AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 2002
REGISTRATION STATEMENT NO. 333-71362
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
IKON RECEIVABLES FUNDING, LLC
(exact name of registrant as specified in charter)
Delaware 1738 Bass Road to be applied for
(state or jurisdiction P.O. Box 9115 (I.R.S. Employer
of organization) Macon, GA 31208 Identification No.)
(Address, including zip code, and telephone number,
including area code, of registrants principal executive
offices)
______________________
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
(Name, address and telephone number, including area code, of agent for service)
______________________
Copies to:
Harry G. Kozee Dominic Liberatore, Esq. Peter Humphreys, Esq.
IOS Capital, LLC IKON Office Solutions, Inc. Dewey Ballantine LLP
1738 Bass Road 70 Valley Stream Parkway 1301 Avenue of the Americas
P.O. Box 9115 Malvern, PA 19355 New York, New York 10019
Macon, Georgia 31208
_____________________
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is filed as a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Amount Proposed Maximum Proposed Maximum Amount
Title of Securities To Be Aggregate Price Per Aggregate Offering Of Registration
Being Registered Registered Unit(1) Price(1) Fee(2)(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Lease-Backed Notes (the "Notes") $2,500,000,000 100% $2,500,000,000 $230,000
====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) IKON Receivables, LLC, as a registrant, previously paid a registration fee
in the amount of $528,000 in connection with the registration of
$2,000,000,000 of securities under registration statement no 333-91599 with
an initial filing date of November 24, 1999. $271,859,000 of securities
remain unissued under that registration statement. Pursuant to Rule 457(p)
of the Securities Act, the registrant hereunder is applying the unused
portion of the registration fee from registration number 333-91599 in an
amount equal to $71,770.78 towards the registration fee due hereunder.
(3) The amount of $155,000 is paid pursuant to this Amendment No. 1. The amount
of $3,229.22 was paid previously in connection with the prior filing of
this Registration Statement. The amount of $71,770.78 was paid in
connection with the registration of the amount of Securities sold under
registration statement no. 333-91599.
______________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
FORM OF PROSPECTUS SUPPLEMENT
- -----------------------------
IKON Receivables Funding, LLC $____________
Issuer Lease-Backed Notes, Series _____
IOS Capital, LLC
Originator and Servicer
- -----------------------------
- --------------------------------------------------------------------------------
[LOGO OF IOS COMPANY]
You should read the section entitled "Risk Factors" starting on page S-12 of
this prospectus supplement and page 7 of the prospectus and consider these
factors before making a decision to invest in the notes.
The notes represent asset-backed debt secured only by the pledged assets and are
not interests in or obligations of any other person.
Neither the notes nor the underlying leases will be insured or guaranteed by any
governmental agency or instrumentality.
This Prospectus Supplement may be used to offer and sell the notes only if
accompanied by the Prospectus.
- --------------------------------------------------------------------------------
IKON Receivables Funding, LLC, as issuer, will issue [_______] classes of notes
backed solely by a pledge of the assets of the asset pool. The assets of the
asset pool will consist of a pool of office equipment leases or contracts and
related assets.
The notes --
. The ________ classes of notes set forth in the table below are offered
by this prospectus supplement.
. Interest and principal on the notes is scheduled to be paid monthly,
on the __th day of the month, or the business day immediately
following such __th day. The first scheduled payment date is
______________.
Credit enhancement --
.
Underwriting --
. The underwriters will offer the public the notes at the following
prices:
Initial
Aggregate Price
Note to Underwriting
Class Balance Note Rate Public Discount Depositor/1/
- ----- --------- --------- ------ ------------ ------------
(1) Before deducting expenses, estimated to be $________.
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.
[underwriter(s)]
The date of this prospectus supplement is ________________
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 offered 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 offered notes to you unless you have
received both this prospectus supplement and the prospectus.
To the extent the prospectus contemplates different or multiple options,
you should rely on the information in this prospectus supplement as to the
application option.
The issuer has filed with the Securities and Exchange Commission (the
"Commission") a registration statement under the Securities Act of 1933 as
amended, with respect to the offered notes offered pursuant to this prospectus
supplement. This prospectus supplement and the prospectus, which form a part of
the registration statement, omit certain information contained in such
registration statement pursuant to the rules and regulations of the Commission.
You may inspect and copy the registration statement at the Public Reference Room
at the 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 such 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 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 following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-2
TABLE OF CONTENTS
Page
------
SUMMARY................................................................................................... S-45
PARTIES................................................................................................... S-5
Issuer............................................................................................. S-5
Originator......................................................................................... S-5
Seller............................................................................................. S-5
Servicer........................................................................................... S-5
Indenture Trustee.................................................................................. S-5
Cut-Off Date....................................................................................... S-5
Closing Date....................................................................................... S-6
DESCRIPTION OF THE NOTES.................................................................................. S-6
PAYMENTS ON THE NOTES..................................................................................... S-6
Payment Date....................................................................................... S-6
Record Date........................................................................................ S-6
Remittance Period.................................................................................. S-6
Cross-Collateralization............................................................................ S-6
Interest........................................................................................... S-7
Principal.......................................................................................... S-7
Available Funds.................................................................................... S-7
Priority of Payments............................................................................... S-7
Events of Default.................................................................................. S-7
CREDIT ENHANCEMENT........................................................................................ S-8
Subordination...................................................................................... S-8
Asset Pool......................................................................................... S-8
General............................................................................................ S-8
The Leases......................................................................................... S-8
Origination and Acquisition........................................................................ S-9
Servicing.......................................................................................... S-10
Lease Substitution................................................................................. S-10
Repurchases for Breaches of Representations and Warranties......................................... S-10
Advances........................................................................................... S-10
Certain Legal Aspects of the Lease................................................................. S-11
Optional Redemption................................................................................ S-11
Material Federal Income Tax Consequences........................................................... S-11
ERISA Considerations............................................................................... S-11
Rating of the Notes................................................................................ S-11
RISK FACTORS.............................................................................................. S-12
THE ASSET POOL............................................................................................ S-14
THE ISSUER................................................................................................ S-14
THE LEASES................................................................................................ S-15
USE OF PROCEEDS........................................................................................... S-20
THE ORIGINATOR............................................................................................ S-20
Loss and Delinquency Experience.................................................................... S-20
THE SELLER................................................................................................ S-22
THE INDENTURE TRUSTEE..................................................................................... S-22
General............................................................................................ S-22
Duties and Immunities of the Indenture Trustee..................................................... S-22
DESCRIPTION OF THE NOTES.................................................................................. S-23
General............................................................................................ S-23
Collections........................................................................................ S-23
S-3
Distributions...................................................................................... S-24
Prepayment and Yield Considerations................................................................ S-25
Weighted Average Lives of the Notes................................................................ S-26
DESCRIPTION OF THE TRANSACTION DOCUMENTS.................................................................. S-27
Acquisition of the Lease Receivables Pursuant to an Assignment and Servicing Agreement............. S-27
Repurchase Obligation.............................................................................. S-27
Substitutions...................................................................................... S-28
[Security Interest]................................................................................ S-28
Representations and Warranties of the Originator and the Seller.................................... S-28
Indemnification.................................................................................... S-28
The Accounts....................................................................................... S-29
Available Funds.................................................................................... S-29
Priority of Payments............................................................................... S-29
Interest........................................................................................... S-30
Principal.......................................................................................... S-30
Withholding........................................................................................ S-30
Optional Redemption................................................................................ S-31
The Servicer....................................................................................... S-31
Assignment and Servicing Agreement................................................................. S-31
Remittance and Other Servicing Procedures.......................................................... S-31
Servicing Compensation and Payment of Expenses..................................................... S-31
Reports to Noteholders............................................................................. S-32
Evidence as to Compliance.......................................................................... S-33
Certain Matters Relating to the Servicer........................................................... S-34
Events of Servicing Termination.................................................................... S-34
[Rights Upon an Event of Servicing Termination].................................................... S-34
Events of Default.................................................................................. S-34
Early Retirement of the Notes...................................................................... S-34
Amendment.......................................................................................... S-34
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................................................. S-34
ERISA CONSIDERATIONS...................................................................................... S-36
RATINGS................................................................................................... S-37
PLAN OF DISTRIBUTION...................................................................................... S-38
LEGAL OPINIONS............................................................................................ S-38
ANNEX A................................................................................................... A-1
Clearance, Settlement and Tax Documentation Procedures............................................. A-1
S-4
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 certain 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-3640 in this prospectus
supplement and under the caption "Index of Terms" beginning on page 45 in
the accompanying prospectus.
PARTIES
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 the lease
receivables, issuing and making payments on the notes and other activities
related thereto.
For more information about the issuer, you should read the section titled "The
Issuer" herein.
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 (912) 471-2300.
For more information about the originator, you should read the section titled
"The Originator's Leasing Business," in the Prospectus.
Seller
IKON Receivables-2, LLC, is a Delaware special purpose entity. The issuer will
acquire the 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.
For more information about the role of the seller, you should read the section
titled "The Seller," herein.
Servicer
IOS Capital, 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.
For more information about the role of the servicer, you should read the section
titled "Description of the Transaction Documents--The Servicer," herein and in
the prospectus.
Indenture Trustee
__________, a banking corporation organized under the laws of ________. The
corporate trust offices of the indenture trustee are located at ________.
Cut-Off Date
The cut-off date is the [close] of business on _____________, (the "cut-off
date").
S-5
Closing Date
The closing date is ____________, (the "closing date").
DESCRIPTION OF THE NOTES
. The issuer will issue [___] classes of lease-backed notes (the "notes").
. The notes are designated as the class A notes and could involve other
classes. The class A notes, together with any such other classes, are
collectively referred to as the notes.
. The notes will be backed solely by a pledge of a segregated pool of assets
of the issuer, which will consist primarily of a pool of office equipment
leases or contracts and related assets, [leases intended as security
agreements], [installment sale contracts], rental stream obligations, and
the seller's interests (other than its ownership interest in the underlying
equipment) and related assets.
. Each class of notes will have the initial principal amount and interest
rate set forth in the following table. The dates on which the final payment
of principal and interest on each class of notes is expected to be made and
must ultimately be made are also set forth in the following table.
Initial Note
Principal Expected Final Legal Final
Class Balance Note Rate Payment Date Maturity Date CUSIP Number
- ----- ------------ --------- -------------- ------------- ------------
[A] $[-] [-]% _____ __, ____ ________ ____ [-]
[B] $[-] [-]% _____ __, ____ ________ ____ [-]
The aggregate initial note principal balance of the notes is equal to $[-] (the
"initial note principal balance"), which represents the sum of the initial note
principal balance of each class of notes.
The notes will be issued in book-entry form only, through the facilities of The
Depository Trust Company. The notes will be issued in minimum denominations of
[$1,000] and multiples of [$1,000] in excess thereof, [with the exception of one
note in each class which will be issued in an odd amount].
PAYMENTS ON THE NOTES
Payment Date
Principal and interest is scheduled to be paid to the noteholders on the [15]th
day of each month, or, if such day is not a business day, on the next succeeding
business day, commencing on ____________.
Record Date
The indenture trustee will make payments to the noteholders of record as of the
close of business on the last business day of the month preceding the month in
which such payment date occurs (or in the case of the initial payment date, the
closing date).
Remittance Period
Payments made on each payment date will relate to the collections received in
respect of the leases during the period beginning on the opening of business on
the [second] day of the immediately preceding calendar month and ending on the
close of business on the [first day] of the calendar month in which such payment
date occurs.
Cross-Collateralization
. As described in the related transaction document, the source of payment for
notes
S-6
of each series will be the assets pledge to the related pool only.
. Certain of the notes include the right to receive monies from a common pool
of credit enhancement. No payment received on any lease receivable backing
an asset pool may be applied to the payment of notes backed by any other
asset pool.
Interest
[Information on the interest payable to Noteholders will be provided in
accordance with the structuring of the transaction.]
Principal
[Information on the interest payable to Noteholders will be provided in
accordance with the structuring of the transaction.]
Available Funds
With respect to each payment date, the funds received on or prior to the last
day of the month preceding the month of such payment date (the "calculation
date"). These funds relate to and may include payments on the leases, proceeds
from casualties, payments due to the issuer from any counterparty under any
interest rate swap agreements, certain renewal payments, terminations or
repurchases of leases, recoveries on defaulted leases, advances made by the
servicer to cover delinquent leases and investment proceeds thereon (excluding
certain amounts specified in the indenture) shall constitute available funds
which are available for distribution by the indenture trustee on such payment
date.
Priority of Payments
On each payment date, amounts received during the related remittance period in
respect of the lease receivables are to be paid, until such amounts are
exhausted, in the following order of priority:
first [_];
second [_];
third [_];
fourth [_];
fifth [_];
sixth [_].
. However, if an event of default and acceleration of the notes has occurred
or a restricted event has occurred:
first [_];
second [_];
third [_];
fourth [_];
fifth [_];
sixth [_].
seventh [_].
. restricting event means the occurrence of any of:
(i) an event of default by the servicer under the assignment and servicing
agreement;
(ii) events of default; and
(iii) replacement of the servicer.
Events of Default
"Events of default" under the related transaction documents will consist of any
one or more of the following:
. a default for [five] days or more in the payment of any interest on any
note;
. a default in the payment of the principal of or any installment of the
principal of any note when the same becomes due and payable;
. default in the observance or performance in any material respect of any
covenant or agreement of the transaction made in the 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
S-7
time made, and the continuation of any such default or the failure to cure
such breach of a representation or warranty for a period of 30 days after
notice thereof is given to the issuer by the indenture trustee or the
issuer and the indenture trustee by the holders of at least 25% in
principal amount of the notes then outstanding; or
. certain events of bankruptcy, insolvency, receivership or liquidation of
the issuer.
If an event of default should occur and be continuing with respect to the notes,
the indenture trustee or a majority (by outstanding principal amount) of the
noteholders may declare the principal of the notes to be immediately due and
payable. Such declaration may, under certain circumstances, be rescinded by a
majority of the noteholders.
. Outstanding principal amount means with respect to any class of notes and
any date of determination the difference between (a) the initial principal
amount of the notes of such class at the issuance thereof, less (b) all
amounts previously distributed with respect to such class as principal.
The information described above is qualified in its entirety by the more
detailed description of the flow of funds set forth herein under "Description of
the Notes--Flow of Funds."
CREDIT ENHANCEMENT
The credit enhancement available to the noteholders will consist of [more
information will be provided upon the structuring of the transaction].
Subordination
[The credit enhancement available for the benefit of any class of notes is
provided by each class of notes having a lower priority of payment than such
class of notes.]
Asset Pool
General
The property comprising the asset pool will consist of:
. A portfolio of chattel paper composed of leases, leases intended as
security agreements, installment sales contracts, or rental stream
obligations, together with all monies received relating thereto (the
"leases");
. The seller's security or other interests (other than its ownership
interest) in the underlying equipment, property and proceeds relating to
the leases (the "equipment" and together with the leases, the "lease
receivables"). However, the asset pool will not have any residual interest
in the related equipment after the related lease receivable has been paid
in full.
. All amounts held in accounts established by the servicer pursuant to the
transaction documents.
. All the rights to proceeds and recoveries on insurance policies covering
the equipment and on the disposition of repossessed equipment.
. Credit enhancement with respect to an asset pool or any class of notes.
[more information to be provided upon structuring of transaction]
. The interest of the issuer in any proceeds from recourse to lessees on
lease payments.
. Other rights of the issuer under the assignment and servicing agreement.
. All proceeds of the foregoing.
The Leases
. The leases are obligations for the lease or purchase of the equipment, or
evidence borrowings used to acquire or refinance the
S-8
equipment, entitling the obligee thereunder (the "lessor") to receive a
stream of scheduled payments (the "scheduled payments") and related
payments and, in some cases, to either the return of the equipment at the
termination of the related lease or, with respect to certain of the leases,
the payment of a purchase price for the equipment at the election of the
obligor thereunder (the "lessee").
. The originator will transfer the lease receivables comprising each asset
pool to the seller and the seller will transfer such lease receivables to
the issuer pursuant to an Assignment and Servicing Agreement (as defined
herein). The issuer will then pledge all of its right, title and interest
in and to such lease receivables to an indenture trustee on behalf of
noteholders pursuant to an indenture. The leases transferred to the issuer
and pledged to the indenture trustee shall have a discounted lease balance
(as defined below).
. The "discounted lease balance" of a lease as of any cut-off date is the
present value of all of the remaining payments scheduled to be made with
respect to such lease, discounted at a rate and frequency specified below.
. The "discounted present value of the leases", at any given time, shall
equal the future remaining scheduled payments (not including delinquent
amounts, excess copy charges, maintenance charges and fee per scan charges)
from the leases (including non-performing leases), discounted at a rate
equal to ____ %, which rate is equal to the sum of (a) the weighted average
interest rate of the various classes of notes, each weighted by (i) the
initial principal amount of such note classes and (ii) the expected
weighted average life (under a zero prepayment, and no loss scenario) of
each note class, as applicable, and (b) the servicing fee rate of ____ %
per annum.
. For more information about the leases, you should read the section titled
"The Leases" herein.
Origination and Acquisition
Each lease was previously originated by either:
. the originator; or
. acquired by the originator from other originators of leases.
For all of the leases:
. the leases are valid and enforceable, and unconditionally require the
lessee to make periodic lease payments (including taxes);
. the leases are noncancellable and do not contain early termination options
(unless the early termination or prepayment clauses require the lessee to
pay all remaining scheduled payments under such lease);
. all payments payable under the leases are absolute, unconditional
obligations of the lessees;
. all of the leases require the lessee or a third party to maintain the
equipment in good working order, to pay all the costs of operating the
equipment, including taxes and insurance;
. the leases do not materially violate any U.S. or state laws;
. the leases provide for periodic payments;
. in the event of a casualty loss, the lessee, at its expense, must replace
the equipment with like equipment in good repair, acceptable to the
originator or pay at a minimum the outstanding principal or net book value
of the leases and any applicable make-whole premium;
. the leases have been sold to the issuer free and clear of any liens and are
assignable without prior written consent of the lessee;
S-9
. the leases are denominated in U.S. dollars and the lessor and each lessee
are located in the United States;
. the lease is not a consumer lease;
. the lease is not subject to any guaranty by the originator;
. the party transferring the lease to the issuer did not use adverse
selection when choosing the lease for transfer to the issuer;
. the lessee has represented to the originator that it has accepted the
equipment;
. the lessee is not a subject of an insolvency or bankruptcy proceeding at
the time of the transfer;
. the leases are not defaulted leases;
. each lease is not more than 62 days past due at the time of transfer to the
issuer;
. require the periodic, scheduled payment of rent or other payments on a
monthly, quarterly, semi-annual, or annual basis, in arrears or in advance.
Servicing
The servicer is responsible for servicing, managing and administering the leases
and the equipment and enforcing and making collections on the leases. The
servicer is required to exercise the degree of skill and care in performing
these functions that it customarily exercises with respect to similar property
owned or serviced by the servicer.
For a further description of the Servicer and the Servicer's delinquency and
loss experience, you should read the section titled "The Servicer" herein.
Lease Substitution
Subject to certain limitations, the originator may substitute an eligible lease
for any defaulted lease, prepaid lease, or lease that has had its terms modified
or adjusted in accordance with the transaction documents. The substitute lease
must be at least equal in discounted lease balance and comparable in terms of
credit quality, monthly payment, and other characteristics; provided, that in no
event shall the maturity date of any lease substituted for a lease removed from
the related asset pool be later than the last maturity date of any lease
receivable.
For a further description of Originator's Substitution Option, you should read
the section titled "The Leases--Substitutions" herein.
Repurchases for Breaches of Representations and Warranties
The originator will be obligated to repurchase from the issuer the issuer's
interest in any lease if the noteholders' interest in the lease is materially
adversely affected by a breach of any representation or warranty made by the
originator, which representation or warranty has been assigned to the issuer by
the seller, with respect to such lease receivable, which breach has not been
cured as of 30 days following the discovery by or notice to the issuer of the
breach.
For a further description of Originator's repurchase obligations, you should
read the section titled "Description of the Notes--Representations and
Warranties of Originator" herein.
Advances
In the event that any obligor fails to make its full scheduled payment due on
time, the servicer may make an advance from its own funds of an amount equal to
such unpaid scheduled payment, if the servicer, in its sole discretion,
determines that the servicer is likely to be repaid from collections from or on
behalf of the related obligor and that such amount has not been deposited in the
collection account by three business days prior to the payment date.
The indenture provides for the reimbursement of the servicer for such advances.
S-10
For a further description of the servicer's obligation to make advances, you
should read the section titled "Description of the Notes--Servicer Advances"
herein.
Certain Legal Aspects of the Lease
With respect to the transfer of the leases to the seller by the originator and
then by the seller to the issuer pursuant to the assignment and servicing
agreement and the pledge of the issuer's right, title and interest in and to
such leases on behalf of noteholders pursuant to the indenture, the originator,
the seller and the issuer, respectively, will warrant that:
. the transfer of the leases is a valid transfer and assignment of the leases
or the grant of a security interest in the leases, except for the ownership
interest in the equipment, which the seller is not transferring to the
issuer; and
. if the transfer of the leases to the issuer is deemed to be a grant to the
issuer of a security interest in the leases, then the issuer will have a
perfected security interest therein.
The servicer will be required to take such action as is required to perfect the
issuer's interest in the leases. If the issuer, the servicer or the indenture
trustee, while in possession of the leases, sells or pledges and delivers such
leases to another party, in violation of the indenture and the assignment and
servicing agreement, there is a risk that the purchaser could acquire an
interest in such leases having priority over the issuer's interest and thus the
related asset pool's interest.
UCC financing statements will not be filed to perfect any security interest in
the Equipment. Thus, in the event of repossession and resale of equipment, it
may be subject to a senior lien, with such senior lienholder possibly entitled
to full payment of its debt before any payments could be made on the debt owed
to the issuer.
Optional Redemption
The notes may be redeemed in whole by the servicer on any payment date on which
the aggregate discounted lease principal balance is less than 10% of the
aggregate discounted lease principal balance as of the closing date so long as
the servicer deposits or causes to be deposited in the collection account the
aggregate amounts owed on the notes as of such payment date.
Material Federal Income Tax Consequences
Dewey Ballantine LLP, tax counsel to the issuer and counsel to the underwriter,
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.
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" herein, we expect that pension, profit-sharing or other employee
benefit plans, as well as individual retirement accounts and certain types of
Keogh Plans, may purchase the notes. Investors should consult with their counsel
regarding the applicability of the provisions of ERISA before purchasing a note.
Rating of the Notes
The notes must receive at least the following ratings from [the rating
agencies]:
For additional information concerning the ratings, you should read the section
titled "Ratings" herein.
S-11
RISK FACTORS
In addition to the risk factors discussed in the Prospectus, prospective
offered Noteholders should consider, among other things, the following
additional factors in connection with the purchase of the notes:
Risk of Downgrade of Initial Ratings It is a condition to the issuance
Assigned to Notes of the notes that they receive the
ratings from the rating agencies
set forth in the summary under the
heading "rating of the notes." A
rating is not a recommendation to
purchase, hold or sell the notes,
inasmuch as such rating does not
comment as to market price or
suitability for a particular
investor. The ratings of the notes
address the likelihood of the
timely payment of interest on and
the ultimate repayment of principal
of the notes pursuant to their
respective terms. There is no
assurance that a rating will remain
for any given period of time or
that a rating will not be lowered
or withdrawn entirely by a rating
agency if in its judgment
circumstances in the future so
warrant. The ratings of the notes
are based primarily on the rating
agencies' analysis of the leases
and the equipment, and, with
respect to the [class A] notes, the
subordination provided by the
subordinate notes.
Transfer of Servicing May Delay If IOS Capital were to cease acting
Payments as servicer, delays in processing
payments on the leases and
information in respect thereof
could occur and result in delays in
payments to the noteholders.
Risks Associated with Inability of IOS IOS Capital, as originator or as
Capital to Reacquire Leases and the servicer, as the case may be, will
Related Equipment make representations and warranties
with respect to certain matters
relating to the leases. In certain
circumstances, IOS Capital will be
required to reacquire from the
asset pool leases with respect to
which such representations and
warranties have been breached. In
the event that IOS Capital is
incapable of complying with its
obligations to reacquire the leases
and no other party is obligated to
perform or satisfy such
obligations, the noteholders may be
subject to delays in receiving
payments and suffer loss of their
investment in the notes.
Geographic Concentrations of Leases As of the applicable cut-off date,
obligors with respect to
approximately [_]%, [_]% and[_]% of
the leases were located in the
States of [_], [_] and [_],
respectively. To the extent adverse
events or economic conditions were
particularly severe in such
geographic regions or in the event
an obligor or group of obligors
under the leases in such geographic
regions were to experience
financial difficulties due to the
economic conditions specific to
such obligor's region, the
delinquency and loss
S-12
experience of the leases could be
adversely impacted with a potential
negative effect on the timing or
ultimate payment of the amounts due
to the noteholders. The originator
is unable to determine and has no
basis to predict, with respect to
any state or region, whether any
such events have occurred or may
occur, or to what extent any such
events may affect the leases or the
repayment of amounts due under the
notes. Accordingly, adverse
economic conditions or other
factors particularly affecting
these states could adversely affect
the delinquency, loss or
repossession experience of the
asset pool with respect to the
leases. See the "Leases" herein.
S-13
THE ASSET POOL
The Asset Pool will consist of (i) a pool of Leases, (ii) all moneys
(including accrued interest) due thereunder on or after the Cut-off Date, (iii)
such amounts as from time to time may be held in one or more accounts
established and maintained by the Servicer pursuant to the related Transaction
Document, as described below, (iv) the Seller's interests (other than ownership
interests), in the Equipment relating to such pool of Leases, (v) the rights of
the Issuer under the Assignment and Servicing Agreement, and (vi) interest
earned on certain short-term investments held by the Issuer. The Asset Pools
will not have any residual interest in the equipment underlying an operating
lease.
The Equipment underlying the Lease Receivables included in the Asset Pool
generally will be limited to personal property which is leased or financed by
the Originator to the Lessee 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. The Asset Pool will not have any
residual interest in the Equipment after the related Lease Receivable has been
paid in full.
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 the Asset Pool
will be selected from Leases held by the Originator based on the criteria
described in the Prospectus under "The Leases--Eligible Leases."
On or prior to the Closing Date on which the Notes are delivered to the
holders of the Notes (the "Noteholders"), the Issuer will form the Asset Pool by
(i) acquiring Lease Receivables pursuant to the Assignment and Servicing
Agreement between the Issuer and the Seller and (ii) entering into an Indenture
with an Indenture Trustee, relating to the issuance of the Notes, secured by the
Asset Pool.
The Lease Receivables comprising the Asset Pool will generally have been
originated by the Originator or acquired by the Originator in accordance with
the Originator's specified underwriting criteria. The underwriting criteria
applicable to the Lease Receivables included in the Asset Pool is described in
all material respects under the heading "IOS Capital's Leasing Business" in the
Prospectus.
THE ISSUER
The Issuer is a Delaware limited liability company all of the membership
interest in which will be held by the Seller. The Issuer was formed on October
9, 2001. The Issuer was formed on October 9, 2001. The Issuer was organized
solely for the limited purpose of engaging in the type of 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 under the Assignment and Servicing Agreement from engaging in
other activities. In addition, its organizational documents and the Assignment
and Servicing Agreement it is required 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
31210.
The Issuer does not have, nor is it expected in the future to have, any
significant assets other than the Asset Pools. The Servicer with respect to any
series of Notes may be the Originator or another affiliate of the Issuer. As
described under "Description of the Transaction Documents -- Acquisition of the
Leases Pursuant to an Assignment and Servicing Agreement", in addition to the
acquisition of Lease
S-14
Receivables from the Seller, the Issuer may acquire Lease Receivables through or
from an affiliate of the Originator.
The Issuer will pledge its interest in the Lease Receivables to the
Indenture Trustee for the benefit of an Asset Pool and issue the Notes pursuant
to an indenture between the between the Issuer and the Indenture Trustee (the
"Indenture").
If the protection provided to the Noteholders of a given class by the
subordination of another Class of Notes is insufficient, the Issuer must rely
solely on the payments from the Lessees on the related Leases, and the proceeds
from the sale of Equipment which secures or is leased under the Defaulted
Leases. In such event, certain factors may affect such Issuer's ability to
realize on the collateral securing such Leases, and thus may reduce the proceeds
to be distributed to the Noteholders.
THE LEASES
Portfolio Parameters
As described below, Leases in the aggregate shall be required to comply
with certain portfolio concentration criteria (the "Portfolio Concentration
Criteria"): [more information will be provided upon the structuring of the
transaction]
The Lease Receivable Statistical Information
Following is certain statistical information relating to the Lease
Receivable pool, calculated as of the Calculation Date and assuming a discount
rate of [_]%. Certain columns may not total 100% due to rounding.
S-15
DISTRIBUTION OF LEASES BY DISCOUNTED LEASE BALANCE
Discounted Lease Sum of Discounted Percentage of Aggregate
Balances Number of Leases Lease Balances Discounted Lease Balance
---------------- ---------------- ----------------- ------------------------
Less Than
Greater Than or Equal to
---------------- ----------------
$ 1 $ 5,000
5,000 10,000
10,000 15,000
15,000 20,000
20,000 25,000
25,000 30,000
30,000 35,000
35,000 40,000
40,000 45,000
45,000 50,000
50,000 55,000
55,000 60,000
60,000 65,000
65,000 70,000
70,000 75,000
75,000 80,000
80,000 85,000
85,000 90,000
90,000 95,000
95,000 100,000
100,000 150,000
150,000 200,000
200,000 250,000
250,000 300,000
300,000 350,000
350,000 400,000
400,000 450,000
450,000 500,000
500,000 600,000
600,000 750,000
Total..................................................... 100%
S-16
DISTRIBUTION OF THE LEASES BY STATE
Number Sum of Discounted Lease Percentage of Aggregate
State of Leases Balances Discounted Lease Balance
- ---------------- --------- ----------------------- ------------------------
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Washington, D.C.
West Virginia
Wisconsin
Wyoming
DISTRIBUTION OF LEASES BY REMAINING TERM TO MATURITY
Percentage of
Statistical Statistical Aggregate Percentage of
Percentage of Discounted Discounted Original Original
Number of Number of Present Value Percent Value Equipment Equipment
Remaining Term Leases Leases of Leases of Leases Cost Cost
-------------- --------- ------------- ------------- ------------- ---------- -------------
1 - 12
13 - 24
25 - 36
37 - 48
49 - 60
61 - 72
73 - 84
- --------------------------------------------------------------------------------------------------------------
Total...................... 100.00% 100.00% 100.00%
==============================================================================================================
S-17
DISTRIBUTION OF LEASES BY ORIGINAL TERM TO MATURITY
Percentage of
Statistical Statistical Aggregate Percentage of
Percentage of Discounted Discounted Original Original
Purchase Number of Number of Present Value Percent Value Equipment Equipment
Option Leases Leases of Leases of Leases Cost Cost
-------------------- --------- ------------- ------------- ------------- ---------- -------------
1 - 12
13 - 24
25 - 36
37 - 48
49 - 60
61 - 72
73 - 84
- --------------------------------------------------------------------------------------------------------------
Total...................... 100.00% 100.00% 100.00%
==============================================================================================================
DISTRIBUTION OF LEASES BY CLASSIFICATION TYPE
Percentage of
Statistical Statistical Aggregate Percentage of
Percentage of Discounted Discounted Original Original
Purchase Number of Number of Present Value Percent Value Equipment Equipment
Option Leases Leases of Leases of Leases Cost Cost
-------------------- --------- ------------- ------------- ------------- ---------- -------------
Finance Lease
Operating Lease
- --------------------------------------------------------------------------------------------------------------
Total...................... 100.00% 100.00% 100.00%
==============================================================================================================
DISTRIBUTION OF FINANCE LEASES BY PURCHASE OPTION
Percentage of
Statistical Statistical Aggregate Percentage of
Percentage of Discounted Discounted Original Original
Purchase Number of Number of Present Value Percent Value Equipment Equipment
Option Leases Leases of Leases of Leases Cost Cost
-------------------- --------- ------------- ------------- ------------- ---------- -------------
Nominal Buyout
Fair Market Value
Fixed Purchase Option
- --------------------------------------------------------------------------------------------------------------
Total...................... 100.00% 100.00% 100.00%
==============================================================================================================
S-18
DISTRIBUTION OF LEASES BY EQUIPMENT TYPE
Percentage of
Statistical Statistical Aggregate Percentage of
Percentage of Discounted Discounted Original Original
Equipment Number of Number of Present Value Percent Value Equipment Equipment
Type Leases Leases of Leases of Leases Cost Cost
- --------------- --------- ------------- -------------- ------------- ---------- -------------
Total.......... 100.00% 100.00% 100.00%
=========================================================================================================
S-19
USE OF PROCEEDS
The proceeds from the sale of the Notes will be applied by the Issuer to
the acquisition of the related Lease Receivables from the Seller and applied by
the Seller to the acquisition thereof from the Originator.
THE ORIGINATOR
IOS Capital, LLC ("IOS Capital" or the "Originator"), formerly known as IOS
Capital, Inc., was formed in 1987 to provide lease financing to customers of
IKON Office Solutions, Inc. ("IKON"). 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. The Originator's corporate headquarters
are located at 1738 Bass Road, Macon, Georgia 31208. The Originator's securities
are registered under the 1934 Act and 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 ending
September 30, 2001 on December 24, 2001 and a Quarterly Report on Form 10-Q for
the three-month period ending December 31, 2001 on February 14, 2002. A copy of
the reports, including the exhibits thereto, will be provided without charge to
any person to whom this Offering Circular is delivered upon written request.
Requests for such copies should be directed to IOS Capital, 1738 Bass Road, P.O.
Box 9115, Macon, Georgia 31208, Attn: Harry Kozee.
Loss and Delinquency Experience
Delinquencies remained at a consistent level for fiscal 2001, 2000 and
1999. During this three-year period, accounts classified as current (less that
30 days past due) ranged from 87.1% and 89.9% of the total portfolio balance on
a monthly basis. The aging of the Originator's lease portfolio receivables at
September 30, 2001 was as follows:
The following table sets forth amounts of leases held in Originator's lease
servicing portfolio and the combined delinquency and foreclosure experience of
leases in the servicing portfolio for the periods indicated:
Summary Historical Delinquency Data (Entire Portfolio)
IOS Capital Portfolio
As at:
December September 30,
31, 2001 September 30, 2001 2000 September 30, 1999
----------------- ------------------ ----------------- -----------------
($ %* ($ %* ($ %* ($ millions) %*
millions) millions) millions)
Current $2,683.1 89.6% $2,679.6 89.9% $2,446.5 87.1% $2,397.6 89.6%
31-60 Days 182.9 6.1% 174.9 5.9% 213.4 7.6 157.9 5.9
61-90 Days 74.2 2.5% 71.8 2.4% 92.7 3.3 74.9 2.8
Over 90
Days 53.3 1.8% 53.3 1.8% 55.6 2.0 45.5 1.7
-------- ----- -------- ----- -------- ----- -------- -----
Total $2,993.5 100.0% $2,979.6 100.0% $2,808.2 100.0% $2,675.9 100.0%
September 30, September 30,
1998 1997
---------------- -----------------
($ ($
millions) %* millions) %*
Current $2,292.2 90.8% $1,882.1 89.4%
31-60 Days 136.3 5.4 113.7 5.4
61-90 Days 63.1 2.5 65.3 3.1
Over 90
Days 32.8 1.3 44.2 2.1
-------- ----- -------- -----
Total $2,524.4 100.0% $2,105.3 100.0%
* Represents lease portfolio receivables as a percentage of the total
portfolio balance.
S-20
Summary Historical Loss Data (Entire Portfolio)
IOS Capital Portfolio
For the Quarter
Ended: For the Fiscal Year Ended:
- ---------------------------------------- -----------------------------------------------------------------------------
December 31, September 30, September 30, September 30, September 30, September 30,
2001 2001 2000 1999 1998 1997
--------------- ------------- ------------- ------------ ------------- -------------
Average Portfolio
Balance for the Period
($ millions)* $2,994 $ 2,913 $ 2,704 $ 2,621 $ 2,394 $ 1,891
Gross Charge-offs**
($ millions) $ 19.9 $ 69.4 $ 72.5 $ 79.2 $ 98.8 $ 51.6
Gross Charge-offs as a
% of the Average
Portfolio Balance for
the Period** 2.7%*** 2.4% 2.7% 3.0% 4.1% 2.7%
* Average Portfolio Balance at September 30 in each of fiscal years 1997
through 2001 was calculated by adding the ending servicing portfolio
balance for each of the four quarters of such fiscal year and dividing by
four.
** Information with respect to net charge-offs is not available. Lease
receivables in the Servicer's servicing portfolio are 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:
- --------------------------------------------------------------------------------------
December 31, September 30, September 30,
2001 2001 2000
--------------------- ---------------------- ---------------------
($ millions) %* ($ millions) %* ($ millions) %*
Current $ 2,390.2 88.4% $2,412.9 88.9% $2,076.9 85.6%
31-60 Days 184.7 6.8% 176.2 6.5% 205.7 8.5
61-90 Days 75.2 2.8% 72.5 2.7% 89.2 3.7
91-120 Days 32.7 1.2% 33.4 1.2% 33.2 1.4
Over 120 Days 20.8 0.8% 20.4 0.8% 20.1 0.8
---------- ----- -------- ----- -------- -----
Total $ 2,703.7 100.0% $2,715.4 100.0% $2,425.1 100.0%
----------------------------------------------------------------------
September 30, September 30, September 30,
1999 1998 1997
--------------------- ---------------------- ---------------------
($ millions) %* ($ millions) %* ($ millions) %*
Current $ 1,903.0 87.0% 1,656.0 87.4% $1,363.3 85.7%
31-60 Days 161.9 7.4 138.3 7.3 116.1 7.3
61-90 Days 76.6 3.5 64.4 3.4 65.2 4.1
91-120 Days 37.2 1.7 30.3 1.6 27.0 1.7
Over 120 Days 8.7 0.4 5.7 0.3 19.1 1.2
--------- ----- ------- ----- -------- -----
Total $ 2,187.4 100.0% 1,894.7 100.0% $1,590.7 100.0%
* Represents lease portfolio receivables as a percentage of the total
portfolio balance. `
Summary Historical Loss Data (Without Funded Leases)
For the Quarter IOS Capital Portfolio
Ended: For the Fiscal Year Ended:
--------------- -----------------------------------------------------------------------------
December 31, September 30, September 30, September 30, September 30, September 30,
2001 2001 2000 1999 1998 1997
--------------- ------------- ------------- ------------- ------------- -------------
Average Portfolio Balance
for the Period ($ millions)* $2,704 $2,662 $2,307 $2,062 $1,797 $1,447
Gross Charge-offs
($ millions)** $ 19.4 $ 67.5 $ 70.0 $ 67.2 $ 80.5 $ 47.4
Gross Charge-offs as a % of
the Average Portfolio
Balance for the Period** 2.9%*** 2.5% 3.0% 3.3% 4.5% 3.3%
* Average Portfolio Balance at September 30 in fiscal years 1997, 1998, 1999,
2000 and 2001 was calculated by adding the ending servicing portfolio
balance for each of the four quarters of such fiscal year and dividing by
four.
** Information with respect to net charge-offs is not available. Lease
receivables in the Servicer's servicing portfolio are 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.
S-21
Gross charge-offs for IOS Capital's portfolio excluding funded leases
decreased to $67.5 million, or 2.5% of the average portfolio balance excluding
funded leases, for the year ended September 30, 2001 from $70.0 million, or
3.0%, for the year ended September 30, 2000. Of the remaining incremental
increase in gross charge-offs over fiscal year 1997, approximately $15.7 million
resulted from a change in IOS Capital's charge-off policy in restrictions on
exceptions to the charge-off policy. 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 180 days past due require
approval by the credit review team at IOS Capital to avoid charge-off.
Exceptions for leases beyond 181 days past due require approval by members of a
senior executive management team at IKON Office Solutions. The revised policy
promotes the constant and timely recognition of losses.
There can be no assurance that the levels of delinquency and loss reflected
in the tables above are or will be indicative of the performance of the Leases
in the future.
THE SELLER
IKON Receivables-2, LLC, the Seller, is a wholly-owned bankruptcy remote
subsidiary of IOS Capital. The Seller was organized for the limited purpose of
engaging in the type of transactions described herein and any activities
incidental to and necessary or convenient for accomplishment of such purposes
and is restricted by its organizational documents and under the Assignment and
Servicing Agreement from engaging in other activities. In addition, its
organizational documents and the Assignment and Servicing Agreement require that
it operate in a manner such that it should not be consolidated in the bankruptcy
estate of IOS Capital, or its affiliates in the event that one of them becomes
subject to bankruptcy or insolvency proceedings. The Seller's address is 1738
Bass Road, Macon, Georgia 31210.
THE INDENTURE TRUSTEE
General
The Indenture Trustee, [_________] is a banking corporation organized under
the laws of ________. The Indenture Trustee may resign, subject to the
conditions set forth below, at any time upon written notice to the Issuer and
the Servicer, in which event the Servicer will be obligated to appoint a
successor Indenture Trustee. If no successor Indenture Trustee shall have been
so appointed and have accepted such appointment within 30 days after the giving
of such notice of resignation, the resigning Indenture Trustee may petition a
court of competent jurisdiction for the appointment of a successor Indenture
Trustee. Any successor Indenture Trustee shall meet the financial and other
standards for qualifying as a successor Indenture Trustee under the Indenture.
The Servicer may and shall at the direction of the Noteholders evidencing more
than 25% of the aggregate outstanding note principal balances of all classes of
notes (the "Percentage Interests") may, also remove the Indenture Trustee if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
and fails to resign after written request therefor.
S-22
Duties and Immunities of the Indenture Trustee
The Indenture 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
Event of Servicing Termination has occurred, then the Indenture 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 Indenture 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 [_________], in its individual capacity, and [_________] shall 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 Indenture Trustee's own negligence or
willful misconduct.
The Indenture Trustee will be entitled to receive, pursuant to the priority
set forth in the Indenture, (a) reasonable compensation for its services (the
"Indenture Trustee Fee"), (b) reimbursement for its reasonable expenses and (c)
indemnification for loss, liability or expense incurred without negligence or
bad faith on its part, arising out of performance of its duties thereunder ((b)
and (c) collectively, the "Indenture Trustee Expenses").
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the Indenture to be entered into by
the Issuer and the Indenture Trustee. The Servicer will provide a copy of the
Indenture to subsequent Noteholders without charge on written request addressed
to it at 1738 Bass Road, P.O. Box 9115, Macon, Georgia 31208 Attn: Harry Kozee.
General
The obligations evidenced by the Notes are recourse to the assets pledged
to the relevant Asset Pool only and are not recourse to the Originator, the
Seller, the Servicer, the Indenture Trustee, the Issuer, or any other Person.
The Issuer will agree in the Indenture and in the respective Notes to pay
to the Noteholders (i) an amount of principal equal to the Initial Note
Principal Balance and (ii) monthly interest at the times, from the sources and
on the terms and conditions set forth in the Indenture and in the respective
Notes.
Collections
The Indenture Trustee shall deposit the following funds into the Collection
Account ("Available Funds"), which funds received on or prior to the last day of
the prior calendar month (the "Calculation Date") shall be available for
distribution, pursuant to the Indenture, on the next succeeding Payment Date:
(a) Lease Payments (as defined below) due before each Cut-Off Date;
S-23
(b) recoveries from Defaulted Leases (as defined below) to the extent
the Originator has not substituted Substitute Leases for such Defaulted
Leases (except to the extent required to reimburse unreimbursed Servicer
Advances);
(c) proceeds from repurchases by the Seller of Leases as a result of
breaches of representations and warranties by the Seller (such breach a
"Warranty Event") to the extent the Originator has not substituted
Substitute Leases for such Leases;
(d) proceeds from investment of funds in the Collection Account;
(e) Casualty Payments (as defined below);
(f) Termination Payments (as defined below); and
(g) Servicer Advances (as defined below).
A "Lease Payment" is each periodic installment of rent payable by a Lessee
under a Lease. Casualty Payments, Termination Payments, prepayments of rent
required pursuant to Termination Payments, prepayments of rent required pursuant
to the terms of a Lease at or before the commencement of the term of such lease,
payments becoming due before each Cut-Off Date and supplemental or additional
payments required by the terms of such a Lease with respect to taxes, insurance,
maintenance, or other specific charges shall not be considered Lease Payments
hereunder.
A "Casualty Payment" is any payment pursuant to a Lease on account of the
loss, theft, condemnation, governmental taking, destruction, or damage beyond
repair of any item of Equipment subject thereto which results, in accordance
with the terms of such Lease (such event a "Casualty Loss"), 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 "Termination Payment" is a payment payable by a Lessee under a Lease upon
the early termination of such Lease ( such Lease, an "Early Termination 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 beneficial owner thereof, and the
Lessee.
"Defaulted Leases" are (i) Leases that have become more than 123 days
delinquent or (ii) Leases that have been charged off by the Servicer.
Distributions
Unless an Event of Default and acceleration of the Notes has occurred or a
Restricting Event has occurred, on or before each Payment Date, the Servicer
will instruct the Indenture Trustee to apply or cause to be applied the
Available Funds to make the following payments in the following priority:
(a) [_];
(b) [_];
(c) [_];
(d) [_]; and
(e) [_].
S-24
If an Event of Default and acceleration of the Notes has occurred or a
Restricting Event has occurred, on or before each Payment Date, the Servicer
will instruct the Indenture Trustee to apply or cause to be applied the
Available Funds to make the following payments in the following priority:
(a) [_];
(b) [_];
(c) [_];
(d) [_];
(e) [_];
(f) [_]; and
(g) [_].
"Restricting Events" with respect to any series include the following:
(a) an event of default by the Servicer under the Assignment and
Servicing Agreement;
(b) Events of Default (as defined herein); and
(c) replacement of the Servicer.
"Outstanding Principal Amount" means with respect to any Class of Notes and
any date of determination the difference between (a) the initial principal
amount of the Notes of such Class at the issuance thereof, less (b) all amounts
previously distributed with respect to such Class as principal.
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 such prepayments or liquidations will 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 such
payments may be influenced by a number of other factors, including general
economic conditions. The rate of Principal Payments with respect to any series
may also be affected by any repurchase of the underlying Leases by the
Originator pursuant to the Assignment and Servicing Agreement. In such event,
the application of the repurchase price will decrease the aggregate Discounted
Lease Balance, 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 ______% of
the Discounted
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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 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.
The Scheduled Final Payment Date for the Notes is [_]. This date is the
date on which the note principal balance would be reduced to zero, assuming,
among other things, (i) prepayments with respect to the Leases are received at a
rate of [_]% CPR and (ii) the modeling assumptions apply. The weighted average
life of the Notes is likely to be shorter than would be the case if payments
actually made on the Leases conformed to the foregoing assumptions, and the
final Payment Date with respect to the Notes could occur significantly earlier
than such final scheduled Payment Dates due to defaults, and because the
Originator is obligated to repurchase Leases in the event of breaches of
representations and warranties.
"Weighted average life" refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average lives of the Notes will be
influenced by the rate at which principal payments (including Lease payments and
prepayments) on the Leases are made. Principal payments on Leases may be in the
form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments and liquidations due to a default or other
dispositions of the Leases). The weighted average lives of the Notes will also
be influenced by delays associated with realizing on Defaulted Leases. The
prepayment model used in this Prospectus Supplement, the "Conditional Prepayment
Rate" or "CPR", represents an assumed annualized rate of prepayment relative to
the then outstanding balance on a pool of Leases. The CPR assumes that a
fraction of the outstanding Lease Pool is prepaid on each Payment Date, which
implies that each Lease in the Lease Pool is equally likely to prepay. This
fraction, expressed as a percentage, is annualized to arrive at the CPR for the
Lease Pool. The CPR measures prepayments based on the outstanding principal on
the previous Payment Date. 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.
Weighted Average Lives of the Notes
The following tables set forth the percentages of the initial principal
amount of the Notes that would be outstanding after each of the dates shown,
assuming a CPR of [_]%.
S-26
PERCENTAGE OF INITIAL NOTE
PRINCIPAL BALANCE OUTSTANDING
Notes
Prepayment Speed (CPR)
Payment 0% 2% 4% 6% 8%
Date
- --------------------------------------------------------------------------
Closing
Date
- --------------------------------------------------------------------------
Weighted Average
Life (years)
The Leases will not have the characteristics assumed above, and there can
be no assurance that (i) the Leases will prepay at any of the rates shown in the
tables or at any other particular rate or will prepay proportionately or (ii)
the weighted average lives of the Notes will be as calculated above. Because the
rate of distributions of principal of the Notes will be a result of the actual
amortization (including prepayments) of the Leases, which will include Leases
that have remaining terms to stated maturity shorter or longer than those
assumed, the weighted average lives of the Notes will differ from those set
forth above, even if all of the Leases prepay at the indicated constant
prepayment rates.
The effective yield to Noteholders will depend upon, among other things,
the price at which such Notes are purchased, and the amount of and rate at which
principal, including both scheduled and Lease Payments thereof, is paid to the
Noteholders. See "Special Considerations -- Maturity and Prepayment
Considerations" in the Prospectus.
DESCRIPTION OF THE TRANSACTION DOCUMENTS
The following summary describes certain terms of each Transaction Document
pursuant to which the Asset Pool will be created and the Notes will be issued.
For purposes of this Prospectus Supplement, the term "Transaction Document" as
used with respect to the Asset Pool means, collectively, and except as otherwise
specified, any and all agreements relating to the establishment of the Asset
Pool, the servicing of the related Lease Receivables and the issuance of the
Notes, including, without limitation, the Indenture, pursuant to which any Notes
shall be issued. The summary does not purport to be complete. It is qualified in
its entirety by reference to the provisions in each respective Transaction
Document.
Acquisition of the Lease Receivables Pursuant to an Assignment and Servicing
Agreement
On the Closing Date, the Lease Receivables will be acquired by the Seller
from the Originator under the Assignment and Servicing Agreement among the
Seller, the Originator and the Issuer. Contemporaneously, the Lease Receivables
will be transferred by the Seller to the Issuer pursuant to the Assignment and
Servicing Agreement. The Leases included in the 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 to the holders of Notes,
the Issuer will form the Asset Pool by (i) acquiring Lease Receivables pursuant
to the Assignment and Servicing Agreement and (ii) entering into an Indenture
with the Trustee, relating to the issuance of the Notes.
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Repurchase Obligation
The Originator will be obligated to repurchase from the Issuer its interest
in any Lease transferred to the Issuer or pledged to an Indenture Trustee on
behalf of the Noteholders, in which any representation or warranty of the
Originator under the Transaction Documents has been breached, if the
Noteholders' interest in the Lease is materially affected by the breach, and the
breach has not been cured following discovery of such breach (each a "Warranty
Lease"). In addition, the Originator may from time to time reacquire certain
Leases or substitute other Substitute Leases for such Leases subject to
specified conditions set forth in the related Transaction Documents.
The Indenture Trustee will have possession of the Leases and the
documents in the files relating thereto (the "Lease Files") not retained by the
Servicer for its servicing purposes, and the Servicer will retain copies of any
other documents which relate to the Lease Receivables, any related evidence of
insurance and payment, delinquency and related reports maintained by the
Servicer in the ordinary course of business with respect to each Lease
Receivable. Prior to transfer of the Lease Receivables to the Issuer, the
Servicer will cause its electronic ledger to be marked to show that such Lease
Receivables have been transferred to the Seller and then to the Issuer, and the
Originator and the Seller will file UCC financing statements reflecting the sale
and assignment of the Lease Receivables in certain jurisdictions, as required by
the Assignment and Servicing Agreement. See "Certain Legal Aspects of the Lease
Receivables" in the Prospectus.
Substitutions
Pursuant to the Transaction Documents, in addition to Warranty Leases, the
Originator will have the option to substitute Eligible Leases for Defaulted
Leases, Leases which have undergone modifications or adjustments to the terms of
such leases (each an "Adjusted Lease"), and Leases that have prepaid, up to a
maximum of [ %] of the aggregate Discounted Lease Balance of the Leases
contributed to the pool, provided the following conditions are met:
(i) At the time of substitution, the substituted Eligible Leases have
in the aggregate Discounted Lease Balances of not less than the Discounted
Lease Balance of the Leases being replaced;
(ii) Substitutions by the Originator shall be approximately the same
weighted average life of the remaining originally scheduled Lease payments
in the pool and shall not extend the final maturity of the pool beyond the
original maturity of the initial Leases in the pool.
Each Substitute Lease shall be a Lease, satisfying certain representations
and warranties set forth in the Indenture and the Assignment and Servicing
Agreement (a "Substitute Lease") as of the related Substitute Lease Cut-Off
Date. In addition, the following conditions must be satisfied:
(i) as of the related Substitute Lease Cut-Off Date, the Substitute
Leases then being transferred have in the aggregate Discounted Lease
Balances that are not less than the aggregate of the Discounted Lease
Balances of the Leases being replaced; and
(ii) no substitution shall be permitted if, after giving effect to
such substitution, (x) the sum of the Lease Payments on all Leases due in
any Remittance Period thereafter would be less than (y) the sum of the
Lease Payments which would otherwise be due in such Remittance Period.
S-28
[Security Interest]
The Noteholders will be secured by [the security will be described when the
structuring of the transaction is available].
Representations and Warranties of the Originator and the Seller
[The representation and warranties will be described when the structuring
of the transaction is available.]
Indemnification
[The indemnification provisions will be described when the structuring of
the transaction is available.]
The Accounts
The Servicer will maintain an account (the "Collection Account") in the
name of the Indenture Trustee to which all Lease Payments received under each
Lease (including any residual proceeds and late charges), any recoveries for
Defaulted Leases if not substituted for, proceeds of Casualty Losses and Early
Termination Leases, and payments by the Seller in connection with a Warranty
Event will be directed within at least two (2) Business Days of receipt by the
Servicer, but excluding any Excluded Amounts.
Amounts exempt from deposit into the Collection Account ("Excluded
Amounts"), including (i) collections attributable to any taxes, fees or other
charges imposed by any governmental authority; (ii) collections representing
reimbursements of insurance premiums or payments for services that were not
financed by the Seller; (iii) other non-contract or rental charges reimbursable
to the Servicer in accordance with the Servicer's customary policies and
procedures; and (iv) collections with respect to repurchased Leases.
[The identity of any other accounts will be described when the structuring
of the transaction is available.]
Available Funds
Available Funds for any Payment Date shall include funds received on or
prior to the related Calculation Date, net of any Excluded Amounts, will be
available for distribution by the Indenture Trustee on each Payment Date and
will include:
(i) Lease Payments (including residual proceeds and late charges);
(ii) Servicer Advances;
(iii) recoveries on Defaulted Leases to the extent the Servicer has
not substituted an Eligible Lease for such Defaulted Lease;
(iv) proceeds from a Casualty Loss or Early Termination Lease;
(v) proceeds from repurchases by the Seller due to a Warranty Event;
and
(vi) proceeds from investment of funds in the Collection Account[;
S-29
(vii) any other items constituting Available Funds will be identified
when the structuring of the transaction is available].
Priority of Payments
On each Payment Date prior to the occurrence and continuance of an Event of
Default and acceleration of the Notes or a Restricting Event, Available Funds
will be distributed by the Indenture Trustee in the following order of priority:
(i) [_];
(ii) [_];
(iii) [_];
(iv) [_];
(v) [_].
On each Payment Date after the occurrence and during the continuance of an
Event of Default or Restricting Event, Available Funds will be distributed by
the Indenture Trustee in the following order of priority:
(i) [_];
(ii) [_];
(iii) [_];
(iv) [_];
(v) [_];
(vi) [_];
(vii) [_];
(viii) [_].
Any one or more of the following will be a Restricting Event under the
Indenture with respect to the Notes:
(i) an event of default by the servicer under the Assignment and
Servicing Agreement;
(ii) Events of Default (as defined herein);
(iii) replacement of the servicer;
Interest
[Information on the interest payable to Noteholders will be provided in
accordance with the structuring of the transaction.]
S-30
Principal
[Information on the principal payable to Noteholders will be provided in
accordance with the structuring of the transaction.]
Withholding
The Indenture Trustee is required to comply with all applicable federal
income tax withholding requirements respecting payments to Noteholders of
interest with respect to the Notes. The consent of Noteholders is not required
for such withholding. In the event the Noteholder is other than DTC, then in the
event that the Indenture Trustee does withhold or causes to be withheld any
amount from interest payments or advances thereof to any Noteholders pursuant to
federal income tax withholding requirements, the Indenture Trustee shall
indicate the amount withheld annually to such Noteholders.
Optional Redemption
The Servicer will have the option, subject to certain conditions, to redeem
all, but not less than all, of the Notes as of any Payment Date on which the
aggregate Discounted Lease Balance as of the related Calculation Date is less
than or equal to 10 % of the aggregate Discounted Lease Balance as of the
Cut-off Date.
The Servicer
IOS Capital, in its servicing role (the "Servicer") will service the Lease
Receivables comprising an Asset Pool 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.
The Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Transaction Documents 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 Default by the Servicer under the
related Transaction Documents.
Assignment and Servicing Agreement
The Assignment and Servicing Agreement will further detail the procedures
for Lease Payment collections and Equipment remarketing. In general, the
Servicer in accordance with the Servicer's policies and procedures will manage,
service, administer, collect and enforce the Leases on behalf of the Issuer in
accordance with its customary procedures, and shall have full power and
authority to do any and all things in connection with such managing, servicing,
administration, and collection that it deems necessary or desirable. The
Servicer's duties will include collection and posting of all payments,
responding to inquiries of obligors regarding the Leases, investigating
delinquencies and making required Servicer Advances, remitting payments to the
Collection Account in a timely manner, furnishing monthly and annual statements
with respect to collections and payments, using commercially reasonable efforts
to dispose of any related Equipment that has been pledged to the Indenture
Trustee upon the expiration or termination of a Lease, and using its best
efforts to maintain the perfected security interest of the Indenture Trustee on
behalf of the Noteholders and their respective interests, if any, in the related
Equipment to the extent required herein.
S-31
Remittance and Other Servicing Procedures
[Information will be provided in accordance with the structuring of the
transaction.]
Servicing Compensation and Payment of Expenses
For its servicing of the Leases, the Servicer will receive servicing
compensation including a monthly fee (the "Servicer Fee") for each Remittance
Period (payable on the next succeeding Payment Date) and Servicing Charges.
The servicing compensation will compensate the Servicer for customary
equipment Lease servicing activities to be performed by the Servicer for the
Issuer, additional administrative services performed by the Servicer on behalf
of the Issuer, and expenses paid by the Servicer on behalf of the Issuer.
The Servicer, as an independent contractor on behalf of the Issuer for the
benefit of the Noteholders, will be responsible for the managing, servicing and
administering the Lease Receivables and enforcing and making collections on the
Leases and for the enforcing of any security interest in any item of Equipment,
all as set forth in the Assignment and Servicing Agreement. The Servicer's
responsibilities will include collecting and posting of all payments, responding
to inquiries of Lessees, investigating delinquencies, accounting for
collections, furnishing monthly and annual statements to the Indenture Trustee,
making advances (each a "Servicer Advance"), providing appropriate federal
income tax information for use in providing information to Noteholders,
collecting and remitting sales and property taxes on behalf of taxing
authorities and maintaining the perfected security interest of the Issuer in the
Equipment and the Leases.
Reports to Noteholders
On or prior to each Payment Date, the Servicer or the Indenture Trustee, as
applicable, will forward or cause to be forwarded to each holder of record of
such class of Notes a statement or statements with respect to the Asset Pool
setting forth the information specifically described in the Transaction Document
(such statements, collectively, the "Servicer Reports") which generally will
include the following information:
(i) the amount of the distribution with respect to each class of
Notes;
(ii) the amount of such distribution allocable to principal;
(iii) the amount of such distribution allocable to interest;
(iv) the Asset Pool balance, if applicable, as of the close of
business on the last day of the related Remittance Period;
(v) the aggregate outstanding principal balance and the Pool Factor
for each Class of Notes after giving effect to all payments reported under
(ii) above on such Payment Date;
(vi) the amount paid to the Servicer, if any, with respect to the
related Remittance Period; and
(vii) the amount of the aggregate purchase amounts for Lease
Receivables that have been reacquired, if any, for such Remittance Period.
S-32
Each amount set forth pursuant to clauses (i), (ii), (iii) and (v) with
respect to the Notes of any series will be expressed as a dollar amount per
$1,000 of the initial principal balance of such Notes, as applicable.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year, the Issuer, or the Servicer on behalf of the Issuer,
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.
The "Note Factor" is the seven digit decimal number that the Servicer will
compute or cause to be computed for each Remittance Period and will make
available on the related Calculation Date representing the ratio of (x) the note
principal balance which will be outstanding on the next Payment Date (after
taking into account all distributions to be made on such Payment Date) to (y)
the Initial Note Principal Balance.
The "Pool Factor" is the seven digit decimal number that the Servicer will
compute or cause to be computed for each Remittance Period and will make
available on the related Calculation Date representing the ratio of (x) the
aggregate Discounted Lease Balance as of the end of the immediately preceding
Remittance Period to (y) the aggregate Discounted Lease Balance as of the
Cut-Off Date.
[In addition, by _______ of each calendar year following any year during
which the Notes are outstanding, commencing ________, _____, the Indenture
Trustee will furnish to each Noteholder of record at any time during such
preceding calendar year, information as to the aggregate of amounts reported
pursuant to items (a) and (b) above for such calendar year to enable Noteholders
to prepare their federal income tax returns.]
Evidence as to Compliance
The Assignment and Servicing Agreement requires that the Servicer cause an
independent accountant (who may also render other services to the Servicer) to
prepare a statement to the Indenture Trustee and each Rating Agency dated not
later than [_], and annually as of the same month thereafter, to the effect that
the independent accountant has examined the servicing procedures, manuals,
guides and records of the Servicer and the accounts and records of the Servicer
relating to the Lease Receivables and the Lease Files (which procedures,
manuals, guides and records shall be described in one or more schedules to such
statement), that such firm has compared the information contained in the
Servicer's certificates delivered in the relevant period with information
contained in the accounts and records for such period and that, on the basis of
such examination and comparison, nothing has come to the independent
accountant's attention to indicate that the Servicer has not, during the
relevant period, serviced the Lease Receivables in compliance with such
servicing procedures, manuals and guides and in the same manner required by the
Servicer's standards and with the same degree of skill and care consistent with
that which the Servicer customarily exercises with respect to similar property
owned by it, that such accounts and records have not been maintained in
accordance with the Assignment and Servicing Agreement, that the information
contained in the Servicer's certificates does not reconcile with the information
contained in the accounts and records or that such certificates, accounts and
records have not been properly prepared and maintained in all material respects,
except in each case for (a) such exceptions as the independent accountant shall
believe to be immaterial and (b) such other exceptions as shall be set forth in
such statement. On or before [_] of each year, commencing on [_], the Servicer
shall deliver to the Indenture Trustee and each Rating Agency a copy of such
statement.
S-33
The Assignment and Servicing Agreement will also provide for annual
delivery of a report (the "Supplementary Report") by the Servicer to the
Indenture Trustee not later than 120 days after the end of each fiscal year,
signed by an authorized officer of the Servicer (a "Servicing Officer") on
behalf of the Servicer and dated as of the last day of such fiscal year, stating
that (a) a review of the activities of the Servicer and the Servicer's
performance under the Assignment and Servicing Agreement for the previous
12-month period has been made under such Servicing Officer's supervision and (b)
nothing has come to such Servicing Officer's attention to indicate that an Event
of Servicing Termination has occurred, or, if such Event of Servicing
Termination has so occurred and is continuing, specifying each such event known
to the officer, the nature and status thereof and the steps necessary to remedy
such event.
The Assignment and Servicing Agreement will provide that the Servicer, upon
request of the Indenture Trustee, will furnish to the Indenture Trustee such
underlying data necessary for administration of the Trust or enforcement actions
as can be generated by the Servicer's existing data processing system.
Certain Matters Relating to 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 a
determination that the Servicer's performance of such duties is no longer
permissible under applicable law. The Servicer can only be removed pursuant to
an Event of Servicing Termination as discussed below.
Events of Servicing Termination
[Information will be provided upon the structuring of the transaction.]
[Rights Upon an Event of Servicing Termination]
[Information will be provided upon the structuring of the transaction.]
Events of Default
[Information will be provided upon the structuring of the transaction.]
Early Retirement of the Notes
[Information will be provided upon the structuring of the transaction.]
Amendment
Each of the Transaction Documents may be amended by the parties thereto,
without the consent of the Noteholders, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such
Transaction Documents or of modifying in any manner the rights of such
Noteholders; provided that such action will not, in the opinion of counsel
satisfactory to the Indenture Trustee materially and adversely affect the
interests of any such Noteholder. The Transaction Documents may also be amended
by the Issuer, the Servicer, and/or the Indenture Trustee, as applicable, with
the consent of the holders of Notes evidencing at least a majority of the voting
rights of such then outstanding Notes for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such
Transaction Documents or of modifying in any manner the rights of such
Noteholders; provided, however, that no such amendment may (i) increase or
reduce in any manner the amount of, or accelerate or delay the timing of,
collections of payments on the related Lease Receivables or distributions that
are required to be made for the benefit of such Noteholders or (ii) reduce the
aforesaid
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percentage of the Notes which are required to consent to any such amendment,
without the consent of all of the Noteholders.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the Notes is to be
considered only in connection with "Material Federal Income Tax Consequences" in
the accompanying prospectus. The discussion herein 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 and in the accompanying
prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult 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.
Treatment 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 IRS and the courts have set forth 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 such factors as applied to the
facts and its analysis of the economic substance of the contemplated
transaction, Dewey Ballantine LLP, tax counsel to the issuer, is of the opinion
that, for federal income tax purposes, (i) the Notes will be treated as
indebtedness and (ii) the issuer will not be classified as an association or as
a publicly traded partnership taxable as a corporation. See "Material Federal
Income Tax Consequences" 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 indenture trustee, on
behalf of the trust, 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
such a characterization will prevail. If the IRS successfully asserted that the
Notes did not represent debt 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 equitable interest in a partnership,
the partnership itself would not be subject to federal income tax; rather each
partner would be
S-35
taxed individually on such partner's respective distributive share of the
partnership's income, gain, loss, deductions and credits. The amount, timing and
characterization of items of income and deduction 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, none of the servicer, the indenture trustee or the owner
trustee will attempt to satisfy the tax reporting requirements that would apply
under this alternative characterization of the Notes.
Discount and Premium
It is not anticipated that the Notes will be issued with any original issue
discount See "Material Federal Income Tax Consequences -- Discount and Premium
- -- Original Issue Discount" in the accompanying prospectus. 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"
in the accompanying prospectus.
State Taxes
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Notes under the tax laws of any state.
Investors considering an investment in the Notes may wish to consult their own
tax advisors regarding these tax consequences.
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
S-36
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; PCTE 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 diversification, an investment in the Notes is appropriate for the Benefit
Plan, taking into
S-37
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.
RATINGS
It is a condition to the issuance of the Notes that the [Class A] Notes be
rated [_] by _______ and [_] by _________, and the [Class __ ] Notes be rated [_
] by ________ and [_] by ______. The ratings are not a recommendation to
purchase, hold or sell the Notes, inasmuch as such ratings do not comment as to
market price or suitability for a particular investor. Each rating may be
subject to revision or withdrawal at any time by the assigning Rating Agency.
There is not assurance that any such rating will continue for any period of time
or that it will not be lowered or withdrawn entirely by the Rating Agency if, in
its judgment, circumstances so warrant. A revision or withdrawal of such rating
may have an adverse effect 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 pursuant to their terms. 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 prepayments on the
return of principal to the Noteholders.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") for the sale of the Notes dated [_], the Issuer
has agreed to sell and [ ______ ] (the "Underwriter") has agreed to purchase,
the Notes. The Issuer is affiliated with IOS Capital.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions therein, to purchase all the Notes offered hereby if any of
such Notes are purchased.
The Underwriter has advised the Issuer that it proposes to offer the Notes
purchased by the Underwriter for sale from time to time in one or more
negotiated transactions or otherwise, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. The
Underwriter may effect such transactions by selling such Notes to or through a
dealer, and such dealer may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters or purchasers of the
Notes for whom they may act as agent. Any dealers that participate with the
Underwriter in the distribution of the Notes purchased by the Underwriter may be
deemed to be underwriters, and any discounts or commissions received by them or
the Underwriter, and any profit on the resale of Notes by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act of 1933, as amended (the "Securities Act"). Noteholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
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. Such
stabilizing, if commenced, may be discontinued at any time.
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 and the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
an implication that
S-38
there has been no change in the affairs of the Seller or the Issuer or any
affiliate thereof or the Leases since the date hereof. This Prospectus does not
constitute an offer or solicitation by anyone in any state in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so to anyone to whom it is unlawful to make
such offer or solicitation.
The Transaction Documents and the Underwriting Agreement provide that the
Servicer and Issuer will indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriter may be required to make in respect thereof.
For further information regarding any offer or sale of the Notes pursuant
to this Prospectus Supplement and the Prospectus, see "Underwriting" in the
Prospectus.
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.
S-39
INDEX OF PRINCIPAL DEFINED TERMS
Page
-----
Additional Lease............................................................................. 25
Adjusted Lease............................................................................... 25, 28
Assignment and Servicing Agreement........................................................... 14
Available Funds.............................................................................. 23
Benefit Plan................................................................................. 36
Calculation Date............................................................................. 23
Casualty Loss................................................................................ 24
Casualty Payment............................................................................. 24
Collection Account........................................................................... 29
Commission................................................................................... 2, 20
Conditional Prepayment Rate.................................................................. 26
CPR.......................................................................................... 26
Defaulted Leases............................................................................. 24
Early Termination Lease...................................................................... 24, 25
Excluded Amounts............................................................................. 29
IKON......................................................................................... 20
Indenture Trustee Expenses................................................................... 23
Indenture Trustee Fee........................................................................ 23
IOS Capital.................................................................................. 20
IRA.......................................................................................... 36
Leases....................................................................................... 12
Note Factor.................................................................................. 32
Noteholders.................................................................................. 14
Originator................................................................................... 20
Outstanding Principal Amount................................................................. 25
Percentage Interests......................................................................... 22
Plan Assets Regulation....................................................................... 36
Pool Factor.................................................................................. 33
Portfolio Concentration Criteria............................................................. 15
PTCE......................................................................................... 37
Restricting Events........................................................................... 25
Securities Act............................................................................... 38
Servicer..................................................................................... 31
Servicer Advance............................................................................. 32
Servicer Fee................................................................................. 31
Servicer Reports............................................................................. 32
Servicing Officer............................................................................ 33
Substitute Lease............................................................................. 25, 28
Supplementary Report......................................................................... 33
Termination Payment.......................................................................... 24
Transaction Document......................................................................... 27
Underwriting Agreement....................................................................... 38
Warranty Event............................................................................... 23
Warranty Lease............................................................................... 25, 27
S-40
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.
A-1
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.
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.
A-2
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, 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.
A-3
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 as well as
the application of the withholding regulations. 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 form is signed.
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.
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 substantial decisions of the
trust.
A non-U.S. person is any person who is not a U.S. person.
A-4
Prospectus
- --------------------------------------------------------------------------------
$2,500,000,000
IKON Receivables Funding, LLC Lease-Backed Notes
Issuer Issuable in Series
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 7, 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, Inc.LLC, a Delaware corporationlimited liability company formerly
known as IKONIOS 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
Notes the 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
Yield that 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
Equipment; Certain Security the benefit of noteholders will have any
Interests are Not Perfected and ownership interest in any equipment,
Other Creditors May Have Rights including any residual interest in the
to the Equipment equipment at the end 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 May State laws impose requirements and
Impede Recovery Efforts and Affect restrictions on foreclosure sales and
the Ability of the Issuer to Recoup obtaining deficiency judgments and may
the Full Amount Due on the Leases prohibit, limit or delay repossession
and sale of equipment to recover losses
on non-performing 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
and the Insolvency of the servicer, the originator or the seller,
Issuer, Originator, Seller or while in possession of the leases may
Servicer May Result in Reduced result in competing claims to ownership
or Delayed Payments to or security interests in the leases
Noteholders which could result in delays in payments
on the notes, losses to the noteholders
or an acceleration of the repayment of
the notes.
8
Commingling of Funds with IOS If bankruptcy or reorganization
Capital May Result in Reduced or proceedings are commenced with respect
Delayed Payments to Noteholders to the servicer, any funds then held by
the servicer may be 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 IKON In some circumstances, a bankruptcy of
Receivables-2, LLC May Reduce IOS Capital or IKON Receivables-2, LLC
Payments to noteholders. may reduce payments IOS Capital and IKON
to Noteholders 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
Delay Payments to Noteholders the 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
Noteholders available for payment to you will be
reduced.
No Recourse Against Affiliates There is no recourse against any
of the Issuer affiliates of the issuer. The notes
Issuer 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 the We cannot guarantee that the
Leases May Differ From the delinquency and loss levels of
Originator's Historical Loss and leases in the asset pools will
Delinquency Levels correspond to the historical levels
the 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 of If a significant number of leases are
Leases May Adversely Affect added or replaced, this could affect the
Cashflow and May Decrease the Yield rate at which funds are distributed on
on the Notes the notes and decrease 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
Equipment May Reduce Value of office equipment cause leased equipment
Collateral to become 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 tsite 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.
12
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.
13
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.
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"):
14
(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;
(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.
15
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:
(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.
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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.
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,
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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 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, 2000.2001. 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.
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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 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.
19
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.
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".
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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.
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.
21
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;
(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
22
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.
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.
23
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.
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
24
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.
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.
25
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 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
26
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;
(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.
27
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.
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
28
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.
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
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;
29
(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
-------- -------
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;
(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 one 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
30
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.
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
31
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 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
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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.
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.
33
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 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(2a). 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,
34
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.
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.
35
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 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
36
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 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
37
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.
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
38
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 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.
39
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.
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
44
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.
45
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
46
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
Pre-Funding Account........................................................................................... 30
Premium Note.................................................................................................. 38
Rating Agencies............................................................................................... 21
Rating Agency................................................................................................. 21
Reserve Account............................................................................................... 30
Retainable Deposit............................................................................................ 23
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
47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance and distribution of the Offered Notes.
SEC Filing Fee.................................................. $ 230,000
Indenture Trustee's Fees and Expenses........................... 30,000
Legal Fees and Expenses......................................... 325,000
Accounting Fees and Expenses.................................... 175,000
Printing and Engraving Expenses................................. 50,000
Blue Sky Qualification and Legal Investment Fees and Expenses... 45,000
Rating Agency Fees.............................................. 40,000
Miscellaneous................................................... 250,000
- ---------------------------------------------------------------- ----------
TOTAL $1,145,000
____________________________
Item 15. Indemnification of Managers and Officers.
Indemnification. Under the Delaware Limited Liability Company Act, the
Registrant has the power and in some instances may be required to provide an
agent, including an officer or manager, who was or is a party or is threatened
to be made a party to certain proceedings, with indemnification against certain
expenses, judgments, fines, settlements and other amounts under certain
circumstances.
Section 7.1 of the Limited Liability Company Agreement of IKON Receivables
Funding, LLC provides that all officers and managers of the company shall be
indemnified by the company from and against all expenses, liabilities or other
matters arising out of their status as an officer or manager for their acts,
omissions or services rendered in such capacities. IOS Capital, LLC, the
ultimate corporate parent of IKON Receivables Funding, LLC, maintains certain
policies of liability insurance coverage for the officers and managers of IOS
Capital, LLC and certain of its subsidiaries, including IKON Receivables
Funding, LLC.
The form of the Underwriting Agreement, filed as Exhibit 1.1 to this
Registration Statement, provides that IKON Receivables Funding, LLC will
indemnify and reimburse the underwriter(s) and each controlling person of the
underwriter(s) with respect to certain expenses and liabilities, including
liabilities under the 1933 Act or other federal or state regulations or under
the common law, which arise out of or are based on certain material
misstatements or omissions in the Registration Statement. In addition, the
Underwriting Agreement provides that the underwriter(s) will similarly indemnify
and reimburse IKON Receivables Funding, LLC with respect to certain material
misstatements or omissions in the Registration Statement which are based on
certain written information furnished by the underwriter(s) for use in
connection with the preparation of the Registration Statement.
Insurance. As permitted under the Delaware Limited Liability Company Act,
the Registrant's Limited Liability Company Agreement permit the managers to
purchase and maintain insurance on behalf of the Registrant's agents, including
its officers and managers, against any liability asserted against them in such
capacity or arising out
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of such agents' status as such, whether or not such Registrant would have the
power to indemnify them against such liability under applicable law.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Formation of IKON Receivables Funding, LLC.*
3.2 Limited Liability Company Agreement of IKON Receivables Funding, LLC.*
4.1 Form of Indenture between the Issuer and the Indenture Trustee.*
5.1 Opinion of Dewey Ballantine LLP with respect to validity.*
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters.*
10.1 Form of Assignment and Servicing Agreement.*
23.1 Consents of Dewey Ballantine (included in Exhibit 8.1 hereto).*
23.2 Consents of Dewey Ballantine LLP (included in Exhibit 5.1 hereto).*
23.3 Consents of Accountants.
25.1 Form of Statement of Eligibility of Indenture Trustee. a
__________________________
* Previously filed on October 10, 2001 in connection with Registration
Statement on Form S-3 (Registration No. 333-71362) and incorporated herein by
reference.
a To be Filed Subsequently.
Item 17. Undertakings.
A. Undertaking in respect of indemnification
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to managers, officers and controlling persons of the Registrant
pursuant to the provisions described above in Item 15, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a manager, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such manager, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of their counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by them is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in
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the aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which is registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change of such information in the Registration Statement; provided,
however, that paragraphs (i) and (ii) do not apply if the information required
to be included in the post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
C. Undertaking pursuant to Rule 430A.
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
D. Undertaking pursuant to the Trust Indenture Act of 1939.
The Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of section 310 of the Trust Indenture Act ("Act") in accordance with the
rules and regulations prescribed by the Commission under section 305(b)(2) of
the Act.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on the 7th day of March,
2002. As of the date hereof, the Registrant reasonably believes that the
Security rating requirement for asset-backed offerings on Form S-3 will be met
at the time of each sale.
IKON RECEIVABLES FUNDING, LLC
By: IKON RECEIVABLES FUNDING, INC.,
as Manager
By: /s/ Russell Slack
-----------------
Name: Russell Slack
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- ------------------------------------ -------------------------------------- --------------------------------------
/s/ Russell Slack
- -----------------------------
Russell Slack President & Director March 7, 2002
/s/ Harry Kozee
- -----------------------------
Harry Kozee C.F.O., Vice-President & Director March 7, 2002
/S/ J.F. Quinn
- -----------------------------
J.F. Quinn Vice-President,Treasurer & Director March 7, 2002
II-4
EXHIBIT INDEX
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Formation of IKON Receivables Funding, LLC.*
3.2 Limited Liability Company Agreement of IKON Receivables Funding, LLC.*
4.1 Form of Indenture between the Issuer and the Indenture Trustee.*
5.1 Opinion of Dewey Ballantine LLP with respect to validity.*
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters.*
10.1 Form of Assignment and Servicing Agreement.*
23.1 Consents of Dewey Ballantine LLP (included in Exhibit 8.1 hereto).*
23.2 Consents of Dewey Ballantine LLP (included in Exhibit 5.1 hereto).*
23.3 Consents of Accountants.
25.1 Form of Statement of Eligibility of Indenture Trustee. a
____________________________
* Previously filed on October 10, 2001 in connection with Registration
Statement on Form S-3 (Registration No. 333-71362) and incorporated herein by
reference.
a To be Filed Subsequently.
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