<PAGE>
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 December 31, 1996 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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IKON 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)
(912) 471-2300
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(Registrant's telephone number, including area code)
NONE
- --------------------------------------------------------------------------------
(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 issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes______ No _____
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of January 31, 1997.
Common Stock, $.01 par value per share 1,000 shares
Registered Debt Outstanding as of January 31, 1997 $1,186,900,000
The registrant, an indirect wholly owned subsidiary of IKON Office Solutions,
Inc. ("IKON") (formerly Alco Standard Corporation), 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.
<PAGE>
INDEX
IKON CAPITAL, INC.
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets--December 31, 1996 and
September 30, 1996
Statements of Income--Three months ended
December 31, 1996 and December 31, 1995
Statements of Cash Flows--Three months ended
December 31, 1996 and December 31, 1995
Notes to Financial Statements--December 31, 1996
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
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
- ---------------------------------------
IKON CAPITAL, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
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<S> <C> <C>
ASSETS
Investments in leases:
Direct financing leases $1,244,553 $1,140,851
Less: Unearned income (221,200) (203,459)
----------- ------------
1,023,353 937,392
Funded leases, net 357,468 313,250
----------- ------------
1,380,821 1,250,642
Accounts receivable 55,365 48,334
Prepaid expenses and other assets 11,510 15,582
Leased equipment-operating rentals at cost
less accumulated depreciation of:
12/96 - $22,017 9/96 - $ 17,624 33,828 31,341
Property and equipment at cost, less
accumulated depreciation of:
12/96 - $2,728 9/96 - $ 2,536 8,143 6,889
----------- ------------
Total assets $1,489,667 $1,352,788
=========== ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses $40,365 $42,538
Accrued interest 4,641 20,870
Due to IKON Office Solutions 7,438 24,330
Notes payable to Banks 40,000 58,000
Medium Term Notes 1,138,900 969,900
Deferred income taxes 51,371 45,750
----------- ------------
Total liabilities 1,282,715 1,161,388
Shareholder's equity:
Common Stock - $.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital 118,415 112,415
Retained earnings 88,537 78,985
----------- ------------
Total shareholder's equity 206,952 191,400
----------- ------------
Total liabilities and shareholder's equity $1,489,667 $1,352,788
=========== ============
</TABLE>
See notes to financial statements.
<PAGE>
IKON CAPITAL, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31
1996 1995
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<S> <C> <C>
REVENUES:
Lease finance income $36,900 $25,360
Rental income 4,792 3,231
Interest on IKON income tax deferrals 2,736 1,889
Other income 1,734 1,368
--------- ---------
46,162 31,848
EXPENSES:
Interest 17,626 13,417
General and administrative 12,959 8,309
--------- ---------
30,585 21,726
GAIN ON SALE OF LEASE RECEIVABLES 613 312
--------- ---------
INCOME BEFORE INCOME TAXES 16,190 10,434
PROVISION FOR INCOME TAXES 6,638 4,278
--------- ---------
NET INCOME $ 9,552 $ 6,156
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
IKON CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $9,552 $6,156
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 4,585 3,148
Provision for deferred taxes 5,621 4,721
Gain on sale of lease receivables (613) (312)
Changes in operating assets and liabilities:
Accounts receivable (7,031) (6,373)
Prepaid expenses and other assets 4,685 (279)
Accounts payable and accrued expenses (2,173) 15
Accrued interest (16,229) (8,355)
------------ ------------
Net cash used (1,603) (1,279)
------------ ------------
INVESTING ACTIVITIES:
Purchases of equipment for rental, net (6,880) (7,495)
Purchases of property and equipment (1,446) (24)
Direct financing leases:
Additions (239,350) (171,318)
Cancellations 35,751 30,177
Collections 92,205 59,451
Proceeds from sale 25,433 13,154
Funded leases:
Additions (111,244) (47,968)
Cancellations 16,616 8,449
Collections 50,410 16,646
------------ ------------
Net cash used (138,505) (98,928)
------------ ------------
FINANCING ACTIVITIES:
Payments on bank borrowings (18,000) (40,000)
Proceeds from issuance of medium term notes 177,000 120,000
Payments on medium term notes (8,000)
Contributed capital 6,000 7,000
------------ ------------
Net cash provided 157,000 87,000
------------ ------------
DECREASE(INCREASE) IN AMOUNTS DUE TO IKON 16,892 (13,207)
DUE (TO) FROM IKON AT BEGINNING OF PERIOD (24,330) 26,577
------------ ------------
DUE (TO) FROM IKON AT END OF PERIOD ($7,438) $13,370
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
IKON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Note 1: Basis of Presentation
---------------------
The accompanying unaudited condensed financial statements 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 of
normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the financial statements and
footnotes thereto included in the Company's report on Form 10-K for the year
ended September 30, 1996.
Note 2: Medium Term Note Program
------------------------
During the three months ended December 31, 1996, IKON Capital issued an
additional $177 million under its $1.5 billion medium term note program. At
December 31, 1996, $1,138.9 million of medium term notes remain outstanding with
a weighted average interest rate of 6.7%, leaving $323.1 million available under
this program.
Note 3: Asset Securitization
--------------------
In September 1996, IKON Capital entered into a new agreement which expires
in September 1997, to sell, under an asset securitization program, an undivided
ownership interest in $150 million of eligible direct financing lease
receivables. The September 1994 agreement for $125 million expires in March
1997, but is expected to be renewed. Under these agreements, the company sold
$25.4 million in direct financing leases during the first quarter of fiscal
1997, replacing leases which had been liquidated during the quarter and
recognized a pretax gain of $613,000. Under the terms of the sales agreements,
the Company will continue to service the lease portfolio.
<PAGE>
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.
Three Months Ended December 31, 1996 Compared
----------------------------------------------
with the Three Months Ended December 31, 1995
---------------------------------------------
Comparative summarized results of operations for the three months ended December
31, 1996 and 1995 are set forth in the table below. This table also shows the
increase in the dollar amounts of major revenue and expense items between
periods, as well as the related percentage increase.
<TABLE>
<CAPTION>
Three Months
(dollars in thousands) Ended December 31 Increase
----------------- --------
1996 1995 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C>
Revenues:
Lease finance income $36,900 $25,360 $ 11,540 45.5%
Rental income 4,792 3,231 1,561 48.3%
Interest on IKON income tax deferrals 2,736 1,889 847 44.8%
Other income 1,734 1,368 366 26.8%
------- ------- -------
46,162 31,848 14,314 44.9%
Expenses:
Interest 17,626 13,417 4,209 31.4%
General and administrative 12,959 8,309 4,650 56.0%
------- ------- -------
30,585 21,726 8,859 40.8%
Gain on sale of lease receivables 613 312 301 96.5%
------- ------- -------
Income before income taxes 16,190 10,434 5,756 55.2%
Provision for income taxes 6,638 4,278 2,360 55.2%
------- ------- -------
Net income $ 9,552 $ 6,156 $ 3,396 55.2%
======= ======= =======
</TABLE>
Revenues
- --------
Total revenues increased $14.3 million or 44.9% in the first quarter of fiscal
1997 compared to the first quarter of fiscal 1996. Approximately 80.6% or $11.5
million of this increase in revenues was a result of increased lease finance
income due to continued growth in the portfolio of direct financing and funded
leases. The lease portfolio, net of lease receivables that were sold in asset
securitization transactions, increased 43.4% from December 31, 1995 to December
31, 1996.
In October 1994, the Company began offering an operating lease product to the
IKON dealer network, whereby office equipment placed on long term rental to
customers could be funded through the Company. In preceding years, this
equipment was funded by the respective IKON dealer. During the first quarters
of fiscal 1997 and 1996, IKON Capital funded $6.9 million and $7.5 million,
respectively. Operating leases contributed $4.8 million in rental income during
the first quarter of fiscal 1997, compared to $3.2 million in the first quarter
of 1996.
<PAGE>
The Company earns interest income on the deferred tax liabilities of the IKON
dealers resulting from leases funded through the Company at a rate consistent
with the Company's weighted average outside borrowing rate of interest. The
Company's average rate was 6.9% for the first quarter of fiscal 1997, compared
to 6.8% for the first quarter of fiscal 1996. In addition, the deferred tax base
upon which these payments are calculated increased 39.5% to $172.4 million at
December 31, 1996 from $123.6 million at December 31, 1995. As a result of the
increased deferred tax liabilities, interest income on deferred taxes rose
$847,000 or 44.8% when comparing the three months ended December 31, 1996 to the
three months ended December 31, 1995.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1996. The growth in other income from fees is primarily due to the increased
size of the lease portfolio upon which these fees are based. Overall, fee income
from these sources grew by $366,000 or 26.8%, when comparing the first quarter
of fiscal 1997 to the same period of fiscal 1996.
Expenses
- --------
Debt to fund the lease portfolio in the form of loans from major banks and the
issuance of medium term notes in the public market increased by 37.9%, to
$1,178.9 million outstanding at December 31, 1996. The Company paid a weighted
average interest rate on all borrowings for the first quarter of fiscal 1997 of
6.9%, compared to 6.8% for the first quarter fiscal 1996. Due to the combined
effect of increased borrowings and an increase in the Company's overall weighted
average interest rate, interest expense grew by $4.2 million or 31.4%, when
comparing the first quarter of fiscal 1997 to fiscal 1996. At December 31,
1996, the Company's debt to equity ratio, including intercompany amounts owed to
IKON was 5.7 to 1.
The Company has a $1.5 billion medium term note program that allows for the
issuance of medium term notes in the public markets with maturities ranging from
nine months up to ten years, through four nationally recognized investment
firms. At December 31, 1996, $1,138.9 million of medium term notes were
outstanding under these two programs with a weighted average interest rate of
6.7%.
At December 31, 1996, the Company had outstanding notes payable to banks of $40
million, with a weighted average rate of 6.4%, compared to $133 million at
December 31, 1995.
Total general and administrative expenses for the quarter ended December 31,
1996 increased by $4.7 million or 56.0%, over the quarter ended December 31,
1995. The general and administrative expense category in the first quarter of
fiscal 1997 includes depreciation expense on leased equipment totaling $4.4
million, compared to $3.0 million for the first quarter of fiscal 1996. In
addition, the general and administrative expense category includes lease bonus
subsidy payments to either IKON or directly to the IKON dealers, based on the
level of dealer participation in the Company's leasing programs or for the
funding of targeted new lease volume. During the first quarter of fiscal 1997,
lease bonus subsidy payments totaled $2.1 million as compared to $449,000 during
the first quarter of fiscal 1996.
Excluding the effects of depreciation expense on operating leases and lease
bonus subsidy payments, remaining general and administrative expenses grew by
$1.8 million or 37.2%, when comparing the first quarter of fiscal 1997 to the
first quarter of fiscal 1996.
<PAGE>
Gain on Sale of Lease Receivables
- ---------------------------------
In September 1996, the Company entered into an asset securitization transaction
whereby the Company sold an undivided ownership interest in $150 million in
eligible direct financing lease receivables. This agreement was structured as a
revolving securitization so that as collections reduce previously sold
interests, additional leases can be sold up to $150 million.
Under an asset securitization program entered into in September 1994, the
Company sold an undivided ownership interest in $125 million of eligible direct
financing lease receivables. This agreement, which expires in March 1997 but is
expected to be renewed, was also structured as a revolving securitization.
Under this program, new leases can be sold up to $125 million as collections
reduce previously sold lease receivables.
During the three months ended December 31, 1996, collections reduced previously
sold interests under these two agreements by approximately $25.4 million. The
Company sold an additional $25.4 million in net eligible direct financing leases
during the first quarter of fiscal 1997 and recognized pretax gains of $613,000.
Income Before Taxes
- -------------------
Income before taxes for the first quarter of fiscal 1997 increased by $58
million or 55.2% over the first quarter of fiscal 1996. This increase in income
before taxes was essentially the effect of higher earnings on a larger lease
portfolio base, partially offset by higher borrowing costs due to the increased
debt to fund the lease portfolio and a slightly higher average interest rate in
the first quarter of fiscal 1997 versus the first quarter of fiscal 1996.
Provision for Income Taxes
- --------------------------
Income taxes for the first quarter of fiscal 1997 increased by $2.4 million or
55.2% over the first quarter of fiscal 1996. This increase in income taxes is
directly attributable to the increase in income before taxes in the first
quarter of fiscal 1997 as compared to the first quarter of fiscal 1996. The
effective tax rate was 41% for both the first quarter of fiscal 1997 and 1996.
Parent Company Name Change
- --------------------------
On January 23, 1997, the shareholders of the Company's parent company, Alco
Standard Corporation (Alco), voted to change the name of Alco to IKON Office
Solutions, Inc.
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
On November 13, 1996, the registrant filed a Current Report on Form 8-
K to file, under Item 5 of the form, the Amended and Restated 1996
Support Agreement with its parent, Alco Standard Corporation ("Alco"),
as Exhibit 10 under Item 7 of the Form 8-K and to announce that on
November 8, 1996, the Board of Directors of Alco declared a special
dividend of 100% of the common stock of Unisource Worldwide, Inc.,
Alco's wholly-owned subsidiary, payable December 31, 1996 to
shareholders of record of Alco common stock on December 13, 1996.
<PAGE>
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.
IKON CAPITAL, INC.
Date February 14, 1997 /s/Robert M. Kearns II
----------------- ----------------------
Robert M. Kearns II
Vice President
(Chief Accounting Officer)
<PAGE>
Index to Exhibits
-----------------
Exhibit Number
- --------------
(27) Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of IKON Capital, Inc. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,436,186,000<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 66,716,000<F2>
<DEPRECIATION> 24,745,000<F2>
<TOTAL-ASSETS> 1,489,667,000
<CURRENT-LIABILITIES> 0
<BONDS> 1,178,900,000
0
0
<COMMON> 0<F3>
<OTHER-SE> 206,952,000
<TOTAL-LIABILITY-AND-EQUITY> 1,489,667,000
<SALES> 0
<TOTAL-REVENUES> 46,162,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,959,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,626,000
<INCOME-PRETAX> 16,190,000
<INCOME-TAX> 6,638,000
<INCOME-CONTINUING> 9,552,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,552,000
<EPS-PRIMARY> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1>Includes net investments in leases of $1,380,821,000 and other accounts
receivable.
<F2>Includes leased equipment of: cost - $55,845,000; accumulated depreciation -
$22,017,000.
<F3>Common stock, $0.01 par value, 1,000 shares outstanding. Since total is less
than $1,000, zero is reported.
<F4>Not required as the registrant is a wholly-owned subsidiary.
</FN>
</TABLE>
