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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 333-71362
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IKON Receivables Funding, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 52-2652209
(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 $1,308,934,511.
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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1
IKON Receivables Funding, LLC
INDEX*
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets - March 31, 2003 (unaudited) and September 30, 2002
Statement of Income - Three and six months ended March 31, 2003 (unaudited)
Statement of Cash Flows - Six months ended March 31, 2003 (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 Funding, 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 Funding, LLC
Balance Sheets
March 31,
2003 September 30,
(unaudited) 2002
- ------------------------------------------------------------------------------------------------------------------------
Assets
Investments in leases:
Finance lease receivables $ 624,278 $ 741,005
Less: Unearned income (105,429) (138,799)
- ------------------------------------------------------------------------------------------------------------------------
518,849 602,206
Cash 1 1
Restricted cash 26,330 27,015
Accounts receivable 9,250 10,586
Prepaid expenses and other assets 1,492 1,895
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 555,922 $ 641,703
========================================================================================================================
Liabilities and Member's Deficit
Liabilities:
Accrued expenses $ 851 $ 978
Lease-backed notes 473,039 570,224
Deferred income taxes 207,540 240,882
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 681,430 812,084
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Member's deficit:
Contributed capital (149,026) (182,502)
Retained earnings 23,518 12,121
- ------------------------------------------------------------------------------------------------------------------------
Total Member's Deficit (125,508) (170,381)
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Member's Deficit $ 555,922 $ 641,703
========================================================================================================================
See notes to condensed financial statements.
4
IKON Receivables Funding, LLC
Statement of Income
(unaudited)
Three Months Six Months
Ended Ended
March 31, 2003 March 31, 2003
- ---------------------------------------------------------------------------------------------------------------
Revenues
Lease finance income $ 15,468 $ 32,172
Interest income on restricted cash 42 105
- ---------------------------------------------------------------------------------------------------------------
15,510 32,277
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Expenses
Interest 5,497 11,298
General and administrative 947 1,984
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6,444 13,282
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Income before taxes on income 9,066 18,995
Taxes on income 3,626 7,598
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Net income $ 5,440 $ 11,397
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See notes to condensed financial statements.
5
IKON Receivables Funding, LLC
Statement of Cash Flows
(unaudited)
Six Months
Ended
March 31, 2003
- -----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 11,397
Additions (deductions) to reconcile net income to net cash provided
by operating activities:
Amortization 494
Provision for income taxes 7,598
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,336
Increase in prepaid expenses and other assets (91)
Decrease in accrued expenses (127)
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Net cash provided by operating activities 20,607
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Cash Flows from Investing Activities
Investments in leases:
Collections, net of financing income 87,558
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Net cash provided by investing activities 87,558
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Cash Flows from Financing Activities
Payments on lease-backed notes (97,185)
Deposits to restricted cash 685
Capital distributed to IOS Capital, LLC ("IOSC") (11,665)
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Net cash used in financing activities (108,165)
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Net increase in cash -
- -----------------------------------------------------------------------------------------------
Cash at beginning of year 1
Cash at end of period $ 1
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Supplemental financing activities:
Noncash capital contributions $ 45,141
Interest paid $ 11,425
See notes to condensed financial statements.
6
IKON Receivables Funding, LLC
Notes to Condensed Financial Statements
(unaudited)
Note 1: Basis of Presentation
---------------------
The accompanying unaudited condensed financial statements of IKON Receivables
Funding, 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.
Note 2: Capital Contributions
---------------------
In fiscal 2003, IOSC made non-cash capital contributions to the Company of
$45,141 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 $97,185 of lease-backed notes during the six months ended
March 31, 2003.
Note 4: Subsequent Event
----------------
On April 23, 2003, the Company issued Series 2003-1 Lease-Backed Notes as
described below:
Principal Stated
Issuance Issuance Maturity
Series Notes Date Amount Interest Rate Date
-------------------------------------------------------------------------------------------------
2003-1 Class A-1 04/23/03 $253,200 1.30813% May 2004
Class A-2 04/23/03 26,700 1.68% November 2005
Class A-3a 04/23/03 206,400 LIBOR + 0.24% December 2007
Class A-3b 04/23/03 206,400 2.33% December 2007
Class A-4 04/23/03 159,385 3.27% July 2011
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Total $852,085
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In April 2003, the Company entered into a swap transaction to hedge the variable
rate 2003-1 Class A-3a lease-backed note to a fixed rate of 2.095%. This hedge
qualifies for evaluation using the "short cut" method of assessing
effectiveness; accordingly, there is an assumption of no ineffectiveness.
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
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, income generated from the
leases was $15,468, interest income on restricted cash was $42, while interest
expense during the period was $5,497 and administrative expenses were $947.
Collections on the lease receivables, net of financing income were $42,767 and
the Company repaid $49,467 of principal on the lease-backed notes during the
three months ended March 31, 2003. Taxes on income for the three months ended
March 31, 2003 were $3,626. The effective income tax rate was 40%.
7
Six Months Ended March 31, 2003
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, income generated from the
leases was $32,172, interest income on restricted cash was $105, while interest
expense during the period was $11,298 and administrative expenses were $1,984.
Collections on the lease receivables, net of financing income were $87,558 and
the Company repaid $97,185 of principal on the lease-backed notes during the six
months ended March 31, 2003. Taxes on income for the six months ended March 31,
2003 were $7,598. The effective income tax rate was 40%.
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 2006
----------------------------------------------------------------------------
Lease-backed notes $473,039 $183,911 $289,128
Payments on lease-backed notes generally are made from collections of our
finance lease receivables. At March 31, 2003, lease-backed notes were $473,039
and net finance lease receivables were $518,849.
On April 23, 2003, the Company issued Series 2003-1 Lease-Backed Notes as
described below:
Principal Stated
Issuance Issuance Maturity
Series Notes Date Amount Interest Rate Date
-------------------------------------------------------------------------------------------------
2003-1 Class A-1 04/23/03 $253,200 1.30813% May 2004
Class A-2 04/23/03 26,700 1.68% November 2005
Class A-3a 04/23/03 206,400 LIBOR + 0.24% December 2007
Class A-3b 04/23/03 206,400 2.33% December 2007
Class A-4 04/23/03 159,385 3.27% July 2011
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Total $852,085
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In April 2003, the Company entered into a swap transaction to hedge the variable
rate 2003-1 Class A-3a lease-backed note to a fixed rate of 2.095%. This hedge
qualifies for evaluation using the "short cut" method of assessing
effectiveness; accordingly, there is an assumption of no ineffectiveness.
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.
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 Funding, LLC
Date: May 15, 2003
By: /s/ Harry G. Kozee
---------------------
Name: Harry G. Kozee
Title: Vice President - Finance (Principal Financial Officer)
8
CERTIFICATIONS
I, Russell S. Slack, President and Principle Executive Officer of IKON
Receivables Funding, LLC certify that:
1. I have reviewed this quarterly report on Form 10-Q of IKON Receivables
Funding, 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
9
I, Harry G. Kozee, Vice President - Finance, Principal Financial Officer, and
Principal Accounting Officer of IKON Receivables Funding, LLC certify that:
1. I have reviewed this quarterly report on Form 10-Q of IKON Receivables
Funding, 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
10