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IKON Receivables, LLC
FORM 10-K
September 30, 1999
As filed with the Securities and Exchange Commission on December 28, 1999
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1999 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-K
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)
(912) 471-2300
(Registrant's telephone number, including area code)
____________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
(Title of Class)
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 December 23, 1999 was $1,183,902,000.
Documents incorporated by reference:
None
The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing with the reduced
disclosure format contemplated thereby.
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TABLE OF CONTENTS
Page No.
--------
PART I
ITEM 1. BUSINESS............................................................................. 1
ITEM 2. PROPERTIES........................................................................... 1
ITEM 3. LEGAL PROCEEDINGS.................................................................... 1
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 1
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................. 1
ITEM 6. SELECTED FINANCIAL DATA.............................................................. 1
ITEM 7. FINANCIAL INFORMATION................................................................ 1
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 4
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 5
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................................. 5
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS..................................................... 5
ITEM 11. EXECUTIVE COMPENSATION............................................................... 6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................................... 6
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 6
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K............................................................................ 7
PART I
ITEM 1. BUSINESS
IKON Receivables LLC (the "Company" or the "Registrant") is an indirect
wholly-owned bankruptcy-remote subsidiary of IOS Capital, Inc. The Registrant
was formed solely for the purpose of acquiring from IKON Office Solutions, Inc.
or any of its subsidiaries, from time to time, certain leases (the "Leases") and
any security interests in the equipment underlying the leases (the "Equipment"),
and pledging the Leases through the issuance of debt securities (the "Notes").
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 Notes) 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.
ITEM 2. PROPERTIES
The Registrant does not utilize any facilities. Actions related to
servicing and maintaining the Registrants assets are performed by IOS Capital
Inc.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No response to this item is required.
PART II
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 6. SELECTED FINANCIAL DATA
The information called for by this item has been omitted pursuant to
General Instruction I(2)(a).
ITEM 7. FINANCIAL INFORMATION
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 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. ("IOS
Capital"), a wholly-owned finance subsidiary of IKON Office Solutions, Inc.
("IKON"), a publicly traded office technology company with fiscal 1999 revenues
of $5.5 billion. The Company was organized in the State of Delaware on January
20, 1999 and is managed by IKON Receivables Funding, Inc. (the "Manager").
1
On May 19, 1999, the Company issued $304,474,000 aggregate principal amount
of 5.11% Lease-Backed Notes, Class A-1 (the "Class A-1 Notes"), $61,579,000
aggregate principal amount of 5.60% Lease-Backed Notes, Class A-2 (the "Class A-
2 Notes"), $304,127,000 aggregate principal amount of 5.99% Lease-Backed Notes,
Class A-3 (the "Class A-3 Notes"), and $81,462,000 aggregate principal amount of
6.23% Lease-Backed Notes, Class A-4 (the "Class A-4 Notes" and, together with
the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the "1999-1
Notes"). The 1999-1 Notes were issued pursuant to an Indenture dated as of April
1, 1999 between the Company and Harris Trust and Savings Bank, as Indenture
Trustee. The 1999-1 Notes are secured solely by the 1999-1 Asset Pool, which
includes a portfolio of chattel paper composed of leases, leases intended as
security agreements and installment sales contracts acquired or originated by
IOS Capital (the "1999-1 Leases") (together with the equipment financing portion
of each periodic rental payment due under the 1999-1 Leases on or after the
opening of business on April 1, 1999), and all related casualty payments,
retainable deposits, and termination payments. The 1999-1 Notes have certain
credit enhancement features available to noteholders including a reserve
account, an overcollateralization account and a noncancellable insurance policy
from Ambac Assurance Corporation with respect to the 1999-1 Notes.
Payments on the 1999-1 Notes are due on the fifteenth day of each month (or
if that is not a Business Day, the next succeeding Business Day), commencing on
June 15, 1999. The 1999-1 Notes bear interest from May 25, 1999 at the
respective fixed per annum interest rates specified above. The interest rate is
calculated on the basis of a year of 360 days comprised of twelve 30-day months
(except in the case of the Class A-1 Notes, for which interest will be
calculated on the basis of a year of 360 days and the actual number of days in
the interest period) payable on the payment date. On each payment date, to the
extent funds are available therefore from the collection of the lease
receivables, principal payments will be made to noteholders in the following
priority: (i) to the Class A-1 Noteholders only, until the outstanding principal
amount on the Class A-1 Notes has been reduced to zero, then (ii) to the
Class A-2 noteholders only, until the outstanding principal amount on the Class
A-2 Notes has been reduced to zero, then (iii) to the Class A-3 noteholders
only, until the outstanding principal amount on the Class A-3 Notes has been
reduced to zero, and then (iv) to the Class A-4 noteholders, until the
outstanding principal amount on the Class A-4 Notes has been reduced to zero.
Each class of 1999-1 Notes will be payable in full on the applicable stated
maturity date, which is as follows: Class A-1 Notes - June 2000, Class A-2
Notes, Class A-3 Notes and Class A-4 Notes - May 2005. However, if all payments
are made on the 1999-1 Leases as scheduled, final payment on the 1999-1 Notes
will be earlier than the stated maturity dates. The Company may, on any payment
date, redeem the 1999-1 Notes when the total discounted lease balance is less
than or equal to 10% of the total discounted lease balance as of April 1, 1999.
IOS Capital services the 1999-1 Leases pursuant to an Assignment and Servicing
Agreement by and among IOS Capital, as Originator and Servicer, the Sole Member,
as Seller, and the Company, as Issuer. IOS Capital may delegate its servicing
responsibilities to one or more sub-servicers, but such delegation does not
relieve IOS Capital of its liabilities with respect thereto. IOS Capital retains
possession of the 1999-1 Leases and related files, and receives a monthly
service fee from the Company for servicing the 1999-1 Leases. The Company has
full recourse to IOS Capital Inc. for any lease which becomes past due by 120
days or more therefore the Company does not record a lease default reserve.
Interest income earned on the Asset Pool is expected to offset interest
expense on the Notes, amortization of debt issuance costs and discount on the
notes and the fees charged by IOS Capital for servicing the Asset Pool and
providing administrative services to the Company. For the period April 6, 1999
(date the Company commenced operations) to September 30, 1999, income generated
from the Asset Pool was approximately $33.3 million, other income earned was $.5
million, while interest expense during this period was $14.7 million and
administrative expenses were $1.5 million. Collections on the lease receivables
since inception through September 30, 1999 have been approximately $115.8
million. The Company repaid $128.7 million of principal on the Class A-1 Notes
through the September 15, 1999 payment date. The Company's portfolio of leases
has an average yield of 10.8% at September 30, 1999, while the Company's
weighted average interest rate on its debt outstanding as of September 30, 1999
is 5.7%. This rate differential, in addition to the overcollateralization of the
lease portfolio balance, gives rise to the 52% net income to revenue
relationship for the period April 6, 1999 to September 30, 1999.
2
Subsequent Event
On October 7, 1999, the Company issued $235,326,000 aggregate principal
amount of 6.14125% Lease-Backed Notes, Class A-1 (the "Class A-1 Notes"),
$51,100,000 aggregate principal amount of 6.31% Lease-Backed Notes, Class A-2
(the "Class A-2 Notes"), $100,000,000 aggregate principal amount of 6.59% Lease-
Backed Notes, Class A-3a (the "Class A-3a Notes"), $240,891,000 aggregate
principal amount of variable rate Lease-Backed Notes, Class A-3b (the "Class A-
3b Notes"), and $72,278,000 aggregate principal amount of 6.88% Lease-Backed
Notes, Class A-4 (the "Class A-4 Notes" and, together with the Class A-1 Notes,
the Class A-2 Notes, the Class A-3 Notes, the "1999-2 Notes"). The Class A-3b
Notes are variable rate notes paying interest at a rate of LIBOR plus 0.36%
(which we have fixed at 6.58% through an interest rate swap). The 1999-2 Notes
were issued pursuant to an Indenture dated as of October 1, 1999 between the
Company and Harris Trust and Savings Bank, as Indenture Trustee. The Sole Member
contributed a segregated pool of $809,556,000 of office equipment leases or
contracts and related assets (the "1999-2 Asset Pool"). The 1999-2 Notes are
secured solely by the 1999-2 Asset Pool, which includes a portfolio of chattel
paper composed of leases, leases intended as security agreements and installment
sales contracts acquired or originated by IOS Capital (the "1999-2 Leases")
(together with the equipment financing portion of each periodic rental payment
due under the 1999-2 Leases on or after the opening of business on September 1,
1999, and all related casualty payments, retainable deposits, and termination
payments. The 1999-2 Notes have certain credit enhancement features available to
noteholders including a reserve account, an overcollateralization account and a
noncancellable insurance policy from Ambac Assurance Corporation with respect to
the 1999-2 Notes.
Payments on the 1999-2 Notes are due on the fifteenth day of each month (or
if that is not a Business Day, the next succeeding Business Day), commencing on
November 15, 1999. The 1999-2 Notes bear interest from October 7, 1999 at the
respective interest rates specified above. The interest rate is calculated on
the basis of a year of 360 days comprised of twelve 30-day months (except in the
case of the Class A-1 Notes and the Class A-3b Notes, for which interest will be
calculated on the basis of a year of 360 days and the actual number of days in
the interest period) payable on the payment date. On each payment date, to the
extent funds are available therefore from the collection of the lease
receivables, principal payments will be made to noteholders in the following
priority: (i) to the Class A-1 Noteholders only, until the outstanding principal
amount on the Class A-1 Notes has been reduced to zero, then (ii) to the Class
A-2 noteholders only, until the outstanding principal amount on the Class A-2
Notes has been reduced to zero, then (iii) to the Class A-3 noteholders only,
until the outstanding principal amount on the Class A-3 Notes has been reduced
to zero, and then (iv) to the Class A-4 noteholders, until the outstanding
principal amount on the Class A-4 Notes has been reduced to zero. Each class of
1999-2 Notes will be payable in full on the applicable stated maturity date,
which is as follows: Class A-1 Notes - October 2000, Class A-2 Notes - May 2001,
Class A-3a Notes - August 2003, Class A-3b Notes - August 2003, and Class A-4
Notes - November 2005. However, if all payments are made on the 1999-2 Leases as
scheduled, final payment on the 1999-2 Notes will be earlier than the stated
maturity dates. The Company may, on any payment date, redeem the 1999-2 Notes
when the total discounted lease balance is less than or equal to 10% of the
total discounted lease balance as of September 1, 1999.
IOS Capital services the 1999-2 Leases pursuant to an Assignment and
Servicing Agreement by and among IOS Capital, as Originator and Servicer, the
Sole Member, as Seller, and the Company, as Issuer. IOS Capital may delegate its
servicing responsibilities to one or more sub-servicers, but such delegation
does not relieve IOS Capital of its liabilities with respect thereto. IOS
Capital retains possession of the 1999-2 Leases and related files, and receives
a monthly service fee from the Company for servicing the 1999-2 Leases.
Future maturities of the 1999-2 Notes, based on contractual maturities of
leases, are $252,700,000, $193,944,770, $143,174,200, $88,815,390, and
$20,960,620 in fiscal 2000, 2001, 2002, 2003 and 2004, respectively.
Impact of Year 2000
IOS Capital is responsible for servicing the 1999-1 and 1999-2 Leases and,
therefore, any Year 2000 issues adversely affecting IOS Capital could adversely
affect the Company.
State of Readiness. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
IOS Capital's computer programs or hardware that have date-sensitive software or
embedded technology (non-IT systems) may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations,
3
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The potential
for a problem exists with all computer hardware and software, as well as in
products with embedded technology; copiers and fax machines; security and HVAC
systems; voice/telephony systems; elevators, etc.
IKON has appointed a Year 2000 Corporate Compliance Team, which has
prepared a compliance program for all business units, including IOS Capital, and
is responsible for coordination and inspecting compliance activities in all
business units. The compliance program requires all business units and locations
in every country to inventory potentially affected systems and products, assess
risk, take any required corrective actions, test and certify compliance. IKON's
Year 2000 Testing and Certification Guidelines delineate the Year 2000
compliance process, testing and quality assurance guidelines, certification and
reporting processes and contingency planning. An independent consulting company
has reviewed the compliance program.
Costs. The Company has no internal or external costs relating to the Year
2000 issue. IOS Capital has used both internal and external resources to
reprogram or replace, test and implement its IT and non-IT systems for Year 2000
modifications. IOS Capital does not separately track the internal costs incurred
on the Year 2000 project. Such costs are principally payroll and related costs
for internal IT personnel. IOS Capital's total cost of the Year 2000 project,
excluding these internal costs, is approximately $1.2 million and is being
funded through operating cash flows. Of the total estimated project cost,
approximately $0.2 million is attributable to the purchase of new software and
hardware and has been capitalized. Through October 31, 1999, IOS Capital has
incurred approximately $1.1 million ($0.9 million expensed and $0.2 million
capitalized), related to its Year 2000 project. Remaining amounts are to be
incurred early in the first quarter of fiscal 2000.
Risks. Management believes, based on the information currently available
to it, that the most reasonably likely worst case scenario that could be caused
by technology failures relating to Year 2000 could pose a significant threat not
only to the Company, IOS Capital, IKON, its customers and suppliers, but to all
businesses. Risks include:
. Legal risks, including customer, supplier, employee or shareholder
lawsuits over failure to deliver contracted services, product
failure, or health and safety issues.
. Loss of revenues due to failure to meet customer quality expectations.
. Increased operational costs due to manual processing, data corruption
or disaster recovery.
. Inability to bill or invoice.
The cost of the project and the date on which IKON and IOS Capital believe
it will complete the Year 2000 modifications are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and costs of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Contingency Plans. IKON's Guidelines require that contingency plans be
developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. Contingency plans are
currently being developed and completed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(No response to this item is required.)
4
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of IKON Receivables, LLC are submitted herewith on
Pages F-1 through F-10 of this report.
Quarterly Data
The following table shows comparative summarized unaudited quarterly
results for fiscal 1999.
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- -----
(IN THOUSANDS)
1999
Finance income......... $0 $0 $13,031 $20,317 $33,348
Interest expense....... 0 0 4,530 10,172 14,702
Net income............. 0 0 7,935 9,639 17,574
Any additional information required by this item has been omitted pursuant
to General Instruction I(2)(a) of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Manager of the Company are as
follows:
Directors and Executive Officers of the Manager of the Company
The following table sets forth the executive officers and directors of
IKON Receivables Funding Inc., the manager of the Company ("Manager"), and their
ages and positions as of December 28, 1999. Because the Company is organized as
a special purpose company and is largely passive, it is expected that the
officers and directors of the Manager will participate in the management of the
Company only to a limited extent. Most of the actions related to maintaining
and servicing the assets will be performed by IOS Capital.
- --------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------
Robert McLain 73 President & Director
Patricia Donato 35 Secretary & Director
Joseph Churchman 62 Director
Robert C. Campbell 41 Director
Robert W. Grier 40 Director
Karin M. Kinney 38 Secretary
J. F. Quinn 44 Treasurer
Robert K. McLain has served as Director since being elected on January
20, 1999. Mr. McLain joined Alco Standard Corporation in 1972 and served in
various positions including Assistant Corporate Controller, Controller and Vice
President until his retirement from the Company in 1991. From the time he
retired from Alco
5
until September 30, 1998, he organized and managed Delaware investment
companies, which include subsidiaries of IKON Office Solutions, Inc. and
Unisource Worldwide, Inc., on a part-time basis.
Patricia A. Donato has served as Director since being elected on
January 20, 1999. Ms. Donato joined Alco Standard Corporation as a Tax
Coordinator in 1988. Since January 1991, she has served as Office Manager, and
subsequently, Controller, for investment companies in Delaware, which include
subsidiaries of IKON Office Solutions, Inc. and Unisource Worldwide, Inc.
Joseph B. Churchman has served as Director since being elected on
January 20, 1999. Mr. Churchman joined Alco Standard Corporation in 1975 as
Corporate Accounting Manager. He subsequently served as Manager of Alco's Data
Services and as President of Alco Health Services, now known as Amerisource,
until his retirement in 1988. Currently, Mr. Churchman is a business consultant
and serves as a director of several Delaware investment companies.
Robert C. Campbell has served as Director since being elected on April
9, 1999. Mr. Campbell, the Co-founder and Managing Director of Entity Services
Group, L.L.C., advises corporations on structural and tax ramifications arising
from their holding companies. Mr. Campbell, a Certified Public Accountant, has
also served as a Tax Manager at KPMG LLP where he advised corporate clients on
tax planning and compliance issues. Prior to joining KPMG LLP, Mr. Campbell
worked at the captive-finance subsidiary of Sears Roebuck & Co.
Robert W. Grier has served as Director since being elected on April 9,
1999. Presently, Mr. Grier is Executive Vice President of Entity Services
Group, L.L.C. Mr. Grier has previously served as a Senior Tax Manager at KPMG
LLP, where he advised companies, ranging from closely-held to multi-national
corporations, on compliance and tax planning issues. Prior to joining KPMG LLP,
Mr. Grier was employed by Simon, Master & Sidlow, P.A., a Wilmington accounting
firm.
Karin M. Kinney has served as Secretary of IKON Office Solutions, Inc.
since 1996 and as Corporate Counsel since 1994. From 1987 through 1994, Ms.
Kinney served as Counsel.
J.F. Quinn has served as Treasurer for IKON Office Solutions, Inc.
from November 1997 to the present. Prior to assuming his current position, Mr.
Quinn served as Assistant Treasurer from January 1996 through November 1997 and
Manager, Foreign Exchange and Cash Management from June 1994 through January
1996. Before joining IKON Office Solutions, Inc. Mr. Quinn served as Manager,
Foreign Exchange for ARCO Chemical Company, Manager, Financial Services for the
Columbia Gas System, Inc. and Supervising Senior Auditor for Peat, Marwick,
Mitchell & Co.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item has been omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item has been omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 hereof for information concerning the relationship between the
Company, IOS Capital, Inc. and IKON Receivables Funding, Inc.
Any additional information required by this item has been omitted pursuant
to General Instruction I(2)(c) of Form 10-K.
6
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Auditors................................................... F-1
Balance Sheets at September 30, 1999 and April 6, 1999.............................................. F-2
Statement of Income for the period April 6, 1999 to September 30, 1999.............................. F-3
Statement of Changes in Member's Equity for the period April 6, 1999 to September 30, 1999.......... F-4
Statement of Cash Flows for the period April 6, 1999 to September 30 199............................ F-5
Notes to Financial Statements....................................................................... F-6
Financial Statements and Schedules other than those listed above are
omitted because the required information is included in the financial statements
or the notes thereto or because they are inapplicable.
(b) Exhibits
1.1 Underwriting Agreement dated May 19, 1999 among the Company, IKON
Receivables-1, LLC, IOS Capital, Inc., and Lehman Brothers as
Representative of the Underwriters, filed as Exhibit 1.1 to the
Company's Form 8-K dated May 25, 1999, is incorporated herein by
reference.
3.1 Certificate of Formation of IKON Receivables, LLC., filed as Exhibit
3.1 to the Company's Registration Statement on Form S-3 (File No. 333-
71073), is incorporated herein by reference.
3.2 Limited Liability Company Agreement of IKON Receivables, LLC., filed
as Exhibit 3.2 to the Company's Registration Statement on Form S-3
(File No. 333-71073), is incorporated herein by reference.
4.1 Indenture, dated as of April 1, 1999 among the Company, Harris Trust
Savings Bank, as Trustee, and IOS Capital, Inc., as Servicer, filed as
Exhibit 4.1 to the Company's Form 8-K dated May 25, 1999, is
incorporated herein by reference.
4.2 Certificate Guaranty Insurance Policy, dated May 25, 1999, issued and
delivered by Ambac Assurance Corporation, filed as Exhibit 4.2 to the
Company's Form 8-K dated May 25, 1999, is incorporated herein by
reference.
10.1 Assignment and Servicing Agreement, dated as of April 1, 1999, among
the Company, IKON Receivables-1, LLC, and IOS Capital, Inc., as
Originator and Servicer, filed as Exhibit 10.1 to the Company's
Form 8-K dated May 25, 1999, is incorporated herein by reference.
10.2 Indemnification Agreement, dated as of May 25, 1999, among Lehman
Brothers, Chase Securities Inc., Deutsche Bank Securities Inc., PNC
Capital Markets, Inc., as Underwriters, and Ambac Assurance
Corporation, as Insurer, filed as Exhibit 10.2 to the Company's
Form 8-K dated May 25, 1999, is incorporated herein by reference.
10.3 Insurance and Indemnity Agreement, dated as of May 25, 1999, among IOS
Capital, Inc., as Originator and Servicer, the Company, IKON
Receivables-1, LLC, and Ambac Assurance Corporation, as Insurer, filed
as Exhibit 10.3 to the Company's Form 8-K dated May 25, 1999, is
incorporated herein by reference.
12 Ratio of Earnings to Fixed Charges
23 Auditors' Consent
7
27 Financial Data Schedule
(c) Reports on Form 8-K
None.
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 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 Leases
(such as lessee defaults or factors impeding recovery efforts), and risks and
uncertainties affecting the business of IOS Capital and/or IKON as set forth in
IOS Capital'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.
8
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
IKON Office Solutions, Inc.
We have audited the accompanying balance sheets of IKON Receivables, LLC as
of September 30, 1999 and April 6, 1999, and the related statements of income,
changes in member's equity, and cash flows 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IKON Receivables, LLC at
September 30, 1999 and April 6, 1999, and the results of its operations and its
cash flows for the period April 6, 1999 to September 30, 1999, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
October 25, 1999
F-1
IKON RECEIVABLES, LLC
BALANCE SHEETS
(in thousands)
September 30, April 6,
1999 1999
------------- -------------
Assets
Investments in leases (note 5)
Direct financing leases...................................................... $827,842
Less: Unearned income........................................................ (120,076)
--------
707,766
Cash.............................................................................. 26,694 $1
Restricted cash (note 2).......................................................... 29,625
Accounts receivable............................................................... 24,057
Prepaid expenses and other assets................................................. 3,045
-------- --------
Total assets............................................................. $791,187 $1
======== ========
Liabilities and Member's equity
Liabilities:
Accounts payable and accrued expenses........................................ $ 1
Accrued interest............................................................. 1,540
Lease-backed notes (note 6).................................................. 622,948
--------
Total liabilities........................................................ 624,489
Member's equity:
Contributed capital (note 3)................................................. 149,124 $1
Retained earnings............................................................ 17,574
-------- --------
Total member's equity.................................................... 166,698 1
-------- --------
Total liabilities and member's equity.................................... $791,187 $1
======== ========
See accompanying notes.
F-2
IKON RECEIVABLES, LLC
STATEMENT OF INCOME
(in thousands)
April 6, 1999 through
September 30, 1999
------------------
Revenues:
Finance income ................................................... $33,348
Other income...................................................... 501
-------
33,849
Expenses:
Interest expense (note 6)......................................... 14,702
General and administrative expenses (note 4)...................... 1,573
-------
16,275
Net income............................................................ $17,574
=======
See accompanying notes.
F-3
IKON RECEIVABLES, LLC
STATEMENT OF CHANGES IN MEMBER'S EQUITY
(in thousands)
Contributed Retained
Capital Earnings Total
----------- -------- ---------
Balance at April 6, 1999.................................... $ 1 -- $ 1
Net income.................................................. $17,574 17,574
Capital contributions....................................... 823,591 -- 823,591
Capital distributions....................................... (674,468) -- (674,468)
-------- ------- --------
Balance at September 30, 1999............................... $149,124 $17,574 $166,698
======== ======= ========
See accompanying notes.
F-4
IKON RECEIVABLES, LLC
STATEMENT OF CASH FLOWS
(in thousands)
April 6, 1999 through
September 30, 1999
------------------
Operating activities
Net income............................................................... $ 17,574
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization......................................................... 726
Changes in operating assets and liabilities:
Accounts receivable.............................................. (24,057)
Prepaid expenses and other assets................................ (1,460)
Accounts payable and accrued expenses............................ 1
Accrued interest................................................. 1,540
---------
Net cash used in operating activities.................................... (5,676)
---------
Investing activities
Investment in leases:
Collections.......................................................... 115,825
---------
Net cash provided by investing activities................................ 115,825
---------
Financing activities
Proceeds from lease-backed notes..................................... 749,331
Payments on lease-backed notes....................................... (128,694)
Deposit to restricted cash........................................... (29,625)
Capital contributed by Sole Member................................... 1
Capital distributed to Sole Member................................... (674,468)
---------
Net cash used in financing activities.................................... (83,455)
---------
Increase in Cash......................................................... $ 26,694
=========
See accompanying notes.
F-5
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. ("IOS Capital"), a wholly owned finance subsidiary of IKON
Office Solutions, Inc. ("IKON"), a publicly traded office technology company
with fiscal 1999 revenues of $5.5 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, IOS Capital, 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, IOS Capital,
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 IOS
Capital 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.
F-6
IKON RECEIVABLES, LLC
NOTES TO FINANCIAL STATEMENTS
2. Significant Accounting Policies - Continued
Fair Value Disclosures
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" (SFAS 107), requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the Company has computed and disclosed the fair value of its lease-
backed notes (Note 6).
Restricted Cash
Cash related to the pledged 1999-1 Leases is held in segregated accounts
pending distribution to the holders of the 1999-1 Notes and is restricted in its
use.
Pending Accounting Change
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. It will require the
Company to recognize all derivatives as either assets or liabilities and measure
the instruments at fair value. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company intends to
adopt this standard on October 1, 2000. The Company does not believe the effect
of adoption will be material.
F-7
IKON RECEIVABLES, LLC
NOTES TO FINANCIAL STATEMENTS
3. Capital Contributions
The Sole Member made an initial cash capital contribution of $1,000 to the
Company on April 6, 1999. Subsequently, the Sole Member contributed a segregated
pool of $819,572,000 of office equipment leases or contracts and related assets
(the "1999-1 Asset Pool") to the Company as an initial transfer of leases to the
Company. After the initial transfer, an additional $45,941,000 of leases were
added to the 1999-1 Asset Pool as substitution for $41,922,000 that were
cancelled or defaulted subsequent to April 1, 1999, resulting in a net non-cash
capital contribution of $4,019,000. On September 30, 1999, the Company
distributed $674,468,000 to its Sole Member.
4. Servicing Agreement
The Company has a servicing agreement with IOS Capital for which IOS
Capital services the Asset Pool 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 $1,573,000
for the period April 6, 1999 through September 30, 1999.
5. Investments in Leases
At September 30, 1999, contractual maturities of direct financing leases
are as follows (in thousands):
2000.................................................... $ 327,109
2001.................................................... 256,194
2002.................................................... 158,229
2003.................................................... 75,554
2004.................................................... 10,756
---------
827,842
Less unearned interest.................................. (120,076)
---------
$ 707,766
=========
6. Lease-Backed Notes
On May 19, 1999, the Company issued $304,474,000 aggregate principal amount
of 5.11% Lease-Backed Notes, Class A-1 (the "Class A-1 Notes"), $61,579,000
aggregate principal amount of 5.60% Lease-Backed Notes, Class A-2 (the "Class A-
2 Notes"), $304,127,000 aggregate principal amount of 5.99% Lease-Backed Notes,
Class A-3 (the "Class A-3 Notes"), and $81,462,000 aggregate principal amount of
6.23% Lease-Backed Notes, Class A-4 (the "Class A-4 Notes" and, together with
the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the "1999-1
Notes"). The 1999-1 Notes were issued pursuant to an Indenture dated as of April
1, 1999 between the Company and Harris Trust and Savings Bank, as Indenture
Trustee. The 1999-1 Notes are collateralized solely by the 1999-1 Asset Pool,
which includes a portfolio of chattel paper composed of leases, leases intended
as security agreements and installment sales contracts acquired or originated by
IOS Capital (the "1999-1 Leases") (together with the equipment financing portion
of each periodic rental payment due under the 1999-1 Leases on or after the
opening of business on April 1, 1999), and all related casualty payments,
retainable deposits, and termination payments. The 1999-1 Notes have certain
credit enhancement features available to noteholders including a reserve
account, an overcollateralization account and a noncancellable insurance policy
from Ambac Assurance Corporation with respect to the 1999-1 Notes.
F-8
IKON RECEIVABLES, LLC
NOTES TO FINANCIAL STATEMENTS
6. Lease-Backed Notes - continued
Payments on the 1999-1 Notes are due on the fifteenth day of each month (or if
that is not a Business Day, the next succeeding Business Day), commencing on
June 15, 1999. The 1999-1 Notes bear interest from May 25, 1999 at the
respective fixed per annum interest rates specified above. The interest rate is
calculated on the basis of a year of 360 days comprised of twelve 30-day months
(except in the case of the Class A-1 Notes, for which interest will be
calculated on the basis of a year of 360 days and the actual number of days in
the interest period) payable on the payment date. On each payment date, to the
extent funds are available therefore from the collection of the lease
receivables, principal payments will be made to noteholders in the following
priority: (i) to the Class A-1 Noteholders only, until the outstanding principal
amount on the Class A-1 Notes has been reduced to zero, then (ii) to the Class
A-2 noteholders only, until the outstanding principal amount on the Class A-2
Notes has been reduced to zero, then (iii) to the Class A-3 noteholders only,
until the outstanding principal amount on the Class A-3 Notes has been reduced
to zero, and then (iv) to the Class A-4 noteholders, until the outstanding
principal amount on the Class A-4 Notes has been reduced to zero. Each class of
1999-1 Notes will be payable in full on the applicable stated maturity date,
which is as follows: Class A-1 Notes - June 2000, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes - May 2005. However, if all payments are made on the
1999-1 Leases as scheduled, final payment on the 1999-1 Notes will be earlier
than the stated maturity dates. The Company may, on any payment date, redeem the
1999-1 Notes when the total discounted lease balance is less than or equal to
10% of the total discounted lease balance as of April 1, 1999.
IOS Capital services the 1999-1 Leases pursuant to an Assignment and Servicing
Agreement by and among IOS Capital, as Originator and Servicer, the Sole Member,
as Seller, and the Company, as Issuer. IOS Capital may delegate its servicing
responsibilities to one or more sub-servicers, but such delegation does not
relieve IOS Capital of its liabilities with respect thereto. IOS Capital retains
possession of the 1999-1 Leases and related files, and receives a monthly
service fee from the Company for servicing the 1999-1 Leases.
The average interest rate on the lease-backed notes outstanding at
September 30, 1999 was 5.7%. Interest paid amounted to $13,162,000 for the
period April 6, 1999 through September 30, 1999.
At September 30, 1999, the fair value of the Company's leased-backed notes
is estimated to be $590,221,000 using a discounted cash flow analysis.
Future maturities of lease-backed notes outstanding, based on contractual
maturity of leases, at September 30, 1999 are as follows (in thousands):
Fiscal 2000............................................... $270,813
2001...................................................... 185,518
2002...................................................... 121,813
2003...................................................... 44,804
--------
$622,948
========
F-9
IKON RECEIVABLES, LLC
NOTES TO FINANCIAL STATEMENTS
7. Subsequent Event
On October 7, 1999, the Company issued $235,326,000 aggregate
principal amount of 6.14125% Lease-Backed Notes, Class A-1 (the "Class A-1
Notes"), $51,100,000 aggregate principal amount of 6.31% Lease-Backed Notes,
Class A-2 (the "Class A-2 Notes"), $100,000,000 aggregate principal amount of
6.59% Lease-Backed Notes, Class A-3a (the "Class A-3a Notes"), $240,891,000
aggregate principal amount of variable rate Lease-Backed Notes, Class A-3b (the
"Class A-3b Notes"), and $72,278,000 aggregate principal amount of 6.88% Lease-
Backed Notes, Class A-4 (the "Class A-4 Notes" and, together with the Class A-1
Notes, the Class A-2 Notes, the Class A-3 Notes, the "1999-2 Notes"). The Class
A-3b Notes are variable rate notes paying interest at a rate of LIBOR plus 0.36%
(which we have fixed at 6.58% through an interest rate swap). The 1999-2 Notes
were issued pursuant to an Indenture dated as of October 1, 1999 between the
Company and Harris Trust and Savings Bank, as Indenture Trustee. The Sole Member
contributed a segregated pool of $809,556,000 of office equipment leases or
contracts and related assets (the "1999-2 Asset Pool") to the Company. The 1999-
2 Notes are collateralized solely by the 1999-2 Asset Pool, which includes a
portfolio of chattel paper composed of leases, leases intended as security
agreements and installment sales contracts acquired or originated by IOS Capital
(the "1999-2 Leases") together with the equipment financing portion of each
periodic rental payment due under the 1999-2 Leases on or after the opening of
business on September 1, 1999, and all related casualty payments, retainable
deposits, and termination payments. The 1999-2 Notes have certain credit
enhancement features available to noteholders including a reserve account, an
overcollateralization account and a noncancellable insurance policy from Ambac
Assurance Corporation with respect to the 1999-2 Notes.
Payments on the 1999-2 Notes are due on the fifteenth day of each
month (or if that is not a Business Day, the next succeeding Business Day),
commencing on November 15, 1999. The 1999-2 Notes bear interest from October 7,
1999 at the respective interest rates specified above. The interest rate is
calculated on the basis of a year of 360 days comprised of twelve 30-day months
(except in the case of the Class A-1 Notes and the Class A-3b Notes, for which
interest will be calculated on the basis of a year of 360 days and the actual
number of days in the interest period) payable on the payment date. On each
payment date, to the extent funds are available therefore from the collection of
the lease receivables, principal payments will be made to noteholders in the
following priority: (i) to the Class A-1 Noteholders only, until the outstanding
principal amount on the Class A-1 Notes has been reduced to zero, then (ii) to
the Class A-2 noteholders only, until the outstanding principal amount on the
Class A-2 Notes has been reduced to zero, then (iii) to the Class A-3
noteholders only, until the outstanding principal amount on the Class A-3 Notes
has been reduced to zero, and then (iv) to the Class A-4 noteholders, until the
outstanding principal amount on the Class A-4 Notes has been reduced to zero.
Each class of 1999-2 Notes will be payable in full on the applicable stated
maturity date, which is as follows: Class A-1 Notes - October 2000, Class A-2
Notes - May 2001, Class A-3a Notes - August 2003, Class A-3b Notes - August
2003, and Class A-4 Notes - November 2005. However, if all payments are made on
the 1999-2 Leases as scheduled, final payment on the 1999-2 Notes will be
earlier than the stated maturity dates. The Company may, on any payment date,
redeem the 1999-2 Notes when the total discounted lease balance is less than or
equal to 10% of the total discounted lease balance as of September 1, 1999.
IOS Capital services the 1999-2 Leases pursuant to an Assignment and
Servicing Agreement by and among IOS Capital, as Originator and Servicer, the
Sole Member, as Seller, and the Company, as Issuer. IOS Capital may delegate its
servicing responsibilities to one or more sub-servicers, but such delegation
does not relieve IOS Capital of its liabilities with respect thereto. IOS
Capital retains possession of the 1999-2 Leases and related files, and receives
a monthly service fee from the Company for servicing the 1999-2 Leases.
Future maturities of the 1999-2 Notes, based on contractual maturity of
leases, are $252,700,000, $193,944,770, $143,174,200, $88,815,390, and
$20,960,620 in fiscal 2000, 2001, 2002, 2003 and 2004, respectively.
F-10
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 period ended
September 30, 1999 to be signed on its behalf by the undersigned, thereunto duly
authorized.
IKON RECEIVABLES, LLC
Date: December 28, 1999
By: IKON RECEIVABLES FUNDING INC.,
as Sole Member and Initial Manager
By: /s/ Robert K.McLain
--------------------
Name: Robert K. McLain
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below on December 28, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
Signatures Title
---------- -----
/s/ Robert K. McLain President, Director and
- --------------------------------------------------------
Robert K. McLain Principal Executive Officer
/s/ Patricia Donato Secretary and Director
- --------------------------------------------------------
Patricia Donato
/s/ Joseph Churchman Director and
- --------------------------------------------------------
Joseph Churchman Principal Financial Officer
/s/ Robert C. Campbell Director
- --------------------------------------------------------
Robert C. Campbell
/s/ Robert W. Grier Director
- --------------------------------------------------------
Robert W. Grier
/s/ J. F. Quinn Treasurer
- --------------------------------------------------------
J. F. Quinn
IKON RECEIVABLES, LLC
INDEX TO EXHIBITS
EXHIBIT
NO. Title
- ------- -----
12 Ratio of Earnings to Fixed Charges
23 Auditors' Consent
27 Financial Data Schedule