
| Restricted cash | 166,569 | 115,594 | ||||||||||||
| Accounts receivable | 77,304 | 65,107 | ||||||||||||
| Prepaid expenses and other assets | 24,383 | 18,236 | ||||||||||||
| Due from IKON Office Solutions, Inc. ("IKON") | 115,761 | |||||||||||||
| Leased equipment - operating rentals at cost, less accumulated depreciation | ||||||||||||||
| of: June 30, 2003 - $46,140; September 30, 2002 - $42,196 | 78,884 | 72,271 | ||||||||||||
| Property and equipment at cost, less accumulated depreciation of: | ||||||||||||||
| June 30, 2003 - $9,733; September 30, 2002 - $9,406 | 1,059 | 1,329 | ||||||||||||
| Total Assets | $ | 3,558,817 | $ | 3,320,016 | ||||||||||
| Liabilities and Member's Equity | ||||||||||||||
| Liabilities: | ||||||||||||||
| Accounts payable | $ | 54,465 | $ | 65,567 | ||||||||||
| Accrued interest | 8,441 | 17,045 | ||||||||||||
| Due to IKON | 1,566 | |||||||||||||
| Convertible subordinated notes | 300,000 | 300,000 | ||||||||||||
| Notes payable | 407,974 | 277,170 | ||||||||||||
| Lease-backed notes | 1,841,831 | 1,690,828 | ||||||||||||
| Asset securitization conduit financing | 225,000 | 312,500 | ||||||||||||
| Deferred tax liabilities | 261,211 | 224,657 | ||||||||||||
| Total Liabilities | 3,098,922 | 2,889,333 | ||||||||||||
| Commitments and contingencies | ||||||||||||||
| Member's equity: | ||||||||||||||
| Contributed capital | 179,796 | 179,796 | ||||||||||||
| Retained earnings | 295,331 | 275,057 | ||||||||||||
| Accumulated other comprehensive loss | (15,232 | ) | (24,170 | ) | ||||||||||
| Total Member's Equity | 459,895 | 430,683 | ||||||||||||
| Total Liabilities and Member's Equity | $ | 3,558,817 | $ | 3,320,016 | ||||||||||
See notes to condensed consolidated financial statements.
4
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||
| Revenues | ||||||||||
| Lease finance income | $ | 86,373 | $ | 85,900 | $ | 260,294 | $ | 258,601 | ||
| Rental income | 9,645 | 8,144 | 28,398 | 24,288 | ||||||
| Other income | 5,188 | 4,894 | 14,087 | 15,933 | ||||||
| 101,206 | 98,938 | 302,779 | 298,822 | |||||||
| Expenses | ||||||||||
| Interest | 32,477 | 37,337 | 100,829 | 113,974 | ||||||
| Lease defaults, net of recoveries | 11,593 | 3,546 | 34,843 | 11,455 | ||||||
| Depreciation on operating rentals | 6,689 | 6,737 | 22,362 | 20,258 | ||||||
| General and administrative | 11,063 | 8,725 | 30,274 | 25,458 | ||||||
| Loss from early extinguishment of debt | 20,194 | 20,292 | ||||||||
| 82,016 | 56,345 | 208,600 | 171,145 | |||||||
| Income before taxes on income | 19,190 | 42,593 | 94,179 | 127,677 | ||||||
| Taxes on income | 3,910 | 17,037 | 33,905 | 51,071 | ||||||
| Net income | $ | 15,280 | $ | 25,556 | $ | 60,274 | $ | 76,606 | ||
See notes to condensed financial statements.
5
| Nine Months Ended June 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||||||||
| Cash Flows from Operating Activities | ||||||||||||||
| Net income | $ | 60,274 | $ | 76,606 | ||||||||||
| Additions (deductions) to reconcile net income to net cash | ||||||||||||||
| provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 28,148 | 26,721 | ||||||||||||
| Provision for deferred income taxes | 30,595 | 39,694 | ||||||||||||
| Provision for lease default reserves | 41,831 | 16,444 | ||||||||||||
| Loss from early extinguishment of debt | 20,292 | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| (Increase) decrease in accounts receivable | (12,197) | 36,628 | ||||||||||||
| Increase in prepaid expenses and other assets | (13,020) | (13,968) | ||||||||||||
| Increase (decrease) in accounts payable and accrued expenses | 3,231 | (13,371) | ||||||||||||
| Decrease in accrued interest | (8,604) | (6,511) | ||||||||||||
| Net cash provided by operating activities | 150,550 | 162,243 | ||||||||||||
| Cash Flows from Investing Activities | ||||||||||||||
| Purchases of equipment | (35,396) | (41,802) | ||||||||||||
| Proceeds from terminations of leased equipment | 6,383 | 6,280 | ||||||||||||
| Investments in leases: | ||||||||||||||
| Additions | (1,302,393) | (1,265,867) | ||||||||||||
| Cancellations | 200,734 | 260,339 | ||||||||||||
| Collections | 1,011,335 | 991,208 | ||||||||||||
| Net cash used in investing activities | (119,337) | (49,842) | ||||||||||||
| Cash Flows from Financing Activities | ||||||||||||||
| Proceeds from asset securitization conduit financing | 551,145 | 449,911 | ||||||||||||
| Payments on asset securitization conduit financing | (638,645) | (593,411) | ||||||||||||
| Proceeds from notes payable | 350,000 | |||||||||||||
| Payments on notes payable | (233,442) | |||||||||||||
| Payments on medium term notes | (82,000) | |||||||||||||
| Short-term borrowings, net of repayments | (4,087) | 5,663 | ||||||||||||
| Proceeds from issuance of lease-backed notes | 852,085 | 720,290 | ||||||||||||
| Payments on lease-backed notes | (701,082) | (597,279) | ||||||||||||
| Proceeds from issuance of convertible subordinated notes | 300,000 | |||||||||||||
| Deposits to restricted cash | (50,975) | (7,809) | ||||||||||||
| Dividends to IKON | (40,000) | (149,500) | ||||||||||||
| Change in due to/from IKON, net | (117,327) | (158,866) | ||||||||||||
| Net cash used in financing activities | (32,328) | (113,001) | ||||||||||||
| Net decrease in cash | (1,115) | (600) | ||||||||||||
| Cash at beginning of year | 10,994 | 16,056 | ||||||||||||
| Cash at end of period | $ | 9,879 | $ | 15,456 | ||||||||||
See notes to condensed consolidated financial statements.
5
6
Note 1: Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements of IOS Capital, LLC ("IOSC"(“IOSC” or the "Company"“Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim periods have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company'sCompany’s Annual Report on Form 10-K for the year ended September 30, 2002. Certain prior year amounts have been reclassified to conform with the current year presentation.
Note 2: Notes Payable and Lease-Backed Notes
-------------------------------------
In June 2003, the Company issued $350,000 of notes payable with an interest rate of 7.25% (7.43% yield including the original issue discount) which are due on June 30, 2008. Interest is paid on the notes semi-annually in June and December beginning December 30, 2003. With the proceeds from the issuance, the Company tendered $205,609 par value of its 9.75% notes due January 15, 2004, for $223,844 and deposited sufficient funds with an escrow agent to defease the remaining $34,891 of 9.75% notes not tendered. The remainder of the proceeds were used for general corporate purposes.
During the six months ended March 31,first quarter of fiscal 2003, the Company repurchased $9,500 par value of its 9.75% notes payable due June 15, 2004 for $9,598. During
As a result of these repurchases, the sixCompany recognized a loss, including the write-off of unamortized costs, of $20,292, which is included in loss from early extinguishment of debt, in the consolidated statements of income for the nine months ended March 31,June 30, 2003.
On April 23, 2003, IKON Receivables Funding, LLC (a wholly-owned subsidiary of the Company repaid $474,782Company) issued Series 2003-1 Lease-Backed Notes (the “2003-1 Notes”) as described below:
| Series | Notes | Issuance Date | Principle Issuance Amount | Interest Rate | Stated Maturity Date |
|---|---|---|---|---|---|
| 2003-1 | Class A-1 | 04/23/03 | $253,200 | 1.30813% | May 2004 |
| Class A-2 | 04/23/03 | 26,700 | 1.68% | November 2005 | |
| Class A-3a | 04/23/03 | 206,400 | LIBOR + 0.24% | December 2007 | |
| Class A-3b | 04/23/03 | 206,400 | 2.33% | December 2007 | |
| Class A-4 | 04/23/03 | 159,385 | 3.27% | July 2011 | |
| Total | $852,085 | ||||
Proceeds from the issuance of lease-backed notes.
At March 31, 2003, notes payable included borrowings of $140,900 relatedthe 2003-1 Notes were used to make payments on the Company's $300,000 unsecured credit facility. As discussed in Note 6, the
Company repaid the borrowings under the unsecured credit facility in April 2003.
Note 3: Asset Securitization Conduit Financing
--------------------------------------
During the six months ended March 31, 2003, the Company pledged or transferred
$385,140 in financing lease receivables for $326,145 in cash in connection with
itsCompany’s revolving asset securitization conduit financing agreements (the "Conduits"“Conduits”), repay unsecured credit facility borrowings and increase the Company’s cash balance.
The 2003-1 Notes were issued pursuant to certain indentures between IKON Receivables Funding, LLC, the Company and certain indenture trustees. The 2003-1 Notes are collateralized by a pool of office equipment leases or contracts and related assets (the “Leases”) acquired or originated by the Company (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 2003-1 Notes are made from payments on the Leases. The 2003-1 Notes have certain credit enhancement features available to noteholders, including reserve accounts, overcollateralization accounts and noncancelable insurance policies from Ambac Assurance Corporation with respect to the 2003-1 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.
7
In April 2003, the Company entered into a swap transaction to hedge the variable rate 2003-1 Class A-3a lease-backed note to a fixed rate of 2.095%. This hedge qualifies for evaluation using the “short cut” method of assessing effectiveness; accordingly, there is an assumption of no ineffectiveness.
During the nine months ended June 30, 2003, the Company repaid $701,082 of lease-backed notes.
Note 3: Asset Securitization Conduit Financing
During the nine months ended June 30, 2003, the Company pledged or transferred $652,978 in financing lease receivables for $551,145 in cash in connection with conduits. As of March 31,June 30, 2003, the Company had approximately $66,355$480,000 available under revolving asset securitization conduit financing agreements.
Note 4: Comprehensive Income
--------------------
Total comprehensive income is as follows:
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||
|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||
| Net income | $ 15,280 | $ 25,556 | $ 60,274 | $ 76,606 | |||
| Gain (loss) on derivative financial instruments, net | |||||||
| of tax expense (benefit) of: $1,293 and $(1,570) | |||||||
| for the three months ended June 30, 2003 and 2002, | |||||||
| respectively; $5,959 and $5,430 for the nine | |||||||
| months ended June 30, 2003 and 2002, respectively | 1,939 | (2,355) | 8,938 | 8,146 | |||
| Total comprehensive income | $ 17,219 | $ 23,201 | $ 69,212 | $ 84,752 | |||
Note 5: Financial Instruments
---------------------
As of March 31,June 30, 2003, all of the Company'sCompany’s derivatives designated as hedges are interest rate swaps which qualify for evaluation using the "short cut"“short cut” method for assessing effectiveness. As such, there is an assumption of no ineffectiveness. The Company uses interest rate swaps to fix the interest rates on its variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the sixnine months ended March 31,June 30, 2003, unrealized gains totaling $6,998$8,938 after taxes, were recorded in accumulated other comprehensive loss.
7
Note 6: Subsequent Events
-----------------
On April 23, 2003, IKON Receivables Funding, LLC (a wholly-owned subsidiary of
the Company) issued Series 2003-1 Lease-Backed Notes (the "2003 Notes") as
described below:
Principal Stated
Issuance Issuance Maturity
Series Notes Date Amount Interest Rate Date
-------------------------------------------------------------------------------------------------
2003-1 Class A-1 04/23/03 $253,200 1.30813% May 2004
Class A-2 04/23/03 26,700 1.68% November 2005
Class A-3a 04/23/03 206,400 LIBOR + 0.24% December 2007
Class A-3b 04/23/03 206,400 2.33% December 2007
Class A-4 04/23/03 159,385 3.27% July 2011
-------------------------------------------------------------------------------------------------
Total $852,085
-------------------------------------------------------------------------------------------------
Proceeds from the issuance of the 2003 Notes were used to make payments on the
Company's Conduits, repay the unsecured credit facility borrowings and increase
the Company's cash balance.
In April 2003, the Company entered into a swap transaction to hedge the variable
rate 2003-1 Class A-3a lease-backed note to a fixed rate of 2.095%. This hedge
qualifies for evaluation using the "short cut" method of assessing
effectiveness; accordingly, there is an assumption of no ineffectiveness.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Pursuant to General Instruction H(2)(a) of Form 10-Q, the following analysis of the results of operations is presented in lieu of Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
In response to the SEC'sSEC’s Release No. 33-8040, "Cautionary“Cautionary Advice Regarding Disclosure About Critical Accounting Policies,"” we have identified below the accounting principles critical to our business and results of operations. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We discuss these accounting policies at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements contained in our 2002 Annual Report on Form 10-K. In addition, we believe our most critical accounting policies include the following:
Residual Values. IKON and IOSC estimate the residual value of equipment sold under sales-type leases. Our residual values are based on the dollar value of the equipment. Residual values generally range between 0% to 22% of manufacturers suggested retail price, depending on equipment model and lease term. We evaluate residual values quarterly for impairment. Changes in market conditions could cause actual residual values to differ from estimated values, which could accelerate the write-down of the value of the equipment.
Allowance for Lease Receivables. IOSC maintains an allowance for lease defaults for estimated losses resulting from the inability of its customerslessess to make required payments. If the financial condition of IKON's customersthe lessees were to deteriorate, resulting in an impairment of their ability to make required payments, increases to our allowance may be required.
8
Our preparation of this Quarterly Report on Form 10-Q and other financial statements filed with the SEC requires us to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and notes. Actual results could differ from those estimates and assumptions.
Total revenues decreasedincreased by $936,$2,268, or 0.9%2.3%, in the secondthird quarter of fiscal 2003 compared to the secondthird quarter of fiscal 2002. Lease finance income decreasedincreased by $433,$473, or 0.5%0.6%, due to the increase in the lease portfolio in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. This increase was partially offset by a decrease in the average yield of leases in the portfolio infrom the secondthird quarter of fiscal 2003 compared to the secondthird quarter of fiscal 2002. This decrease was partially offset by the growth in the lease
portfolio from the second quarter of fiscal 2003 compared to the second quarter
of fiscal 2002.
8
Office equipment placed on rental, with either cancelable or non-cancelable terms, by the IKON marketplaces to customers may be purchased by the Company. During the secondthird quarter of fiscal 2003, the Company purchased operating lease equipment of $12,629$10,905 compared to $11,450$21,749 during the secondthird quarter of fiscal 2002. The increasedecrease in purchases is due to an increasea decrease in operating rentals written by the IKON marketplaces. Since the Company can service operating rentals more efficiently than the IKON marketplaces, substantially all of the operating rentals written by the IKON marketplaces are purchased by the Company. Rental income increased by $676,$1,501 or 8.0%18.4%, during the secondthird quarter of fiscal 2003 compared to the secondthird quarter of fiscal 2002, primarily due to an increase in the lease portfolio on a year-to-year basis.
Other income consists primarily of late payment charges, various billing fees, and interest income on restricted cash. Overall, income from these sources increased by $294, or 6.0%, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. Various billing fees increased by $647 or 54.0%, which was off set by a decrease in interest income on restricted cash of $169, or 45.4%, in the third quarter of 2003 compared to the third quarter of fiscal 2002, due to the decline in short-term interest rates. Also offsetting the increase was a decrease in late payment charges of $184, or 5.5%, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002, due to the improvement in the delinquency of the lease portfolio.
Total expenses increased by $25,671, or 45.6%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Borrowings to finance the investment in leases in the form of convertible subordinated notes, asset securitization conduit financing, lease-backed notes in the public market net of intercompany receivables due from IKON were $2,659,043 outstanding at June 30, 2003 compared to $2,571,022 outstanding at June 30, 2002. This increase was primarily due to the issuance of $852,085 of lease-backed notes and $350,000 of notes payable offset by the early extinguishment of $205,609 of notes payable and the repayment of $701,082 of lease-backed notes. The Company paid a weighted average interest rate on all borrowings of 4.9% as of June 30, 2003 compared to 6.3% as of June 30, 2002. Primarily as a result of the decrease in the weighted average interest rate on all borrowings, interest expense decreased by $4,860, or 13.0%, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. In accordance with the 1996 Support Agreement between the Company and IKON, the Company’s debt to equity ratio, including amounts due from IKON, was 5.9 to 1 and 6.0 to 1, at June 30, 2003 and June 30, 2002, respectively.
Lease defaults, net of recoveries, increased by $8,047, or 226.9%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Prior to October 1, 2002, the Company was involved in a shared recourse arrangement with the IKON marketplaces. Under that shared recourse arrangement, the Company recorded 35% of the total provision for lease defaults. Effective October 1, 2002, the shared recourse arrangement with IKON marketplaces was terminated, and the Company records 100% of the provision for lease defaults.
Depreciation expense on operating rentals decreased by $48, or 0.7%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002, due to the volume and mix of leased equipment. General and administrative expenses increased by $2,338, or 26.8%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Effective fiscal 2003, the Company is responsible for the cost of the lease sales and marketing staff and certain credit investigation expenses, both of which were previously expensed by the IKON marketplaces.
During the three months ended June 30, 2003, the Company repurchased $205,609 par value of its 9.75% notes due January 15, 2004, for $223,844. As a result, the Company recognized a loss from the early extinguishment of debt, including the write-off of unamortized costs, of $20,194 during the three months ended June 30, 2003.
Income before taxes on income for the third quarter of fiscal 2003 decreased by $23,403, or 54.9%, compared to the third quarter of fiscal 2002 as a result of the items above.
9
Taxes on income for the third quarter of fiscal 2003 decreased by $13,127, or 77.0%, compared to the third quarter of fiscal 2002. The effective income tax rate was 20% for the three months ended June 30, 2003 and 40% for the three months ended June 30, 2002. The decrease in taxes on income is attributable to the decrease in income before taxes on income for the third quarter of fiscal 2003 as compared to the third quarter of fiscal 2002. Also, the Company’s annual effective income tax rate was decreased from 40% to 36% during the quarter ended June 30, 2003.
Total revenues increased by $3,957, or 1.3%, for the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. Lease finance income increased by $1,693, or 0.7%, due to the increase in the lease portfolio for the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. This increase was partially offset by a decrease in the average yield of leases in the portfolio for the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002.
Office equipment placed on rental, with either cancelable or non-cancelable terms, by the IKON marketplaces to customers, may be purchased by the Company. During the nine months ended June 30, 2003, the Company purchased operating lease equipment of $35,339 compared to $41,663 during the nine months ended June 30, 2002. The decrease in purchases is due to a decrease in operating rentals written by the IKON marketplaces. Since the Company can service operating rentals more efficiently than the IKON marketplaces, substantially all of the operating rentals written by the IKON marketplaces are purchased by the Company. Rental income increased by $4,110, or 16.9% during the nine months ended June 30, 2003, compared to the nine months ended June 30, 2002, due to an increase in the lease portfolio.
Other income consists primarily of late payment charges, various billing fees, and interest income on restricted cash. Overall, income from these sources decreased by $1,179,$1,846, or 20.9%11.6%, in the second quarter of fiscalnine months ended June 30, 2003 compared to the second quarter of fiscalnine months ended June 30, 2002. Interest income on restricted cash decreased by $276,$752, or 54.0%49.5%, in the second quarter of 2003 compared to the second quarter
of fiscalnine months ended June 30, 2002, due to the decline in short-term interest rates. Late payment charges and various billing fees decreased $519,by $1,306, or 14.1%12.3%, in the second quarter
of fiscal 2003 compared to the second quarter of fiscalnine months ended June 30, 2002, primarily due to the improvement in the delinquency of the lease portfolio.
Total expenses increased $5,944,by $37,455, or 10.5%21.9%, forduring the threenine months ended March 31,June 30, 2003 compared to the threenine months ended March 31,June 30, 2002. Average borrowingsBorrowings to finance the investment in leases in the form of convertible subordinated notes, notes payable to banks, asset securitization conduit financing, lease-backed notes in the public market andnet of intercompany borrowings withreceivables from IKON with $2,598,259were $2,659,043 outstanding at March 31,June 30, 2003 compared to $2,558,183$2,571,022 outstanding at March 31,
2002 increasedJune 30, 2002. This increase is due primarily to the borrowingsissuance of $140,900 on$852,085 of lease-backed notes and $350,000 of notes payable offset by the revolving
credit facility.early extinguishment of $215,109 of notes payable and the repayment of $701,082 of lease-backed notes. The Company paid a weighted average interest rate on all borrowings of 5.2%4.9% as of March 31,June 30, 2003 compared to 6.3% as of March 31,June 30, 2002. Primarily as a result of the decrease in the weighted average interest rate on all borrowings, interest expense decreased by $4,650,$13,145, or 12.5%11.5%, induring the second
quarter of fiscalnine months ended June 30, 2003 compared to the second quarter of fiscalnine months ended June 30, 2002. At March
31, 2003 and September 30, 2002, the Company's debt to equity ratio, including
amounts due to IKON, was 5.9 to 1 and 6.0 to 1, respectively.
Lease defaults, net of recoveries, increased by $8,867,$23,388, or 227.3%204.2%, forduring the threenine months ended March 31,June 30, 2003 compared to the threenine months ended March 31,June 30, 2002. Prior to October 1, 2002, the Company was involved in a shared recourse arrangement with the IKON marketplaces. This arrangement provided for net losses resulting from lease defaults to be shared equally. Effective October 1, 2002, the shared recourse arrangement with IKON marketplaces was terminated, and the Company records the entire provision for lease defaults.
Depreciation expense decreasedon operating rentals increased by $1,492,$2,104, or 16.2%10.4%, forduring the threenine months ended March 31,June 30, 2003 compared to the threenine months ended March 31,June 30, 2002, due to the volume and mix of leased equipment. General and administrative expenses increased by $3,219,$4,816, or 50.5%18.9%, forduring the threenine months ended March 31,June 30, 2003 compared to the threenine months ended March 31,June 30, 2002. This increase is due to the
sale leaseback of the Company's facilities duringEffective fiscal 2002, which increased
its monthly rent expense in the current period. In addition,2003, the Company is now responsible for the cost of the lease sales and marketing staff and certain credit investigation expenses, both of which were previously expensed by the IKON marketplaces.
During the nine months ended June 30, 2003, the Company repurchased $215,109 par value of its 9.75% notes due January 15, 2004, for $233,442. As a result, the Company recognized a loss from the early extinguishment of debt, including the write-off of unamortized costs, of $20,292 during the nine months ended June 30, 2003.
Income before taxes on income for the second quarter of fiscalnine months ended June 30, 2003 decreased by $6,880,$33,498, or 15.5%26.2%, compared to the second quarter of fiscalnine months ended June 30, 2002 as a result of the items above.
Taxes on income for the second quarter of fiscalnine months ended June 30, 2003 decreased by $2,772,$17,166, or 15.6%33.6%, compared to the second quarter of fiscal 2002. The effective income tax
rate was 40% for the threenine months ended March 31, 2003 and March 31,June 30, 2002. The decrease in income taxes on income is directly attributable to the decrease in income before taxes on income for the second quarter of fiscalnine months ended June 30, 2003 as compared to the second quarter of fiscal 2002.
Six Months Ended March 31, 2003
Compared to the Six Months Ended March 31, 2002
Total revenues increased by $1,689, or 0.8%, for the sixnine months ended March 31,
2003 compared to the six months ended March 31,June 30, 2002. Lease finance income
increased by $1,220, or 0.7%, due to the growth in the lease receivables
portfolio and the longer average lease terms in the portfolio for the six months
ended March 31, 2003 compared to the six months ended March 31, 2002.
Office equipment placed on rental, with cancelable terms, by the IKON
marketplaces to customers, may be purchased by the Company. During the six
months ended March 31, 2003, the Company purchased operating lease equipment of
$24,434 compared to $20,206 during the six months ended March 31, 2002. The
increase in purchases is due to an increase in operating rentals written by the
IKON marketplaces. Since the Company can service operating rentals more
efficiently than the IKON marketplaces, substantially all of the operating
rentals written by the IKON marketplaces are purchased by the Company. Rental
income increased by $2,609, or 16.2%
9
during the six months ended March 31, 2003, compared to the six months ended
March 31, 2002, due to the increase in the leased equipment portfolio.
Other income consists primarily of late payment charges, various billing fees,
and interest income on restricted cash. Overall, income from these sources
decreased by $2,140, or 19.4%, in the six months ended March 31, 2003 compared
to the six months ended March 31, 2002. Interest income on restricted cash
decreased by $309, or 48.5%, compared to the six months ended March 31, 2002,
due to the decline in short-term interest rates. Late payment charges and
various billing fees decreased by $1,122, or 31.1%, compared to the six months
ended March 31, 2002, primarily due to the improvement in the delinquency of the
lease portfolio.
Total expenses increased by $11,784, or 10.3%, during the six months ended March
31, 2003 compared to the six months ended March 31, 2002. Average borrowings to
finance the investment in leases in the form of convertible subordinated notes,
notes payable to banks, asset securitization conduit financing, lease-backed
notes in the public market and intercompany borrowings with IKON with $2,598,259
outstanding at March 31, 2003 compared to $2,558,183 outstanding at March 31,
2002 increased due primarily to the borrowings of $140,000 on the revolving
credit facility. The Company paid a weighted average interest rate on all
borrowings of 5.2% as of March 31, 2003 compared to 6.3% as of March 31, 2002.
Primarily as a result of the decrease in the weighted average interest rate on
all borrowings, interest expense decreased by $8,187, or 10.7%, during the six
months ended March 31, 2003 compared to the six months ended March 31, 2002.
Lease defaults, net of recoveries, increased by $15,341, or 194.0%, during the
six months ended March 31, 2003 compared to the six months ended March 31, 2002.
Prior to October 1, 2002, the Company was involved in a shared recourse
arrangement with the IKON marketplaces. This arrangement provided for net losses
resulting from lease defaults to be shared equally. Effective October 1, 2002,
the shared recourse arrangement with IKON marketplaces was terminated, and the
Company records the entire provision for lease defaults.
Depreciation expense decreased by $2,138, or 12.0%, during the six months ended
March 31, 2003 compared to the six months ended March 31, 2002, due to the
volume and mix of leased equipment. General and administrative expenses
increased by $6,768, or 54.4%, during the six months ended March 31, 2003
compared to the six months ended March 31, 2002. This increase is due to the
sale leaseback of the Company's facilities during fiscal 2002, which increased
its monthly rent expense in the current period. In addition, the Company is now
responsible for the cost of the lease sales and marketing staff and certain
credit investigation expenses, both of which were previously expensed by the
IKON marketplaces.
Income before taxes on income for the six months ended March 31, 2003 decreased
by $10,095, or 11.9%, compared to the six months ended March 31, 2002 as a
result of the items above.
Taxes on income for the six months ended March 31, 2003 decreased by $4,039, or
11.9%, compared to the six months ended March 31, 2002. The effective income tax rate was 36% for the nine months ended June 30, 2003 and 40% for the sixnine months ended March 31, 2003 and March 31,June 30, 2002. The
decrease in income taxes is directly attributable to the decrease in income
before taxes on income for the six months ended March 31, 2003 as compared to
the six months ended March 31, 2002.
10
The following summarizes IOSC'sIOSC’s significant contractual obligations and commitments as of March 31,June 30, 2003:
| Payments due by | |||||
|---|---|---|---|---|---|
| Contractual Obligations | Total | June 30, 2004 | June 30, 2006 | June 30, 2008 | Thereafter |
| Debt | $ 2,774,805 | $ 1,126,010 | $ 874,168 | $ 774,627 | |
| Operating Leases | 16,106 | 2,454 | 2,029 | 2,024 | $ 9,599 |
| Total | $ 2,790,911 | $ 1,128,464 | $ 876,197 | $ 776,651 | $ 9,599 |
Payments on our debt generally are made from collections of our finance receivables. At March 31,June 30, 2003, the Company'sCompany’s debt was $2,561,461$2,774,805 and net finance receivables were $3,071,214.
On April 23, 2003, IKON Receivables Funding, LLC (a wholly-owned subsidiary of
the Company) issued Series 2003-1 Leased-Backed Notes (the "2003 Notes") as
described below:
10
Principal Stated
Issuance Issuance Maturity
Series Notes Date Amount Interest Rate Date
--------------------------------------------------------------------------------------------------
2003-1 Class A-1 04/23/03 $253,200 1.30813% May 2004
Class A-2 04/23/03 26,700 1.68% November 2005
Class A-3a 04/23/03 206,400 LIBOR + 0.24% December 2007
Class A-3b 04/23/03 206,400 2.33% December 2007
Class A-4 04/23/03 159,385 3.27% July 2011
--------------------------------------------------------------------------------------------------
Total $852,085
--------------------------------------------------------------------------------------------------
Proceeds from the issuance of the 2003 Notes were used to make payments on the
Company's Conduits, repay the unsecured credit facility borrowings and increase
the Company's cash balance.
$3,084,978.
Evaluation of Disclosure Controls and Procedures.Procedures. The Company's PrincipleCompany’s Principal Executive Officer and PrinciplePrincipal Financial Officer have evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c)13a-15(e) and 15d-14(c) under the Exchange Act) as of an
evaluation date within 90 days prior to the filing dateend of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, they have concluded that, as of the evaluation date, the Company'sCompany’s disclosure controls and procedures are reasonably designed to alert them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in its reports filed or submitted under the Exchange Act.
Changes in Internal Controls. Since the evaluation date referred to above, there
have not been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
4.1 First Amendment, dated as of February 28, 2003, to the Credit Agreement,
dated May 24, 2002, among IKON and various institutional lenders, with JP
Morgan Chase Bank, N.A., as Agent (Filed as Exhibit 4.1 to the quarterly
report of IKON Office Solutions Inc. for the quarter ended March 31, 2003).
4.2 Second Amendment, dated as
| Item 6. | Exhibits and Reports on Form 8-K |
| a) | Exhibits | ||
| 31.1 | Certification of Principal Executive Officer of IOS Capital, LLC pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 | ||
| 31.2 | Certification of Principal Financial Officer of IOS Capital, LLC pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 | ||
| 32 | Certifications of Principal Executive Officer and Principal Financial Officer of IOS Capital, LLC pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 | ||
| b) | Reports on Form 8-K | ||
On April 11, 2003, to the Credit Agreement,
dated May 24, 2002, among IKON and various institutional lenders, with JP
Morgan Chase Bank, N.A., as Agent (Filed as Exhibit 4.2 to the quarterly
report of IKON Office Solutions Inc. for the quarter ended March 31, 2003).
10.1 Amended and Restated Agreement dated as of March 28, 2003, relating to the
Asset Backed Loan Agreement between RochFord, Inc., as Borrower, and IKON
Capital PLC, as Originator and Servicer, and Park Avenue Receivables
Corporation, as Conduit Lender, and Certain APA Banks and JP Morgan Chase
Bank, as Funding Agent (Filed as Exhibit 10.1 to the quarterly report of
IKON Office Solutions Inc. for the quarter ended March 31, 2003).
10.2 Amended and Restated Receivables Transfer Agreement dated as of March 31,
2003 among IKON Funding-3, LLC, as Transferor, IOS Capital, LLC, as
Originator and Collection Agent, Gemini Securitization Corp., as Conduit
Transferee, The Several Financial Institutions party hereto from time to
time, as Alternate Transferees, and Deutsche Bank AG, New York Branch, as
Administrative Agent (Filed as Exhibit 10.2 to the quarterly report of IKON
Office Solutions Inc. for the quarter ended March 31, 2003).
10.3 First Amendment, dated as of May 9, 2003, to the Amended and Restated
Transfer Agreement, dated as of March 31, 2003, among IKON Funding -3, LLC,
as Transferor, IOS Capital, LLC, as Originator and Collection Agent, Gemini
Securitization Corp., as Conduit Transferee, The Several Financial
Institutions party hereto from time to time, as Alternate Transferees, and
Deutsche Bank AB, New York Branch, as Administrative Agent (Filed as
Exhibit 10.3 to the quarterly report of IKON Office Solutions Inc. for the
quarter ended March 31, 2003).
23.1 Consent of PricewaterhouseCoopers LLP
99.1 Certification Pursuant to 18 U.S.C. Section 1850, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
On January 24, 2003 the Company filed a Current Report on Form 8-K to file, under Item 5 of the Form, information contained in its parent's press release dated January 23,April 24, 2003 regarding its results for the firstthird quarter of fiscal 2003.
On February 26, 2003, the Company filed a Current Report on Form 8-K to file,
under Item 5 of the Form, information contained in its parent's press release
dated February 25, 2003 regarding the election of Matthew J. Espe, President and
CEO, to the additional position of Chairman of the Board.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. This report has also been signed by the undersigned in his capacity as the chief accounting officer of the Registrant.
IOS Capital, LLC
Date: May 15, 2003
By: /s/ Harry G. Kozee
-----------------------------
Name: Harry G. Kozee
Title: Vice President - Finance (Principal Financial Officer)
| IOS Capital, LLC Date: August 14, 2003 By: /s/ Harry G. Kozee Name: Harry G. Kozee Title: Vice President - Finance (Principal Financial Officer) |
12
CERTIFICATIONS
I, Russell S. Slack, President and Principal Executive Officer of IOS Capital,
LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IOS Capital, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information contained in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Russell S. Slack
- --------------------------
Russell S. Slack
President and Principal Executive Officer
13
I, Harry G. Kozee, Vice President - Principal Financial Officer, and Principal
Accounting Officer of IOS Capital, LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IOS Capital, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information contained in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Harry G. Kozee
- ---------------------------
Harry G. Kozee
Vice President - Finance, Principal Financial Officer,
and Principal Accounting Officer
14