10-Q 1 ioq10q.txt IOS 10Q 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 -------------------------------------------------------- IOS CAPITAL, INC. -------------------------------------------------------------------------------- (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: 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) ------------------ ----------------- Net cash used in investing activities (108,945) (308,206) ------------------ ----------------- 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