AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON January 22, 1999
REGISTRATION STATEMENT NO. 333- [ ]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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IKON RECEIVABLES, LLC
(exact name of registrant as specified in charter)
Delaware 501 Silverside Road [*******]
(state or jurisdiction Suite 28 (I.R.S. Employer
of organization) Wilmington, Delaware 19809 Identification No.)
(Address, including zip code,
and telephone number, including
area code, of registrants
principal executive offices)
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The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
(Name, address and telephone number, including area code, of agent for service)
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Copies to:
Harry G. Kozee Carl H. Fridy, Esq. Peter Humphreys, Esq.
IOS Capital, Inc. Ballard Spahr Andrews Dewey Ballantine LLP
1738 Bass Road & Ingersoll, LLP 1301 Avenue of the Americas
P.O. Bax 9115 1735 Market Street, 51st Floor New York, New York 10019
Macon, Georgia 31208 Philadelphia, PA 19103-7599
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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
<TABLE>
<CAPTION>
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Amount Proposed Maximum Proposed Maximum
Title of Securities To Be Aggregate Price Per Aggregate Offering Amount
Being Registered Registered Unit(1) Price(1) Of Registration Fee
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<S> <C> <C> <C> <C>
Lease-Backed Notes (the "Notes") $1,000,000 100% $1,000,000 $278
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
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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.
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Prospectus supplement to prospectus dated _______ __, 1999
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IKON RECEIVABLES, LLC
Issuer $_____________
IOS CAPITAL, INC. Lease Backed Notes, Series 1999-1
Originator and Servicer
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IKON Receivables, 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 (or
participations therein) and related assets.
You should read the section entitled "Risk Factors" starting on page S-__ of
this prospectus supplement and page __ of the prospectus and consider these
factors before making a decision to invest in the notes.
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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.
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This Prospectus Supplement may be used to offer and sell the notes only if
accompanied by the Prospectus
The Notes
o The _______ classes of notes set forth in the table below are offered by
this prospectus supplement.
o 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_________ __, 1999.
Credit Enhancement
o
Underwriting
o The underwriters will offer the public the notes at the following prices:
<TABLE>
<CAPTION>
Initial Aggregate Underwriting
Class Note Balance Note Rate Price to Public Discount Depositor(1)
------- ----------------- --------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
</TABLE>
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(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.
LEHMAN BROTHERS
The date of this prospectus supplement is__________ __, 1999
<PAGE>
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 Seven World Trade Center, 13th Floor, New York,
New York 10048, and Northwestern Atrium 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.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY........................................................................5
PARTIES........................................................................5
Issuer....................................................................5
Originator................................................................5
Seller....................................................................5
Servicer..................................................................5
Indenture Trustee.........................................................5
Cut-Off Date..............................................................5
Closing Date..............................................................5
DESCRIPTION OF THE NOTES.......................................................5
PAYMENTS ON THE NOTES..........................................................6
Payment Date..............................................................6
Record Date...............................................................6
Remittance Period.........................................................6
Cross-Collateralization...................................................6
Interest..................................................................6
Principal.................................................................6
Available Funds...........................................................6
Priority of Payments......................................................6
Events of Default.........................................................7
CREDIT ENHANCEMENT.............................................................8
Subordination.............................................................8
Asset Pool................................................................8
General...................................................................8
Origination and Acquisition...............................................8
Servicing.................................................................9
Lease Substitution.......................................................9
Repurchases for Breaches of Representations and Warranties................9
Advances..................................................................9
Certain Legal Aspects of the Lease.......................................10
Optional Redemption......................................................10
Material Federal Income Tax Consequences.................................10
ERISA Considerations.....................................................10
Rating of the Notes......................................................10
RISK FACTORS..................................................................11
THE ISSUER....................................................................12
THE LEASES....................................................................13
THE ORIGINATOR................................................................18
Loss and Delinquency Experience..........................................18
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THE SELLER....................................................................18
THE INDENTURE TRUSTEE.........................................................18
General..................................................................18
[Duties and Immunities of the Indenture Trustee..........................19
DESCRIPTION OF THE NOTES......................................................19
General..................................................................19
Collections..............................................................19
Distributions............................................................20
Prepayment and Yield Considerations......................................21
Weighted Average Lives of the Notes......................................21
DESCRIPTION OF THE TRANSACTION DOCUMENTS......................................22
Acquisition of the Lease Receivables Pursuant
to a Contribution and Sale Agreement...................................22
Acquisition of the Lease Receivables Pursuant
to a Lease Receivables Transfer Agreement..............................23
Repurchase Obligation....................................................23
[Security Interest]......................................................23
Representations and Warranties of the Originator and the Seller..........24
Indemnification..........................................................24
The Accounts.............................................................24
Available Funds..........................................................24
Priority of Payments.....................................................24
Interest.................................................................25
Principal................................................................25
Withholding..............................................................25
Optional Redemption......................................................25
The Servicer.............................................................25
Servicing Agreement......................................................25
Remittance and Other Servicing Procedures................................26
Servicing Compensation and Payment of Expenses...........................26
Reports to Noteholders...................................................26
Evidence as to Compliance................................................27
Certain Matters Relating to the Servicer.................................27
Events of Servicing Termination..........................................27
[Rights Upon an Event of Servicing Termination]..........................28
Events of Default........................................................28
Early Retirement of the Notes............................................28
Amendment................................................................28
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................................28
General..................................................................28
ERISA CONSIDERATIONS..........................................................28
RATINGS.......................................................................29
PLAN OF DISTRIBUTION..........................................................29
LEGAL OPINIONS................................................................30
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SUMMARY
o 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.
o 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.
o 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 [i] in this prospectus
supplement and under the caption "Index of Terms" beginning on page [50]
in the accompanying prospectus.
PARTIES
Issuer
IKON Receivables, 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, Inc., is a Delaware corporation formerly known as IKON Capital
Inc., a wholly-owned subsidiary of IKON Office Solutions, Inc. The originator's
principal executive offices are located at 1738 Bass Road, P.O. Box 9115, 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 Funding Inc., is a Delaware special purpose corporation. The
issuer will acquire the lease receivables from the seller pursuant to the lease
receivables transfer agreement. The seller's principal executive offices are
located at 501 Silverside Road, Suite 28, Wilmington, Delaware 19809.
For more information about the role of the seller, you should read the section
titled "The Seller," herein.
Servicer
IOS Capital, Inc. will be the servicer of lease receivables under the servicing
agreement. The servicer's principal executive offices are located at 1738 Bass
Road, P.O. Box 9115, 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 _____, 1999 (the "cut-off date").
Closing Date
The closing date is _______, 1999 (the "closing date").
DESCRIPTION OF THE NOTES
o The issuer will issue [___] classes of lease-backed notes (the "notes").
The notes are designated as the class A notes and class B notes. The class
A notes and class B notes are collectively referred to as the notes.
o 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],
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S-5
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[installment sale contracts], rental stream obligations, and the seller's
interests (other than its ownership interest in the underlying equipment)
and related assets.
o 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
Class Principal Balance Note Rate
----- ----------------- ---------
[A] $[ ] [ ]%
[B] $[ ] [ ]%
Expected Final Legal Final
Payment Date Maturity Date CUSIP Number
------------ ------------- ------------
----- ---, --- -------- --- [ ]
----- ---, --- -------- --- [ ]
The aggregate initial note principal balance of the notes is equal to $[ ] (the
"initial note principal balance"). The sum of the initial note principal balance
for the class [A] notes and the class [B] notes is equal to $[ ].
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 _______, __, 1999.
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
o As described in the related transaction document, the source of payment
for notes of each series will be the assets pledged to the related asset
pool only.
o 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 payments on the leases, proceeds from casualties,
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 [ ].
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S-6
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o 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 [ ].
o restricting event means the occurrence of any of:
(i) an event of default by the servicer under the 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:
o a default for [five] days or more in the payment of any interest on any
note;
o 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;
o 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 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
o 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.
o 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."
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S-7
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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:
o 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");
o 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.
o All amounts held in accounts established by the servicer pursuant to the
transaction documents.
o All the rights to proceeds and recoveries on insurance policies covering
the equipment and on the disposition of repossessed equipment.
o Credit enhancement with respect to an asset pool or any class of notes.
o The interest of the issuer in any proceeds from recourse to lessees on
lease payments.
o Other rights of the issuer under the lease receivables transfer agreement.
o All proceeds of the foregoing.
The Leases
o The leases are obligations for the lease or purchase of the equipment, or
evidence borrowings used to acquire or refinance the 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").
o The originator will transfer the lease receivables comprising each asset
pool to the seller pursuant to a Contribution and Sale Agreement (as
defined herein) and the seller will transfer such lease receivables to the
issuer pursuant to a Lease Receivables Transfer 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).
o 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.
o 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 class A notes and the class B notes, each
weighted by (i) the initial principal amount of the class A notes and the
initial principal amount of the class B notes and (ii) the expected
weighted average life (under a zero prepayment, and no loss scenario) of
each class of notes, 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:
o the originator; or
o acquired by the originator from other originators of leases.
For all of the leases:
o the leases are valid and enforceable, and unconditionally require the
lessee to make periodic lease payments (including taxes);
o the leases are noncancellable and do not contain early termination options
(unless the early termination or prepayment clauses
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require the lessee to pay all remaining scheduled payments under such
lease);
o all payments payable under the leases are absolute, unconditional
obligations of the lessees;
o 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;
o the leases do not materially violate any U.S. or state laws;
o the leases provide for periodic payments;
o 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;
o the leases have been sold to the issuer free and clear of any liens and
are assignable without prior written consent of the lessee;
o the leases are denominated in U.S. dollars and the lessor and each lessee
are located in the United States;
o the lease is not a consumer lease;
o the lease is not subject to any guaranty by the originator;
o the party transferring the lease to the issuer did not use adverse
selection when choosing the lease for transfer to the issuer;
o the lessee has represented to the originator that it has accepted the
equipment;
o the lessee is not a subject of an insolvency or bankruptcy proceeding at
the time of the transfer;
o the leases are not defaulted leases;
o each lease is not more than 60 days past due at the time of transfer to
the issuer;
o 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 [___________] 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
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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.
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
pursuant to the contribution and sale agreement and then by the seller to the
issuer pursuant to the lease receivables transfer 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:
o 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
o 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 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, special tax counsel to the issuer and counsel to the
underwriter, is of the opinion that the notes will be characterized as debt 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, 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.
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S-10
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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 It is a condition to the issuance of the
Ratings Assigned to Notes 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 If IOS Capital were to cease acting as
Delay Payments 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 IOS Capital, as originator or as servicer,
of IOS Capital to Reacquire as the case may be, will make
Leases and the Related Equipment 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 As of the statistic calculation date,
Leases obligors with respect to approximately [ [
]%, [ ]% and [ %] ] of the leases were
located in the States of [ ], 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
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-11
<PAGE>
THE ASSET POOLS
The Asset Pools 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 Lease Receivables Transfer 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
pursuant to the Contribution and Sale Agreement between the Seller and the
Originator (the "Contribution and Sale Agreement"). The Lease Receivables will
then be transferred from the Seller to the Issuer pursuant to a Lease
Receivables Transfer Agreement (the "Lease Receivables Transfer Agreement"). The
Lease Receivables included in the Asset Pool will be selected from those Lease
Receivables held by the Seller based on the criteria specified in the applicable
Transaction Document and described herein.
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 an Asset Pool by
(i) acquiring Lease Receivables pursuant to a Lease Receivables Transfer
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 organized solely
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 under the
Lease Receivables Transfer Agreement from engaging in other activities. In
addition, its organizational documents and the Lease Receivables Transfer
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 501 Silverside Road, Suite 28, Wilmington, Delaware
19809, and its telephone number is __________________.
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 a Lease Receivables Transfer Agreement", in addition to the
acquisition of Lease 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
S-12
<PAGE>
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-13
<PAGE>
DISTRIBUTION OF LEASES BY DISCOUNTED LEASE BALANCE
Percentage of
Discounted Number of Sum of Discounted Aggregate Discounted
Lease Balances Leases Lease Balances Lease Balance
-------------- ------ -------------- -------------
Greater Less Than or
Than 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............................... $ 100.00%
================================================================================
S-14
<PAGE>
DISTRIBUTION OF THE LEASES BY STATE
Percentage of
Number of Sum of Discounted Aggregate Discounted
State Leases Lease Balances 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
S-15
<PAGE>
DISTRIBUTION OF LEASES BY REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
Percentage of
Statistical Statistical
Percentage of Discounted Discounted Aggregate Percentage of
Number of Number of Present Value Present Value of Original Original
Remaining Term Leases Leases of Leases of Leases Equipment Cost Equipment Cost
- -------------- ------ ------ --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1 - 12
13 - 24
25 - 36
37 - 48
49 - 60
61 - 72
73 - 84
- ---------------------------------------------------------------------------------------------------------------------
Total.......... 100% 100.00% 100.00%
=====================================================================================================================
</TABLE>
DISTRIBUTION OF LEASES BY ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
Percentage of
Statistical Statistical
Percentage of Discounted Discounted Aggregate Percentage of
Number of Number of Present Value Present Value of Original Original
Original Term Leases Leases of Leases of Leases Equipment Cost Equipment Cost
- -------------- ------ ------ --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1 - 12
13 - 24
25 - 36
37 - 48
49 - 60
61 - 72
73 - 84
85 - 96
- ---------------------------------------------------------------------------------------------------------------------
Total.......... 100% 100.00% 100.00%
=====================================================================================================================
</TABLE>
DISTRIBUTION OF LEASES BY CLASSIFICATION TYPE
<TABLE>
<CAPTION>
Percentage of
Statistical Statistical
Percentage of Discounted Discounted Aggregate Percentage of
Number of Number of Present Value Present Value of Original Original
Least Type Leases Leases of Leases of Leases Equipment Cost Equipment Cost
---------- ------ ------ --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Finance Lease
Operating Lease
- ---------------------------------------------------------------------------------------------------------------------
Total.......... 100% 100.00% 100.00%
=====================================================================================================================
</TABLE>
DISTRIBUTION OF FINANCE LEASES BY PURCHASE OPTION
<TABLE>
<CAPTION>
Percentage of
Statistical Statistical
Percentage of Discounted Discounted Aggregate Percentage of
Number of Number of Present Value Present Value of Original Original
Purchase Option Leases Leases of Leases of Leases Equipment Cost Equipment Cost
- --------------- ------ ------ --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Nominal Buyout
Fair Market Value
Fixed Purchase Option
- ---------------------------------------------------------------------------------------------------------------------
Total.......... 100% 100.00% 100.00%
=====================================================================================================================
</TABLE>
S-16
<PAGE>
DISTRIBUTION OF LEASES BY EQUIPMENT TYPE
<TABLE>
<CAPTION>
Percentage of
Statistical Statistical
Percentage of Discounted Discounted Aggregate Percentage of
Number of Number of Present Value Present Value of Original Original
Equipment Type Leases Leases of Leases of Leases Equipment Cost Equipment Cost
- -------------- ------ ------ --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Total.......... 100% 100.00% 100.00%
=====================================================================================================================
</TABLE>
S-17
<PAGE>
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, Inc. ("IOS Capital" or the "Originator"), formerly known as
IKON Capital, Inc., was formed in 1987 to provide lease financing to customers
of IKON Office Solutions, Inc. ("IKON"). The Originator is a wholly-owned
subsidiary of IKON. The Originator's corporate headquarters are located at 1738
Bass Road, P.O. Box 9115, 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,
1998 and a Quarterly Report on Form 10-Q for the three-month period ending
December 31, 1998. 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, Inc., 1738 Bass Road, P.O. Box 9115, Macon, Georgia 31208, Attn:
________________ .
Loss and Delinquency Experience
Delinquencies remained at a consistent level for fiscal 1998 and 1997.
During this two-year period, accounts classified as current (less that 30 days
past due) ranged from 85% and 91% of the total portfolio balance on a monthly
basis. The aging of the Originator's lease portfolio receivables at September
30, 1998 (excluding $275 million of net lease receivables sold under an asset
securitization agreement being serviced by the Originator) 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:
[Tables to be provided]
THE SELLER
IKON Receivables Funding, Inc. the Seller is a wholly-owned bankruptcy
remote subsidiary of IOS Capital, Inc. The Seller was organized for the limited
purpose of engaging in 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 Contribution and
Sale Agreement from engaging in other activities. In addition, its
organizational documents and the Contribution and Sale Agreement require that it
operate in a manner such that it should not be consolidated in the bankruptcy
estate of IOS Capital, Inc. or its affiliates in the event that one of them
becomes subject to bankruptcy or insolvency proceedings. The Seller's address is
501 Silverside Road, Suite 28, Wilmington, Delaware 19809.
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
S-18
<PAGE>
the Indenture Trustee ceases to be eligible to continue as such under the
Indenture and fails to resign after written request therefor.
Duties and Immunities of the Indenture Trustee
The Indenture Trustee will make no representations as to the validity or
sufficiency of the 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
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 Servicing Agreement.
No recourse is available based on any provision of the 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:_________].
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;
(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);
S-19
<PAGE>
(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 120 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) [ ].
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 Servicing Agreement;
(b) Events of Default (as defined herein); and
(c) replacement of the Servicer.
S-20
<PAGE>
"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 Contribution and Sale 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 for either Defaulted
Leases, Warranty Leases, or Adjusted Leases. The Originator may substitute for
Defaulted Leases, Adjusted Leases, or Warranty Leases in an aggregate amount not
to exceed _____% of the Discounted Present Value of the Leases as of the Cut-Off
Date with respect to Defaulted Leases and in an aggregate amount not to exceed
____% of the Discounted Present Value of the Leases as of the Cut-Off Date with
respect to Adjusted Leases and Warranty Leases. In addition, in the event of an
Early Termination Lease which has been prepaid in full, 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 Lease Balance of not less than the Discounted Lease Balance of the
Leases being replaced and the monthly payments on the Substitute Lease will be
at least equal to those of the replaced Lease through the term of such replaced
Lease. In the event that a Substitute Lease is not provided for a Defaulted
Lease, the aggregate Discounted Lease Balance of the Leases will be reduced in
an amount at least equal to the Discounted Lease Balance of the Defaulted 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 [ ]%.
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<PAGE>
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 an 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 a Contribution and Sale
Agreement
On the Closing Date, the Seller will acquire the related Lease Receivables
from the Originator pursuant to the Contribution and Sale Agreement in which the
Originator will make certain representations and warranties concerning the Lease
Receivables. The rights and benefits of the Seller under the Contribution and
Sale Agreement will be assigned to the Issuer as collateral for the Notes by the
Seller pursuant to the Lease Receivables Transfer Agreement. The obligations of
the Seller and the Servicer under such Transaction Documents include those
specified below.
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Acquisition of the Lease Receivables Pursuant to a Lease Receivables Transfer
Agreement
On the Closing Date, the Issuer will acquire the related Lease Receivables
from the Seller pursuant to the Lease Receivables Transfer Agreement. The Issuer
will pledge the Issuer's right, title and interests in and to such Lease
Receivables to the Indenture Trustee on behalf of Noteholders pursuant to the
Indenture. Certain of the rights and benefits of the Issuer under the Lease
Receivables Transfer Agreement will be assigned to the Indenture Trustee on
behalf of Noteholders as collateral for the Notes by the Issuer pursuant to the
Indenture.
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, which 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 Contribution and Sale Agreement, the Lease Receivables Transfer Agreement
and the 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 Servicing Agreement, the Indenture, the
Contribution and Sale Agreement, and the Lease Receivables Transfer 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.
[Security Interest]
The Noteholders will be secured by [the security will be described when
the structuring of the transaction is available].
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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.
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.
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) [ ];
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(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 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.]
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, Inc. in its servicing role (the "Servicer") will service the
Lease Receivables comprising an Asset Pool pursuant to a 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.
Servicing Agreement
The Servicer and the Issuer will enter into a Servicing Agreement on or
prior to the Closing Date that 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,
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<PAGE>
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.
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 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.
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
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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 January 31 of each calendar year following any year during
which the Notes are outstanding, commencing January 31, [ ], 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 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 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.
The 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 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 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 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]
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[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 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
General
The following paragraphs together with the description of federal income
tax consequences detailed in the Prospectus under the heading "Material Federal
Income Tax Consequences" sets forth a general discussion of the material
anticipated federal income tax considerations to investors of the purchase,
ownership and disposition of the notes offered hereby. The discussion is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change. The discussion below and the Prospectus does not purport to
deal with all federal tax considerations 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 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.
[Additional disclosure will be provided based on the structuring of the
transaction.]
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.
ERISA also imposes certain duties on persons who are fiduciaries of plans
subject to ERISA and prohibits certain transactions between a plan and parties
in interest with respect to such plans. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the assets
of a plan is considered to be a fiduciary of such plan (subject to certain
exceptions not here relevant). A violation of these "prohibited transaction"
rules may generate excise tax and other liabilities under ERISA and the Code for
such persons.
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,
114 S.Ct. 517 (1993). In John Hancock, the Supreme Court ruled that assets held
in an insurance company's general account
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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 acquires an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation is
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 such 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 such case,
certain exemptions from the prohibited transaction rules could be applicable
depending on the type and circumstances of the plan fiduciary making the
decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 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 plans that are government plans (as defined in Section 3(32) of
ERISA) and certain church plans (as defined in Section 3(53) 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 account the overall investment policy of the Benefit Plan and
the composition of the Benefit Plan's investment portfolio.
RATINGS
It is a condition to the issuance of the Notes that the [Class A] Notes be
rated [ ] by _______ and [ ] by _________, and the [Class B] 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 Lehman Brothers (the "Underwriter") has agreed to
purchase, the Notes. The Issuer is affiliated with IOS Capital.
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<PAGE>
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 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 relating to the Notes will be passed upon for the
Issuer by Ballard Spahr Andrews & Ingersoll, LLP and for the Underwriter by
Dewey Ballantine LLP, New York, New York.
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<PAGE>
INDEX OF PRINCIPAL DEFINED TERMS
Page
----
Additional Lease..............................................................21
Adjusted Lease................................................................23
Asset Pool.....................................................................8
Available Funds............................................................6, 19
Benefit Plan..................................................................29
Calculation Date...........................................................6, 19
Casualty Loss.................................................................20
Casualty Payment..............................................................20
Class A Notes..................................................................5
Class B Notes..................................................................5
Closing Date...................................................................5
Collection Account............................................................24
Commission.....................................................................2
Conditional Prepayment Rate...................................................21
Contribution and Sale Agreement...............................................12
CPR...........................................................................21
Cut-Off Date...................................................................5
Defaulted Leases..............................................................20
Discounted Lease Balance.......................................................8
Discounted Present Value of the Leases.........................................8
Early Termination Lease.......................................................20
Equipment......................................................................8
Events of Default..............................................................7
Excluded Amounts..............................................................24
IKON..........................................................................18
Indenture Trustee Expenses....................................................19
Indenture Trustee Fee.........................................................19
Initial Note Principal Balance.................................................6
IOS Capital...................................................................18
IRA...........................................................................29
Lease Payment.................................................................20
Lease Receivables..............................................................8
Lease Receivables Transfer Agreement..........................................12
Leases.........................................................................8
Lessee.........................................................................8
Lessor.........................................................................8
Note Factor...................................................................27
Noteholders...................................................................12
Notes..........................................................................5
Originator....................................................................18
Outstanding Principal Amount...............................................7, 21
Percentage Interests..........................................................18
Plan Assets Regulation........................................................29
Pool Factor...................................................................27
Portfolio Concentration Criteria..............................................13
PTCE..........................................................................29
Restricting Events............................................................20
Securities Act................................................................30
Servicer......................................................................25
Servicer Advance..............................................................26
Servicer Default..............................................................25
Servicer Fee..................................................................26
Servicer Reports..............................................................26
Servicing Officer.............................................................27
Substitute Lease..............................................................23
Supplementary Report..........................................................27
Termination Payment...........................................................20
Transaction Document..........................................................22
Underwriters..................................................................29
Underwriting Agreement........................................................29
Warranty Event................................................................19
Warranty Lease................................................................23
Weighted Average Life.........................................................21
S-31
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PROSPECTUS
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IKON Receivables, LLC Lease-Backed Notes
Issuer Issuable in Series
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IKON Receivables, LLC may sell, from time to time, a series of its lease-backed
notes, backed solely by a pool of office equipment leases or contracts and
related assets.
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[IKON LOGO]
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You should read the section entitled "Risk Factors" starting on page 6 of this
prospectus and consider these factors before making a decision to invest in the
notes.
The notes represent non-recourse obligations of the Issuer only and are not
interests in or obligations of any other person.
Except as otherwise described in the related prospectus supplement, the notes
will not be insured or guaranteed by any governmental agency or instrumentality.
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.
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The Notes --
The notes will be issued in series consisting of one or more classes on
terms to be determined at the time of sale. Any series of notes may
include one or more classes or subclasses of notes that are subordinate in
right of distribution to the rights of distribution of one or more other
classes or subclasses of such series. The relative interests of the senior
notes and the subordinated notes may be subject to adjustment from time to
time on the basis of the distributions received.
The Assets --
The assets of the issuer backing each series of notes may consist of any
combination of leases, leases intended as security agreements, installment
sale contracts or rental stream obligations, together with all monies
received relating thereto, funds on deposit in one or more accounts and
such forms of credit support as are described herein and in the related
prospectus supplement. The indenture trustee, on behalf of the
noteholders, will not have any interest in or recourse to any equipment or
property relating to any leases or other contracts, except under certain
circumstances.
Underwriting --
The notes offered by this prospectus and the related prospectus supplement
will be offered by one or more underwriters specified in this prospectus
and the related prospectus supplement. It is expected that delivery of the
notes will be made in book-entry form through the facilities of Depository
Trust Company. In connection with this offering, the underwriters may
overallot or effect transactions which stabilize or maintain the market
prices of the notes at levels above those which might otherwise prevail in
the open market. Such stabilizing, if commenced, may be discontinued at
any time.
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 __________ 1999.
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IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the notes in two separate documents
that progressively provide more detail: (1) this prospectus, which provides
general information, some of which may not apply to a particular series of
notes, and (2) the prospectus supplement, which describes the specific terms of
your series of notes.
This prospectus does not contain complete information about the offering
of your securities. Additional information is contained in the prospectus
supplement. You are urged to read both this prospectus and the prospectus
supplement in full. We can not sell the securities to you unless you have
received both this prospectus and the 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 relating to a series of securities to be offered
hereunder will state:
o the aggregate principal amount, interest rate, and authorized
denominations of each class of such notes;
o certain information concerning the lease receivables, and the
transaction parties;
o the terms of any credit enhancement with respect to such series;
o the terms of any insurance related to the lease receivables;
o information concerning any other assets backing the notes, including
any reserve fund;
o the final scheduled payment date of each class of such notes;
o the method to be used to calculate the amount of principal required
to be applied to the notes of each class of such series on each
payment date, the timing of the application of principal and the
order of priority of the application of such principal to the
respective classes and the allocation of principal to be so applied;
o the payment dates;
o additional information with respect to the plan of distribution of
such notes; and
o the federal income tax characterization of the notes.
REPORTS
The issuer will be required to file certain reports with the Securities
and Exchange Commission pursuant to the requirements of the Securities Exchange
Act of 1934, as amended. The issuer intends to suspend filing such reports if
and when such reports are no longer required under the Securities Exchange Act.
i
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WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. 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
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. SEC filings are also available to the public on the
SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that all documents and reports filed by the issuer with
respect to an asset pool pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, after the date of this prospectus
and prior to the termination of any offering of securities evidencing interests
therein shall be deemed to be a part of this prospectus.
This prospectus is part of a registration statement filed by the issuer
with the SEC (Registration No. 333-_______). You may request a free copy of this
filing by writing or calling:
IOS Capital, Inc.
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.
ii
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TABLE OF CONTENTS
Page
IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT..........................i
REPORTS........................................................................i
WHERE YOU CAN FIND MORE INFORMATION...........................................ii
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................6
THE ASSET POOLS................................................................9
THE ISSUER....................................................................10
THE LEASES....................................................................10
POOL FACTORS..................................................................13
USE OF PROCEEDS...............................................................13
THE ORIGINATOR'S LEASING BUSINESS.............................................13
THE INDENTURE TRUSTEE.........................................................18
DESCRIPTION OF THE NOTES......................................................18
DESCRIPTION OF THE TRANSACTION DOCUMENTS......................................24
CERTAIN LEGAL ASPECTS OF THE LEASES...........................................30
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................................32
RATINGS.......................................................................37
ERISA CONSIDERATIONS..........................................................37
PLAN OF DISTRIBUTION..........................................................37
LEGAL OPINIONS................................................................38
EXPERTS.......................................................................38
ADDITIONAL INFORMATION........................................................38
INDEX OF TERMS................................................................40
iii
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PROSPECTUS SUMMARY
o 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.
o 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.
PARTIES
Issuer
IKON Receivables, LLC, a Delaware limited liability company. The issuer's
principal executive offices are located at 501 Silverside Road, Suite 28,
Wilmington, DE 19809.
For more information about the issuer you should read the section titled "The
Issuer," herein.
Originator
IOS Capital, Inc., a Delaware corporation formerly known as IKON Capital Inc., a
wholly-owned subsidiary of IKON Office Solutions, Inc ("IKON"). The originator's
principal executive offices are located at 1738 Bass Road, P.O. Box 9115, 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," herein.
Seller
IKON Receivables Funding, Inc., a Delaware special purpose corporation. The
seller's principal executive offices are located at 501 Silverside Road, Suite
28, Wilmington, DE 19809.
Servicer
The servicer for each series will be identified in the related prospectus
supplement. The servicer, which may be the originator, will service the lease
receivables backing each series of notes pursuant to the related Servicing
Agreement. The servicer may subcontract all or any portion of its obligations as
servicer under each Servicing Agreement to a qualified subservicer but the
servicer will not be relieved thereby of its liability with respect thereto.
For more information about the role of the Servicer you should read the section
titled "Description of the Transaction Documents--The Servicer," herein and the
related prospectus supplement.
Indenture Trustee
With respect to any series of notes, the indenture trustee specified in the
related prospectus supplement.
For more information about the indenture trustee you should read the section
titled "The Indenture Trustee" herein and in the related prospectus supplement.
The Notes
Each class of notes of any series will represent non-recourse debt obligations
of the issuer which, unless otherwise specified in the related prospectus
supplement, are secured solely by a related segregated pool of assets (each an
"asset pool"), as described herein and in the related prospectus supplement.
o With respect to each series of notes, the issuer will enter into an
indenture (each, an "indenture") by and between the issuer and the trustee
named in such indenture. Each indenture will describe the respective
rights of the noteholders of each of the related classes of notes to the
funds derived from the related asset pool and will detail the security for
the debt issued thereunder by the related issuer.
o For purposes of this prospectus, the term "transaction document" as used
with respect to any individual asset pool means, collectively, and except
as otherwise described in the related
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prospectus supplement, any and all agreements relating to the
establishment of an asset pool, if any, the servicing of the related lease
receivables and the issuance of the related notes.
o The notes will not be obligations, either recourse or non-recourse (except
for certain non-recourse debt described under "Certain Tax
Considerations"), of the servicer, the seller or any person other than the
issuer.
o Additionally, all of the notes offered pursuant to this prospectus and the
related prospectus supplement will be of the fixed-income type ("fixed
income securities"). Fixed income securities will generally be styled as
debt instruments, having a principal balance and a specified interest
rate. Fixed income securities will represent debt secured by certain
assets of the issuer.
Each series or class of fixed income securities offered pursuant to this
prospectus may have a different interest rate, which may be a fixed or
adjustable interest rate. The related prospectus supplement will specify
the interest rate for each series or class of fixed income securities
described therein, 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 fixed income securities
("stripped notes") entitled (i) to principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) to
interest distributions, with disproportionate, nominal or no principal
distributions. In addition, a series of notes may include two or more
classes of fixed income securities that differ as to timing, sequential
order, priority of payment, interest rate or amount of distribution of
principal or interest or both, or as to which 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.
Any such series may include one or more classes of fixed income securities
("accrual notes"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance (or nominal
balance, in the case of accrual notes which are also stripped notes)
thereof on each payment date, as hereinafter defined, or in the manner
described in the related prospectus supplement.
If so provided in the related prospectus supplement, a series may include
one or more other classes of fixed income securities (collectively, the
"senior notes") that are senior to one or more other classes of fixed
income securities (collectively, the "subordinate notes") in respect of
certain distributions of principal and interest and allocations of losses
on lease receivables.
For more information about the notes you should read the section titled
"Description of the Notes" herein and in the related prospectus
supplement.
Remittance Period
Each Transaction Document will describe a period preceding each payment date
(for example, in the case of monthly-pay notes, the calendar month preceding the
month in which a payment date occurs). As more fully described in the related
prospectus supplement, collections received on or with respect to the related
lease receivables constituting an asset pool during a remittance period will be
required to be remitted by the servicer to the indenture trustee prior to the
related payment date and may be used to fund payments to noteholders on such
payment date or to acquire additional lease receivables.
Payment Date
As provided in the related transaction document and as described in the related
prospectus supplement, the noteholders will be entitled to receive payments on
the notes on specified dates (each, a "payment date"). Payment dates with
respect to fixed income securities will occur monthly, quarterly or
semi-annually, as described in the related prospectus supplement.
Record Date
The related prospectus supplement will describe a date preceding such payment
date, as of which the issuer or its paying agent will fix the identity of the
holders of the notes for the purpose of receiving payments on the next
succeeding payment date.
Cross-Collateralization
Except as described below, the source of payment for notes of each series will
be the related asset pool only. To the extent described in the related
prospectus supplement, a series or class of notes may include the right to
receive moneys from a common
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pool of credit enhancement which may be available for more than one series of
notes.
Asset Pool
As specified in the related prospectus supplement, each asset pool may consist
of:
o Any combination of leases, leases intended as security agreements,
installment sale contracts or rental stream obligations, together with all
monies due relating thereto (the "leases").
o The seller's interests (other than its ownership interests) in the
underlying equipment and related property, together with the proceeds
thereof (the "equipment" and together with the leases, the "lease
receivables").
o Amounts held in accounts established by the servicer pursuant to the
transaction documents.
o Proceeds and recoveries on insurance policies and the disposition of
repossessed equipment.
o Credit enhancement with respect to an asset pool or any class of notes.
For more information about credit enhancement you should read the section titled
"Description of the Transaction Documents--Credit and Cash Flow Enhancement"
herein and in the related prospectus supplement.
o In addition, if so specified in the related prospectus supplement, the
asset pool may include monies on deposit in a pre-funding account to be
established with the indenture trustee, which will be used to acquire
additional lease receivables from time to time during the "pre-funding
period" specified in the related prospectus supplement.
o If so specified in the related prospectus supplement, the asset pool may
be subject to a revolving period during which additional lease receivables
may be placed in the asset pool with the proceeds of payments on existing
lease receivables. In this event principal payments to the noteholders may
be reduced or eliminated until the end of such revolving period.
For more information about the asset pool you should read the section titled
"The Asset Pool" herein and in the related prospectus supplement.
The Leases
o The leases are obligations for the lease or purchase of the equipment, or
evidence borrowings used to acquire or refinance the 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").
o The originator will transfer the lease receivables comprising each asset
pool to the seller pursuant to a Contribution and Sale Agreement (as
defined herein) and the seller will transfer such lease receivables to the
issuer pursuant to a Lease Receivables Transfer 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) specified in the related prospectus supplement.
o 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 in the
related prospectus supplement.
For more information about the leases you should read the section titled "The
Leases" herein and in the related prospectus supplement.
Registration of Notes
Notes may be represented by global notes registered in the name of Cede & Co.
("Cede"), as nominee of The Depository Trust Company ("DTC"), or another
nominee. In such case, noteholders will not be entitled to receive definitive
notes representing such noteholders' interests, except in certain limited
circumstances described in the related prospectus supplement.
For more information about the form of the Notes you should read the section
titled "Description of the
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3
<PAGE>
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Notes--Book Entry Registration" herein and in the related prospectus
supplement."
Credit and Cash Flow Enhancement
If and to the extent specified in the related prospectus supplement, credit
enhancement with respect to an asset pool or any class of notes may include any
one or more of the following:
o a policy issued by an insurer specified in the related prospectus
supplement (a "note insurer"),
o overcollateralization,
o subordination of certain classes of notes,
o a reserve account,
o letters of credit,
o credit or liquidity facilities,
o third party payments or other support,
o cash deposits or other similar arrangements.
Any form of credit enhancement will have certain limitations and exclusions from
coverage thereunder, which will be described in the related prospectus
supplement.
For more information about credit and cash flow enhancement you should read the
section titled "Description of the Transaction Documents--Credit and Cash Flow
Enhancement" herein and in the related prospectus supplement.
Servicer's Compensation
The servicer shall be entitled to receive a fee for servicing the leases of each
asset pool equal to a specified percentage of the value of the assets comprising
such asset pool, as set forth in the related prospectus supplement.
For more information on how the servicer will be paid, you should read the
section titled "Description of the Transaction Documents--Servicing
Compensation" herein and in the related prospectus supplement.
Certain Legal Aspects of the Leases
With respect to the transfer of the leases to the seller by the originator
pursuant to the Contribution and Sale Agreement, by the seller to the issuer
pursuant to the Lease Receivables Transfer Agreement and the pledge of the
issuer's right, title and interest in and to such leases on behalf of
noteholders pursuant to an indenture, the originator, the seller and the issuer,
respectively, will warrant, in each case, that such transfer is either a valid
transfer and assignment of the leases or the grant of a security interest in the
leases. Each prospectus supplement will specify what actions will be taken by
which parties as will be required to perfect either the issuer's or the
noteholders' security interest in the leases. The indenture trustee, on behalf
of the noteholders, will not have any interest in or recourse to any equipment
or property relating to the leases, except under certain circumstances.
Each prospectus supplement will specify if the originator, the seller or the
issuer has filed or will be required to file UCC financing statements
identifying the equipment as collateral pledged in favor of the issuer or
indenture trustee on behalf of the noteholders. In the absence of such filings
any security interest in the equipment will not be perfected in favor of the
issuer or indenture trustee. See "Risk Factors--No Ownership Interest in the
Equipment."
For more information about the transfer of leases, you should read the section
titled "Certain Legal Aspects of the Leases" herein and in the related
prospectus supplement.
Optional Termination
The servicer, the seller, the issuer, or, if specified in the related prospectus
supplement, certain other entities may, at their respective options, effect
early retirement of a series of notes under the circumstances and in the manner
set forth herein under "Description of the Transaction Documents-- Termination"
and in the related prospectus supplement.
For more information about the early retirement of the notes optional
termination of the notes you should read the section titled "Description of the
Transaction Documents--Termination" herein and in the related prospectus
supplement.
Mandatory Termination
The issuer, the servicer or certain other entities specified in the related
prospectus supplement may
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be required to effect early retirement of all or any portion of a series of
notes by soliciting competitive bids for the purchase of the related asset pool
or otherwise, under other circumstances and in the manner specified in
"Description of the Transaction Documents--Termination" herein and in the
related prospectus supplement.
For more information on the mandatory termination of the notes you should read
the section titled "Description of the Transaction Documents--Termination" and
"Description of the Notes--Mandatory Termination" herein and in the related
prospectus supplement.
Tax Considerations
Lease-backed notes of each series offered hereby will constitute indebtedness
for federal income tax purposes. Dewey Ballantine LLP, special tax counsel to
the Issuer, will render an opinion upon issuance of a series of notes as to the
tax characteristics of the notes. Investors are urged to consult their tax
advisors.
For more information on the tax consequences of owning such notes you should
read the section titled "Material Federal Income Tax Consequences" herein and in
the related prospectus supplement.
ERISA Considerations
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus and the related prospectus supplement, 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. You should consult with your counsel regarding the applicability of the
provisions of ERISA before purchasing a note.
For more information on the ERISA considerations of the purchase of such notes
you should read the section titled "ERISA Considerations" herein and in the
related prospectus supplement.
Ratings
Each class of notes offered pursuant to this prospectus and the related
prospectus supplement will be rated in one of the four highest rating categories
by one or more "national statistical rating organizations", as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and commonly
referred to as "rating agencies". Such 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 their terms.
For more information on the ratings on the notes please read the section titled
"Ratings" herein and in the related prospectus supplement.
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RISK FACTORS
Prospective noteholders should consider, among other things, the following
factors in connection with the purchase of the notes:
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Limited Liquidity There is currently no public market for the
notes. There are no assurances that one will
develop. The underwriters expect, but are
not obligated, to make a market in the
notes. There is no assurance that any such
market will be created or, if so created,
will continue. If no public market develops,
noteholders may not be able to liquidate
their investment in the notes prior to
maturity.
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No Ownership Interest The originator will transfer all of its
in the Equipment right, title and interest in the equipment
related to the leases to the seller. The
seller will assign its interest as secured
party in the equipment relating to certain
of the leases to the issuer, which will in
turn pledge such interest to the indenture
trustee. The seller will not transfer any of
its ownership interests in any of the
equipment to the issuer. Because of this,
the indenture trustee, on behalf of the
noteholders, will have no interest in or
recourse to any of the equipment other than
by virtue of the assignment of the seller's
interest as secured party in such equipment
to the issuer and the issuer's pledge of
such interest to the indenture trustee. As a
result, the indenture 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. See "Certain
Legal Aspects of the Lease Receivables."
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Restrictions on Recoveries State laws impose requirements and
restrictions relating to foreclosure sales
and obtaining deficiency judgments following
the repossession of collateral securing
leases. In the event that the indenture
trustee must rely on the repossession and
disposition of equipment to recover
scheduled payments due on defaulted leases,
the indenture trustee and the noteholders
may not realize the full amount due (or may
not realize the full amount on a timely
basis). Also, the indenture trustee on
behalf of the noteholders will have no
interest in or recourse to, and no ability
to repossess or dispose of, equipment
relating to the leases. Other factors that
may affect the ability of the Issuer to
realize the full amount due on a lease
include:
o whether financing statements to
perfect the security interest in
the equipment had been filed,
o depreciation,
o obsolescence,
o damage or loss of any item of
equipment,
o the application of federal and
state bankruptcy and insolvency
laws.
As a result, the noteholders may be subject
to delays in receiving payments and suffer
loss of their investment in the notes.
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Insolvency and Bankruptcy The issuer will take steps in structuring
Matters the transactions contemplated hereby that
are intended to ensure that the voluntary or
involuntary application for relief by the
originator or the seller (the originator and
the seller, collectively for these purposes,
"debtors") under the United States
Bankruptcy Code or similar applicable state
laws ("insolvency laws") will not result in
the assets of the issuer becoming property
of the estate of a debtor within the meaning
of such insolvency laws. However, there can
be no assurance that the activities of the
issuer would not result in a court's
concluding that the assets and liabilities
of the issuer should be consolidated with
those of the originator or the seller in a
proceeding under any insolvency law.
The issuer believes that the transfer of the
lease receivables by the originator to the
seller and from the seller to the issuer
should be treated as a valid transfer of
such lease receivables. However, in the
event of an insolvency of the originator, a
competing creditor or a trustee in
bankruptcy could attempt to have a court
recharacterize the transfer of the lease
receivables by the originator or the seller
as a borrowing by the originator or the
seller, secured by a pledge of the lease
receivables. Such an attempt, even if
unsuccessful, could result in delays in
payments on the notes. If such an attempt
were successful, a court, among other
remedies, could elect to accelerate payment
of the notes and liquidate the lease
receivables, with the noteholders entitled
only to the current value of the leases and
any available credit enhancement. Thus,
noteholders could lose the right to future
payments and may incur reinvestment losses
on the amounts recovered.
If either the transfer to the seller or the
transfer to the issuer were recharacterized
as a borrowing or the assets of the issuer
were consolidated with those of either the
originator or the seller, the assets of the
issuer could be made available to satisfy
claims of creditors of the originator or the
seller with the result that the noteholders
could experience losses.
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Subsequent Transfer of Leases In connection with the issuance of any
series of notes, the seller will transfer
leases to the issuer.
If the issuer, the servicer, or the seller,
while in possession of the leases, sells or
pledges and delivers such leases to another
party, there is a risk that such other party
could acquire an interest in such leases
having a priority over the issuer's
interest. Furthermore, if the issuer, the
servicer, the originator or the seller,
while in possession of the leases, is
rendered insolvent, such event of insolvency
may result in competing claims to ownership
or security interests in the leases which
could result in delays in payments on the
notes, losses to the noteholders or an
acceleration of the repayment of the notes.
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Losses and Delinquencies There can be no assurance that the
historical levels of delinquencies and
losses experienced by the originator on its
equipment lease portfolio will be indicative
of the performance of the leases included in
any asset pool or that such levels will
continue in the future. Delinquencies and
losses could increase or decline
significantly for various reasons, including
changes in the federal income tax laws,
changes in the local, regional or national
economies or due to other events.
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Subordination; Limited Assets Payments of interest and principal on
certain classes of notes will be
subordinated in priority of payment to
interest and principal due on other classes
of notes. Moreover, the asset pool will not
include any significant assets or sources of
funds other than the related lease
receivables. Consequently, holders of the
notes must rely for repayment primarily upon
payments on the lease receivables.
Maturity and Prepayment The rate of payment of principal on the
Considerations notes cannot be predicted because the rate
of payment of principal on the notes will
depend, among other things, on the rate of
payment on the related leases. Payments on
the leases will include scheduled payments
as well as:
o partial and full prepayments,
o payments upon the liquidation of
defaulted leases,
o payments upon repurchases by the
originator on account of a breach
of certain representations and
warranties, and
o payments upon an acceleration by
the seller or the servicer.
The rate of early terminations of leases due
to prepayments and defaults may be
influenced by a variety of economic and
other factors, including, among others,
obsolescence, prevailing interest rates,
then current economic conditions and tax
considerations. The risk of reinvesting
distributions of the principal of the notes
will be borne by the noteholders.
The yield to maturity on stripped notes, or
notes purchased at premiums or discounts
will be extremely sensitive to the rate of
prepayments on the related lease
receivables. In addition, the yield to
maturity on certain other types of classes
of notes may be relatively more sensitive to
the rate of prepayment of the related leases
than other classes of notes.
- --------------------------------------------------------------------------------
Certain UCC Considerations Certain states have adopted a version of
Article 2A of the Uniform Commercial Code.
Article 2A may, among other things, limit
enforceability of any "unconscionable" lease
or "unconscionable" provision in a lease,
provide a lessee with remedies, including
the right to cancel the lease or modify its
terms, for certain lessor breaches or
defaults.
- --------------------------------------------------------------------------------
Risk of Downgrade of It is a condition to the issuance of the
Initial Ratings notes that, at the time of issuance, the
Assigned to Notes notes be rated in one of the four highest
long-term rating categories by at least two
rating agencies. 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 the rating agency if
in its judgement circumstances in the future
so warrant.
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Credit Enhancer Rating The rating of notes credit enhanced by a
letter of credit, financial guaranty
insurance policy, reserve fund, credit or
liquidity facilities, cash deposits or other
forms of credit enhancement (collectively,
"credit enhancement") will depend primarily
on the creditworthiness of the issuer of
such credit enhancement (a "credit
enhancer"). Any reduction in the rating
assigned to the claims paying ability of the
related credit enhancer below the rating
initially given to the notes would likely
result in a reduction in the rating of the
notes.
- --------------------------------------------------------------------------------
Inability of the Seller to The originator will make representations and
Reacquire Lease Receivables warranties with respect to certain matters
relating to the lease receivables the breach
of which will require the originator to
reacquire from the issuer the lease
receivables. In the event that the
originator is incapable of complying with
its reacquisition obligations 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.
- --------------------------------------------------------------------------------
Impact of Year 2000 Costs The originator is faced with the task of
completing its goals for compliance in
connection with the year 2000 issue. The
year 2000 issue is the result of prior
computer programs being written using two
digits to define the applicable year. Any
computer programs that have time-sensitive
software may recognize a date using "00" as
the year 1900 rather than the year 2000. Any
such occurrence could result in major
computer system failure or miscalculations.
Although the originator reasonably believes
that its servicing system will be year 2000
compliant prior to the year 2000, it is
presently engaged in various procedures to
determine if its computer systems and
software, and those of its material
suppliers, customers, brokers and agents
will be year 2000 compliant.
In the event that the originator, any
affiliate or any of their suppliers,
customers, brokers or agents do not
successfully and timely achieve year 2000
compliance, the originator's performance of
its obligations under the transaction
documents, including servicing of the leases
could be adversely affected. This could
result in delays in processing payments on
the leases and could cause a delay in
distributions to the holders of the notes.
See "IOS Capital's Leasing Business--Year
2000 Issues" herein.
- --------------------------------------------------------------------------------
THE ASSET POOLS
The property comprising each Asset Pool may include (i) a pool of leases
(each, a "Lease"), (ii) all moneys (including accrued interest) due thereunder
on or after a date specified by the Originator (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 Lease Receivables Transfer Agreement and (vi) interest earned on
certain short-term investments held by the Issuer.
The Lease Receivables comprising the Asset Pool will be either (i)
originated by the Originator or (ii) acquired by the Originator from sellers or
other originators of Lease Receivables.
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
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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
pursuant to the Contribution and Sale Agreement between the Seller and the
Originator (the "Contribution and Sale Agreement"). The Lease Receivables will
then be transferred from the Seller to the Issuer pursuant to a Lease
Receivables Transfer Agreement (the "Lease Receivables Transfer Agreement"). The
Lease Receivables included in the Asset Pool will be selected from those lease
receivables held by the Seller based on the criteria specified in the applicable
Transaction Document and described herein.
On or prior to the Closing Date on which the Notes are delivered to
Noteholders, the Issuer will form an Asset Pool by (i) acquiring Lease
Receivables pursuant to a Lease Receivables Transfer 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 Lease
Receivables.
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".
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 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 under the
Contribution and Sale Agreement from engaging in other activities. In addition,
its organizational documents and the Lease Receivables Transfer Agreement
required 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 501 Silverside Road, Suite 28, Wilmington, Delaware 19809.
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
Lease Receivables Pursuant to a Lease Receivables Transfer Agreement", the
Issuer may acquire Lease Receivables through or from an affiliate of the
Originator. The balance sheet of the Issuer is attached as Exhibit 1 hereto.
The Issuer will pledge its interest in the Asset Pools to the Indenture
Trustee and issue the Notes pursuant to 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
Lease Receivables Pool
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 current principal balance as of the
applicable Cut-0ff Date.
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<PAGE>
Characteristics
The Leases consist of direct financing leases, which may be either tax
leases or conditional sales contacts. In a "Finance Lease," the Lessor transfers
substantially all benefits and risks of ownership to the Lessee. In accordance
with Statement of Financial Accounting Standards No. 13 ("FASB 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. All leases which do not meet
the criteria of Finance Leases are classified, in accordance with FASB 13, as
"Operating Leases." Installment sale contracts and loan contracts (the "Purchase
Leases") secured by the related Equipment provide for scheduled payments which
fully amortize the amount financed by an obligor. The related Prospectus
Supplement will further describe the type and characteristics of the Leases
included in each Asset Pool relating to the Notes offered pursuant to this
Prospectus and the related Prospectus Supplement. See "Originator's Leasing
Business -- Types of Leases."
Lease Payments and Valuation
In connection with all calculations required to be made pursuant to the
Transaction Documents with respect to the determination of the aggregate
Discounted Lease Balance (the "Aggregate Discounted Lease Balance") for all
Leases, on any Calculation Date the Aggregate Discounted Lease Balance for each
Lease shall be calculated assuming:
(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 (each such period, a "Collection Period");
(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
Collection Period prior to the Calculation Date.
All of the Leases require the periodic, scheduled payment of rent or other
payments on a monthly, quarterly, semi-annual or annual basis, in arrears or in
advance. Such periodic payments are referred to herein as "Lease Payments."
Eligible Leases
The following eligibility requirements apply to all Leases purchased by
the Issuer on or prior to the Cut-off Date and all Substitute Leases
(collectively, "Eligible Leases"). All Eligible Leases have been originated in
the ordinary course of the Originator's business and comply with the
Originator's credit and collections policies.
Leases shall comply with the following:
i) The Leases are valid and enforceable, and contain "Hell or High
Water" clauses that unconditionally obligate the Lessee to make periodic
Lease payments (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, which require the Lessee to pay the
remainder of all remaining Scheduled Payments under such Lease upon such
cancellation or prepayment);
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<PAGE>
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) The Leases provide for periodic payments;
vii) In the event of a Casualty Loss, 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;
viii) The Leases have been sold to the Issuer free and clear of any
liens and are assignable without prior written consent of the Lessee;
ix) The Leases are U.S. dollar-denominated and the Lessor and each
Lessee are located in the United States;
x) The Lease is not a consumer lease;
xi) No more than three percent (3%) of the Leases in any Asset Pool
will consist of Leases with government entities as the obligor;
xii) The Lease is not subject to any guaranty by the Originator;
xiii) No adverse selection was used in selecting the Lease for
transfer to the Issuer;
xiv) The Lessee has represented to the Originator that it has
accepted the Equipment;
xv) The Lessee is not a subject of an insolvency or bankruptcy
proceeding at the time of the transfer;
xvi) The Leases are not Defaulted Leases;
xvii) The maximum remaining term of any Lease shall not exceed [ ]
months ("Maximum Lease Term"); and
xviii) Each Lease is not more than 60 days past due at time of
transfer to the Issuer (an "Acceptable Payment Status").
Delinquencies, Repossession and Gross Losses
Certain information relating to the Originator's delinquency, repossession
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 such
Originator's portfolio during certain specified periods, including Leases which
may not meet the criteria for selection as a Lease Receivable for the particular
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.
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<PAGE>
Maturity and Prepayment Considerations
If a Lease permits a prepayment, such payment, together with accelerated
payments resulting from defaults, will shorten the weighted average life of the
pool of Lease Receivables and the weighted average life of the Notes. The rate
of Prepayments on the Lease Receivables may be influenced by a variety of
economic, financial and other factors. In addition, under certain circumstances,
the Originator will be obligated to reacquire Lease Receivables from the Issuer
pursuant to the applicable Transaction Documents as a result of breaches of
representations and warranties. Any reinvestment risks resulting from a faster
or slower amortization of the Notes which results from Prepayments will be borne
entirely by the Noteholders.
Acquisition of Lease Receivables from the Seller
The Lease Receivables underlying the Notes will be acquired (i) by the
Seller from the Originator pursuant to a Contribution and Sale Agreement and
(ii) by the Issuer from the Seller pursuant to a Lease Receivables Transfer
Agreement between the Issuer and the Seller.
The Issuer expects that each Lease Receivable so acquired will have been
originated or acquired by the Originator thereof in accordance with the
underwriting criteria specified herein and sold to the Seller. See "IOS
Capital's Leasing Business - Credit Policies and Loss Experience" herein. The
Originator pursuant to the Contribution and Sale Agreement 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 Lease Receivables Transfer Agreement; the
material terms of such representations and warranties will be set forth in the
related Prospectus Supplement. The Issuer will assign all its rights to the
Indenture Trustee for the benefit of the Noteholders, and the Originator shall
thereupon be liable to the Issuer and the Indenture Trustee for defective or
missing documents or an uncured breach of such Originator's representations or
warranties.
POOL FACTORS
The "Pool Factor" for each Class of Notes will be a seven-digit decimal,
which the Servicer will compute 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, 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. 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 (as
defined herein) of such Noteholder's Notes and (ii) the applicable Pool Factor.
The Noteholders of record will receive reports on or about each Payment
Date concerning the payments received on the Lease Receivables, the Pool Balance
(as hereinafter defined), each 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 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'S LEASING BUSINESS
IOS Capital, Inc. ("IOS Capital" or the "Originator"), formerly known as
IKON Capital, Inc., was formed in 1987 to provide lease financing to customers
of IKON Office Solutions, Inc. ("IKON"). The Originator is a wholly-owned
subsidiary of IKON. The Originator's corporate headquarters are located at 1738
Bass Road, Macon, Georgia 31210. 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 ended September 30, 1998 and a
Quarterly Report on Form 10-Q for the three-month period ended December
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31, 1998. 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, Inc., 1738 Bass Road,
Macon, Georgia 31210, Attn: Kim Taylor.
IKON is a public company headquartered in Malvern, Pennsylvania operating
the largest network of independent copier and office equipment marketplaces in
North America and the United Kingdom. IKON has over 800 locations in the United
States, Canada, the United Kingdom, Germany, France, Denmark and Mexico. IKON
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 also offers network
consulting and design, hardware and software product interfaces, computer
networking, technology training and software solutions for the networked office
environment. IKON's fiscal 1998 revenues were $5.6 billion.
The Originator is engaged in the business of arranging lease financing
exclusively for office equipment marketed by IKON's office equipment
marketplaces ("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 to its customer base. During the 1998 fiscal year, 69% of
new equipment sold by IKON marketplaces was financed through the Originator. The
Originator and IKON 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,
1997 and 1996, operating revenues totaled approximately $214 million and $151
million, respectively, with net income of approximately $43 million and $32
million, respectively. For the fiscal year ended September 30, 1998, total
operating revenue equaled $289 million with net income of approximately $63
million.
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 70% of the
equipment financed by the Originator represents copiers, 17% fax machines, and
13% other equipment. Although equipment models vary, IKON 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 2.5% of the Originator's total lease portfolio. The typical new lease
financed by the Originator averaged $17,900 in amount and 46 months in duration.
Although 97% of the leases 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 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. Direct financing leases are
contractual obligations between the Originator and the IKON customer and
represent the majority of the Originator's lease portfolio.
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 is desired.
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. Tax leases represented 96% of the Originator's total lease
portfolio as of September 30, 1998. 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
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<PAGE>
market value purchase option. Generally, the customer may return the equipment,
continue to rent the equipment or purchase the equipment for its fair market
value at the end of the lease.
Each tax lease has a stated equipment residual value generally ranging
from 0% to 25% of original retail price, depending on model and term. As of
September 30, 1998, the average equipment residual value for all leases in the
Originator's portfolio was 7.8%. 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 Sales Contracts. Conditional sale contracts account for the
remaining 4% 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 would receive any tax benefit associated with equipment
depreciation. Each conditional sales contract has a stated 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
lease-end. Thus, because of the higher monthly payments, the after-tax cost of
the equipment to the customer under a conditional sales contract is
substantially the same as under a tax lease (assuming the exercise of the
purchase option). 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
Prior to January, 1998 IKON maintained a decentralized credit policy. Each
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 centralized its credit policy. The
National Risk Management Policy established minimum standards for all IKON
leasing transactions and vested all credit authority with the Originator. The
policy utilizes a tiered approach incorporating analyst reviews and credit
scoring based on customer exposure.
Origination. Lease packages are assembled by an IKON sales representative
and submitted to their 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 performs a complete package review. All documents are
reviewed for completion, accuracy and compliance. Any changes to the original
document must be approved. 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 approval process is tiered based upon credit exposure. Requests
less than $50,000 utilize the CLAS credit scorecard for approval. Credit scoring
for smaller balance exposures provides the Originator with the ability to adjust
risk scores systemwide and monitor performance. Exposure 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 audited financial statements and/or tax
returns. Exposure of more than $250,000 benefit from the combined resources of
the districts and the Originator, while maintaining
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local ownership of the customer. Ideally, the process will be transparent to the
customer yet provide the necessary and timely information required to understand
the risk factors of the exposure and those in the portfolio.
Based upon the segmented approach, the following approval authorities have
been established:
o Customer Service Professional and/or Customer Service Professional
Manager
Dun &Bradstreet rated according to a decision matrix; up to
$50,000; no override authority.
o Business Credit Analysts
Up to high risk transactions.
o Senior Credit Analysts
Single signature for exposure up to $1 million; dual signature for
exposure up to $2 million.
o Director of Portfolio Quality & National Credit Coordinator
Single signature for exposure up to $2 million; dual signature for
exposure up to $5 million.
o Corporate
Exposure in excess of $5 million.
Challenges to the recommendations of the Originator's credit analysts will
be the responsibility of the IKON district presidents. In the event the analyst
does not agree with the actions recommended by the IKON district, the Originator
senior management will be requested to intervene. Sole credit authority remains
with the Originator, not IKON. 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. The following minimum standards for collection activity and
contact are established for the organization. At 31 days past due the initial
collection call or letter is sent, dependent on account balance, to inquire as
to payment status, determine reason for delinquency, and attempt to obtain
payment date. At 45 days past due the first or second collection call is made,
depending on account balance. At 60 days past due the second or third collection
call is made and the contract is reviewed for guarantors or additional avenues
of collection. At this point the approach is to be firm and the collector must
obtain a full understanding of any dispute that may exist. A Collection Manager
is notified of any problems at 60 days past due. At 75 days past due a third or
fourth collection call is made and if payment arrangement is not agreed upon,
possibility of contract cancellation, supply or equipment retrieval or
foreclosure is raised. At 90 days past due the customer is advised that the
equipment/supplies will be picked up and contract canceled if payment is not
received immediately. An acceleration letter is generally sent within 10 days if
payment is not received. A notice of repossession letter is sent out at day 105
to the customer and the originating marketplace. Accounts are generally
scheduled for charge off at 120 days past due unless extenuating circumstances
(approved by Collection Manager) warrants delay and additional collection
efforts. These actions are required during the indicated time frame, and may be
accelerated to an earlier time as deemed appropriate. All collection activities
are documented.
Delinquencies remained at a consistent level for fiscal 1998 and 1997.
During this two-year period, accounts classified as current (less that 30 days
past due) ranged from 85% and 91% of the total portfolio balance on a monthly
basis. More information concerning the Originator's delinquency and loss
experience will be provided in the Prospectus Supplement.
Year 2000 Issues
State of Readiness. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Originator's computer programs or hardware that have date-sensitive
software or embedded technology (non-IT (as defined below) systems) may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send
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invoices, or engage in similar normal business activities. The potential for a
problem exists with all computer hardware and software, as well as in products
with embedded technology; copiers and fax machines; security and HVAC systems;
voice/telephone systems; elevators, etc.
IKON has appointed a Year 2000 Corporate Compliance Team, which has
prepared a compliance program for the Originator and is responsible for
coordination and inspecting compliance activities in all business units. The
compliance program requires all business units and locations in every country to
inventory potentially affected systems and products, assess risk, take any
required corrective actions, test and certify compliance. IKON's Year 2000
Testing and Certification Guidelines delineate the Year 2000 compliance process,
testing and quality assurance guidelines, certification and reporting processes
and contingency planning. An independent consulting company has received the
compliance program and any appropriate recommendations have been implemented.
All internal information technology ("IT") systems and non-IT systems have been
inventoried. The Originator has completed the assessment phase of its Year 2000
project. The remediation phase is 80% complete and the testing phase is 40%
complete. The Originator anticipates completing the Year 2000 project no later
than October 31, 1999, which is prior to any anticipated material impact on its
operating systems.
Costs. The Originator will use both internal and external resources to
reprogram or replace, test and implement its IT and non-IT systems for Year 2000
modifications. The Originator does not separately track the internal costs
incurred on the Year 2000 project. Such costs are principally payroll and
related costs for its internal IT personnel. The total cost of the Year 2000
project, excluding these internal costs, is estimated at $1.4 million and is
being funded through operating cash flows, all of which will be expensed as
incurred. Through September, 1998, the Originator has expensed approximately
$570,000 related to its Year 2000 project.
Risk. The Issuer is advised by the Originator that the Originator
believes, based on the information currently available to the Originator, that
the most reasonable likely worst case scenario that could be caused by
technology failures relating to the Year 2000 issue could pose a significant
threat not only to the Originator, IKON, its customers and suppliers, but to all
businesses. Risks include:
o Legal risks, including customer, supplier, employee or shareholder
lawsuits over failure to deliver contracted services, product
failure, or health and safety issues.
o Loss of sales due to failure to meet customer quality expectations
or inability to ship products.
o Increased operational costs due to manual processing, date
corruption or disaster recovery.
o Inability to bill or invoice.
The cost of the Year 2000 project and the date on which IKON and the
Originator believe it will complete the Year 2000 modifications are based on
management's best estimates, which were derived using numerous assumptions of
future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and costs of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
Contingency Plans. IKON's Guidelines require that contingency plans be
developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. The Originator and
IKON expect to have contingency plans in place by October 31, 1999. In addition,
IKON is forming a rapid response team as part of its IT group that will respond
to any operational problems during the Year 2000 date change period.
Relation to Issuer. In the event that the Originator, any affiliate or any
of their suppliers, customers, brokers or agents do not successfully and timely
achieve Year 2000 compliance, the Originator's performance of its obligations to
the Issuer under the Transaction Documents, including servicing of the Leases,
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could be adversely affected. This could result in delays in processing payments
on the Leases and could cause a delay in distributions to the Noteholders.
THE INDENTURE TRUSTEE
The Indenture Trustee for the Notes will be determined in the related
Prospectus Supplement. The Indenture Trustee's liability in connection with the
issuance and sale of the Notes is limited solely to the express obligations of
the Indenture Trustee set forth in the Indenture.
No resignation or removal of the Indenture Trustee and no appointment of a
successor Indenture Trustee shall become effective until the acceptance of
appointment by the successor Indenture Trustee. The Indenture Trustee may resign
at any time by giving written notice thereof to the Issuer 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 Indenture
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
Indenture Trustee and the Issuer. If the Indenture Trustee shall resign, be
removed, or become incapable of acting, or if a vacancy shall occur in the
office of Indenture Trustee for any cause, the Issuer shall promptly appoint a
successor Indenture Trustee. If no successor Indenture Trustee shall have been
so appointed by the Issuer or the Noteholders, or if no successor Indenture
Trustee shall have accepted appointment within 30 days after any such
resignation or removal, existence of incapability, or occurrence of such
vacancy, the Indenture Trustee or any Noteholder may petition any court of
competent jurisdiction for the appointment of a successor Indenture Trustee.
DESCRIPTION OF THE NOTES
General
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 relating to the
Notes. The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Transaction Documents and the Notes.
All of the Notes offered pursuant to this Prospectus will be rated in one
of the four highest rating categories by one or more Rating Agencies.
The Notes will generally be styled as debt instruments, having a principal
balance and a specified interest rate. The Notes will represent debt secured by
an Asset Pool.
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 (if a
Business Day or otherwise on the following 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 Indenture Trustee or any of their respective
affiliates.
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 during the prior
Collection Period;
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(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 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 ___ 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 of principal and interest due on
the Notes, amounts owed to the Servicer, Indenture Trustee and other parties in
the order described in the related Prospectus Supplement.
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 payments of principal and interest due on the Notes,
amounts owed to the Servicer, Indenture Trustee and other parties in the order
described in the related Prospectus Supplement.
"Restricting Events" with respect to any series include the following:
(a) an event of default by the Servicer under the Servicing Agreement;
(b) Events of Default (as defined herein); and
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(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 Contribution and Sale 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.
The Originator will have the option to substitute Eligible Leases having
similar characteristics (each a "Substitute Lease") for (i) a Defaulted Lease,
(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 for
Defaulted Leases, Adjusted Leases, or Warranty Leases in an aggregate amount not
to exceed ____% of the Discounted Present Value of the Leases as of the Cut-off
Date with respect to Defaulted Leases and in an aggregate amount not to exceed
___% of the Discounted Present Value of the Leases as of the Cut-off Date with
respect to Adjusted Leases and Warranty Leases. In addition, in the event of a
Early Termination Lease which has been prepaid in full, 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 Lease Balance of not less than the Discounted Lease Balance of the
Leases being replaced and the monthly payments on the Substitute Leases or
Additional Leases will be at least equal to those of the replaced Leases through
the term of such replaced Leases. In the event that a Substitute Lease is not
provided for a Defaulted Lease, the Aggregate Discounted Lease Balance of the
Leases will be reduced in an amount at least equal to the Discounted Lease
Balance of the Defaulted 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
As may be described in the related Prospectus Supplement, Noteholders of a
given series may hold their Notes through DTC (in the United States) or CEDEL or
Euroclear (in Europe) if they are participants of such systems, or indirectly
through organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Notes in respect of given
series. CEDEL and Euroclear will hold omnibus positions on behalf of the CEDEL
Participants (as defined below) and the Euroclear Participants (as defined
below) (collectively, the "Participants"), respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositories (collectively, the "Depositories") which in turn will
hold such positions in customers' securities accounts in the Depositories' names
on the books of DTC.
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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 CEDEL 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 CEDEL
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, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depository to take action
to effect final settlement on its behalf by delivering or receiving Notes in
DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositories.
Because of time-zone differences, credits of Notes in CEDEL 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 such credits or any transactions in such Notes settled
during such processing will be reported to the relevant CEDEL Participant or
Euroclear Participant on such Business Day. Cash received in CEDEL or Euroclear
as a result of sales of Notes by or through a CEDEL 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 CEDEL or Euroclear cash
account only as of the Business Day following settlement in DTC.
The Noteholders of a given series 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 such payments will be forwarded by the Issuer
or note paying agent to Cede, as nominee for DTC. DTC will forward such 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.
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DTC will advise the Issuer and/or Indenture 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.
CEDEL is incorporated under the laws of Luxembourg as a professional Trust
Depository. CEDEL holds notes for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of notes
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of notes. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its CEDEL Participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities lending and borrowing. CEDEL interfaces
with domestic markets in several countries. As a professional Trust Depository,
CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold notes for participants of the
Euroclear System ("Euroclear Participants") 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 any of 28 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. Euroclear is operated by Morgan Guaranty Trust Company of
New York, Brussels, Belgium office, under contract with Euroclear Clearance
System, S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the "Euroclear Operator" (as defined below), 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
Underwriter. 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 the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as 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.
Except as required by law, neither the Issuer not 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 such beneficial ownership interests.
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Definitive Notes
The Notes 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) such 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 related Transaction
Documents, Noteholders representing at least a majority of the outstanding
principal amount of such Notes 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 Indenture Trustee will be required to notify all such Noteholders
through Participants of the availability of Definitive Notes. Upon surrender by
DTC of the Definitive Notes representing such Notes and receipt of instructions
for reregistration, the Issuer will reissue such Notes as Definitive Notes to
such Noteholders.
Distributions of principal of, and interest on, such Notes will thereafter
be made by the Issuer in accordance with the procedures set forth in the
Indenture or Transaction Document directly to holders of Definitive Notes in
whose names the Definitive Notes were registered at the close of business on the
applicable Record Date. Such distributions will be made by check mailed to the
address of such holder as it appears on the register maintained by the Issuer.
The final payment on any such Security, however, will be made only upon
presentation and surrender of such Security 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 respective Indenture Trustee, as applicable, or of a certificate
registrar named in a notice delivered to holders of such Definitive Notes. No
service charge will be imposed for any registration of transfer or exchange, but
the Issuer or the Indenture Trustee, as applicable, 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 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.
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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.
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, the term "Transaction Document" as used with
respect to an 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. Forms of the Transaction Documents have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part. The summary does
not purport to be complete. It is qualified in its entirety by reference to the
provisions of the respective Transaction Documents.
Acquisition of the Lease Receivables Pursuant to a Contribution and Sale
Agreement
On the Closing Date, the Seller will acquire the related Lease Receivables
from the Originator pursuant to a Contribution and Sale Agreement in which the
Originator will make certain representations and warranties concerning the Lease
Receivables. The rights and benefits of the Seller under a Contribution and Sale
Agreement will be assigned to the Issuer by the Seller pursuant to a Lease
Receivables Transfer Agreement and in turn pledged to the Indenture Trustee
under an Indenture. The obligations of the Seller and the Servicer under such
Transaction Documents include those specified below.
Acquisition of the Lease Receivables Pursuant to a Lease Receivables Transfer
Agreement
On the Closing Date, the Issuer will acquire the related Lease Receivables
from the Seller pursuant to the Lease Receivables Transfer Agreement. The Issuer
will pledge the Issuer's right, title and interests in and to such Lease
Receivables to the Indenture Trustee on behalf of Noteholders pursuant to the
Indenture. Certain of the rights and benefits of the Issuer under the Lease
Receivables Transfer Agreement will be assigned to the Indenture Trustee on
behalf of Noteholders as collateral for the Notes by the Issuer pursuant to the
Indenture.
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 Noteholders that has become 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.
Substitution of Leases
Pursuant to the Transaction Documents, in addition to Warranty Leases the
Originator will have the option to substitute Eligible Leases for Defaulted
Leases, Adjusted Leases and Leases that have been prepaid. The percentage of
Leases in any Asset Pool that can be substituted for will be limited in the
related Prospectus Supplement to a percentage of the aggregated Discounted
Present Value of the Leases in the Asset Pool as of the related Cut-off Date.
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Accounts
The Servicer will establish and maintain with the Indenture Trustee one or
more accounts, in the name of such Indenture Trustee on behalf of the
Noteholders, into which all payments made on or with respect to the related
Lease Receivables will be deposited (the "Collection Account"). The Servicer
will also establish and maintain with the Indenture Trustee separate accounts,
in the name of the Issuer on behalf of the Noteholders, in which amounts
released from the Collection Account for distribution to the Noteholders will be
deposited and from which distributions to the Noteholders will be made (the
"Distribution Account").
Funds in the Collection Account and the Distribution Account
(collectively, the "Transaction Accounts") shall be invested as provided in the
related Transaction Document and Indenture in Eligible Investments. "Eligible
Investments" are generally limited to investments acceptable to the Rating
Agencies as being consistent with the rating of such Notes. Subject to certain
conditions, Eligible Investments may include Notes issued by the Issuer, the
Seller, the Servicer or their respective affiliates. Except as described below,
Eligible Investments are limited to obligations that mature not later than the
Business Day immediately preceding the related Payment Date. Investment earnings
on funds deposited in the applicable Transaction Accounts, net of losses and
investment expenses (collectively, "Investment Earnings"), shall be deposited in
the Collection Account on each Payment Date and shall be treated as collections
of interest on the related Lease Receivables.
The Transaction Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a Trust Depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), having corporate trust
powers and acting as trustee for funds deposited in such account, so long as any
of the Notes of such Trust Depository institution has a credit rating from each
Rating Agency in one of its generic rating categories which signifies investment
grade. "Eligible Institution" means, (a) the corporate trust department of the
Indenture Trustee, or (b) a Trust Depository institution organized under the
laws of the United States of America or any one of the states thereof or the
District of Columbia (or any domestic branch of a foreign bank), which (i) (A)
has either (w) a long-term unsecured debt rating acceptable to the Rating
Agencies or (x) a short-term unsecured debt rating or certificate of deposit
rating acceptable to the Rating Agencies or (B) the parent corporation of which
has either (y) a long-term unsecured debt rating acceptable to the Rating
Agencies or (z) a short-term unsecured debt rating or certificate of deposit
rating acceptable to the Rating Agencies and (ii) whose deposits are insured by
the FDIC.
The Servicer
The Servicer will service the Lease Receivables comprising an Asset Pool
pursuant to a 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.
Servicing Procedures
The Servicing Agreement will provide that the Servicer will make
reasonable efforts to collect all payments due with respect to the Lease
Receivables and will continue such collection procedures as the Servicer follows
with respect to the particular type of Lease Receivable in the particular pool
it services for itself and others. Consistent with its normal procedures, the
Servicer may, in its discretion and on a case-by-case basis, arrange with the
Lessee on a Lease to extend or modify the payment schedule. Some of such
arrangements (including, without limitation any extension of the payment
schedule beyond the final scheduled Payment Date for the related Notes) may
result in the Servicer acquiring such Lease Receivable if such Lease becomes a
Defaulted Lease. The Servicer
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may sell the Equipment securing the respective Defaulted Lease, if any, at a
public or private sale, or take any other action permitted by applicable law.
See "Certain Legal Aspects of the Lease Receivables".
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
Indenture Trustee an amount sufficient to cover delinquencies on all Leases with
respect to the prior Collection Period. The Servicer will be reimbursed for
Servicer Advances from Available Funds on the second following Payment Date. See
"Description of the Notes--Distributions" above.
Payments on Lease Receivables
With respect to each series of Notes, the Servicer will deposit all
payments on the related Lease Receivables (from whatever source) and all
proceeds of such Lease Receivables collected within two (2) Business Days of
receipt thereof in the related collection facility, such as a lock-box account
or collection account. Moneys deposited in such collection facility may be
commingled with funds from other sources. The Servicer will be required to
deposit payments on the Lease Receivables (from whatever source) collected
during the Collection Period into the related Collection Account on the
specified day each month.
Servicing Compensation
The Servicer will be entitled to receive a servicing fee for each
Collection Period (the "Servicing Fee") in an amount equal to a specified
percentage per annum (the "Servicing Fee Rate") of the discounted present value
of the assets comprising the Asset Pool, as of the first day of such Collection
Period. The Servicing Agreement will specify the priority of distributions with
respect to the Servicing Fee (together with any portion of the Servicing Fee
that remains unpaid from prior Payment Dates), such Servicing Fee may be paid
prior to any distribution to the Noteholders.
The Servicer will also 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, including collecting and posting all payments,
responding to inquiries of Lessees on the Lease Receivables, investigating
delinquencies, sending payment coupons to Lessees, reporting tax information to
Lessees, paying costs of collection and disposition of defaults, and policing
the collateral. The Servicing Fee also will compensate the Servicer for
administering the Lease Receivables, accounting for collections and furnishing
statements to the Issuer and the Indenture Trustee, if any, 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.
Distributions
Beginning on the first Payment Date (the "Initial Payment Date"),
distributions of principal and interest (or, where applicable, of principal or
interest only) on each Class of such Notes entitled thereto will be made by the
Indenture Trustee to the Noteholders. The timing, calculation, allocation,
order, source, priorities of, distribution of, and requirements for each class
of Notes of such series will be set forth in the related Prospectus Supplement.
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On each Payment Date collections on the related Lease Receivables will be
transferred from the Collection Account to the Distribution Account for
distribution to Noteholders, respectively.
Credit and Cash Flow 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 applicable 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 or
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 series of Notes, Noteholders
of any such series will be subject to the risk that such Credit Enhancement will
be exhausted by the claims of Noteholders of other series.
Statements to Indenture Trustees and Issuer
Prior to each Payment Date with respect to each series of Notes, the
Servicer will provide to the Indenture Trustee and Credit Enhancer as of the
close of business on the last day of the preceding related Collection 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 Servicing Agreement will provide that a firm of independent public
accountants will furnish to the Issuer and the Indenture 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
Closing Date) with certain standards relating to the servicing of the Lease
Receivables.
The Servicing Agreement will also provide for the annual delivery to the
Issuer and/or the Indenture Trustee of a certificate signed by an officer of the
Servicer stating that the Servicer either has fulfilled its obligations under
such Transaction Document in all material respects throughout the preceding 12
months (or, in the case of the first such certificate, the period from the
applicable Closing Date) or, if there has been a default in the fulfillment of
any such obligation in any material respect, describing each such default. The
Servicer also will agree to give the Indenture Trustee notice of certain
"Servicer Defaults" (as defined below) under the related Transaction Document.
Copies of such statements and certificates may be obtained by Noteholders
by a request in writing addressed to the Indenture Trustee or the Issuer. In
addition, in the event of bankruptcy of the Seller, the Issuer's security
interest in the Equipment may be subject to avoidance.
Certain Matters Regarding the Servicer. The Servicing Agreement will
provide that the Servicer may not resign from its obligations and duties as
Servicer thereunder, except upon determination that the
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performance by the Servicer of such duties is no longer permissible under
applicable law. No such resignation will become effective until the Indenture
Trustee or a successor servicer has assumed the Servicer's servicing obligations
and duties under the Transaction Document.
The Servicing Agreement will further provide that neither the Servicer nor
any of its respective directors, officers, employees, or agents shall be under
any liability to the Issuer or the Noteholders for taking any action or for
refraining from taking any action pursuant to such Transaction Document, or for
errors in judgment; provided, however, that neither the Servicer nor any such
person will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. In addition, such Transaction Document will provide that the
Servicer is under no obligation to appear in, prosecute, or defend any legal
action that is not incidental to its servicing responsibilities under the
Servicing Agreement and that, in its opinion, may cause it to incur any expense
or liability.
Under the circumstances specified in the 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 Servicing Agreement.
Servicer Default
"Servicer Default" under the Servicing Agreement will include (i) any
failure by the Servicer to deliver to the Indenture Trustee for deposit in any
of the related Transaction Accounts any required payment or to direct the Issuer
or the Indenture Trustee to make any required distributions therefrom, which
failure continues unremedied for greater than three (3) Business Days after
written notice from the Indenture Trustee is received by the Servicer or after
discovery by the Servicer; (ii) any failure by the Servicer or the Seller, as
the case may be, duly to observe or perform in any material respect any other
covenant or agreement in such Transaction Document, which failure materially and
adversely affects the rights of the Noteholders and which continues unremedied
for greater than ninety (90) days after the giving of written notice of such
failure (1) to the Servicer or the Seller, as the case may be, by the Indenture
Trustee or (2) to the Servicer or the Seller, as the case may be, and to the or
the Indenture Trustee by holders of the Notes, as applicable, evidencing not
less than 25% of the voting rights of the then outstanding Notes of such Series;
and (iii) any Insolvency Event. An "Insolvency Event" shall mean financial
insolvency, readjustment of debt, marshalling of assets and liabilities, or
similar proceedings with respect to the Servicer or the related Seller and
certain actions by the Servicer or the Seller indicating its insolvency,
reorganization pursuant to bankruptcy proceedings, or inability to pay its
obligations.
Rights upon Servicer Default
As long as a Servicer Default under the Servicing Agreement remains
unremedied, the Indenture Trustee, or holders of Notes evidencing not less than
25% of the voting rights of such then outstanding Notes may terminate all the
rights and obligations of the Servicer, if any, under such Transaction Document,
whereupon a successor servicer appointed by such Indenture Trustee will succeed
to all the responsibilities, duties and liabilities of the Servicer under such
Transaction Document 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 Default other than such appointment has occurred, such
bankruptcy trustee or official may have the power to prevent the Indenture
Trustee or the Noteholders from effecting a transfer of servicing. In the event
that the Indenture Trustee is unwilling or unable to so act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a successor
with a net worth of at least $25,000,000 and whose regular business includes the
servicing of similar types of leases. The Indenture Trustee may make
arrangements for compensation to be paid to any such successor, which in no
event may be greater than the servicing compensation payable to the Servicer
under the Transaction Document.
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Waiver of Past Defaults
The holders of Notes evidencing at least a majority of the voting rights
of such then outstanding Notes may, on behalf of all Noteholders of the Notes,
waive any default by the Servicer, or by the Originator or the Seller, in the
performance of its obligations under the related Transaction Document and its
consequences, except a default in making any required deposits to or payments
from any of the Transaction Accounts in accordance with such Transaction
Documents. No such waiver shall impair the Noteholders' rights with respect to
subsequent defaults.
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 percentage of the Notes which are required to consent to any such
amendment, without the consent of all of the Noteholders.
Events of Default
"Events of Default" under the related Transaction Documents will consist
of: (i) a default for five days or more in the payment of any interest on any
Note; (ii) 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; (iii) a default
in the observance or performance in any material respect of any covenant or
agreement regarding the contemplated 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 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 (iv) 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.
Insolvency Event
If an Insolvency Event occurs with respect to a Debtor the Lease
Receivables will be liquidated unless, before 90 days after the date of such
Insolvency Event, the Indenture Trustee shall have received written instructions
from each of the Noteholders (other than the Issuer and its affiliates) to the
effect that such party disapproves of the liquidation of such Lease Receivables.
Promptly after the occurrence of any Insolvency Event with respect to a Debtor,
notice thereof is required to be given to the Noteholders; provided, however,
that any failure to give such required notice will not prevent or delay
liquidation of the Lease Receivables. In connection with any such liquidation,
the Indenture Trustee shall direct that the Lease Receivables and related assets
be promptly sold (excluding the related Transaction Accounts) in a commercially
reasonable manner and on commercially reasonable terms. The proceeds from any
such sale, disposition or liquidation of such Lease
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Receivables and related assets will be treated as collections on such Lease
Receivables and deposited in the related Collection Account. If the proceeds
from the liquidation of such Lease Receivables and the related Distribution
Account are not sufficient to pay the Notes in full, the amount of principal
returned to Noteholders will be reduced and some or all of such Noteholders will
incur a loss.
Optional Termination and Redemption
The obligations of the Servicer, the Originator, the Seller, the Issuer
and/or the Indenture Trustee, as applicable, pursuant to the related Transaction
Document will terminate upon the earlier to occur of (i) the maturity or other
liquidation of the last Lease Receivable and the disposition of any amounts
received upon liquidation of any such remaining Lease Receivables and (ii) the
payment to Noteholders of all amounts required to be paid to them pursuant to
such Transaction Document. In order to avoid excessive administrative expense,
the Servicer will be permitted, at its option, to purchase from the Issuer, as
of the end of any Collection Period immediately preceding a Payment Date, if the
Discounted Lease Balance of the Leases is less than ten percent (10%) of the
Initial Aggregate Discounted Lease Balance in respect of the related Asset Pool,
all such remaining Lease Receivables at a price stated which shall in no event
be less than the aggregate of the amounts owed on the Notes as of the such
Payment Date. The related Notes will be redeemed following such purchase.
CERTAIN LEGAL ASPECTS OF THE LEASES
General
The Leases that comprise the Lease Receivables will be "chattel paper" as
defined in the Uniform Commercial Code. 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. The Issuer, the Originator, the Servicer
and/or the Seller will cause the filing of appropriate UCC-1 financing
statements to be made with the appropriate governmental authorities. Under the
Transaction Documents, the Servicer will be obligated from time to time to take
such actions as are necessary to protect, perfect and preserve the Issuer's or
the Indenture Trustee's interests in the Leases and their proceeds, as the case
may be.
The Equipment
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 certain of the Leases to the Issuer, which in turn
will pledge such interest to the Indenture 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 Indenture Trustee, on behalf of the
Noteholders, will have no interest in or recourse to any of the Equipment other
than by virtue of the assignment of the Seller's interest as secured party in
such Equipment to the Issuer and the Issuer's pledge of such interest to the
Indenture Trustee. As a result, the Indenture 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 may not be filed to
perfect any security interest in the Equipment. Moreover, in the event of the
repossession and resale of Equipment, it may be subject to a superior lien. In
such 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 such proceeds could
be applied to the payment of claims of the Servicer on behalf of the Issuer. In
addition, in the event of bankruptcy of the Originator or the Seller, the
Issuer's security interest in the Equipment may be subject to avoidance under
the Bankruptcy Code.
In the event of a default by the Lessee under a Finance Lease, the
Servicer may take action to enforce such Defaulted 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.
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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. Each Transaction Document may
require the Servicer to sell promptly any repossessed item of Equipment, acquire
such Equipment from the Issuer 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
financed pursuant to the Lease Receivables generally declines with age and
because of obsolescence, the net disposition proceeds of Equipment at any time
during the term of the lease may be less than the outstanding balance on the
Lease principal balance which it secures. 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
Defaulted Lease in the event that the Servicer elects to repossess and sell such
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 such 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 9-505(2). 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 uncollectable.
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 of 1978 (the "Bankruptcy Code") and related laws may interfere with or
eliminate the ability of the Servicer, the Issuer or the Indenture Trustee to
enforce its rights under the Lease Receivables. If bankruptcy proceedings were
instituted in respect of a Lessee, the Issuer and/or Indenture Trustee could be
prevented from continuing to collect payments due from or on behalf of such
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 Indenture Trustee with a lien on
substitute collateral, so long as such substitute collateral constituted
"adequate protection" as defined under the Bankruptcy Code.
In addition, certain of the Lease Receivables may be leased by the Seller
to governmental entities. Payment by governmental authorities of amounts due
under such Leases may be contingent upon legislative approval. Further, the
assignment of such 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.
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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 collateral to less than the amount due on the related Lease.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the Notes offered hereby. The discussion is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below does not purport to deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors are urged to consult their own tax advisors in
determining the particular federal, state and local 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.
General. Dewey Ballantine LLP, special tax counsel to the Issuer ("Tax
Counsel"), will deliver its opinion to the Issuer that the Notes will be
classified as debt secured by the related Lease Receivables. Consequently, the
Notes will not be treated as ownership interests in the Lease Receivables or the
Issuer. Beneficial owners will be required to report income received with
respect to the Notes in accordance with their normal method of accounting. For
additional tax consequences relating to Notes purchased at a discount or with
premium, see "Discount and Premium," below.
Sale or Exchange. If a beneficial owner of a Note sells or exchanges such
Note, the beneficial owner will recognize gain or loss equal to the difference,
if any, between the amount received and the beneficial owner's adjusted basis in
the Note. The adjusted basis in the Note generally will equal its initial cost,
increased by any original issue discount or market discount previously included
in the seller's gross income with respect to the Note and reduced by the
payments previously received on the Note, other than payments of qualified
stated interest, and by any amortized premium.
Alternative Characterization of the Notes
Although, as described above, it is the opinion of Tax Counsel that the
Notes are properly characterized as debt for federal income tax purposes, the
opinion of Tax Counsel is not binding on the courts or the IRS and no assurance
can be given that this characterization will prevail. It is possible that the
IRS could assert that, for purposes of the Tax Code, the transaction
contemplated by this Prospectus with respect to the Notes constitutes a sale of
the Lease Receivables (or an interest therein) to the Noteholders and that the
proper classification of the legal relationship between the Issuer and the
Noteholders resulting from the transaction is that of a partnership.
Taxation of Beneficial Owners of Partnership Interests. If the Issuer is
treated as a partnership for federal income tax purposes, the Issuer will not be
subject to federal income tax and the holders of beneficial ownership interests
in the Issuer may be regarded as holding partnership interests in the Issuer
(each a "Partnership Interest"). Instead, each beneficial owner of a Partnership
Interest will be required to separately take into account an allocable share of
income, gains, losses, deductions, credits and other tax items of the Issuer.
These partnership allocations are made in accordance with the Internal Revenue
Code of 1986 (the "Code"), Treasury regulations and the partnership agreement
(here, the Transaction Documents).
The Issuer's assets will be the assets of the partnership. The Issuer's
income will consist primarily of interest and finance charges earned on the
underlying Lease Receivables. The Issuer's deductions will consist primarily of
interest accruing with respect to any indebtedness issued by the Issuer,
servicing and other fees, and losses or deductions upon collection or
disposition of the Issuer's assets.
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In certain instances, the Issuer could have an obligation to make payments
of withholding tax on behalf of a beneficial owner of a Partnership Interest.
(See "Backup Withholding" and "Foreign Investors" below).
Substantially all of the taxable income allocated to a beneficial owner of
a Partnership Interest that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
Under section 708 of the Code, the Issuer will be deemed to terminate for
federal income tax purposes if 50% or more of the capital and profits interests
in the Asset Pool are sold or exchanged within a 12-month period. Under the
final regulations issued on May 9, 1997 if such a termination occurs, the Issuer
is deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a Partnership Interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests. Generally, capital gain or loss
will be recognized on a sale or exchange of Partnership Interests in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Partnership Interests sold. A beneficial owner of a Partnership
Interest's tax basis in a Partnership Interest will generally equal the
beneficial owner's cost increased by the beneficial owner's share of Issuer
includible income and decreased by any distributions received with respect to
such Partnership Interest. In addition, both the tax basis in the Partnership
Interest and the amount realized on a sale of a Partnership Interest would take
into account the beneficial owner's share of any indebtedness of the Issuer. A
beneficial owner acquiring Partnership Interests at different prices may be
required to maintain a single aggregate adjusted tax basis in such Partnership
Interest, and upon sale or other disposition of some of the Partnership
Interests, allocate a portion of such aggregate tax basis to the Partnership
Interests sold (rather than maintaining a separate tax basis in each Partnership
Interest for purposes of computing gain or loss on a sale of that Partnership
Interest).
Any gain on the sale of a Partnership Interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the Issuer would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a Partnership Interest is required to recognize an aggregate amount of income
over the life of the Partnership Interest that exceeds the aggregate cash
distributions with respect thereto, such excess will generally give rise to a
capital loss upon the retirement of the Partnership Interest. If a beneficial
owner sells its Partnership Interest at a profit or loss, the transferee will
have a higher or lower basis in the Partnership Interests than the transferor
had. The tax basis of the Issuer's assets will not be adjusted to reflect that
higher or lower basis unless the Issuer files an election under section 754 of
the Tax Code.
Partnership Reporting Matters. A partnership is required to (i) keep
complete and accurate books of the Issuer, (ii) file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Issuer and
(iii) report each beneficial owner of a Partnership Interest's allocable share
of items of Issuer income and expense to beneficial owners and the IRS on
Schedule K-1. The Issuer will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships as such requirements would
apply if the Notes were not treated as indebtedness.
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.
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
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<PAGE>
price of a Note is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial number of the Notes were 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 "Closing 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 such Note. The stated redemption
price at maturity of any other Note is its stated principal amount, plus an
amount equal to the excess (if any) of the interest payable on the first Payment
Date over the interest that accrues for the period from the Closing Date to the
first Payment Date. The Indenture 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 such discount is less than 0.25% of the stated redemption
price at maturity of the Note multiplied by its weighted average life. The
weighted average life of a Note is apparently 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 Closing Date until the date on which
each such distribution is expected to be made under the assumption that the
Lease Receivables prepay at a specified rate (the "Prepayment Assumption") by
(ii) a fraction, the numerator of which is the amount of such 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 such distribution will be recognized.
Section 1272(a)(6) of the Tax Code contains special original issue
discount rules applicable to prepayable securities. Under these rules (described
in greater detail below), (i) the amount and rate of accrual of original issue
discount on each series of Notes will be based on (x) the Prepayment Assumption,
and (y) in the case of a Note calling for a variable rate of interest, an
assumption that the value of the index upon which such variable rate is based
remains equal to the value of that rate on the Closing Date, and (ii)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Tax Code requires that the Prepayment
Assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Issuer anticipates that the Prepayment Assumption
for each series of Notes will be consistent with this standard. The Issuer makes
no representation, however, that the Lease Receivables for a given series will
prepay at the rate reflected in the Prepayment Assumption for that series or at
any other rate. Each investor must make its own decision as to the appropriate
Prepayment Assumption to be used in deciding whether or not to purchase any of
the Notes.
Each beneficial owner must include in gross income the sum of the "daily
portions" of original issue discount on its Note for each day during its taxable
year on which it held such Note. 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 (i) beginning on a payment date (or, in the case of the first
such period, the Closing Date) and ending on the day before the next payment
date or (ii) 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 (i) the sum of (A) the present values of all the distributions remaining
to be made on the Note, if any, as of the end of the accrual period and (B) the
distribution made on such Note during the accrual period of amounts included in
the stated redemption price at maturity, over (ii) the adjusted issue price of
such Note 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 (i) the yield to maturity of the Note, calculated as of the Closing
Date, giving effect to the Prepayment Assumption, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period, (iii)
the Prepayment Assumption, and (iv) in the case of a Note
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<PAGE>
calling for a variable rate of interest, an assumption that the value of the
index upon which such variable rate is based remains the same as its value on
the Closing Date over the entire life of such Note. The adjusted issue price of
a Note at any time will equal the issue price of such Note, increased by the
aggregate amount of previously accrued original issue discount with respect to
such Note, and reduced by the amount of any distributions made on such Note 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 such Note 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 such Note, the daily
portion of original issue discount with respect to such Note (but reduced, if
the cost of such Note to such purchaser exceeds its adjusted issue price, by an
amount equal to the product of (i) such daily portion and (ii) a constant
fraction, the numerator of which is such excess and the denominator of which is
the sum of the daily portions of original issue discount on such Note for all
days on or after the day of purchase).
Market Discount. A beneficial owner that purchases a Note at a market
discount, that is, at a purchase price less than the remaining stated redemption
price at maturity of such Note (or, in the case of a Note with original issue
discount, its adjusted issue price), will be required to allocate each principal
distribution first to accrued market discount on the Note, and recognize
ordinary income to the extent such distribution does not exceed the aggregate
amount of accrued market discount on such Note not previously included in
income. With respect to Notes that have unaccrued original issue discount, such
market discount must be included in income in addition to any original issue
discount. A beneficial owner that incurs or continues indebtedness to acquire a
Note at a market discount may also be required to defer the deduction of all or
a portion of the interest on such indebtedness until the corresponding amount of
market discount is included in income. In general terms, market discount on a
Note may be treated as accruing either (i) under a constant yield method or (ii)
in proportion to remaining accruals of original issue discount, if any, or if
none, in proportion to remaining distributions of interest on the Note, in any
case taking into account the Prepayment Assumption. The Indenture 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% 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. For any Note acquired on or after April 4, 1994, a
beneficial owner may elect to include in gross income all "interest" that
accrues on the 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
35
<PAGE>
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.
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 at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such 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.
The Internal Revenue Service has issued final regulations (the
"Withholding Regulations"), which change certain of the rules relating to
certain presumptions currently available relating to information reporting and
backup withholding. The Withholding Regulations would provide alternative
methods of satisfying the beneficial ownership certification requirement. The
Withholding Regulations are effective for distributions made after December 31,
1999, although valid withholding certificates that are held on that date remain
valid until the earlier of December 31, 2000 or the due date of expiration of
the certificate under the rules as currently in effect.
Foreign Investors
The Withholding Regulations would require, in the case of Notes held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. See "Backup Withholding" 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.
The Notes. 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 Tax Code.
Partnership Interests. Depending upon the particular terms of the
Transaction Documents and the Indenture, the Issuer may be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-U.S. persons. If the Issuer is considered
to be engaged in a trade or business in the United States for such purposes and
the Issuer is treated as a partnership, the income of the Issuer distributable
to a non-U.S. person would be subject to federal withholding tax. Also, in such
cases, a non-U.S. beneficial owner of a Partnership Interest that is a
corporation may be subject to the branch profits tax. If the Issuer is notified
that a beneficial owner of a Partnership Interest is a foreign person, the
Issuer may withhold as if it were engaged in a trade or business in the United
States in order to protect the Issuer from possible adverse consequences of a
failure to withhold. A foreign holder generally would be entitled to file with
the IRS a claim for refund with respect to withheld taxes, taking the position
that no taxes were due because the Issuer was not in a U.S. trade or business.
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RATINGS
Each Class of Notes offered pursuant to this Prospectus and the related
Prospectus Supplement will be rated in one of the four highest rating categories
by one or more Rating Agencies. Such 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. Such 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, subject
to the limitations discussed therein, considerations under ERISA relevant to the
purchase of such Notes by employee benefit plans and individual retirement
accounts.
PLAN OF DISTRIBUTION
The Notes will be acquired by the Underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices to
be determined at the time of sale or at the time of commitment therefor.
In connection with the sale of the Notes, Underwriters may receive
compensation from the Issuer or from purchasers of the Notes in the form of
discounts, concessions or commissions. The Underwriters and dealers
participating in the distribution of the Notes may be deemed to be underwriters
in connection with such 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.
Such 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
such Notes 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 such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Notes. Holders of Notes should consult with their legal advisors in this regard
prior to any such reoffer or sale.
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 in connection with the offer
made by 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 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.
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LEGAL OPINIONS
Certain legal matters will be passed upon in relation to the issuance of
the Notes for the Issuer by Ballard Spahr Andrews & Ingersoll, LLP and in
relation to certain other matters for the Underwriters by Dewey Ballantine LLP,
New York, New York.
EXPERTS
The consolidated balance sheet of the Issuer as of _____________ ___, 1999
incorporated by reference in the Prospectus, has been incorporated herein in
reliance on the report of Ernst & Young LLP, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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EXHIBIT 1
IKON RECEIVABLES, LLC
BALANCE SHEET
as of January __,
1999
- ------------------------------------------------------------ -----------------
Assets
Cash ..................................................... $100.00
Total assets......................................... $100.00
=======
Liabilities and Shareholder's Equity
Liabilities................................................. $0
Total liabilities.................................... $0
=======
Shareholder's equity........................................ $100.00
Total shareholders equity............................ $100.00
=======
Total liabilities and shareholder's equity.................. $100.00
=======
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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.
Acceptable Payment Status.....................................................11
Accrual Notes..................................................................2
Aggregate Discounted Lease Balance............................................10
Asset Pool.....................................................................1
Available Funds...............................................................17
Bankruptcy Code...............................................................30
Calculation Date..............................................................17
Casualty Loss.................................................................18
Casualty Payment..............................................................18
Cede...........................................................................4
CEDEL Participants............................................................21
Closing Date..................................................................33
Collection Account............................................................24
Collection Period.............................................................10
Contribution and Sale Agreement................................................9
Cooperative...................................................................21
Debtors........................................................................6
Defaulted Leases..............................................................18
Definitive Notes..............................................................22
Depositories..................................................................20
Discounted Lease Balance.......................................................3
Distribution Account..........................................................24
DTC............................................................................4
Early Termination Lease.......................................................18
Eligible Deposit Account......................................................24
Eligible Institution..........................................................24
Eligible Investments..........................................................24
Eligible Leases...............................................................10
Equipment......................................................................3
Euroclear Operator............................................................21
Euroclear Participants........................................................21
Events of Default.............................................................28
Exchange Act...................................................................6
FASB 13.......................................................................10
Finance Lease.................................................................10
Fixed Income Securities........................................................2
Fully Taxable Bonds...........................................................34
Indenture......................................................................1
Initial Payment Date..........................................................25
Insolvency Event..............................................................28
Insolvency Laws................................................................6
Investment Earnings...........................................................24
Lease Payments................................................................10
Lease Receivables..............................................................3
Lease Receivables Transfer Agreement...........................................9
leases.........................................................................3
Lessee.........................................................................3
Lessor.........................................................................3
Maximum Lease Term............................................................11
Note Insurer...................................................................4
Operating Leases..............................................................10
40
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Outstanding Principal Amount..................................................19
Participants..................................................................19
Payment Date...................................................................2
Pool Factor...................................................................12
Premium Note..................................................................34
Prepayment Assumption.........................................................33
Purchase Leases...............................................................10
Rating Agencies................................................................6
Restricting Events............................................................18
Rules.........................................................................20
Senior Notes...................................................................2
Servicer Advance..............................................................25
Servicer Default..............................................................24
Servicer Reports..............................................................22
Servicing Fee.................................................................25
Servicing Fee Rate............................................................25
Stripped Notes.................................................................2
Subordinate Notes..............................................................2
Substitute Lease..............................................................19
Tax Counsel...................................................................31
Termination Payment...........................................................18
Terms and Conditions..........................................................21
Transaction Accounts..........................................................24
Transaction Document...........................................................1
U.S. Person...................................................................35
Warranty Event................................................................18
Withholding Regulations.......................................................35
41
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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 Notes.
SEC Filing Fee.............................................. $ *
Indenture Trustee's Fees and Expenses....................... *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Printing and Engraving Expenses............................. *
Blue Sky Qualification and Legal Investment Fees and
Expenses................................................. *
Rating Agency Fees.......................................... *
Miscellaneous............................................... *
*
- ------------------------------------------------------------ -----------
TOTAL $
- ------------
* To be files by Amendment
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, 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, Inc., the
ultimate corporate parent of IKON Receivables LLC., maintains certain policies
of liability insurance coverage for the officers and managers of IOS Capital,
Inc. and certain of its subsidiaries, including IKON Receivables, LLC.
The form of the Underwriting Agreement, filed as Exhibit 1.1 to this
Registration Statement, provides that IKON Receivables, 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,
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 of such agents' status as such, whether or not such
Registrant would have the power to indemnify them against such liability under
applicable law.
II-1
<PAGE>
Item 16. Exhibits.
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Formation of IKON Receivables, LLC.*
3.2 Limited Liability Company Agreement of IKON Receivables, LLC.*
4.1 Form of Indenture between the Issuer and the Indenture Trustee.*
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
validity.*
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters.*
10.1 Form of Receivables Acquisition Agreement.*
23.1 Consents of Dewey Ballantine (included in Exhibit 8.1 hereto).*
23.2 Consents of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5.1 hereto).*
23.3 Consents of Accountants*
25.1 Form of Statement of Eligibility of Indenture Trustee*
99.1 Form of Prospectus Supplement
- --------------------------
* To be Filed by Amendment.
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 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;
II-2
<PAGE>
(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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<PAGE>
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 21st day of
January, 1999. 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, LLC
By: IKON RECEIVABLES FUNDING INC.,
as Sole Member and Initial Manager
By:/s/ Robert K. McLain
--------------------------------
Name: Robert K. McLain
Title: President
Pursuant to the requirements of the Securities 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/ Robert K. McLain President & Director January 21, 1999
- ------------------------
Robert K. McLain
/s/ Patricia Donato Secretary & Director January 21, 1999
- ------------------------
Patricia Donato
/s/ Joseph Churchman Treasurer & Director January 21, 1999
- ------------------------
Joseph Churchman
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<PAGE>
EXHIBIT INDEX
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Formation of IKON Receivables, LLC*
3.2 Limited Liability Company Agreement of IKON Receivables, LLC*
4.1 Form of Indenture between the Issuer and the Indenture Trustee.*
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
validity.*
8.1 Opinion of Dewey Ballantine with respect to tax matters.*
10.1 Form of Receivables Acquisition Agreement.*
23.1 Consents of Dewey Ballantine (included in Exhibit 8.1 hereto).*
23.2 Consents of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit
5.1 hereto).*
23.3 Consents of Accountants*
25.1 Form of Statement of Eligibility of Indenture Trustee*
99.1 Form of Prospectus Supplement.
- ----------------------------
* To be Filed by Amendment.
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