Filed Pursuant to Rule 424(b)(5)
File No. 333-71362
Prospectus Supplement to Prospectus dated March 11, 2002
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IKON Receivables Funding, LLC $634,800,000
Issuer Lease-Backed Notes, Series 2002-1
IOS Capital, LLC
Originator and Servicer
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- --------------------------------------------------------------------------------
IOSCapital
An IKON Office Solutions Company
You should read the section entitled "Risk Factors" starting on page S-8 of this
prospectus supplement and page 7 of the prospectus and consider these factors
before making a decision to invest in the notes.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
Offers of the notes will be made through the underwriters on a firm commitment
basis.
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The issuer will issue the four classes of notes shown in the table below.
The notes -
. Are backed by a pledge of assets of the issuer, primarily a pool of
equipment leases or contracts and related assets;
. Receive distributions beginning on June 17, 2002; and
. Currently have no trading market.
Credit enhancement for the notes will consist of -
. A reserve account that can be used to pay shortfalls in payments on the
notes;
. Overcollateralization resulting from the excess of the principal value
of the initial leases over the aggregate initial principal amount of the
notes;
. Certain renewal payments with respect to the leases; and
. A financial guaranty insurance policy issued by Ambac Assurance
Corporation unconditionally guaranteeing timely payment of interest and
ultimate payment of principal, as described in this prospectus
supplement.
Ambac
=====================================================================================================================
Underwriting
Initial Public Discount and
Issuance Amount Interest Rate Offering Price Commissions Net Proceeds
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Class A-1 Notes ............ $171,000,000 2.044% 100.00000% 0.150% $171,000,000.00
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Class A-2 Notes ............ $ 46,000,000 2.91% 99.99976% 0.180% $ 45,999,889.60
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Class A-3 Notes ............ $266,400,000 3.90% 99.98098% 0.245% $266,349,330.72
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Class A-4 Notes ............ $151,400,000 4.68% 99.99351% 0.375% $151,390,174.14
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Total ...................... $633,400,000 $634,739,394.46 $1,559,730.00 $634,739,394.46
=====================================================================================================================
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
Banc of America Securities LLC
Lehman Brothers
Wachovia Securities
The date of this Prospectus
Supplement is May 21, 2002
No dealer, salesman or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus supplement and the accompanying prospectus. If given or made,
the information or representations must not be relied upon. We are stating this
information as of the date of this prospectus supplement.
Table of Contents
Prospectus Supplement
Page
----
Summary ................................................................. S-4
Risk Factors ............................................................ S-8
The Issuer .............................................................. S-9
The Servicer and the Originator ......................................... S-9
The Insurer and the Policy .............................................. S-11
The Asset Pool .......................................................... S-14
Description of the Notes ................................................ S-22
Prepayment and Yield Considerations ..................................... S-31
The Trustee ............................................................. S-36
Material Federal Income Tax Consequences ................................ S-36
ERISA Considerations .................................................... S-38
Use of Proceeds ......................................................... S-39
Ratings of the Notes .................................................... S-39
Underwriting ............................................................ S-39
Experts ................................................................. S-40
Legal Matters ........................................................... S-41
Prospectus
Page
----
Important Information about this Prospectus and the Accompanying
Prospectus Supplement .................................................. 3
Prospectus Summary ...................................................... 4
Risk Factors ............................................................ 7
Where You Can Find More Information ..................................... 11
The Issuer .............................................................. 12
The Asset Pools ......................................................... 12
Management's Discussion and Analysis of Financial Condition ............. 13
Directors and Executive Officers of the Manager of the Issuer ........... 13
The Leases .............................................................. 14
Pool Factors ............................................................ 17
Use of Proceeds ......................................................... 17
The Originator's Leasing Business ....................................... 17
The Trustee ............................................................. 20
Description of the Notes ................................................ 21
Description of the Transaction Documents ................................ 27
Legal Aspects of the Lease Receivables .................................. 32
Material Federal Income Tax Consequences ................................ 35
Ratings ................................................................. 39
ERISA Considerations .................................................... 39
Plan of Distribution .................................................... 39
Legal Opinions .......................................................... 40
Experts ................................................................. 40
Index Of Terms .......................................................... 45
S-2
Important Notice About the Information Presented in This Prospectus
Supplement and the Accompanying Prospectus
We provide information to you about the notes in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of notes, and (2) this prospectus supplement, which describes the
specific terms of your series of notes.
This prospectus supplement does not contain complete information about
the offering of the notes. Additional information is contained in the
prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We cannot sell the notes to you unless you have received
both this prospectus supplement and the prospectus.
If the prospectus contemplates multiple options, you should rely on
the information in this prospectus supplement as to the applicable option.
The issuer has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 with respect to the
notes offered by this prospectus supplement. This prospectus supplement and the
prospectus, which form a part of the registration statement, omit information
contained in the registration statement pursuant to the rules and regulations of
the Securities and Exchange Commission. You may inspect and copy the
registration statement at the Public Reference Room at the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C., and the
Commission's regional offices at 233 Broadway, New York, New York 10279, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You can obtain copies of these materials at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Securities and Exchange Commission maintains a site on
the World Wide Web containing reports, proxy materials, information statements
and other items. The address is http://www.sec.gov.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The table of contents in this prospectus supplement
and the table of contents included in the accompanying prospectus provide the
pages on which these captions are located.
S-3
Summary
... This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the notes, read carefully this entire prospectus
supplement and the accompanying prospectus.
... This summary provides an overview of calculations, cash flows and other
information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
... You can find a listing of the pages where capitalized terms used in this
prospectus supplement summary are defined under the caption "Index of
Principal Defined Terms" beginning on page S-42 in this prospectus
supplement and under the caption "Index of Terms" beginning on page 45 in
the accompanying prospectus.
Lease-Backed Notes
Series 2002-1
Issuer
IKON Receivables Funding, LLC is a Delaware limited liability company. The
issuer's activities will be limited by the terms of its organizational documents
and the transaction documents to acquiring, holding and managing lease
receivables, issuing and making payments on asset backed notes and other
activities related thereto.
Originator
IOS Capital, LLC, is a Delaware limited liability company formerly known as IOS
Capital, Inc. IOS Capital is a wholly-owned subsidiary of IKON Office Solutions,
Inc. The originator's principal executive offices are located at 1738 Bass Road,
Macon, Georgia 31208 and its telephone number is (478) 471-2300.
Seller
IKON Receivables-2, LLC, is a Delaware limited liability company. The seller's
activities will be limited by the terms of its organizational documents and the
transaction documents to acquiring, holding and selling lease receivables and
the related equipment and other activities related thereto. The issuer will
acquire lease receivables from the seller pursuant to the assignment and
servicing agreement. The seller's principal executive offices are located at
1738 Bass Road, Macon, Georgia 31208.
Servicer
IOS Capital, LLC will be the servicer of lease receivables under the assignment
and servicing agreement. The servicer's principal executive offices are located
at 1738 Bass Road, Macon, Georgia 31208.
Trustee
BNY Midwest Trust Company, an Illinois state banking corporation. The trustee's
offices are located at 2 North LaSalle Street, Suite 1020, Chicago, Illinois
60602.
Insurer
Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation.
The Asset Pool
The issuer will pledge property to secure payments on the notes. The pledged
assets will include:
. a pool of office equipment leases or contracts, including installment
sale contracts, and related assets, including all renewal payments
under such leases or contracts;
. cash on deposit in the reserve account, the collection account and the
renewal account; and
. other assets as described in detail elsewhere in this prospectus
supplement.
The Leases
... On or prior to the issuance date, IOS Capital, LLC will contribute to IKON
Receivables-2, LLC, a pool of office equipment leases, including conditional
sale and other contracts, and IKON Receivables-2, LLC will transfer them to the
issuer. Payments on
S-4
the notes will be made from payments on these leases.
... The leases will relate to various items or types of office equipment.
Initially, a substantial portion relates to copiers.
... The leases are triple-net leases, which means that the lessee is required
to pay all taxes, maintenance and insurance associated with the equipment. The
leases are noncancellable by the lessees. All payments under the leases are
absolute, unconditional obligations of the lessees. The leases provide that the
payments are not subject to set-off or reduction without the lessor's consent.
... The aggregate principal value of the pool of leases at any time will be
calculated by discounting their remaining payments (except for certain minor
charges and delinquent payments) at a rate equal to 5.13%.
... The issuer will pay amounts due on the notes from payments on the leases.
Noteholders should not rely on the sale of leased equipment for payments on the
notes.
Issuance Date
On or about May 30, 2002.
Cut-Off Date
The opening of business on May 1, 2002.
Payment Date
The 15th day of each month if the 15th is a business day. If the 15th is not a
business day, the payment date will be the following day that is a business day.
The first payment date will be June 17, 2002.
Determination Date
Five business days before the payment date. The trustee will calculate the
amounts to be paid on the notes on this date.
Due Period
Payments made on each payment date will relate to the collections received in
respect of the prior calendar month.
Record Date
The last business day preceding a payment date unless the notes are no longer
book-entry notes. If the notes are definitive notes, the record date is the last
business day of the month preceding a payment date.
Stated Maturity Dates
If the notes have not already been paid in full, the issuer will pay the
outstanding principal amount of the notes in full on the payment dates in the
following months:
Class A-1 June 2003
Class A-2 February 2005
Class A-3 October 2006
Class A-4 November 2009
Final payment on the notes will probably be earlier than the stated maturity
dates listed above for the related class of notes.
Optional Redemption
... The issuer may, on any payment date, redeem the notes when the total
discounted lease balance is less than or equal to 10% of the total discounted
lease balance of the leases as of the opening of business on May 1, 2002.
... If a redemption occurs, you will receive a final distribution equaling the
entire unpaid principal balance of the notes plus any accrued and unpaid
interest.
Denominations
... The issuer will issue the notes in minimum denominations of $1,000 and
integral multiples of $1,000.
... One note in each class may be issued in another denomination.
Payments on the Notes
Each month, the issuer will distribute the amounts received on the leases and
any other amounts available for these purposes as follows:
... Interest Distributions. On each payment date, the issuer will pay interest
at the applicable interest rate that accrued during the prior interest accrual
period.
S-5
. Principal Distributions. On each payment date, the issuer will pay
principal in reduction of the outstanding principal balance of the notes.
. Principal payments will be an amount usually based on the decrease in
the principal value of the leases between determination dates. The issuer
will pay principal in the following priority:
. to the Class A-1 noteholders only, until the principal amount on the
Class A-1 Notes has been reduced to zero, an amount equal to the
decrease in the principal value of the leases;
. when the Class A-1 Notes have been paid in full, to the Class A-2
noteholders only, until the principal amount on the Class A-2 Notes
has been reduced to zero, an amount generally equal to approximately
89.36090% of the decrease in the principal value of the leases;
. when the Class A-2 Notes have been paid in full, to the Class A-3
noteholders only, until the principal amount on the Class A-3 Notes
has been reduced to zero, an amount generally equal to approximately
89.36090% of the decrease in the principal value of the leases; and
. when the Class A-3 Notes have been paid in full, to the Class A-4
noteholders, until the principal amount on the Class A-4 Notes has
been reduced to zero, an amount generally equal to approximately
89.36090% of the decrease in the principal value of the leases.
This general description of distributions of principal on the notes is
subject to targets and floors which may result in additional principal
payments. We refer you to "Descriptions of the Notes--Distributions" in
this prospectus supplement for further information regarding the payment of
interest and principal on the notes.
Credit Enhancement
The credit enhancement available to you will consist of the following:
. Reserve Account. A reserve account will be established in the name of
the trustee for the benefit of the noteholders. Funds in the reserve
account will be used to pay shortfalls in amounts due to noteholders. The
issuer will initially deposit 1% of the initial principal value of the
leases into the reserve account.
. Overcollateralization. Additional credit enhancement is provided
because the initial principal amount of the notes is less than the initial
principal value of the leases in the asset pool.
. Renewals. The leases contain automatic renewal provisions which provide
that upon expiration of the contractual lease, the lease will renew on a
month-to-month or quarter-to-quarter basis until the lessee notifies the
lessor of its intent to discontinue its use of the equipment and returns
the equipment to the lessor. The renewal payments, if any, of each lease
will serve as credit enhancement.
. Insurance Policy. The issuer will obtain a noncancellable insurance
policy from Ambac Assurance Corporation with respect to the notes. This
insurance policy will unconditionally and irrevocably guarantee payments to
you of interest and principal, but subject to specific terms and conditions
set forth under the heading "The Insurer and the Policy" in this prospectus
supplement.
We refer you to "The Insurer and the Policy" and "Description of the
Notes--Principal Payments" and "--Reserve Account" in this prospectus
supplement for more detail.
Material Federal Income Tax Consequences
For federal income tax purposes:
. Dewey Ballantine LLP, tax counsel, is of the opinion that the notes
will be characterized as indebtedness and the issuer will not be
characterized as an association (or a publicly traded partnership) taxable
as a corporation for federal income tax purposes. By your acceptance of a
note, you agree to treat the notes as indebtedness.
. Interest on the notes will be taxable as ordinary income when received
by a holder using the cash method of accounting and when accrued by a
holder using the accrual method of accounting.
. Dewey Ballantine LLP has prepared the discussion under "Material
Federal Income Tax Consequences" in the prospectus and this prospectus
supplement and is of the opinion that this discussion accurately states all
material federal income tax consequences of the purchase, ownership and
disposition of the notes to their original purchaser.
S-6
Legal Investment
The Class A-1 Notes will be eligible securities for purchase by money market
funds under rule 2a-7 under the Investment Company Act of 1940, as amended.
ERISA Considerations
Subject to the considerations and conditions described under "ERISA
Considerations" in the prospectus and this prospectus supplement, pension,
profit-sharing and other employee benefit plans, as well as individual
retirement accounts, may purchase notes. Investors should consult with their
counsel regarding the applicability of the Employee Retirement Income Security
Act of 1974, as amended, before purchasing a note.
Ratings
... The issuer will not issue the notes unless they have been assigned the
following ratings:
Initial Ratings
-----------------
Moody's S&P
Class A-1 P-1 A-1+
Class A-2 Aaa AAA
Class A-3 Aaa AAA
Class A-4 Aaa AAA
... You must not assume that the ratings will not be lowered, qualified or
withdrawn by the rating agencies.
S-7
Risk Factors
In addition to the risk factors discussed in the prospectus, prospective
investors should consider, among other things, the following additional factors
in connection with the purchase of the notes:
Geographic Concentrations of Adverse economic conditions or other factors
Leases May Adversely Affect the affecting any state or region where a high
Leases and Payments on the Notes concentration of lessees under the leases
are located could adversely affect the
performance of the leases. As of the opening
of business on May 1, 2002, lessees with
respect to approximately 13.07%, 7.68% and
6.06% of the leases (based on the
statistical discounted present value of the
leases) were located in California, Texas
and Florida, respectively. No other state
accounts for more than 5% of the leases.
If adverse events or economic conditions
were particularly severe in those geographic
regions or in the event a lessee or group of
lessees in those geographic regions
experienced financial difficulties, the
lessees may be unable to pay or may not make
timely payments. If these events or
conditions occur, you may experience delays
in receiving payments on the notes and
suffer loss of your investment. The issuer
is unable to determine and has no basis to
predict, for any state or region, whether
any events like these have occurred or may
occur, or to what extent any events like
these may affect the leases or the repayment
of amounts due under the notes.
Ratings of the Notes are Dependent The ratings of the notes will depend
upon the Creditworthiness of the primarily on the creditworthiness of the
Insurer insurer as the provider of the financial
guarantee insurance policy relating to the
notes. There is a risk that any reduction
in any of the insurer's financial strength
ratings would result in a reduction in the
ratings of the notes.
Low Renewal Rates May Adversely A portion of the credit enhancement
Affect the Amount of Credit available will depend upon whether lessees
Enhancement renew their leases on either a month-to-
month or quarter-to-quarter basis. Lessees
will generally evidence their decision to
renew their leases by retaining the leased
equipment beyond the initial term of the
lease. In the event that renewal rates are
less than anticipated, the amount of such
renewal payments may ultimately result in a
lower amount of credit enhancement than is
anticipated. The issuer cannot guarantee
the amount of lessees that will renew their
leases after the expiration of the initial
term of each such lease.
Timing of Payments on the Leases Distributions on the notes are paid on a
monthly basis. Certain leases are paid on a
quarterly basis which may affect the timing
of the payment of principal on the notes.
S-8
The Issuer
The Issuer, IKON Receivables Funding, LLC, is a special purpose
Delaware limited liability company all of the membership interests in which are
held by the Seller, IKON Receivables-2 LLC, also a special purpose Delaware
limited liability company. All of the membership interests in the Seller are, in
turn, owned by the Originator and Servicer, IOS Capital, LLC.
The Notes will be secured solely by the Asset Pool (as defined
herein). The Issuer does not have, nor is it expected in the future to have, any
significant assets other than the Asset Pool (and similar asset pools securing
other series of notes) and the sole sources of funds available for payment of
the Notes are the Asset Pool, including the Reserve Account and proceeds of the
financial guaranty insurance policy described herein (the "Policy").
Because the Issuer has no operating history and will not engage in
any business other than activities incidental to the acquisition of the Asset
Pool (and asset pools relating to other series of notes) and the issuance of the
Notes (and other series of notes), no historical or pro forma financial
statements or financial ratios with respect to the Issuer, other than the
balance sheet of the Issuer at March 5, 2002 included in the accompanying
Prospectus dated March 11, 2002, have been included herein or in the Prospectus.
The Issuer will pledge its interest in the Asset Pool to BNY Midwest
Trust Company, as Trustee for the benefit of the holders of the Notes and will
issue the Notes pursuant to an indenture between the Issuer and the Trustee.
The Servicer and the Originator
General. The Lease Receivables (as defined herein) will be acquired
by the Seller from IOS Capital and by the Issuer from the Seller. IOS Capital, a
Delaware limited liability company headquartered in Macon, Georgia, will serve
as the Servicer of the Leases. IOS Capital is a wholly-owned subsidiary of IKON
Office Solutions, Inc. ("IKON Office Solutions"). Additional information about
IOS Capital is contained in the Prospectus. See "The Originator's Leasing
Business" in the Prospectus.
At March 31, 2002, on an unaudited basis, IOS Capital had
approximately $3,267,637,000 in assets, approximately $2,835,994,000 in
liabilities and approximately $431,643,000 in members' equity.
Historical Delinquency and Loss Information. General delinquency
information for leases in IOS Capital's servicing portfolio (including and
excluding funded leases) not charged-off, and general charge-off information for
leases in IOS Capital's servicing portfolio (including and excluding funded
leases), are set forth in the tables below. Lease receivables in the Servicer's
servicing portfolio are generally charged-off between 121 and 181 days past due
depending upon credit quality and the reasons for delinquency in accordance with
the IKON risk management policy. Any account more than 181 days past due
requires IKON corporate authorization to waive charge-off. Any subsequent
recoveries offset gross losses.
As described under "The Originator's Leasing Business - Types of
Leases" in the Prospectus, the lease portfolio of IOS Capital consists of direct
financing leases and funded leases, although the Leases included in the Asset
Pool consist solely of direct financing leases. Funded leases are contractual
obligations between IKON Office Solutions and IKON Office Solutions' operational
units which have been financed by IOS Capital. Direct financing leases are
contractual obligations between IOS Capital and the customer and represent the
majority of IOS Capital's lease portfolio. The tables below separately set forth
historical delinquency and loss information for IOS Capital's lease portfolio
including funded leases and excluding funded leases for the respective periods
or dates indicated.
S-9
Summary Historical Delinquency Data (Entire Portfolio)
IOS Capital Portfolio
As at:
--------------------------------------------------------------------------------------
March 31, March 31, September 30, September 30,
2002 2001 2001 2000
-------------------- -------------------- -------------------- --------------------
($ millions) %* ($ millions) %* ($ millions) %* ($ millions) %*
Current $2,765.3 92.4% $2,600.6 89.8% $ 2,679.6 89.9% $ 2,446.5 87.1%
31-60 Days 144.6 4.8 173.8 6.0 174.9 5.9 213.4 7.6
61-90 Days 47.6 1.6 75.3 2.6 71.8 2.4 92.7 3.3
91-120 Days 21.0 0.7 28.9 1.0 32.8 1.1 33.7 1.2
Over 120 Days 15.8 0.5 17.4 0.6 20.5 0.7 21.9 0.8
------------ ------ ------------ ------ ------------ ------ ------------ ------
Total $2,994.3 100.0% $2,896.0 100.0% $ 2,979.6 100.0% $ 2,808.2 100.0%
----------------------------------------------------------------
September 30, September 30, September 30,
1999 1998 1997
-------------------- -------------------- --------------------
($ millions) %* ($ millions) %* ($ millions) %*
Current $ 2,397.6 89.6% $ 2,292.2 90.8% $1,882.1 89.4%
31-60 Days 157.9 5.9 136.3 5.4 113.7 5.4
61-90 Days 74.9 2.8 63.1 2.5 65.3 3.1
91-120 Days 37.5 1.4 30.3 1.2 27.4 1.3
Over 120 Days 8.0 0.3 2.5 0.1 16.8 0.8
------------ ------ ------------ ------ ------------ ------
Total $ 2,675.9 100.0% $ 2,524.4 100.0% $2,105.3 100.0%
* Represents lease portfolio receivables as a percentage of the total
portfolio balance.
Summary Historical Loss Data (Entire Portfolio)
IOS Capital Portfolio
For the Six Months Ended: For the Fiscal Year Ended:
------------------------ -----------------------------------------------------------------------
March 31, March 31, September 30, September 30, September 30, September 30, September 30,
2002 2001 2001 2000 1999 1998 1997
---------- ----------- ------------- ------------- ------------- ------------- -------------
Average Portfolio Balance for the
Period ($ millions)* $ 2,994 $ 2,863 $ 2,913 $ 2,704 $ 2,621 $ 2,394 $ 1,891
Gross Charge-offs** ($ millions) $ 76.9*** $ 71.1*** $ 69.4 $ 72.5 $ 79.2 $ 98.8 $ 51.6
Gross Charge-offs as a % of the
Average Portfolio Balance for
the Period** 2.6%*** 2.5%*** 2.4% 2.7% 3.0% 4.1% 2.7%
* Average Portfolio Balance for the Period was calculated by adding the
ending servicing portfolio balance for each of the related quarters in
the period and dividing by the number of quarters in such period.
** Information with respect to net charge-offs is not available. Lease
receivables in the Servicer's servicing portfolio are generally
charged-off between 121 and 181 days past due depending upon credit
quality and the reasons for delinquency in accordance with the IKON
risk management policy.
*** Annualized.
Summary Historical Delinquency Data (Without Funded Leases)
IOS Capital Portfolio
As at:
--------------------------------------------------------------------------------------
March 31, March 31, September 30, September 30,
2002 2001 2001 2000
-------------------- -------------------- -------------------- --------------------
($ millions) %* ($ millions) %* ($ millions) %* ($ millions) %*
Current $ 2,496.6 91.6% $ 2,581.2 89.7% $ 2,415.4 89.0% $ 2,063.4 85.1%
31-60 Days 144.6 5.3 173.8 6.0 174.9 6.4 213.4 8.8
61-90 Days 47.6 1.7 75.3 2.6 71.8 2.6 92.7 3.8
91-120 Days 21.0 0.8 28.9 1.0 32.8 1.2 33.7 1.4
Over 120 Days 15.8 0.6 17.4 0.6 20.5 0.8 21.9 0.9
------------ ------ ------------ ------ ------------ ------ ------------ ------
Total $ 2,725.6 100.00% $ 2,876.6 l00.0% $ 2,715.4 100.0% $ 2,425.1 100.0%
----------------------------------------------------------------
September 30, September 30, September 30,
1999 1998 1997
-------------------- -------------------- --------------------
($ millions) %* ($ millions) %* ($ millions) %*
Current $ 1,909.1 87.3% $ 1,662.5 87.7% $ 1,367.5 86.0%
31-60 Days 157.9 7.2 136.3 7.2 113.7 7.1
61-90 Days 74.9 3.4 63.1 3.3 65.3 4.1
91-120 Days 37.5 1.7 30.3 1.6 27.4 1.7
Over 120 Days 8.0 0.4 2.5 0.1 16.8 1.1
------------ ------ ------------ ------ ------------ ------
Total $ 2,187.4 100.0% $ 1,894.7 100.0% $ 1,590.7 100.0%
* Represents lease portfolio receivables as a percentage of the total
portfolio balance
S-10
Summary Historical Loss Data (Without Funded Leases)
IOS Capital Portfolio
For the Six Months Ended: For the Fiscal Year Ended:
--------------------------- ---------------------------------------------------------------------
March 31, March 31, September 30, September 30, September 30, September 30, September 30,
2002 2001 2001 2000 1999 1998 1997
----------- -------------- --------------- ------------- ------------ ------------ -------------
Average Portfolio Balance
for the Period ($ millions)* $2,714 $2,615 $2,662 $2,307 $2,062 $1,797 $1,447
Gross Charge-offs
($ millions)** $ 74.6*** $ 70.1*** $ 67.5 $ 70.0 $ 67.2 $ 80.5 $ 47.4
Gross Charge-offs as a %
of the Average Portfolio
Balance for the Period** 2.7%*** 2.7%*** 2.5% 3.0% 3.3% 4.5% 3.3%
* Average Portfolio Balance for the Period was calculated by adding the
ending servicing portfolio balance for each of the related quarters in the
period and dividing by the number of quarters in such period.
** Information with respect to net charge-offs is not available. Lease
receivables in the Servicer's servicing portfolio are generally charged-off
between 121 and 181 days past due depending upon credit quality and the
reasons for delinquency in accordance with the IKON risk management policy.
*** Annualized.
IOS Capital's charge-off policy was revised in early 1998 to
promote the timely recognition of losses. Prior to the implementation of the
revised charge-off policy, the individual IKON Office Solutions operational
units had the authority to make exceptions to the charge-off policy on leases
over 120 days past due for customers that the operational units judged were
likely to pay. The revised policy defines specific exceptions to the charge-off
policy based on company-wide standardized credit risk management criteria and
requires specific evidence of a customer's ability to bring the lease to a
current status. Exceptions for leases that are between 121 and 181 days past due
require approval by the credit review team at IOS Capital to avoid charge-off.
There can be no assurance that the levels of delinquency and loss
reflected in the tables above will be indicative of the performance of the
Leases in the future.
The Insurer and the Policy
General. The information set forth in this section has been
provided by Ambac Assurance Corporation ("Ambac" or the "Insurer") for inclusion
in this Prospectus Supplement. No representation is made by any of the
Underwriters (as defined herein), the Issuer, IOS Capital, or any of their
affiliates as to the accuracy or completeness of the information.
The Insurer. Ambac is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. Ambac
primarily insures newly issued municipal and structured finance obligations.
Ambac is a wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly
AMBAC Inc.), a 100% publicly-held company. Moody's Investors Service Inc.
("Moody's"), Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"), and Fitch, Inc. ("Fitch") have each assigned a triple-A
financial strength rating to Ambac.
The consolidated financial statements of Ambac and its
subsidiaries as of December 31, 2001 and December 31, 2000, and for each of the
years in the three-year period ended December 31, 2001, prepared in accordance
with accounting principles generally accepted in the United States of America,
included in the Annual Report on Form 10-K of Ambac Financial Group, Inc. (which
was filed with the Securities and Exchange Commission ("SEC") on March 26, 2002,
Commission File No. 1-10777), the unaudited consolidated financial statements of
Ambac and its subsidiaries as of March 31, 2002 and for the periods ending March
31, 2002 and March 31, 2001 included in the Quarterly Report on Form 10-Q of
Ambac Financial Group, Inc. (filed with the SEC on May 13, 2002), and the
Current Reports of Form 8-K filed with the SEC on January 25, 2002 and April 18,
2002, as each related to Ambac, are hereby incorporated by reference into this
Prospectus Supplement and shall be deemed to be a part hereof. Any statement
contained in a document incorporated herein by reference shall be modified or
S-11
superseded for the purposes of this Prospectus Supplement to the extent that a
statement contained herein by reference herein also modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of Ambac and its subsidiaries included
in documents filed by Ambac Financial Group, Inc. with the SEC pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Notes shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing of those documents.
The following table sets forth the capitalization of Ambac as of
December 31, 2000, December 31, 2001 and March 31, 2002, respectively, in
conformity with accounting principles generally accepted in the United States of
America.
Ambac Assurance Corporation and Subsidiaries
Consolidated Capitalization Table
(Dollars in Millions)
March 31,
December 31, December 31, 2002
2000 2001 (unaudited)
------------ ------------ -----------
Unearned premiums................. $ 1,556 $ 1,790 $ 1,817
Other liabilities................. 581 888 835
------- ------- -------
Total liabilities................. $ 2,137 $ 2,678 $ 2,652
------- ------- -------
Stockholder's equity:
Common stock................. 82 82 82
Additional paid-in capital... 760 928 928
Accumulated other
comprehensive income......... 82 81 53
Retained earnings............ 2,002 2,386 2,488
------- ------- -------
Total stockholder's equity........ $ 2,926 $ 3,477 $ 3,551
------- ------- -------
Total liabilities and
stockholder's equity........... $ 5,063 $ 6,155 $ 6,203
======= ======= =======
For additional financial information concerning Ambac and its
subsidiaries, see the audited financial statements of Ambac and subsidiaries
incorporated by reference herein. Copies of the financial statements of Ambac
incorporated herein by reference and copies of Ambac's annual statement for the
year ended December 31, 2001 prepared in accordance with statutory accounting
standards are available, without charge, from Ambac. The address of Ambac's
administrative offices and its telephone number are One State Street Plaza,
19/th/ Floor, New York, New York, 10004 and (212) 668-0340.
Ambac makes no representation regarding the Notes or the
advisability of investing in the Notes and makes no representation regarding,
nor has it participated in the preparation of, this Prospectus Supplement other
than the information supplied by Ambac and presented under the heading "The
Insurer and the Policy" and in the financial statements incorporated herein by
reference.
The Policy. The following summary of the terms of the Policy does
not purport to be complete and is qualified in its entirety by reference to the
Policy.
The Insurer will issue the Policy with respect to the Notes in
favor of the Trustee for the benefit of the Noteholders (as defined in this
section). The Policy unconditionally guarantees the payment of Insured Payments
(as defined in this section) on the Notes. The Insurer will make each required
Insured Payment, other than
S-12
with respect to Preference Amounts (as defined in this section) to the Trustee
on the later of (i) the Payment Date (as defined herein) on which the Insured
Payment is distributable to the Noteholders pursuant to the Indenture; and (ii)
the third Business Day (as defined in this section) following the Business Day
on which the Insurer shall have received telephonic or telegraphic notice,
subsequently confirmed in writing, or written notice by registered or certified
mail, from the Trustee, specifying that an Insured Payment is due in accordance
with the terms of the Policy. The Insurer will pay any Insured Payment that is a
Preference Amount on the third Business Day following the Business Day on which
the Insurer has received a certified copy of a final non-appealable order
requiring the return of the Preference Amount, and other documentation as is
reasonably required by the Insurer, as specified in the Policy, in a form
satisfactory to the Insurer. If any documentation required under the Policy is
received after 12:00 noon (New York City time) on that Business Day, it will be
deemed to have been received on the following Business Day.
The Insurer's obligation under the Policy will be discharged to
the extent that funds are received by the Trustee for distribution to the
Noteholders, whether or not the funds are properly distributed by the Trustee.
The Insurer will be subrogated to all of the Noteholders' rights
to payment on the Notes to the extent of the payments made under the Policy and
shall be deemed to the extent of payments so made to be a registered Noteholder
for purposes of payment. Payments under the Policy will be made only at the time
set forth in the Policy and no accelerated payments shall be made regardless of
any acceleration of any of the Notes, unless the acceleration is at the sole
option of the Insurer.
The Policy does not cover shortfalls, if any, attributable to the
liability of the Issuer or the Trustee for withholding taxes, if any (including
interest and penalties in respect of that liability), any prepayment penalty or
other accelerated payment, which at any time may become due on or with respect
to any Note, including as a result of any Acceleration Event (as defined
herein), nor against any risk other than nonpayment, including failure of the
Trustee to make any payment due to the Noteholders. The Policy does not cover,
and Insured Payments do not include, any shortfalls due to the application of
the Soldiers' and Sailors' Relief Act.
For purposes of the Policy, "Noteholders" does not and may not
include the Issuer, the Seller, the Servicer or their respective affiliates.
"Business Day" means any day that is not a Saturday, a Sunday or
other day on which commercial banking institutions in the cities in which the
principal office of the Trustee, the Insurer and the Servicer are located are
authorized or obligated by law or executive order to remain closed.
"Insured Payment" means (a) on any Payment Date, the excess, if
any, of (i) the related Interest Payments (as defined herein) over (ii) the
related Available Funds (as defined herein), (b) on any Business Day, any
Preference Amount (without duplication), (c) on the Payment Date in June 2003,
the outstanding Note Principal Balance (as defined in this section) of the Class
A-1 Notes then outstanding to the extent Available Funds are not sufficient to
make the payment on that Payment Date, (d) on the Payment Date in February 2005,
the outstanding Note Principal Balance of the Class A-2 Notes then outstanding
to the extent Available Funds are not sufficient to make the payment on that
Payment Date, (e) on the Payment Date in October 2006, the outstanding Note
Principal of the Class A-3 Notes then outstanding to the extent Available Funds
are not sufficient to make the payment on that Payment Date, and (f) on the
Payment Date in November 2009, the outstanding Note Principal Balance of the
Class A-4 Notes then outstanding to the extent Available Funds are not
sufficient to make the payment on that Payment Date.
"Note Principal Balance" means, as of any date of determination
and with respect to each Class of Notes, the principal balance of the related
class of Notes on or about May 30, 2002 (the "Issuance Date") less any amounts
actually distributed as principal thereon.
"Preference Amount" means any payment of principal or interest on
a Note to a Noteholder by or on behalf of the Trustee which has been deemed to
be a preferential transfer and theretofore recovered from the Noteholder by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.)
as amended from time to time, in accordance with a final non-appealable order of
a court having competent jurisdiction.
S-13
The Policy is noncancellable. The Policy expires and terminates
without any action on the part of the Insurer or any other person on the date
that is one year and one day following the date on which the Notes have been
paid in full.
The Policy is issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
Draws Under the Policy. On each Determination Date, the Trustee
will determine, based on the servicing report with respect to such Determination
Date, whether an Insured Payment is required to be paid for the Notes for the
related Payment Date. If the Trustee determines that an Insured Payment is
required to be paid for the related Payment Date, the Trustee will complete a
notice in the form of Exhibit A to the Policy and submit it to the Insurer no
later than 12:00 noon (New York City time) on the third Business Day preceding
that Payment Date as a claim for an Insured Payment. If the Trustee receives a
certified copy of an order of the appropriate court that any amount previously
distributed to a Noteholder has been avoided in whole or in part as a Preference
Amount, the Trustee shall so notify the Insurer and shall comply with the
provisions of the Policy to obtain payment by the Insurer of such Preference
Amount.
Under the Indenture, the Insurer has the option to deliver funds
to the Trustee to provide for payment of fees or expenses of any provider of
services to the Issuer or to be added to Available Funds to the extent that a
drawing under the Policy otherwise would be required.
The Asset Pool
Lease Receivables. The Notes will be secured by a segregated pool
of assets (the "Asset Pool") that 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 "Leases"), together with
the equipment financing portion of each periodic rental payment due under the
Leases on or after the opening of business on May 1, 2002 (the "Cut-Off Date")
and all related Casualty Payments, Retainable Deposits, Termination Payments and
Renewal Payments (each as defined herein). The Leases, including the Issuer's
security interest in the underlying equipment and other property relating to the
Leases (such equipment and property, the "Equipment"), are referred to as the
"Lease Receivables."
The Issuer will not have and the Asset Pool will not include any
ownership interest in any Equipment, including any residual interest in any
Equipment after the related Lease has been paid in full.
The Leases and Equipment will be acquired by the Seller from the
Originator pursuant to an Assignment and Servicing Agreement among the Seller,
the Originator and the Issuer (the "Assignment and Servicing Agreement").
Contemporaneously, the Lease Receivables will be transferred from the Seller to
the Issuer pursuant to the Assignment and Servicing Agreement and pledged by the
Issuer to the Trustee for the benefit of the Noteholders.
The Leases were originated by the Originator or acquired by the
Originator from sellers or other originators in accordance with the Originator's
specified underwriting criteria. The underwriting criteria applicable to the
Leases included in the Asset Pool are described in all material respects under
the heading "The Originator's Leasing Business" in the Prospectus.
The Leases are triple-net leases which means that the terms of
the leases require the lessees to pay all taxes, maintenance and insurance
associated with the related Equipment and provide that they are noncancellable
by the businesses and individual business owners who lease the Equipment (each,
a "Lessee"). Under some conditions, IOS Capital may consent to prepayment of the
Leases. Generally, IOS Capital will consent to a prepayment of a Lease where the
Lessee is upgrading the related Equipment. All payments under the Leases are
S-14
absolute, unconditional obligations of the related Lessees. The Leases provide
that payments under the Leases are not subject to setoff or reduction without
the consent of the related lessor (each a "Lessor"). Payments on the Leases will
be made by the Lessees to IOS Capital, as Servicer, for the account of IKON
Receivables Funding, LLC.
Each Lessee entered into its Lease for specified Equipment which
may be designated in schedules incorporated into the Lease. To the extent not
set forth in the Lease, the schedules, among other things, establish the
periodic payments and the term of the Lease with respect to the Equipment. The
Leases follow one of several different forms of lease agreement, with occasional
modifications which do not materially affect the basic terms of the Leases. As
of the Cut-Off Date, the weighted average remaining term of the Leases in the
Asset Pool is 45.32 months. The Originator will represent and warrant that, as
of the Cut-Off Date, all Leases will be current or less than 63 days delinquent
and, as of the initial Determination Date, all Lessees will have made the first
scheduled payment.
IOS Capital offers a cost per copy program, pursuant to which
Lessees pay a fixed monthly payment for which they are allowed a minimum monthly
copy usage. The monthly fixed payment represents equipment financing and a
monthly maintenance charge (the "Maintenance Charge"). The Maintenance Charge is
remitted to IKON Office Solutions monthly upon collection by IOS Capital. IOS
Capital calculates usage monthly using copier meter readings. To the extent that
the usage has exceeded the monthly copy allowance, IOS Capital bills the Lessee
incremental charges for the excess copy usage ("Excess Copy Charge"). This
Excess Copy Charge is remitted to IKON Office Solutions upon collection by IOS
Capital.
Lessees covenant to maintain the Equipment and install it at a
place of business agreed upon with IOS Capital. Delivery, transportation,
repairs and maintenance are the obligation of the Lessees, and all Lessees are
required to carry, at their respective expense, liability and replacement cost
insurance under terms acceptable to IOS Capital. Proceeds of this insurance will
constitute Casualty Payments. Any defaults under a Lease permit a declaration,
as immediately due and payable, of all remaining Lease Payments under the Lease
and the immediate return of the Equipment. Generally, any payments received ten
days or more after the scheduled payment date are subject to late charges. Late
charges will be retained by the Servicer to the extent Servicer Advances (as
defined herein) are made by the Servicer.
"Non-Performing Leases" are (a) Leases that have become more than
120 days delinquent, (b) Leases that have been accelerated by the Servicer or
(c) Leases that the Servicer has determined to be uncollectible in accordance
with the Servicer's customary practices. IOS Capital will represent and warrant
that, as of the Cut-Off Date, none of the Leases are Non-Performing Leases and
the Seller will represent in the Assignment and Servicing Agreement that at the
time of transfer of any Lease to the Issuer, the Lease was not a Non-Performing
Lease.
The Servicer's customary practices with respect to Non-Performing
Leases include any action necessary to cause, or attempt to cause, the Lessee
thereunder to cure its non-performance or to terminate the Lease and recover the
outstanding amount owed under the Lease and all damages resulting from any
default on the Non-Performing Leases. The Servicer will take action that is
consistent with the customary practices of servicers in the equipment leasing
industry. In addition, the Servicer will use its best efforts to sell or lease
any Equipment that is subject to a Non-Performing Lease in a timely manner and
upon the most favorable terms and conditions available at the time in order to
recoup any amounts still due on the Lease.
Certain Information with Respect to the Leases and the Lessees.
The following tables present information about the Leases and the Lessees as of
the Cut-Off Date. The Issuer is not aware of any trends or changes relating to
the data in the following tables that would be expected to impact the future
performance of the pool of Leases. As used in these tables, the "Statistical
Discounted Present Value of the Leases" means an amount equal to the future
remaining scheduled Lease Payments from the Leases as of the Cut-Off Date,
discounted at a rate equal to 5.25%. The aggregate Statistical Discounted
Present Value of the Leases as of the Cut-Off Date is $688,486,886.50. The top
ten obligors represent less than 3.12% of the aggregate Statistical Discounted
Present Value of the Leases. Certain leases may be removed from the Asset Pool
prior to the Issuance Date in an amount no more than 5% of the Asset Pool. This
removal would result in a decrease in the Initial Principal Amount of the Notes
issued on the Issuance Date. However, this removal is not expected to materially
affect the distribution of the Leases detailed below. Figures in the tables may
not add up to the stated totals due to rounding. See "Description of the
Notes--Discounted Present Value of the Leases."
S-15
Composition of the Initial Leases
Aggregate Statistical Discounted Present Value of the Leases: $688,486,886.50
Number of Leases: 38,022
Average Statistical Discounted Present Value of the Leases: $18,107.59
Weighted Average Original Term: 52.90 months
Weighted Average Remaining Term: 45.32 months
Weighted Average Seasoning: 7.58 months
S-16
Distribution of Leases by State/(1)/
Percentage of
Percentage Statistical Statistical
of Discounted Discounted
Number of Number of Present Present Value
State Leases Leases Value of Leases of Leases
- --------------------------------- -------------- -------------- ---------------------- -----------------
Alabama 349 0.92% $ 4,855,023.71 0.71%
Alaska 144 0.38 2,981,519.84 0.43
Arizona 797 2.10 15,824,485.57 2.30
Arkansas 178 0.47 4,324,552.90 0.63
California 3,706 9.75 90,011,810.94 13.07
Colorado 581 1.53 10,490,317.48 1.52
Connecticut 1,020 2.68 15,766,904.20 2.29
Delaware 57 0.15 527,481.41 0.08
District of Columbia 149 0.39 3,414,527.02 0.50
Florida 2,810 7.39 41,725,998.91 6.06
Georgia 1,440 3.79 25,734,447.84 3.74
Hawaii 180 0.47 3,190,808.74 0.46
Idaho 281 0.74 3,372,622.61 0.49
Illinois 1,090 2.87 20,299,685.61 2.95
Indiana 1,108 2.91 22,298,709.62 3.24
Iowa 532 1.40 7,871,315.06 1.14
Kansas 469 1.23 7,660,662.74 1.11
Kentucky 507 1.33 6,886,612.44 1.00
Louisiana 265 0.70 3,187,472.37 0.46
Maine 292 0.77 3,649,177.20 0.53
Maryland 425 1.12 7,704,273.50 1.12
Massachusetts 1,525 4.01 30,635,100.29 4.45
Michigan 1,209 3.18 20,289,787.94 2.95
Minnesota 1,268 3.33 21,417,603.40 3.11
Mississippi 374 0.98 3,969,727.70 0.58
Missouri 1,242 3.27 25,282,730.69 3.67
Montana 39 0.10 746,212.13 0.11
Nebraska 276 0.73 4,262,399.98 0.62
Nevada 639 1.68 10,680,678.96 1.55
New Hampshire 286 0.75 5,044,786.63 0.73
New Jersey 510 1.34 9,695,061.49 1.41
New Mexico 222 0.58 4,124,131.25 0.60
New York 1,601 4.21 28,755,594.43 4.18
North Carolina 1,526 4.01 23,431,481.04 3.40
North Dakota 3 0.01 61,279.59 0.01
Ohio 1,005 2.64 21,547,746.11 3.13
Oklahoma 394 1.04 8,311,904.13 1.21
Oregon 757 1.99 12,408,479.68 1.80
Pennsylvania 1,082 2.85 23,392,661.85 3.40
Rhode Island 301 0.79 6,405,161.04 0.93
South Carolina 578 1.52 12,132,706.01 1.76
South Dakota 24 0.06 145,866.24 0.02
Tennessee 369 0.97 7,240,399.15 1.05
Texas 3,201 8.42 52,859,931.25 7.68
Utah 272 0.72 4,663,772.93 0.68
Vermont 229 0.60 2,970,114.14 0.43
Virginia 903 2.37 15,841,548.80 2.30
Washington 1,206 3.17 20,369,099.28 2.96
West Virginia 69 0.18 1,874,340.45 0.27
Wisconsin 425 1.12 6,996,033.90 1.02
Wyoming 107 0.28 1,152,136.31 0.17
========================================================================================================================
Total: 38,022 100.00% $ 688,486,886.50 100.00%
========================================================================================================================
(1) Based on the location of the lessees.
S-17
Distribution of Leases by Lease Balance
Percentage of
Percentage Statistical Statistical
Statistical Discounted of Discounted Discounted
Present Value of the Number of Number of Present Present Value
Leases Leases Leases Value of Leases of Leases
----------------------- ----------- ----------- ----------------- ----------------
0.01 - 5,000.00 11,496 30.24% $29,871,797.96 4.34%
5,000.01 - 10,000.00 9,582 25.20 70,510,320.86 10.24
10,000.01 - 15,000.00 5,347 14.06 65,474,661.26 9.51
15,000.01 - 20,000.00 3,350 8.81 57,991,522.68 8.42
20,000.01 - 25,000.00 2,061 5.42 45,887,324.42 6.66
25,000.01 - 30,000.00 1,285 3.38 35,075,259.96 5.09
30,000.01 - 40,000.00 1,597 4.20 55,018,005.30 7.99
40,000.01 - 50,000.00 907 2.39 40,519,752.70 5.89
50,000.01 - 60,000.00 525 1.38 28,748,999.91 4.18
60,000.01 - 70,000.00 381 1.00 24,663,896.69 3.58
70,000.01 - 80,000.00 280 0.74 20,924,858.19 3.04
80,000.01 - 90,000.00 187 0.49 15,817,740.80 2.30
90,000.01 - 100,000.00 169 0.44 15,987,651.93 2.32
100,000.01 - 150,000.00 398 1.05 48,491,779.95 7.04
150,000.01 - 200,000.00 180 0.47 31,155,653.53 4.53
200,000.01 - 300,000.00 157 0.41 37,603,441.04 5.46
300,000.01 - 400,000.00 54 0.14 18,504,900.54 2.69
400,000.01 - 500,000.00 22 0.06 9,770,275.71 1.42
500,000.01 - 600,000.00 19 0.05 10,064,098.58 1.46
600,000.01 - 700,000.00 3 0.01 1,865,456.69 0.27
700,000.01 - 800,000.00 6 0.02 4,470,377.49 0.65
800,000.01 - 900,000.00 1 0.00 862,337.84 0.13
900,000.01 - 1,000,000.00 3 0.01 2,916,313.25 0.42
1,000,000.01 - 1,500,000.00 10 0.03 12,484,946.66 1.81
1,500,000.01 - 2,000,000.00 1 0.00 1,732,617.74 0.25
greater than
or equal to
2,000,000.01 1 0.00 2,072,894.84 0.30
=====================================================================================
Total: 38,022 100.00% $688,486,886.50 100.00%
=====================================================================================
Distribution of Leases by Remaining Term to Maturity
Percentage of
Percentage Statistical Statistical
of Discounted Discounted
Number of Number of Present Present Value
Remaining Term (months) Leases Leases Value of Leases of Leases
----------------------- ------------- ----------- ------------------ ---------------
1 - 12 923 2.43% $ 3,832,732.35 0.56%
13 - 24 3,420 8.99 25,507,942.54 3.70
25 - 36 11,631 30.59 133,887,322.45 19.45
37 - 48 7,829 20.59 150,639,628.81 21.88
49 - 60 14,212 37.38 373,476,138.42 54.25
61 - 72 7 0.02 1,143,121.93 0.17
=====================================================================================
Total: 38,022 100.00% $688,486,886.50 100.00%
=====================================================================================
Distribution of Leases by Payment Frequency
Percentage of
Percentage Statistical Statistical
of Discounted Discounted
Payment Number of Number of Present Present Value
Frequency Leases Leases Value of Leases of Leases
------------------ --------------- ---------- ------------------ --------------
Annual 8 0.02% $ 73,818.95 0.01%
Monthly 35,648 93.76 652,476,257.87 94.77
Quarterly 2,362 6.21 35,903,134.00 5.21
Semi-Annual 4 0.01 33,675.68 0.00
=====================================================================================
Total: 38,022 100.00% $688,486,886.50 100.00%
=====================================================================================
S-18
Distribution of Leases by Original Term to Maturity
Percentage of
Percentage Statistical Statistical
of Discounted Discounted
Number of Number of Present Present Value
Original Term (months) Leases Leases Value of Leases of Leases
- ------------------------ --------- ---------- --------------- -------------
1 - 12 322 0.85% $ 1,140,246.32 0.17%
13 - 24 1,355 3.56 6,693,388.32 0.97
25 - 36 11,348 29.85 115,139,064.58 16.72
37 - 48 8,002 21.05 132,073,104.17 19.18
49 - 60 16,597 43.65 408,081,264.41 59.27
61 - 72 384 1.01 24,470,446.45 3.55
73 - 84 10 0.03 785,866.03 0.11
85 - 96 3 0.01 93,533.00 0.01
97 - 108 1 0.00 9,973.20 0.00
===============================================================================
Total: 38,022 100.00% $688,486,886.50 100.00%
===============================================================================
Distribution of Leases by Purchase Option
Percentage of
Percentage Statistical Statistical
of Discounted Discounted
Number of Number of Present Present Value
Purchase Option Leases Leases Value of Leases of Leases
- ------------------------ --------- ---------- --------------- -------------
Fair Market Value 36,460 95.89% $669,099,151.15 97.31%
Nominal Buyout 1,562 4.11 18,487,735.34 2.69
===============================================================================
Total: 38,022 100.00% $688,486,886.50 100.00%
===============================================================================
Distribution of Leases by Delinquencies
Percentage of
Percentage Statistical Statistical
of Discounted Discounted
Number of Number of Present Present Value
Days Delinquent Leases Leases Value of Leases of Leases
- ------------------------ --------- ---------- --------------- -------------
0 - 30 35,416 93.15% $629,651,685.03 91.45%
31 - 60 2,606 6.85 58,835,201.47 8.55
===============================================================================
Total: 38,022 100.00% $688,486,886.50 100.00%
===============================================================================
Distribution of Leases by Equipment Type
Percentage of
Percentage Statistical Statistical
of Discounted Discounted
Number of Number of Present Present Value
Equipment Type Leases Leases Value of Leases of Leases
- ------------------------------- --------- ---------- --------------- -------------
Digital/Multi-purpose Copier 25,318 67.11% $533,725,449.95 77.52%
Color Copier 1,897 4.99 83,846,421.42 12.18
Analog Copier 5,334 14.03 44,034,021.69 6.40
Fax Machine 3,244 8.53 12,865,006.14 1.87
Miscellaneous 1,635 4.30 7,641,235.55 1.11
Printer 394 1.04 6,374,751.74 0.93
======================================================================================
Total: 38,022 l00.00% $688,486,886.50 100.00%
======================================================================================
S-19
Additions, Substitutions and Adjustments. Although the Leases provide that
they cannot be cancelled by the Lessees, IOS Capital has, from time to time,
permitted early termination by Lessees ("Early Lease Termination") or other
modifications of the Lease terms in circumstances more fully specified in the
Assignment and Servicing Agreement, including, without limitation, in connection
with a full or partial buy-out or equipment upgrade.
In the event of an Early Lease Termination which has been prepaid in full
or in part, the Issuer will have the option to reinvest the proceeds of the
related Lease ("Early Termination Lease") in one or more Leases having similar
characteristics as the terminated Lease (each, an "Additional Lease"). The
aggregate Discounted Present Value of the Early Termination Leases for which IOS
Capital may reinvest proceeds in Additional Leases is limited to an amount not
in excess of 20% of the aggregate Discounted Present Value of the Leases as of
the Cut-Off Date.
In addition, IOS Capital will have the option to substitute one or more
leases having similar characteristics (each, a "Substitute Lease") for (a)
Non-Performing Leases, (b) Leases subject to repurchase as a result of a breach
of representation and warranty (each a "Warranty Lease") and (c) Leases
following a modification or adjustment to its terms (each, an "Adjusted Lease").
The aggregate Discounted Present Value of the Non-Performing Leases which IOS
Capital may replace with Substitute Leases is limited to an amount not in excess
of 10% of the aggregate Discounted Present Value of the Leases as of the Cut-Off
Date. The aggregate Discounted Present Value of Adjusted Leases and Warranty
Leases which IOS Capital may replace with Substitute Leases is limited to an
amount not in excess of 10% of the aggregate Discounted Present Value of the
Leases as of the Cut-Off Date.
The terms of a Lease may be modified or adjusted for administrative reasons
or at the request of the Lessee or Lessor in a variety of circumstances,
including changes to the delivery date of equipment, the cost of equipment, the
components of leased equipment or to correct information when a Lease is entered
into IOS Capital's servicing system. These modifications may result in
adjustments to the lease commencement date, the monthly payment date, the amount
of the monthly payment or the equipment subject to a Lease.
Additional Leases and Substitute Leases will be originated using the same
credit criteria as the initial Leases. To the extent material, information with
respect to Additional Leases or Substitute Leases will be included in periodic
reports filed with the SEC as are required under the Securities Exchange Act of
1934. Each Substitute Lease and Additional Lease will be required to be an
Eligible Lease.
In no event will the aggregate scheduled Lease Payments, after the
inclusion of the Substitute Leases and Additional Leases, be less than the
aggregate scheduled Lease Payments prior to the substitution or reinvestment.
Additionally, the scheduled final Lease Payment for the Substitute Leases or
Additional Leases will be on or prior to the Payment Date in April 2008, or, to
the extent the final scheduled Lease Payment for such Leases is due subsequent
to the Payment Date in April 2008, only scheduled Lease Payments due on or prior
to that date will be included in the Discounted Present Value of the Leases for
the purpose of making any calculation under the Indenture.
In the event that an Early Lease Termination is allowed by IOS Capital and
an Additional Lease is not provided, the amount prepaid will be equal to at
least the Discounted Present Value of the terminated Lease, plus any delinquent
payments. See "The Asset Pool--The Leases."
Assignment and Servicing Agreement. In the Assignment and Servicing
Agreement, IOS Capital will make certain representations and warranties
regarding the Leases and the related Equipment. In the event that (a) any of
these representations and warranties proves at any time to have been inaccurate
in any material respect as of the Issuance Date, or (b) any Lease is terminated
in whole or in part by a Lessee, or (c) any amounts due with respect to any
Lease are reduced or impaired, as a result of (i) any action or inaction by IOS
Capital (other than any action or inaction of IOS Capital, when acting as
Servicer, in connection with the enforcement of any Lease other than those
leases IOS Capital permitted to be terminated early in a manner consistent with
the provisions of the Assignment and Servicing Agreement) or (ii) any claim by
any Lessee against IOS Capital, and, in any such case, the event or condition
causing the inaccuracy, termination, reduction, impairment or claim has not been
cured or corrected within 30 days after the earlier of the date on which IOS
Capital is given notice thereof by the Issuer or the
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Trustee or the date on which IOS Capital otherwise first has notice
thereof, IOS Capital will purchase the Lease and the related Equipment interests
by paying to the Trustee for deposit into the Collection Account, not later than
the Determination Date next following the expiration of the 30-day period, an
amount at least equal to the Discounted Present Value of the Lease plus any
amounts previously due and unpaid thereon. Subject to the satisfaction of
certain requirements set forth in the Assignment and Servicing Agreement, IOS
Capital will also have the option to substitute one or more Substitute Leases
for a Warranty Lease. Any inaccuracy in any representation or warranty with
respect to (i) the priority of the lien of the Indenture with respect to any
Lease or (ii) the amount (if less than represented) of the Lease Payments,
Casualty Payments or Termination Payments under any Lease, will be deemed to be
material.
The Servicer. The Servicer will service the Lease Receivables pursuant to
the Assignment and Servicing Agreement. The Servicer may delegate its servicing
responsibilities to one or more sub-servicers, but will not be relieved of its
liabilities with respect thereto.
Pursuant to the Assignment and Servicing Agreement, the Servicer will
forward Excess Copy Charges and Maintenance Charges to IKON Office Solutions and
may make Servicer Advances.
The Servicer will retain possession of the Leases and Lease files;
provided, however, that, the Servicer may be required, upon the written request
- -------- -------
of the Insurer, to deliver the Leases and Lease files to the Trustee or other
custodian if the long-term debt rating assigned to the Servicer is downgraded
below BBB- by S&P or Baa3 by Moody's.
The Servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Assignment and Servicing Agreement. An uncured breach of any of these
representations or warranties that in any respect materially and adversely
affects the interests of the Noteholders will constitute a Servicer Event of
Default. See "Description of the Transaction Documents--Assignment and Servicing
Agreement--Servicer Events of Default" and "--Rights upon Servicer Events of
Default" in the Prospectus.
Remittance and Other Servicing Procedures. All payments on Leases will be
made by the Lessees to the order of the Servicer to the national lock box
account of the Servicer. The Servicer must deposit these payments (net of
amounts that the Servicer is entitled to retain or use to reimburse itself, or
must remit to third parties, such as IKON Office Solutions) in the Collection
Account within two Business Days of the receipt thereof. See "Description of the
Notes--Collection Account".
Servicing Compensation and Payment of Expenses. A servicing fee (the
"Servicing Fee") will be paid monthly to the Servicer on each Payment Date from
amounts in the Collection Account and will be calculated by multiplying
one-twelfth (or, in the case of the Initial Payment Date, a fraction of which
the number of days from the Issuance Date to the Initial Payment Date is the
numerator and 360 is the denominator) of 0.75% times the lesser of (i) the
Outstanding Principal Amount of the Notes or (ii) the Discounted Present Value
of the Performing Leases, each at the Determination Date for that Payment Date
before application of payments with respect thereto.
The Servicing Fee will be paid to the Servicer for servicing the Lease
Receivables and to pay certain administrative expenses in connection with the
Notes, including Trustee fees and certain Trustee expenses.
Reports to Noteholders. The Servicer or the Trustee, as applicable, will
forward or cause to be forwarded to each holder of record of each Class of Notes
statements or information with respect to the Asset Pool setting forth the
information specifically described in the Assignment and Servicing Agreement and
the Indenture which will include the statements and information described under
"Description of the Notes--Reports to Noteholders" in the Prospectus.
Certain Rights of Insurer. Under the Transaction Documents, so long as the
Policy is outstanding and there is no Insurer Default, the Insurer will be
entitled to exercise substantially all of the rights of Noteholders and the
Noteholders will be precluded from exercising those rights without the prior
written consent of
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the Insurer. These rights include: (i) the right to remove the Servicer or
Trustee and to appoint or approve successors to the Servicer or Trustee, (ii)
the right to declare defaults or to waive defaults, (iii) the right to institute
proceedings in respect of the Transaction Documents or the Notes and (iv) the
right to consent to or approve certain amendments or modifications to the
Transaction Documents.
An "Insurer Default" is a failure by the Insurer to make a payment required
under the Policy in accordance with the terms thereof.
Description of the Notes
General. The 2.044% Class A-1 Lease-Backed Notes (the "Class A-1 Notes"),
2.91% Class A-2 Lease-Backed Notes (the "Class A-2 Notes"), 3.90% Class A-3
Lease-Backed Notes (the "Class A-3 Notes") and 4.68% Class A-4 Lease-Backed
Notes (the "Class A-4 Notes" and, together with the Class A-1 Notes, Class A-2
Notes and Class A-3 Notes, the "Notes") will be issued pursuant to the
Indenture. The following statements with respect to the Notes is a summary of
all material terms relating to the Notes. However, investors in the Notes should
review the Indenture, the form of which is filed as an exhibit to the
registration statement of which this Prospectus forms a part. Whenever any
particular section of the Indenture or any term used therein is referred to, the
section in the Indenture or the term used therein should be reviewed by you in
order to fully understand this offering.
The Issuer will agree in the Indenture and in the Notes to pay to the
Noteholders (i) the Initial Principal Amount and (ii) monthly interest at the
times, from the sources and on the terms and conditions set forth in the
Indenture and in the Notes. The Notes are debt obligations of the Issuer secured
by the Asset Pool. The Notes do not represent any interest in or a recourse
obligation of IOS Capital, the Insurer (except as provided in the Policy), the
Trustee or any of their affiliates other than the Issuer. The Issuer is a
special purpose company with limited assets. Consequently, Noteholders must rely
solely upon the Asset Pool and the Policy for payment of principal of and
interest on the Notes.
The initial principal amount of the Notes of each class will be
$171,000,000 for the Class A-1 Notes (the "Class A-1 Initial Principal Amount"),
$46,000,000 for the Class A-2 Notes (the "Class A-2 Initial Principal Amount"),
$266,400,000 for the Class A-3 Notes (the "Class A-3 Initial Principal Amount")
and $151,400,000 for the Class A-4 Notes (the "Class A-4 Initial Principal
Amount" and, together with the Class A-1 Initial Principal Amount, the Class A-2
Initial Principal Amount and the Class A-3 Initial Principal Amount, the "Class
A Initial Principal Amount").
The initial aggregate principal amount of the Notes will comprise the
initial principal amount (the "Initial Principal Amount") of the Notes. The
aggregate unpaid principal amount of the Notes outstanding at any time will
comprise the outstanding principal amount (the "Outstanding Principal Amount")
of the Notes as of that time.
Interest on the Notes will be payable as set forth under "Interest
Payments." Principal on the Notes will be payable as set forth under "Principal
Payments." Notes may be presented to the corporate trust office of the Trustee
for registration of transfer or exchange. Notes may be exchanged without a
service charge, but the Trustee may require payment to cover taxes, other
governmental charges or any amounts necessary to indemnify the Trustee in
accordance with the terms of the Indenture.
Book-Entry Registration. The Noteholders may hold their Notes through The
Depository Trust Company ("DTC") (in the United States) or Clearstream Banking,
societe anonyme ("Clearstream") and the Euroclear System ("Euroclear") (in
Europe) if they are participants of those systems, or indirectly through
organizations which are participants in those systems. See "Description of the
Notes--Book Entry Registration" in the Prospectus.
Discounted Present Value of the Leases. The discounted present value of the
Leases (the "Discounted Present Value of the Leases"), at any given time, shall
equal the future remaining scheduled Lease Payments on the Leases (including
Non-Performing Leases), discounted at a rate equal to 5.13% (the "Discount
Rate"). The discounted present value of the Performing Leases (the "Discounted
Present Value of the Performing
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Leases") equals the Discounted Present Value of the Leases, reduced by all
future remaining scheduled Lease Payments on the Non-Performing Leases,
discounted at the Discount Rate. The aggregate Discounted Present Value of the
Leases as of the Cut-Off Date, calculated at the Discount Rate, is
$690,018,926.51. Certain of the information set forth in this Prospectus
Supplement is based on the Statistical Discounted Present Value of the Leases as
of the Cut-Off Date rather than on the basis of the Discounted Present Value of
the Leases as of the Cut-Off Date. However, the Statistical Discounted Present
Value of the Leases as of the Cut-Off Date is not expected to vary materially
from the Discounted Present Value of the Leases as of the Cut-Off Date. See "The
Asset Pool--Certain Information with Respect to the Leases and the Lessees."
Stated Maturity. The stated maturity date with respect to the Class A-1
Notes is the Payment Date in June 2003, the stated maturity date with respect to
the Class A-2 Notes is the Payment Date in February 2005, the stated maturity
date with respect to the Class A-3 Notes is the Payment Date in October 2006,
and the stated maturity date with respect to the Class A-4 Notes is the Payment
Date in November 2009. However, if all payments on the Leases are made as
scheduled, final payment with respect to the Notes would occur prior to each
stated maturity.
Determination Date. The determination date ("Determination Date") with
respect to each Payment Date is the fifth Business Day prior to that Payment
Date. On each Determination Date, the Servicer will determine the amount of
payments received on the Leases in respect of the immediately preceding calendar
month (each such period, a "Due Period") which will be available for
distribution on the Payment Date. See "Description of the Notes--Distributions
on Notes."
Payment Date. Payments on the Notes will be made on the fifteenth day of
each month (or if that day is not a Business Day, the next succeeding Business
Day), commencing on June 17, 2002, to holders of record on the last Business Day
preceding a Payment Date, or, if the Notes are definitive notes, the last
Business Day of the month preceding a Payment Date (each, a "Record Date"). See
"Description of the Notes--Distributions on Notes."
Interest Payments. The Notes will bear interest from the Issuance Date at
the applicable interest rate for the respective class as set forth below. The
Interest Rate on the Class A-1 Notes will be calculated on the basis of a year
of 360 days and the actual number of days in the Interest Accrual Period payable
on the Payment Date to the person in whose name the Note was registered at the
close of business on the preceding Record Date. The Interest Rate on the Class
A-2 Notes, the Class A-3 Notes and the Class A-4 Notes will be calculated on the
basis of a year of 360 days comprised of twelve 30-day months payable on the
Payment Date to the person in whose name the Note was registered at the close of
business on the preceding Record Date. The interest rate for the Notes is as
follows: 2.044% per annum on the Class A-1 Notes, 2.91% per annum on the Class
A-2 Notes, 3.90% per annum on the Class A-3 Notes and 4.68% per annum on the
Class A-4 Notes. With respect to any particular class of Notes, the "Interest
Rate" refers to the applicable rate indicated in the preceding sentence.
On each Payment Date, the interest due (the "Interest Payments") with
respect to the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes and the
Class A-4 Notes will be the interest that has accrued on those Notes since the
last Payment Date (or in the case of the first Payment Date, since the Issuance
Date) (each such period, an "Interest Accrual Period") at the applicable
Interest Rate applied to the then Outstanding Principal Amounts of the Class A-1
Notes, the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes,
respectively, after giving effect to payments of principal to the Class A-1
Noteholders, the Class A-2 Noteholders, the Class A-3 Noteholders and the Class
A-4 Noteholders, respectively, on the preceding Payment Date (or, in the case of
the first Payment Date, the Issuance Date), plus all previously accrued and
unpaid interest on the Notes. See "Description of the Notes--General" and
"Distributions on Notes."
Principal Payments. On each Payment Date, the Noteholders will be entitled
to receive payments of principal ("Principal Payments"), to the extent funds are
available therefor, in the priorities set forth in the Indenture and described
below and under "Description of the Notes--Distributions on Notes." On each
Payment Date, to the extent funds are available therefor, the Principal Payment
will be paid to the Noteholders in the following priority: (a) (i) to the Class
A-1 Noteholders only, until the Outstanding Principal Amount on the Class A-1
Notes has been reduced to zero, the Class A Principal Payment, 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, the Class A Principal Payment, then (iii) to
the Class A-3 Noteholders only, until the Outstanding Principal Amount on the
Class A-3
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Notes has been reduced to zero, the Class A Principal Payment, 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, the Class A Principal Payment; and (b) if an
Acceleration Event has occurred, or, so long as IOS Capital is the Servicer, the
senior long-term debt rating of IOS Capital is Ba2 or below (Moody's) or BB or
below (S&P), Additional Principal will be distributed, as an additional
principal payment, sequentially, to the Class A-1 Noteholders, the Class A-2
Noteholders, the Class A-3 Noteholders and the Class A-4 Noteholders until the
Outstanding Principal Amount of each class has been reduced to zero.
"Additional Principal" with respect to each Payment Date equals the excess,
if any, of (i)(A) the Outstanding Principal Amount of the Notes plus the
Overcollateralization Balance as of the immediately preceding Payment Date after
giving effect to payments on the preceding Payment Date, minus (B) the
Discounted Present Value of the Performing Leases as of the related
Determination Date, over (ii) the Class A Principal Payment to be paid on the
current Payment Date.
The "Class A Principal Payment" will equal (a) while the Class A-1 Notes
are outstanding, (i) on all Payment Dates prior to the June 2003 Payment Date,
the lesser of (1) the amount necessary to reduce the Outstanding Principal
Amount on the Class A-1 Notes to zero and (2) the difference between (A) the
Discounted Present Value of the Performing Leases as of the Determination Date
for the preceding Payment Date and (B) the Discounted Present Value of the
Performing Leases as of the related Determination Date, and (ii) on and after
the June 2003 Payment Date, the entire Outstanding Principal Amount of the Class
A-1 Notes and (b) after the Class A-1 Notes have been paid in full, the amount
necessary to reduce the aggregate Outstanding Principal Amount of the Notes to
the Class A Target Investor Principal Amount.
The "Class A Target Investor Principal Amount" with respect to each Payment
Date is an amount equal to the lesser of (a) the product of (i) the Class A
Percentage and (ii) the Discounted Present Value of the Performing Leases as of
the related Determination Date, and (b) the Discounted Present Value of the
Performing Leases as of the related Determination Date minus the
Overcollateralization Floor.
The "Class A Percentage" will be equal to approximately 89.36090%.
An "Acceleration Event" will occur if: (i) a Servicer Event of Default has
occurred and is continuing (regardless of whether the rights and obligations of
the Servicer are terminated as a result of that Servicer Event of Default); (ii)
with respect to any Payment Date, the Overcollateralization Balance is less than
or equal to the Overcollateralization Floor, (iii) for any three consecutive Due
Periods, the average of the Annualized Default Rates for those Due Periods is
greater than 6.25%; or (iv) for any three consecutive Due Periods, the average
of the Delinquency Rates for those Due Periods is greater than 8.0%.
The "Overcollateralization Balance" with respect to each Payment Date is an
amount equal to the excess, if any, of (a) the Discounted Present Value of
Performing Leases as of the related Determination Date over (b) the Outstanding
Principal Amount of the Notes as of that Payment Date after giving effect to all
principal payments made on that day.
The "Overcollateralization Floor" with respect to each Payment Date means
(a) 2.5% of the Discounted Present Value of the Leases as of the Cut-Off Date,
plus (b) the Cumulative Loss Amount with respect to that Payment Date, minus (c)
the amount on deposit in the Reserve Account after giving effect to withdrawals
to be made on account of that Payment Date.
The "Cumulative Loss Amount" with respect to each Payment Date is an amount
equal to the excess, if any, of (a) the total of (i) the Outstanding Principal
Amount of the Notes as of the immediately preceding Payment Date after giving
effect to all principal payments made on that day, plus (ii) the
Overcollateralization Balance as of the immediately preceding Payment Date,
minus (iii) the lesser of (A) the Discounted Present Value of the Performing
Leases as of the Determination Date relating to the immediately preceding
Payment Date minus the Discounted Present Value of the Performing Leases as of
the related Determination Date and (B) Available Funds remaining after the
payment of the Policy premium, amounts owing the Servicer and in respect of
interest on the Notes on that Payment Date, over (b) the Discounted Present
Value of the Performing Leases as of the related Determination Date.
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The "Annualized Default Rate" means for any Due Period, the sum as of the
related Determination Date of the Discounted Present Value of the Leases that
became Non-Performing Leases during that Due Period minus the sum of the
recoveries on Non-Performing Leases received during that Due Period, divided by
the Discounted Present Value of the Leases on the Determination Date immediately
preceding that Determination Date, multiplied by twelve.
The "Delinquency Rate" means for any Due Period, the sum as of the related
Determination Date of the Discounted Present Value of the Leases that are 63 or
more days delinquent, as of that Determination Date, divided by the Discounted
Present Value of the Leases on that Determination Date.
Collection Account. The Trustee will establish and maintain an Eligible
Account (as defined herein) (the "Collection Account") into which the Servicer
must deposit, as described in the Prospectus, all Lease Payments, Casualty
Payments, Retainable Deposits, Termination Payments, certain proceeds from
purchases by IOS Capital of Leases as a result of breaches of representations
and warranties and recoveries from Non-Performing Leases to the extent IOS
Capital has not substituted a Substitute Lease (except to the extent required to
reimburse unreimbursed Servicer Advances) (each as defined herein) on or in
respect of each Lease included in the Asset Pool within two Business Days of
receipt thereof. See "Description of the Notes--Collections" in the Prospectus.
An "Eligible Account" is either (a) an account maintained with a depository
institution or trust company acceptable to each of the Rating Agencies and, so
long as no Insurer Default shall have occurred and be continuing, the Insurer,
or (b) a trust account or similar account acceptable to each of the Rating
Agencies that is maintained with a federal or state chartered depository
institution, which may be an account maintained with the Trustee.
A "Lease Payment" is the equipment financing portion of each fixed periodic
rental payment payable by a Lessee under a Lease. Casualty Payments, Retainable
Deposits, Termination Payments, prepayments of rent required pursuant to the
terms of a Lease at or before the commencement of the Lease, security deposits,
payments becoming due before the applicable Cut-Off Date and supplemental or
additional payments required by the terms of a Lease with respect to taxes,
insurance, maintenance (including, without limitation, any Maintenance Charges)
or other specific charges (including, without limitation, any Excess Copy
Charges), will not be Lease Payments.
A "Casualty Payment" is any payment pursuant to a Lease on account of the
loss, theft, condemnation, governmental taking, destruction, or damage beyond
repair (each, a "Casualty") of any item of Equipment subject thereto which
results, in accordance with the terms of the Lease, in a reduction in the number
or amount of any future Lease Payments due thereunder or in the termination of
the Lessee's obligation to make future Lease Payments thereunder.
A "Renewal" is the renewal of a Lease on a month-to-month or
quarter-to-quarter basis as provided for in the related Lease.
A "Renewal Payment" is any of the monthly payments (or, in the case of
quarterly Leases, the quarterly payments) received from a Lessee in connection
with a Renewal.
A "Renewal Trigger Event" will occur when the Renewal Trigger Ratio is less
than 20%.
The "Renewal Trigger Ratio" means, with respect to any Payment Date, an
amount equal to (i) the aggregate number of Leases of which the obligors
thereunder have elected to extend the term of such Leases upon the expiration
thereof during the three preceding Due Periods, divided by (ii) the aggregate
number of Leases which have reached their stated expiration date during the
three preceding Due Periods.
A "Retainable Deposit" is any security or other similar deposit which the
Servicer has determined in accordance with its customary servicing practices is
not refundable to the related Lessee.
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A "Termination Payment" is a payment payable by a Lessee under a Lease upon
the early termination of the Lease (but not on account of a Casualty or a Lease
default) which may be agreed upon by the Servicer, acting in the name of the
Issuer, and the Lessee.
The following funds will be deposited into the Collection Account:
(a) Lease Payments (including Renewal Payments);
(b) recoveries from Non-Performing Leases to the extent IOS Capital has not
substituted Substitute Leases for the Non-Performing Leases;
(c) late charges received on delinquent Lease Payments not advanced by the
Servicer;
(d) proceeds from purchases by IOS Capital of Leases as a result of
breaches of representations and warranties to the extent IOS Capital
has not substituted Substitute Leases for those Leases;
(e) proceeds from investment of funds in the Collection Account, the
Reserve Account and the Renewal Account, if any;
(f) Casualty Payments;
(g) Retainable Deposits;
(h) Servicer Advances, if any, in respect of the related Due Period;
(i) Termination Payments to the extent the Issuer does not reinvest the
Termination Payments in Additional Leases; and
(j) proceeds, if any, received to redeem the Notes.
The foregoing funds on deposit in the Collection Account on each
Determination Date (excluding any Lease Payments not due during the related or
any prior Due Period), together with any funds deposited into the Collection
Account first from the Renewal Account and then from Reserve Account, will
constitute "Available Funds".
The Servicer will not be required to deposit in the Collection Account, and
Available Funds will not include, cash flows realized from the sale or re-lease
of the Equipment following the expiration dates of the Leases, other than
Renewal Payments and Equipment subject to Non-Performing Leases that have not
been substituted.
The Servicer must deposit the funds referred to in clauses (a) through (d),
(f) and (i) above into the Collection Account within two Business Days of
receipt thereof by the Servicer. The funds referred to in clauses (e), (g), (h)
and (j) above are to be deposited into the Collection Account on or prior to the
related Payment Date.
Reserve Account. The Trustee will establish and maintain an Eligible
Account as a reserve account (the "Reserve Account"). On the Issuance Date, the
Issuer will make an initial deposit to the Reserve Account in an amount equal to
1.0% of the Discounted Present Value of the Leases as of the Cut-Off Date. Prior
to each Payment Date, the Trustee will transfer from the Reserve Account to the
Collection Account the amount specified by the Servicer in the related Servicing
Report representing investment earnings on amounts held in the Reserve Account
as of the related Determination Date. In the event that Available Funds
(exclusive of amounts on deposit in the Reserve Account) are insufficient to pay
the Servicing Fee, unreimbursed Servicer Advances, the premium on the Policy,
Interest Payments on the Notes and the Class A Principal Payment (such payments,
the "Required Payments" and such shortfall, an "Available Funds Shortfall") on
any Payment Date, the Trustee will
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transfer from the Reserve Account to the Collection Account an amount equal to
the lesser of the funds on deposit in the Reserve Account (the "Available
Reserve Amount") and the amount of the deficiency.
On each Payment Date, Available Funds remaining after the payment of the
Required Payments will be deposited into the Reserve Account to the extent that
the Required Reserve Amount exceeds the Available Reserve Amount. The "Required
Reserve Amount" equals the lesser of (a) 1.0% of the Discounted Present Value of
the Leases as of the Cut-Off Date and (b) the then Outstanding Principal Amount
of the Notes. Any amounts on deposit in the Reserve Account in excess of the
Required Reserve Amount will be released to the Issuer.
Renewal Account. The Trustee will establish and maintain an Eligible
Account as an additional reserve account (the "Renewal Account"). In the event
that Available Funds (exclusive of amounts on deposit in the Reserve Account and
the Renewal Account) are insufficient to pay the Required Payments and amounts
required to be deposited in the Reserve Account on any Payment Date, the Trustee
will transfer from the Renewal Account to the Collection Account an amount equal
to the lesser of the funds on deposit in the Renewal Account and the amount of
such deficiency.
All Renewal Payments will be deposited into the Collection Account. During
a Renewal Account Deposit Period, Available Funds remaining after the payment of
the Required Payments and amounts required to be deposited into the Reserve
Account will be deposited into the Renewal Account to the extent that the
Required Renewal Amount exceeds the amount on deposit in the Renewal Account
(the "Available Renewal Amount") but not in excess of the amount of Renewal
Payments for the preceding Due Period. The Required Renewal Amount equals the
lesser of (a) 2.0% of the Discounted Present Value of the Leases as of the
Cut-off Date and (b) the then Outstanding Principal Amount of the Notes less the
Available Reserve Amount. Any amounts on deposit in the Renewal Account in
excess of the Required Renewal Amount will be released to the Issuer.
"Renewal Account Deposit Period" means the period from the Payment Date on
which a Renewal Trigger Event has occurred until the Payment Date succeeding
such Payment Date on which no Renewal Trigger Event occurs.
Distributions on Notes. On each Determination Date, the Servicer will
determine the Available Funds and the Required Payments in respect of the
related Payment Date.
For each Payment Date, the interest due with respect to the Notes will be
the interest that has accrued since the last Payment Date (or, in the case of
the first Payment Date, since the Issuance Date), at the applicable Interest
Rates applied to the Outstanding Principal Amount of each class, after giving
effect to payments of principal to Noteholders on the preceding Payment Date,
plus all previously accrued and unpaid interest on the Notes.
For each Payment Date, Principal Payments due with respect to the Notes
will be the Class A Principal Payment. In addition, if an Acceleration Event
occurs with respect to any Payment Date, Additional Principal will be
distributed, sequentially, as an additional principal payment on the Notes of
each class until the Outstanding Principal Amount of each class has been reduced
to zero.
On each Payment Date, the Trustee will make required payments of principal
and interest on the Notes from Available Funds.
Unless an Event of Default (as defined herein) and acceleration of the
Notes has occurred, on or before each Payment Date, the Servicer will instruct
the Trustee to apply or cause to be applied the Available Funds to make the
following payments in the following priority:
(a) to pay the Insurer the premium due under the Policy;
(b) to pay the Servicing Fee;
(c) to reimburse unreimbursed Servicer Advances in respect of a prior
Payment Date;
S-27
(d) to make Interest Payments owing on the Class A Notes concurrently to
the Class A-1 Noteholders, Class A-2 Noteholders, Class A-3 Noteholders
and Class A-4 Noteholders;
(e) to pay the Insurer any unreimbursed Insured Payments and any
unreimbursed optional payments together with interest thereon at a per
annum rate equal to the greater of the Citibank base rate from time to
time plus 2% or the then highest applicable rate of interest on the
Notes (the "Late Payment Rate");
(f) to make the Class A Principal Payment to (i) the Class A-1 Noteholders
only, until the Outstanding Principal Amount on the Class A-1 Notes is
reduced to zero, then (ii) to the Class A-2 Noteholders only, until the
Outstanding Principal Amount on the Class A-2 Notes is reduced to zero,
then (iii) to the Class A-3 Noteholders only, until the Outstanding
Principal Amount on the Class A-3 Notes is reduced to zero, and finally
(iv) to the Class A-4 Noteholders, until the Outstanding Principal
Amount on the Class A-4 Notes is reduced to zero;
(g) if an Acceleration Event has occurred, or, if and so long as IOS
Capital is the Servicer, the long-term senior debt rating assigned by
Moody's or S&P to IOS Capital is Ba2 or below or BB or below,
respectively, to pay the Additional Principal, if any, as an additional
reduction of principal to the Noteholders, in the order established in
clause (f) above, until the Outstanding Principal Amount on all of the
Class A Notes has been reduced to zero;
(h) to make a deposit to the Reserve Account in an amount equal to the
excess of the Required Reserve Amount over the Available Reserve
Amount;
(i) during a Renewal Account Deposit Period, to make a deposit to the
Renewal Account in an amount equal to the excess of the Required
Renewal Amount over the Available Renewal Amount but not in excess of
the amount of Renewal Payments for the preceding Due Period; and
(j) to pay the Issuer the balance, if any (subject to the next succeeding
paragraph).
Under certain circumstances, amounts that would have otherwise been paid to
the Issuer, at the level of priority set forth in (j) above, shall instead be
diverted to one or more different series of notes issued by either the Issuer or
by certain issuers that are affiliated with the Issuer. Similarly, under certain
circumstances, amounts that would otherwise be payable to the Issuer or certain
issuers that are affiliated with the Issuer under the distribution of proceeds
sections of the transaction documents for such other series of notes shall
instead be applied to the payment of the Notes.
Advances by the Servicer. Prior to any Payment Date, the Servicer may, but
will not be required to, advance (each, a "Servicer Advance") to the Trustee an
amount sufficient to cover delinquencies on some or all Leases with respect to
prior Due Periods. In the absence of any Servicer Event of Default, the Servicer
will be reimbursed for Servicer Advances from Available Funds on the following
Payment Date. See "Distributions on Notes" above.
Redemption. The Issuer may, at its option, redeem the Notes, as a whole, at
their principal amount, without premium, together with interest at the
applicable rate accrued to the date fixed for redemption if on any payment date
the Discounted Present Value of the Performing Leases is less than or equal to
10% of the Discounted Present Value of the Leases as of the Cut-Off Date. The
Issuer will give written notice of redemption to each Noteholder and the Trustee
at least 30 days before the Payment Date fixed for redemption. Upon deposit of
funds necessary to effect the redemption, the Trustee shall pay the remaining
unpaid principal amount on the Notes and all accrued and unpaid interest as of
the date fixed for redemption.
S-28
Events of Default and Notice Thereof. The following events, among others,
will be "Events of Default" with respect to the Notes:
(a) default in making Interest Payments on any Note when due and payable;
(b) default in making Principal Payments at Stated Maturity;
(c) certain defaults in the performance of covenants or agreements or
breaches of representations or warranties by the Issuer;
(d) the occurrence of a Servicer Event of Default; or
(e) insolvency or bankruptcy events relating to the Issuer.
The Indenture will provide that the Trustee will give the Insurer and the
Noteholders notice of all uncured defaults actually known to it (the term
"default" to include the events specified above without applicable grace
periods).
If an Event of Default occurs, the Trustee shall, at the written direction
of the Insurer (if no Insurer Default has occurred and is continuing) or of
holders of not less than 66-2/3% of the Outstanding Principal Amount of the
Notes (if an Insurer Default has occurred and is continuing), and, if an Insurer
Default has occurred and is continuing, may, declare the unpaid principal amount
of the Notes to be immediately due and payable together with all accrued and
unpaid interest thereon. However, if the Event of Default involves other than
non-payment of principal or interest on the Notes, the Trustee may not sell the
related Leases or any Equipment unless the sale is for an amount greater than or
equal to the Outstanding Principal Amount of the Notes and unless directed to do
so in writing by the Insurer (if no Insurer Default has occurred and is
continuing) or the holders of 66-2/3% of the then Outstanding Principal Amount
of the Notes (if an Insurer Default has occurred and is continuing).
Subsequent to an Event of Default and following any acceleration of the
Notes pursuant to the Indenture, any monies that may then be held or thereafter
received by the Trustee will be applied in the following order of priority, on
the date or dates fixed by the Trustee and, in case of the distribution of the
entire amount due on account of principal or interest, upon presentation and
surrender of the Notes:
First to the payment of all costs and expenses of collection incurred by
-----
the Trustee, the Insurer and the Noteholders (including the reasonable fees and
expenses of any counsel to the Trustee, the Insurer and the Noteholders) and all
fees and expenses (including legal fees and expenses) owed to the Trustee under
the Indenture;
Second to the Servicer under the Assignment and Servicing Agreement
------
(irrespective of whether IOS Capital or an affiliate of IOS Capital is then
acting as Servicer), to the payment of all Servicing Fees and unreimbursed
Servicer Advances then due to that person;
Third first, to the payment of all accrued and unpaid interest on the
-----
Outstanding Principal Amount of the Class A-1 Notes, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes pro rata to the date of payment thereof, including (to
the extent permitted by applicable law) interest on any overdue installment of
interest and principal from the maturity of that installment to the date of
payment thereof at the rate per annum equal to the Class A-1 Interest Rate,
Class A-2 Interest Rate, Class A-3 Interest Rate and Class A-4 Interest Rate,
respectively; second to the payment of the Outstanding Principal Amount of the
Class A-1 Notes; third, to the payment of the Outstanding Principal Amount of
the Class A-2 Notes; fourth, to the payment of the Outstanding Principal Amount
of the Class A-3 Notes; and fifth, to the payment of the Outstanding Principal
Amount of the Class A-4 Notes; provided, that the Noteholders may allocate
--------
payments for interest, principal and premium at their own discretion, except
that no allocation shall affect the allocation of amounts or future payments
received by any other Noteholder;
S-29
Fourth to the payment of amounts then due the Insurer under the
------
Indenture, including Policy premiums owed to the Insurer (other than
amounts referred to in clause Fifth);
Fifth to the payment to the Insurer of any unreimbursed Insured
-----
Payments and any unreimbursed optional payments made by the Insurer
together with interest thereon at the Late Payment Rate; and
Sixth to the payment of the remainder, if any, to the Issuer or
-----
any other person legally entitled thereto (subject to the next
succeeding paragraph).
Under certain circumstances, amounts that would have otherwise
been paid to the Issuer, at the level of priority set forth in Sixth above,
shall instead be diverted to one or more different series of notes issued by
either the Issuer or by certain issuers that are affiliated with the Issuer.
Similarly, under certain circumstances, amounts that would otherwise be payable
to the Issuer or certain issuers that are affiliated with the Issuer under the
distribution of proceeds sections of the transaction documents for such other
series of notes shall instead be applied to the payment of the Notes.
The Issuer will be required to furnish annually to the Trustee a
written statement of officers of the Issuer to the effect that to the best of
their knowledge the Issuer is not in default in the performance and observance
of the terms of the Indenture or, if the Issuer is in default, specifying the
default.
The Indenture will provide that the Trustee, at the written
direction of the Insurer (if no Insurer Default has occurred and is continuing)
or the holders of 66-2/3% in aggregate principal amount of the Notes then
outstanding (if an Insurer Default has occurred and is continuing), will have
the right to waive certain defaults and, subject to certain limitations, to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust power conferred on the Trustee.
The Indenture will provide that in case an Event of Default occurs of which the
Trustee is actually aware (which shall not have been cured or waived), the
Trustee will be required to exercise its rights and powers under the Indenture
and to use the degree of care and skill in their exercise that a prudent man
would exercise or use in the circumstances in the conduct of his own affairs.
Subject to these provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of the Insurer or
the Noteholders unless such request is in writing and they have offered the
Trustee security or indemnity reasonably satisfactory to the Trustee. Upon
request of a Noteholder, the Trustee will provide information as to the
outstanding principal amount of each Class of Notes.
Modification of the Indenture. The Indenture may be modified and
amended as described under "Description of the Transaction
Documents--Modification of the Indenture" in the Prospectus. The consent of the
Insurer (if no Insurer Default has occurred and is continuing) or of the holders
of 66-2/3% of the aggregate principal amount of the Notes (if an Insurer Default
has occurred and is continuing) is required for certain modifications or
amendments.
Servicer Events of Default. The events and conditions
constituting "Servicer Events of Default" under the Assignment and Servicing
Agreement and the rights of the Trustee on behalf of the Insurer or the
Noteholders in the event of a Servicer Event of Default are described in
"Description of the Transaction Documents--Servicer Events of Default" and
"--Rights upon Servicer Events of Default" in the Prospectus.
Servicer Events of Default shall include: (i) if for any three
consecutive Due Periods, the average of the Annualized Default Rates for these
Due Periods is greater than 8%; and (ii) if for any three consecutive Due
Periods, the average of the Delinquency Rates for these Due Periods is greater
than 10%.
Security for the Notes. Repayment of the Notes will be secured by
(a) a first priority security interest in the Leases perfected by filing UCC
financing statements against the Issuer, the Seller and IOS Capital, (b) a first
priority security interest in the Issuer's security interest in the Equipment
perfected by filing UCC financing statements against the Issuer and the Seller
and (c) a first priority security interest in all funds in the Collection
Account, the Reserve Account and the Renewal Account.
S-30
Prepayment and Yield Considerations
The rate of principal payments on the Notes, the aggregate amount of each
interest payment on the Notes and the yield to maturity of the Notes are
directly related to the rate of payments on the underlying Leases. The payments
on the Leases may be in the form of scheduled payments, prepayments or
liquidations due to default, Casualty and other events, which cannot be
specified at present. Any payments may result in distributions to Noteholders of
amounts which would otherwise have been distributed over the remaining term of
the Leases. In general, the rate of payments may be influenced by a number of
other factors, including general economic conditions. The rate of principal
payments with respect to any class may also be affected by any purchase of the
underlying Leases by IOS Capital pursuant to the Assignment and Servicing
Agreement. In this event, the purchase price will decrease the Discounted
Present Value of the Performing Leases, causing the corresponding weighted
average life of the Notes to decrease. See "Risk Factors--Prepayments and
Related Reinvestment May Reduce Your Yield" in the Prospectus.
In the event a Lease becomes a Non-Performing Lease, a Warranty Lease or an
Adjusted Lease, IOS Capital will have the option to substitute a Substitute
Lease; provided that any substitution will be limited to (i) an aggregate amount
--------
not to exceed 10% of the Discounted Present Value of the Leases as of the
Cut-Off Date with respect to Non-Performing Leases and (ii) an aggregate amount
not to exceed 10% of the Discounted Present Value of the Leases as of the
Cut-Off Date with respect to Adjusted Leases and Warranty Leases. In addition,
in the event of an Early Lease Termination resulting in a Lease having been
prepaid in full, IOS Capital will have the option to transfer an Additional
Lease. Such transfer of Additional Leases will be limited to an amount not in
excess of 20% of the aggregate Discounted Present Value of the Leases as of the
Cut-Off Date. The Substitute Leases and Additional Leases will have a Discounted
Present Value equal to or greater than that of the Leases being replaced and the
monthly payments on the Substitute Leases or Additional Leases will be at least
equal to those of the terminated Leases through the term of the terminated
Leases. In the event that an Early Lease Termination is allowed by IOS Capital
and a Substitute Lease is not provided, the amount prepaid will be equal to at
least the Discounted Present Value of the Early Termination Lease, plus any
delinquent payments.
The effective yield to holders of the Notes will depend upon, among other
things, the amount of and rate at which principal is paid to Noteholders. The
after-tax yield to Noteholders may be affected by lags between the time interest
income accrues to Noteholders and the time the related interest income is
received by the Noteholders.
The following charts set forth the percentage of the Initial Principal
Amount of the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class A-4
Notes which would be outstanding on the Payment Dates set forth below assuming a
Conditional Prepayment Rate ("CPR") of 0%, 7%, 10% and 12%, respectively, which
in each case was calculated using a discount rate of 5.3%. The Initial
Principal Amounts of the Class A-1 Notes, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes are $171,000,000, $46,000,000, $266,400,000 and
$151,400,000, respectively. The Class A Percentage for the Class A Notes is
equal to 89.36090%. This information is hypothetical and is set forth for
illustrative purposes only. The CPR assumes that a fraction of the outstanding
Leases in the Asset Pool is prepaid on each Payment Date, which implies that
each Lease in the Asset Pool is equally likely to prepay. This fraction,
expressed as a percentage, is annualized to arrive at the CPR for the Leases in
the Asset Pool. The CPR measures prepayments based on the outstanding discounted
present value of the Leases discounted at 5.13%, after the payment of all
scheduled payments on the Leases during the related Due Period. The CPR further
assumes that all Leases are the same size and amortize at the same rate and that
each Lease will be either paid as scheduled or prepaid in full. The amounts set
forth below are based upon the timely receipt of scheduled monthly Lease
Payments as of the Cut-Off Date, assume that the Issuer does not exercise its
option to redeem the Notes (except as indicated), assume that no Acceleration
Event has occurred, assume that the amount on deposit in the Reserve Account on
each Payment Date is equal to the Required Reserve Amount, assume that payments
on the Notes are made on each Payment Date (and each such date is assumed to be
the fifteenth day of each applicable month) and assume the Issuance Date is May
30, 2002 and the first Payment Date is June 15, 2002.
S-31
Percentage of the Initial Principal Amounts at
the Respective CPR Set Forth Below
==============================================================================================
0% CPR
-------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3 Class A-4
------------------------- -------------------- -------------- -------------- ----------------
Issuance Date 100 100 100 100
15-Jun-02 91 100 100 100
15-Jul-02 82 100 100 100
15-Aug-02 73 100 100 100
15-Sep-02 64 100 100 100
15-Oct-02 54 100 100 100
15-Nov-02 45 100 100 100
15-Dec-02 36 100 100 100
15-Jan-03 27 100 100 100
15-Feb-03 18 100 100 100
15-Mar-03 8 100 100 100
15-Apr-03 0 97 100 100
15-May-03 0 67 100 100
15-Jun-03 0 36 100 100
15-Jul-03 0 5 100 100
15-Aug-03 0 0 96 100
15-Sep-03 0 0 90 100
15-Oct-03 0 0 85 100
15-Nov-03 0 0 80 100
15-Dec-03 0 0 74 100
15-Jan-04 0 0 69 100
15-Feb-04 0 0 64 100
15-Mar-04 0 0 59 100
15-Apr-04 0 0 53 100
15-May-04 0 0 48 100
15-Jun-04 0 0 43 100
15-Jul-04 0 0 38 100
15-Aug-04 0 0 33 100
15-Sep-04 0 0 29 100
15-Oct-04 0 0 24 100
15-Nov-04 0 0 20 100
15-Dec-04 0 0 16 100
15-Jan-05 0 0 11 100
15-Feb-05 0 0 8 100
15-Mar-05 0 0 4 100
15-Apr-05 0 0 0 100
15-May-05 0 0 0 93
15-Jun-05 0 0 0 86
15-Jul-05 0 0 0 80
15-Aug-05 0 0 0 74
15-Sep-05 0 0 0 68
15-Oct-05 0 0 0 62
15-Nov-05 0 0 0 56
15-Dec-05 0 0 0 50
15-Jan-06 0 0 0 44
15-Feb-06 0 0 0 38
15-Mar-06 0 0 0 32
15-Apr-06 0 0 0 27
15-May-06 0 0 0 21
15-Jun-06 0 0 0 16
15-Jul-06 0 0 0 12
15-Aug-06 0 0 0 8
15-Sep-06 0 0 0 4
15-Oct-06 0 0 0 *
15-Nov-06 0 0 0 0
Weighted Average Life/(1)/
(years) 0.46 1.05 2.00 3.60
Weighted Avg. Life to
Call/(1)/ (years) 0.46 1.05 2.00 3.47
Optional Clean-Up Call
Date NA NA NA Feb-06
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class A-3
Note and Class A-4 Note is determined by (a) multiplying the amount of
cash distributions in reduction of the Outstanding Principal Amount of
the respective Note by the number of years from the Issuance Date to the
relevant Payment Date, (b) adding the results, and (c) dividing the sum
by the Initial Principal Amount of the applicable class.
* Greater than 0.0% and less than 0.5%.
S-32
<Table>
<Caption>
Percentage of the Initial Principal Amounts at the Respective CPR Set Forth Below
=================================================================================================
7% CPR
-------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3 Class A-4
- -------------------------- -------------------- ----------- ------------ ------------------------
Issuance Date 100 100 100 100
15-Jun-02 89 100 100 100
15-Jul-02 77 100 100 100
15-Aug-02 66 100 100 100
15-Sep-02 55 100 100 100
15-Oct-02 44 100 100 100
15-Nov-02 33 100 100 100
15-Dec-02 22 100 100 100
15-Jan-03 11 100 100 100
15-Feb-03 1 100 100 100
15-Mar-03 0 67 100 100
15-Apr-03 0 32 100 100
15-May-03 0 0 100 100
15-Jun-03 0 0 94 100
15-Jul-03 0 0 88 100
15-Aug-03 0 0 82 100
15-Sep-03 0 0 77 100
15-Oct-03 0 0 71 100
15-Nov-03 0 0 66 100
15-Dec-03 0 0 60 100
15-Jan-04 0 0 55 100
15-Feb-04 0 0 50 100
15-Mar-04 0 0 44 100
15-Apr-04 0 0 39 100
15-May-04 0 0 34 100
15-Jun-04 0 0 29 100
15-Jul-04 0 0 24 100
15-Aug-04 0 0 20 100
15-Sep-04 0 0 15 100
15-Oct-04 0 0 11 100
15-Nov-04 0 0 7 100
15-Dec-04 0 0 3 100
15-Jan-05 0 0 0 99
15-Feb-05 0 0 0 93
15-Mar-05 0 0 0 87
15-Apr-05 0 0 0 81
15-May-05 0 0 0 75
15-Jun-05 0 0 0 69
15-Jul-05 0 0 0 64
15-Aug-05 0 0 0 58
15-Sep-05 0 0 0 53
15-Oct-05 0 0 0 47
15-Nov-05 0 0 0 42
15-Dec-05 0 0 0 37
15-Jan-06 0 0 0 32
15-Feb-06 0 0 0 27
15-Mar-06 0 0 0 23
15-Apr-06 0 0 0 18
15-May-06 0 0 0 14
15-Jun-06 0 0 0 10
15-Jul-06 0 0 0 7
15-Aug-06 0 0 0 4
15-Sep-06 0 0 0 *
15-Oct-06 0 0 0 0
15-Nov-06 0 0 0 0
Weighted Average Life/(1)/
(years) 0.37 0.87 1.77 3.41
Weighted Avg. Life to
Call/(1)/ (years) 0.37 0.87 1.77 3.26
Optional Clean-Up Call
Date NA NA NA Dec-05
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class A-3
Note and Class A-4 Note is determined by (a) multiplying the amount of cash
distributions in reduction of the Outstanding Principal Amount of the
respective Note by the number of years from the Issuance Date to the
relevant Payment Date, (b) adding the results, and (c) dividing the sum by
the Initial Principal Amount of the applicable class.
* Greater than 0.0% and less than 0.5%.
</Table>
S-33
Percentage of the Initial Principal Amounts at the Respective CPR Set Forth Below
========================================================================================================================
10% CPR
----------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3 Class A-4
- ------------------------ ------------------ --------------- -------------- -----------------
Issuance Date 100 100 100 100
15-Jun-02 88 100 100 100
15-Jul-02 75 100 100 100
15-Aug-02 63 100 100 100
15-Sep-02 51 100 100 100
15-Oct-02 39 100 100 100
15-Nov-02 27 100 100 100
15-Dec-02 16 100 100 100
15-Jan-03 4 100 100 100
15-Feb-03 0 78 100 100
15-Mar-03 0 41 100 100
15-Apr-03 0 4 100 100
15-May-03 0 0 95 100
15-Jun-03 0 0 89 100
15-Jul-03 0 0 83 100
15-Aug-03 0 0 77 100
15-Sep-03 0 0 71 100
15-Oct-03 0 0 65 100
15-Nov-03 0 0 60 100
15-Dec-03 0 0 54 100
15-Jan-04 0 0 49 100
15-Feb-04 0 0 44 100
15-Mar-04 0 0 38 100
15-Apr-04 0 0 33 100
15-May-04 0 0 28 100
15-Jun-04 0 0 23 100
15-Jul-04 0 0 19 100
15-Aug-04 0 0 14 100
15-Sep-04 0 0 10 100
15-Oct-04 0 0 6 100
15-Nov-04 0 0 2 100
15-Dec-04 0 0 0 97
15-Jan-05 0 0 0 91
15-Feb-05 0 0 0 85
15-Mar-05 0 0 0 79
15-Apr-05 0 0 0 73
15-May-05 0 0 0 68
15-Jun-05 0 0 0 62
15-Jul-05 0 0 0 57
15-Aug-05 0 0 0 52
15-Sep-05 0 0 0 47
15-Oct-05 0 0 0 41
15-Nov-05 0 0 0 37
15-Dec-05 0 0 0 32
15-Jan-06 0 0 0 28
15-Feb-06 0 0 0 23
15-Mar-06 0 0 0 19
15-Apr-06 0 0 0 15
15-May-06 0 0 0 12
15-Jun-06 0 0 0 8
15-Jul-06 0 0 0 5
15-Aug-06 0 0 0 2
15-Sep-06 0 0 0 0
15-Oct-06 0 0 0 0
15-Nov-06 0 0 0 0
Weighted Average Life/(1)/
(years) 0.34 0.81 1.68 3.32
Weighted Avg. Life to
Call/(1)/ (years) 0.34 0.81 1.68 3.17
Optional Clear-Up Call
Date NA NA NA Nov-05
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class
A-3 Note and Class A-4 Note is determined by (a) multiplying the
amount of cash distributions in reduction of the Outstanding Principal
Amount of the respective Note by the number of years from the Issuance
Date to the relevant Payment Date, (b) adding the results, and (c)
dividing the sum by the Initial Principal Amount of the applicable
class.
S-34
Percentage of the Initial Principal Amounts
at the Respective CPR Set Forth Below
========================================================================================================
12% CPR
------------------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3 Class A-4
- --------------------- --------------------- --------------- ------------------ -----------------
Issuance Date 100 100 100 100
15-Jun-02 87 100 100 100
15-Jul-02 74 100 100 100
15-Aug-02 61 100 100 100
15-Sep-02 48 100 100 100
15-Oct-02 36 100 100 100
15-Nov-02 24 100 100 100
15-Dec-02 12 100 100 100
15-Jan-03 0 99 100 100
15-Feb-03 0 61 100 100
15-Mar-03 0 23 100 100
15-Apr-03 0 0 98 100
15-May-03 0 0 91 100
15-Jun-03 0 0 85 100
15-Jul-03 0 0 79 100
15-Aug-03 0 0 73 100
15-Sep-03 0 0 67 100
15-Oct-03 0 0 61 100
15-Nov-03 0 0 56 100
15-Dec-03 0 0 50 100
15-Jan-04 0 0 45 100
15-Feb-04 0 0 40 100
15-Mar-04 0 0 35 100
15-Apr-04 0 0 29 100
15-May-04 0 0 25 100
15-Jun-04 0 0 20 100
15-Jul-04 0 0 15 100
15-Aug-04 0 0 11 100
15-Sep-04 0 0 7 100
15-Oct-04 0 0 3 100
15-Nov-04 0 0 0 98
15-Dec-04 0 0 0 92
15-Jan-05 0 0 0 85
15-Feb-05 0 0 0 80
15-Mar-05 0 0 0 74
15-Apr-05 0 0 0 69
15-May-05 0 0 0 63
15-Jun-05 0 0 0 58
15-Jul-05 0 0 0 53
15-Aug-05 0 0 0 48
15-Sep-05 0 0 0 43
15-Oct-05 0 0 0 38
15-Nov-05 0 0 0 33
15-Dec-05 0 0 0 29
15-Jan-06 0 0 0 25
15-Feb-06 0 0 0 21
15-Mar-06 0 0 0 17
15-Apr-06 0 0 0 14
15-May-06 0 0 0 10
15-Jun-06 0 0 0 7
15-Jul-06 0 0 0 4
15-Aug-06 0 0 0 1
15-Sep-06 0 0 0 0
15-Oct-06 0 0 0 0
15-Nov-06 0 0 0 0
Weighted Average Life/(1)/
(years) 0.33 0.78 1.62 3.26
Weighted Avg. Life to
Call/(1)/ (years) 0.33 0.78 1.62 3.09
Optional Clean-Up Call
Date NA NA NA Oct-05
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class A-3
Note and Class A-4 Note is determined by (a) multiplying the amount of cash
distributions in reduction of the Outstanding Principal Amount of the
respective Note by the number of years from the Issuance Date to the
relevant Payment Date, (b) adding the results, and (c) dividing the sum by
the Initial Principal Amount of the applicable class.
S-35
The Trustee
The Trustee, BNY Midwest Trust Company, is an Illinois state banking
corporation. The Prospectus describes the conditions under which the Trustee may
resign and the appointment of a successor trustee. See "The Trustee" in the
Prospectus. The Trustee is subject to the requirements of Section 310(b) of the
Trust Indenture Act, as amended, regarding the disqualification of a trustee
upon acquiring any conflicting interest.
Material Federal Income Tax Consequences
Potential investors should consider the following discussion of certain
material federal income tax consequences to investors of the purchase, ownership
and disposition of the Notes only in connection with "Material Federal Income
Tax Consequences" in the accompanying prospectus. The discussion in this
prospectus supplement and in the accompanying prospectus is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors. Some holders,
including insurance companies, tax-exempt organizations, financial institutions
or broker dealers, taxpayers subject to the alternative minimum tax, holders
that will hold the Notes as part of a hedge, straddle, appreciated financial
position or conversion transaction and holders that will hold the Notes as other
than capital assets, may be subject to special rules that are not discussed
below. Potential investors should consult with their own tax advisors in
determining the state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Notes.
Tax Characterization of the Issuer
Dewey Ballantine LLP is our tax counsel and is of the opinion that,
assuming the parties will comply with the terms of the governing agreements, the
Issuer will not be characterized as an association, or publicly traded
partnership, taxable as a corporation for federal income tax purposes.
Tax Consequences to Holders of the Notes
The Originators, the Seller, the Issuer and the Trustee agree, and the
Noteholders will agree by their purchase of the Notes, to treat the Notes as
indebtedness for all federal, state and local income tax purposes. There are no
regulations, published rulings or judicial decisions involving the
characterization for federal income tax purposes of securities with terms
substantially the same as the Notes. In general, whether instruments such as the
Notes constitute indebtedness for federal income tax purposes is a question of
fact, the resolution of which is based primarily upon the economic substance of
the instruments and the transaction pursuant to which they are issued rather
than merely upon the form of the transaction or the manner in which the
instruments are labeled.
The Internal Revenue Service (the "IRS") and the courts have stated
various factors to be taken into account in determining, for federal income tax
purposes, whether an instrument constitutes indebtedness and whether a transfer
of property is a sale because the transferor has relinquished substantial
incidents of ownership in the property or whether such transfer is a borrowing
secured by the property.
On the basis of its analysis of the above factors as applied to the facts
and its analysis of the economic substance of the contemplated transaction, tax
counsel is of the opinion that, for federal income tax purposes, the Notes will
be treated as indebtedness, and not as an ownership interest in the leases, nor
as an equity interest in the Issuer or in a separate association taxable as a
corporation or other taxable entity. See "Material Federal Income Tax
Consequences -- Tax Characterization of the Issuer" and "-- Tax Characterization
of the Notes" in the accompanying prospectus.
If the Notes are characterized as indebtedness, interest paid or accrued
on a Note will be treated as ordinary income to Noteholders, and principal
payments on a Note will be treated as a return of capital to the extent of the
Noteholder's basis in the Note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the Notes when earned, even if
not paid, unless it is determined to be uncollectable. The Issuer
S-36
will report to the Noteholders of record and the IRS the amount of interest paid
and original issue discount, if any, accrued on the Notes to the extent required
by law.
Possible Alternative Characterizations of the Notes
Although, as described above, it is the opinion of tax counsel that, for
federal income tax purposes, the Notes will be characterized as indebtedness,
such opinion is not binding on the IRS, and thus no assurance can be given that
this characterization will prevail. If the IRS successfully asserted that one or
more classes of the Notes did not represent indebtedness for federal income tax
purposes, Noteholders would likely be treated as owning an interest in a
partnership and not an interest in an association, or a publicly traded
partnership, taxable as a corporation. If the Noteholders were treated as owning
an equity interest in a partnership, the partnership itself would not be subject
to federal income tax; rather each partner would be taxed individually on their
respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of types of
income and deductions for a Noteholder would differ if the Notes were held to
constitute partnership interests, rather than indebtedness. Since the parties
will treat the Notes as indebtedness for federal income tax purposes, neither
the Servicer nor the Trustee will attempt to satisfy the tax reporting
requirements that would apply under this alternative characterization of the
Notes. Investors that are foreign persons should consult their own tax advisors
in determining the Federal, state, local and other tax consequences to them of
the purchase, ownership and disposition of the Notes. See "Material Federal
Income Tax Consequences Foreign Investors" in the accompanying prospectus.
Discount and Premium
We do not anticipate issuing the Notes with any original issue discount.
See "Material Federal Income Tax Consequences -- Discount and Premium --
Original Issue Discount" in the accompanying prospectus. The prepayment
assumption that will be used for purposes of computing original issue discount,
if any, for federal income tax purposes is 0% CPR. We make no guarantee that the
Notes will prepay at this rate or any other rate. See "Prepayment and Yield
Considerations" in this prospectus supplement. A subsequent purchaser who buys a
Note for less than its principal amount may be subject to the "market discount"
rules of the Code. See "Material Federal Income Tax Consequences -- Discount and
Premium -- Market Discount" in the accompanying prospectus. A subsequent
purchaser who buys a Note for more than its principal amount may be subject to
the "market premium" rules of the Code. See "Material Federal Income Tax
Consequences -- Discount and Premium --Premium" in the accompanying prospectus.
Sale or Redemption of the Notes
If a Note is sold or retired, the Seller will recognize gain or loss
equal to the difference between the amount realized on the sale and such
Noteholder's adjusted basis in the Note. See "Material Federal Income Tax
Consequences -- Sale or Exchange of Notes" in the accompanying prospectus.
Other Matters
For a discussion of backup withholding and taxation of foreign investors
in the Notes, see "Material Federal Income Tax Consequences -- Backup
Withholding and " -- Foreign Investors" in the accompanying prospectus.
State and Local Tax Consequences
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential Noteholders should
consult their own tax advisors as to the various state and local tax
consequences of an investment in the Notes.
S-37
ERISA Considerations
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan. A
violation of these "prohibited transaction" rules may generate excise tax and
other liabilities under ERISA and the Code for those persons. ERISA also imposes
certain duties on persons who are fiduciaries of plans subject to ERISA,
including the duty to make investments that are prudent, diversified (except if
prudent not to do so) and in accordance with the documents and instruments
governing the plan. Under ERISA, any person who exercises any discretionary
authority or discretionary control respecting the management or disposition of
the assets of a plan is considered to be a fiduciary of such plan (subject to
certain exceptions not here relevant).
In addition to the matters described below, purchasers of Notes that are
insurance companies should consult with their counsel with respect to the United
States Supreme Court case interpreting the fiduciary responsibility rules of
ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank,
510 U.S. 86 (1993). In John Hancock, the Supreme Court rules that assets held in
an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to make purchases of the
Notes.
Certain transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Issuer were
deemed to be "plan assets" of an employee benefit plan subject to ERISA or the
Code, or an individual retirement account (an "IRA"), or any entity whose
underlying assets are deemed to be assets of an employee benefit plan or an IRA
by reason of such employee benefit plan's or such IRA's investment in such
entity (each a "Benefit Plan"). Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of the Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquired an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation were
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features.
The Notes should be treated as indebtedness without substantial equity
features for purposes of the Plan Assets Regulation. This determination is based
in part upon the traditional debt features of the Notes, including the
reasonable expectation of purchasers of Notes that the Notes will be repaid when
due, as well as the absence of conversion rights, warrants and other typical
equity features. The debt treatment of the Notes for ERISA purposes could change
if the Issuer incurred losses. However, without regard to whether the Notes are
treated as an equity interest for these purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Issuer or any of its affiliates is or becomes a
party in interest or disqualified person with respect to such Benefit Plan. In
this case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by bank
collective investment funds; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 96-23, regarding transactions by "in-house asset
managers"; and PTCE 84-14, regarding transactions by "qualified professional
assets managers". Each investor using the assets of a Benefit Plan which
acquires the Notes, or to whom the Notes are transferred, will be deemed to have
represented that the acquisition and continued holding of the Notes will be
covered by a Department of Labor class exemption.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA,
are not subject to ERISA; however, such plans may be subject to comparable state
law restrictions.
Any Benefit Plan fiduciary considering the purchase of a Note should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment. Moreover, each Benefit Plan fiduciary should
determine whether, under the general fiduciary standards of investment prudence
and
S-38
diversification, an investment in the Notes is appropriate for the Benefit Plan,
taking into account the overall investment policy of the Benefit Plan and the
composition of the Benefit Plan's investment portfolio.
The sale of Notes to a Benefit Plan is in no respect a representation by
the Issuer or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Benefit Plans generally or by a
particular Benefit Plan, or that this investment is appropriate for Benefit
Plans generally or any particular Benefit Plan.
Use of Proceeds
The net proceeds from the sale of the Notes will be used to fund the
Reserve Account and to make distributions by the Issuer to the Seller and by the
Seller to the Originator. See "Use of Proceeds" in the accompanying Prospectus.
The Originator will apply a portion of the net proceeds distributed to it to
satisfy (or partially satisfy) obligations of it or its subsidiaries under
warehouse facilities, including (i) a warehouse facility with Twin Towers Inc.,
for which Deutsche Bank AG, New York Branch is agent, (ii) a warehouse facility
with Market Street Funding Corporation, for which PNC Bank, National Association
is agent, and (iii) a warehouse facility with Park Avenue Receivables
Corporation, for which JPMorganChase Bank is agent.
Ratings of the Notes
It is a condition to the issuance of the Notes that the Class A-1 Notes
be rated at least "P-1" and "A-1+" and that the Class A-2, A-3 and A-4 Notes be
rated at least "Aaa" and "AAA" by Moody's and S&P, respectively (each a "Rating
Agency"). The ratings are dependent upon the financial strength ratings of the
Insurer as described in "Risk Factors--Ratings of the Notes are Dependent upon
Creditworthiness of the Insurer."
The ratings are not a recommendation to purchase, hold or sell the Notes,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor. There is no assurance that any rating will continue for any
period of time or that it will not be lowered or withdrawn entirely by a Rating
Agency if, in its judgment, circumstances so warrant. A revision or withdrawal
of a rating may have an adverse affect on the market price of the Notes. The
rating of the Notes addresses the likelihood of the timely payment of interest
and the ultimate payment of principal on the Notes by the Stated Maturity Date.
The rating does not address the rate of prepayments that may be experienced on
the Leases and, therefore, does not address the effect of the rate of Lease
prepayments on the return of principal to the Noteholders.
Underwriting
Under the terms and subject to the conditions set forth in the
underwriting agreement for the sale of the Notes, the Issuer has agreed to sell,
and each of the Underwriters, Banc of America Securities LLC, First Union
Securities, Inc. and Lehman Brothers Inc. has severally agreed to purchase, the
principal amount of the Notes set forth below:
Principal Amount
-----------------------------------------------------------------------------------------
Banc of America First Union
Securities LLC Securities, Inc. Lehman Brothers Inc. Totals
-----------------------------------------------------------------------------------------
Class A-1 Notes $ 85,500,000 $ 42,750,000 $ 42,750,000 $171,000,000
Class A-2 Notes $ 23,000,000 $ 11,500,000 $ 11,500,000 $ 46,000,000
Class A-3 Notes $133,200,000 $ 66,600,000 $ 66,600,000 $266,400,000
Class A-4 Notes $ 75,700,000 $ 37,850,000 $ 37,850,000 $151,400,000
Totals $317,400,000 $158,700,000 $158,700,000 $634,800,000
The Issuer has been advised by the Underwriters that the several
Underwriters propose initially to offer the Notes to the public at the
respective prices set forth on the cover page of this Prospectus, and to certain
dealers at these prices, less a selling concession not in excess of 0.090% per
Class A-1 Note, 0.110% per Class A-2
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Note, 0.115% per Class A-3 Note, and 0.225% per Class A-4 Note. The Underwriters
may allow, and dealers may reallow to other dealers, a discount not in excess of
0.055% per Class A-1 Note, 0.070% per Class A-2 Note, 0.095% per Class A-3 Note
and 0.140% per Class A-4 Note.
Each Underwriter will represent and agree that:
(1) it has not offered or sold and, prior to the expiry period of six
months from the Issuance Date, will not offer or sell any Notes to
persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose
of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, as amended;
(2) it has only communicated or caused to be communicated and will
only communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning of
section 21 of the Financial Services and Markets Act 2000 (the
"FSMA")) received by it in connection with the issue or sale of
any Notes in circumstances in which section 21(1) of the FSMA does
not apply to the Issuer; and
(3) it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the
Notes in, from or otherwise involving the United Kingdom.
The Issuer and IOS Capital have agreed to jointly and severally indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Issuer has been advised by the Underwriters that the Underwriters
presently intend to make a market in the Notes, as permitted by applicable laws
and regulations. The Underwriters are not obligated, however, to make a market
in the Notes and any market making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Notes.
The Underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Notes in accordance with Regulation M under the Securities Exchange Act of
1934, as amended. Over-allotment transactions involve syndicate sales in excess
of the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the Notes so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transaction involve
purchase of the Notes in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriters to reclaim a selling concession from a syndicate member when the
Notes originally sold by the syndicate member are purchased in a syndicate
covering transaction. Such over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the Notes to be higher than they would otherwise be in the absence of
these transactions. The Issuer and the Underwriters do not represent that the
Underwriters will engage in any of these transactions. These transactions, once
commenced, may be discontinued without notice at any time.
From time to time the Underwriters or their affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, the Originator or its affiliates.
For further information regarding any offer or sale of the Notes pursuant
to this Prospectus Supplement and the Prospectus, see "Plan of Distribution" in
the Prospectus.
Experts
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries as of December 31, 2001 and 2000 and for each of the years in the
three-year period ended December 31, 2001 are
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incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of that firm as experts
in accounting and auditing.
Legal Matters
Certain legal matters relating to the Notes will be passed upon for the
Issuer by Don H. Liu, Esq., General Counsel of the Originator and IKON Office
Solutions, the parent company of the Originator, and for the Underwriters by
Dewey Ballantine LLP, New York, New York. As of the date of this Prospectus
Supplement, Mr. Liu is a full-time employee and an officer of IKON Office
Solutions and a beneficial owner of shares of common stock of IKON Office
Solutions and options to purchase shares of common stock of IKON Office
Solutions.
S-41
Index Of Principal Defined Terms
Acceleration Event ......................................... S-24
Additional Lease ........................................... S-20
Additional Principal ....................................... S-24
Adjusted Lease ............................................. S-20
Ambac ...................................................... S-11
Annualized Default Rate .................................... S-25
Asset Pool ................................................. S-14
Assignment and Servicing Agreement ......................... S-14
Available Funds ............................................ S-26
Available Funds Shortfall .................................. S-26
Available Renewal Amount ................................... S-27
Available Reserve Amount ................................... S-27
Benefit Plan ............................................... S-38
Business Day ............................................... S-13
Casualty ................................................... S-25
Casualty Payment ........................................... S-25
Class A Initial Principal Amount ........................... S-22
Class A Percentage ......................................... S-24
Class A Principal Payment .................................. S-24
Class A Target Investor Principal Amount ................... S-24
Class A-1 Initial Principal Amount ......................... S-22
Class A-1 Notes ............................................ S-22
Class A-2 Initial Principal Amount ......................... S-22
Class A-2 Notes ............................................ S-22
Class A-3 Initial Principal Amount ......................... S-22
Class A-3 Notes ............................................ S-22
Class A-4 Initial Principal Amount ......................... S-22
Class A-4 Notes ............................................ S-22
Clearstream ................................................ S-22
Collection Account ......................................... S-25
CPR ........................................................ S-31
Cumulative Loss Amount ..................................... S-24
Cut-Off Date ............................................... S-14
Default .................................................... S-29
Delinquency Rate ........................................... S-25
Determination Date ......................................... S-23
Discount Rate .............................................. S-23
Discounted Present Value of the Leases ..................... S-22
Discounted Present Value of the Performing
Leases .................................................. S-23
DTC ........................................................ S-22
Due Period ................................................. S-23
Early Lease Termination .................................... S-20
Early Termination Lease .................................... S-20
Eligible Account ........................................... S-25
Equipment .................................................. S-14
Euroclear .................................................. S-22
Events of Default .......................................... S-29
Excess Copy Charge ......................................... S-15
Fitch ...................................................... S-11
IKON Office Solutions ...................................... S-9
Initial Principal Amount ................................... S-22
Insured Payment ............................................ S-13
Insurer .................................................... S-11
Insurer Default ............................................ S-22
Interest Accrual Period .................................... S-23
Interest Payments .......................................... S-23
Interest Rate .............................................. S-23
IRA ........................................................ S-38
IRS ........................................................ S-36
Issuance Date .............................................. S-13
Late Payment Rate .......................................... S-28
Lease Payment .............................................. S-25
Lease Receivables .......................................... S-14
Leases ..................................................... S-14
Lessee ..................................................... S-14
Lessor ..................................................... S-15
Maintenance Charge ......................................... S-15
Moody's .................................................... S-11
Non-Performing Leases ...................................... S-15
Note Principal Balance ..................................... S-13
Noteholders ................................................ S-13
Notes ...................................................... S-22
Outstanding Principal Amount ............................... S-22
Overcollateralization Balance .............................. S-24
Overcollateralization Floor ................................ S-24
Plan Assets Regulation ..................................... S-38
Policy ..................................................... S-9
Preference Amount .......................................... S-13
Principal Payments ......................................... S-23
PTCE ....................................................... S-38
Rating Agency .............................................. S-39
Record Date ................................................ S-23
Renewal .................................................... S-25
Renewal Account Deposit Period ............................. S-27
Renewal Payment ............................................ S-25
Renewal Trigger Event ...................................... S-25
Renewal Trigger Ratio ...................................... S-25
Required Payments .......................................... S-26
Required Reserve Amount .................................... S-27
Reserve Account ............................................ S-26
Retainable Deposit ......................................... S-25
S&P ........................................................ S-11
Servicer Advance ........................................... S-28
Servicer Events of Default ................................. S-30
Servicing Fee .............................................. S-21
Statistical Discounted Present Value ....................... S-15
Substitute Lease ........................................... S-20
Termination Payment ........................................ S-26
Warranty Lease ............................................. S-20
S-42
Annex A
Clearance, Settlement and Tax Documentation Procedures
NOTICE TO INVESTORS: THIS ANNEX A IS AN INTEGRAL PART OF THE PROSPECTUS
SUPPLEMENT TO WHICH IT IS ATTACHED.
Except in limited circumstances, the securities will be
available only in book-entry form. Investors in the securities may hold the
securities through any of DTC, Clearstream or Euroclear. The securities will be
tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through Clearstream
and Euroclear will be conducted in the ordinary way in accordance with the
normal rules and operating procedures of Clearstream and Euroclear and in
accordance with conventional eurobond practice, which is seven calendar day
settlement.
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Clearstream or
Euroclear and DTC participants holding securities will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream and Euroclear and as DTC participants.
Non-U.S. holders of global securities will be subject to U.S.
withholding taxes unless the holders meet a number of requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
Initial Settlement
All securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Clearstream and Euroclear
will hold positions on behalf of their participants through their relevant
depository which in turn will hold these positions in their accounts as DTC
participants.
Investors electing to hold their securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their securities through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
security and no lock-up or restricted period. Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between DTC Participants
Secondary market trading between DTC participants will be
settled using the procedures applicable to asset-back securities issues in
same-day funds.
A-1
Trading between Clearstream or Euroclear Participants
Secondary market trading between Clearstream participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC, Seller and Clearstream or Euroclear Participants
When securities are to be transferred from the account of a DTC
participant to the account of a Clearstream participant or a Euroclear
participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream participant or Euroclear participant at least one Business
Day prior to settlement. Clearstream or Euroclear will instruct the relevant
depository, as the case may be, to receive the securities against payment.
Payment will include interest accrued on the securities from and including the
last coupon distribution date to and excluding the settlement date, on the basis
of the actual number of days in the accrual period and a year assumed to consist
of 360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the relevant depository to the DTC participant's
account against delivery of the securities. After settlement has been completed,
the securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Clearstream
participant's or Euroclear participant's account. The securities credit will
appear the next day, European time and the cash debt will be back-valued to, and
the interest on the global securities will accrue from, the value date, which
would be the preceding day when settlement occurred in New York. If settlement
is not completed on the intended value date and the trade fails, the Clearstream
or Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the securities are credited to their account one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Clearstream participants or Euroclear
participants purchasing securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the securities were credited to their
accounts. However, interest on the securities would accrue from the value date.
Therefore, in many cases the investment income on the global securities earned
during that one-day period may substantially reduce or offset the amount of the
overdraft charges, although the result will depend on each Clearstream
participant's or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business
hours, DTC participants can employ their usual procedures for crediting global
securities to the respective European depository for the benefit of Clearstream
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser
Due to time zone differences in their favor, Clearstream
participants and Euroclear participants may employ their customary procedures
for transactions in which securities are to be transferred by the respective
clearing system, through the respective depository, to a DTC participant. The
seller will send instructions to Clearstream or Euroclear through a Clearstream
participant or Euroclear participant at least one Business Day prior to
settlement. In these cases Clearstream or Euroclear will instruct the respective
depository, as appropriate, to credit the securities to the DTC participant's
account against payment. Payment will include interest accrued on the securities
from and including the last interest payment to and excluding the settlement
date on the basis of the actual number of days in the accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of
Clearstream participant or Euroclear participant the following day,
A-2
and receipt of the cash proceeds in the Clearstream participant's or Euroclear
participant's account would be back-valued to the value date, which would be the
preceding day, when settlement occurred in New York. In the event that the
Clearstream participant or Euroclear participant has a line of credit with its
respective clearing system and elects to be in debt in anticipation of receipt
of the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date and the trade fails, receipt of the cash proceeds in the
Clearstream participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase global securities from DTC participants for delivery to Clearstream
participants or Euroclear participants may wish to note that these trades would
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
. borrowing through Clearstream or Euroclear for one day, until the purchase
side of the trade is reflected in their Clearstream or Euroclear accounts in
accordance with the clearing system's customary procedures;
. borrowing the securities in the U.S. from a DTC participant no later than one
day prior to settlement, which would give the securities sufficient time to
be reflected in their Clearstream or Euroclear account in order to settle the
sale side of the trade; or
. staggering the value dates for the buy and sell sides of the trade so that
the value date for the purchase from the DTC participant is at least one day
prior to the value date for the sale to the Clearstream participant or
Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of securities holding securities through
Clearstream or Euroclear, or through DTC if the holder has an address outside
the U.S., will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest, including original issue discount, on registered debt
issued by U.S. persons, unless:
(1) each clearing system, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between the beneficial owner and the U.S.
entity required to withhold tax complies with applicable certification
requirements and
(2) the beneficial owner takes one of the steps described below to
obtain an exemption or reduced tax rate.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the securities.
Prospective investors are urged to consult their own tax advisors for specific
advice regarding their holding and disposing of the securities.
Exemption for Non-U.S. Persons - Form W-8 BEN
Beneficial owners of global securities that are non-U.S. persons, as
defined below, can obtain a complete exemption from the withholding tax by
filing a signed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner
for United States Tax Withholding. The Form W-8BEN is valid for a period of
three years beginning on the date that the form is signed. If the information
shown on Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of
the change.
Exemption for Non-U.S. Persons with effectively connected income -
Form W-8ECI
A non-U.S. person may claim an exemption from U.S. withholding on
income effectively connected with the conduct of a trade or business in the
United States by filing Form W-8ECI, Certificate of Foreign Person's Claim for
Exemption From Withholding on Income Effectively Connected With the Conduct of a
Trade or Business in the United States. The Form W-8ECI is valid for a period of
three years beginning on the date that the
A-3
form is signed. If the information shown on Form W-8ECI changes, a new Form
W-8ECI must be filed within 30 days of the change.
Exemption or reduced rate for non-U.S. Persons resident in
treaty countries - Form W-8BEN
A non-U.S. person may claim treaty benefits by filing Form
W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding. The Form W-8BEN is valid for a period of three years beginning on
the date that the form is signed. If the information shown on Form W-8BEN
changes, a new Form W-8BEN must be filed within 30 days of the change.
Exemption for U.S. Persons-Form W-9
U.S. persons can obtain a complete exemption from the
withholding tax by filing Form W-9, Payer's Request for Taxpayer Identification
Number and Certification.
A U.S. person is:
(1) a citizen or resident of the United States;
(2) a corporation, partnership or other entity organized
in or under the laws of the United States or any political subdivision thereof;
(3) an estate that is subject to U.S. federal income tax
regardless of the source of its income; or
(4) a trust if a court within the United States can
exercise primary supervision over its administration and at least one United
States fiduciary has the authority to control all substantive decisions of the
trust.
A non-U.S. person is any person who is not a U.S. person.
Prospectus
- --------------------------------------------------------------------------------
$2,500,000,000
IKON Receivables Funding, LLC Lease-Backed Notes
Issuer Issuable in Series
- --------------------------------------------------------------------------------
You should read the section entitled "Risk Factors" starting on page 7 of this
prospectus and consider these factors before making a decision to invest in the
notes.
The notes of each series will be debt solely of the issuer and will be payable
only from the pledged assets of the issuer and any credit enhancement for such
series.
Retain this prospectus for future reference. This prospectus may not be used to
consummate sales of securities unless accompanied by the prospectus supplement
relating to the offering of such securities.
From time to time the issuer may sell a series of its notes that--
... will represent debt obligations solely of the issuer; and
... will consist of one or more classes on terms to be determined at the time
of sale.
The assets backing the notes may consist of any combination of
... leases;
... installment sale contracts;
... rental stream obligations;
... monies received relating to the leases, agreements, contracts and
obligations;
... funds on deposit in one or more accounts; and
... one or more forms of credit enhancement.
The terms of your series of notes are described in this prospectus and the
accompanying prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is March 11, 2002.
Table Of Contents
Page
Important Information about this Prospectus and the Accompanying Prospectus Supplement .................. 3
Prospectus Summary ...................................................................................... 4
Risk Factors ............................................................................................ 7
Where You Can Find More Information ..................................................................... 11
The Issuer .............................................................................................. 12
The Asset Pools ......................................................................................... 12
Management's Discussion and Analysis of Financial Condition ............................................. 13
Directors and Executive Officers of the Manager of the Issuer ........................................... 13
The Leases .............................................................................................. 14
Pool Factors ............................................................................................ 17
Use of Proceeds ......................................................................................... 17
The Originator's Leasing Business ....................................................................... 17
The Trustee ............................................................................................. 20
Description of the Notes ................................................................................ 21
Description of the Transaction Documents ................................................................ 27
Legal Aspects of the Lease Receivables .................................................................. 32
Material Federal Income Tax Consequences ................................................................ 35
Ratings ................................................................................................. 39
ERISA Considerations .................................................................................... 39
Plan of Distribution .................................................................................... 39
Legal Opinions .......................................................................................... 40
Experts ................................................................................................. 40
Index Of Terms .......................................................................................... 45
2
Important Information about this
Prospectus and the Accompanying Prospectus Supplement
If the terms of your series of notes vary between this prospectus and the
accompanying prospectus supplement, you should rely on the information in the
prospectus supplement.
The prospectus supplement for your series of notes will state among other
things:
. the aggregate principal amount, interest rate and authorized
denominations of the notes;
. specific information concerning the characteristics of the lease
receivables;
. the terms of any credit enhancement with respect to the notes;
. information concerning any other assets backing the notes,
including any reserve fund or other funds;
. the final scheduled payment date of the notes;
. how and when principal is to be paid on the notes on each payment
date, the timing of the application of principal and the order of
priority of the applications of the principal to the respective
classes of such notes;
. the federal income tax characterization of the notes;
. the terms of any subordination relating to the notes;
. the terms of any cross-collateralization relating to the notes;
. the terms of any redemptions and the related redemption prices
relating to the notes;
. servicing terms relating to the notes;
. the presence of any prefunding feature relating to the notes;
. the length and terms of any revolving period relating to the
notes; and
. additional information on the plan of distribution of the notes.
3
Prospectus Summary
... This summary highlights select information from this prospectus and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the notes, read carefully this entire prospectus and the accompanying
prospectus supplement.
... This summary provides an overview of calculations, cash flows and other
information to aid your understanding. To understand all of the terms of
the offering, carefully read this entire document and, in particular, the
full description of these calculations, cash flows and other information
in this prospectus.
Lease-Backed Notes
Issuable in Series
Issuer
IKON Receivables Funding, LLC, a Delaware limited liability company.
Originator
IOS Capital, LLC, a Delaware limited liability company formerly known as IOS
Capital, Inc and is a wholly-owned subsidiary of IKON Office Solutions, Inc.
Seller
IKON Receivables-2, LLC, a Delaware special purpose limited liability company.
Servicer
The servicer will be IOS Capital unless otherwise specified in the related
prospectus supplement.
Trustee
For any series of notes, the trustee named in the related prospectus supplement.
The Notes
... The notes of each series will be secured solely by office equipment
leases or contracts and related assets. The assets will be pledged by the issuer
to a trustee under an indenture for the benefit of noteholders of that series.
... The transaction documents relating to each series of notes will
describe the rights of each of the related classes of notes to the funds derived
from the related asset pool.
... The notes are fixed income securities, having a principal balance and a
specified interest rate.
... Each class of notes may have a different interest rate, which may be a
fixed or floating interest rate. The related prospectus supplement will specify
the interest rate for each series or class of notes, or the initial interest
rate and the method for determining subsequent changes to the interest rate.
... A series may include one or more classes of notes which are:
. stripped of regular interest payments and entitled only to
principal distributions, with disproportionate, nominal or no
interest distributions; or
. stripped of regular principal payments and entitled only to
interest distributions, with disproportionate, nominal or no
principal distributions.
... A series of notes may include two or more classes of notes with different
terms including different interest rates and different timing, sequential order
or priority of payments, amount of principal or interest or both.
... A series may provide that distributions of principal or interest or both
on any class may be made:
. upon the occurrence of specified events;
. in accordance with a schedule or formula; or
. on the basis of collections from designated portions of the
related asset pool.
4
... Any series may include one or more classes of notes which will not
distribute accrued interest but rather will add the accrued interest to the note
principal balance, or nominal balance, in the manner described in the related
prospectus supplement.
... A series may include one or more other classes of notes that are senior to
one or more other classes of notes in respect of distributions of principal and
interest and allocations of losses on the related asset pool.
The Asset Pools
... As specified in the related prospectus supplement, the pledged pool of
assets securing a series of notes may consist of:
. leases which may include any combination of leases, leases intended
as security agreements, installment sale contracts or rental stream
obligations, together with certain monies due on these leases and
agreements and related guarantees;
. interests other than ownership interests in the underlying equipment
and related property, together with the proceeds from disposal of the
equipment, if any;
. amounts held in any collection, reserve, prefunding, renewal or other
accounts established pursuant to the transaction documents;
. proceeds and recoveries on insurance policies and the disposition of
repossessed equipment;
. credit enhancement for an asset pool or any class of notes; and
. interest earned on certain short-term investments.
... If the related prospectus supplement specifies, the trustee may acquire
additional leases and equipment during a specified pre-funding period following
the issuance of the notes from monies in a pre-funding account.
... If the related prospectus supplement specifies, the notes may have a
revolving period. During a revolving period, the issuer may acquire additional
leases and interests in equipment from the proceeds of payments on existing
lease payments. The notes may not pay principal during this period.
Payment Date
As described in the related prospectus supplement, the notes will pay principal
and/or interest on specified dates. Payment dates will occur monthly, quarterly,
or semi-annually.
Due Period
The calendar month preceding the month in which a payment date occurs is the due
period. As the related prospectus supplement will more fully describe, the
servicer will remit collections received in respect of the due period to the
trustee prior to the related payment date. The collections may be used to fund
payments to noteholders on such payment date or to acquire additional lease
receivables.
Record Date
The related prospectus supplement will describe a date preceding the payment
date, as of which the issuer or its paying agent will fix the identity of the
holders of the notes. Noteholders whose identities are fixed on this date will
receive payments on the next succeeding payment date.
Registration of Notes
The issuer will initially issue the notes as global notes registered in the name
of Cede & Co. as nominee of The Depository Trust Company, or another nominee.
Noteholders will not receive definitive notes representing their interests,
except in certain limited circumstances described in the related prospectus
supplement.
Credit Enhancement
... As described in the related prospectus supplement, credit enhancement for
an asset pool or any class of notes may include any one or more of the
following:
. a policy issued by an insurer specified in the related prospectus
supplement;
. overcollateralization;
. subordination of certain classes of notes;
. a reserve account;
5
. an interest rate swap agreement;
. letters of credit;
. credit or liquidity facilities;
. lease renewal payments;
. third party payments or other support; and
. cash deposits or other similar arrangements.
... The prospectus supplement will describe any limitations and exclusions from
coverage.
Optional or Mandatory Termination
... Under the circumstances described in this prospectus and the related
prospectus supplement, the servicer, the seller, the issuer or other entities
may, at their respective options, cause the early retirement of a series of
notes at the price or prices indicated in the related prospectus supplement.
... The related prospectus supplement may describe circumstances under which
the issuer, servicer or other entities will be required to retire early all or
any portion of a series of notes. An indenture may require these parties to
solicit competitive bids for the purchase of the related asset pool or
otherwise.
Tax Consequences
For federal income tax purposes, Dewey Ballantine LLP, tax counsel to the
issuer, will render an opinion upon issuance of a series of notes that the notes
will be characterized as indebtedness and the issuer will not be characterized
as an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes.
For additional information concerning the application of federal income tax
laws, you should read the section titled "Material Federal Income Tax
Consequences" herein.
ERISA Considerations
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus and the related prospectus supplement,
pension, profit-sharing or other employee benefit plans, as well as individual
retirement accounts and certain types of Keogh Plans, may purchase the notes.
You should consult with your counsel regarding the applicability of the
provisions of ERISA before purchasing a note.
Ratings
... The issuer will not issue the notes unless a rating agency rates them in
one of the four highest rating categories.
... You must not assume that the rating agency will not lower, qualify or
withdraw its rating.
6
Risk Factors
You should carefully consider, among other things, the following risk factors
before deciding to invest in the notes offered by this prospectus.
You May Not Be Able to Sell Your There is currently no public market for the
Notes notes. If no public market develops, you may
not be able to sell your notes. The
underwriters expect to make a market in the
notes but they are not required to do so.
There is no assurance that any market will
be created or, if created, will continue.
Prepayments and Related In the case of notes purchased at a
Reinvestment May Reduce Your discount, you should consider the risk that
Yield slower than anticipated rates of prepayments
on the leases could result in an actual
yield that is less than the anticipated
yield. Conversely, you should consider the
risk that in the case of notes purchased at
a premium, a faster than the anticipated
rate of prepayments could result in an
actual yield that is less than the
anticipated yield.
Be aware that you bear the risk of
reinvesting unscheduled distributions
resulting from prepayments of the notes.
The rate of payment of principal is
unpredictable because the rate on the notes
will depend on, among other things, the rate
of payment on the underlying leases. In
addition to the normally scheduled payments
on the leases, payments may come from a
number of different sources, including the
following:
. prepayments permitted by the servicer;
. payments as a result of leases which are
defaulted;
. payments as a result of leases
accelerated by the servicer;
. payments due to loss, theft, destruction
or other casualty; and
. payments upon repurchases by IOS Capital
on account of a breach of representations
and warranties.
Subject to limitations, IOS Capital may
elect to reinvest the proceeds of a lease
which has been partially or fully repaid or
upgraded in one or more additional leases
and to substitute leases for defaulted,
repurchased or modified or adjusted leases.
Reinvestments and substitutions may affect
the rate or amount of payments on the leases
as a whole, the rate at which funds are
distributed on the notes and the yield to
noteholders.
The rate of early terminations of leases due
to prepayments and various non-payments may
be influenced by a variety of economic and
other factors. For example, adverse economic
conditions and natural disasters such as
floods, hurricanes, earthquakes and
tornadoes may affect prepayments.
7
No Ownership Interest in the Neither the issuer nor the trustee for the
Equipment; Certain Security benefit of noteholders will have any ownership
Interests are Not Perfected interest in any equipment, including any
and Other Creditors May Have residual interest in the equipment at the end
Rights to the Equipment of the related lease term. Also, IOS Capital
has not filed and will not file financing
statements to perfect any security interest it
may have in any of the equipment. Although any
security interest of IOS Capital in the
equipment will be assigned by IOS Capital to
the seller and by the seller to the issuer,
none of IOS Capital, the seller, the issuer nor
the trustee will have a perfected security
interest in the equipment against lessees. This
lack of a perfected security interest in the
equipment may result in other creditors of the
related lessees acquiring rights in the
equipment superior to those of the issuer or
the trustee and may adversely affect the
ability of the issuer or the trustee on behalf
of noteholders to recover any monies on the
equipment following a lease default. This could
reduce the funds available to pay the notes.
Accordingly, noteholders should not rely on the
sale, release or other disposition of any
leased equipment for payment on the notes.
State Laws and Other Factors State laws impose requirements and restrictions
May Impede Recovery Efforts on foreclosure sales and obtaining deficiency
and Affect the Ability of the judgments and may prohibit, limit or delay
Issuer to Recoup Full Amount repossession and sale of equipment to recover
Due on the Leases losses on non-performing the leases.
Additional factors that may affect the issuer's
ability to recoup the full amount due on a
lease include:
. the issuer's lack of any ownership
interest in any of the equipment;
. the issuer's failure to file financing
statements to perfect its security
interest in equipment against a lessee;
. depreciation;
. obsolescence;
. damage or loss of any item of equipment;
and
. the application of federal and state
bankruptcy and insolvency laws.
As a result, the noteholders may be subject to
delays in receiving payments and losses.
Possession of the Leases by Any insolvency by the issuer, the servicer, the
and the Insolvency of the originator or the seller, while in possession
Issuer, Originator, Seller or of the leases may result in competing claims to
Servicer May Result in Reduced ownership or security interests in the leases
or Delayed Payments to which could result in delays in payments on the
Noteholders notes, losses to the noteholders or an
acceleration of the repayment of the notes.
8
Commingling of Funds with IOS If bankruptcy or reorganization proceedings are
Capital May Result in Reduced commenced with respect to the servicer, any
or Delayed Payments to funds then held by the servicer may be
Noteholders unavailable to noteholders. If those funds are
not transferred to the trustee, as required by
the indenture, payments to noteholders could be
delayed or reduced if the servicer becomes
bankrupt or insolvent.
Insolvency of IOS Capital or In some circumstances, a bankruptcy of IOS
IKON Receivables-2 LLC May Capital or IKON Receivables-2, LLC may reduce
Reduce Payments to Noteholders payments to noteholders. IOS Capital and IKON
Receivables-2, LLC believe that each
contribution of the leases should be treated as
an absolute and unconditional assignment.
However, in the event of an insolvency of IOS
Capital or IKON Receivables-2, LLC, a court or
bankruptcy trustee could attempt to:
. recharacterize the contribution of the
related leases by IOS Capital to IKON
Receivables-2, LLC as a loan from IKON
Receivables-2, LLC to IOS Capital
secured by a pledge of the leases; or
. recharacterize the contribution of the
related leases by IKON Receivables-2,
LLC to the issuer as a loan from the
issuer to IKON Receivables-2, LLC
secured by a pledge of the leases; or
. consolidate the assets of the issuer
with those of IOS Capital because IOS
Capital will indirectly own all of the
membership interests in the issuer; or
. consolidate the assets of the issuer
with those of IKON Receivables-2, LLC
because IKON Receivables-2, LLC will own
all of the membership interests in the
issuer.
If either recharacterization or consolidation
were successful, the bankruptcy trustee could
repudiate any leases that are considered to be
operating leases for bankruptcy law purposes
and all obligations relating to such operating
leases. An attempt to recharacterize the
transactions, even if unsuccessful, could
result in delays in payments to you. If either
attempt were successful, the notes would be
accelerated, and the trustee's recovery on your
behalf could be limited to the then current
value of the leases or the underlying
equipment. Consequently, you could lose the
right to future payments and you may not
receive your anticipated principal and interest
on the notes.
Although IOS Capital and IKON Receivables-2,
LLC both believe that the contribution of the
leases should be treated as an absolute and
unconditional assignment, for accounting
purposes, the leases will be treated as assets
of IOS Capital on the tax return of its
consolidated group and, for tax purposes, no
such assignment will be recognized. This
treatment of the assets might increase the risk
of recharacterization of the transfer to the
issuer as a financing.
Transfer of Servicing May If IOS Capital were to cease servicing the
Delay Payments to Noteholders leases, delays in processing payments on the
leases and information regarding lease payments
could occur. This could delay payments to the
noteholders.
9
Default or Insolvency of If lessees default on the leases, lease
Lessees May Reduce Payments to payments will decrease and funds available for
Noteholders payment to you will be reduced.
No Recourse Against Affiliates There is no recourse against any affiliates of
of the Issuer the issuer. The notes represent debt of the
issuer payable solely from the related asset
pool and any applicable credit enhancement. If
the lease payments, any other assets pledged to
secure the notes and any applicable credit
enhancement are insufficient to pay the notes
in full, you have no rights to obtain payment
from IOS Capital or any of its affiliates other
than the issuer. The issuer is a limited
liability company with limited assets.
Losses and Delinquencies on We cannot guarantee that the delinquency and
the Leases May Differ From the loss levels of leases in the asset pools will
Originator's Historical Loss correspond to the historical levels the
and Delinquency Levels originator experienced on its equipment lease
portfolio. There is a risk that delinquencies
and losses could increase or decline
significantly for various reasons including:
. changes in the federal income tax laws;
or
. changes in the local, regional or
national economies.
The Addition and Substitution If a significant number of leases are added or
of Leases May Adversely Affect replaced, this could affect the rate at which
Cashflow and May Decrease the funds are distributed on the notes and decrease
Yield on the Notes the yield to noteholders. The transaction
documents will permit IOS Capital under certain
circumstances, to substitute or add qualifying
leases. The addition or substitution of leases
may include leases that have different payment
due dates, installment amounts and maturity
dates than the existing or substituted leases.
IOS Capital may only add or substitute leases
that meet qualifying characteristics and
conditions. The ability of IOS Capital to
acquire such leases depends upon its ability to
originate enough leases that meet the specified
eligibility criteria. This may be affected by a
variety of social and economic factors,
including interest rates, unemployment levels,
the rate of inflation and public perception of
economic conditions generally. The addition or
substitution of leases could increase the
geographic, equipment or other concentrations
of the related asset pool. Consequently, any
adverse economic or social factors that
particularly affect a particular geographic
area, certain types of equipment or other
concentrations of leases in the related asset
pool may adversely affect the performance of
the asset pool, which, in turn, could affect
the rating of the notes.
Technological Obsolescence of If technological advances relating to office
Equipment May Reduce Value of equipment cause leased equipment to become
Collateral obsolete, the value of the equipment will
decrease. This will reduce the amount of monies
recoverable should the equipment be sold
following a lease default and you may not
recover the full amount due on your notes.
10
Where You Can Find More Information
The issuer or the servicer will file with the SEC all required annual,
quarterly and special reports, proxy statements and other information about the
notes. You can read and copy these documents at the public reference facility
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, NW, Room 1024,
Washington, DC 20549. You can also copy and inspect such reports, proxy
statements and other information at the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
233 Broadway Citicorp Center
New York, NY 10048 500 West Madison Street, Suite 1400
Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. SEC filings are also available to the public on the
SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we
file with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Prospectus. Information that we file later with
the SEC will automatically update the information in this Prospectus. In all
cases, you should rely on the later information over different information
included in this Prospectus or the Prospectus Supplement. We incorporate by
reference any future annual, monthly and special SEC reports and proxy materials
filed by or on behalf the issuer until we terminate our offering of the notes.
We filed a registration statement relating to the notes with the SEC.
This Prospectus is part of the registration statement but the registration
statement includes additional information. As a recipient of this Prospectus,
you may request a copy of the registration statement and any document we
incorporate by reference, except exhibits to the documents (unless the exhibits
are specifically incorporated by reference), at no cost, by writing or calling
us at:
IOS Capital, LLC
Attn: Harry Kozee
1738 Bass Road
P.O. Box 9115
Macon, GA 31208
(912) 471-2300
You should rely only on the information incorporated by reference or
provided in this prospectus or the accompanying Prospectus Supplement. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this Prospectus is accurate as of any date
other than the date on the cover page of this Prospectus or the accompanying
Prospectus Supplement.
You can find a listing of the pages where capitalized terms are
defined under "Index of Terms" beginning on page 45 in this Prospectus.
11
The Issuer
IKON Receivables Funding, LLC (the "Issuer") is a Delaware limited
liability company all of the membership interests in which will be held by IKON
Receivables-2, LLC, a special purpose Delaware limited liability company (the
"Seller"). All of the membership interests in the Seller are, in turn, held by
IOS Capital, LLC ("IOS Capital" " or the "Originator"). The Issuer was formed on
October 9, 2001. The Issuer was organized for the limited purpose of engaging in
the transactions described herein and any activities incidental to and necessary
or convenient for the accomplishment of such purposes and is restricted by its
organizational documents and certain agreements from engaging in other
activities. In addition, its organizational documents and certain agreements
require it to operate in a manner such that it should not be consolidated in the
bankruptcy estate of the Originator or its affiliates in the event that one of
them becomes subject to bankruptcy or insolvency proceedings. The Issuer's
address is 1738 Bass Road, Macon, Georgia 31208.
The Issuer will from time to time sell a series of Notes consisting of
one or more classes on terms to be determined at the time of sale and described
in a related Prospectus Supplement. The Notes of each series will be secured
solely by the related Asset Pool (as defined herein). The Issuer does not have,
nor is it expected in the future to have, any significant assets other than the
Asset Pools. The servicer of any Asset Pool relating to any series of Notes may
be IOS Capital or another affiliate of the Issuer (IOS Capital or such other
servicer, in its capacity as servicer, the "Servicer").
Because the Issuer has no operating history and will not engage in any
business other than activities incidental to the acquisition of each Asset Pool
(including asset pools relating to each series of notes) and the issuance of the
Notes (including the issuance of various series of Notes), no historical or pro
forma financial statements or ratios of earnings to fixed charges with respect
to the Issuer have been included herein, but such financial information may be
included in the Prospectus Supplement with respect to subsequent series of Notes
as such financial information becomes available.
The Issuer will pledge its interests in an Asset Pool to a Trustee in
respect of the related series of Notes pursuant to an Indenture between the
Issuer and such Trustee.
The balance sheet of the Issuer at March 5, 2002 is attached as
Exhibit 1 hereto.
The Asset Pools
The Notes of each series will be secured by a segregated pool of
equipment leases or contracts and related assets (an "Asset Pool"). The property
comprising each Asset Pool may include (i) a pool of leases, which may include
any combination of leases, leases intended as security agreements, installment
sale contracts or rental stream obligations (each, a "Lease") and may include
certain renewal payments thereunder, (ii) certain monies due under the Leases on
or after a specified date (the "Cut-off Date"), (iii) monies held from time to
time in one or more accounts established and maintained pursuant to the related
Transaction Documents (as defined herein), (iv) a security interest in the
Seller's interests in the underlying equipment and related property relating to
such pool of Leases (such equipment and related property, the "Equipment"), (v)
the rights of the Issuer under any interest rate swap agreement relating to the
Asset Pool, (vi) the rights of the Issuer under the Assignment and Servicing
Agreement (as defined herein) relating to the Asset Pool, and (vii) investment
earnings on certain accounts created under the related Indenture. The Leases,
including the Issuer's security interest in the underlying equipment and other
property relating to the Leases, in an Asset Pool are referred to as the "Lease
Receivables."
The Issuer will not have and the Asset Pools will not include any
residual interest in any Equipment after the related Lease has been paid in
full.
The Equipment generally will be limited to personal property which is
leased or financed by the Originator to lessees (each a "Lessee" and,
collectively, "Lessees") pursuant to Leases which either are "chattel paper" (as
defined in the Uniform Commercial Code) or are Leases that are not treated
materially differently from "chattel paper" for purposes of title transfer,
security interests or remedies on default.
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The Lease Receivables will be acquired by the Seller from the
Originator under an Assignment and Servicing Agreement among the Seller, the
Originator and the Issuer (the "Assignment and Servicing Agreement").
Contemporaneously, the Lease Receivables will be transferred by the Seller to
the Issuer pursuant to the Assignment and Servicing Agreement. The Leases
included in an Asset Pool will be selected from Leases held by the Originator
based on the criteria described under "The Leases--Eligible Leases."
On or prior to the date of issuance of the Notes of any series to the
holders of Notes, the Issuer will form an Asset Pool by (i) acquiring Lease
Receivables pursuant to the related Assignment and Servicing Agreement and (ii)
entering into an Indenture with the Trustee, relating to the issuance of the
Notes.
The Leases in each Asset Pool will have been originated by the
Originator or acquired by the Originator in accordance with the Originator's
specified underwriting criteria. The material underwriting criteria applicable
to the Leases are described under "Originator's Leasing Business."
Management's Discussion and Analysis of Financial Condition
As of the date of this Prospectus, the Issuer has no operating
history. The net proceeds of the sale of the Notes of each series will be used
to fund any applicable reserve or other accounts and to make distributions to
the owner of the Issuer. See "Use of Proceeds." The Issuer is prohibited by its
Limited Liability Company Agreement from engaging in business other than (i) the
purchase of equipment leases and Lease Receivables from IOS Capital and its
affiliates, (ii) the issuance of notes collateralized by its assets and (iii)
engaging in acts incidental, necessary or convenient to the foregoing and
permitted under Delaware law. The Issuer's ability to incur, assume or guaranty
indebtedness for borrowed money is also restricted by its Limited Liability
Company Agreement to only such activities that relate to the Lease Receivables.
Directors and Executive Officers of the Manager of the Issuer
The following table sets forth the executive officers and directors
of, the manager of the Issuer ("Manager"), and their ages and positions as of
October 1, 2001. Because the Issuer is organized as a special purpose company
and will be largely passive, it is expected that the officers and directors of
the Manager will participate in the management of the Issuer only to a limited
extent. Most of the actions related to maintaining and servicing the assets will
be performed by the Servicer.
- -------------------------------------------------------------------------------------
Name Age Position
- -------------------------------------------------------------------------------------
Russell Slack 44 President & Director
Harry Kozee 46 Chief Financial Officer, Vice President & Director
J. F. Quinn 46 Vice President, Treasurer & Director
Don H. Liu 40 Secretary
Dominic Liberatore 39 Assistant Secretary
Russell S. Slack has served as President and Director of IKON
Receivables Funding, Inc. since being elected on January 1, 2000. Mr. Slack has
served as the President of IOS Capital since 1999. Mr. Slack joined IOS Capital
in 1996. Prior to Mr. Slack's appointment as President of IOS Capital, Mr. Slack
served as the Director of Portfolio Quality. Prior to joining IOS Capital, Mr.
Slack was an Assistant Vice President for Citicorp from 1993 through 1996. Prior
to joining Citicorp, Mr. Slack spent approximately 11 years in the leasing and
financial services industry.
Harry Kozee has served as Chief Financial Officer, Vice President and
Director of IKON Receivables Funding, Inc. since being elected on January 1,
2000. Mr. Kozee has served as Vice President-Finance of IOS Capital since 1993.
Mr. Kozee joined IOS Capital in 1991 and was promoted to Controller in 1992.
Prior to joining IOS Capital, Mr. Kozee spent 15 years in auditing and in the
financial services industry.
13
J.F. Quinn has served as Vice President, Treasurer and Director of
IKON Receivables Funding, Inc. since being elected on January 1, 2000. Mr. Quinn
has served as Treasurer of 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, 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.
Don H. Liu has served as Secretary of IKON Receivables Funding, Inc.
since being elected on January 1, 2000. Mr. Liu serves as Senior Vice President,
General Counsel, Secretary and Chair of the Diversity Council at IKON Office
Solutions, Inc. Prior to joining IKON Office Solutions in March of 1999, he was
Vice President and Deputy Chief Legal Officer at Aetna U. S. Healthcare from
1992-1999. Before joining Aetna U.S. Healthcare, Mr. Liu practiced law in New
York City in the areas of mergers and acquisitions and general corporate law.
Dominic A. Liberatore has served as Assistant Secretary of IKON
Receivables Funding, Inc. since being elected on January 1, 2000. Mr. Liberatore
serves as Chief Counsel of Leasing for IKON Office Solutions, Inc. Mr.
Liberatore joined IKON Office Solutions, Inc. in September of 1999. Prior to
joining IKON Office Solutions, Mr. Liberatore was Counsel to Copelco Financial
Services Group, Inc. from 1995 through 1999. Before joining Copelco Financial
Services Group, Inc., Mr. Liberatore spent 9 years practicing law in the areas
of finance, leasing and general corporate law.
The Lease Information with respect to the Lease Receivables in each
Asset Pool will be set forth in the related Prospectus Supplement, including the
composition of such Lease Receivables and the distribution of such Lease
Receivables by equipment type, payment frequency and Discounted Present Value of
the Leases (as defined herein) as of the applicable Cut-Off Date. As of the date
of issuance of the Notes of any series, no more than 5% of the Lease Receivables
in the related Asset Pool (as measured by Discounted Present Value of the
Leases) will deviate from the characteristics of the Lease Receivables described
in the related Prospectus Supplement.
The Leases
Eligible Leases
All Leases have been originated or acquired in the ordinary course of
the Originator's business and comply with the Originator's credit and
collections policies. In addition, the following eligibility requirements apply
or will apply to all Leases on or prior to the related Cut-Off Date
(collectively, "Eligible Leases"):
(i) The Leases are valid and enforceable, and unconditionally
obligate the Lessee to make periodic Lease Payments (as defined herein)
(including taxes);
(ii) The Leases are noncancellable by the Lessee and do not contain
early termination options (except for Leases which contain early
termination or prepayment clauses that require the Lessee to pay all
remaining scheduled payments under such Lease upon early termination or
prepayment);
(iii) All payments payable under the Leases are absolute,
unconditional obligations of the Lessees;
(iv) All of the Leases require the Lessee or a third party to
maintain the Equipment in good working order, to bear all the costs of
operating the Equipment, including taxes and insurance relating thereto;
(v) The Leases do not materially violate any U.S. or state laws;
(vi) In the event of a Casualty (as defined herein), the Lessee is
required to pay at a minimum the outstanding principal or net book value of
the Leases and any applicable make-whole premium;
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(vii) The Leases have been transferred to the Issuer free and clear
of any liens and are assignable without prior written consent of the
Lessee;
(viii) The Leases are U.S. dollar-denominated and the lessor and each
Lessee are located in the United States;
(ix) The Lease is not a consumer lease;
(x) No more than three percent (3%) of the Leases in any Asset Pool
will consist of Leases with government entities as the obligor;
(xi) The Lease is not subject to any guaranty by the Lessor or
Originator but may be subject to the guaranty of others;
(xii) No adverse selection was used in selecting the Lease for
transfer to the Issuer;
(xiii) The Lessee has represented to the Originator that it has
accepted the Equipment;
(xiv) The Lessee is not a subject of an insolvency or bankruptcy
proceeding at the time of the transfer;
(xv) The Leases are not Non-Performing Leases (as defined herein);
and
(xvi) Each Lease is not more than 62 days past due at time of
transfer to the Issuer.
Accounting Characteristics
The Leases consist of finance leases for accounting purposes. In a
finance lease, the lessor transfers substantially all benefits and risks of
ownership of the underlying equipment to the lessee. In accordance with
Statement of Financial Accounting Standards No. 13, a lease is classified as a
finance lease if the collectibility of lease payments are reasonably certain and
it meets one of the following criteria: (1) the lease transfers title and
ownership of the equipment to the lessee by the end of the lease term; (2) the
lease contains a bargain purchase option; (3) the lease term at inception is at
least 75% of the estimated life of the equipment; or (4) the present value of
the minimum lease payments is at least 90% of the fair market value of the
equipment at inception of the lease.
Although the Leases are finance leases for accounting purposes, some
or all of the Leases may be considered operating or non-finance leases for tax,
bankruptcy law or other purposes.
Discounted Present Value
The discounted present value of the Leases (the "Discounted Present
Value of the Leases"), at any given time, will equal the future remaining
scheduled payments (not including delinquent amounts, excess copy charges and
maintenance charges) from the Leases (including Non-Performing Leases),
discounted at the rate specified in the related Prospectus Supplement (the
"Discount Rate"). The discounted present value of the Performing Leases (the
"Discounted Present Value of the Performing Leases") equals the Discounted
Present Value of the Leases, reduced by all future remaining scheduled payments
on the Non-Performing Leases (not including delinquent amounts and maintenance
charges), discounted at the Discount Rate. The Discounted Present Value of the
Leases in respect of each Asset Pool as of the initial Cut-Off Date, calculated
at the Discount Rate, will be specified in the related Prospectus Supplement.
In connection with all calculations required to be made pursuant to an
Indenture or an Assignment and Servicing Agreement with respect to the
determination of the Discounted Present Value of the Leases at any given time,
it will be assumed that:
15
(i) Lease Payments are due on the last day of the period from and
including the first day of each calendar month to and including the last day of
the calendar month immediately preceding the related Payment Date;
(ii) Lease Payments are discounted on a monthly basis using a 30-day
month and a 360-day year; and
(iii) Lease Payments are discounted to the last day of the calendar
month prior to the relevant calculation date.
In addition, each Indenture and Assignment and Servicing Agreement
will provide that any calculation of future remaining scheduled payments made on
or with respect to any date will be calculated after giving effect to any
payments received prior to the date of that calculation to the extent such
payments relate to scheduled payments due and payable with respect to the
related Due Period (as defined herein) and all prior Due Periods.
Delinquencies and Gross Losses
Information relating to the Originator's delinquency and gross loss
experience with respect to leases it has originated or acquired will be set
forth in the related Prospectus Supplement. This information may include, among
other things, the experience with respect to all leases in the Originator's
portfolio during specified periods, including leases not included in any Asset
Pool and leases which may not meet the criteria for selection as a Lease
Receivable for an Asset Pool. There can be no assurance that the delinquency,
repossession and net loss experience on any Asset Pool will be comparable to the
Originator's prior experience.
Maturity and Prepayment Considerations
If a Lease permits a prepayment, the amount of the prepayment, together
with accelerated payments resulting from defaults, will, subject to the use of
those monies to acquire additional or substituted leases pursuant to the terms
of the applicable Transaction Documents, shorten the weighted average life of
the pool of Lease Receivables and the weighted average life of the Notes. The
rate of prepayments on the Lease Receivables may be influenced by a variety of
economic, financial and other factors. In addition, under certain circumstances,
the Originator will be obligated to reacquire Lease Receivables from the Issuer
pursuant to the applicable Transaction Documents as a result of breaches of
representations and warranties. Any reinvestment risks resulting from a faster
or slower amortization of the Notes, which results from prepayments, will be
borne entirely by the Noteholders.
Acquisition of Lease Receivables
The Lease Receivables underlying the Notes will be acquired pursuant
to an Assignment and Servicing Agreement (i) by the Seller from the Originator
and (ii) by the Issuer from the Seller.
The Issuer expects that each Lease Receivable so acquired will have
been originated or acquired by the Originator in accordance with the
underwriting criteria specified herein and sold to the Seller. See "The
Originator's Leasing Business - Credit Policies and Loss Experience" herein.
Pursuant to the Assignment and Servicing Agreement, the Originator will make
certain representations and warranties to the Seller in respect of the related
Lease Receivables and the benefit of such representations and warranties will be
assigned to the Issuer pursuant to the Assignment and Servicing Agreement. The
Issuer will assign all its rights under the Assignment and Servicing Agreement
to the Trustee for the benefit of the Noteholders with the result that the
Originator will be liable to the Issuer and the Trustee for defective or missing
documents or an uncured breach of the Originator's representations or
warranties.
16
Pool Factors
A Noteholder's portion of the aggregate outstanding principal balance
of the related Class of Notes is the product of (i) the original outstanding
principal amount of such Noteholder's Notes and (ii) the applicable Pool Factor.
The "Pool Factor" for each Class of Notes will be a seven-digit decimal, which
the Servicer will compute on each determination date prior to each distribution
with respect to such Class of Notes, indicating the remaining outstanding
principal balance of such Class of Notes as of the applicable payment date (the
"Payment Date"), as a fraction of the initial outstanding principal balance of
such Class of Notes. Each Pool Factor will be initially 1.0000000, and
thereafter will decline to reflect reductions in the outstanding principal
balance of the applicable Class of Notes.
The Noteholders of record will receive reports on or about each
Payment Date concerning the payments received on the Lease Receivables, the
balance of Leases in the Asset Pool, the Pool Factor and various other items of
information. In addition, Noteholders of record during any calendar year will be
furnished information for tax reporting purposes not later than the latest date
permitted by law.
Use of Proceeds
The net proceeds from the sale of the Notes of each series will be
used to fund any applicable reserve or other accounts and to make distributions
by the Issuer to the Seller and by the Seller to the Originator.
The Originator's Leasing Business
The Originator, formerly known as IOS Capital, Inc., was formed in
1987 to provide lease financing to customers of IKON Office Solutions, Inc.
("IKON Office Solutions"). On December 31, 2001 the name of the Originator was
changed to IOS Capital, LLC and the Originator was converted from a Delaware
corporation to a Delaware limited liability company. The Originator is a
wholly-owned subsidiary of IKON Office Solutions. The Originator's corporate
headquarters are located at 1738 Bass Road, Macon, Georgia 31210. The
Originator's securities are registered under the Securities Exchange Act of
1934, as amended (the "1934 Act") and the Originator is subject to the reporting
requirements of the 1934 Act and, in accordance therewith, files reports and
other information with the Securities and Exchange Commission (the
"Commission"). The Originator filed an Annual Report on Form 10-K for the fiscal
year ended September 30, 2001 on December 24, 2001. Also, the Originator filed a
10-Q for the fiscal quarter ended December 31, 2001 on February 14, 2002. A copy
of the reports, including the exhibits thereto, are available to the public on
the SEC's web site at http://www.sec.gov. Requests for copies or other
information should be directed to IOS Capital, LLC, 1738 Bass Road, P.O. Box
9115, Macon, Georgia 31210, Attn: Harry Kozee.
IKON Office Solutions is a public company headquartered in Malvern,
Pennsylvania operating a large network of independent copier and office
equipment marketplaces in North America and the United Kingdom. IKON Office
Solutions has over 900 locations in the United States, Canada, the United
Kingdom, Germany, France, Denmark and Mexico. IKON Office Solutions also
provides equipment services and supplies, outsourcing and imaging services, such
as mailroom and copy center management, specialized document copying services
and electronic imaging and file conversion. IKON Office Solutions also offers
network consulting and design, hardware and software product interfaces,
computer networking, technology training and software solutions for the
networked office environment. IKON Office Solutions' fiscal 2001 gross revenues
were $5.3 billion.
The Originator is engaged in the business of arranging lease financing
for office equipment marketed by members of IKON Office Solutions' independent
dealer network ("IKON Marketplaces"), which sell and service copier equipment
and facsimile machines. The ability to offer lease financing on this equipment
through the Originator is considered a competitive marketing advantage which
more closely ties IKON Office Solutions to its customer base. During the 2001
fiscal year, 75% of new equipment sold by IKON marketplaces was financed through
the Originator. The Originator and IKON Office Solutions will seek to increase
this percentage in the future, as leasing enhances the overall profit margin on
equipment and is considered an important customer retention strategy. For the
fiscal years ended September 30, 2001 and 2000, the Originator's operating
revenues totaled
17
approximately $377.4 million and $358.4 million, respectively, with net income
of approximately $84.7 million and $79.4 million, respectively.
The equipment financed by the Originator consists of copiers,
facsimile machines, and related accessories and peripheral equipment, the
majority of which are produced by major office equipment manufacturers.
Currently 20% of the equipment financed by the Originator represents analog
copiers, 63% digital copiers, 12% color copiers, 2% facsimile machines, and 3%
other equipment. Although equipment models vary, IKON Office Solutions is
increasingly focusing its marketing efforts on the sale of higher segment
equipment, such as copiers which produce 50 or more impressions per minute.
The Originator's customer base (which consists of the end users of the
equipment) is widely dispersed, with the ten largest customers representing less
than 3% of the Originator's total lease portfolio as of September 30, 2001. The
typical new lease financed by the Originator during fiscal year 2001 averaged
$19,000 in amount and 51 months in duration. Although 96% of the leases in the
Originator's total lease portfolio as of September 30, 2001 are scheduled for
regular monthly payments, customers are also offered quarterly, semi-annual and
other customized payment terms. In connection with its leasing activities, the
Originator performs billing, collection, property and sales tax filings, and
provides quotes on equipment upgrades and lease-end notification. The Originator
also provides certain financial reporting services to the IKON marketplaces,
such as a monthly report of marketplace increases in leasing activity and
related statistics.
Types of Leases
The lease portfolio of the Originator consists of direct financing
leases and funded leases, although the Leases to be included in any Asset Pool
will consist solely of direct financing leases. Funded leases are contractual
obligations between IKON Office Solutions and IKON Marketplaces which have been
financed by the Originator. Direct financing leases are contractual obligations
between the Originator and the IKON Office Solutions customer and represent the
majority of the Originator's lease portfolio.
Funded leases and direct financing leases are structured as either tax
leases (from the Originator's perspective) or conditional sales contracts,
depending on the customer's needs. The customer decides which of the two
structures it desires. Under either structure, the total cost of the equipment
to the customer is substantially the same (assuming the exercise of the purchase
option).
Tax leases represented 97% of the Originator's total lease portfolio
as of September 30, 2001. The Originator is considered to be the owner of the
equipment for tax purposes during the life of these leases and receives the tax
benefit associated with equipment depreciation. Tax leases are structured with a
fair market value purchase option. Generally, the customer may return the
equipment, continue to rent the equipment or purchase the equipment for its fair
market value at the end of the lease.
Each tax lease has an assumed equipment residual value generally
ranging from 0% to 25% of original retail price, depending on model and term.
Although an Asset Pool may include tax leases with residual values, such
residual values will not be available for the benefit of the Noteholders of such
Asset Pool.
Conditional sale contracts account for the remaining 3% of the total
leases in the Originator's portfolio. Under these arrangements, the customer is
considered to be the owner of the equipment for tax purposes and is entitled to
receive any tax benefit associated with equipment depreciation. Each conditional
sales contract has an assumed residual value of 0%. Conditional sales contracts
are customarily structured with higher monthly lease payments than the tax
leases and have a $1 purchase option for the equipment at the end of the lease
term. Although the customer has the option of returning or continuing to rent
the equipment at lease-end, the customer almost always exercises the $1 purchase
option at the end of the lease term.
Credit Policies and Loss Experience
General. Prior to January 1998, IKON Office Solutions maintained a
decentralized credit policy. Each IKON marketplace was responsible for
developing and maintaining a credit policy that governed credit
18
practices and procedures. The policies contained minimum credit standards.
Credit authority levels were established and maintained locally with ultimate
authority vested in the district presidents and district CFOs. The Originator
provided credit assistance through the support of an automated front-end lease
application tracking system ("CLAS").
Beginning in January 1998, IKON Office Solutions centralized its
credit policy. IKON Office Solutions' National Risk Management Policy
established minimum standards for all IKON Office Solutions leasing transactions
and vested all credit authority with the Originator. The policy uses a tiered
approach incorporating analyst reviews and credit scoring based on customer
exposure.
Origination. Lease packages are assembled by an IKON Office Solutions
sales representative and submitted to its respective IKON marketplace or
district processing center. The IKON marketplace and/or district have the
responsibility to review for accuracy and completeness prior to submission to
the Originator for funding. The marketplace and/or district administration staff
enter the lease applications into the CLAS program. The CLAS program provides
both the credit processing and lease administration module. When applications
have completed both modules, the documents have been reviewed and the invoice
has been prepared, the marketplace and/or district administration staff forward
the leasing package for funding review and transmit the CLAS application to the
Originator.
The Originator reviews all documents for completion, accuracy and
compliance. Any changes to the original document must be approved by the
Originator's contract and documentation review specialists. Each application is
checked for credit approval based on a comprehensive risk management policy.
When the transaction has completed final review the CLAS application is updated
and uploaded to the mainframe for activation, funding and invoicing.
Credit Processing. The Originator's credit process is segmented by
transaction size and approval authority. The "High Risk Review List" lists
industries or customers which are considered volatile and require special
attention. Guidelines are also established for automatic approvals which require
minimal information.
The IKON Office Solutions approval process is tiered based upon
customer exposure. Requests less than $50,000 use the CLAS credit scorecard for
approval. Credit scoring for smaller balance exposures provides the Originator
with the ability to adjust risk scores system-wide and monitor performance.
Exposures of $50,000 to $250,000 rely on the expertise of the Originator's
credit staff in analyzing and verifying information regarding bank
relationships, trade references, D&B Business Information Reports, and financial
statements and/or tax returns. Exposures of more than $250,000 benefit from the
combined resources of the districts and the Originator, while maintaining local
ownership of the customer. Ideally, the process will be transparent to the
customer yet provide the necessary and timely information required to understand
the risk factors of the exposure and those in the portfolio.
Based upon the segmented approach, the following approval authorities
have been established:
. Customer Service Professional and/or Customer Service Professional
Manager
Dun & Bradstreet rated according to a decision matrix; up to
$50,000; no override authority.
. Business Credit Analysts
Up to high risk transactions.
. Senior Credit Analysts
Single signature for exposure up to $1 million; dual signature for
exposure up to $2 million.
. Director of Portfolio Quality & National Credit Coordinator
Single signature for exposure up to $2 million; dual signature for
exposure up to $5 million.
. Corporate
Exposure in excess of $5 million.
19
Challenges to the recommendations of the Originator's credit analysts
will be the responsibility of the IKON Office Solutions district presidents. In
the event the analyst does not agree with the actions recommended by the IKON
Office Solutions district, the Originator senior management will be requested to
intervene. Sole credit authority remains with the Originator, not IKON Office
Solutions. The requirements for the above approval categories for exposures
under $250,000 may be overridden with approval of a Senior Credit Analyst,
National Credit Coordinator, Director of Portfolio Quality or President of the
Originator. Justifications will be entered into CLAS.
Collections. Accounts for collection are selected by management using
a computer system and pre-determined assignment logic. Collectors have a system
queue that is regenerated each night, and accounts queue on line. Between 15 and
45 days past due, depending on contract balance, all accounts are contacted via
telephone, letter or both. These initial contacts are designed as reminders to
facilitate payments. After 45 days, collection calls continue with increasing
intensity. If a dispute or equipment allegation is made, the servicer of the
equipment in notified, but collection efforts, both verbal and written,
continue. By 60 days past due, any guarantor is contacted. Between 61 and 90
days past due calls and letters continue, and escalation to higher levels is
pursued. The customer contact at this point will be with a controller or vice
president. Collection supervisors monitor the progress and ask for definitive
plans to resolve any outstanding issues. At 90 days past due, the customer is
notified of possible repossession of the equipment. Accelerated demand letters,
explaining the contract terms, are sent shortly thereafter. A formal notice of
repossession is generally sent at 105 days past due. Through monthly delinquency
review meetings, collection strategies are discussed and then implemented.
Chargebacks are recognized in accordance with Originator's national risk
management policy which requires charge offs between 120 and 180 days
contractually past due. Any time during the handling of the account, a collector
can accelerate the process if the situation warrants. All collection activity is
documented through on line notation, which includes a record of letters sent.
Quality contracts, queue status and other statistics are tracked and reviewed
weekly to assure compliance and effectiveness.
Delinquency and Loss Experience. Historical delinquency information
for leases not charged off and loss information for leases owned and included in
IOS Capital's servicing portfolio will be set forth in each Prospectus
Supplement. See "The Leases--Delinquencies and Gross Losses".
The Trustee
The Trustee for a series of Notes will be identified in the related
Prospectus Supplement. The Trustee's liability in connection with the issuance
and sale of the Notes will be limited solely to the express obligations of the
Trustee set forth in the Indenture. The Originator and its affiliates may from
time to time enter into normal banking and Trustee relationships with the
Trustee and its affiliates. The Trustee, the Servicer and any of their
respective affiliates may hold Notes in their own names. In addition, for
purposes of meeting the legal requirements of certain local jurisdictions, the
Trustee shall have the power to appoint a co-trustee or a separate Trustee under
the Indenture. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Indenture will be
conferred or imposed upon the Trustee and such separate Trustee or co-Trustee
jointly, or in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee, who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
No resignation or removal of the Trustee and no appointment of a
successor Trustee will become effective until the acceptance of appointment by
the successor Trustee. The Trustee may resign at any time by giving written
notice thereof to the Issuer and the Servicer and by mailing notice of
resignation by first-class mail, postage prepaid, to the Noteholders of such
series at their addresses appearing on the security register. The Trustee may be
removed at any time by written notice of the holders of Notes evidencing more
than 66% of the voting rights thereof, delivered to the Trustee and the Issuer.
If the Trustee resigns, is removed, or becomes incapable of acting, or if a
vacancy shall occur in the office of the Trustee for any cause, the Issuer must
promptly appoint a successor Trustee. If no successor Trustee shall have been so
appointed by the Issuer or the Noteholders, or if no successor Trustee shall
have accepted appointment within 30 days after any such resignation or removal,
existence of incapability, or occurrence of such vacancy, the Trustee or any
Noteholder may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
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The Trustee will make no representations as to the validity or
sufficiency of the Assignment and Servicing Agreement, the Notes (other than the
authentication thereof) or of any Lease Receivable or related document and will
not be accountable for the use or application by the Servicer or the Issuer of
any funds paid to the Issuer in consideration of the sale of any Notes. If no
Servicer Events of Default (as defined herein) have occurred, then the Trustee
will be required to perform only those duties specifically required of it under
the Assignment and Servicing Agreement. However, upon receipt of the various
resolutions, certificates, statements, opinions, reports, documents, orders or
other instruments required to be furnished to it, the Trustee will be required
to examine them to determine whether they conform as to form to the requirements
of the Assignment and Servicing Agreement.
No recourse is available based on any provision of the Assignment and
Servicing Agreement, the Notes or any Lease Receivable or assignment thereof
against the Trustee, in its individual capacity, and the Trustee will not have
any personal obligation, liability or duty whatsoever to any Noteholder or any
other person with respect to any such claim and such claim shall be asserted
solely against the Servicer or any indemnitor, except for such liability as is
determined to have resulted from the Trustee's own gross negligence or willful
misconduct.
The Trustee will be entitled to receive (a) reasonable compensation
for its services,(b) reimbursement for its reasonable expenses and (c)
indemnification for loss, liability or expense incurred without gross negligence
or bad faith on its part, arising out of performance of its duties thereunder.
Description of the Notes
General
Each series of the Notes will be issued pursuant to an Indenture. The
following summaries (together with additional summaries under "Description of
the Transaction Documents" below) describe all material terms and provisions of
the Notes. The summaries do not contain all the terms of the Notes and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Transaction Documents and the Notes.
All of the Notes offered by this Prospectus will be rated in one of
the four highest rating categories by one or more nationally recognized
statistical rating organizations (each a "Rating Agency" and, collectively, the
"Rating Agencies").
The Notes will generally be styled as debt instruments, having a
principal balance and a specified floating or fixed interest rate. The Notes of
each series will represent debt secured by an Asset Pool comprised primarily of
the Lease Receivables described in the related Prospectus Supplement.
General Payment Terms of Notes
As provided in the related Transaction Documents, Noteholders will be
entitled to receive payments on their Notes on the specified Payment Dates or on
the next day that is not a Saturday, Sunday or other day on which commercial
banking institutions located in the city or cities where the Corporate Trust
Office of the Trustee and the Servicer (and, if applicable, any credit
enhancement provider) are located are authorized or obligated by law or
executive order to be closed (each a "Business Day").
Neither the Notes nor the underlying Lease Receivables will be
guaranteed or insured by any governmental agency or instrumentality or the
Issuer, the Servicer, the Seller, any Trustee or any of their respective
affiliates.
Collections
The following funds will be deposited into the Collection Account (as
defined below):
(a) Lease Payments;
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(b) recoveries from Non-Performing Leases (as defined below) to the
extent the Originator has not substituted Substitute Leases (as defined below)
for such Non-Performing Leases;
(c) late charges received on delinquent Lease Payments not advanced by
the Servicer;
(d) proceeds from purchases of Leases by the Originator as a result of
breaches of representations and warranties to the extent the Originator has not
substituted Substitute Leases for such Leases;
(e) any amounts due to the Issuer from the applicable counterparty
under any interest rate swap agreement related to any series;
(f) proceeds from investment of funds in the Collection Account and
any other applicable Transaction Account (as defined below);
(g) Casualty Payments;
(h) Retainable Deposits (each as defined below);
(i) Servicer Advances (as defined below, if any);
(j) Termination Payments (as defined below), to the extent the Issuer
does not reinvest such Termination Payments in Additional Leases; and
(k) proceeds received to effect a redemption of the Notes pursuant to
the Indenture.
The foregoing funds on deposit in the Collection Account on each
determination date relating to a Payment Date, excluding Lease Payments not due
during the preceding calendar month (a "Due Period") or any prior Due Period,
together with any funds deposited into the Collection Account from any Reserve
Account as described below under "Distributions," will constitute available
funds ("Available Funds"). Available Funds do not include cash flows realized
from the sale or release of Equipment following the expiration date of the
related Lease other than Equipment subject to Non-Performing Leases (as defined
below) that have not been replaced.
The Servicer must deposit the funds referred to in clauses (a) through
(d), (f) and (i) above into the Collection Account within two Business Days of
receipt thereof by the Servicer. The funds referred to in clauses (e), (g), (h)
and (j) above are to be deposited into the Collection Account on or prior to the
related Payment Date.
A "Lease Payment" is the equipment financing portion of each fixed
periodic rental payment payable by a Lessee under a Lease. Casualty Payments,
Retainable Deposits, Termination Payments, prepayments of rent required pursuant
to the terms of a Lease at or before the commencement of the term of such Lease,
security deposits, payments becoming due before each Cut-Off Date and
supplemental or additional payments required by the terms of a Lease with
respect to taxes, insurance, maintenance or other specific charges such as
excess copy charges are not Lease Payments. To the extent applicable with
respect to a series of Notes, Lease Payments may include certain renewal
payments with respect to the Leases.
A "Casualty Payment" is any payment pursuant to a Lease on account of
the loss, theft, condemnation, governmental taking, destruction, or damage
beyond repair (each, a "Casualty") of any item of Equipment subject thereto
which results, in accordance with the terms of the Lease, in a reduction in the
number or amount of any future Lease Payments or in the termination of the
Lessee's obligation to make future Lease Payments.
A "Retainable Deposit" is any security or other similar deposit which
the Servicer has determined in accordance with its customary servicing practices
is not refundable to the related Lessee.
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A "Termination Payment" is a payment payable by a Lessee under a Lease
upon the early termination of such Lease (other than on account of a Casualty or
a Lease default) which may be agreed upon by the Servicer, acting in the name of
the Issuer, and the Lessee.
"Non-Performing Leases" are (i) Leases that have become more than 123
days delinquent, (ii) Leases that have been accelerated by the Servicer or (iii)
Leases that the Servicer has determined to be uncollectible in accordance with
the Servicer's customary practices.
Distributions
On each Payment Date, Available Funds will be applied to make payments
of principal and interest due on the Notes, amounts owed to the Servicer,
Trustee (to the extent not payable by the Servicer) and other parties and for
other purposes as described and in the priority set forth in the related
Prospectus Supplement. If a Reserve Account is established for a series of
Notes, the related Prospectus Supplement will describe how much in that account
will be transferred to the Collection Account when there is a deficiency in
Available Funds otherwise available to make any payment due on each Payment
Date. Similarly, the related Prospectus Supplement will describe the extent to
which the proceeds of any applicable credit enhancement will be applied to make
up any such deficiency.
Prepayment and Yield Considerations
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yield to maturity of the Notes are
directly related to the rate of payments on the underlying Leases. The payments
on the Leases may be in the form of scheduled payments, prepayments or
liquidations due to default, casualty and other events, which cannot be
specified at present. Any prepayments or liquidations will result in
distributions to Noteholders of amounts which would otherwise have been
distributed over the remaining term of the Leases. The rate of such prepayments
and liquidations may be influenced by a number of other factors, including
general economic conditions. The rate of principal payments may also be affected
by any repurchase of the underlying Leases by the Originator or Seller pursuant
to the Assignment and Servicing Agreement. In such event, the application of the
repurchase price will decrease the Discounted Present Value of the Performing
Leases, causing the corresponding weighted average life of the Notes to
decrease.
Subject to certain limitations, the Originator will have the option to
substitute Eligible Leases having similar characteristics (each a "Substitute
Lease") for (i) Non-Performing Leases, (ii) Leases subject to repurchase as a
result of a breach of a representation and warranty by the Originator under the
Transaction Documents which breach has not been cured following discovery/notice
of such breach (each, a "Warranty Lease") and (iii) Leases following a
modification or adjustment to the terms of such Lease (each an "Adjusted
Lease"). The Originator may substitute Substitute Leases for Non-Performing
Leases, Adjusted Leases or Warranty Leases in amounts not to exceed specified
percentages (to be stated in the related prospectus supplement) of the
Discounted Present Value of the Leases as of the original Cut-Off Date. In
addition, in the event of a Lease that terminates early or which has been
prepaid in full (each, an "Early Termination Lease"), the Originator will have
the option to transfer an additional lease of similar characteristics (each, an
"Additional Lease"). The Substitute Leases and Additional Leases must have a
Discounted Present Value of not less than the Discounted Present Value of the
Leases being replaced and the monthly payments on the Substitute Leases or
Additional Leases must be at least equal to those of the replaced Leases through
the term of such replaced Leases. In the event that a Substitute Lease is not
provided for a Non-Performing Lease, the Discounted Present Value of the Leases
in the related Asset Pool will be reduced in an amount at least equal to the
Discounted Present Value of the Non-Performing Lease, plus any delinquent
payments.
The effective yield to holders of the Notes will depend upon, among
other things, the rate at which principal is paid to such Noteholders. The
after-tax yield to Noteholders may be affected by lags between the time interest
income accrues to Noteholders and the time the related interest income is
received by the Noteholders.
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Book-Entry Registration
Noteholders of a given series may hold their Notes through the
Depository Trust Company ("DTC") (in the United States) or Clearstream (defined
below) or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
Cede & Co. ("Cede"), as nominee for DTC, will hold the global Notes in
respect of given series. Clearstream and Euroclear will hold omnibus positions
on behalf of the Clearstream Participants (as defined below) and the Euroclear
Participants (as defined below) (collectively, the "Participants"),
respectively, through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositories (collectively,
the "Depositories") which in turn will hold those positions in customers'
securities accounts in the Depositories' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of securities. Participants
include brokers and dealers, banks, trust companies and clearing corporations.
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depository; however, cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depository to take action
to effect final settlement on its behalf by delivering or receiving Notes in
DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the
Depositories.
Because of time-zone differences, credits of Notes in Clearstream or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent Notes settlement processing, dated the Business Day
following the DTC settlement date, and those credits or any transactions in
those subsequent Notes will be reported to the relevant Clearstream Participant
or Euroclear Participant on that Business Day. Cash received in Clearstream or
Euroclear as a result of sales of Notes by or through a Clearstream Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Clearstream or
Euroclear cash account only as of the Business Day following settlement in DTC.
Noteholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Notes may do so only through Participants and Indirect Participants. In
addition, Noteholders will receive all distributions of principal and interest
through the Participants who in turn will receive them from DTC. Under a
book-entry format, Noteholders may experience some delay in their receipt of
payments, since the payments will be forwarded by the Issuer or note paying
agent to Cede, as nominee for DTC. DTC will forward the payments to its
Participants, which thereafter will forward them to Indirect Participants or the
Noteholders. It is anticipated that the only "Noteholder" in respect of any
series will be Cede, as nominee of DTC. Noteholders will not be recognized as
Noteholders, and the Noteholders will be permitted to exercise the rights of
Noteholders only indirectly through DTC and its Participants.
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Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Notes among Participants on whose behalf it acts with respect to the Notes
and to receive and transmit distributions of principal of, and interest on, the
Notes. Participants and Indirect Participants with which the Noteholders have
accounts with respect to the Notes similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Noteholders. Accordingly, although such Noteholders will not possess Notes, the
Rules provide a mechanism by which Participants will receive payments and will
be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Noteholder
to pledge Notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to such Notes, may be limited due to
the lack of a physical certificate for such Notes.
DTC will advise the Issuer and/or Trustee in respect of each series
that it will take any action permitted to be taken by a Noteholder only at the
direction of one or more Participants to whose accounts with DTC the Notes are
credited. DTC may take conflicting actions with respect to other undivided
interests to the extent that such actions are taken on behalf of Participants
whose holdings include such undivided interests.
Clearstream Banking, societe anonyme, was incorporated in 1970 as
"Cedel S.A.," a company with limited liability under Luxembourg law, a societe
anonyme. Clearstream holds securities for its customers and facilitates the
clearance and settlement of securities transactions between Clearstream
customers through electronic book-entry changes in accounts of Clearstream
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream in any of 40 currencies, including
United States Dollars. Clearstream provides to its customers, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in over 30 countries
through established depository and custodial relationships. Clearstream is
registered as a bank in Luxembourg. Clearstream is subject to regulation by the
Commission de Surveillance du Secteur Financier, which supervises Luxembourg
banks. Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers, and dealers, banks, trust companies and
clearing corporations. Clearstream U.S. customers are limited to securities
brokers and dealers, and banks. Currently, Clearstream has over 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream is available to other
institutions that clear through or maintain a custodial relationship with a
customer of Clearstream.
Euroclear was created in 1968 to hold securities for participants of
the Euroclear System and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of notes and any
risk from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in over 40 currencies, including United States dollars. The
Euroclear System includes various other services, including securities lending
and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. The Euroclear System is operated by Euroclear Bank S.A./N.V.
All operations are conducted by the Euroclear operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear operator, not the cooperative. The cooperative establishes policy for
the Euroclear System on behalf of Euroclear participants. Euroclear participants
include banks, including central banks, securities brokers and dealers and other
professional financial intermediaries and may include the underwriters of any
series of notes. Indirect access to the Euroclear System is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
The Euroclear operator is Euroclear Bank S.A./N.V., a bank organized
under the laws of Belgium. It is regulated and examined by the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of notes and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to Notes in the Euroclear System. All Notes in the Euroclear System are
held on a
25
fungible basis without attribution of specific Notes to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of relationship with
persons holding through Euroclear Participants.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
Except as required by law, neither the Issuer nor any paying agent
will have any liability for any aspect of the records relating to or payments
made or account of beneficial ownership interests of the related Notes held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
Definitive Notes
The Notes of any series will be issued in fully registered,
certificated form ("Definitive Notes") to the Noteholders or their nominees,
rather than to DTC or its nominee, only if (i) the Servicer advises in writing
that DTC is no longer willing or able to discharge properly its responsibilities
as Trust Depository with respect to such Notes and such Issuer is unable to
locate a qualified successor, (ii) the Servicer, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
"Event of Default" under the Indenture or a default by the Servicer under the
Assignment and Servicing Agreement. Noteholders representing at least a majority
of the outstanding principal amount of the Notes of that series advise the
Issuer through DTC in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in such Noteholders' best
interest.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Trustee will be required to notify all affected
Noteholders through Participants of the availability of Definitive Notes. Upon
surrender by DTC of its Notes and receipt of instructions for reregistration,
the Issuer will reissue DTC's Notes as Definitive Notes to the Noteholders in
the amounts specified in the reregistration instructions.
Distributions of principal of, and interest on, Definitive Notes will
thereafter be made by the Issuer in accordance with the procedures set forth in
the Indenture directly to holders of Definitive Notes in whose names the
Definitive Notes were registered at the close of business on the applicable
Record Date. Distributions will be made by check mailed to the address of such
holder as it appears on the register maintained by the Trustee. The final
payment on any Definitive Note, however, will be made only upon presentation and
surrender of the Note at the office or agency specified in the notice of final
distribution to the applicable Noteholders.
Definitive Notes will be transferable and exchangeable at the offices
of the Issuer or Trustee or of a certificate registrar named in a notice
delivered to holders of the Definitive Notes. No service charge will be imposed
for any registration of transfer or exchange, but the Issuer or the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Reports to Noteholders
On or prior to each Payment Date, the Servicer or the Trustee will
forward or cause to be forwarded to each holder of record of a Class of Notes a
statement or statements with respect to the related Asset Pool setting forth the
information specifically described in the Transaction Document which generally
will include the following information:
(i) the amount of the distribution with respect to that class of
Notes;
(ii) the amount of the distribution allocable to principal;
(iii) the amount of the distribution allocable to interest;
26
(iv) the Discounted Present Value of the Leases in the related Asset
Pool;
(v) the Asset Pool balance;
(vi) the aggregate outstanding principal balance and the Pool Factor
for such Class of Notes after giving effect to all payments reported under
(ii) above on such Payment Date;
(vii) the amount paid to or retained by the Servicer, if any, with
respect to the related Due Period; and
(viii) the aggregate purchase amounts for Lease Receivables that have
been reacquired, if any, for the related Due Period.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year, the Issuer or the Servicer will provide to the
Noteholders a statement containing the amounts described in (ii) and (iii) above
for that calendar year and any other information required by applicable tax
laws, for the purpose of the Noteholders' preparation of federal income tax
returns.
Description of the Transaction Documents
The following summary describes the material terms of each transaction
document pursuant to which an Asset Pool will be created and a series of Notes
will be issued. For purposes of this Prospectus, the term "Transaction
Documents" as used with respect to a series of Notes means the Indenture and
Assignment and Servicing Agreement relating to a series of Notes. Forms of the
Transaction Documents have been filed as exhibits to the Registration Statement
of which this Prospectus forms a part. This description is not a complete
summary of all the provisions of the respective Transaction Documents.
Assignment and Servicing Agreement
Acquisition of the Lease Receivables. On the Issuance Date, the Seller
will acquire the related Lease Receivables from the Originator pursuant to an
Assignment and Servicing Agreement in which the Originator will make certain
representations and warranties concerning the Lease Receivables. The rights and
benefits of the Seller under the Assignment and Servicing Agreement will be
assigned to the Issuer by the Seller pursuant to the Assignment and Servicing
Agreement and, in turn, pledged to the Trustee under an Indenture.
Contemporaneously, the Issuer will acquire the related Lease
Receivables from the Seller pursuant to the Assignment and Servicing Agreement.
The Issuer will pledge the Issuer's right, title and interests in and to the
Lease Receivables to the Trustee for the benefit of Noteholders under the
Indenture. The rights and benefits of the Issuer under the Assignment and
Servicing Agreement will be assigned to the Trustee on behalf of Noteholders as
collateral for the Notes by the Issuer under the Indenture.
Additions, Substitutions and Adjustments. The Originator will be
obligated to purchase from the Issuer its interest in any Lease in the Asset
Pool that has become a Warranty Lease unless an Eligible Lease is substituted
therefor in accordance with the related Assignment and Servicing Agreement.
Pursuant to the Assignment and Servicing Agreement, the Originator
will have the option to substitute Eligible Leases for Non-Performing Leases,
Adjusted Leases and Warranty Leases and to add Additional Leases. The percentage
of Leases in any Asset Pool that can be substituted for Non-Performing Leases,
Adjusted Leases and Warranty Leases will be limited, as described in the related
Prospectus Supplement, to a percentage of the aggregate Discounted Present Value
of the Leases in the Asset Pool as of the related Cut-Off Date. See "Description
of the Notes--Prepayment and Yield Considerations."
Servicing. The Servicer will service the Lease Receivables in an Asset
Pool pursuant to an Assignment and Servicing Agreement. The Servicer may
delegate its servicing responsibilities to one or more sub-servicers, but will
not be relieved of its liabilities with respect thereto.
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The Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Assignment and Servicing Agreement. An uncured breach of
such a representation or warranty that in any respect materially and adversely
affects the interests of the Noteholders will constitute a Servicer Event of
Default by the Servicer.
The Assignment and Servicing Agreement will provide that the Servicer
will take or cause to be taken all actions as are necessary or advisable to
service, administer and collect each Lease in accordance with customary and
prudent servicing procedures for leases of a similar type, and in accordance
with applicable laws, rules and regulations and, in any event, according to a
standard of care not less than that which it applies to leases it services for
its own account.
Advances by the Servicer. Prior to any Payment Date, with respect to
any series, the Servicer may, but will not be required to, advance (each, a
"Servicer Advance") to the Trustee an amount sufficient to cover delinquencies
on Leases with respect to the prior Due Period. The Servicer will be entitled to
reimbursement for Servicer Advances.
Servicing Compensation. The Servicer will be entitled to receive a
servicing fee for each Due Period (the "Servicing Fee") in an amount equal to a
specified percentage per annum of the Discounted Present Value of the Performing
Leases or the Outstanding Principal Amount of the Notes, as of the first day of
such Due Period. The Indenture will specify the priority of the Servicing Fee in
relation to payments to Noteholders and other persons. The Servicing Fee may be
paid prior to any distribution to the Noteholders.
If so provided in the related Transaction Documents, the Servicer will
also be entitled to reimbursement of out-of-pocket expenses reasonably incurred
in the course of performance of its duties as Servicer and to collect and retain
any late fees, the penalty portion of interest paid on past due amounts and
other administrative fees or similar charges allowed by applicable law with
respect to the Lease Receivables and any prepayment premiums or other payments
in excess of the present value of all outstanding amounts owed under a Lease by
a Lessee as a result of the early termination thereof, and will be entitled to
reimbursement from the Issuer for certain liabilities. Payments by or on behalf
of Lessees will be allocated to scheduled payments and late fees and other
charges in accordance with the Servicer's normal practices and procedures.
The Servicing Fee will compensate the Servicer for performing the
functions of a third-party servicer of similar types of leases as an agent for
their beneficial owner. The Servicing Fee also will compensate the Servicer for
administering the Lease Receivables, accounting for collections and furnishing
statements to the Issuer and the Trustee with respect to distributions. The
Servicing Fee also will reimburse the Servicer for certain taxes, accounting
fees, outside auditor fees, trustees fees, data processing costs and other costs
incurred in connection with administering the Lease Receivables.
Statements to Trustees and Issuer. Prior to each Payment Date for a
series of Notes, the Servicer will provide to the Trustee as of the close of
business on the last day of the preceding related Due Period, a statement
setting forth substantially the same information as is required to be provided
in the periodic reports provided to Noteholders described under "Description of
the Notes--Reports to Noteholders."
Evidence as to Compliance. The Assignment and Servicing Agreement will
provide that a firm of independent public accountants will furnish to the Issuer
and the Trustee, annually, a statement as to compliance by the Servicer during
the preceding twelve months (or, in the case of the first such certificate, the
period from the applicable Issuance Date) with certain standards relating to the
servicing of the Lease Receivables.
The Assignment and Servicing Agreement will also provide for the
annual delivery to the Issuer and/or the Trustee of a certificate signed by an
officer of the Servicer stating that the Servicer either has fulfilled its
obligations under the Assignment and Servicing Agreement in all material
respects throughout the preceding 12 months (or, in the case of the first
certificate, the period from the applicable Issuance Date) or, if there has been
a default in the fulfillment of any obligation in any material respect,
describing each default. The Servicer also will agree to give the Trustee notice
of certain Servicer Events of Defaults (as defined below) under the related
Assignment and Servicing Agreement.
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Copies of such statements and certificates may be obtained by
Noteholders owning at least 25% of the outstanding principal amount of the Notes
of the relevant series upon request in writing addressed to the Trustee or the
Servicer.
Certain Matters Regarding the Servicer. The Assignment and Servicing
Agreement will provide that the Servicer may not resign from its obligations and
duties as Servicer thereunder, except upon determination that the performance by
the Servicer of such duties is no longer permissible under applicable law. No
resignation by the Servicer will become effective until the Trustee or a
successor servicer has assumed the Servicer's servicing obligations and duties
under the Assignment and Servicing Agreement.
The Assignment and Servicing Agreement will further provide that
neither the Servicer nor any of its directors, officers, employees, or agents
will be under any liability to the Issuer or the Noteholders for taking any
action or for refraining from taking any action pursuant to the Assignment and
Servicing Agreement; provided, however, that neither the Servicer nor any of
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those other persons will be protected against any liability that would otherwise
be imposed based on any breach of the warranties, representations or warranties
made by the Servicer in the Assignment and Servicing Agreement or by reason of
willful misfeasance, bad faith or negligence in the performance or
non-performance of duties.
Under the circumstances specified in the Assignment and Servicing
Agreement, any entity into which the Servicer may be merged or consolidated, or
any entity resulting from any merger or consolidation to which the Servicer is a
party, or any entity succeeding to the business of the Servicer or, with respect
to its obligations as Servicer, which corporation or other entity in each of the
foregoing cases assumes the obligations of the Servicer, will be the successor
to the Servicer under the Assignment and Servicing Agreement.
Servicer Events of Default. The following events and conditions, and
any additional events and conditions that are described in the related
Prospectus Supplement, will be defined in the Assignment and Servicing Agreement
as "Servicer Events of Default":
(a) failure on the part of the Servicer to remit to the Trustee within
three Business Days following the receipt thereof any monies
received by the Servicer required to be remitted to the Trustee
under the Assignment and Servicing Agreement;
(b) failure on the part of the Servicer to pay to the Trustee on the
date when due, any payment required to be made by the Servicer
pursuant to the Assignment and Servicing Agreement;
(c) default on the part of either the Servicer or (so long as IOS
Capital is the Servicer) IOS Capital in its observance or
performance in any material respect of certain covenants or
agreements in the Assignment and Servicing Agreement which failure
continues unremedied for a period of 30 days after the earlier of
(i) the date it first becomes known to any officer of IOS Capital
or the Servicer, as the case may be, and (ii) the date on which
written notice thereof requiring the same to be remedied shall
have been given to the Servicer or IOS Capital, as the case may
be, by the Trustee, or to the Servicer or IOS Capital, as the case
may be, and the Trustee by any Noteholder;
(d) if any representation or warranty of IOS Capital made in the
Assignment and Servicing Agreement proves to be incorrect in any
material respect as of the time made; provided, however, that the
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breach of any representation or warranty made by IOS Capital in
such Assignment and Servicing Agreement will be deemed to be
"material" only if it affects the Noteholders or the
enforceability of the related Indenture or of the related Notes;
and provided, further, that a material breach of any
-------- -------
representation or warranty made by IOS Capital in an Assignment
and Servicing Agreement with respect to any of the Lease
Receivables subject thereto will not constitute a Servicer Event
of Default if IOS Capital purchases such Lease Receivable in
accordance with the Assignment and Servicing Agreement to the
extent provided therein;
(e) certain insolvency or bankruptcy events relating to the Servicer;
29
(f) the failure of the Servicer to make one or more payments due with
respect to aggregate recourse debt or other obligations exceeding
$5,000,000, or the occurrence of any event or the existence of any
condition, the effect of which event or condition is to cause (or
permit on or more persons to cause) more than $5,000,000 of
aggregate recourse debt or other obligations of the Servicer to
become due before its (or their) stated maturity or before its
(or their) regularly scheduled dates of payment so long as such
failure, event or condition shall be continuing and not waived by
the person or persons entitled to performance; or
(g) a final judgment or judgments (or decrees or orders) for the
payment of money aggregating in excess of $5,000,000 and any one
of such judgments (or decrees or orders) has remained unsatisfied
and in effect for any period of 60 consecutive days without a stay
of execution.
Rights upon Servicer Events of Default. As long as a Servicer Event of
Default under the Assignment and Servicing Agreement remains unremedied, the
Trustee may, and upon the instruction of holders of Notes evidencing not less
than 66-2/3% in principal amount of the Notes of the relevant series or, if and
to the extent described in the related Prospectus Supplement, any credit
enhancement provider, shall, terminate all the rights and obligations of the
Servicer, if any, under the related Assignment and Servicing Agreement,
whereupon a successor servicer appointed by such Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Assignment
and Servicing Agreement and will be entitled to similar compensation
arrangements. If, however, a bankruptcy trustee or similar official has been
appointed for the Servicer, and no Servicer Event of Default other than the
appointment of a successor servicer has occurred, the bankruptcy trustee or
official may have the power to prevent the Trustee or the Noteholders from
effecting a transfer of servicing. In the event that the Trustee is unwilling or
unable to so act, it may, subject to certain limitations, appoint, or petition a
court of competent jurisdiction for the appointment of, a successor servicer.
The Trustee may make arrangements for compensation to be paid to the successor,
which in no event may be greater than the servicing compensation payable to the
Servicer under the Assignment and Servicing Agreement or such other amount
indicated in the related Prospectus Supplement.
Indenture
Accounts. The Trustee will establish and maintain one or more accounts
in the name of such Trustee on behalf of the Noteholders into which payments
made on or with respect to the related Lease Receivables shall be deposited as
provided in the related Transaction Documents (the "Collection Account"). In
addition, the Trustee may establish one or more other separate accounts in the
name of the Trustee for the benefit of the Noteholders, (i) for the deposit of
funds for distribution to the Noteholders (a "Distribution Account"), (ii) to
provide reserves to cover shortfalls in Available Funds (a "Reserve Account"),
(iii) to provide funds for the purchase of additional Lease Receivables during
any applicable pre-funding period (a "Pre-Funding Account"), (iv) to provide for
an additional reserve account with respect to renewal payments (a "Renewal
Account") or (v) for any other purpose (an "Additional Account").
Funds in the Collection Account and any Distribution Account, Reserve
Account, Pre-Funding Account or Additional Account (collectively, the
"Transaction Accounts") will be invested as provided in the related Indenture in
Eligible Investments. "Eligible Investments" are generally limited to
investments acceptable to the Rating Agencies as being consistent with the
rating of the Notes. Eligible Investments generally are limited to obligations
that mature not later than the Business Day immediately preceding the next
succeeding Payment Date.
The Transaction Accounts will be maintained as Eligible Accounts.
"Eligible Account" means either (a) an account maintained with a depository
institution or trust company acceptable to each of the Rating Agencies and any
credit enhancement provider, or (b) a trust account or similar account
maintained with a federal or state chartered depository institution, which may
be an account maintained with the Trustee.
Distributions. Beginning on the first Payment Date, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on each Class of Notes entitled thereto will be made to the Noteholders.
The timing, calculation, allocation, order, source, priorities of, distribution
of, and requirements for each Class of Notes will be set forth in the related
Prospectus Supplement.
30
Credit Enhancements. The amounts and types of credit enhancement
arrangements, if any, and the provider thereof, if applicable, with respect to
each Class of Notes of a given series will be set forth in the related
Prospectus Supplement. If and to the extent provided in the related Prospectus
Supplement, credit enhancement may be in the form of an insurance policy,
subordination of one or more classes of Notes, reserve accounts,
overcollateralization, letters of credit, credit or liquidity facilities, third
party payments or other support, surety bonds, guaranteed cash deposits or such
other arrangements as may be described in the related Prospectus Supplement or
any combination of two or more of the foregoing. If specified in the related
Prospectus Supplement, credit enhancement for a Class of Notes may cover one or
more other classes of Notes of the same series, and credit enhancement for a
series of Notes may cover one or more other series of Notes.
The presence of credit enhancement for the benefit of any Class or
series of Notes is intended to enhance the likelihood of receipt by the
Noteholders of such Class or series of the full amount of principal and interest
due thereon and to decrease the likelihood that such Noteholders will experience
losses. As more specifically provided in the related Prospectus Supplement, the
credit enhancement for a Class or series of Notes will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance and interest thereon. If losses occur which exceed the amount
covered by any credit enhancement or which are not covered by any credit
enhancement, Noteholders of any Class or series will bear their allocable share
of deficiencies, as described in the related Prospectus Supplement. In addition,
if a form of credit enhancement covers more than one Class of Notes or more than
one series of Notes, Noteholders of any such Class or series will be subject to
the risk that such credit enhancement will be exhausted by the claims of
Noteholders of other series.
If the protection provided to the Noteholders of a given Class of
Notes by any applicable credit enhancement or by the subordination of another
Class of Notes is insufficient, the Issuer must rely solely on the Asset Pool.
Modification of the Indenture. Under an Indenture, the rights and
obligations of the Issuer and the rights of the Noteholders may be modified by
the Issuer with the consent of the holders of not less than 66-2/3% in aggregate
principal amount of the Notes then outstanding under the Indenture or, if and to
the extent described in the related Prospectus Supplement, the consent of any
credit enhancement provider; but no such modification may be made if it would
result in the reduction or withdrawal of the then current ratings of the
outstanding related Notes and no such modification may be made without the
consent of the holder of each outstanding note affected thereby if it would: (a)
change the fixed maturity of any Note, or the principal amount or interest
amount payable thereof, or change the priority of payment thereof or reduce the
interest rate or the principal thereon or change the place of payment where, or
the coin or currency in which, any Note or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any payment on or
after the maturity thereof; or (b) reduce the above-stated percentage of Notes,
without the consent of the holders of all Notes then outstanding under that
Indenture or (c) modify the provisions of the Indenture restricting
modifications or waivers of the provisions of the Indenture except to increase
any percentage or fraction set forth therein or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the holder of each outstanding note affected thereby; or (d) modify or alter the
provisions of the Indenture treating Notes held by the Issuer or any affiliate
of the Issuer as not being "Outstanding" for certain purposes under the
Indenture; or (e) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any part of any Asset Pool
or, except as provided in the Indenture, terminate the lien of the Indenture on
any part of an Asset Pool at any time subject to the Indenture or deprive any
Noteholder of the security afforded by the lien of the Indenture.
Events of Default. "Events of Default" under an Indenture will
include, in addition to any other events or conditions described in the related
Prospectus Supplement: (i) a default for five days or more in the payment of any
interest on any Note issued under that Indenture; (ii) a default in the payment
of the principal of or any installment of the principal of any Note at the
stated maturity or when the same becomes due and payable; (iii) a default in the
observance or performance in any material respect of any covenant or agreement
regarding the contemplated transaction made in the related Transaction
Documents, or any representation or warranty made by the Issuer in the
Transaction Documents or in any certificate delivered pursuant thereto or in
connection therewith having been incorrect as of the time made, and the
continuation of any default or the failure to cure a breach of a representation
or warranty for a period of 30 days (or in certain circumstances 90 days) after
notice thereof is given to the Issuer by the Trustee or the Issuer and the
Trustee by the holders of at least 25% in principal amount of the
31
Notes then outstanding; or (iv) certain events of bankruptcy, insolvency,
receivership or liquidation relating to the Issuer.
If an Event of Default occurs, the Trustee or, to the extent described
in the related Prospectus Supplement, any credit enhancement provider may, and
if so directed by holders of not less than 66-2/3% of the then outstanding
principal amount of the Notes, shall, declare the unpaid principal amount of the
related Notes to be immediately due and payable together with all accrued and
unpaid interest thereon. If the Event of Default involves other than non-payment
of principal or interest on the Notes, the Trustee may not sell the related
Lease Receivables unless the sale is for an amount greater than or equal to the
outstanding principal amount of the Notes unless directed to do so by the
holders of 66-2/3% of the then outstanding principal amount of the Notes.
Subsequent to an Event of Default and following any acceleration of
the Notes pursuant to the Indenture, any monies that may then be held or
thereafter received by the Trustee will be applied in the order of priority set
forth in the related Prospectus Supplement at the date or dates fixed by the
Trustee and, in case of the distribution of the entire amount due on account of
principal or interest, upon presentation and surrender of the Notes.
Each Indenture will provide that the holders of 66-2/3% in aggregate
principal amount of the Notes then outstanding or, if and to the extent
described in the related Prospectus Supplement, any credit enhancement provider
will have the right to waive certain defaults and, subject to certain
limitations, to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust power conferred
on the Trustee. The Indenture will provide that in case an Event of Default
shall occur (which shall not have been cured or waived), the Trustee will be
required to exercise its rights and powers under such Indenture and to use the
degree of care and skill in their exercise that a prudent man would exercise or
use in the conduct of his own affairs. Subject to these provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the Noteholders unless they shall have
offered to the Trustee security or indemnity satisfactory to the Trustee. Upon
request of a Noteholder, the Trustee will provide information as to the
outstanding principal amount of each Class of Notes.
Redemption. The Issuer may, at its option, redeem the Notes, as a
whole, at their principal amount, without premium, together with interest
accrued to the date fixed for redemption if on any payment date the Discounted
Present Value the Leases is less than or equal to 10% of the Discounted Present
Value of the Leases in the related Asset Pool as of the original Cut-Off Date.
The Issuer will give notice of redemption to each Noteholder and the Trustee at
least 30 days before the Payment Date fixed for prepayment. Upon deposit of
funds necessary to effect redemption, the Trustee shall pay the remaining unpaid
principal amount on the Notes and all accrued and unpaid interest as of the
Payment Date fixed for redemption.
Legal Aspects of the Lease Receivables
General
The Leases will either be "chattel paper" as defined in the Uniform
Commercial Code or Leases that are not treated materially differently from
"chattel paper" for purposes of title transfer, security interests or remedies
on default. Pursuant to the UCC for most purposes, a sale of chattel paper is
treated in a manner similar to a transaction creating a security interest in
chattel paper. In connection with the creation of an Asset Pool, the Issuer, the
Originator, the Servicer and/or the Seller will cause the filing of appropriate
UCC-1 financing statements with respect to the Leases to be made with the
appropriate governmental authorities. Under the Assignment and Servicing
Agreement, the Servicer will be obligated from time to time to take any actions
necessary to protect, perfect and preserve the Issuer's or the Trustee's
interests in the Leases and their proceeds, as the case may be.
The Leases are triple-net leases, requiring the Lessees to pay all
taxes, maintenance and insurance associated with the Equipment, and provide that
they are noncancellable by the Lessees.
32
The Leases are full payoff leases, under which the obligations of the
Lessee are absolute and unconditional, regardless of any defense, setoff or
abatement which the Lessee may have against IOS Capital, as Originator or
Servicer, the Issuer, or any other person or entity whatsoever.
Defaults under the Leases are generally the result of failure to pay
amounts when due, failure to observe other covenants in the Lease,
misrepresentations by, or insolvency, bankruptcy or appointment of a trustee or
receiver for, the Lessee under a Lease. The remedies of the lessor (and the
Issuer as assignee) following any applicable notice and cure period are
generally to enforce the performance by the Lessee of the terms and covenants of
the Lease (including the Lessee's obligations to make scheduled payments) or
recover damages of the breach thereof, to accelerate the balance of the
remaining scheduled payments paid or to terminate the rights of the Lessee under
such Lease. Although the Leases permit the lessor to repossess and dispose of
the related Equipment in the event of a lease default, and to credit the
proceeds against the Lessee's liabilities thereunder, these remedies may be
limited where the Lessee thereunder is subject to bankruptcy, or other
insolvency proceedings.
UCC and Bankruptcy Considerations
The Originator will transfer all the Originator's interest in the
Equipment to the Seller. The Seller will assign its interest as secured party in
the Equipment relating to the Leases to the Issuer, which in turn will pledge
that interest to the Trustee for the benefit of the Noteholders. The Seller will
not transfer any of its ownership interests in any of the Equipment. Because of
this, the Trustee, on behalf of the Noteholders, will have no interest in or
recourse to any of the Equipment other than by virtue of the security interest
granted to the Issuer in the Seller's interest in the Equipment and the Issuer's
pledge of that interest to the Trustee. As a result, the Trustee may be unable
to foreclose on the Equipment in the event of a default by a Lessee on any Lease
and Noteholders may experience delays in receiving payments and suffer a loss of
their investment in the Notes. UCC financing statements will not be filed to
perfect any security interest in the Equipment. Moreover, Equipment may be
subject to a superior lien. In this case, the senior lienholder may be entitled
to be paid the full amount of the indebtedness owed to it out of the sale
proceeds before the proceeds could be applied to the payment of claims on behalf
of the Issuer or Noteholders. In addition, in the event of bankruptcy of the
Originator or the Seller, the security interest in the Equipment of the Issuer
or Trustee may be subject to avoidance under the Bankruptcy Code of 1978, as
amended (the "Bankruptcy Code").
In the event of a default by the Lessee under a finance lease, the
Servicer may take action to enforce the Non-Performing Lease by repossession and
resale of the Equipment. Under the UCC in most states, a creditor can, without
prior notice to the debtor, repossess assets securing a defaulted contract by
the Lessee's voluntary surrender of such assets or by "self-help" repossession
that does not involve a breach of the peace or by judicial process.
In the event of a default by the Lessee under a finance lease, some
jurisdictions require that the Lessee be notified of the default and be given a
time period within which it may cure the default prior to repossession.
Generally, this right of reinstatement may be exercised on a limited number of
occasions in any one-year period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the Lessee with reasonable
notice of the date, time and place of any public sale and/or the date after
which any private sale of the collateral may be held and that any such sale be
conducted in a commercially reasonable manner. The Assignment and Servicing
Agreement may require the Servicer to sell promptly any repossessed item of
Equipment or re-lease such Equipment for the benefit of the Noteholders.
Under most state laws, a Lessee has the right to redeem collateral for
its obligations prior to actual sale by paying to the secured party the unpaid
balance of the obligation plus reasonable expenses for repossession, holding and
preparing the collateral for disposition and arranging for its sale, plus, to
the extent provided for in the written agreement of the parties, reasonable
attorneys' fees.
In addition, because the market value of the equipment of the type
subject to the Leases generally declines with age and because of obsolescence,
the net disposition proceeds of Equipment at any time during the term of a Lease
may be less than the outstanding balance of the Lease Payments. Because of this,
and because other
33
creditors may have rights in the related Equipment superior to those of the
Issuer, the Servicer may not be able to recover the entire amount due on a Non-
Performing Lease in the event that the Servicer elects to repossess and sell the
Equipment at any time.
Under the UCC and laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a Lessee for any deficiency on
repossession and resale of the asset securing the unpaid balance of the Lessee's
contract. However, some states impose prohibitions or limitations on deficiency
judgments. In most jurisdictions, the courts, in interpreting the UCC, would
impose upon a creditor an obligation to repossess the equipment in a
commercially reasonable manner and to "mitigate damages" in the event of a
Lessee's failure to cure a default. The creditor would be required to exercise
reasonable judgment and follow acceptable commercial practice in seizing and
disposing of the equipment and to offset the net proceeds of such disposition
against its claim. In addition, a Lessee may successfully invoke an election of
remedies defense to a deficiency claim in the event that the Servicer's
repossession and sale of the Equipment is found to be a retention discharging
the Lessee from all further obligations under UCC Section 9-620(a). If a
deficiency judgment were granted, the judgment would be a personal judgment
against the Lessee for the shortfall, but a defaulting Lessee may have very
little capital or sources of income available following repossession. Therefore,
it may not be useful to seek a deficiency judgment or, if one is obtained, it
may be settled at a significant discount or be uncollectible.
Certain statutory provisions, including federal and state bankruptcy
and insolvency laws, may also limit the ability of the Servicer to repossess and
resell collateral or obtain a deficiency judgment. In the event of the
bankruptcy or reorganization of a Lessee, various provisions of the Bankruptcy
Code and related laws may interfere with or eliminate the ability of the
Servicer, the Issuer or the Trustee to enforce its rights under the Lease
Receivables. If bankruptcy proceedings were instituted in respect of a Lessee,
the Issuer and/or Trustee could be prevented from continuing to collect payments
due from or on behalf of the Lessee or exercising any remedies without the
approval of the bankruptcy court, and the bankruptcy court could permit the
Lessee to use or dispose of the Equipment and provide the Issuer and/or Trustee
with a lien on substitute collateral, so long as such substitute collateral
constituted "adequate protection" as defined under the Bankruptcy Code.
In the case of operating leases, the Bankruptcy Code grants to the
bankruptcy trustee or the debtor-in-possession a right to elect to assume or
reject any executory contract or unexpired lease. Any rejection of this type of
lease or contract constitutes a breach of the lease or contract, entitling the
nonbreaching party to a claim for damages for breach of contract. The net
proceeds from any resulting judgment would be deposited by the Servicer into the
Collection Account and allocated to the Noteholders as more fully described
herein and in the related Prospectus Supplement. Upon the bankruptcy of a
Lessee, if the bankruptcy trustee or debtor-in-possession elected to reject a
Lease, the flow of scheduled payments to Noteholders would cease. In the event
that, as a result of the bankruptcy of a Lessee, the Leases become
Non-Performing Leases, no recourse would be available against the Originator
(except for misrepresentation or breach of warranty) and the Noteholders could
suffer a loss. Similarly, upon the bankruptcy of the Issuer, if the bankruptcy
trustee or debtor-in-possession elected to reject a Lease, the flow of Lease
Payments to the Issuer and the Noteholders would cease. As noted above, however,
the Issuer has been structured so that the filing of a bankruptcy petition with
respect to it is unlikely. See "The Issuer."
In addition, certain of the Leases (but not in excess of 3% of the
related Asset Pool) may be with governmental entities. Payment by governmental
authorities of amounts due under these Leases may be contingent upon legislative
approval. Further, the assignment of their payment obligations may be void or
voidable if not done in compliance with applicable government rules and
regulations. Accordingly, payment delays and collection difficulties may limit
collections with respect to certain governmental Leases.
These UCC and bankruptcy provisions, in addition to the possible
decrease in value of a repossessed item of Equipment, may limit the amount
realized on the sale of the Equipment to less than the amount due on the related
Lease.
34
Material Federal Income Tax Consequences
General
The following discussion sets forth the material federal income tax
consequences to investors of the purchase, ownership and disposition of the
Notes. The opinion of Dewey Ballantine LLP, tax counsel to the Issuer ("Tax
Counsel"), does not purport to deal with all federal tax considerations
applicable to all categories of investors. Certain holders, including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
taxpayers subject to the alternative minimum tax, and holders that will hold the
Notes as other than capital assets, may be subject to special rules that are not
discussed below. In particular, this discussion applies only to institutional
investors that purchase the Notes directly from the Issuer and hold the Notes as
capital assets.
The discussion that follows, and the opinion of Tax Counsel set forth
below are based upon provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), treasury regulations promulgated thereunder as in effect on the
date hereof, and existing judicial and administrative interpretations thereof.
These authorities are subject to change and to differing interpretations, which
could apply retroactively. The opinion of Tax Counsel is not binding on the
courts or the Internal Revenue Service (the "IRS"). Potential investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Notes.
The following discussion addresses lease-backed notes such as the
Notes that are intended to be treated for federal income tax purposes as
indebtedness secured by the underlying Lease Receivables. Tax Counsel has
prepared the following discussion and is of the opinion that such discussion is
correct in all material respects.
Tax Characterization of the Issuer
Tax Counsel is of the opinion that the Issuer will not be
characterized as an association (or a publicly traded partnership) taxable as a
corporation for federal income tax purposes.
Tax Characterization of the Notes
Although no transaction closely comparable to that contemplated herein
has been the subject of any treasury regulation, revenue ruling or judicial
decision, based on the application of existing law to the facts as set forth in
the applicable agreements, Tax Counsel is of the opinion that the Notes will be
characterized as indebtedness for federal income tax purposes. If characterized
as indebtedness, interest on the Notes will be treated as ordinary income for
federal income tax purposes. Noteholders using the accrual method of accounting
may be required to report income for tax purposes when earned even if not paid,
unless it is determined to be uncollectable. Interest received on the Notes also
may constitute "investment income" for purposes of certain limitations of the
Code concerning the deductibility of investment interest expense. Interest paid
to a non-U.S. Noteholder will not be subject to United States federal income
tax, provided the interest is not effectively connected with the Noteholder's
trade or business in the United States.
Although it is the opinion of Tax Counsel that the Notes are properly
characterized as indebtedness for federal income tax purposes, no assurance can
be given that such characterization of the Notes will prevail. If the Notes were
treated as an ownership interest in the Leases, all income on the Leases would
be income to the holders of the Notes, and related fees and expenses would
generally be deductible (subject to certain limitations on the deductibility of
miscellaneous itemized deductions by individuals) and certain market discount
and premium provisions of the Code might apply to a purchase of the Notes.
If, alternatively, the Notes were treated as an equity interest in the
Issuer, the Issuer might be classified as a partnership, or as an association
(or a publicly traded partnership) taxable as a corporation. If the Notes were
treated as interests in a partnership, each item of income, gain, loss,
deduction and credit generated through the ownership of the Equipment and the
Lease Receivables by the partnership would be passed through to the Noteholders,
as partners in a partnership according to their respective interests therein.
The timing, amount and character of the income or expenses reportable by the
Noteholders as partners in such a partnership could differ from
35
the income or expenses reportable by the Noteholders as holders of indebtedness.
If the Noteholders were treated as partners, a cash basis Noteholder might be
required to report income when it accrues to the partnership rather than when it
is received by the Noteholder. Moreover, if Notes were treated as interests in a
partnership, an individual Noteholder's share of expenses of the partnership
(such as Servicing Fees) would be miscellaneous itemized deductions that in the
aggregate are allowed only to the extent they exceed two percent of the
individual Noteholder's adjusted gross income, meaning that the individual
Noteholder might be taxed on a greater amount of income than the stated interest
on his or her Notes. Finally, if a Note were treated as a partnership interest,
any taxable income allocated to a Noteholder that is a pension, profit sharing
or employee benefit plan or otherwise tax-exempt, could constitute "unrelated
business taxable income."
If the Notes were treated as interests in an association (or a
publicly traded partnership) taxable as a corporation, the resulting entity
would be subject to federal income tax at corporate tax rates on its taxable
income generated by ownership of the Lease Receivables. Moreover, distributions
by the entity on the Notes probably would not be deductible in computing the
entity's taxable income and all or part of any distributions to Noteholders
would probably be treated as dividend income to such Noteholders. Such an
entity-level tax could result in a reduced amount of cash available for
distributions to Noteholders.
Since the Issuer will treat the Notes as indebtedness for federal
income tax purposes, the Trustee (and Participants and Indirect Participants)
will not attempt to satisfy the tax reporting requirements that would apply
under these alternative characterizations of the Notes. Further, if the IRS were
to contend successfully that the Notes are interests in a publicly traded
partnership taxable as a corporation, additional tax consequences would apply to
foreign Noteholders. Investors are urged to consult their own tax advisors with
regard to the potential application of those provisions.
Discount and Premium
A Note purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In very general terms, (i) original issue discount is
treated as a form of interest and must be included in a beneficial owner's
income as it accrues (regardless of the beneficial owner's regular method of
accounting) using a constant yield method; (ii) market discount is treated as
ordinary income and must be included in a beneficial owner's income as principal
payments are made on the Note (or upon a sale of a Note); and (iii) if a
beneficial owner so elects, premium may be amortized over the life of the Note
and offset against inclusions of interest income. These tax consequences are
discussed in greater detail below. Beneficial owners who are required to include
the interest income as it accrues may be required to report income for tax
purposes in advance of receiving a corresponding cash contribution with which to
pay the related tax.
Original Issue Discount. In general, a Note will be considered to be
issued with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The issue price of a Note
is the initial offering price to the public (excluding bond houses and brokers)
at which a substantial amount of the Notes is sold. The issue price also
includes any accrued interest attributable to the period between the beginning
of the first remittance period and the closing date relating to such series of
Notes (the "Issuance Date"). The stated redemption price at maturity of a Note
that has a notional principal amount or receives principal only or that is or
may provide for accruals of interest is equal to the sum of all distributions to
be made under that Note. The stated redemption price at maturity of any other
Note is its stated principal amount, plus an amount equal to the excess, if any,
of the interest payable on the first Payment Date over the interest that accrues
for the period from the Issuance Date to the first Payment Date. The Trustee
will supply, at the time and in the manner required by the IRS, to beneficial
owners, brokers and middlemen information with respect to the original issue
discount accruing on the Notes.
Notwithstanding the general definition, original issue discount will
be treated as zero if the discount is less than 0.25 percent of the stated
redemption price at maturity of the Note multiplied by its weighted average
life. The weighted average life of a Note is computed for this purpose as the
sum, for all distributions included in the stated redemption price at maturity,
of the amounts determined by multiplying (i) the number of complete years
(rounding down for partial years) from the Issuance Date until the date on which
each of those distributions is expected to be made by (ii) a fraction, the
numerator of which is the amount of the distribution and the denominator of
which is the Note's stated redemption price at maturity. Even if original issue
discount is treated
36
as zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Note and, when each such
distribution is received, gain equal to the discount allocated to the
distribution will be recognized.
Each beneficial owner must include in gross income the sum of the "daily
portions" of original issue discount on its security for each day during its
taxable year on which it held the security. For this purpose, in the case of an
original beneficial owner, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." Original
issue discount calculations must be based on accrual periods of no longer than
one year either (1) beginning on a payment date, or, in the case of the first
period, the Closing Date, and ending on the day before the next payment date or
(2) beginning on the next day following a payment date and ending on the next
payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (a) the sum of (1) the present values of all the distributions remaining
to be made on the security, if any, as of the end of the accrual period and (2)
the distribution made on the security during the accrual period of amounts
included in the stated redemption price at maturity, over (b) the adjusted issue
price of the security at the beginning of the accrual period. The present value
of the remaining distributions referred to in the preceding sentence will be
calculated based on (1) the yield to maturity of the security, calculated as of
the Closing Date, giving effect to the prepayment assumption, (2) events,
including actual prepayments, that have occupied prior to the end of the accrual
period, (3) the prepayment assumption, and (4) in the case of the security
calling for a variable rate of interest, an assumption that the value of the
index upon which the variable rate is based remains the same as its value on the
closing date over the entire life of the security. The adjusted issue price of a
security at any time will equal the issue price of the security, increased by
the aggregate amount of previously accrued original issue discount with respect
to the security, and reduced by the amount of any distributions made on the
security as of that time of amounts included in the stated redemption price at
maturity. The original issue discount accruing during any accrual period will
then be allocated ratably to each day during the period to determine the daily
portion of original issue discount.
A subsequent purchaser of a Note that purchases it at a cost less than
its remaining stated redemption price at maturity also will be required to
include in gross income for each day on which it holds the Note, the daily
portion of original issue discount with respect to the Note but reduced, if the
cost of the Note to the purchaser exceeds its adjusted issue price, by an amount
equal to the product of (i) that daily portion and (ii) a constant fraction, the
numerator of which is that excess and the denominator of which is the sum of the
daily portions of original issue discount on the Note for all days on or after
the day of purchase.
Market Discount. A beneficial owner that purchases a Note at a market
discount, that is, at a purchase price less than the remaining stated redemption
price at maturity of such Note (or, in the case of a Note with original issue
discount, its adjusted issue price), will be required to allocate each principal
distribution first to accrued market discount on the Note, and recognize
ordinary income to the extent such distribution does not exceed the aggregate
amount of accrued market discount on such Note not previously included in
income. With respect to Notes that have unaccrued original issue discount, such
market discount must be included in income in addition to any original issue
discount. A beneficial owner that incurs or continues indebtedness to acquire a
Note at a market discount may also be required to defer the deduction of all or
a portion of the interest on such indebtedness until the corresponding amount of
market discount is included in income. In general terms, market discount on a
Note may be treated as accruing either (i) under a constant yield method or (ii)
in proportion to remaining accruals of original issue discount, if any, or if
none, in proportion to remaining distributions of interest on the Note. The
Trustee will make available, as required by the IRS, to beneficial owners of
Notes information necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if such discount is less than 0.25 percent of the
remaining stated redemption price at maturity of such Note multiplied by its
weighted average remaining life. Weighted average remaining life presumably
would be calculated in a manner similar to weighted average life, taking into
account payments, including prepayments, prior to the date of acquisition of the
Note by the subsequent purchaser. If market discount on a Note is treated as
zero under this rule, the actual amount of market discount must be allocated to
the remaining principal distributions on the Note and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
37
Premium. A purchaser of a Note that purchases such Note at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Note (a "Premium Note") at a premium. Such a purchaser need
not include in income any remaining original issue discount and may elect, under
section 171(c)(2) of the Code, to treat such premium as "amortizable bond
premium." If a beneficial owner makes such an election, the amount of any
interest payment that must be included in such beneficial owner's income for
each period ending on a Payment Date will be reduced by the portion of the
premium allocable to such period based on the Premium Note's yield to maturity.
Such premium amortization should be made using constant yield principles. If
such election is made by the beneficial owner, the election will also apply to
all bonds the interest on which is not excludible from gross income, "fully
taxable bonds," held by the beneficial owner at the beginning of the first
taxable year to which the election applies and to all such fully taxable bonds
thereafter acquired by it, and is irrevocable without the consent of the IRS. If
such an election is not made, (i) such a beneficial owner must include the full
amount of each interest payment in income as it accrues, and (ii) the premium
must be allocated to the principal distributions on the Premium Note and when
each such distribution is received, a loss equal to the premium allocated to
such distribution will be recognized. Any tax benefit from the premium not
previously recognized will be taken into account in computing gain or loss upon
the sale or disposition of the Premium Note.
Special Election. A beneficial owner may elect to include in gross income
all "interest" that accrues on a Note by using a constant yield method. For
purposes of the election, the term "interest" includes stated interest,
acquisition discount, original issue discount, de minimis original issue
discount, market discount, de minimis market discount and unstated interest as
adjusted by any amortizable bond premium or acquisition premium. A beneficial
owner should consult its own tax advisor regarding the time and manner of making
and the scope of the election and the implementation of the constant yield
method.
Sale or Exchange of Notes
If a Note is sold or exchanged, the seller of the Note will recognize
gain or loss equal to the difference between the amount realized on the sale or
exchange and the adjusted basis of the Note. The adjusted basis of a Note will
generally equal its cost, increased by any original issue discount or market
discount includible in income with respect to the Note through the date of sale
and reduced by any principal payments previously received with respect to the
Note, any payments allocable to previously accrued original issue discount or
market discount and any amortized market premium. Subject to the market discount
rules, gain or loss will generally be capital gain or loss if the Note was held
as a capital asset. Capital losses generally may be used only to offset capital
gains. Gain realized by a Non-U.S. Noteholder on the disposition of the Notes
will not be subjected to United States federal income tax unless (i) gain is
effectively connected with the Noteholder's conduct of U.S. trade or business,
or (ii) the Noteholder is an individual present in the U.S. for at least 183
days during the taxable year of disposition and certain other conditions are
met.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Notes, may be subject to the "backup withholding tax"
under section 3406 of the Code if recipients of the distributions fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from that
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of distributions that
is required to supply information but that does not do so in the proper manner.
Foreign Investors
Distributions made on a Note to, or on behalf of, a beneficial owner that
is not a U.S. Person generally will be exempt from U.S. federal income and
withholding taxes. The term "U.S. Person " means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
an estate that is subject to U.S. federal income tax regardless of the source of
its income, or a trust if a court within the United States can exercise primary
supervision over its administration and at least one United States person has
the authority to control all substantial decisions of the trust. This exemption
is applicable provided (a) the beneficial owner is not subject to U.S. tax as a
result of a
38
connection to the United States other than ownership of the Note, (b) the
beneficial owner signs a statement under penalties of perjury that certifies
that such beneficial owner is not a U.S. Person, and provides the name and
address of such beneficial owner, and (c) the last U.S. Person in the chain of
payment to the beneficial owner receives such statement from such beneficial
owner or a financial institution holding on its behalf and does not have actual
knowledge that such statement is false. Beneficial owners should be aware that
the IRS might take the position that this exemption does not apply to a
beneficial owner that is a "controlled foreign corporation" described in Section
881(c)(3)(C) of the Code.
A foreign beneficial owner, including, in the case of a foreign
partnership, the partners thereof, may be required to obtain a United States
taxpayer identification number and make certain certifications if the foreign
beneficial owner wishes to obtain exemption from, or a reduced rate of,
withholding under an income tax treaty. In the case of Notes held by a foreign
partnership, (i) the certification described above may be provided by the
partners rather than by the foreign partnership and (ii) the partnership must
provide information, including a United States taxpayer identification number
(see "Backup Withholding and Information Reporting" above). A look-through rule
would apply in the case of tiered partnerships. Non-U.S. Persons should consult
their own tax advisors regarding the application to them of the Withholding
Regulations.
State and Local Tax Consequences
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences", potential investors should consider the state
and local income tax consequences of the acquisition, ownership and disposition
of the Notes. State and local tax laws may differ substantially from the
corresponding federal tax law, and the foregoing discussion does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an Investment in the
Notes.
Ratings
Each Class of Notes offered by this Prospectus and the related Prospectus
Supplement will be rated in one of the four highest rating categories by one or
more Rating Agencies. These ratings will address, in the opinion of such Rating
Agencies, the likelihood that the Issuer will be able to make timely payment of
all amounts due on the related Notes in accordance with the terms thereof. These
ratings will neither address any prepayment or yield considerations applicable
to any Notes nor constitute a recommendation to buy, sell or hold any Notes.
ERISA Considerations
The Prospectus Supplement for each series of Notes will summarize
considerations under ERISA relevant to the purchase of Notes of that series by
employee benefit plans and individual retirement accounts.
Plan of Distribution
The Notes will be acquired by the underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices to
be determined at the time of sale or at the time of commitment therefor.
In connection with the sale of the Notes, underwriters may receive
compensation from the Issuer or from purchasers of the Notes in the form of
discounts, concessions or commissions. The underwriters and dealers
participating in the distribution of the Notes may be deemed to be underwriters
in connection with the Notes, and any discounts or commissions received by them
from the Issuer and any profit on the resale of Notes by them may be deemed to
be underwriting discounts and commissions under the Securities Act.
In connection with this offering, the underwriters may over-allot or
effect transactions which stabilize or maintain the market prices of the offered
notes at levels above those which might otherwise prevail in the open market.
Any stabilizing, if commenced, may be discontinued at any time.
39
The underwriting agreement pertaining to the sale of the Notes will
provide that the obligations of the underwriters will be subject to certain
conditions precedent, that the underwriters will be obligated to purchase all
the Notes subject to that agreement if any are purchased and that, in limited
circumstances, the Issuer will indemnify the underwriters and the underwriters
will indemnify the Issuer against certain civil liabilities, including
liabilities under the Securities Act, or will contribute to payments required to
be made in respect thereof.
Purchasers of Notes, including dealers, may, depending on the facts and
circumstances of their purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Notes. Noteholders should consult with their legal advisors in this regard prior
to any such reoffer or sale.
Legal Opinions
Certain legal matters will be passed upon for the Issuer by Don H. Liu,
Esq., General Counsel of the Originator and IKON Office Solutions, the parent
company of the Originator, and for the Underwriters by Dewey Ballantine LLP, New
York, New York. As of the date of this Prospectus, Mr. Liu is a full-time
employee and an officer of IKON Office Solutions and a beneficial owner of
shares of common stock of IKON Office Solutions and options to purchase shares
of common stock of IKON Office Solutions.
Experts
The balance sheet as of March 5, 2002 included in this Prospectus has
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm in auditing and
accounting.
40
Index To Financial Statements
Page
----
Report of Independent Auditors 42
Balance Sheet of the Issuer as of March 5, 2002 43
Notes to Balance Sheet 44
41
Report of Independent Accountants
To the Board of Directors and Member
of IKON Receivable Funding, LLC
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of IKON Receivables Funding, LLC (Company) at
March 5, 2002 in conformity with accounting principles generally accepted in the
United States. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the balance sheet is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 5, 2002
42
Exhibit 1
IKON RECEIVABLES FUNDING, LLC
BALANCE SHEET
December 31,
2001
-----------------
Assets
Cash $ 1,000
-------
Total assets $ 1,000
=======
Member's Equity
Contributed capital $ 1,000
-------
Total member's equity $ 1,000
=======
See notes to financial statements.
43
IKON RECEIVABLES FUNDING, LLC
NOTES TO BALANCE SHEET
March 5, 2002
Note 1. Organization
------------
The Company is a special purpose Delaware limited liability company,
all of the membership interests in which are held by IKON
Receivables-2, 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
office technology company with fiscal 2001 revenues of $5.3 billion.
The Company was organized in the State of Delaware on October 9, 2001
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 is 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.
Note 2. Capital Contributions
---------------------
The Sole Member made an initial capital contribution of $1,000 to the
Company on March 5, 2002.
Note 3. 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
IOSC will be treated as a single entity for tax purposes. The
Company's income and losses are passed through to the Sole Manager
and, accordingly, no provision for income taxes has been recorded.
Note 4. Registration Statement
----------------------
At March 5, 2002, the Company was in the process of registering with
the Securities and Exchange Commission to be able to issue up to $2.5
billion of its Lease-Backed Notes.
44
Index Of Terms
Set forth below is a list of the defined terms used in this Prospectus
and the pages on which the definitions of such terms may be found herein.
1934 Act ................................................................... 17
Additional Account ......................................................... 30
Additional Lease ........................................................... 23
Adjusted Lease ............................................................. 23
Asset Pool ................................................................. 12
Assignment and Servicing Agreement ......................................... 13
Available Funds ............................................................ 22
Bankruptcy Code ............................................................ 33
Business Day ............................................................... 21
Casualty ................................................................... 22
Casualty Payment ........................................................... 22
Cede ....................................................................... 24
CLAS ....................................................................... 19
Code ....................................................................... 35
Collection Account ......................................................... 30
Commission ................................................................. 17
Cut-off Date ............................................................... 12
Definitive Notes ........................................................... 26
Depositories ............................................................... 24
Discount Rate .............................................................. 15
Discounted Present Value of the Leases ..................................... 15
Discounted Present Value of the Performing Leases .......................... 15
Distribution Account ....................................................... 30
DTC ........................................................................ 24
Due Period ................................................................. 22
Early Termination Lease .................................................... 23
Eligible Account ........................................................... 30
Eligible Investments ....................................................... 30
Eligible Leases ............................................................ 14
Equipment .................................................................. 12
Euroclear Operator ......................................................... 25
Events of Default .......................................................... 31
High Risk Review List ...................................................... 19
IKON marketplaces .......................................................... 17
IKON Office Solutions ...................................................... 17
Indirect Participants ...................................................... 24
IOS Capital ................................................................ 12
IRS ........................................................................ 35
Issuer ..................................................................... 12
Lease ...................................................................... 12
Lease Payment .............................................................. 22
Lease Receivables .......................................................... 12
Lessee ..................................................................... 12
Lessees .................................................................... 12
Manager .................................................................... 13
Non-Performing Leases ...................................................... 23
Originator ................................................................. 12
Originator's Leasing Business .............................................. 13
Participants ............................................................... 24
Payment Date ............................................................... 17
Pool Factor ................................................................ 17
45
Pre-Funding Account ........................................................ 30
Premium Note ............................................................... 38
Rating Agencies ............................................................ 21
Rating Agency .............................................................. 21
Reserve Account ............................................................ 30
Retainable Deposit ......................................................... 22
Rules ...................................................................... 25
Seller ..................................................................... 12
Servicer ................................................................... 12
Servicer Advance ........................................................... 28
Servicer Events of Default ................................................. 29
Servicing Fee .............................................................. 28
Substitute Lease ........................................................... 23
Tax Counsel ................................................................ 35
Termination Payment ........................................................ 23
Terms and Conditions ....................................................... 25
Transaction Accounts ....................................................... 30
Transaction Documents ...................................................... 27
U.S. Person ................................................................ 38
Warranty Lease ............................................................. 23
46
================================================================================
$634,800,000
IKON Receivables
Funding, LLC $171,000,000
2.044% Class A-l
Lease-Backed Notes
__________________________
P R O S P E C T U S
S U P P L E M E N T $46,000,000
__________________________ 2.91% Class A-2
Lease-Backed Notes
Banc of America Securities LLC
Lehman Brothers
$266,400,000
Wachovia Securities 3.90% Class A-3
Lease-Backed Notes
Dated May 21, 2002
$151,400,000
4.68% Class A-4
Lease-Backed Notes
Until 90 days after the date of this
prospectus supplement, all dealers that
effect transactions in the Notes, whether
or not participating in this offering,
may be required to deliver a prospectus
supplement and prospectus. This is in
addition to the dealers' obligation to
deliver a prospectus supplement and
prospectus when acting as underwriters
and with respect to their unsold
allotments or subscriptions.
================================================================================