ITEM 1. BUSINESS
IKON Receivables, LLC (the "Company" or the "Registrant") is an indirect wholly-owned bankruptcy-remote subsidiary of IOS Capital, Inc. ("IOSC") which is a wholly-owned finance subsidiary of IKON Office Solutions, Inc. ("IKON"), a publicly traded office technology company with fiscal 2001 revenues of $5.3 billion. The Registrant was formed solely for the purpose of acquiring from IKON or any of its subsidiaries, from time to time, certain leases and any security interests in the equipment underlying the leases (the "Equipment"), and pledging the leases through the issuance of debt securities. As a bankruptcy-remote entity, the Registrant's operations are restricted so that (a) it does not engage in business with, or incur liabilities to, any other entity (other than the trustee on behalf of the holders of the debt securities) which may bring bankruptcy proceedings against the Registrant and (b) the risk that it will be consolidated into the bankruptcy proceedings of any other entity is diminished. The Company is a special purpose Delaware limited liability company, all of the membership interests in which are held by IKON Receivables-1, LLC ("Sole Member"), also a special purpose Delaware limited liability company. All of the membership interests in the Sole Member are owned by IOSC. The Company was organized in the State of Delaware on January 20, 1999 and is managed by IKON Receivables Funding, Inc. (the "Manager").
ITEM 2.
ITEM 2. PROPERTIES
The Registrant does not utilize any facilities. Actions related to servicing and maintaining the Registrant's assets are performed by IOSC.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is currently no market for the Registrant's equity securities nor is it anticipated that such a market will develop.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pursuant to General Instruction I(2)(a) of Form 10-K, 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.
The Company has issued Series 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Lease-Backed Notes (collectively, the "Notes") as described below:
Series
Notes
Issuance
Date
Principal
Issuance
Amount
Interest
Rate
Stated
Maturity
Date
1999-1
Class A-1
05/25/99
$ 304,474
5.11%
June, 2000
Class A-2
05/25/99
61,579
5.60%
May, 2005
Class A-3
05/25/99
304,127
5.99%
May, 2005
Class A-4
05/25/99
81,462
6.23%
May, 2005
Sub-Total
751,642
1999-2
Class A-1
10/07/99
235,326
6.14125%
October, 2000
Class A-2
10/07/99
51,100
6.31%
May, 2001
Class A-3a
10/07/99
100,000
6.59%
August, 2003
Class A-3b
10/07/99
240,891
LIBOR + 0.36%
August, 2003
Class A-4
10/07/99
72,278
6.88%
November, 2005
Sub-Total
699,595
2000-1
Class A-1
06/02/00
130,000
6.99625%
June, 2001
Class A-2
06/02/00
54,000
7.51000%
March, 2002
Class A-3
06/02/00
230,000
LIBOR + 0.19%
March, 2004
Class A-4
06/02/00
84,510
LIBOR + 0.23%
September, 2006
Sub-Total
498,510
2000-2
Class A-1
12/07/00
193,532
6.66125%
December, 2001
Class A-2
12/07/00
70,193
6.60%
September, 2002
Class A-3
12/07/00
290,800
LIBOR + 0.23%
October, 2004
Class A-4
12/07/00
79,906
LIBOR + 0.27%
July, 2007
Sub-Total
634,431
2001-1
Class A-1
06/28/01
168,000
3.73375%
July, 2002
Class A-2
06/28/01
41,000
4.16%
March, 2004
Class A-3
06/28/01
260,000
LIBOR + 0.23%
January, 2006
Class A-4
06/28/01
126,200
LIBOR + 0.27%
October, 2008
Sub-Total
595,200
Total Issued
$3,179,378
The Notes were issued pursuant to an Indenture between the Company, IOSC and various Indenture Trustees. The Notes are collateralized by a pool of office equipment leases or contracts and related assets (the "Leases") acquired or originated by IOSC (together with the equipment financing portion of each periodic lease or rental payment due under the Leases on or after the related indenture date) and all related casualty payments, retainable deposits, and termination payments. Payments on the Notes are made from payments on the Leases. The Notes have certain credit enhancement features available to noteholders, including reserve accounts, overcollateralization accounts and noncancellable insurance policies from Ambac Assurance Corporation with respect to the Notes. On each payment date, funds available from the collection of lease receivables will be paid to the noteholders in the order of their priority class.
The Notes bear interest from the related issuance date at the stated rates specified above. The variable rate 1999-2 Class A-3b, 2000-1 Class A-3, 2000-1 Class A-4, 2000-2 Class A-3, 2000-2 Class A-4, 2001- 1 Class A-3 and 2001-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%, 6.475%, 6.475%, 4.825% and 5.435%, respectively, through interest rate swaps.
IOSC services the Leases pursuant to Assignment and Servicing Agreements by and among IOSC, as originator and servicer, the Sole Member, as seller, and the Company, as issuer. IOSC may delegate its servicing responsibilities to one or more sub-servicers, but such delegation does not relieve IOSC of its liabilities with respect thereto. IOSC retains possession of the Leases and related files, and receives a monthly service fee from the Company for servicing the Leases.
Restricted cash on the consolidated balance sheets primarily represents cash that has been collected on the Leases which must be used to repay the 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Notes, respectively.
As of September 30, 2001, the Company has approximately $271,859 available under the $2,000,000 shelf registration statement.
Future maturities of the Notes, based on contractual maturities of the Leases for each of the succeeding fiscal years are as follows:
During fiscal 2001, income generated from the Leases was $213,947, other income earned was $5,494, while interest expense was $113,383 and administrative expenses were $11,806. Principal collections on lease receivables during fiscal 2001 were $1,484,435 and the Company repaid $699,883 of principal on the Notes. During fiscal 2000, income generated from the Leases was $153,097, other income earned was $4,241, while interest expense was $82,431 and administrative expenses were $8,794. Principal collections on lease receivables during fiscal 2000, were $721,855 and the Company repaid $553,412 of principal on the Notes. The Company's portfolio of Leases has an average yield of 10.6% at September 30, 2001, while the Company's weighted average interest rate of its total debt cost during fiscal 2001 is 6.4%.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company incurs debt to fund the origination of leases for IKON. The interest rates charged on the debt are determined based on current market conditions and include variable measures of interest rates such as LIBOR. The Company monitors interest rates on debt in order to mitigate exposure to unfavorable variations as compared to the interest rate earned on the pledged finance lease receivables. The objective in managing this risk is to achieve fixed-rate financing at the same time the Company establishes the rate to be received by the Company on the leases. As a result, from time to time interest rate swaps are utilized to effectively fix the rate on variable rate debt, as opposed to a direct issuance of fixed rate debt. The risk associated with the use of interest rate swaps is the possible inability of the counterparties to meet the terms of their contracts. The Company does not enter into interest rate swap agreements for trading purposes.
The following table presents, as of September 30, 2001, information regarding the interest rate swap agreements to which we are a party: (i) the notional amount, (ii) the fixed interest rate payable by the Company, (iii) the variable interest rate payable to the Company by the counterparty under the agreement, (iv) the fair value of the instrument, and (v) the maturity date of the agreement.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of IKON Receivables, LLC are submitted herewith on Pages through of this report.
Quarterly Data
The following table shows comparative summarized results for fiscal 2001 and 2000.
First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Total
Lease finance income
$ 45,011
$ 53,587
$ 52,590
$ 62,759
$ 213,947
Interest expense
24,652
29,853
27,192
31,686
113,383
Net income
19,523
22,255
23,767
28,707
94,252
First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Total
Lease finance income
$ 38,740
$ 35,104
$ 36,581
$ 42,672
$ 153,097
Interest expense
19,871
18,793
19,534
24,233
82,431
Net income
17,687
15,141
16,095
17,190
66,113
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(No response to this item is required.)
On September 21, 2001, the Company filed a Current Report on Form 8-K to file, under Item 5 of the Form, that Chase Manhattan Bank has been appointed Successor Trustee pursuant to Section 8.09 of the Indenture to the Preliminary Prospectus in connection with the offering of the Company's Lease-Backed Notes Series 2000-1.
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 include, but are not limited to, factors which may affect the Company's ability to recoup the full amount due on the 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Leases (such as lessee defaults or factors impeding recovery efforts), the continuation of the substitution of terminated or defaulted leases which is currently done at IOSC's option, and risks and uncertainties affecting the business of IOSC and/or IKON as set forth in IOSC's and IKON's periodic reports filed with the Securities & Exchange Commission, including, but 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. 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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of IKON Office Solutions, Inc.:
In our opinion, the accompanying balance sheets as of September 30, 2001 and 2000 and the related statements of income, changes in member's equity and cash flows, present fairly, in all material respects, the financial position of IKON Receivables, LLC at September 30, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in notes 2 and 7 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, in fiscal 2001.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
October 26, 2001
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
IKON Office Solutions, Inc.
We have audited the accompanying statements of income, changes in member's equity, and cash flows of IKON Receivables, LLC for the period April 6, 1999 to September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of IKON Receivables, LLC for the period April 6, 1999 to September 30, 1999, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Philadelphia, Pennsylvania
October 25, 1999
IKON RECEIVABLES, LLC
BALANCE SHEETS
See accompanying notes to financial statements.
IKON RECEIVABLES, LLC
STATEMENTS OF INCOME
See accompanying notes to financial statements.
IKON RECEIVABLES, LLC
STATEMENTS OF CHANGES IN MEMBER'S EQUITY
See accompanying notes to financial statements.
IKON RECEIVABLES, LLC
STATEMENTS OF CASH FLOWS
IKON RECEIVABLES, LLC
NOTES TO FINANCIAL STATEMENTS
1. Organization
IKON Receivables, LLC (the "Company") is a special purpose Delaware limited liability company, all of the membership interests in which are held by IKON Receivables-1, LLC ("Sole Member"), also a special purpose Delaware limited liability company. All of the membership interests in the Sole Member are owned by IOS Capital, Inc. ("IOSC"), a wholly owned finance subsidiary of IKON Office Solutions, Inc. ("IKON"), a publicly traded office technology company with fiscal 2001 revenues of $5.3 billion. The Company was organized in the State of Delaware on January 20, 1999 and is managed by IKON Receivables Funding, Inc. (the "Manager").
The Company was organized to engage exclusively in the following business and financial activities: to purchase or acquire from IKON, or any subsidiary or affiliate of IKON, any right to payment, whether constituting an account, chattel paper, instrument or general intangible, and certain related property (other than equipment) and rights (collectively, "Lease Receivables"), and hold, sell, transfer, pledge or otherwise dispose of Lease Receivables or interests therein; to enter into any agreement related to any Lease Receivables that provides for the administration, servicing and collection of amounts due on such Lease Receivables and to enter into any interest rate hedging arrangements in connection therewith; to distribute Lease Receivables or proceeds from Lease Receivables and any other income to its Sole Member; and to engage in any lawful act or activity and to exercise any power that is incidental and necessary or convenient to the foregoing and permitted under Delaware law.
Neither the Sole Member nor the Manager is liable for the debts, liabilities, contracts or other obligations of the Company solely by reason of being the Sole Member or Manager of the Company.
The Company's organizational documents require it to operate in such a manner that it should not be consolidated in the bankruptcy estate of the Sole Member, IOSC, or IKON, should any of these entities become subject to such a proceeding. The Company is legally separate from each of the foregoing entities and the assets of the Company, including, without limitation, the Lease Receivables, are not available to the creditors of the Sole Member, IOSC, or IKON.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and notes. Actual results could differ from those estimates and assumptions.
Revenue Recognition
Unearned lease finance income is amortized into revenue using the effective interest method over the term of the lease agreements.
Income Taxes
As a limited liability company, the Company will be treated as a disregarded entity for tax purposes. The Company, the Sole Member and IOSC will be treated as a single entity for tax purposes. The Company's income and losses are passed through to the Sole Member and, accordingly, no provision for income taxes has been recorded.
Adoption of SFAS 133
The Company adopted Statement of Financial Accounting Standards ("SFAS") 133, as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities", on October 1, 2000. SFAS 133 requires that all derivatives be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in earnings or Other Comprehensive Income (Loss) ("OCI") depending on the type of hedging instrument and the effectiveness of those hedges. In accordance with the transition provisions of SFAS 133, the Company recorded a cumulative loss adjustment to OCI of $3,471, after taxes, to recognize the fair value of its derivatives as of the date of adoption. All of the derivatives used by the Company as hedges are highly effective as defined by SFAS 133 because all of the critical terms of the derivatives match those of the hedged item. All of the derivatives used by the Company have been designated as cash flow hedges at the time of adoption of SFAS 133 or at the time they were executed, if later than October 1, 2000. All derivatives are adjusted to their fair market values at the end of each quarter. Unrealized net gains and losses for cash flow hedges are recorded in OCI.
As of September 30, 2001, all of the Company's derivatives designated as hedges are interest rate swaps which qualify for evaluation using the "short cut" method for assessing effectiveness. As such, there is an assumption of no ineffectiveness. The Company uses interest rate swaps to fix the interest rates on our variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the year ended September 30, 2001, unrealized net losses totaling $30,374, after taxes, were recorded in OCI, including the $3,471 cumulative effect adjustment as of October 1, 2000.
3. Capital Contributions
In fiscal 2001, 2000 and 1999 the Sole Member made non-cash capital contributions of $2,109,129, $1,498,169 and $823,591, respectively, of office equipment leases or contracts and related assets (the "Leases") to the Company. The Sole Member made an initial cash capital contribution of $1 to the Company on April 6, 1999.
4. Servicing Agreement
The Company has a servicing agreement with IOSC for which IOSC services the Leases and provides administrative services to the Company. The servicing fee is calculated by multiplying 0.75% by the lesser of the discounted present value of performing leases or the outstanding amount of the lease-backed notes (see Note 6). The servicing fee expense was $11,806 for the fiscal year ended September 30, 2001, $8,794 for the fiscal year ended September 30, 2000 and $1,573 for the period April 6, 1999 through September 30, 1999. 5. Investments in Leases
At September 30, 2001, contractual maturities of finance lease receivables are as follows:
Residual values included in the investment in leases are guaranteed by IKON. IKON is responsible for the remarketing of equipment.
Series
Notes
Issuance
Date
Principal
Issuance
Amount
Interest
Rate
Stated
Maturity
Date
1999-1
Class A-1
05/25/99
$ 304,474
5.11%
June, 2000
Class A-2
05/25/99
61,579
5.60%
May, 2005
Class A-3
05/25/99
304,127
5.99%
May, 2005
Class A-4
05/25/99
81,462
6.23%
May, 2005
Sub-Total 751,642
1999-2
Class A-1
10/07/99
235,326
6.14125%
October, 2000
Class A-2
10/07/99
51,100
6.31%
May, 2001
Class A-3a
10/07/99
100,000
6.59%
August, 2003
Class A-3b
10/07/99
240,891
LIBOR + 0.36%
August, 2003
Class A-4
10/07/99
72,278
6.88%
November, 2005
Sub-Total
699,595
2000-1
Class A-1
06/02/00
130,000
6.99625%
June, 2001
Class A-2
06/02/00
54,000
7.51000%
March, 2002
Class A-3
06/02/00
230,000
LIBOR + 0.19%
March, 2004
Class A-4
06/02/00
84,510
LIBOR + 0.23%
September, 2006
Sub-Total
498,510
2000-2
Class A-1
12/07/00
193,532
6.66125%
December, 2001
Class A-2
12/07/00
70,193
6.60%
September, 2002
Class A-3
12/07/00
290,800
LIBOR + 0.23%
October, 2004
Class A-4
12/07/00
79,906
LIBOR + 0.27%
July, 2007
Sub-Total
634,431
2001-1
Class A-1
06/28/01
168,000
3.73375%
July, 2002
Class A-2
06/28/01
41,000
4.16%
March, 2004
Class A-3
06/28/01
260,000
LIBOR + 0.23%
January, 2006
Class A-4
06/28/01
126,200
LIBOR + 0.27%
October, 2008
Sub-Total
595,200
Total Issued
$3,179,378
The Notes were issued pursuant to an Indenture between the Company, IOSC and various Indenture Trustees. The Notes are collateralized by a pool of office equipment leases or contracts and related assets (the "Leases") acquired or originated by IOSC (together with the equipment financing portion of each periodic lease or rental payment due under the Leases on or after the related indenture date) and all related casualty payments, retainable deposits, and termination payments. Payments on the Notes are made from payments on the Leases. The Notes have certain credit enhancement features available to noteholders, including reserve accounts, overcollateralization accounts and noncancellable insurance policies from Ambac Assurance Corporation with respect to the Notes. On each payment date, funds available from the collection of lease receivables will be paid to the noteholders in the order of their priority class.
The Notes bear interest from the related issuance date at the stated rates specified above. The variable rate 1999-2 Class A-3b, 2000-1 Class A-3, 2000-1 Class A-4, 2000-2 Class A-3, 2000-2 Class A-4, 2001-
1 Class A-3 and 2001-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%, 6.475%, 6.475%, 4.825% and 5.435%, respectively, through interest rate swaps.
IOSC services the Leases pursuant to Assignment and Servicing Agreements by and among IOSC, as originator and servicer, the Sole Member, as seller, and the Company, as issuer. IOSC may delegate its servicing responsibilities to one or more sub-servicers, but such delegation does not relieve IOSC of its liabilities with respect thereto. IOSC retains possession of the Leases and related files, and receives a monthly service fee from the Company for servicing the Leases.
Restricted cash on the consolidated balance sheets primarily represents cash that has been collected on the Leases which must be used to repay the 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Notes, respectively.
Future maturities of the Notes, based on contractual maturities of the Leases for each of the succeeding fiscal years are as follows:
7. Derivative Financial Instruments
The Company incurs debt to fund the origination of leases for IKON. The interest rates charged on the debt are determined based on current market conditions and include variable measures of interest rates such as LIBOR. The Company monitors interest rates on debt in order to mitigate exposure to unfavorable variations as compared to the interest rate earned on the pledged finance lease receivables. The objective in managing this risk is to achieve fixed-rate financing at the same time the Company establishes the rate to be received by the Company on the leases. As a result, from time to time interest rate swaps are utilized to effectively fix the rate on variable rate debt, as opposed to a direct issuance of fixed rate debt. The risk associated with the use of interest rate swaps is the possible inability of the counterparties to meet the terms of their contracts. The Company does not enter into interest rate swap agreements for trading purposes.
The following table presents, as of September 30, 2001, information regarding the interest rate swap agreements to which we are a party: (i) the notional amount, (ii) the fixed interest rate payable by the Company, (iii) the variable interest rate payable to the Company by the counterparty under the agreement, (iv) the fair value of the instrument, and (v) the maturity date of the agreement.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Form 10-K for the fiscal year ended September 30, 2001 to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
IKON RECEIVABLES FUNDING INC.,
as Sole Member and Initial Manager
By:
/s/ Russell S. Slack
Name: Russell S. Slack
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below on December 21, 2001 by the following persons on behalf of the registrant and in the capacities indicated.
Signatures
Title
/s/ Russell S. Slack
President, Director and Principal Executive Officer
Russell S. Slack
/s/ Harry G. Kozee
Vice President, Director and Principal Financial Officer
Harry G. Kozee
/s/ J. F. Quinn
Vice President, Director and Treasurer
J. F. Quinn
/s/ Robert C. Campbell
Director
Robert C. Campbell
/s/ Robert W. Grier
Director
Robert W. Grier