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, 2000 or [ ] Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ________ to _________
Commission file number 0-20405
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IOS CAPITAL, INC.
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(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 corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 11, 2000.
Common Stock, $.01 par value per share 1,000 shares
Registered Debt Outstanding of the Company and all wholly owned
subsidiaries $2,057,811,866
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. Condensed Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2000 (unaudited) and
September 30, 1999
Consolidated Statements of Income - Three and nine
months ended June 30, 2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows - Nine months
ended June 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1: Condensed Consolidated Financial Statements
----------------------------------------------------
IOS CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, September 30,
2000 1999
(unaudited)
----------------- ---------------
Assets
Investment in leases:
Direct financing leases, net of lease default
reserve of: $66,575 - June 30, 2000;
$0 - September 30, 1999 $2,806,630 $2,310,663
Less: Unearned income (443,766) (374,279)
----------------- ---------------
2,362,864 1,936,384
Funded leases, net 367,661 465,188
----------------- ---------------
2,730,525 2,401,572
Cash 3,273 1,335
Restricted Cash 89,179 29,625
Accounts receivable 78,009 76,805
Prepaid expenses and other assets 6,883 10,018
Leased equipment-operating rentals at cost
less accumulated depreciation of:
June 30, 2000 - $55,287;
September 30, 1999 - $51,055 43,792 59,681
Property and equipment at cost, less
accumulated depreciation of:
June 30, 2000 - $8,627;
September 30, 1999 - $7,384 9,030 10,395
----------------- ---------------
Total assets $2,960,691 $2,589,431
================= ===============
Liabilities and shareholder's equity
Liabilities:
Accounts payable and accrued expenses $66,956 $65,204
Accrued interest 7,837 23,481
Due to IKON 109,974 112,649
Medium term notes 743,500 1,242,850
Lease-backed notes 1,414,614 622,948
Bank debt 83,000
Deferred income taxes 115,163 129,869
----------------- ---------------
Total liabilities 2,541,044 2,197,001
----------------- ---------------
Shareholder's equity:
Common Stock - $.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital 149,415 149,415
Retained earnings 270,232 243,015
----------------- ---------------
Total shareholder's equity 419,647 392,430
----------------- ---------------
Total liabilities and shareholder's equity $2,960,691 $2,589,431
================= ===============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
IOS CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- ----------------------------------
2000 1999 2000 1999
------------ ------------ ----------------- ------------
Revenues:
<S> <C> <C> <C> <C>
Lease finance income $70,778 $54,513 $207,822 $166,363
Rental income 8,850 8,723 27,186 27,760
Interest on IKON income tax deferrals 4,168 4,361 12,672 12,836
Other income 6,591 5,486 17,534 12,900
------------ ------------ ----------------- ------------
90,387 73,083 265,214 219,859
------------ ------------ ----------------- ------------
Expenses:
Interest 36,875 28,339 109,652 84,148
General and administrative 20,527 15,470 60,090 48,014
------------ ------------ ----------------- ------------
57,402 43,809 169,742 132,162
------------ ------------ ----------------- ------------
Gain on sale of lease receivables 3,477 76 24,356
------------ ------------ ----------------- ------------
Income before income taxes 32,985 32,751 95,548 112,053
Provision for income taxes 13,306 11,307 38,331 44,614
------------ ------------ ----------------- ------------
Net income $19,679 $21,444 $57,217 $67,439
============ ============ ================= ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
IOS CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------------
2000 1999
----------- -----------
Cash Flows from operating activities:
<S> <C> <C>
Net income $ 57,217 $ 67,439
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 23,934 25,401
Deferred tax provision 14,644 29,176
Provision for lease default 14,999
Gain on sale of investment in leases (76) (24,356)
Changes in operating assets and liabilities:
Accounts receivable (1,204) (17,891)
Prepaid expenses and other assets 10,215 17,436
Accounts payable and accrued expenses 1,752 2,301
Accrued interest (15,644) (26,714)
----------- -----------
Net cash provided by operating activities 105,837 72,792
----------- -----------
Cash flows from investing activities:
Purchases of leased equipment (11,407) (6,024)
Proceeds from terminations of leased equipment 4,605 5,495
Purchases of property and equipment (140)
Proceeds from sale of property and equipment 122 122
Investment in Leases
Additions (1,400,034) (1,128,360)
Cancellations 222,327 257,133
Collections 1,029,779 633,879
Lease default reserve transfer from IKON, net of deferred tax 44,955
Proceeds from sale of leases 923 375,142
Repurchase of leases (275,000) (250,000)
----------- -----------
Net cash used in investing activities (383,730) (112,753)
----------- -----------
Cash flows from financing activities:
Payments on bank borrowings (250,000) (100,000)
Proceeds from bank borrowings 333,000
Payments on medium term notes (499,350) (385,900)
Proceeds from issuance of lease-backed notes 1,194,849 749,331
Payments on lease-backed notes (406,439) (55,105)
Deposit to restricted cash (59,554) (33,433)
Dividend to IKON (30,000) (30,000)
----------- -----------
Net cash provided by financing activities 282,506 144,893
----------- -----------
Increase in cash and amounts due from IKON 4,613 104,932
Cash and Due (to) from IKON at beginning of year (111,314) 54,681
----------- -----------
Cash and Due (to) from IKON at end of period ($ 106,701) $ 159,613
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
IOS Capital, Inc.
Notes to Condensed Consolidated Financial Statements
(amounts in thousands)
(unaudited)
Note 1: Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements of IOS
Capital, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement of the results of the interim periods
have been included. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K/A for
the year ended September 30, 1999. Certain prior year amounts have been
reclassified to conform with the current year presentation.
Note 2: Medium Term Note Program
------------------------
The amount available to be offered under the Company's medium term note program
is $3,500,000. The program allows the Company to offer to the public from time
to time medium term notes having an aggregate initial offering price not
exceeding the total program amount. These notes are offered at varying
maturities of nine months or more from their dates of issue and may be subject
to redemption at the option of the Company, in whole or in part, prior to the
maturity date in conjunction with meeting specified provisions. Interest rates
are determined based on market conditions at the time of issuance. As of June
30, 2000, $743,500 of medium term notes were outstanding with a weighted average
interest rate of 6.4%.
Note 3: Asset Securitization Conduit Financing
--------------------------------------
On December 9, 1999, the Company pledged or transferred $311,382 in financing
lease receivables for $247,600 in cash in connection with its revolving asset
securitization, in a transfer accounted for as a financing. On January 20, 2000,
the Company pledged or transferred $2,860 in financing lease receivables for
$2,400 in cash in connection with its revolving asset securitization, in a
transfer accounted for as a financing. The Company repaid $250,000 on June 2,
2000 when it issued the 2000-1 Notes described below. On June 30, 2000, the
Company pledged or transferred $98,907 in financing lease receivables for
$83,000 in cash in connection with its revolving asset securitization, in a
transfer accounted for as a financing. As of June 30, 2000, the Company had
approximately $167,000 available under its revolving asset securitization
agreement.
The Company had additional asset securitization agreements for $275,000 of
eligible direct financing receivables. These agreements were also structured as
revolving securitizations, whereby additional leases can be sold as collections
reduce the previously sold interests. During fiscal 1999, collections reduced
previously sold interests on the Company's asset securitization agreements by
$152,098. The Company sold an additional $152,098 in net eligible direct
financing receivables and recognized pretax gains of $12,200 for fiscal year
1999. On October 7, 1999, these leases were repurchased with a portion of the
proceeds received from the issuance of $699,595 of lease-backed notes.
Note 4: Lease-Backed Notes
------------------
In addition to the $622,948 of lease-backed notes (the "1999-1 Notes")
outstanding at September 30, 1999, on October 7, 1999, IKON Receivables, LLC (a
consolidated affiliate of the Company) publicly issued $699,595 of lease-backed
notes (the "1999-2 Notes") under its $1,825,000 shelf registration statement
filed May 7, 1999 with the Securities and Exchange Commission. Class A-1 Notes
<PAGE>
totaling $235,326 have a stated interest rate of 6.14125%, Class A-2 Notes
totaling $51,100 have a stated interest rate of 6.31%, Class A-3a Notes totaling
$100,000 have a stated interest rate of 6.59%, Class A-3b Notes totaling
$240,891 have a variable interest rate and Class A-4 Notes totaling $72,278 have
a stated interest rate of 6.88%. The Class A-3b Notes pay interest at a rate of
1-month LIBOR plus 0.36% (which has been fixed at 6.63% through an interest rate
swap). The 1999-1 and 1999-2 Notes are secured by a pool of office equipment
leases or contracts and related assets ("the 1999-1 and 1999-2 Asset Pools") and
the payments on the 1999-1 and 1999-2 Notes are made from payments received on
the leases. The Company received approximately $697,000 in net proceeds from the
sale of the 1999-2 Notes and used $275,000 of that amount to repurchase
previously sold leases. The repurchased leases were contributed as part of the
1999-2 Asset Pool.
On June 2, 2000, IKON Receivables, LLC publicly issued $498,510 of lease-backed
notes (the "2000-1 Notes") under a $2,000,000 shelf registration statement filed
in May 2000 (which incorporated the unused portion of the $1,825,000 shelf
registration statement filed May 7, 1999) with the Securities and Exchange
Commission. Class A-1 Notes totaling $130,000 have a stated interest rate of
6.99625%, Class A-2 Notes totaling $54,000 have a stated interest rate of 7.51%,
Class A-3 Notes totaling $230,000 have a variable interest rate, and Class A-4
Notes totaling $84,510 have a variable interest rate. The Class A-3 Notes pay
interest at a rate of 1-month LIBOR plus 0.19% (which has been fixed at 7.802%
through an interest rate swap) and the Class A-4 Notes pay interest at a rate of
1-month LIBOR plus 0.23% (which has been fixed at 7.82% through an interest rate
swap). The transaction was structured the same as the 1999-1 Notes and the
1999-2 Notes described above. The Notes are secured by a pool of office
equipment leases or contracts and related assets ("the 2000-1 Asset Pool") and
the payments on the Notes are made from payments received on the leases. The
Company received approximately $497,000 in net proceeds from the sale of the
2000-1 Notes and used $250,000 of that amount to repurchase previously sold
leases. The repurchased leases were contributed as part of the 2000-1 Asset
Pool. As of June 30, 2000, IKON Receivables, LLC had approximately $1,501,000
available under the $2,000,000 shelf registration statement.
Restricted cash on the balance sheet represents cash that has been collected on
the lease receivables in the 1999-1, 1999-2 and 2000-1 Asset Pools, which must
be used to repay the 1999-1, 1999-2 and 2000-1 Notes, respectively.
Note 5: Comprehensive Income
--------------------
Total comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income $19,679 $21,444 $57,217 $67,439
Mark to market adjustment on the retained
interest on lease receivables, net of tax (1,128)
------------ ------------ ------------ ------------
Total comprehensive income $19,679 $20,316 $57,217 $67,439
============ ============ ============ ============
</TABLE>
Note 6: Lease Default Reserve
---------------------
Effective the first quarter of fiscal 2000, reserves for credit loss are
maintained on the books of the Company, rather than each IKON Office Solutions,
Inc. ("IKON") marketplace. At the beginning of fiscal 2000, lease default
reserves of $74,305 and the related deferred tax liability of $29,350 were
transferred to the Company from the IKON marketplaces. During fiscal 2000, a
provision for lease defaults of $42,873 was recorded to increase the reserve. Of
this provision, $14,999 was recorded as an expense on the books of the Company
and $27,873 was recorded as an expense on the books of the IKON marketplaces.
Lease write-offs of $50,602 were recorded to reduce the reserve. As a result of
the above, the lease default reserve at June 30, 2000 is $66,575.
<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 June 30, 2000 Compared
-----------------------------------------
with the Three Months Ended June 30, 1999
-----------------------------------------
Revenues
--------
Total revenues increased by $17,304 or 23.7% in the third quarter of fiscal 2000
compared to the third quarter of fiscal 1999. Lease finance income increased by
$16,265 or 29.8%. The lease portfolio increased 13.7% from September 30, 1999 to
June 30, 2000. This increase is attributable to the change from off balance
sheet asset securitizations to on balance sheet asset backed financings.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company as an operating lease. During
the third quarter of fiscal 2000, the Company's purchases of operating lease
equipment were $3,539, compared to $317 in the third quarter of fiscal 1999.
Operating leases contributed $8,850 in rental income during the third quarter of
fiscal 2000, compared to $8,723 in the third quarter of fiscal 1999.
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 6.8% for the third quarter of fiscal
2000 and 6.4% for the third quarter of fiscal 1999. The deferred tax base upon
which these payments are calculated decreased by 3.8% to $253,850 at June 30,
2000 from $262,209 at June 30, 1999. Interest income on deferred taxes remained
relatively consistent for the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999.
Other income consists primarily of late payment charges, interest income on
restricted cash and various billing fees. The structure of these fees has
remained basically unchanged from fiscal 1999. The growth in other income is
primarily due to interest income on restricted cash in relation to the financing
of the Company's asset backed securitizations. Overall, income from these
sources grew by $1,105 or 20.1%, in the third quarter of fiscal 2000 compared to
the third quarter of fiscal 1999.
Expenses
--------
Average 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 3.7%, with $2,241,114 outstanding at June 30, 2000 compared
to $2,160,387 outstanding at June 30, 1999. The Company paid a weighted average
interest rate on all borrowings for the third quarter of fiscal 2000 of 6.8%
compared to 6.4% for the third quarter of fiscal 1999. As a result of the
increased average borrowings and weighted average interest rate and the
Company's change from off balance sheet asset securitizations to on balance
sheet asset backed financings, interest expense grew by $8,536 or 30.1%, in the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. At
June 30, 2000, the Company's debt to equity ratio including amounts due to IKON
was 5.6 to 1.
Total general and administrative expenses in the third quarter of fiscal 2000
increased by $5,057 or 32.7%, compared to the third quarter of fiscal 1999. The
general and administrative expense category in the third quarter of fiscal 2000
includes depreciation expense on leased equipment totaling $7,358 compared to
$7,257 in the third quarter of fiscal 1999. Effective October 1, 1999, the
Company terminated the lease bonus program which provided incentives to IKON
marketplaces when IKON customers leased equipment from the Company; therefore,
there were no lease bonus subsidy payments included in the general and
administrative expense category in the third quarter of fiscal 2000 compared to
$3,082 in the third quarter of fiscal 1999. In addition, effective October 1,
1999, reserves for credit losses are maintained by the Company rather than the
IKON marketplaces; therefore, bad debt expense included in the general and
administrative expense category in the third quarter of fiscal 2000 was
<PAGE>
$5,393 compared to none in the third quarter of fiscal 1999. Excluding the
effects of depreciation expense on operating leases, lease bonus subsidy
payments and bad debt expense, remaining general and administrative expenses
increased by $2,645 or 51.6%, in the third quarter of fiscal 2000 compared to
the third quarter of fiscal 1999 primarily due to the removal of general and
administrative expense credits associated with the prior off balance sheet asset
securitizations.
Gain on Sale of Lease Receivables
---------------------------------
During the third quarter of fiscal 1999, the Company completed an asset
securitization whereby it sold $42,125 in net eligible direct financing
receivables and recognized pretax gains of $3,477.
Income Before Income Taxes
--------------------------
Income before income taxes for the third quarter of fiscal 2000 increased by
$234 or .7% compared to the third quarter of fiscal 1999. This increase in
income before income taxes was essentially the effect of increased lease finance
income offset by increases in interest expense and general and administrative
expenses in the third quarter of fiscal 2000, and a gain on sale of lease
receivables recorded in fiscal 1999 primarily due to the removal of
administrative expense credits associated with the prior off balance sheet asset
securitizations.
Provision for Income Taxes
--------------------------
Income taxes for the third quarter of fiscal 2000 increased by $1,999 or 17.7%
compared to the third quarter of fiscal 1999. This increase in income taxes is
directly attributable to the change in estimated effective tax rate during the
third quarter of fiscal 1999. The effective tax rate was 40% for the third
quarter of fiscal 2000 and 35% for the third quarter of 1999.
Nine Months Ended June 30, 2000 Compared
----------------------------------------
with the Nine Months Ended June 30, 1999
----------------------------------------
Revenues
--------
Total revenues increased by $45,355 or 20.6% in the first nine months of fiscal
2000 compared to the first nine months of fiscal 1999. Lease finance income
increased by $41,459 or 24.9%. The lease portfolio increased by 13.7 % from
September 30, 1999 to June 30, 2000. This increase is attributable to the change
from off balance sheet asset securitization to on balance sheet asset backed
financings.
Office equipment placed on rental by the IKON marketplaces to customers, with
cancelable terms, may be purchased by the Company as an operating lease. During
the first nine months of fiscal 2000 and 1999, the Company purchased operating
lease equipment of $11,407 and $6,024, respectively. Operating leases
contributed $27,186 in rental income during the first nine months of fiscal
2000, compared to $27,760 in the first nine months of fiscal 1999.
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 6.7% for the first nine months of
fiscal 2000 and 6.4% for the first nine months of fiscal 1999. The deferred tax
base upon which these payments are calculated decreased by 3.8% to $253,850 at
June 30, 2000 from $262,209 at June 30, 1999. Interest income on deferred taxes
decreased by $164 or 1.3% in the first nine months of fiscal 2000 compared to
the first nine months of fiscal 1999.
Other income consists primarily of late payment charges, interest income on
restricted cash and various billing fees. The structure of these fees has
remained basically unchanged from fiscal 1999. The growth in other income is
primarily due to interest income on restricted cash in relation to the Company's
<PAGE>
financing of asset backed securitizations. Overall, income from these sources
grew by $4,634 or 35.9%, in the first nine months of fiscal 2000 compared to the
first nine months of fiscal 1999.
Expenses
--------
Average 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 3.7%, with $2,241,114 outstanding at June 30, 2000 compared
to $2,160,387 outstanding at June 30, 1999. The Company paid a weighted average
interest rate on all borrowings of 6.7% in the first nine months of fiscal 2000
and 6.4% in the first nine months of fiscal 1999. Primarily as a result of the
increased average borrowings and weighted average interest rate and the
Company's change from off balance sheet asset securitizations to on balance
sheet asset backed financings, interest expense grew by $25,504, or 30.3%, in
the first nine months of fiscal 2000 compared to the first nine months of fiscal
1999. At June 30, 2000, the Company's debt to equity ratio, including
intercompany amounts due to IKON, was 5.6 to 1.
Total general and administrative expenses for the first nine months of fiscal
2000 increased by $12,076 or 25.2%, compared to the first nine months of fiscal
1999. The general and administrative expense category in the first nine months
of fiscal 2000 includes depreciation expense on leased equipment totaling
$22,691, compared to $23,281 for the first nine months of fiscal 1999. Effective
October 1, 1999, the Company terminated the lease bonus program which provided
incentives to IKON marketplaces when IKON customers leased equipment from the
Company; therefore, there were no lease bonus subsidy payments included in the
general and administrative expense category in the first nine months of fiscal
2000 compared to $8,890 in the first nine months of fiscal 1999. In addition,
effective October 1, 1999, reserves for credit losses are maintained by the
Company rather than the IKON marketplaces; therefore, bad debt expense included
in the general and administrative expense category in the first nine months of
fiscal 2000 was $14,999 compared to none in the first nine months of fiscal
1999. Excluding the effects of depreciation expense on operating leases, lease
bonus subsidy payments and bad debt expense, remaining general and
administrative expenses increased by $6,557 or 41.4%, in the first nine months
of fiscal 2000 compared to the first nine months of fiscal 1999, primarily due
to the removal of general and administrative expense credits associated with the
prior off balance sheet asset securitizations.
Gain on Sale of Lease Receivables
---------------------------------
The Company completed various asset securitization transactions whereby it sold
direct financing receivables. The Company recognized pretax gains on these
transactions of $76 and $24,356 in the first nine months ended June 30, 2000 and
1999, respectively.
Income Before Income Taxes
--------------------------
Income before income taxes for the first nine months of fiscal 2000 decreased by
$16,505 or 14.7% compared to the first nine months of fiscal 1999. This decrease
in income before income taxes is directly attributable to the decrease in the
gain on sale of lease receivables offset by higher operating income in the first
nine months of fiscal 2000 compared to the first nine months of fiscal 1999.
Provision for Income Taxes
--------------------------
Income taxes for the first nine months of fiscal 2000 decreased by $6,283 or
14.1% compared to the first nine months of fiscal 1999. This decrease in income
taxes is directly attributable to the decrease in income before income taxes in
the first nine months of fiscal 2000 compared to the first nine months of fiscal
1999. The effective tax rate was 40% for the first nine months of fiscal 2000
and 40% for the first nine months of 1999.
Impact of Year 2000
-------------------
Through July 31, 2000, our operations are fully functioning and have not
experienced any significant issues associated with the Year 2000 problem. For
further information, refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's
<PAGE>
quarterly report on Form 10-Q for the period ended March 31, 2000 and the
Company's Annual Report on Form 10-K/A for its fiscal year ended September 30,
1999.
Pending Accounting Changes
--------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. It will require us
to recognize all derivatives as either assets or liabilities and measure the
instruments at fair value. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement No.138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - An Amendment to FASB Statement No.133" which addresses a
limited number of implementation issues and should be adopted concurrently with
Statement No.133. The Company intends to adopt both standards on October 1,
2000. The Company does not believe the effect of adoption will be material.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Pursuant to General Instruction H(2)(c) of Form 10-Q the information required by
this item has been omitted.
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:
factors which may affect the Company's ability to recoup the full amount due on
the 1999-1, 1999-2 and 2000-1 Leases (such as lessee defaults or factors
impeding recovery efforts), conducting operations in a competitive environment
and a changing industry (which includes technical services and products that are
relatively new to the industry, IKON, and to the Company); delays, difficulties,
management transitions and employment issues associated with consolidations
and/or changes in business operations; managing the integration of acquired
businesses; existing and future vendor relationships; risks relating to currency
exchange; economic, legal and political issues associated with international
operations; potential Year 2000 deficiencies associated with the operation of
IKON's or the Company's internal systems and distributed products; the Company's
ability to access capital and its debt service requirements (including
sensitivity to fluctuation in interest rates); and general economic conditions.
The results for the interim are not necessarily indicative of the results to be
expected for the entire year. Certain additional risks and uncertainties are set
forth in the Company's 1999 Annual Report on Form 10-K/A 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 3, 2000, the Company's parent filed a Current Report on Form 8-K to file,
under Item 5 of the form, information contained in its press release dated April
26, 2000 regarding the results for the second quarter of fiscal 2000 as well as
announcing that James J. Forese had been named to serve as Chairman of IKON's
Board of Directors.
On May 22, 2000, and as amended on May 25, 2000, IKON Receivables, LLC (a wholly
owned subsidiary of the Company) filed a Current Report on Form 8-K to file,
under Item 5 of the form, information that incorporated by reference the
consolidated financial statements of Ambac Assurance Corporation and its
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999, included in the Annual
Report on Form 10-K of Ambac Financial Group, Inc. and the unaudited
consolidated financial statements of Ambac Assurance Corporation and its
subsidiaries as of March 31, 2000, and for the periods ended March 31, 2000, and
March 31, 1999, included in the Quarterly Report on Form 10-Q of Ambac Financial
Group, Inc. for the period ended March 31, 2000. The above referenced
consolidated financial statements were also incorporated into the Registration
Statement of IKON Receivables, LLC and the Preliminary Prospectus Supplement
dated May 19, 2000, and as amended on May 25, 2000, respectively, relating to
IKON Receivables, LLC's Lease-Backed Notes, Series 2000-1.
On May 30, 2000, IKON Receivables, LLC (a wholly owned subsidiary of the
Company) filed a Current Report on Form 8-K to file, under Item 5 of the form,
information furnished to certain prospective investors regarding the offering of
IKON Receivables, LLC Lease-Backed Notes, Series 2000-1.
On June 16, 2000, IKON Receivables, LLC (a wholly owned subsidiary of the
Company) filed a Current Report on Form 8-K to file, under Item 2 of the form,
information regarding the registration of $2,000,000 in principal amount of
Lease-Backed Notes by a Registration Statement on Form S-3 and the issuance of
$498,510 in principal amount of said Lease-Backed Notes. Each series of notes
which may be issued under the registration statement will be issued pursuant to
an indenture.
<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 14, 2000 /s/ Harry G. Kozee
------------------ ------------------------------------
Harry G. Kozee
Vice President - Finance
(Chief Accounting Officer)
