[IKON Letterhead]
January 25, 2006
Barbara C. Jacobs, Esq.
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: IKON Office Solutions, Inc.
Registration Statement on Form S-4
Filed on December 20, 2005
File No. 333-130513
Form 10-K for the year ended September 30, 2005
File No. 1-05964
Dear Ms. Jacobs:
This letter is in response to the comments of the staff (the "Staff")
of the Division of Corporation Finance of the Securities and Exchange Commission
in your comment letter dated January 13, 2006 (the "Comment Letter") to IKON
Office Solutions, Inc. (the "Company") with respect to the above-referenced
Registration Statement and Form 10-K.
The numbered paragraphs and headings below correspond to the headings
set forth in the Comment Letter. The Staff's comments are set forth in italics
below followed by the Company's responses.
Form S-4
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Exchange Offer
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1. We note from pages 4 and 74 that you are making the exchange offer in
reliance on the position of the Commission as set forth in certain
no-action letters. As such, please provide us with a supplemental letter
stating that you are registering the exchange offer in reliance on the
staff's position enunciated in the Exxon Capital Holdings Corporation (May
13, 1998), Shearman & Sterling (July 2, 1993), and Morgan Stanley & Co.
Incorporated (June 5, 1991) no-action letters. Also include the
supplemental representations from Shearman & Sterling and Morgan Stanley &
Co. Incorporated. If these are not the letters you are referencing, please
advise. Please be sure to submit your supplemental letter on EDGAR.
The Company hereby confirms that it is registering the exchange offer in
reliance on the Staff's position enunciated in the Exxon Capital Holdings
Corporation
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(May 13, 1998), Shearman & Sterling (July 2, 1993) and Morgan Stanley & Co.
Incorporated (June 5, 1991) no-action letters.
The Company represents that it has not entered into any arrangement or
understanding with any person to distribute the exchange notes and, to the
best of the Company's knowledge and belief, each person participating in
the exchange offer is acquiring the exchange notes in its ordinary course
of business and has no arrangement or understanding with any person to
participate in the distribution of the exchange notes. The Company further
represents that no broker-dealer has entered into any arrangement or
understanding with the Company or an affiliate of the Company to distribute
the exchange notes.
The Company has stated on page 74 of the initial filing on Form S-4 that
any broker-dealer who holds original notes acquired for its own account as
a result of market-making activities or other trading activities and who
receives exchange notes in exchange for such original notes pursuant to the
exchange offer may be a statutory underwriter and must deliver a prospectus
meeting the requirements of the Act in connection with any resale of such
exchange notes. As noted on page 78 of the initial filing on Form S-4, the
Company has included in the letter of transmittal (filed as Exhibit 99.1 to
the initial filing on Form S-4), and will include in the final
documentation, a provision indicating that if the exchange offeree is a
broker-dealer holding original notes acquired for its own account as a
result of market-making activities or other trading activities, an
acknowledgement that it will deliver a prospectus meeting the requirements
of the Act in connection with any resale of the exchange notes received in
respect of such original notes pursuant to the exchange offer.
Risk Factors
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"If we fail to maintain an effective system of internal control over financial
- ------------------------------------------------------------------------------
reporting ..."
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2. Please revise the subheading to state unambiguously that your internal
control over financial reporting is ineffective.
We intend to revise the subheading in response to the Staff's comments to
read in its entirety as set forth below:
"Our system of internal control over financial reporting is currently
ineffective due to a material weakness in our billing processes. If we fail
to remediate this material weakness or any material weaknesses we may
discover in the future, we may not be able to accurately report our
financial results or prevent fraud. As a result, our business, brand and
operating results could be harmed or we could fail to meet our reporting
obligations."
Forms S-4 and 10-K for the year ended September 30, 2005
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Disclosure Controls and Procedures
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3. We note that you have identified a material weakness in your internal
control over financial reporting and concluded that your disclosure
controls and procedures were ineffective as of September 30, 2005. Please
amend the filings to state when the material weakness was first identified
and by whom.
We respectfully submit that the requested information has been disclosed by
the Company in prior Exchange Act filings; specifically, in the Company's
Form 8-Ks filed on April 21, 2005 and April 28, 2005 and Item 9A of the
Form 10-K/A for the year ended September 30, 2004, filed on July 8, 2005.
Based on this prior disclosure, we respectfully submit that an amendment of
the Form 10-K for the year ended September 30, 2005 is not necessary to
provide this information to the public. In addition, we will amend our Form
S-4 to include the following summary, which is intended to state when the
material weakness was identified and by whom:
"During an analysis of aged trade receivables conducted during the quarter
ended March 31, 2005, and in connection with performing self-assessment and
testing of its internal controls over financial reporting under Section 404
of the Sarbanes-Oxley Act of 2002, the Company identified deficiencies in
the processes and timeliness by which it issues and adjusts certain
invoices (the "Billing Matter"). Further assessment of these deficiencies
led the Audit Committee of the Board of Directors of the Company to
conclude on April 26, 2005 that the Company was required to restate its
previously issued financial statements included in the Company's Form 10-K
for the year ended September 30, 2004 and Form 10-Q for the quarter ended
December 31, 2004 (the "Restatement"). In connection with the Restatement,
management, including our Chief Executive Officer and Chief Financial
Officer, determined that the Billing Matter constituted a material weakness
in internal control over financial reporting."
4. You indicate that you have undertaken "several initiatives to remediate the
material weakness ... including" the specific initiatives you list on page
95. Please clarify whether the initiatives listed constitute all of the
initiatives you plan to take to remedy the material weakness. If you
believe you will adopt remedial measures in addition to any steps taken to
date, please clarify this. To the extent you have established a more
specific timeline than fiscal 2006 for implementing specific
recommendations, this information should be disclosed. Furthermore, to the
extent that the remedial efforts involve material costs to the company,
please disclose this as well.
We have attached a draft of the Item 4 disclosure that we intend to include
in the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 2005 (expected to be filed during the first week of February)
in response to the Staff's comments to include additional information
regarding our initiatives and the progress thereof. We intend to include
substantially similar disclosure in the Controls and Procedures section of
Amendment No. 1 to the Form S-4. We respectfully inform the Staff that the
costs of the remedial efforts are at this time not material to the Company,
and are not expected to be material.
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In light of the additional disclosure to be included in the
soon-to-be-filed Form 10-Q for the quarter ended December 31, 2005, we
respectfully submit that an amendment of the Form 10-K for the year ended
September 30, 2005 is not necessary to provide this information to the
public.
5. The disclosure relating to changes in internal control over financial
reporting on page 97 does not conform to the disclosure requirements of
Item 308(c) of Regulation S-K. It appears from your disclosure regarding
the initiatives taken to address the material weakness that there were
material changes to your internal control over financial reporting during
your fourth fiscal quarter. Please state unambiguously, if true, that there
were changes and specify what measures were taken during that quarter. With
regard to the control deficiencies related to inadequate segregation of
incompatible duties and ineffective controls over access to programs and
data, you state that you have implemented controls to "compensate" for
those deficiencies. If the remedial measures were taken during the fourth
fiscal quarter, please clearly describe what measures were taken during
that quarter and clarify whether management believes the deficiency has
been fully addressed and no longer exists.
We have attached a draft of the Item 4 disclosure that we intend to include
in the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 2005 (expected to be filed during the first week of February)
in response to the Staff's comments to include additional information
regarding our initiatives and the progress thereof. We intend to include
substantially similar disclosure in the Controls and Procedures section of
Amendment No. 1 to the Form S-4.
In light of the additional disclosure to be included in the
soon-to-be-filed Form 10-Q for the quarter ended December 31, 2005, we
respectfully submit that an amendment of the Form 10-K for the year ended
September 30, 2005 is not necessary to provide this information to the
public.
5
We expect to file our Form 10-Q for the quarter ended December 31, 2005
during the first week of February and would like to include disclosure
responsive to the Staff's comments in that filing and a concurrently filed
Amendment No. 1 to the Form S-4. We hope that we can work together so that we
can achieve this timetable. Thank you for your cooperation.
Please call our attorneys at Cravath, Swaine & Moore LLP -- specifically
Andrew J. Pitts at (212) 474-1620 or Sarah S. Jones at (212) 474-1365 -- if you
have any questions regarding this submission.
Very truly yours,
/s/ Mark A. Hershey, Esq.
-------------------------
cc: (w/encl.)
Maryse Mills-Apenteng, Esq.
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Andrew J. Pitts, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
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ATTACHMENT
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities and Exchange Act of 1934 as amended (the
"Exchange Act") is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of December
31, 2005 pursuant to Rule 13a-15(b) under the Exchange Act. Management
necessarily applied its judgment in assessing the costs and benefits of such
controls and procedures that, by their nature, can provide only reasonable
assurance regarding management's control objectives. Management does not expect
that its disclosure controls and procedures will prevent all errors and fraud. A
control system, irrespective of how well it is designed and operated, can only
provide reasonable assurance, and cannot guarantee that it will succeed in its
stated objectives.
Based on their evaluation, our management, including our Chief Executive
Officer and Chief Financial Officer, has concluded that our disclosure controls
and procedures were not effective at the reasonable assurance level because of
the material weakness described below. Notwithstanding the material weakness
described herein, management believes that the unaudited interim consolidated
financial statements included in this report fairly present, in all material
respects, the Company's financial condition, results of operations and cash
flows for all periods presented.
MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management, including our Chief Executive Officer and Chief
Financial Officer, identified the following control deficiencies, which in the
aggregate, constitute a material weakness in the Company's internal control over
financial reporting as of December 31, 2005.
The Company did not maintain effective controls over the accuracy and
validity of service and equipment revenue and the related accounts receivable
and deferred revenue. Specifically, the Company's controls over (i) the timely
issuance of invoice adjustments, (ii) the initiation of customer master records
and contracts to ensure consistent billing of periodic charges, (iii) the
collection of accurate meter readings from equipment to ensure the accurate
generation of customer invoices and (iv) the segregation of incompatible duties
within the billing function were deficient. These control deficiencies resulted
in the restatement of the Company's interim consolidated financial statements
for the quarter ended December 31, 2004 and the annual consolidated financial
statements for the years ended September 30, 2004, 2003 and 2002 to correct
revenue, accounts receivable, deferred revenue and the related income tax
provision. Additionally, these control deficiencies could result in a
misstatement of the aforementioned accounts that would result in a material
misstatement to the Company's interim or annual consolidated financial
statements that would not be prevented or detected. Accordingly, management,
including our Chief Executive Officer and Chief Financial Officer, has
determined that these control deficiencies, in the aggregate, constitute a
material weakness as of December 31, 2005.
MANAGEMENT'S REMEDIATION INITIATIVES
We have a complex billing process that is performed in several locations
using multiple billing platforms. The process requires the proper initiation of
a customer master record and contract to ensure
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consistent billing of periodic charges. Additionally, our collection of accurate
meter readings from equipment at customer locations is critical in order to
ensure the generation of accurate bills for our customers.
During fiscal 2005, we undertook numerous initiatives to remediate the
material weakness. The material initiatives we undertook in the fourth quarter
of fiscal 2005 are as follows:
- - realigning responsibilities to ensure direct accountability for all
customer billing;
- - synchronizing service contract initialization and termination with
equipment installation and removal;
- - creating a quality assurance function to test contract set-up and
termination;
- - improving our meter reading collection process and reducing reliance on
meter estimates; and
- - standardizing our issue resolution process across all IKON locations in
North America.
We continued to make progress on these ongoing initiatives during the first
quarter of fiscal 2006. The material initiatives we undertook in the first
quarter of fiscal 2006 are as follows:
- - establishing a service billing organization structure and appointing a vice
president of service billing operations;
- - conducting tests of contract set-up procedures at each of our North
American billing centers;
- - using actual service billing data from our service provider in lieu of
estimated amounts; and
- - initializing a pilot program designed to assess the accuracy of estimated
meter reads.
In addition, during the first quarter of fiscal 2006, we began to refocus
on our conversion to one platform comprised of a common enterprise resource
planning system, primarily based on the Oracle E-Business Suite, which we expect
will further remediate the material weakness in billing described above.
As of December 31, 2005, our remediation efforts related to the material
weakness described above were not complete and we have not yet determined what
further initiatives may be undertaken or when in the future we believe our
efforts to remediate the material weakness will be completed; however, we will
continue to focus on these initiatives and develop new measures with the goal of
ultimately resolving and remediating our material weakness in a timely manner.
The costs of our remediation efforts are not material to the Company, and are
not expected to be material.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We previously reported that we had taken steps to remediate certain control
deficiencies related to inadequate segregation of incompatible duties and
ineffective controls over access to programs and data. Specifically, certain of
the Company's personnel had unrestricted access to various financial application
programs and data. During fiscal 2005, we began to review and evaluate employee
access capabilities and their respective corresponding job responsibilities in
an effort to identify and eliminate incompatible duties. Significant progress
was made in the fourth quarter of fiscal 2005 with respect to these initiatives,
which were designed to compensate for the deficiencies that resulted from duties
that were not segregated. Although these deficiencies did not rise to the level
of a material weakness, we continued to identify and eliminate incompatible
duties during the first quarter of fiscal 2006. In addition, during the first
quarter of fiscal 2006, we began to refocus on our conversion to one platform
comprised of a common enterprise resource planning system, primarily based on
the Oracle E-Business Suite. We believe the controls described above adequately
compensate for these deficiencies as of December 31, 2005, except as relates to
the material weakness described above.
Other than the changes in the first quarter of fiscal 2006 discussed in
this Item 4, there were no changes in the Company's internal control over
financial reporting during the fourth quarter of fiscal 2005 or the Company's
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.