================================================================================
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, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
1738 Bass Road, Macon, Georgia 31210
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(478) 471-2300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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:
The number of shares of common stock, par value $.01 per share, outstanding as
of May 14, 2002 was 1,000, all of which were owned by IKON Office Solutions,
Inc.
Registered debt outstanding of the Company and all wholly-owned subsidiaries as
of May 14, 2002 was $1,671,517,317.
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.
================================================================================
IOS CAPITAL, LLC
INDEX*
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2002 (unaudited) and
September 30, 2001
Consolidated Statements of Income - Three and six months ended
March 31, 2002 and 2001 (unaudited)
Consolidated Statements of Cash Flows - Six months ended March
31, 2002 and 2001 (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
*All amounts contained in this quarterly report on Form 10-Q are in thousands
unless otherwise noted.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
IOS CAPITAL, LLC
CONSOLIDATED BALANCE SHEETS
March 31,
2002 September 30,
(unaudited) 2001
-------------------------------
Assets
Investments in leases:
Direct financing leases, net of lease default reserve of:
March 31, 2002 - $52,625;
September 30, 2001 - $59,158 $ 3,279,093 $ 3,284,106
Less: Unearned income (542,300) (545,451)
---------------------------------
2,736,793 2,738,655
Funded leases, net 257,530 240,965
---------------------------------
2,994,323 2,979,620
Cash 16,304 16,056
Restricted cash 124,383 126,861
Accounts receivable 63,750 91,775
Prepaid expenses and other assets 11,607 10,548
Leased equipment - operating rentals at cost, less accumulated
depreciation of:
March 31, 2002 - $41,903; September 30, 2001 - $40,552 55,857 44,793
Property and equipment at cost, less accumulated depreciation of:
March 31, 2002 - $9,211; September 30, 2001 - $10,332 1,413 8,145
---------------------------------
Total assets $ 3,267,637 $ 3,277,798
=================================
Liabilities and Member's Equity
Liabilities:
Accounts payable and accrued expenses $ 66,386 $ 78,011
Accrued interest 11,662 13,873
Due to IKON Office Solutions, Inc. ("IKON") 351,341 182,533
Medium term notes - 82,000
Notes payable 277,025 271,292
Lease-backed notes 1,489,430 1,797,389
Asset securitization conduit financing 440,387 193,500
Deferred income taxes 199,763 162,609
---------------------------------
Total liabilities 2,835,994 2,781,207
---------------------------------
Commitments and contingencies
Member's equity:
Contributed capital 179,796 179,796
Retained earnings 271,720 347,169
Accumulated other comprehensive loss (19,873) (30,374)
---------------------------------
Total member's equity 431,643 496,591
---------------------------------
Total liabilities and member's equity $ 3,267,637 $ 3,277,798
=================================
See notes to condensed consolidated financial statements.
IOS CAPITAL, LLC
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended Six months ended
March 31, March 31,
------------------------------------------------
2002 2001 2002 2001
------------------------------------------------
Revenues:
Lease finance income $ 87,018 $ 79,090 $ 172,701 $ 155,747
Rental income 8,485 8,226 16,144 16,407
Other income 5,632 6,283 11,039 12,060
---------- ----------- ----------- -----------
101,135 93,599 199,884 184,214
---------- ----------- ----------- -----------
Expenses:
Interest 37,301 41,963 76,637 83,458
Lease default, net of recoveries 3,901 3,327 7,909 6,582
General and administrative 15,586 14,901 30,254 29,079
---------- ----------- ----------- -----------
56,788 60,191 114,800 119,119
---------- ----------- ----------- -----------
Income before income taxes 44,347 33,408 85,084 65,095
Provision for income taxes 17,739 13,363 34,034 26,038
---------- ----------- ----------- -----------
Net income $ 26,608 $ 20,045 $ 51,050 $ 39,057
========== =========== =========== ===========
See notes to condensed consolidated financial statements.
IOS CAPITAL, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
March 31,
--------------------------------
2002 2001
--------------------------------
Cash flows from operating activities
Net income $ 51,050 $ 39,057
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 17,811 18,304
Provision for deferred taxes 30,154 16,573
Provision for lease default 11,264 9,964
Changes in operating assets and liabilities:
Decrease in accounts receivable 28,025 11,629
Increase in prepaid expenses and other assets (4,219) (1,102)
Increase in accounts payable and accrued expenses 5,876 9,897
Decrease in accrued interest (2,211) (4,346)
--------------------------------
Net cash provided by operating activities 137,750 99,976
--------------------------------
Cash flows from investing activities
Purchases of equipment (20,206) (12,420)
Proceeds from terminations of leased equipment 1,897 2,935
Investments in leases:
Additions (824,769) (965,093)
Cancellations 146,184 150,791
Collections, net of financing income 651,944 714,842
--------------------------------
Net cash used in investing activities (44,950) (108,945)
--------------------------------
Cash flows from financing activities
Proceeds from bank borrowings 242,336 308,000
Payments on bank borrowings (70,000) (582,795)
Payments on medium term notes (82,000) (281,000)
Short-term borrowings, net of repayments 5,733 7,685
Proceeds from issuance of lease-backed notes 74,551 633,000
Payments on lease-backed notes (307,959) (329,307)
Decrease (increase) in restricted cash 2,478 (37,216)
Dividend to IKON (126,499)
--------------------------------
Net cash used in financing activities (261,360) (281,633)
--------------------------------
Change in cash and amounts Due to IKON (168,560) (290,602)
Cash and Due to IKON at beginning of year (166,477) (18,836)
--------------------------------
Cash and Due to IKON at end of period $ (335,037) $ (309,438)
================================
See notes to condensed consolidated financial statements.
IOS CAPITAL, LLC
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of IOS
Capital, LLC ("IOSC" or 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, 2001. Certain prior year amounts have been
reclassified to conform with the current year presentation.
Note 2: Financial Instruments
As of March 31, 2002, all of the Company's derivatives designated as hedges are
interest rate swaps which qualify for evaluation using the "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 six months
ended March 31, 2002, unrealized gains totaling $10,501 after taxes was recorded
in accumulated other comprehensive loss.
Note 3: Medium Term Notes
During the six months ended March 31, 2002, the Company repaid $82,000 of 6.30%
medium term notes. The Company has $873,350 available under its medium term
notes program.
Note 4: Notes Payable
During the six months ended March 31, 2002, the Company signed promissory notes
and pledged $11,030 of lease receivables for $9,284 of proceeds and repaid
$3,551 of the promissory notes. The notes have various interest rates with
maturities through March 2007.
Note 5: Lease-Backed Notes
In addition to the $1,797,389 of lease-backed notes outstanding on September 30,
2001, on December 28, 2001, IOSC and IKON issued $87,011 and re-purchased
$12,460 of lease-backed notes (the "Notes") for a net issuance of $74,551. The
Notes have a stated maturity of September 15, 2008 and pay an average yield of
5.06%. The Notes are collateralized by a pool of office equipment leases or
contracts, (the "Leases") and related assets, 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 transfer date) and
all related casualty payments, retainable deposits and termination payments.
Payments on the Notes are made from payments on the Leases. The Notes have
certain credit enhancement features available to noteholders, including a
reserve account and an overcollateralization account. The Company repaid
$307,959 of lease-backed notes during the first six months of fiscal 2002.
Note 6: Asset Securitization Conduit Financing
During the six months ended March 31, 2002, the Company pledged or transferred
$362,216 in financing lease receivables for $242,336 in cash in connection with
its revolving asset securitization conduit financing agreements. The Company
repaid $70,000 in connection with its issuance of the Notes described above. As
of March 31, 2002, the Company had approximately $264,664 available under its
revolving asset securitization conduit financing agreements.
IOS CAPITAL, LLC
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 7: Comprehensive Income
Total comprehensive income is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------- -------------- -------------
Net income $ 26,608 $ 20,045 $ 51,050 $ 39,057
Cumulative effect of change in accounting principle for derivative
and hedging activities (SFAS 133), net of taxes of $2,314 (3,471)
Net gain (loss) on derivative financial instruments, net of tax expense
(benefit) of: $4,376 and $(5,165), for the three months ended
March 31, 2002 and 2001, respectively; $7,000 and $(9,684), for the
six months ended March 31, 2002 and 2001, respectively. 6,564 (7,675) 10,501 (14,526)
----------- ------------ ------------ ------------
Total comprehensive income $ 33,172 $ 12,370 $ 61,551 $ 21,060
=========== ============ ============ ============
Note 8: Subsequent Event
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
will be paid on the convertible notes semi-annually beginning November 1, 2002.
The Company has also granted an option to purchase $50,000 aggregate principal
amount of additional convertible notes. The Company intends to use the net
proceeds to repay loans due to IKON and for general corporate purposes.
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.
Critical Accounting Policies and Estimates
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified below some of
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 state these
accounting policies in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to the consolidated
financial statements contained in our Annual Report on Form 10-K for our fiscal
year ended September 30, 2001 and at relevant sections in this discussion and
analysis. In addition, we believe our most critical accounting policies include,
but are not limited to, the following:
Residual Values. IKON and IOSC estimate the residual value of equipment sold
under sales-type leases. Our residuals are based on the dollar value of the
equipment. Residual values generally range between 0% to 25% of 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.
Reserves. IOSC maintains an allowance for lease defaults for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of IKON's customers were to deteriorate, resulting in an
impairment of their ability to make required payments, changes to our allowance
may be required.
Our preparation of this Quarterly Report on Form 10-Q requires us to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements and notes. Actual results could differ from those estimates
and assumptions.
Three Months Ended March 31, 2002 compared with the Three Months Ended March 31,
2001
Revenues
Total revenues increased by $7,536, or 8.1%, in the second quarter of fiscal
2002 compared to the second quarter of fiscal 2001. Lease finance income
increased by $7,928, or 10.0%, due to the growth in the lease receivables
portfolio, longer average lease terms and the increased average yield of leases
in the portfolio in the second quarter of fiscal 2002 compared to the second
quarter of fiscal 2001.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company. During the second quarter of
fiscal 2002, the Company's purchases of operating lease equipment were $17,730
compared to $7,967 during the second quarter of fiscal 2001. Operating leases
contributed $8,485 in rental income during the second quarter of fiscal 2002,
compared to $8,226 in the second quarter of fiscal 2001.
Other income consists primarily of late payment charges, interest income on
restricted cash and various billing fees. Overall, other income decreased by
$651, or 10.4%, in the second quarter of fiscal 2002 compared to the second
quarter of fiscal 2001. Interest income on restricted cash decreased by $1,107,
or 68.4%, compared to the second quarter of fiscal 2001, primarily due to the
decline in short-term interest rates. Late payment charges and various billing
fees increased $28, or 0.8%, compared to the second quarter of fiscal 2001,
primarily due to the increased lease portfolio balance.
Expenses
Total expenses have decreased by $3,403, or 5.7%, for the three months ended
March 31, 2002 compared to the three months ended March 31, 2001. Average
borrowings to finance the lease portfolio increased by 3.2%, with $2,558,183
outstanding at March 31, 2002. The Company paid a weighted average interest rate
on all borrowings of 5.6% as of March 31, 2002 compared to 6.8% as of March 31,
2001. Primarily, as a result of the decrease in the weighted average interest
rate on all borrowings, interest expense decreased by $4,662, or 11.1%, in the
second quarter of fiscal 2002 compared to the second quarter of fiscal 2001. At
March 31, 2002, the Company's debt to equity ratio, including amounts Due to
IKON, was 5.9 to 1 compared to 5.8 to 1 at March 31, 2001.
Lease default, net of recovery income, increased by $574, or 17.3%, for the
three months ended March 31, 2002 compared to the three months ended March 31,
2001, due to an increase in the loss rate due to general economic conditions.
Depreciation expense on leased equipment, which is included in general and
administrative expenses, has increased by $247, or 3.6%, due to the impact of
terminations on the operating lease portfolio. Other general and administrative
expenses have increased by $438, or 5.5%, in the second quarter of fiscal 2002
compared to the second quarter of fiscal 2001, due to increased servicing costs
of the lease portfolio.
Income Before Income Taxes
Income before income taxes for the second quarter of fiscal 2002 increased by
$10,939, or 32.7%, compared to the second quarter of fiscal 2001 as a result of
the items above.
Income Taxes
Income taxes for the second quarter of fiscal 2002 increased by $4,376, or
32.7%, compared to the second quarter of fiscal 2001. The effective income tax
rate was 40% for the three months ended March 31, 2002 and March 31, 2001. The
increase in income taxes is directly attributable to the increase in income
before income taxes for the second quarter of fiscal 2002 as compared to the
second quarter of fiscal 2001.
Six Months Ended March 31, 2002 compared with the Six Months Ended March 31,
2001
Revenues
Total revenues increased by $15,670, or 8.5%, for the six months ended March 31,
2002 compared to the six months ended March 31, 2001. Lease finance income
increased by $16,954, or 10.9%, due to the growth in the lease receivables
portfolio, longer average lease terms and the increased average yield of leases
in the portfolio for the six months ended March 31, 2002 compared to the six
months ended March 31, 2001.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company. During the six months ended
March 31, 2002, the Company's purchases of operating lease equipment were
$26,460 compared to $12,255 during the six months ended March 31, 2001.
Operating leases contributed $16,144 in rental income during the six months
ended March 31, 2002, compared to $16,407 in the six months ended March 31,
2001.
Other income consists primarily of late payment charges, interest income on
restricted cash and various billing fees. Overall, other income decreased by
$1,021, or 8.5%, in the six months ended March 31, 2002 compared to the six
months ended March 31, 2001. Interest income on restricted cash decreased by
$2,031, or 63.9%, compared to the six months ended March 31, 2001, primarily due
to the decline in short-term interest rates. Late payment charges and various
billing fees increased by $320, or 4.6%, compared to the six months ended March
31, 2001, primarily due to the increased lease portfolio balance.
Expenses
Total expenses have decreased by $4,319, or 3.6%, for the six months ended March
31, 2002 compared to the six months ended March 31, 2001. Average borrowings to
finance the lease portfolio increased by 3.3%, with $2,558,183 outstanding at
March 31,
2002. The Company paid a weighted average interest rate on all borrowings of
5.6% as of March 31, 2002 compared to 6.8% as of March 31, 2001. Primarily, as a
result of the decrease in the weighted average interest rate on all borrowings,
interest expense decreased by $6,821, or 8.2%, in the six months ended March 31,
2002 compared to the six months ended March 31, 2001. At March 31, 2002, the
Company's debt to equity ratio, including amounts Due to IKON, was 5.9 to 1
compared to 5.8 to 1 at March 31, 2001.
Lease default, net of recovery income, has increased by $1,327, or 20.2%, for
the six months ended March 31, 2002 compared to the six months ended March 31,
2001, due to an increase in the loss rate due to general economic conditions.
Depreciation expense on leased equipment, which is included in general and
administrative expenses, has decreased by $194, or 1.4%, due to the impact of
terminations on the operating lease portfolio. Other general and administrative
expenses have increased by $1,369, or 8.9%, in the six months ended March 31,
2002 compared to the six months ended March 31, 2001, due to increased servicing
costs of the lease portfolio.
Income Before Income Taxes
Income before income taxes for the six months ended March 31, 2002 increased by
$19,989, or 30.7%, compared to the six months ended March 31, 2001 as a result
of the items above.
Income Taxes
Income taxes for the six months ended March 31, 2002 increased by $7,996, or
30.7%, compared to the six months ended March 31, 2001. The effective income tax
rate was 40% for the six months ended March 31, 2002 and March 31, 2001. The
increase in income taxes is directly attributable to the increase in income
before income taxes for the six months ended March 31, 2002 as compared to the
six months ended March 31, 2001.
Contractual Obligations
The following summarizes IOSC's significant contractual obligations and
commitments as of March 31, 2002:
Payments Due by Period
Less Than
Contractual Obligations Total 1 year 1 - 3 years 4 - 5 years After 5 years
- -------------------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Long-term debt $2,206,842 $1,197,962 $931,041 $74,654 $3,185
Operating leases 15,998 3,815 4,175 2,002 6,006
- -------------------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Total $2,222,840 $1,201,777 $935,216 $76,656 $9,191
Payments on long-term debt are made from collections of our finance receivables.
At March 31, 2002, long-term debt was $2,206,842 and finance receivables were
$2,994,323.
Subsequent Event
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
will be paid on the convertible notes semi-annually beginning November 1, 2002.
The Company has also granted an option to purchase $50,000 aggregate principal
amount of additional convertible notes. The Company intends to use the net
proceeds to repay loans due to IKON and for general corporate purposes.
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, risks and uncertainties relating to:
factors which may affect the Company's ability to recoup the full amount due on
the 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 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 in business operations; managing the
integration of acquired businesses; existing and future vendor relationships;
risks relating to foreign 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 2001 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
On January 18, 2002, the Company filed a Current Report on Form 8-K to file,
under Item 5 of the Form, information regarding the conversion of its form of
business organization from a corporation to a limited liability company, on
January 11, 2002. As a result of the conversion, IOS Capital, Inc. has changed
its name to IOS Capital, LLC.
On January 30, 2002, 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 25, 2002 regarding results of its parent for the first quarter of
fiscal year 2002.
On March 15, 2002, 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
March 13, 2002 regarding the initiation of a transition plan to new leadership
of its parent.
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, 2002
By: /s/ Harry G. Kozee
- ------------------------
Name: Harry G. Kozee
Title: Vice President - Finance (Chief Accounting Officer)