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 June 30, 1999 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)
(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 July 31, 1999.
Common Stock, $.01 par value per share 1,000 shares
Registered Debt Outstanding as of July 31, 1999 $2,065,956,059.06
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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets--June 30, 1999 and
September 30, 1998
Statements of Income--Three and Nine Months ended
June 30, 1999 and June 30, 1998
Statements of Cash Flows--Nine Months ended
June 30, 1999 and June 30, 1998
Notes to Financial Statements--June 30, 1999
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>
June 30, September 30,
1999 1998
----------- -----------
Assets
Investment in leases:
<S> <C> <C>
Direct financing leases $ 2,197,509 $ 2,002,012
Less: Unearned income (354,017) (343,211)
----------- -----------
1,843,492 1,658,801
Funded leases, net 530,952 592,827
----------- -----------
2,374,444 2,251,628
Cash 2,621
Restricted cash 33,433
Accounts receivable 80,957 63,066
Due from IKON 159,613 52,060
Prepaid expenses and other assets 13,786 14,224
Leased equipment-operating rentals at cost
less accumulated depreciation of:
6/99 - $53,245; 9/98 - $43,411 53,799 76,551
Property and equipment at cost, less
accumulated depreciation of:
6/99 - $6,934; 9/98 - $5,596 10,171 11,491
----------- -----------
Total assets $ 2,726,203 $ 2,471,641
=========== ===========
Liabilities and shareholder's equity
Liabilities:
Accounts payable and accrued expenses $ 63,230 $ 59,206
Accrued interest 6,753 33,467
Notes payable to banks 100,000
Medium term notes 1,463,850 1,849,750
Lease-backed notes 696,537
Deferred income taxes 124,291 95,115
----------- -----------
Total liabilities 2,354,661 2,137,538
Shareholder's equity:
Common Stock - $.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital 119,415 149,415
Retained earnings 252,127 184,688
----------- -----------
Total shareholder's equity 371,542 334,103
----------- -----------
Total liabilities and shareholder's equity $ 2,726,203 $ 2,471,641
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
-------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- -------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Lease finance income $54,513 $56,904 $166,363 $163,170
Rental income 8,723 10,138 27,760 28,287
Interest on IKON tax deferrals 4,361 3,944 12,836 11,449
Other income 5,486 3,035 12,900 8,400
------------- ------------- -------------- --------------
73,083 74,021 219,859 211,306
Expenses:
Interest 28,339 27,382 84,148 80,455
General and administrative 15,470 17,658 48,014 53,401
------------- ------------- -------------- --------------
43,809 45,040 132,162 133,856
Gain on sale of lease receivables 3,477 710 24,356 1,891
------------- ------------- -------------- --------------
Income before income taxes 32,751 29,691 112,053 79,341
Provision for income taxes 11,307 12,471 44,614 32,828
------------- ------------- -------------- --------------
Net income $21,444 $17,220 $67,439 $46,513
============= ============= ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------------------------
1999 1998
------------------- ------------------
Operating activities:
<S> <C> <C>
Net income $67,439 $46,513
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,401 25,239
Provision for deferred taxes 29,176 36,706
Gain on sale of leases receivables (24,356) (1,891)
Changes in operating assets and liabilities:
Accounts receivable (17,891) (2,764)
Prepaid expenses and other assets 17,436 2,528
Accounts payable and accrued expenses 2,301 (4,967)
Accrued interest (26,714) (21,431)
------------------- ------------------
Net cash provided 72,792 79,933
------------------- ------------------
Investing activities:
Purchases of leased equipment, net (529) (43,917)
Purchases of property and equipment, net (18) (1,009)
Investment in Leases
Additions (1,128,360) (1,287,825)
Cancellations 257,133 259,893
Collections 633,879 588,237
Proceeds from sale 375,142 78,836
Repurchase of leases sold (250,000) 0
------------------- ------------------
Net cash used (112,753) (405,785)
------------------- ------------------
Financing activities:
Proceeds from bank borrowings 0 200,000
Payments on bank borrowings (100,000) 0
Proceeds from issuance of medium term notes 0 348,500
Payments on medium term notes (385,900) (216,000)
Proceeds from issuance of lease-backed notes 749,331 0
Payments on lease-backed notes (55,105) 0
Deposit to restricted cash (33,433) 0
Capital contributed by IKON 0 5,000
Dividend to IKON (30,000) 0
------------------- ------------------
Net cash provided 144,893 337,500
------------------- ------------------
Increase in cash and amounts due from IKON 104,932 11,648
Cash and Due from IKON at beginning of year 54,681 4,463
------------------- ------------------
Due from IKON at end of period $159,613 $16,111
=================== ==================
</TABLE>
See notes to financial statements.
<PAGE>
IOS Capital, Inc.
Notes to Financial Statements
June 30, 1999
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, 1998. Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2: Medium Term Note Program
During the nine months ended June 30, 1999, IOS Capital, Inc. (the
"Company") issued no medium term notes under its $3.5 billion medium term note
program. At June 30, 1999, $1,463.9 million of medium term notes were
outstanding with a weighted average interest rate of 6.5%. The remaining amount
available under this program is $1,123.3 million.
Note 3: Asset Securitization
In December 1998, the Company entered into an asset securitization
transaction whereby it sold $366.6 million in direct financing lease receivables
for $250 million in cash and a retained interest in the remainder. The agreement
is for an initial three year 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 $250 million. The terms of the agreement require that the Company
continue to service the lease portfolio. The Company recognized a pretax gain of
$14.3 million during the first quarter of fiscal 1999 on this agreement. On May
25, 1999, the Company repurchased the leases sold in this transaction with the
proceeds from the lease-backed notes described below.
The Company has additional asset securitization agreements for $275
million of eligible direct financing receivables that expire in March 2000 ($125
million) and September 1999 ($150 million). Both of these agreements are
expected to be renewed. These agreements are structured as revolving
securitizations, whereby additional leases can be sold as collections reduce the
previously sold interests. During the first nine months of fiscal 1999,
collections reduced previously sold interests on these two agreements and the
$250 million transaction, described above, by $125.1 million. The Company sold
an additional $125.1 million in net eligible direct financing leases and
recognized pretax gains of $10.1 million for the nine months ended June 30,
1999.
<PAGE>
IOS Capital, Inc.
Notes to Financial Statements (Cont.)
June 30, 1999
Note 4: Lease-backed Notes
On May 19, 1999, IKON Receivables, LLC (an affiliate of the Company)
publicly issued approximately $752 million of lease-backed notes (the "Notes")
under a $1.825 billion shelf registration statement. Class A-1 Notes totaling
$304,474,000 have a stated interest rate of 5.11%, Class A-2 Notes totaling
$61,579,000 have a stated interest rate of 5.60%, Class A-3 Notes totaling
$304,127,000 have a stated interest rate of 5.99% and Class A-4 Notes totaling
$81,462,000 have a stated interest rate of 6.23%. The transaction was structured
using two special purpose limited liability companies: IKON Receivables-1, LLC,
of which the Company is the sole member, and IKON Receivables, LLC, of which
IKON Receivables-1, LLC is the sole member. The Company contributed to IKON
Receivables-1, LLC a pool of office equipment leases or contracts and related
assets (the "Asset Pool"), and IKON Receivables-1, LLC transferred them to IKON
Receivables, LLC, which is the issuer of the Notes. The Notes are secured by the
Asset Pool and the payments on the Notes are made from payments on the leases.
The Company received approximately $749 million in net proceeds from the sale of
the Notes and used $250 million of that amount to repurchase previously sold
assets in connection with the asset securitization transaction completed in
December 1998. The repurchased assets were contributed as part of the Asset
Pool. Restricted cash on the balance sheet represents cash that has been
collected on the lease receivables in the Asset Pool, which must be used to
repay the Notes.
Note 5: Comprehensive Income
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes rules for the reporting and presentation of comprehensive income
and its components. SFAS 130 requires mark to market adjustments on the retained
interest on lease receivables to be included in other comprehensive income.
Total comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
-------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $21,444 $17,220 $67,439 $46,513
Mark to market adjustment, net of tax (1,128) 0
------- ------- ------- -------
Total comprehensive income $20,316 $17,220 $67,439 $46,513
======= ========= ========== =======
</TABLE>
<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.
Impact of Year 2000
State of Readiness. The Year 2000 issue arises from computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive software or
embedded technology (non-IT systems) may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The potential for a problem exists with
all computer hardware and software, as well as in products with embedded
technology: copiers and fax machines; security and HVAC systems; voice/telephony
systems; elevators, etc.
IKON has appointed a Year 2000 Corporate Compliance Team, which has prepared a
compliance program for all business units, including the Company, and is
responsible for coordination and inspecting compliance activities in all
business units. The compliance program requires all business units and locations
in every country to inventory potentially affected systems and products, assess
risk, take any required corrective actions, test and certify compliance. IKON's
Year 2000 Testing and Certification Guidelines delineate the Year 2000
compliance process, testing and quality assurance guidelines, certification and
reporting processes and contingency planning. An independent consulting company
has reviewed the compliance program.
The Company's Year 2000 compliance program has five phases: 1) inventory of
internal IT and non-IT systems; 2) risk assessment of the Year 2000 compliance
issues associated with such internal IT and non-IT systems; 3) remediation of
non-compliant systems; 4) testing and validation of remediated systems; and 5)
implementation of remediated systems throughout the Company. The progress to
date of each of these phases is as follows: 1) internal IT and non-IT systems
have been inventoried; 2) appropriate risk assessments have been completed; 3)
remediation of critical systems has been substantially completed and remediation
of non-critical systems is progressing; 4) testing and validation of critical
systems has been substantially completed; and 5) Year 2000 compliant versions of
critical systems are in the process of being implemented in field operations.
The Company anticipates completing the Year 2000 project no later than October
31, 1999, which is prior to any anticipated material impact on its operating
systems.
Costs. The Company will use both internal and external resources to reprogram or
replace, test and implement its IT and non-IT systems for Year 2000
modifications. The Company does not separately track the internal costs incurred
on the Year 2000 project. Such costs are principally payroll and related costs
for its internal IT personnel. The total cost of the Year 2000 project,
excluding these internal costs, is estimated at $1.4 million and is being funded
through operating cash flows, all of which will be expensed as incurred. Through
June 30, 1999, the Company has expensed approximately $833,000 related to its
Year 2000 project.
<PAGE>
Risks. Management believes, based on the information currently available to it,
that the most reasonably likely worse case scenario that could be caused by
technology failures relating to the Year 2000 could pose a significant threat
not only to the Company, IKON, its customers and suppliers, but to all
businesses. Risks include, but are not limited to:
o Legal risks, including customer, supplier, employee or shareholder lawsuits
over failure to deliver contracted services, product failure, or health and
safety issues.
o Loss of revenues due to failure to meet customer quality expectations.
o Increased operational costs due to manual processing, data corruption or
disaster recovery.
o Inability to bill or invoice.
The cost of the project and the date on which IKON and the Company believe it
will complete the Year 2000 modifications are based in management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and other uncertainties.
Contingency Plans. IKON's Guidelines require that contingency plans be developed
and validated in the event that any critical system cannot be corrected and
certified before the system's failure date. The Company and IKON expect to have
contingency plans in place by October 31, 1999. In addition, IKON is forming a
rapid response team as part of its IT group that will respond to any operational
problems during the Year 2000 date change period.
Three Months Ended June 30, 1999 Compared
with the Three Months Ended June 30, 1998
Comparative summarized results of operations for the three months ended June 30,
1999 and 1998 are set forth in the table below. This table also shows the
increase or decrease in the dollar amounts of major revenue and expense items
between periods, as well as the related percentage increase or decrease.
<TABLE>
<CAPTION>
Three Months
(dollars in thousands) Ended June 30 Increase (Decrease)
1999 1998 Amount Percent
---- ---- ------ -------
Revenues:
<S> <C> <C> <C> <C>
Lease finance income $54,513 $56,904 $ (2,391) (4.2)%
Rental income 8,723 10,138 (1,415) (14.0)%
Interest on IKON tax deferrals 4,361 3,944 417 10.6%
Other income 5,486 3,035 2,451 80.8%
--------- --------- ---------
73,083 74,021 (938) (1.3)%
Expenses:
Interest 28,339 27,382 957 3.5%
General and administrative 15,470 17,658 (2,188) (12.4)%
--------- --------- ---------
43,809 45,040 (1,231) (2.7)%
Gain on sale of lease receivables 3,477 710 2,767 389.7%
--------- --------- ---------
Income before income taxes 32,751 29,691 3,060 10.3%
Provision for income taxes 11,307 12,471 (1,164) (9.3)%
--------- ------ ---------
Net income $ 21,444 $ 17,220 $ 4,224 24.5%
========= ========= =========
</TABLE>
<PAGE>
Revenues
Total revenues decreased by approximately $938,000 or 1.3% in the third quarter
of fiscal 1999 compared to the third quarter of fiscal 1998. Lease finance
income decreased by approximately $2.4 million due to the effect of the sale of
$366.6 million in direct financing leases in December 1998 under an asset
securitization transaction. The lease portfolio, net of lease receivables sold
in asset securitization transactions, increased by 7.9 % from June 30, 1998 to
June 30, 1999.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company. During the third quarter of
fiscal 1999, the Company purchased operating lease equipment of $.3 million,
compared to $17.1 million in the third quarter of fiscal 1998. Operating leases
contributed $8.7 million in rental income during the third quarter of fiscal
1999, compared to $10.1 million in the third quarter of fiscal 1998. Effective
October 1, 1998, the Company has limited the funding of rental equipment to the
IKON marketplaces to select accounts.
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 6.4% for the third quarter of fiscal
1999 compared to 6.5% for the third quarter of fiscal 1998. The deferred tax
base upon which these payments are calculated increased by 1.1% to $262.2
million at June 30, 1999 from $259.4 million at June 30, 1998. Primarily as a
result of the increased deferred tax liabilities, interest income on deferred
taxes rose by $418,000 or 10.6% when comparing the three months ended June 30,
1999 to the three months ended June 30, 1998.
Other income consists primarily of late payment charges and various billing
fees. The growth in other income from fees is primarily due to the increased
size of the lease portfolio, including securitized leases, upon which these fees
are based. Overall, fee income from these sources grew by $2.5 million or 80.8%,
when comparing the third quarter of fiscal 1999 to the same period of fiscal
1998.
Expenses
Borrowings to finance the lease portfolio in the form of loans from banks and
the issuance of medium term notes and lease-backed notes in the public market
increased by 13.7% from the prior year, with $2,160.4 million outstanding at
June 30, 1999. The Company paid a weighted average interest rate on all
borrowings of 6.4% in the third quarter of fiscal 1999 compared to 6.5% for the
third quarter of fiscal 1998. As a result of the lease-backed notes issued in
May 1999, interest expense increased by $957,000, or 3.5%, when comparing the
third quarter of fiscal 1999 to the third quarter of fiscal 1998. At June 30,
1999, the Company's debt to equity ratio, including intercompany amounts due
from IKON, was 5.4 to 1.
Total general and administrative expenses for the quarter ended June 30, 1999
decreased by $2.2 million or 12.4%, compared to the quarter ended June 30, 1998.
The general and administrative expense category in the third quarter of fiscal
1999 includes depreciation expense on leased equipment totaling $7.3 million,
compared to $8.5 million for the third quarter of fiscal 1998. In addition,
lease bonus subsidy payments included in the general and administrative expense
category were $3.1 million in the third quarter of fiscal 1999 compared to $3.7
million in the third quarter of fiscal 1998. Excluding the effects of
depreciation expense on operating leases and a decrease in lease bonus subsidy
payments, remaining general and administrative expenses decreased by $318,000 or
5.8%, when comparing the third quarter of fiscal 1999 to the third quarter of
fiscal 1998.
<PAGE>
Gain on Sale of Lease Receivables
The Company has asset securitization agreements for $525 million of eligible
direct financing receivables. These agreements expire in September 1999 ($150
million), March 2000 ($125 million) and November 2001 ($250 million),
respectively. The March and September agreements totaling $275 million are
expected to be renewed. The agreements are structured as revolving
securitizations, whereby additional leases can be sold as collections reduce the
previously sold interests. During the third quarter of fiscal 1999, collections
reduced previously sold interests on all securitization agreements by $42.1
million. The Company sold an additional $42.1 million in net eligible direct
financing leases and recognized pretax gains of $3.5 million. On May 25, 1999,
$250 million of assets securitized under the agreement expiring November 2001
were repurchased by the Company with the proceeds of the lease-backed notes. As
a result of the repurchase, the $250 million commitment remains available.
Income Before Income Taxes
Income before income taxes for the third quarter of fiscal 1999 increased by
$3.1 million or 10.3% over the third quarter of fiscal 1998. This increase in
income before income taxes was essentially the effect of the increase in the
gains on the sale of lease receivables and decreased general and administrative
expenses, offset by additional interest expense and a reduction in revenue.
Provision for Income Taxes
Income taxes for the third quarter of fiscal 1999 decreased by $1.2 million or
9.3% over the third quarter of fiscal 1998. This decrease in income taxes is
primarily a result of a decrease in the effective tax rate in the third quarter
of fiscal 1999 compared to the third quarter of fiscal 1998. The effective tax
rate was 34.5% for the third quarter of fiscal 1999 and 42% for the third
quarter of 1998.
Nine Months Ended June 30, 1999 Compared
with the Nine Months Ended June 30, 1998
Comparative summarized results of operations for the nine months ended June 30,
1999 and 1998 are set forth in the table below. This table also shows the
increase or decrease in the dollar amounts of major revenue and expense items
between periods, as well as the related percentage increase or decrease.
<TABLE>
<CAPTION>
Nine Months
(dollars in thousands) Ended June 30 Increase (Decrease)
1999 1998 Amount Percent
---- ---- ------ -------
Revenues:
<S> <C> <C> <C> <C>
Lease finance income $166,363 $163,170 $3,193 2.0%
Rental income 27,760 28,287 (527) (1.9)%
Interest on IKON tax deferrals 12,836 11,449 1,387 12.1%
Other income 12,900 8,400 4,500 53.6%
--------- --------- ---------
219,859 211,306 8,553 4.0%
Expenses:
Interest 84,148 80,455 3,693 4.6%
General and administrative 48,014 53,401 (5,387) (10.1)%
--------- --------- ---------
132,162 133,856 (1,694) (1.3)%
Gain on sale of lease receivables 24,356 1,891 22,465 1188.0%
--------- --------- ---------
Income before income taxes 112,053 79,341 32,712 41.2%
Provision for income taxes 44,614 32,828 11,786 35.9%
--------- --------- ---------
Net income $ 67,439 $ 46,513 $ 20,926 45.0%
========= ========= =========
</TABLE>
<PAGE>
Revenues
Total revenues increased by approximately $8.6 million or 4.0% in the first nine
months of fiscal 1999 compared to the first nine months of fiscal 1998.
Approximately 37.3% or $3.2 million of this increase in revenues was a result of
increased lease finance income due to the increase in lease receivables prior to
the asset securitization completed in December 1998. The lease portfolio, net of
lease receivables that were sold in asset securitization transactions, increased
by 7.9% from June 30, 1998 to June 30, 1999.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company. During the first nine months
of fiscal 1999 and 1998, the Company purchased operating lease equipment of $6.0
million and $47.8 million, respectively. Operating leases contributed $27.8
million in rental income during the first nine months of fiscal 1999, compared
to $28.3 million in the first nine months of fiscal 1998. Effective October 1,
1998, the Company has limited the funding of rental equipment to the IKON
marketplaces to select accounts.
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 6.4% for the first nine months of
fiscal 1999 compared to 6.5% for the first nine months of fiscal 1998. The
deferred tax base upon which these payments are calculated increased by 1.1 % to
$262.2 million at June 30, 1999 from $259.4 million at June 30, 1998. Primarily
as a result of the increased deferred tax liabilities, interest income on
deferred taxes rose by $1.4 million or 12.1% when comparing the nine months
ended June 30, 1999 to the nine months ended March 31, 1998.
Other income consists primarily of late payment charges and various billing
fees. 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 $4.5 million or 53.6%, when comparing the first nine
months of fiscal 1999 to the same period of fiscal 1998.
Expenses
Borrowings to finance the lease portfolio in the form of loans from banks and
the issuance of medium term notes and lease-backed notes in the public market
increased by 13.7% from the prior year, with $2,160.4 million outstanding at
June 30, 1999. The Company paid a weighted average interest rate on all
borrowings of 6.4% in the first nine months of fiscal 1999 compared to 6.5% for
the first nine months of fiscal 1998. Primarily the result of increased
borrowings, interest expense increased $3.7 million, or 4.6%, when comparing the
first nine months of fiscal 1999 to the first nine months of fiscal 1998. At
June 30, 1999, the Company's debt to equity ratio, including intercompany
amounts due from IKON, was 5.4 to 1.
Total general and administrative expenses for the nine months ended June 30,
1999 decreased by $5.4 million or 10.1%, compared to the nine months ended June
30, 1998. The general and administrative expense category in the first nine
months of fiscal 1999 includes depreciation expense on leased equipment totaling
$23.3 million, compared to $23.9 million for the first nine months of fiscal
1998. In addition, lease bonus subsidy payments included in the general and
administrative expense category were $8.9 million in the first nine months of
fiscal 1999 compared to $11.3 million in the first nine months of fiscal 1998.
Excluding the effects of decreased depreciation expense on operating leases and
a decrease in lease bonus subsidy payments, remaining general and administrative
expenses decreased by $2.4 million or 13.2%, when comparing the first nine
months of fiscal 1999 to the first nine months of fiscal 1998.
<PAGE>
Gain on Sale of Lease Receivables
In December 1998, the Company entered into an asset securitization transaction
whereby it sold $366.6 million in direct financing lease receivables for $250
million in cash and a retained interest in the remainder. The agreement is for
an initial three-year term with certain renewal provisions and was structured as
a revolving asset securitization so that as collections reduce previously sold
interests in the pool of leases, additional leases can be sold up to $250
million. The terms of the agreement require that the Company will continue to
service the lease portfolio. The Company recognized a pretax gain of $14.3
million during the first quarter of fiscal 1999 on this agreement. On May 25,
1999, the Company repurchased leases sold under this agreement with the proceeds
from the lease-backed notes. As a result of the repurchase, the $250 million
commitment remains available.
The Company has additional asset securitization agreements for $275 million of
eligible direct financing receivables. These agreements expire in September 1999
($150 million) and March 2000 ($125 million), respectively. Both of these
agreements are expected to be renewed. These agreements are also structured as
revolving securitizations, whereby additional leases can be sold as collections
reduce the previously sold interests. During the first nine months of fiscal
1999, collections reduced previously sold interests on these two agreements and
the $250 million transaction, described above, by $125.1 million. The Company
sold an additional $125.1 million in net eligible direct financing leases and
recognized pretax gains of $10.1 million for the nine months ended June 30,
1999.
Income Before Income Taxes
Income before income taxes for the first nine months of fiscal 1999 increased by
$32.7 million or 41.2% over the first nine months of fiscal 1998. This increase
in income before income taxes was essentially the effect of higher asset
securitization gains, higher earnings on a larger lease portfolio base and
decreased general and administrative expenses, partially offset by higher
borrowing costs.
Provision for Income Taxes
Income taxes for the first nine months of fiscal 1999 increased by $11.8 million
or 35.9% over the first nine months of fiscal 1998. This increase in income
taxes is directly attributable to the increase in income before income taxes in
the first nine months of fiscal 1999, offset by a decrease in the effective tax
rate compared to the first nine months of fiscal 1998. The effective tax rate
was 39.8% for the first nine months of fiscal 1999 and 41.4% for the first nine
months of 1998.
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
conducting operations in a competitive environment; delays, difficulties,
management transitions and employment issues associated with consolidation of,
and/or changes in business operations; managing the integration of existing and
acquired companies; risks and uncertainties associated with existing or future
vendor relationships; and general economic conditions. Certain additional risks
and uncertainties are set forth in the Company's 1998 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.
<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 May 5, 1999, the Company filed a Current Report on Form 8-K to
file, under Item 5 of the form, information contained in: 1) the
press release issued by IKON, dated April 22, 1999, regarding the
appointment of William S. Urkiel as IKON's Chief Financial Officer
and Senior Vice President, and 2) the press release issued by IKON,
dated April 28, 1999, regarding IKON's financial results for the
period ended March 31, 1999, including unaudited consolidated
statements of income for the three months ended March 31, 1999 and
the six months ended March 31, 1999.
On June 30, 1999, the Company filed a Current Report on Form 8-K to
file, under Item 5 of the form, its announcement that Russell
Slack, who had been serving in an executive capacity for the
Registrant, was appointed President of the Registrant.
On July 30, 1999, the Company filed a Current Report on Form 8-K to
file, under Item 5 of the form, the press release issued by IKON,
dated July 28, 1999, regarding IKON's financial results for the
period ended June 30, 1999, including unaudited consolidated
statements of operations for the three months ended June 30, 1999
and the nine months ended June 30, 1999.
<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 August 13, 1999 /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> 9-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Jun-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,455,401,000<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 124,149,000<F2>
<DEPRECIATION> 60,179,000<F2>
<TOTAL-ASSETS> 2,726,203,000
<CURRENT-LIABILITIES> 0
<BONDS> 2,160,387,000
0
0
<COMMON> 0<F3>
<OTHER-SE> 371,542,000
<TOTAL-LIABILITY-AND-EQUITY> 2,726,203,000
<SALES> 0
<TOTAL-REVENUES> 219,859,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 48,014,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,148,000
<INCOME-PRETAX> 112,053,000
<INCOME-TAX> 44,614,000
<INCOME-CONTINUING> 67,439,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,439,000
<EPS-BASIC> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1> Includes net investments in leases of $2,374,444,000 and other accounts
receivable.
<F2> Includes leased equipment of: cost - $107,044,000; accumulated depreciation
- $53,245,000.
<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>
