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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2002 or
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______
FORM 10-Q
Commission file number 333-71073
IKON Receivables, LLC
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2990188
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1738 Bass Road, P.O. Box 9115, Macon, Georgia 31208
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(Address of principal executive offices) (Zip Code)
(478) 471-2300
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(Registrant's telephone number, including area code)
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 |_|
Registered debt outstanding as of August 14, 2002 was $1,771,279,643.
The registrant 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.
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IKON RECEIVABLES, LLC
INDEX*
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets - June 30, 2002 (unaudited) and September 30, 2001
Statements of Operations - Three and nine months ended June 30, 2002
and 2001 (unaudited)
Statement of Changes in Member's (Deficit) Equity - For the Period
Ended June 30, 2002 (unaudited)
Statements of Cash Flows - Nine months ended June 30, 2002 and 2001
(unaudited)
Notes to Condensed Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
* All amounts contained in this quarterly report on Form 10-Q are in thousands
unless otherwise noted.
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
IKON RECEIVABLES, LLC
BALANCE SHEETS
June 30,
2002 September 30,
(unaudited) 2001
----------- -----------
Assets
Investments in leases:
Finance lease receivables $ 1,785,328 $ 2,493,399
Less: Unearned income (248,771) (384,020)
----------- -----------
1,536,557 2,109,379
Cash 1 1
Restricted cash 99,669 126,861
Accounts receivable 43,854 67,144
Prepaid expenses and other assets 3,358 5,894
----------- -----------
Total assets $ 1,683,439 $ 2,309,279
=========== ===========
Liabilities and Member's (Deficit) Equity
Liabilities:
Accrued expenses $ 39,446 $ 35,849
Lease-backed notes 1,229,037 1,797,389
Deferred income taxes 600,126
----------- -----------
Total liabilities 1,868,609 1,833,238
----------- -----------
Commitments and contingencies
Member's (deficit) equity:
Contributed capital 529,457 328,476
Retained (deficit) earnings (692,882) 177,939
Accumulated other comprehensive loss (21,745) (30,374)
----------- -----------
Total member's (deficit) equity (185,170) 476,041
----------- -----------
Total liabilities and member's deficit (equity) $ 1,683,439 $ 2,309,279
=========== ===========
See notes to condensed financial statements.
3
IKON RECEIVABLES, LLC
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine months ended
June 30, June 30,
-----------------------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Lease finance income $ 46,089 $ 52,590 $ 155,554 $ 151,188
Other income 323 1,208 1,458 4,387
----------- ----------- ----------- -----------
46,412 53,798 157,012 155,575
----------- ----------- ----------- -----------
Expenses:
Interest expense 21,934 27,192 74,833 81,697
General and administrative expenses 2,539 2,839 8,669 8,333
----------- ----------- ----------- -----------
24,473 30,031 83,502 90,030
----------- ----------- ----------- -----------
Income before income taxes 21,939 23,767 73,510 65,545
Provision for income taxes 8,776 29,404
----------- ----------- ----------- -----------
Net income before cumulative effect of a
change in accounting principle 13,163 23,767 44,106 65,545
Cumulative effect of a change in accounting
principle (Note 5) (843,752)
----------- ----------- ----------- -----------
Net income (loss) $ 13,163 $ 23,767 $ (799,646) $ 65,545
=========== =========== =========== ===========
Proforma net income assuming the change in
accounting principle had been applied
retroactively:
Reported net income $ 23,767 $ 65,545
Proforma tax expense 9,507 26,218
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Proforma net income $ 14,260 $ 39,327
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See notes to condensed financial statements.
4
IKON RECEIVABLES, LLC
STATEMENT OF CHANGES IN MEMBER'S (DEFICIT) EQUITY
(unaudited)
Accumulated
Retained Other
Contributed Earnings Comprehensive
Capital (Deficit) Loss Total
--------------------------------------------------------------
Balance at September 30, 2001 $ 328,476 $ 177,939 $ (30,374) $ 476,041
Net income (799,646) (799,646)
Other comprehensive income 8,629 8,629
Equipment leases contributed by Sole Member, net
of deferred taxes of $25,350 38,025 38,025
Distributions to Sole Member (120,927) (71,175) (192,102)
Reversal of income tax liability (Note 5) 283,883 283,883
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Balance at June 30, 2002 $ 529,457 $ (692,882) $ (21,745) $ (185,170)
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See notes to condensed financial statements.
5
IKON RECEIVABLES, LLC
STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
June 30,
--------------------------------
2002 2001
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Cash flows from operating activities
Net (loss) income $ (799,646) $ 65,545
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization 2,590 2,396
Provision for deferred taxes 843,752
Changes in operating assets and liabilities:
Accounts receivable 23,290 (15,128)
Prepaid expenses and other assets (54) (1,293)
Accrued expenses 27,489 963
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Net cash provided by operating activities 97,421 52,483
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Cash flows from investing activities
Investments in leases:
Collections, net of finance income earned 635,841 664,796
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Net cash provided by investing activities 635,841 664,796
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Cash flows from financing activities
Proceeds from lease-backed notes 1,226,761
Payments on lease-backed notes (568,352) (495,185)
Decrease (increase) in restricted cash 27,192 (52,049)
Capital distributed to Sole Member (192,102) (1,396,806)
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Net cash used in financing activities (733,262) (717,279)
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Change in cash - -
Cash at beginning of year 1 1
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Cash at end of period $ 1 $ 1
============== ===============
Supplemental noncash financing activities:
Noncash capital contributions $ 347,258 $ 1,500,658
============== ===============
See notes to condensed financial statements.
6
IKON RECEIVABLES, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed financial statements of IKON Receivables,
LLC (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 only 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 for the
year ended September 30, 2001.
Note 2: Financial Instruments
As of June 30, 2002, 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 its 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 nine months
ended June 30, 2002, unrealized net income totaling $8,629 after taxes, was
recorded in accumulated other comprehensive loss.
Note 3: Capital Contributions
During the first nine months of fiscal 2002, IOS Capital, LLC made noncash
capital contributions of $63,375 of office equipment leases or contracts (the
"Leases") and related assets to the Company.
Note 4: Comprehensive Income
Total comprehensive income is as follows:
Three Months Ended Nine months ended
June 30, June 30,
-------------------------- ---------------------------
2002 2001 2002 2001
----------- ------------ ----------- ------------
Net income $ 13,163 $ 23,767 $ 44,106 $ 65,545
Cumulative effect of change in accounting principle for derivative and
hedging activities (SFAS 133), net of tax benefit of $2,119 (3,471)
Net gain (loss) on derivative financial instruments, net of tax expense
(benefit) of: $4,411 and $(5,143) for the three months ended
June 30, 2002 and 2001, respectively; $6,825 and $(8,504) for the
nine months ended June 30, 2002 and 2001, respectively (1,608) (7,714) 8,629 (14,493)
----------- ------------ ----------- ------------
Total comprehensive income $ 11,555 $ 16,053 $ 52,735 $ 47,581
=========== ============ =========== ============
Note 5: Income Taxes
The Company is classified as a single-member limited liability corporation
("LLC") and, as such, is disregarded as an entity separate from its owners for
income tax purposes. The Company has become aware that the predominant practice
for single-member LLCs is to provide for income taxes in their separate
financial statements, and has concluded that is a more informative presentation.
On April 1, 2002, the Company changed its accounting policy to a preferable
method and began recording income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109").
The Company and the Sole Member are included in the consolidated tax return of
IKON Office Solutions, Inc. ("IKON") and, for purposes of applying FAS 109, are
allocated current and deferred income taxes on a separate return basis.
Currently payable/receivable income taxes are settled in accordance with an
informal tax sharing agreement with IKON and the Sole Member.
The change in accounting for income taxes has been retroactively adopted as of
October 1, 2001, the first day of the current fiscal year. The $843,752
cumulative effect of the change on prior years is included in income for the
nine months ended June 30, 2002. The effect of the change on the three months
ended June 30, 2002 was to decrease net income by $8,776; the effect of the
change on the nine months ended June 30, 2002 was to decrease income before
cumulative effect of a change in accounting principle by $29,404 and net income
by $873,156. The effect of the change on the three months ended March 31, 2002
was to decrease net income by $10,283 to $15,424 and for the three months ended
December 21, 2001 was to decrease net income before cumulative effect of a
change in accounting principle by $10,345 to $15,519 and net income (loss) by
7
$854,097 to ($828,233). The pro forma amounts on the Statement of Income reflect
the effect of retroactive application of the accounting change had the new
method been in effect.
The net investments in leases represents the uncollected contractual cash flow
of the leases that were contributed to the Company by the Sole Member in the
form of contributed capital. The tax basis and related income tax benefits
attributable to the leases are retained by the Sole Member. Therefore, the
effect of the change in principle has resulted in a deferred tax liability of
$843,752 and $614,623 at October 1, 2001 and June 30, 2002, respectively. The
related deferred tax liability is attributed to the difference between the book
and tax basis of the net leases outstanding. Because, under the informal
tax-sharing agreement the Company is not obligated to reimburse the Sole Member
for current income taxes, all reversals of the deferred tax liability to current
income taxes payable for the Company are expected to result in additional
capital contributions from the Sole Member at the time of the reversal.
At June 30, 2002, the components of the net deferred tax liability were as
follows:
Deferred tax asset:
Interest rate swaps $ 14,497
Deferred tax liability:
Investment in leases, net 614,623
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Net deferred tax liability $ 600,126
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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.
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 IOS Capital, LLC ("IOSC") and/or IKON Office Solutions,
Inc.'s ("IKON") future financial condition and results. These risks and
uncertainties, which apply to the Company, IOSC 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, 2000-1,
2000-2 and 2001-1 Leases (such as lessee defaults or factors impeding recovery
efforts); 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 and
Exchange Commission, including, but not limited to: conducting operations in a
competitive environment and in 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 the consolidation of, and/or changes in business operations;
managing the integration of existing and acquired companies; existing and future
vendor relationships; risks relating to foreign currency exchange; economic,
legal and political issues associated with international operations; the
Company's ability to access capital and meet its debt service requirements
(including sensitivity to fluctuation in interest rates); and general economic
conditions. Certain additional risks and uncertainties are set forth in the
Company's fiscal 2001 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.
The Company is a special purpose Delaware limited liability company, all of the
membership interests in the Company are held by IKON Receivables-1, LLC, also a
special purpose Delaware limited liability company. All of the membership
interests in IKON Receivables-1, LLC are owned by IOSC, a wholly-owned finance
subsidiary of IKON, a publicly traded office technology company with fiscal 2001
revenues of approximately $5.3 billion. The Company was organized in the State
of Delaware on January 20, 1999 and is managed by IKON Receivables Funding, Inc.
8
Three Months Ended June 30, 2002 compared with the Three Months Ended June 30,
2001
Interest income earned on the leases offsets interest expense on the
lease-backed notes, amortization of debt issuance costs and discounts on the
lease-backed notes and the fees charged by IOSC for servicing the leases and
providing administrative services to the Company. For the third quarter of
fiscal 2002, income generated from the leases was $46,089, other income earned
was $323, interest expense was $21,934 and administrative expenses were $2,539.
Collections on the lease receivables were $170,397 and the Company repaid
$191,686 of principal on the lease-backed notes for the third quarter of fiscal
2002. For the third quarter of fiscal 2001, income generated from the leases was
$52,590, other income earned was $1,208, while interest expense was $27,192 and
administrative expenses were $2,839. Collections on the lease receivables were
$231,484 and the Company repaid $165,878 of principal on the lease-backed notes
during the third quarter of fiscal 2001. The changes described above are
directly related to the paydown of the debt and amortization of the related
assets in the Company from June 30, 2001 to June 30, 2002.
Nine Months Ended June 30, 2002 compared with the Nine Months Ended June 30,
2001
Interest income earned on the leases offsets interest expense on the
lease-backed notes, amortization of debt issuance costs and discounts on the
lease-backed notes and the fees charged by IOSC for servicing the leases and
providing administrative services to the Company. For the nine months ended June
30, 2002, income generated from the leases was $155,554, other income earned was
$1,458, interest expense was $74,833 and administrative expenses were $8,669.
Collections on the lease receivables were $572,466 and the Company repaid
$568,352 of principal on the lease-backed notes for the nine months ended June
30, 2002. For the nine months ended June 30, 2001, income generated from the
leases was $151,188, other income earned was $4,387, while interest expense was
$81,697 and administrative expenses were $8,333. Collections on the lease
receivables were $664,796 and the Company repaid $495,185 of principal on the
lease-backed notes during the nine months ended June 30, 2001. The changes
described above are directly related to the paydown of the debt and amortization
of the related assets in the Company from June 30, 2001 to June 30, 2002.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
18.1 Preferability Letter from PricewaterhouseCoopers LLP dated August 12,
2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
9
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.
IKON RECEIVABLES, LLC
Date: August 14, 2002
By: IKON RECEIVABLES FUNDING, INC.,
as Sole Member and Initial Manager
By: /s/ Harry G. Kozee
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Name: Harry G. Kozee
Title: Vice President - Finance (Chief Accounting Officer
10