UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001 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
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IOS CAPITAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2493042
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1738 Bass Road, Macon, Georgia 31210
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(Address of principal executive offices)
(Zip Code)
(478) 471-2300
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 7, 2001.
Common Stock, $.01 par value per share 1,000 shares
Registered Debt Outstanding of the Company and all wholly-owned
affiliates
$1,804,108,931
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 disclosure format
contemplated thereby.
INDEX
IOS CAPITAL, INC.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2001 (unaudited)
and September 30, 2000
Consolidated Statements of Income - Three and six months
ended March 31, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows - Six months ended
March 31, 2001 and 2000 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
IOS CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31, September 30,
2001 2000
(unaudited)
--------------------- -------------------
Assets
Investments in leases:
Financing lease receivables, net of lease default
reserve of: March 31, 2001 - $58,576;
September 30, 2000 - $62,266 $3,182,837 $2,899,456
Less: Unearned income (513,945) (458,606)
--------------------- -------------------
2,668,892 2,440,850
Funded leases, net 227,140 367,389
--------------------- -------------------
Investments in leases, net 2,896,032 2,808,239
Cash 3,154 3,998
Restricted cash 129,130 91,914
Accounts receivable 90,060 101,689
Prepaid expenses and other assets 6,510 6,160
Leased equipment-operating rentals at cost,
less accumulated depreciation of:
March 31, 2001 - $50,921;
September 30, 2000 - $55,595 38,598 42,993
Property and equipment at cost, less
accumulated depreciation of:
March 31, 2001 - $9,788;
September 30, 2000 - $8,981 8,558 9,097
--------------------- -------------------
Total assets $3,172,042 $3,064,090
===================== ===================
Liabilities and Shareholder's Equity
Liabilities:
Accounts payable and accrued expenses $95,218 $55,327
Accrued interest 11,175 15,521
Due to IKON Office Solutions, Inc. ("IKON") 312,592 22,834
Medium term notes 287,500 568,500
Notes payable 7,685 -
Lease-backed notes 1,572,765 1,267,641
Asset securitization conduit financing 308,000 582,795
Deferred income taxes 144,201 139,626
--------------------- -------------------
Total liabilities 2,739,136 2,652,244
--------------------- -------------------
Shareholder's equity:
Common Stock - $.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital 149,415 149,415
Retained earnings 301,488 262,431
Accumulated other comprehensive loss (17,997) -
--------------------- -------------------
Total shareholder's equity 432,906 411,846
--------------------- -------------------
Total liabilities and shareholder's equity $3,172,042 $3,064,090
===================== ===================
See notes to condensed consolidated financial statements.
1
IOS CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(unaudited)
Three months ended Six months ended
March 31, March 31,
--------------------------------------- -------------------------------------
2001 2000 2001 2000
--------------- ------------------- ---------------- ----------------
Revenues:
Lease finance income $79,090 $67,831 $155,747 $137,044
Rental income 8,226 9,068 16,407 18,336
Interest on IKON income tax deferrals - 4,286 - 8,504
Other income 6,283 5,076 12,060 9,720
--------------- ------------------- ---------------- ----------------
93,599 86,261 184,214 173,604
--------------- ------------------- ---------------- ----------------
Expenses:
Interest 41,963 36,540 83,458 72,777
Lease default, net of recovery income 3,327 4,241 6,582 8,383
Depreciation 6,866 7,586 13,715 15,333
General and administrative 8,035 7,415 15,364 14,624
--------------- ------------------- ---------------- ----------------
60,191 55,782 119,119 111,117
--------------- ------------------- ---------------- ----------------
Gain on sale of lease receivables - - - 76
--------------- ------------------- ---------------- ----------------
Income before income taxes 33,408 30,479 65,095 62,563
Provision for income taxes 13,363 12,191 26,038 25,025
--------------- ------------------- ---------------- ----------------
Net income $20,045 $18,288 $39,057 $37,538
=============== =================== ================ ================
See notes to condensed consolidated financial statements.
2
IOS CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
March 31,
----------------------------------------------
2001 2000
------------------ -----------------
Cash flows from operating activities
Net income $39,057 $37,538
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18,304 22,257
Deferred tax provision 16,573 14,944
Provision for lease default 9,964 9,606
Gain on sale of investment in leases - (76)
Changes in operating assets and liabilities:
Accounts receivable 11,629 1,879
Prepaid expenses and other assets (1,102) 2,523
Accounts payable and accrued expenses 9,897 6,392
Accrued interest (4,346) (5,183)
------------------ -----------------
Net cash provided by operating activities 99,976 89,880
------------------ -----------------
Cash flows from investing activities
Purchases of equipment (12,420) (7,867)
Proceeds from terminations of equipment 2,935 2,919
Investments in leases:
Additions (965,093) (896,957)
Cancellations 150,791 149,474
Collections 714,842 673,347
Lease default reserve transfer from IKON, net of deferred taxes - 44,955
Proceeds from sale of leases - 923
Repurchase of leases sold - (275,000)
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Net cash used in investing activities (108,945) (308,206)
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Cash flows from financing activities
Proceeds from asset securitization conduit financing 308,000 250,000
Payments on asset securitization conduit financing (582,795) -
Payments on medium term notes (281,000) (378,000)
Proceeds from notes payable 7,685 -
Proceeds from issuance of lease-backed notes 633,000 697,466
Payments on lease-backed notes (329,307) (269,861)
Deposit to restricted cash (37,216) (46,926)
Dividend to IKON - (30,000)
------------------ -----------------
Net cash (used in) provided by financing activities (281,633) 222,679
------------------ -----------------
(Decrease) increase in cash and amounts Due to IKON (290,602) 4,353
Cash and Due to IKON at beginning of year (18,836) (111,314)
------------------ -----------------
Cash and Due to IKON at end of period ($309,438) ($106,961)
================== =================
See notes to condensed consolidated financial statements.
3
IOS CAPITAL, INC.
Notes to Condensed Consolidated Financial Statements
(amounts in thousands)
(unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of IOS
Capital, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles 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 only of normal recurring adjustments)
considered necessary for a fair statement of the results of the interim periods
have been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 2000. Certain prior year amounts have been
reclassified to conform with the current year presentation.
Note 2: Adoption of SFAS 133
The Company adopted Statement of Financial Accounting Standards (SFAS) 133, as
amended by SFAS 138, "Accounting for Derivative Instruments and Hedging
Activities", on October 1, 2000. SFAS 133 requires that all derivatives be
recorded on the consolidated balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in earnings or Other
Comprehensive Income (Loss) ("OCI") depending on the type of hedging instrument
and the effectiveness of those hedges. In accordance with the transition
provisions of SFAS 133, the Company recorded a cumulative loss adjustment to OCI
of $3,471, after taxes, to recognize the fair value of its derivatives as of the
date of adoption.
All of the derivatives used by the Company as hedges are highly effective as
defined by SFAS 133 because all of the critical terms of the derivatives match
those of the hedged item. All of the derivatives used by the Company have been
designated as cash flow hedges at the time of the adoption of SFAS 133 or at the
time they were executed, if later than October 1, 2000. All derivatives are
adjusted to their fair market values at the end of each quarter. Unrealized net
gains and losses for cash flow hedges are recorded in OCI.
As of March 31, 2001, all of the derivatives designated as hedges by the Company
are interest rate swaps which qualify for evaluation using the "shortcut 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 the Company had issued fixed rate notes. During the six
months ended March 31, 2001, unrealized net losses totaling $17,997, after
taxes, were recorded in OCI, including the $3,471 cumulative effect adjustment
as of October 1, 2000.
Note 3: Lease-backed Notes
In addition to the $1,267,641 of lease-backed notes (the "Notes") outstanding at
September 30, 2000, on December 7, 2000, IKON Receivables, LLC (a consolidated
affiliate of the Company) issued $634,431 of lease-backed notes (the "2000-2
Notes") under its $2,000,000 shelf registration statement filed with the
Securities and Exchange Commission. The 2000-2 Notes are comprised of Class A-1
Notes totaling $193,532 have a stated interest rate of 6.66125%, Class A-2 Notes
totaling $70,193 have a stated interest rate of 6.60%, Class A-3 Notes totaling
4
$290,800 have a variable interest rate and Class A-4 Notes totaling $79,906 have
a variable interest rate. Class A-3 Notes pay an interest rate of one-month
LIBOR plus 0.23% (which has been fixed at 6.475% through an interest rate swap).
Class A-4 Notes pay an interest rate of one-month LIBOR plus 0.27% (which has
been fixed at 6.475% through an interest rate swap). The 2000-2 Notes are
collateralized by a pool of office equipment leases or contracts and related
assets and the payments on the 2000-2 Notes are made from payments received on
the equipment leases. The Company received $633,000 in net proceeds from the
sale of the 2000-2 Notes and used $582,795 of that amount to repay asset
securitization conduit financing.
Note 4: Asset Securitization Conduit Financing
On December 7, 2000, the Company repaid $582,795 of asset securitization conduit
financing when it issued the 2000-2 Notes above. For the first six months of
fiscal 2001, the Company pledged or transferred $341,206 in financing lease
receivables for $280,000 in cash in connection with its revolving asset
securitization, in transfers accounted for as financings.
Additionally, on March 31, 2001, the Company entered into an asset
securitization transaction whereby it pledged or transferred $33,299 in
financing lease receivables for $28,000 in cash and a retained interest in the
remainder. 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 sold interests in this new pool of leases,
additional leases can be sold up to $300,000. The terms of the agreement require
that the Company continue to service the lease portfolio.
As of March 31, 2001, the Company had approximately $471,500 available under its
revolving asset securitization conduit financing agreements.
Note 5: Notes Payable
On March 25, 2001, the Company signed promissory notes and pledged $7,943 of
lease receivables for $7,685 of proceeds. The notes have various interest rates
with maturities through December 2005.
Note 6: Comprehensive Income
Total comprehensive income is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- ----------------------
2001 2000 2001 2000
---------------------- ----------------------
Net income $ 20,045 $ 18,288 $ 39,057 $ 37,538
Cumulative effect of change in accounting
principle for derivatives and hedging
activities (SFAS 133), net of tax (3,471)
Net loss on derivatives, net of tax (7,675) (14,526)
-------- -------- -------- --------
Total comprehensive income $ 12,370 $ 18,288 $ 21,060 $ 37,538
======== ======== ======== ========
5
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's Discussion and
Analysis of Financial Condition and Results of Operations. All amounts are in
thousands, unless otherwise noted.
Three Months Ended March 31, 2001 compared
with the Three Months Ended March 31, 2000
Revenues
Total revenues increased by $7,338, or 8.5%, in the second quarter of fiscal
2001 compared to the second quarter of fiscal 2000. Lease finance income
increased by $11,259, or 16.6% due to the increased balance in the lease
portfolio and the increased average yield of new leases effective October 1,
2000. The lease portfolio increased by 2.3% from December 31, 2000 to March 31,
2001.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company as an operating lease. During
the second quarter of fiscal 2001, the Company's purchases of operating lease
equipment were $7,967, compared to $3,936 during the second quarter of fiscal
2000. Operating leases contributed $8,226 in rental income during the second
quarter of fiscal 2001, compared to $9,068 in the second quarter of fiscal 2000,
as a result of the reduced operating lease portfolio balance.
The Company and IKON agreed to terminate the interest on the IKON income tax
deferrals program effective October 1, 2000. As such, interest on the IKON
income tax deferrals program was $0 in the second quarter of fiscal 2001
compared to $4,286 in the second quarter of fiscal 2000.
Other income consists primarily of late payment charges, interest income on
restricted cash and various billing fees. Interest income on restricted cash
increased $654 primarily due to the increase in lease-backed note issuances in
December 2000 compared to the prior year. The growth in other income from late
payment charges and billing fees is primarily due to the increased size of the
lease portfolio upon which these charges and fees are based. Overall, other
income grew by $1,207, or 23.8%, in the second quarter of fiscal 2001 compared
to the second quarter of fiscal 2000.
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
banks, the issuance of medium term and lease-backed notes in the public market,
Due to IKON and notes payable increased by 9.48%, for the second quarter of
fiscal 2001 compared to the second quarter of fiscal 2000. The increase in
borrowing needs is driven by the increase in the lease portfolio. The debt
outstanding was $2,488,542 at March 31, 2001 compared to $2,276,440, at March
31, 2000. The Company paid a weighted average interest rate on all borrowings of
6.8% for the second quarter of fiscal 2001 compared to 6.7% for the second
quarter of fiscal 2000. Primarily as a result of the increased average
borrowings, interest expense grew by $5,423, or 14.8%, in the second quarter of
fiscal 2001 compared to the second quarter of fiscal 2000. At March 31, 2001,
the Company's debt to equity ratio including amounts Due to IKON was 5.75 to 1
compared to 5.69 to 1 at March 31, 2000.
6
Lease default, net of recovery income, decreased by $914, or 21.6%, due to
increased recoveries for the three months ended March 31, 2001 compared to the
three months ended March 31, 2000. Depreciation expense on leased equipment
decreased $720, or 9.5%, due to the reduced operating lease portfolio balance,
and general and administrative expenses increased by $620, or 8.4%, in the
second quarter of fiscal 2001 compared to the second quarter of fiscal 2000.
Overall expenses have increased $ 4,409, or 7.9%, for the three months ended
March 31, 2001 compared to the three months ended March 31, 2000.
Income Before Income Taxes
Income before income taxes for the second quarter of fiscal 2001 increased by
$2,929, or 9.6%, compared to the second quarter of fiscal 2000 as a result of
the items above.
Income Taxes
Income taxes for the second quarter of fiscal 2001 increased by $1,172, or 9.6%,
compared to the second quarter of fiscal 2000. The increase in income taxes is
directly attributable to the increase in income before income taxes for the
second quarter of fiscal 2001 as compared to the second quarter of fiscal 2000.
Six Months Ended March 31, 2001 compared
with the Six Months Ended March 31, 2000
Revenues
Total revenues increased by $10,610, or 6.1%, in the first six months of fiscal
2001 compared to the first six months of fiscal 2000. Lease finance income
increased by $18,703, or 13.6% primarily due to the increased lease portfolio
balance and the increased average yield of new leases funded effective October
1, 2000. The lease portfolio increased by 3.1% from September 30, 2000 to March
31, 2001.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company as an operating lease. During
the first six months of fiscal 2001, the Company's purchases of operating lease
equipment were $12,255, compared to $7,867 in the first six months of fiscal
2000. Operating leases contributed $16,407 in rental income during the first six
months of fiscal 2001, compared to $18,336 in the first six months of fiscal
2000 due to the reduced operating lease portfolio balance.
The Company and IKON agreed to terminate the interest on the IKON income tax
deferrals program effective October 1, 2000. As such, interest on the IKON
income tax deferrals program was $0 in the first six months of fiscal 2001
compared to $8,504 in the first six months of fiscal 2000.
Other income consists primarily of late payment charges, interest income on
restricted cash and various billing fees. Interest income on restricted cash
increased $1,314 primarily due to the increase in lease-backed note issuances in
December 2000 compared to the prior year. The growth in other income from late
payment charges and billing fees is primarily due to the increased size of the
lease portfolio upon which these charges and fees are based. Overall, other
income grew by $2,340, or 24.1%, in the first six months of fiscal 2001 compared
to the first six months of fiscal 2000.
7
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
banks, the issuance of medium term and lease-backed notes in the public market,
Due to IKON and notes payable increased by 4.65%, for the first six months of
fiscal 2001 compared to the first six months of fiscal 2000. The increase in
borrowing needs is driven by the increase in the lease portfolio. The debt
outstanding was $2,488,542 at March 31, 2001 compared to $2,276,440, at March
31, 2000. The Company paid a weighted average interest rate on all borrowings of
6.8% for the first six months of fiscal 2001 compared to 6.7% for the first six
months of fiscal 2000. Primarily as a result of the increased average
borrowings, interest expense grew by $10,681, or 14.7%, in the first six months
of fiscal 2001 compared to the first six months of fiscal 2000. At March 31,
2001, the Company's debt to equity ratio including amounts Due to IKON was 5.75
to 1 compared to 5.69 to 1 at March 31, 2000.
Lease default, net of recovery income, decreased by $1,801, or 21.5%, due to
increased recoveries for the six months ended March 31, 2001 compared to the six
months ended March 31, 2000. Depreciation expense on leased equipment decreased
$1,618, or 10.6%, due to the reduced operating lease portfolio balance, and
general and administrative expenses increased by $740, or 5.1%, in the first six
months of fiscal 2001 compared to the first six months of fiscal 2000. Overall
expenses have increased $8,002, or 7.2%, for the six months ended March 31, 2001
compared to the six months ended March 31, 2000.
Income Before Income Taxes
Income before income taxes for the first six months of fiscal 2001 increased by
$2,532, or 4.0%, compared to the first six months of fiscal 2000 as a result of
the items above.
Income Taxes
Income taxes for the first six months of fiscal 2001 increased by $1,013, or
4.0%, compared to the first six months of fiscal 2000. The increase in income
taxes is directly attributable to the increase in income before income taxes for
the first six months of fiscal 2001 compared to the first six months of fiscal
2000.
FORWARD-LOOKING INFORMATION
This Report includes or incorporates by reference information, which may
constitute forward-looking statements within the meaning of the federal
securities laws. Although the Company believes the expectations contained in
such forward-looking statements are reasonable, it can give no assurances that
such expectations will prove correct. Such forward-looking information is based
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 Company's and/or IKON's future financial condition
and results. These risks and uncertainties, which apply to both the Company and
IKON, include, but are not limited to: factors which may affect the Company's
ability to recoup the full amount due on the 1999-1, 1999-2, 2000-1 and 2000-2
Leases (such as lessee defaults or factors impeding recovery efforts);
conducting operations in a competitive environment and a changing industry
(which includes technical services and products that are relatively new to the
industry, IKON, and to the Company); delays, difficulties, management
transitions and employment issues associated with consolidations and/or changes
8
in business operations; managing the integration of acquired businesses;
existing and future vendor relationships; risks relating to currency exchange;
economic, legal and political issues associated with international operations,
the Company's ability to access capital and meet its debt service requirements
(including sensitivity to fluctuation in interest rates); and general economic
conditions. Certain additional risks and uncertainties are set forth in the
Company's 2000 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Ratio of Earnings to Fixed Charges
b. Reports on Form 8-K
On January 25, 2001, the Company's parent filed a Current Report on
Form 8-K to file, under Item 5 of the Form, a press release concerning
earnings for the first quarter of fiscal year 2001.
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, INC.
Date May 14, 2001 /s/ Harry G. Kozee
-------------------------- --------------------
Harry G. Kozee
Vice President - Finance
(Chief Accounting Officer)
9