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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, 2003 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 333-71073
____________________
IKON Receivables, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 23-2990188
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1738 Bass Road, P.O. Box 9115, Macon, Georgia 31208
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (478) 471-2300
_________________________________________
Former name, former address and former fiscal year, if
changed since last report: None
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Registered debt outstanding as of May 13, 2003 was $647,582,957.
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 - March 31, 2003 (unaudited) and September 30, 2002
Statements of Income - Three and six months ended March 31, 2003
and 2002 (unaudited)
Statements of Cash Flows - Six months ended March 31, 2003 and
2002 (unaudited)
Notes to Condensed Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 4. Controls and Procedures
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
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 IKON Receivables, LLC (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 future financial
condition and results of IKON Office Solutions, Inc. ("IKON") and IOS Capital,
LLC ("IOSC"). 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 collect amounts due from
lessees in order to make payments due in connection with the Company's
lease-backed notes (such as lessee defaults or factors impeding recovery
efforts); growth opportunities and increasing market share; productivity and
infrastructure initiatives; earnings, revenue, cash flow, margin, and
cost-savings projections; the effect of competitive pressures on equipment
sales; expected savings and lower costs from productivity and infrastructure
initiatives; developing and expanding strategic alliances and partnerships; the
impact of e-commerce and e-procurement initiatives; the implementation of
e-IKON; anticipated growth rates in the digital and color equipment and
outsourcing industries; the effect of foreign currency exchange risk; the
reorganization of IKON's business segments and the anticipated benefits of
operational synergies related thereto; and IKON's ability to finance its current
operations and its growth initiatives. 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, IOSC or IKON.
3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
IKON Receivables, LLC
Balance Sheets
March 31, 2003 September 30,
(unaudited) 2002
- ------------------------------------------------------------------------------------------------------------------------
Assets
Investments in leases:
Finance lease receivables $ 967,701 $ 1,518,632
Less: Unearned income (119,386) (202,312)
- ------------------------------------------------------------------------------------------------------------------------
848,315 1,316,320
Cash 1 1
Restricted cash 79,079 83,084
Accounts receivable 26,540 39,788
Prepaid expenses and other assets 1,758 2,905
Deferred tax assets 10,763 15,353
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 966,456 $ 1,457,451
========================================================================================================================
Liabilities and Member's Deficit
Liabilities:
Accrued expenses $ 28,772 $ 41,188
Lease-backed notes 690,531 1,054,042
Deferred income taxes 339,326 526,528
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,058,629 1,621,758
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Member's deficit:
Contributed capital 516,650 467,286
Retained deficit (592,678) (608,564)
Accumulated other comprehensive loss (16,145) (23,029)
- ------------------------------------------------------------------------------------------------------------------------
Total Member's Deficit (92,173) (164,307)
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Member's Deficit $ 966,456 $ 1,457,451
========================================================================================================================
See notes to condensed financial statements.
4
IKON Receivables, LLC
Statements of Income
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
- -------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Revenues
Lease finance income $ 22,282 $ 52,610 $ 56,558 $ 109,465
Interest income on restricted cash 120 499 371 1,135
- -------------------------------------------------------------------------------------------------------------------------------
22,402 53,109 56,929 110,600
- -------------------------------------------------------------------------------------------------------------------------------
Expenses
Interest 11,097 24,507 27,327 52,899
General and administrative 1,255 2,895 3,126 6,130
- -------------------------------------------------------------------------------------------------------------------------------
12,352 27,402 30,453 59,209
- -------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income 10,050 25,707 26,476 51,571
Taxes on income 4,020 10,283 10,590 20,628
- -------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of a change
in accounting principle 6,030 15,424 15,886 30,943
Cumulative effect of a change in accounting principle
(Note 6) (843,752)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,030 $ 15,424 $ 15,886 $ (812,809)
===============================================================================================================================
See notes to condensed financial statements.
5
IKON Receivables, LLC
Statements of Cash Flows
(unaudited)
Six Months Ended
March 31,
- ---------------------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ 15,886 $ (812,809)
Additions (deductions) to reconcile net income to net cash provided
by operating activities:
Amortization 1,218 1,694
Cumulative effect of a change in accounting principle - 843,752
Provision for income taxes 10,590 20,628
Changes in operating assets and liabilities:
Decrease in accounts receivable 13,248 18,302
Increase in prepaid expenses and other assets (71) (30)
Decrease in accrued expenses (942) (1,332)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 39,929 70,205
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investments in leases:
Collections, net of financing income 331,615 402,069
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 331,615 402,069
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payments on lease-backed notes (363,511) (376,666)
Decrease in restricted cash 4,005 7,169
Capital distributed to IOS Capital, LLC ("IOSC") (12,038) (102,777)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (371,544) (472,274)
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash - -
- ---------------------------------------------------------------------------------------------------------------
Cash at beginning of year 1 1
- ---------------------------------------------------------------------------------------------------------------
Cash at end of period $ 1 $ 1
===============================================================================================================
Supplemental financing activities:
Noncash capital contributions $ 61,402 $ 63,375
Interest paid $ 28,269 $ 53,979
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 accounting principles
generally accepted in the United States 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 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, 2002.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Note 2: Capital Contributions
----------------------
In fiscal 2003, IOSC made non-cash capital contributions to the Company of
$61,402 of office equipment leases or contracts and related assets, net of
deferred taxes, and the reversal of current income tax liability.
Note 3: Lease-Backed Notes
------------------
The Company repaid $363,511 of lease-backed notes during the six months ended
March 31, 2003.
Note 4: Comprehensive Income (Loss)
---------------------------
Total comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------
Net income (loss) $ 6,030 $ 15,424 $ 15,886 $ (812,809)
Gain on derivative financial instruments, net of tax expense
of: $2,349 and $4,411 for the three months ended March 31,
2003 and 2002, respectively; $4,590 and $6,825 for the six
months ended March 31, 2003 and 2002, respectively 3,523 6,616 6,884 10,237
-------- --------- ---------- ------------
Total comprehensive income (loss) $ 9,553 $ 22,040 $ 22,770 $ (802,572)
======== ========= ========== ============
Note 5: Financial Instruments
----------------------
As of March 31, 2003, 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 six months
ended March 31, 2003, unrealized gains totaling $6,884 after taxes, were
recorded in accumulated other comprehensive loss.
Note 6: 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. During fiscal 2002, the Company became aware that the
predominant practice for single-member LLCs is to provide for income taxes in
their separate financial statements, and concluded that this 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" ("SFAS 109"). The Company and IKON Receivables Funding, LLC. (the "Sole
Member") are included in the consolidated tax return of IKON Office Solutions,
Inc. ("IKON") and, for purposes of applying SFAS 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.
7
The change in accounting for income taxes was retroactively adopted as of
October 1, 2001, the first day of the fiscal year of the change. The $843,752
cumulative effect of the change on prior years is included in income for the six
months ended March 31, 2002.
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 resulted in a deferred tax liability of
$843,752 at October 1, 2001. 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.
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 March 31, 2003
Compared to the Three Months Ended March 31, 2002
Lease finance income earned on the leases offsets interest expense on the
lease-backed notes, amortization of debt issuance costs and the fees charged by
IOSC for servicing the leases and providing administrative services to the
Company. For the three months ended March 31, 2003 and 2002, income generated
from the leases was $22,282 and $52,610, interest income on restricted cash was
$120 and $499, while interest expense during the period was $11,097 and $24,507
and administrative expenses were $1,255 and $2,895, respectively. Collections on
the lease receivables, net of financing income, were $156,422 and $197,273 and
the Company repaid $206,598 and $184,543 of principal on the lease-backed notes
for the three months ended March 31, 2003 and 2002, respectively. Taxes on
income for the three months ended March 31, 2003 and 2002 were $4,020 and
$10,283, respectively. The effective income tax rate was 40% for both periods.
The changes described above are directly related to the paydown of the debt and
collections on finance lease receivables from March 31, 2003 to March 31, 2002.
Six Months Ended March 31, 2003
Compared to the Six Months Ended March 31, 2002
Lease finance income earned on the leases offsets interest expense on the
lease-backed notes, amortization of debt issuance costs and the fees charged by
IOSC for servicing the leases and providing administrative services to the
Company. For the six months ended March 31, 2003 and 2002, income generated from
the leases was $56,558 and $109,465, interest income on restricted cash was $371
and $1,135, while interest expense during the period was $27,327 and $52,899 and
administrative expenses were $3,126 and $6,130, respectively. Collections on the
lease receivables, net of financing income, were $331,615 and $402,069 and the
Company repaid $363,511 and $376,666 of principal on the lease-backed notes for
the six months ended March 31, 2003 and 2002, respectively. Taxes on income for
the six months ended March 31, 2003 and 2002 were $10,590 and $20,628,
respectively. The effective income tax rate was 40% for both periods. The
changes described above are directly related to the paydown of the debt and
collections on finance lease receivables from March 31, 2003 to March 31, 2002.
Contractual Obligations
The following summarizes the Company's significant contractual obligations and
commitments as of March 31, 2003:
Payments due by
----------------------------------------------
March 31, March 31,
Contractual Obligations Total 2004 2005
- ----------------------------------------------------------- ----------------
Lease-backed notes $690,531 $461,328 $229,203
Payments on lease-backed notes generally are made from collections of our
finance lease receivables. At March 31, 2003, lease-backed notes were $690,531
and net finance lease receivables were $848,315.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's Principle
Executive Officer and Principle Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of an
evaluation date within 90 days prior to the filing date of this Quarterly Report
on Form 10-Q. Based on this evaluation, they have concluded that, as of the
evaluation date, the Company's disclosure controls and procedures are reasonably
designed to alert them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included in its
reports filed or submitted under the Exchange Act.
Changes in Internal Controls. Since the evaluation date referred to above, there
have not been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1850, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b) Reports on Form 8-K
None
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: May 15, 2003
By: /s/ Harry G. Kozee
- ----------------------------------
Name: Harry G. Kozee
Title: Vice President - Finance (Principal Financial Officer)
9
CERTIFICATIONS
I, Russell S. Slack, President and Principle Executive Officer of IKON
Receivables, LLC certify that:
1. I have reviewed this quarterly report on Form 10-Q of IKON Receivables,
LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information contained in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Russell S. Slack
- -----------------------
Russell S. Slack
President and Principle Executive Officer
10
I, Harry G. Kozee, Vice President - Finance, Principal Financial Officer, and
Principal Accounting Officer of IKON Receivables, LLC certify that:
1. I have reviewed this quarterly report on Form 10-Q of IKON Receivables,
LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information contained in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Harry G. Kozee
- ---------------------
Harry G. Kozee
Vice President - Finance, Principle Financial Officer, and
Principle Accounting Officer
11