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, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1738 Bass Road, Macon, Georgia 31210
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(Address of principal executive offices)
(Zip Code)
(912) 471-2300
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(Registrant's telephone number, including area code)
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(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 April 30, 1999.
Common Stock, $.01 par value per share 1,000 shares
Registered Debt Outstanding as of April 30, 1999 $1,622,250,000
The registrant, an indirect wholly owned subsidiary of IKON Office Solutions,
Inc. ("IKON"), meets the conditions set forth in General Instruction I(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--March 31, 1999 and
September 30, 1998
Statements of Income--Three and Six Months ended
March 31, 1999 and March 31, 1998
Statements of Cash Flows--Six Months ended
March 31, 1999 and March 31, 1998
Notes to Financial Statements--March 31, 1999
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. 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>
March 31, September 30,
1999 1998
------------------- -----------------
Assets
Investment in leases:
<S> <C> <C>
Direct financing leases $1,646,285 $2,002,012
Less: Unearned income (271,480) (343,211)
------------------- -----------------
1,374,805 1,658,801
Funded leases, net 575,555 592,827
------------------- -----------------
1,950,360 2,251,628
Retained interest in lease receivables 120,674
Cash 2,621
Accounts receivable 66,397 63,066
Due from IKON Office Solutions 52,060
Prepaid expenses and other assets 38,856 14,224
Leased equipment-operating rentals at cost
less accumulated depreciation of:
3/99 - $50,874; 9/98 - $43,411 61,661 76,551
Property and equipment at cost, less
accumulated depreciation of:
3/99 - $6,504; 9/98 - $5,596 10,499 11,491
------------------- -----------------
Total assets $2,248,447 $2,471,641
=================== =================
Liabilities and shareholder's equity
Liabilities:
Accounts payable and accrued expenses $81,857 $59,206
Accrued interest 29,440 33,467
Due to IKON Office Solutions 47,616
Notes payable to banks 100,000
Medium term notes 1,622,250 1,849,750
Deferred income taxes 116,058 95,115
------------------- -----------------
Total liabilities 1,897,221 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 230,683 184,688
Accumulated other comprehensive income 1,128
------------------- -----------------
Total shareholder's equity 351,226 334,103
------------------- -----------------
Total liabilities and shareholder's equity $2,248,447 $2,471,641
=================== =================
</TABLE>
See notes to financial statements.
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
-------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- -------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Lease finance income $51,323 $54,787 $111,850 $106,266
Rental income 9,195 9,098 19,037 18,149
Interest on IKON tax deferrals 4,279 3,844 8,475 7,505
Other income 3,937 3,130 7,414 5,365
------------- ------------- -------------- --------------
68,734 70,859 146,776 137,285
Expenses:
Interest 26,607 27,208 55,809 53,073
General and administrative 15,512 17,972 32,544 35,743
------------- ------------- -------------- --------------
42,119 45,180 88,353 88,816
Gain on sale of lease receivables 4,203 617 20,879 1,181
------------- ------------- -------------- --------------
Income before income taxes 30,818 26,296 79,302 49,650
Provision for income taxes 12,944 10,782 33,307 20,357
------------- ------------- -------------- --------------
Net income $17,874 $15,514 $45,995 $29,293
============= ============= ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
IOS CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
--------------------------------------
1999 1998
--------------- -----------------
Operating activities:
<S> <C> <C>
Net income $45,995 $29,293
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,931 16,221
Provision for deferred taxes 20,191 20,788
Gain on sale of lease receivables (20,879) (1,181)
Changes in operating assets and liabilities:
Accounts receivable (3,331) (1,913)
Prepaid expenses and other assets 11,092 1,976
Accounts payable and accrued expenses 16,372 (2,039)
Accrued interest (4,027) 6,047
--------------- -----------------
Net cash provided 82,344 69,192
--------------- -----------------
Investing activities:
Purchases of leased equipment, net (1,134) (28,142)
Disposals of property and equipment, net of additions 85 15
Investment in leases:
Additions (736,894) (841,171)
Cancellations 173,730 164,546
Collections 404,055 379,240
Proceeds from sale 333,017 52,271
--------------- -----------------
Net cash provided (used) 172,859 (273,241)
--------------- -----------------
Financing activities:
Payments on bank borrowings (100,000) 0
Proceeds from issuance of medium term notes 0 348,500
Payments on medium term notes (227,500) (155,000)
Capital contributed by IKON 0 5,000
Dividend to IKON (30,000) 0
--------------- -----------------
Net cash (used) provided (357,500) 198,500
--------------- -----------------
Increase in amounts Due to IKON (102,297) (5,549)
Cash and Due from IKON at beginning of year 54,681 4,463
--------------- -----------------
Due to IKON at end of period ($47,616) ($1,086)
=============== =================
</TABLE>
See notes to financial statements.
<PAGE>
IOS Capital, Inc.
Notes to Financial Statements
March 31, 1999
Note 1: Basis of Presentation
The accompanying unaudited condensed 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 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, 1998.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Note 2: Medium Term Note Program
During the six months ended March 31, 1999, the Company issued no
medium term notes under its $3.5 billion medium term note program. At March 31,
1999, $1,622.3 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 the pool of leases, additional leases can be sold
up to $250 million. The terms of the agreement provide that the Company will
continue to service the lease portfolio for the securitization provider. At
March 31, 1999, the interest-only strip of approximately $26.2 million related
to the sale is included in prepaid expenses and other assets and the servicing
obligation of approximately $5.2 million is included in accounts payable and
accrued expenses. The Company recognized a pretax gain of $14.3 million during
the first quarter of fiscal 1999 on this agreement.
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 six months
of fiscal 1999, collections reduced previously sold interests on these two
agreements and the $250 million transaction, described above, by $83.0 million.
The Company sold an additional $83.0 million in net eligible direct financing
leases and recognized pretax gains of $6.6 million for the six months ended
March 31, 1999.
<PAGE>
IOS Capital, Inc.
Notes to Financial Statements (Cont.)
March 31, 1999
Note 4: 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 Six Months Ended
March 31 March 31
--------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $17,874 $15,514 $45,995 $29,293
Mark to market adjustment, net of tax 159 1,128
------- ------- ------- -------
Total comprehensive income $18,033 $15,514 $47,123 $29,293
======= ======= ======= =======
</TABLE>
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pursuant to General Instruction I(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. To
date, the Company has expensed approximately $794,000 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 March 31, 1999 Compared
with the Three Months Ended March 31, 1998
Comparative summarized results of operations for the three months ended March
31, 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 March 31 Increase (Decrease)
---------------------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Revenues:
<S> <C> <C> <C> <C>
Lease finance income $51,323 $54,787 $(3,464) (6.3)%
Rental income 9,195 9,098 97 1.1%
Interest on IKON tax deferrals 4,279 3,844 435 11.3%
Other income 3,937 3,130 807 25.8%
--------- --------- ---------
68,734 70,859 (2,125) (3.0)%
Expenses:
Interest 26,607 27,208 (601) (2.2)%
General and administrative 15,512 17,972 (2,460) (13.7)%
--------- --------- ---------
42,119 45,180 (3,061) (6.8)%
Gain on sale of lease receivables 4,203 617 3,586 581.2%
--------- --------- ---------
Income before income taxes 30,818 26,296 4,522 17.2%
Provision for income taxes 12,944 10,782 2,162 20.1%
--------- --------- ---------
Net income $ 17,874 $ 15,514 $ 2,360 15.2%
========= ========= =========
</TABLE>
<PAGE>
Revenues
Total revenues decreased by approximately $2.1 million or 3.0% in the second
quarter of fiscal 1999 compared to the second quarter of fiscal 1998. Lease
finance income decreased by approximately $3.5 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, decreased .6 % from March 31, 1998 to
March 31, 1999, including the retained interest in the leases sold.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company. During the second quarter of
fiscal 1998, the Company purchased operating lease equipment of $11.2 million,
compared to none in the second quarter of fiscal 1999. Operating leases
contributed $9.2 million in rental income during the second quarter of fiscal
1999, compared to $9.1 million in the second 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 6.5% for the second quarter of both
fiscal 1999 and fiscal 1998. The deferred tax base upon which these payments are
calculated increased by 7.9% to $263.5 million at March 31, 1999 from $244.3
million at March 31, 1998. Primarily as a result of the increased deferred tax
liabilities, interest income on deferred taxes rose by $435,000 or 11.3% when
comparing the three months ended March 31, 1999 to the three months ended March
31, 1998.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1998. 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 $807,000 or 25.8%,
when comparing the second 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 in the public market decreased by 7.9% from
the prior year, with $1,622.3 million outstanding at March 31, 1999. The
decrease was the result of the asset securitization in December 1998. The
Company paid a weighted average interest rate on all borrowings of 6.5% in the
second quarter of both fiscal 1999 and fiscal 1998. As a result, interest
expense decreased by $601,000, or 2.2%, when comparing the second quarter of
fiscal 1999 to the second quarter of fiscal 1998. At March 31, 1999, the
Company's debt to equity ratio, including intercompany amounts due to IKON, was
4.8 to 1.
Total general and administrative expenses for the quarter ended March 31, 1999
decreased by $2.5 million or 13.7%, compared to the quarter ended March 31,
1998. The general and administrative expense category in the second quarter of
both fiscal 1999 and fiscal 1998 includes depreciation expense on leased
equipment totaling $7.7 million. In addition, lease bonus subsidy payments
included in the general and administrative expense category were $3.0 million in
the second quarter of fiscal 1999 compared to $3.8 million in the second 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 $1.7 million or 25.6%, when comparing the
second quarter of fiscal 1999 to the second 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 second quarter of fiscal 1999, collections
reduced previously sold interests on all securitization agreements by $51.9
million. The Company sold an additional $51.9 million in net eligible direct
financing leases and recognized pretax gains of $4.2 million.
Income Before Income Taxes
Income before income taxes for the second quarter of fiscal 1999 increased by
$4.5 million or 17.2% over the second 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.
Provision for Income Taxes
Income taxes for the second quarter of fiscal 1999 increased by $2.2 million or
20.1% over the second quarter of fiscal 1998. This increase in income taxes is
directly attributable to the increase in income before income taxes in the
second quarter of fiscal 1999 compared to the first second of fiscal 1998. The
effective tax rate was 42% for the second quarter of fiscal 1999 and 41% for the
second quarter of 1998.
Six Months Ended March 31, 1999 Compared
with the Six Months Ended March 31, 1998
Comparative summarized results of operations for the six months ended March, 31,
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>
Six Months
(dollars in thousands) Ended March 31 Increase (Decrease)
---------------------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Revenues:
<S> <C> <C> <C> <C>
Lease finance income $111,850 $106,266 $5,584 5.3%
Rental income 19,037 18,149 888 4.9%
Interest on IKON tax deferrals 8,475 7,505 970 12.9%
Other income 7,414 5,365 2,049 38.2%
--------- --------- ---------
146,776 137,285 9,491 6.9%
Expenses:
Interest 55,809 53,073 2,736 5.2%
General and administrative 32,544 35,743 (3,199) (9.0)%
--------- --------- ---------
88,353 88,816 (463) (.5)%
Gain on sale of lease receivables 20,879 1,181 19,698 1667.9%
--------- --------- ---------
Income before income taxes 79,302 49,650 29,652 59.7%
Provision for income taxes 33,307 20,357 12,950 63.6%
--------- --------- ---------
Net income $ 45,995 $ 29,293 $ 16,702 57.0%
========= ========= =========
</TABLE>
<PAGE>
Revenues
Total revenues increased by approximately $9.5 million or 6.9% in the first six
months of fiscal 1999 compared to the first six months of fiscal 1998.
Approximately 58.8% or $5.6 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, decreased
by .6 % from March 31, 1998 to March 31, 1999, including the retained interest
in the leases sold, primarily due to the asset securitization in December 1998.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company. During the first six months
of fiscal 1999 and 1998, IOS Capital purchased operating lease equipment of $5.7
million and $30.7 million, respectively. Operating leases contributed $19.0
million in rental income during the first six months of fiscal 1999, compared to
$18.1 million in the first six 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 6.5% for the first six months of both
fiscal 1999 and fiscal 1998. The deferred tax base upon which these payments are
calculated increased by 7.9 % to $263.5 million at March 31, 1999 from $244.3
million at March 31, 1998. Primarily as a result of the increased deferred tax
liabilities, interest income on deferred taxes rose by $970,000 or 12.9% when
comparing the six months ended March 31, 1999 to the six months ended March 31,
1998.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged from fiscal
1998. 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 $2.0 million or 38.2%, when comparing the first six
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 in the public market decreased by 7.9% from
the prior year, with $1,622.3 million outstanding at March 31, 1999. The
decrease was the result of the asset securitization in December 1998. Excluding
the securitization, debt would have increased by $111.5 million, or 6.3%. The
Company paid a weighted average interest rate on all borrowings of 6.5% in the
first six months of both fiscal 1999 and fiscal 1998. The increased borrowings
prior to the securitization in December 1998 resulted in an increase in interest
expense of $2.7 million, or 5.2%, when comparing the first six months of fiscal
1999 to the first six months of fiscal 1998. At March 31, 1999, the Company's
debt to equity ratio, including intercompany amounts due to IKON, was 4.8 to 1.
Total general and administrative expenses for the six months ended March 31,
1999 decreased by $3.2 million or 9.0%, compared to the six months ended March
31, 1998. The general and administrative expense category in the first six
months of fiscal 1999 includes depreciation expense on leased equipment totaling
$16.0 million, compared to $15.3 million for the first six months of fiscal
1998. In addition, lease bonus subsidy payments included in the general and
administrative expense category were $5.8 million in the first six months of
fiscal 1999 compared to $7.6 million in the first six months of fiscal 1998.
Excluding the effects of increased depreciation expense on operating leases and
a decrease in lease bonus subsidy payments, remaining general and administrative
expenses decreased by $2.1 million or 16.3%, when comparing the first six months
of fiscal 1999 to the first six 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 provide that the Company will continue to
service the lease portfolio for the securitization provider. The Company
recognized a pretax gain of $14.3 million during the first quarter of fiscal
1999 on this agreement.
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 six months of fiscal
1999, collections reduced previously sold interests on these two agreements and
the $250 million transaction, described above, by $83.0 million. The Company
sold an additional $83.0 million in net eligible direct financing leases and
recognized pretax gains of $6.6 million for the six months ended March 31, 1999.
Income Before Income Taxes
Income before income taxes for the first six months of fiscal 1999 increased by
$29.7 million or 59.7% over the first six months of fiscal 1998. This increase
in income before income taxes was essentially the effect of the gain on the
asset securitization completed in the first quarter of fiscal 1999, 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 six months of fiscal 1999 increased by $13.0 million
or 63.6% over the first six months of fiscal 1998. This increase in income taxes
is directly attributable to the increase in income before income taxes in the
first six months of fiscal 1999 compared to the first six months of fiscal 1998.
The effective tax rate was 42% for the first six months of fiscal 1999 and 41%
for the first six 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 5. Other Information
On May 10, 1999, Kurt E. Dinkelacker resigned his position as Sole
Director of the Company. William S. Urkiel has been appointed as the
Sole Director of the Company to succeed Mr. Dinkelacker.
Richard P. Maier, who has served as the Company's President since 1989,
will resign all positions with the Company effective July 1, 1999. The
Company is currently seeking a successor for the position.
During the third quarter of fiscal 1999, IKON Receivables, LLC (a
second-tier wholly-owned subsidiary of the Company) expects to publicly
offer approximately $752.93 million of lease- backed notes (the
"Notes"). This transaction will be structured using two special purpose
limited liability companies: IKON Receivables-1, LLC, of which the
Company is sole member, and IKON Receivables, LLC of which IKON
Receivables-1, LLC is sole member. The Company will contribute to IKON
Receivables-1, LLC a pool of office equipment leases or contracts and
related assets (the "Asset Pool"), and IKON Receivables-1, LLC will
transfer them to IKON Receivables, LLC, which will be the issuer of the
Notes. The Notes will be secured by the Asset Pool and the payments on
the Notes will be made from payments on the leases. The Company will
receive approximately $750 million in proceeds from the sale of the
Notes and will use approximately $250 million of that amount to
repurchase previously sold assets in connection with the asset
securitization transaction completed in December 1998. The repurchased
assets will be contributed as part of the Asset Pool.
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 March 10, 1999, the Company filed a Current Report on Form 8-K
to file, under Item 5 of the form, information contained in the
press release issued by IKON, dated March 9, 1999 announcing the
resignation of Kurt E. Dinkelacker as Chief Financial Officer and a
member of IKON's Board of Directors, effective May 1, 1999.
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.
<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 May 14, 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,016,757,000<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 129,538,000<F2>
<DEPRECIATION> 57,378,000<F2>
<TOTAL-ASSETS> 2,248,447,000
<CURRENT-LIABILITIES> 0
<BONDS> 1,622,250,000
0
0
<COMMON> 0<F3>
<OTHER-SE> 351,226,000
<TOTAL-LIABILITY-AND-EQUITY> 2,248,447,000
<SALES> 0
<TOTAL-REVENUES> 146,776,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,544,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,809,000
<INCOME-PRETAX> 79,302,000
<INCOME-TAX> 33,307,000
<INCOME-CONTINUING> 45,995,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,995,000
<EPS-PRIMARY> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1> Includes net investments in leases of $1,950,360,000 and other accounts
receivable.
<F2> Includes leased equipment of: cost - $112,535,000; accumulated depreciation
- $50,874,000.
<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>
