ITEM 1. Business
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, LLC ("IOSC"), a wholly-owned finance subsidiary of IKON Office Solutions, Inc. ("IKON"), a publicly traded company with fiscal 2002 revenues of approximately $4.8 billion. IKON is a leading provider of products and services that help businesses manage document workflow and increase efficiency. IKON provides customers with total business solutions for every office, production and outsourcing need, including copiers and printers, color solutions, distributed printing, facilities management, imaging and legal document solutions, as well as network design and consulting and e-business development. 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 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, IOSC, 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, IOSC, or IKON.
ITEM 2.
ITEM 2. Properties
The Registrant does not utilize any facilities. Actions related to servicing and maintaining the Registrant's assets are performed by IOSC.
ITEM 3.
ITEM 3. Legal Proceedings
None.
PART II
ITEM 5.
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 7.
ITEM 7. 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 has issued Series 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Lease-Backed Notes (collectively, the "Notes") as described below:
The Notes were issued pursuant to certain indentures ("Indentures") between the Company, IOSC, and certain Indenture trustees. The Notes are collateralized by a pool of office equipment leases or contracts and related assets (the "Leases") acquired or originated by IOSC (together with the equipment financing portion of each periodic lease or rental payment due under the Leases on or after the related indenture date) and all related casualty payments, retainable deposits, and termination payments. Payments on the Notes are made from payments on the Leases. The Notes have certain credit enhancement features available to noteholders, including reserve accounts, overcollateralization accounts and noncancelable insurance policies from Ambac Assurance
Corporation with respect to the Notes. On each payment date, funds available from the collection of lease receivables will be paid to the noteholders in the order of their priority class.
The Notes bear interest from the related issuance date at the stated rates specified above. The variable rate 1999-2 Class A-3b, 2000-1 Class A-3, 2000-1 Class A-4, 2000-2 Class A-3, 2000-2 Class A-4, 2001-1 Class A-3 and 2001-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%, 6.475%, 6.475%, 4.825% and 5.435%, respectively, through interest rate swaps.
IOSC services the Leases and may delegate its servicing responsibilities to one or more sub-servicers, but such delegation does not relieve IOSC of its liabilities with respect thereto. IOSC retains possession of the Leases and related files, and receives a monthly service fee from the Company for servicing the Leases.
Restricted cash on the balance sheet represents the cash that has been collected on the leases that are pledged as collateral for lease-backed notes. This cash must be segregated within two business days into a trust account and the cash is used to pay the principal and interest on lease-backed notes as well as any associated administrative expenses. The level of restricted cash is impacted from one period to the next by the volume of leases pledged as collateral on the lease-backed notes and timing of collections on such leases.
Future maturities of the Notes, based on contractual maturities of the Leases for each of the succeeding fiscal years, are as follows:
During fiscal 2002, income generated from the Leases was $196,882, other income earned was $1,758, while interest expense was $93,609 and administrative expenses were $10,853. Principal collections on lease receivables during fiscal 2002 were $886,408, proceeds from lease-backed notes were $0 and the Company repaid $743,347 of principal on the Notes. During fiscal 2001, income generated from the Leases was $213,947, other income earned was $5,494, while interest expense was $113,383 and administrative expenses were $11,806. Principal collections on lease receivables during fiscal 2001 were $1,484,435, proceeds from lease-backed notes were $1,226,761 and the Company repaid $699,883 of principal on the Notes. The Company's portfolio of Leases has an average yield of 10.6% at September 30, 2002, while the Company's weighted average interest rate of its total debt cost during fiscal 2002 is 6.3%.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company incurs debt to fund the origination of leases for IKON. The interest rates charged on the debt are determined based on current market conditions and include variable measures of interest rates such as LIBOR. The Company monitors interest rates on debt in order to mitigate exposure to unfavorable variations as compared to the interest rate earned on the pledged finance lease receivables. The objective in managing this risk is to achieve fixed-rate financing at the same time the Company establishes the rate to be received by the Company on the leases. As a result, from time to time interest rate swaps are utilized to effectively fix the rate on variable rate debt, as opposed to a direct issuance of fixed rate debt. The risk associated with the use of interest rate swaps is the possible inability of the counterparties to meet the terms of their contracts. The Company does not enter into interest rate swap agreements for trading purposes.
The following tables present, as of September 30, 2002 and 2001, information regarding the interest rate swap agreements to which we are a party: (i) the notional amount, (ii) the fixed interest rate payable by the Company, (iii) the variable interest rate payable to the Company by the counterparty under the agreement, (iv) the fair value of the instrument, and (v) the maturity date of the agreement.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
The financial statements of the Company are submitted herewith on Pages through of this report.
Quarterly Data
The following table shows comparative summarized unaudited quarterly results for fiscal 2002 and 2001:
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
(No response to this item is required.)
PART III
ITEM 14.
ITEM 14. Controls and Procedures
(No response to this item is required.)
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Financial Statements
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
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 Third Amended and Restated Limited Liability Company Agreement of IKON Receivables, LLC, filed as Exhibit 3.3 to the Company's Form 8-K dated June 16, 2001 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 Indenture, dated as of October 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 October 21, 1999 is incorporated herein by reference.
4.3 Indenture, dated as of June 1, 2000 among the Company, Bank One, NA, as Trustee, and IOS Capital Inc., as Servicer, filed as Exhibit 4.1 to the Company's Form 8-K dated June 16, 2001 is incorporated herein by reference.
4.4 Indenture, dated as of December 1, 2000 among the Company, The Chase Manhattan Bank, as Trustee, and IOS Capital, Inc., as Servicer, filed as Exhibit 4.1 to the Company's Form 8-K dated November 29, 2000 is incorporated herein by reference.
4.5 Indenture, dated as of June 1, 2001, among the Company, SunTrust Bank, as Trustee, and IOS Capital, Inc., as Servicer, filed as Exhibit 4.1 to the Company's Form 8-K dated June 16, 2001 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 Assignment and Servicing Agreement, dated as of October 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 October 21, 1999 is incorporated herein by reference.
10.3 Assignment and Servicing Agreement, dated as of June 1, 2000, 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 June 16, 2001 is incorporated herein by reference.
10.4 Assignment and Servicing Agreement, dated as of December 1, 2000, 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 November 29, 2000 is incorporated herein by reference.
10.5 Assignment and Servicing Agreement, dated as of June 1, 2001, 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 June 16, 2001 is incorporated herein by reference.
10.6 Indemnification Agreement, dated as of October 7, 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 October 21, 1999 is incorporated herein by reference.
10.7 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.
10.8 Indemnification Agreement, dated June 2, 2000, among Chase Securities Inc., Banc of America Securities LLC, Deutsche Banc Alex. Brown, Lehman Brothers Inc., and 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 June 16, 2001 is incorporated herein by reference.
10.9 Indemnification Agreement, dated December 7, 2000, among Chase Securities, Inc., Banc of America Securities LLC, Deutsche Banc Alex. Brown, Lehman Brothers, Inc. and 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 November 29, 2000 is incorporated herein by reference.
10.10 Indemnification Agreement, dated June 28, 2001, among Deutsche Banc Alex. Brown Inc., Banc of America Securities LLC, J. P. Morgan Securities Inc., Lehman Brothers Inc. and 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 June 16, 2001 is incorporated herein by reference.
10.11 Insurance and Indemnity Agreement, dated as of May 25, 1999, among IOS Capital, Inc., as Originator and Servicer, the Company, IKON Receivables-1, LLC, Harris Trust and Savings Bank 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.
10.12 Insurance and Indemnity Agreement, dated as of October 7, 1999, among IOS Capital, Inc., as Originator and Servicer, the Company, IKON Receivables-1, LLC, Harris Trust and Savings Bank and Ambac Assurance Corporation, as Insurer, filed as Exhibit 10.3 to the Company's Form 8-K dated October 21,1999 is incorporated herein by reference.
10.13 Insurance and Indemnity Agreement, dated June 2, 2000, among IOS Capital, Inc., as Originator and Servicer, the Company, IKON Receivables-1, LLC, Bank One, N.A. and Ambac Assurance Corporation, as Insurer, filed as Exhibit 10.3 to the Company's Form 8-K dated June 16, 2001 is incorporated herein by reference.
10.14 Insurance and Indemnity Agreement, dated December 7, 2000, among IOS Capital, Inc., as Originator and Servicer, the Company, IKON Receivables-1, LLC, The Chase Manhattan Bank and Ambac Assurance Corporation, as Insurer, filed as Exhibit 10.3 to the Company's Form 8-K dated November 29, 2000 is incorporated herein by reference.
10.15 Insurance and Indemnity Agreement, dated June 28, 2001, among IOS Capital, Inc., as Originator and Servicer, the Company, IKON Receivables-1, LLC, SunTrust Bank and Ambac Assurance Corporation, as Insurer, filed as Exhibit 10.3 to the Company's Form 8-K dated June 16, 2001 is incorporated herein by reference.
10.16 Schedule to ISDA Master Agreement (the "Schedule"), between The Chase Manhattan Bank and the Issuer, Credit Support Annex to the Schedule, between the Chase Manhattan Bank and the Issuer, Confirmation to the ISDA Master Agreement for the Class A-3 Notes, between the Chase Manhattan Bank and the Issuer, and Confirmation to the ISDA Master Agreement for the Class A-4 Notes, between the Chase Manhattan Bank and the Company, each dated as of June 2, 2000, filed as Exhibit 10.4 to the Company's Form 8-K dated June 16, 2001 is incorporated herein by reference.
10.17 Schedule to ISDA Master Agreement (the "Schedule"), between Lehman Brothers Financial Products, Inc. and the Issuer, Credit Support Annex to the Schedule, between Lehman Brothers Financial Products, Inc. and the Issuer, Confirmation to the ISDA Master Agreement for the Class 3b Notes, between Lehman Brothers Financial Products, Inc. and the Company, each dated as of October 7, 1999, filed as Exhibit 10.4 to the Company's Form 8-K dated October 21, 1999 is incorporated herein by reference.
10.18 Schedule to ISDA Master Agreement, between Lehman Brothers Special Financing Inc. and the Issuer and Confirmation to the ISDA Master Agreement, between Lehman Brothers Special Financing, Inc. and the Company, each dated as of December 7, 2000, filed as Exhibit 10.4 to the Company's Form 8-K dated November 29, 2000 is incorporated herein by reference.
10.19 Schedule to ISDA Master Agreement, between Deutsche Bank AG, New York Branch and the Issuer and Confirmations to the ISDA Master Agreement, between Deutsche Bank AG, New York Branch and the Company, each dated as of June 28, 2001, filed as Exhibit 10.4 to the Company's Form 8-K dated November 29, 2000 is incorporated herein by reference.
12 Ratio of Earnings to Fixed Charges.
23 Consent of PricewaterhouseCoopers LLP
99.1 Certifications Pursuant to 18 U.S.C. Section 1850, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(c) Reports on Form 8-K
None.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of IKON Office Solutions, Inc.
In our opinion, the accompanying balance sheets as of September 30, 2002 and 2001 and the related statements of operations, cash flows, changes in member's (deficit) equity present fairly, in all material respects, the financial position of IKON Receivables, LLC at September 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 2 and 8 to the financial statements, the Company adopted Statements of Financial Accounting Standards No. 133, as amended, Accounting For Derivative Instruments and Hedging Activities, in Fiscal 2001.
As discussed in Notes 2 and 7 to the financial statements, the Company has recorded a change in accounting for income taxes, which has been retroactively adopted as of October 1, 2001.
/s/ PricewaterhouseCoopers LLP Philadelphia, PA December 2, 2002
IKON RECEIVABLES, LLC
BALANCE SHEETS
IKON RECEIVABLES, LLC
STATEMENTS OF OPERATIONS
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, LLC ("IOSC"), a wholly-owned finance subsidiary of IKON Office Solutions, Inc. ("IKON"), a publicly traded company with fiscal 2002 revenues of approximately $4.8 billion. IKON is a leading provider of products and services that help businesses manage document workflow and increase efficiency. IKON provides customers with total business solutions for every office, production and outsourcing need, including copiers and printers, color solutions, distributed printing, facilities management, imaging and legal document solutions, as well as network design and consulting and e-business development. 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 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, IOSC, 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, IOSC, 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
Finance income and rental income are recognized over the related lease term. Revenue for other income is recognized in the period earned.
Income Taxes
The Company is classified as a single-member limited liability corporation ("LLC") and, as such, is disregarded as an entity separate from its owners for income tax purposes. The Company has become aware that the predominant practice for single-member LLCs is to provide for income taxes in their separate financial statements, and has concluded this is a more informative presentation. On April 1, 2002, the Company changed its accounting policy to a preferable method and began recording income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes." The Company and the Sole Member are included in the consolidated tax return of IKON, and for purposes of applying SFAS 109, are allocated current and deferred income taxes on a separate return basis. Currently payable/receivable income taxes are settled in accordance with an informal tax sharing agreement with IKON and the Sole Member.
Financial Instruments
The Company uses interest rate swap agreements for purposes other than trading. Interest rate swap agreements are used by the Company to modify variable rate obligations to fixed rate obligations, thereby reducing the exposure to market rate fluctuations. The interest rate swap agreements are designated as hedges, and effectiveness is determined by matching the principal balance and terms with that specific obligation. Such an agreement involves the exchange of amounts based on fixed interest rates for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which payments are based. Gains and losses on terminations of interest rate swap agreements are deferred and amortized over the remaining term of the original contract life of the terminated swap agreement. In the event of early extinguishment of the obligation, any realized or unrealized gain or loss from the swap would be recognized in income at the time of extinguishment.
The Company adopted SFAS 133, as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities", on October 1, 2000. SFAS 133 requires that all derivatives be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in earnings or Other Comprehensive Income (Loss) ("OCI") depending on the type of hedging instrument and the effectiveness of those hedges. In accordance with the transition provisions of SFAS 133, the Company recorded a cumulative loss adjustment to OCI of $3,471, after taxes, to recognize the fair value of its derivatives as of the date of adoption.
All of the derivatives used by the Company as hedges are highly effective as defined by SFAS 133 because all of the critical terms of the derivatives match those of the hedged item. All of the derivatives used by the Company have been designated as cash flow hedges at the time of adoption of SFAS 133 or at the time they were executed, if later than October 1, 2000. All derivatives are adjusted to their fair market values at the end of each quarter. Unrealized net gains and losses for cash flow hedges are recorded in OCI.
As of September 30, 2002, all of the Company's derivatives designated as hedges are interest rate swaps which qualify for evaluation using the "short cut" method for assessing effectiveness. As such, there is an assumption of no ineffectiveness. The Company uses interest rate swaps to fix the interest rates on our variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the year ended September 30, 2002, unrealized net gains totaling $7,345, after taxes, were recorded in OCI.
Restricted Cash
Restricted cash on the balance sheet represents the cash that has been collected on the leases that are pledged as collateral for lease-backed notes. This cash must be segregated within two business days into a trust account and the cash is used to pay the principal and interest on lease-backed notes as well as any associated administrative expenses. The level of restricted cash is impacted from one period to the next by the volume of leases pledged as collateral on the lease-backed notes and timing of collections on such leases.
3. Capital Contributions
In fiscal 2002, 2001 and 2000, the Sole Member made non-cash capital contributions to the Company of $484,841, $2,109,129 and $1,498,169, respectively, of office equipment leases or contracts and related assets (the "Leases") and the reversal of income tax liability (see note 7).
4. Servicing Agreement
The Company has a servicing agreement with IOSC pursuant to which IOSC services the Leases 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 $10,853, $11,806 and $8,794 for the fiscal years ended September 30, 2002, 2001 and 2000, respectively.
5. Investments in Leases
At September 30, 2002, contractual maturities of finance lease receivables are as follows:
Residual values included in the investment in leases are paid by IKON at the end of the lease. The equipment is then transferred to IKON.
6. Lease-Backed Notes
The Company has issued Series 1999-1, 1999-2, 2000-1, 2000-2 and 2001-1 Lease-Backed Notes (collectively, the "Notes") as described below:
The Notes were issued pursuant to certain indentures ("Indentures") between the Company, IOSC, and certain Indenture trustees. The Notes are collateralized by a pool of office equipment leases or contracts and related assets (the "Leases") acquired or originated by IOSC (together with the equipment financing portion of each periodic lease or rental payment due under the Leases on or after the related indenture date) and all related casualty payments, retainable deposits, and termination payments. Payments on the Notes are made from payments on the Leases. The Notes have certain credit enhancement features available to noteholders, including reserve accounts, overcollateralization accounts and noncancelable insurance policies from Ambac Assurance Corporation with respect to the Notes. On each payment date, funds available from the collection of lease receivables will be paid to the noteholders in the order of their priority class.
The Notes bear interest from the related issuance date at the stated rates specified above. The variable rate 1999-2 Class A-3b, 2000-1 Class A-3, 2000-1 Class A-4, 2000-2 Class A-3, 2000-2 Class A-4, 2001-1 Class A-3 and 2001-1 Class A-4 Notes have been fixed at 6.63%, 7.802%, 7.82%, 6.475%, 6.475%, 4.825% and 5.435%, respectively, through interest rate swaps.
IOSC services the Leases and may delegate its servicing responsibilities to one or more sub-servicers, but such delegation does not relieve IOSC of its liabilities with respect thereto. IOSC retains possession of the Leases and related files, and receives a monthly service fee from the Company for servicing the Leases.
Future maturities of the Notes, based on contractual maturities of the Leases for each of the succeeding fiscal years, are as follows:
7. Income Taxes
The Company is classified as a single-member LLC and, as such, is disregarded as an entity separate from its owners for income tax purposes. The Company has become aware that the predominant practice for single-member LLCs is to provide for income taxes in their separate financial statements, and has concluded that is a more informative presentation. On April 1, 2002, the Company changed its accounting policy to a preferable method and began recording income taxes in accordance with SFAS 109. The Company and the Sole Member are included in the consolidated tax return of IKON, and for purposes of applying SFAS 109, are allocated current and deferred income taxes on a separate return basis. Currently payable/receivable income taxes are settled in accordance with an informal tax sharing agreement with IKON and the Sole Member.
The change in accounting for income taxes has been retroactively adopted as of October 1, 2001, the first day of the current fiscal year. The net investments in leases represents the uncollected contractual cash flow of the leases that were contributed to the Company by the Sole Member in the form of contributed capital. The tax basis and related income tax benefits attributable to the leases are retained by the Sole Member. Therefore, the effect of the change in principle has resulted in a deferred tax liability of $843,752 and $526,528 at October 1, 2001 and September 30, 2002, respectively. The related deferred tax liability is attributed to the difference between the book and tax basis of the net leases outstanding. Because under the informal tax-sharing agreement the Company is not obligated to reimburse the Sole Member for current income taxes, all reversals of the deferred tax liability to current income taxes payable for the Company are expected to result in additional capital contributions from the Sole Member at the time of the reversal.
The deferred tax asset balance of $15,353 on the balance sheet at September 30, 2002 is related to SFAS 133. See notes 1 and 8 to the financial statements.
The components of the effective income tax rate were as follows:
Fiscal Year Ended September 30, ----------------- Taxes at federal statutory rate 35.0% State taxes, net of federal benefit 4.2 ------- Effective income tax rate 39.2% -------
8. Derivative Financial Instruments
The Company incurs debt to fund the origination of leases for IKON. The interest rates charged on the debt are determined based on current market conditions and include variable measures of interest rates such as LIBOR. The Company monitors interest rates on debt in order to mitigate exposure to unfavorable variations as compared to the interest rate earned on the pledged finance lease receivables. The objective in managing this risk is to achieve fixed-rate financing at the same time the Company establishes the rate to be received by the Company on the leases. As a result, from time to time interest rate swaps are utilized to effectively fix the rate on variable rate debt, as opposed to a direct issuance of fixed rate debt. The risk associated with the use of interest rate swaps is the possible inability of the counterparties to meet the terms of their contracts. The Company does not enter into interest rate swap agreements for trading purposes.
The following tables present, as of September 30, 2002 and 2001, information regarding the interest rate swap agreements to which we are a party: (i) the notional amount, (ii) the fixed interest rate payable by the Company, (iii) the variable interest rate payable to the Company by the counterparty under the agreement, (iv) the fair value of the instrument, and (v) the maturity date of the agreement.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report on Form 10-K for the Fiscal Year ended September 30, 2002 to be signed on its behalf by the undersigned, thereunto duly authorized.
IKON RECEIVABLES, LLC Date: December 26, 2002 By: IKON RECEIVABLES FUNDING, INC., as Sole Member and Manager
By: /s/ Russell S. Slack -------------------------------- Name: Russell S. Slack Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below on December 26, 2002 by the following persons on behalf of the registrant and in the capacities indicated.
Signatures Title ---------- -----
/s/ Russell S. Slack President, Director and - -------------------------------- Principal Executive Officer Russell S. Slack
/s/ Harry G. Kozee Vice President, Director and - -------------------------------- Principal Financial Officer Harry G. Kozee
/s/ Kathleen M. Burns Vice President, Director and - -------------------------------- Treasurer Kathleen M. Burns
Director - -------------------------------- Robert C. Campbell
Director - -------------------------------- Robert W. Grier
CERTIFICATIONS
I, Russell S. Slack, President and Principal Executive Officer of IKON Receivables, LLC, certify that:
1. I have reviewed this annual report on Form 10-K, and all reports on Form 8-K containing distribution or servicing reports filed in respect of periods included in the year covered by this annual report, of IKON Receivables, LLC;
2. Based on my knowledge, the information in these reports, taken as a whole, 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 as of the last day of the period covered by this annual report;
3. Based on my knowledge, the servicing information required to be provided to the trustee by the servicer under the pooling and servicing agreement is included in these reports;
4. I am responsible for reviewing the activities performed by the servicer under the pooling and servicing agreement and based upon the review required under the pooling and servicing agreement, and except as disclosed in the report, the servicer has fulfilled its obligations under the servicing agreement; and
5. I have disclosed to the registrant's certified public accountants all significant deficiencies relating to the servicer's compliance with the minimum servicing standards in accordance with a review conducted in compliance with the Uniform Single Attestation Program for Mortgage Brokers or similar standard as set forth in the pooling and servicing agreement.
Date: December 26, 2002
/s/ Russell S. Slack Russell S. Slack President and Principal Executive Officer
CERTIFICATIONS
I, Harry G. Kozee, Vice President - Finance, Principal Financial Officer, and Principal Accounting Officer of IKON Receivables, LLC, certify that:
1. I have reviewed this annual report on Form 10-K, and all reports on Form 8-K containing distribution or servicing reports filed in respect of periods included in the year covered by this annual report, of IKON Receivables, LLC;
2. Based on my knowledge, the information in these reports, taken as a whole, 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 as of the last day of the period covered by this annual report;
3. Based on my knowledge, the servicing information required to be provided to the trustee by the servicer under the pooling and servicing agreement is included in these reports;
4. I am responsible for reviewing the activities performed by the servicer under the pooling and servicing agreement and based upon the review required under the pooling and servicing agreement, and except as disclosed in the report, the servicer has fulfilled its obligations under the servicing agreement; and
5. I have disclosed to the registrant's certified public accountants all significant deficiencies relating to the servicer's compliance with the minimum servicing standards in accordance with a review conducted in compliance with the Uniform Single Attestation Program for Mortgage Brokers or similar standard as set forth in the pooling and servicing agreement.
Date: December 26, 2002
/s/ Harry G. Kozee Harry G. Kozee Vice President - Finance, Principal Financial Officer, and Principal Accounting Officer