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 December 31, 1997 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)
(912) 471-2300
(Registrant's telephone number, including area code)
IKON CAPITAL, INC.
(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, 1998.
Common Stock, $.01 par value per share 1,000 shares
Registered Debt Outstanding as of January 31, 1998 $1,800,750,000
The registrant, an indirect wholly owned subsidiary of IKON Office Solutions,
Inc. ("IKON"), 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
IOS CAPITAL, INC.
(formerly IKON Capital, Inc.)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets--December 31, 1997 and
September 30, 1997
Statements of Income--Three months ended
December 31, 1997 and December 31, 1996
Statements of Cash Flows--Three months ended
December 31, 1997 and December 31, 1996
Notes to Financial Statements--December 31, 1997
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)
IOS CAPITAL, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
Assets
<S> <C> <C>
Investment in leases:
Direct financing leases $1,733,713 $1,640,559
Less: Unearned income (300,868) (286,769)
----------- -----------
1,432,845 1,353,790
Funded leases, net 521,876 485,658
----------- -----------
1,954,721 1,839,448
Accounts receivable 63,638 55,589
Due from IKON Office Solutions 41,936 4,463
Prepaid expenses and other assets 13,390 13,436
Leased equipment-operating rentals at cost
less accumulated depreciation of:
12/97 - $36,385; 9/97 - $ 33,598 62,058 50,945
Property and equipment at cost, less
accumulated depreciation of:
12/97 - $4,195; 9/97 - $ 3,771 11,852 12,330
----------- -----------
Total assets $2,147,595 $1,976,211
=========== ===========
Liabilities and shareholder's equity
Liabilities:
Accounts payable and accrued expenses $53,518 $51,018
Accrued interest 7,390 27,785
Notes payable to banks 25,000 25,000
Medium term notes 1,705,750 1,542,250
Deferred income taxes 71,177 64,177
----------- -----------
Total liabilities 1,862,835 1,710,230
Shareholder's equity:
Common Stock - $.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital 149,415 144,415
Retained earnings 135,345 121,566
----------- -----------
Total shareholder's equity 284,760 265,981
----------- -----------
Total liabilities and shareholder's equity $2,147,595 $1,976,211
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF INCOME
(in thousands)
Three Months Ended
December 31
1997 1996
Revenues:
Lease finance income $51,479 $36,900
Rental income 9,051 4,792
Interest on IKON tax deferrals 3,661 2,736
Other income 2,235 1,734
------- -------
66,426 46,162
Expenses:
Interest 25,865 17,626
General and administrative 17,771 12,959
------- -------
43,636 30,585
Gain on sale of lease receivables 564 613
------- -------
Income before income taxes 23,354 16,190
Provision for income taxes 9,575 6,638
------- -------
Net income $13,779 $9,552
======= =======
See notes to financial statements.
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
<S> <C> <C>
Operating activities:
Net income $13,779 $9,552
Adjustments to reconcile net income to net
cash provided (used) in operating activities
Depreciation and amortization 8,092 4,585
Provision for deferred taxes 7,000 5,621
Gain on sale of lease receivables (564) (613)
Changes in operating assets and liabilities:
Accounts receivable (8,049) (7,031)
Prepaid expenses and other assets 610 4,685
Accounts payable and accrued expenses 2,500 (2,173)
Accrued interest (20,395) (16,229)
--------- ---------
Net cash provided (used) 2,973 (1,603)
--------- ---------
Investing activities:
Purchases of leased equipment, net (18,782) (6,880)
Purchases of property and equipment, net 54 (1,446)
Direct financing leases:
Additions (285,578) (239,350)
Cancellations 51,870 35,751
Collections 128,893 92,205
Proceeds from sale 25,760 25,433
Funded leases:
Additions (110,139) (111,244)
Cancellations 20,005 16,616
Collections 53,917 50,410
--------- ---------
Net cash used (134,000) (138,505)
--------- ---------
Financing activities:
Payments on bank borrowings 0 (18,000)
Proceeds from issuance of medium term notes 248,500 177,000
Payments on medium term notes (85,000) (8,000)
Capital contributed by IKON 5,000 6,000
--------- ---------
Net cash provided 168,500 157,000
--------- ---------
Increase in amounts due from IKON 37,473 16,892
Due from (to) IKON at beginning of year 4,463 (24,330)
--------- ---------
Due from (to) IKON at end of period $41,936 ($7,438)
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
IOS Capital, Inc.
Notes to Financial Statements
December 31, 1997
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 annual report on Form 10-K for the
year ended September 30, 1997.
Note 2: Medium Term Note Program
During the three months ended December 31, 1997, IOS Capital issued
$248.5 million under its medium term note program. At December 31, 1997,
$1,705.8 million of medium term notes were outstanding with a weighted average
interest rate of 6.6%. The remaining amount available under this program is
$1,398.2 million.
Note 3: Asset Securitization
IOS Capital has asset securitization agreements for $275 million of
eligible direct financing receivables that expire March 1998 ($125 million) and
September 1998 ($150 million). Both of these agreements are expected to be
renewed. Under these agreements, the Company sold $25.8 million in direct
financing leases during the first three months of fiscal 1998, replacing leases
which had been liquidated during the period and recognized a pretax gain of
approximately $564,000. Under the terms of the sales agreements, the Company
will continue to service the lease portfolio.
Note 4: Name Change
On January 22, 1998, the Company changed its name from IKON Capital,
Inc. to IOS Capital, Inc.
<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, 1997 Compared
with the Three Months Ended December 31, 1996
Comparative summarized results of operations for the three months ended December
31, 1997 and 1996 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
1997 1996 Amount Percent
<S> <C> <C> <C> <C>
Revenues:
Lease finance income $51,479 $36,900 $14,579 39.5%
Rental income 9,051 4,792 4,259 88.9%
Interest on IKON tax deferrals 3,661 2,736 925 33.8%
Other income 2,235 1,734 501 28.9%
------ ------ ------
66,426 46,162 20,264 43.9%
Expenses:
Interest 25,865 17,626 8,239 46.7%
General and administrative 17,771 12,959 4,812 37.1%
------ ------ ------
43,636 30,585 13,051 42.7%
Gain on sale of lease receivables 564 613 (49) (8.0)%
------ ------ ------
Income before income taxes 23,354 16,190 7,164 44.2%
Provision for income taxes 9,575 6,638 2,937 44.2%
------ ------ ------
Net income $13,779 $9,552 $4,227 44.2%
====== ====== ======
</TABLE>
Revenues
Total revenues increased $20.3 million or 43.9% in the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997. Approximately 71.9% or $14.6
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 41.5 % from December 31, 1996 to December
31, 1997.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company. During the first quarter of
fiscal 1998 and 1997, IOS Capital purchased operating lease equipment of $18.8
million and $6.9 million, respectively. Operating leases contributed $9.1
million in rental income during the first quarter of fiscal 1998, compared to
$4.8 million in the first quarter of fiscal 1997.
<PAGE>
The Company earns interest income on the deferred tax liabilities of the IKON
marketplaces associated with 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 6.6% for the first quarter of fiscal
1998 and 6.7% for the first quarter of fiscal 1997. In addition, the deferred
tax base upon which these payments are calculated increased 37.8% to $237.6
million at December 31, 1997 from $172.4 million at December 31, 1996. Primarily
as a result of the increased deferred tax liabilities, interest income on
deferred taxes rose $925,000 or 33.8% when comparing the three months ended
December 31, 1997 to the three months ended December 31, 1996.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1997. 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 $501,000 or 28.9%, when comparing the first quarter
of fiscal 1998 to the same period of fiscal 1997.
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
banks and the issuance of medium term notes in the public market increased by
46.8%, to $1,730.8 million outstanding at December 31, 1997 from December 31,
1996. The Company paid a weighted average interest rate on all borrowings of
6.6% for the first quarter of fiscal 1998 and 6.7% for the first quarter of
fiscal 1997. Primarily as a result of the increased borrowings, interest expense
grew by $8.2 million or 46.7% when comparing the first quarter of fiscal 1998 to
the first quarter of fiscal 1997. At December 31, 1997, the Company's debt to
equity ratio, including intercompany amounts due from IKON, was 5.9 to 1.
Total general and administrative expenses for the quarter ended December 31,
1997 increased by $4.8 million or 37.1%, over the quarter ended December 31,
1996. However, the general and administrative expense category in the first
quarter of fiscal 1998 includes depreciation expense on leased equipment
totaling $7.7 million, compared to $4.2 million for the first quarter of fiscal
1997. In addition, the general and administrative expense category includes
lease bonus subsidy payments to either IKON or directly to the IKON
marketplaces, 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 1998, lease bonus subsidy payments totaled $3.8 million
as compared to $2.1 million during the first quarter of fiscal 1997. Excluding
the effects of increased depreciation expense on operating leases and lease
bonus subsidy payments, remaining general and administrative expenses decreased
by $349,000 or 5.2% compared to general and administrative expenses in the first
quarter of fiscal 1997.
Gain on Sale of Lease Receivables
The Company has asset securitization agreements for $275 million of eligible
direct financing lease receivables that expire in March 1998 ($125 million) and
September 1998 ($150 million). Both of these agreements are expected to be
renewed. As collections reduce previously sold interests, new leases can be sold
up to the agreement amount. During the three months ended December 31, 1997,
collections reduced previously sold interests by approximately $25.8 million on
these two agreements. The Company sold an additional $25.8 million in net
eligible direct financing leases during the first quarter of fiscal 1998 and
recognized pretax gains of $564,000.
<PAGE>
Income Before Income Taxes
Income before income taxes for the first quarter of fiscal 1998 increased by
$7.2 million or 44.2% over the first quarter of fiscal 1997. This increase in
income before income taxes was essentially the effect of higher earnings on a
larger lease portfolio base net of increased general and administrative
expenses, partially offset by higher borrowing costs due to the increased debt
to fund the lease portfolio.
Provision for Income Taxes
Income taxes for the first quarter of fiscal 1998 increased by $2.9 million or
44.2% over the first quarter of fiscal 1997. This increase in income taxes is
directly attributable to the increase in income before taxes in the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997. The
effective tax rate was 41% for both the first quarter of fiscal 1998 and 1997.
FORWARD-LOOKING INFORMATION
This document contains disclosures which are forward-looking statements relating
to the Company or its parent, IKON, within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the 1934 Act. Such forward-looking statements address, among other things,
strategic initiatives (including plans for enhancing the Company's or IKON's
business through new acquisitions, information technology systems, sales
strategies, market growth plans, margin enhancement initiatives, capital
expenditure requirements and financing sources). Such forward-looking
information is based upon management's current plans or expectations and is
subject to a number of uncertainties and risks that could significantly affect
the Company's and/or IKON's current plans, anticipated actions and future
financial condition and results. These uncertainties and risks include, but are
not limited to, those relating to IKON's successful management of an aggressive
program to acquire and integrate new companies, including companies with
technical services and products that are relatively new to IKON, and also
including companies outside the United States, which present additional risks
relating to international operations; risks and uncertainties (applicable to
both the Company and IKON) relating to conducting operations in a competitive
environment; delays, difficulties, technological changes and employment issues
(applicable to both the Company and IKON) associated in a large-scale
transformation project; debt service requirements (applicable to both the
Company and IKON) including sensitivity to fluctuation in interest rates; and
general economic conditions. As a consequence, current plans, anticipated
actions and future financial condition and results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company
or IKON.
<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 October 22, 1997, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, information contained in a
press release issued by its parent, IKON Office Solutions, Inc.
("IKON") concerning IKON's earnings for the fiscal quarter and year
ended September 30, 1997.
<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.
IOS CAPITAL, INC.
Date February 12, 1998 /s/ Harry G. Kozee
Harry G. Kozee
Vice President - Finance
(Chief Accounting Officer)
<PAGE>
Index to Exhibits
Exhibit Number
(27) Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of IOS 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-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,018,359,000<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 114,490,000<F2>
<DEPRECIATION> 40,580,000<F2>
<TOTAL-ASSETS> 2,147,595,000
<CURRENT-LIABILITIES> 0
<BONDS> 1,730,750,000
0
0
<COMMON> 0<F3>
<OTHER-SE> 284,760,000
<TOTAL-LIABILITY-AND-EQUITY> 2,147,595,000
<SALES> 0
<TOTAL-REVENUES> 66,426,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,771,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,865,000
<INCOME-PRETAX> 23,354,000
<INCOME-TAX> 9,575,000
<INCOME-CONTINUING> 13,779,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,779,000
<EPS-PRIMARY> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1>Includes net investments in leases of $1,954,721,000 and other accounts
receivable.
<F2>Includes leased equipment of: cost - $98,443,000; accumulated depreciation -
$36,385,000.
<F3>Common stock, $.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>
