<PAGE>
Pursuant to Rule No. 424(b)(2)
Registration No. 333-71073
Prospectus Supplement
dated September 30, 1999
(To the Prospectus dated May 7, 1999)
_____________________________________
IKON Receivables, LLC
Issuer $699,595,000
IOS Capital, Inc. Lease-Backed Notes, Series 1999-2
Originator and Servicer
______________________________________
- -----------------------
[IOS LOGO]
You should read the section entitled "Risk Factors" starting on page S-8 of this
prospectus supplement and page 7 of the prospectus and consider these factors
before making a decision to invest in the notes.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
Offers of the notes will be made through the underwriters on a firm commitment
basis.
The issuer will issue the five classes of notes shown in the table below.
The notes --
. Are backed by a pledge of assets of the issuer, primarily a pool of
equipment leases or contracts and related assets;
. Receive distributions beginning on November 15, 1999; and
. Currently have no trading market.
Credit enhancement for the notes will consist of --
. A reserve account that can be used to pay shortfalls in payments on the
notes;
. Overcollateralization resulting from the excess of the principal value of
the initial leases over the aggregate initial principal amount of the
notes; and
. A financial guaranty insurance policy issued by Ambac Assurance
Corporation unconditionally guaranteeing timely payment of interest and
ultimate payment of principal, as described in this prospectus
supplement.
[AMBAC LOGO]
<TABLE>
<CAPTION>
=============================================================================================================
Underwriting
Issuance Interest Initial Public Discount and
Amount Rate Offering Price Commissions Net Proceeds/(1)/
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1 Notes $ 235,326,000 6.14125% 100.00000% 0.175% 99.82500%
- -------------------------------------------------------------------------------------------------------------
Class A-2 Notes $ 51,100,000 6.31% 99.99813% 0.200% 99.79813%
- -------------------------------------------------------------------------------------------------------------
Class A-3a Notes $ 100,000,000 6.59% 99.98273% 0.375% 99.60773%
- -------------------------------------------------------------------------------------------------------------
Class A-3b
Notes/(2)/ $ 240,891,000 Variable 100.00000% 0.375% 99.62500%
- -------------------------------------------------------------------------------------------------------------
Class A-4 Notes $ 72,278,000 6.88% 99.98447% 0.425% 99.55947%
- -------------------------------------------------------------------------------------------------------------
Total $ 699,595,000 $699,565,549.66 $2,099,543.25 $697,466,006.41
=============================================================================================================
</TABLE>
/(1)/ Net proceeds are before deducting expenses, estimated to be $400,000.
/(2)/ The Class A-3b Notes are variable rate notes paying interest at a
rate of LIBOR plus 0.36%.
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
CHASE SECURITIES INC.
DEUTSCHE BANC ALEX. BROWN
PNC CAPITAL MARKETS, INC.
<PAGE>
No dealer, salesman or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus supplement and the accompanying prospectus. If given or made,
the information or representations must not be relied upon. We are stating this
information as of the date of this prospectus supplement.
Table of Contents
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.........................................................................................................S-4
Risk Factors....................................................................................................S-8
The Issuer.....................................................................................................S-10
The Servicer and the Originator................................................................................S-10
The Insurer and the Policy.....................................................................................S-13
The Swap Agreement.............................................................................................S-16
The Asset Pool.................................................................................................S-17
Description of the Notes.......................................................................................S-24
Prepayment and Yield Considerations............................................................................S-33
The Trustee....................................................................................................S-38
Material Federal Income Tax Consequences.......................................................................S-38
ERISA Considerations...........................................................................................S-39
Use of Proceeds................................................................................................S-40
Ratings of the Notes...........................................................................................S-40
Experts........................................................................................................S-42
Legal Matters..................................................................................................S-42
<CAPTION>
Prospectus
Page
----
<S> <C>
Important Information about this Prospectus and the Accompanying Prospectus Supplement...........................3
Prospectus Summary................................................................................................4
Risk Factors......................................................................................................7
Where You Can Find More Information..............................................................................12
The Issuer.......................................................................................................13
The Asset Pools..................................................................................................13
Management's Discussion and Analysis of Financial Condition......................................................14
Directors and Executive Officers of the Manager of the Issuer....................................................14
The Leases.......................................................................................................15
Pool Factors.....................................................................................................18
Use of Proceeds..................................................................................................18
The Originator's Leasing Business................................................................................18
The Trustee......................................................................................................22
Description of the Notes.........................................................................................23
Description of the Transaction Documents.........................................................................29
Legal Aspects of the Lease Receivables...........................................................................35
Material Federal Income Tax Consequences.........................................................................37
Ratings..........................................................................................................42
ERISA Considerations.............................................................................................42
Plan of Distribution.............................................................................................42
Legal Opinions...................................................................................................42
Experts..........................................................................................................42
Index To Financial Statements....................................................................................44
Index Of Terms...................................................................................................48
</TABLE>
S-2
<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 notes. Additional information is contained in the
prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We cannot sell the notes to you unless you have received
both this prospectus supplement and the prospectus.
If the prospectus contemplates multiple options, you should rely on
the information in this prospectus supplement as to the applicable option.
The issuer has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 with respect to the
notes offered by this prospectus supplement. This prospectus supplement and the
prospectus, which form a part of the registration statement, omit information
contained in the registration statement pursuant to the rules and regulations of
the Securities and Exchange Commission. The issuer filed with the Securities and
Exchange Commission a quarterly report on Form 10-Q for the period ending June
30, 1999 on August 16, 1999. You may inspect and copy the registration statement
at the Public Reference Room at the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C., and the Commission's regional offices at
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 these materials at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Securities and Exchange Commission maintains a site on
the World Wide Web containing reports, proxy materials, information statements
and other items. The address is http://www.sec.gov.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The table of contents in this prospectus supplement
and the table of contents included in the accompanying prospectus provide the
pages on which these captions are located.
S-3
<PAGE>
Summary
. This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the notes, read carefully this entire prospectus
supplement and the accompanying prospectus.
. This summary provides an overview of calculations, cash flows and other
information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
Lease-Backed Notes
Series 1999-2
Issuer
IKON Receivables, LLC, a Delaware special purpose limited liability company.
Originator
IOS Capital, Inc., a Delaware corporation formerly known as IKON Capital, Inc.
Seller
IKON Receivables-1, LLC, a Delaware special purpose limited liability company.
Servicer
. IOS Capital, Inc.
. The servicer's principal executive offices are located at 1738 Bass Road,
P.O. Box 9115, Macon, Georgia 31208.
Trustee
. Harris Trust and Savings Bank, a banking corporation organized under the
laws of Illinois.
. The trustee's offices are located at 311 West Monroe Street, 12th Floor,
Chicago, IL 60606.
Insurer
Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation.
The Asset Pool
The issuer will pledge property to secure payments on the notes. The pledged
assets will include:
. a pool of office equipment leases or contracts, including installment
sale contracts, and related assets;
. cash on deposit in the reserve account and the collection account;
. rights under the swap agreement described below; and
. other assets as described in detail elsewhere in this prospectus
supplement.
The Leases
. On or prior to the issuance date, IOS Capital, Inc. will contribute to IKON
Receivables-1, LLC, a pool of office equipment leases, including conditional
sale and other contracts, and IKON Receivables-1, LLC will transfer them to the
issuer. Payments on the notes will be made from payments on these leases.
. The leases will relate to various items or types of office equipment.
Initially, a substantial portion relates to copiers.
. The leases are triple-net leases, which means that the lessee is required
to pay all taxes, maintenance and insurance associated with the equipment. The
leases are noncancellable by the lessees. All payments under the leases are
absolute, unconditional obligations of the lessees. The leases provide that the
payments are not subject to set-off or reduction without the lessor's consent.
. The aggregate principal value of the pool of leases at any time will be
calculated by discounting their remaining payments (except for certain minor
charges and delinquent payments) at a rate equal to 7.792%.
. The issuer will pay the notes from payments on the leases. Noteholders
should not rely on the sale of leased equipment for payments on the notes.
S-4
<PAGE>
Issuance Date
On or about October 7, 1999.
Cut-Off Date
The opening of business on September 1, 1999.
Payment Date
The 15th day of each month if the 15th is a business day. If the 15th is not a
business day, the payment date will be the following day that is a business day.
The first payment date will be November 15, 1999.
Determination Date
Five business days before the payment date. The trustee will calculate the
amounts to be paid on the notes on this date.
Due Period
Payments made on each payment date will relate to the collections received in
respect of the prior calendar month or, in the case of the November 15, 1999
payment date, the months of September and October, 1999.
Record Date
The last business day preceding a payment date unless the notes are no longer
book-entry notes. If the notes are definitive notes, the record date is the
last business day of the month preceding a payment date.
Stated Maturity Dates
If the notes have not already been paid in full, the issuer will pay the
outstanding principal amount of the notes in full on the payment dates in the
following months:
Class A-1 October, 2000
Class A-2 May, 2001
Class A-3a August, 2003
Class A-3b August, 2003
Class A-4 November, 2005
Final payment on the notes will probably be earlier than the stated maturity
dates listed above for the related class of notes.
Optional Redemption
. The issuer may, on any payment date, redeem the notes when the total
discounted lease balance is less than or equal to 10% of the total discounted
lease balance of the leases as of September 1, 1999.
. If a redemption occurs, you will receive a final distribution equaling the
entire unpaid principal balance of the notes plus any accrued and unpaid
interest.
Denominations
. The issuer will issue the notes in minimum denominations of $1,000 and
integral multiples of $1,000.
. One note in each class may be issued in another denomination.
Payments on the Notes
Each month, the issuer will distribute the amounts received on the leases and
any other amounts available for these purposes as follows:
. Interest Distributions. On each payment date, the issuer will pay interest
at the applicable interest rate that accrued during the prior interest accrual
period.
. Principal Distributions. On each payment date, the issuer will pay
principal in reduction of the outstanding principal balance of the notes.
. Principal payments will be an amount usually equal to the decrease in the
principal value of the leases between determination dates. The issuer will pay
principal in the following priority:
. to the Class A-1 noteholders only, until the principal amount on the Class
A-1 Notes has been reduced to zero;
. when the Class A-1 Notes have been paid in full to the Class A-2
noteholders only, until the principal amount on the Class A-2 Notes has
been reduced to zero, an amount generally equal to 85.65812% of the
decrease in the principal value of the leases;
. when the Class A-2 Notes have been paid in full, to the Class A-3a
noteholders and the Class A-3b noteholders only, their respective pro rata
shares, until the principal amount on the Class A-3a
S-5
<PAGE>
Notes and Class A-3b Notes has been reduced to zero, an amount generally
equal to 85.65812% of the decrease in the principal value of the leases;
. when the Class A-3a Notes and the Class A-3b Notes have been paid in full,
to the Class A-4 noteholders, until the principal amount on the Class A-4
Notes has been reduced to zero, an amount generally equal to 85.65812% of
the decrease in the principal value of the leases.
This general description of distributions of principal on the notes is subject
to targets and floors which may result in additional principal payments. We
refer you to "Descriptions of the Notes--Distributions" in this prospectus
supplement for further information regarding the payment of interest and
principal on the notes.
Credit Enhancement
The credit enhancement available to you will consist of the following:
. Reserve Account. A reserve account will be set up in the name of the
trustee for the benefit of the noteholders. Funds in the reserve account will be
used to pay shortfalls in amounts due to noteholders. The issuer will initially
deposit 1% of the initial principal value of the leases into the reserve
account.
. Overcollateralization. Additional credit enhancement is provided because
the initial principal amount of the notes is less than the initial principal
value of the leases in the asset pool.
. Insurance Policy. The issuer will obtain a noncancellable insurance policy
from Ambac Assurance Corporation with respect to the notes. This insurance
policy will unconditionally and irrevocably guarantee payments to you of
interest and principal, but subject to specific terms and conditions set forth
under the heading "The Insurer and the Policy" in this prospectus supplement.
We refer you to "The Insurer and the Policy" and "Description of the Notes--
Principal Payments" and "--Reserve Account" in this prospectus supplement for
more detail.
Swap Agreement
. The issuer will enter into a swap agreement with a counterparty for the
benefit of the noteholders. Under the swap agreement, the counterparty's
payments will be calculated at LIBOR and the issuer's payments will be
calculated at the assumed fixed rate of 6.27%.
. To the extent that interest on any payment date at LIBOR exceeds interest
calculated at the assumed fixed rate:
. the counterparty will be obligated to pay an amount equal to the
excess to the issuer; and
. that payment will constitute a portion of available funds.
. Likewise under the swap agreement, to the extent that interest calculated
at the assumed fixed rate exceeds interest calculated at LIBOR, the issuer
will be obligated to pay an amount equal to the excess to the counterparty.
. Lehman Brothers Financial Products Inc., a Delaware corporation, will be
the counterparty to the issuer under the swap agreement. The counterparty
currently has a "AAA" long-term unsecured senior debt credit rating from
Standard & Poor's and a "Aaa" long-term unsecured senior debt credit rating
from Moody's. See "The Swap Agreement" in this prospectus supplement.
Material Federal Income Tax Consequences
For federal income tax purposes:
. Dewey Ballantine LLP, special tax counsel to issuer, is of the opinion that
the notes will be treated as debt and the issuer will not be treated as an
association (or a publicly traded partnership) taxable as a corporation. By your
acceptance of a note, you agree to treat the notes as debt.
. Interest on the notes will be taxable as ordinary income when actually or
constructively received by a holder on the cash method of accounting and when
accrued by a holder on the accrual method of accounting.
. Dewey Ballantine LLP has prepared the discussion under "Material Federal
Income Tax Consequences" in the prospectus and this prospectus supplement and is
of the opinion that this discussion is correct in all material respects.
ERISA Considerations
Subject to the considerations and conditions described under "ERISA
Considerations" in the prospectus and this prospectus supplement, pension,
S-6
<PAGE>
profit-sharing and other employee benefit plans, as well as individual
retirement accounts, may purchase notes. Investors should consult with their
counsel regarding the applicability of the Employee Retirement Income Security
Act of 1974, as amended, before purchasing a note.
Ratings
. The issuer will not issue the notes unless they have been assigned the
following ratings:
Initial Ratings
-----------------------------
Moody's S&P
Class A-1 P-1 A-1+
Class A-2 Aaa AAA
Class A-3a Aaa AAA
Class A-3b Aaa AAA
Class A-4 Aaa AAA
. You must not assume that the ratings will not be lowered, qualified or
withdrawn by the rating agencies.
S-7
<PAGE>
Risk Factors
In addition to the risk factors discussed in the prospectus, prospective
investors should consider, among other things, the following additional factors
in connection with the purchase of the notes:
Geographic Concentrations of Leases Adverse economic conditions or other
May Adversely Affect the Leases and factors affecting any state or region
Payments on the Notes where a high concentration of lessees
under the leases are located could
adversely affect the performance of the
leases. As of the opening of business on
September 1, 1999, lessees with respect
to approximately 7.03%, 6.63%, 5.83%,
6.78% and 6.63% of the leases (based on
the statistical discounted present value
of the leases) were located in
California, Florida, Michigan, Minnesota
and Missouri, respectively. No other
state accounts for more than 5% of the
leases.
If adverse events or economic conditions
were particularly severe in those
geographic regions or in the event a
lessee or group of lessees in those
geographic regions experienced financial
difficulties, the lessees may be unable
to pay or may not make timely payments.
If these events or conditions occur, you
may experience delays in receiving
payments on the notes and suffer loss of
your investment. The issuer is unable to
determine and has no basis to predict,
for any state or region, whether any
events like these have occurred or may
occur, or to what extent any events like
these may affect the leases or the
repayment of amounts due under the notes.
Insolvency of IOS Capital or IKON In some circumstances, a bankruptcy of
Receivables-1, LLC May Reduce IOS Capital or IKON Receivables-1, LLC
Payments to Noteholders may reduce payments to noteholders. IOS
Capital and IKON Receivables-1, LLC
believe that each contribution of the
leases should be treated as an absolute
and unconditional assignment.
However, in the event of an insolvency of
IOS Capital or IKON Receivables-1, LLC, a
court or bankruptcy trustee could attempt
to:
. recharacterize the contribution
of the related leases by IOS
Capital to IKON Receivables-1,
LLC as a loan from IKON
Receivables-1, LLC to IOS
Capital secured by a pledge of
the leases; or
. recharacterize the contribution
of the related leases by IKON
Receivables-1, LLC to the issuer
as a loan from the issuer to
IKON Receivables-1, LLC secured
by a pledge of the leases; or
consolidate the assets of the
issuer with those of IOS Capital
because IOS Capital will
indirectly own all of the
membership interests in the
issuer; or
. consolidate the assets of the
issuer with those of IKON
Receivables-1, LLC because IKON
Receivables-1, LLC will own all
of the membership interests in
the issuer.
If either recharacterization or
consolidation were successful, the
bankruptcy trustee could repudiate any
leases that are considered to be
operating leases for bankruptcy law
purposes and all obligations relating
S-8
<PAGE>
to such operating leases. An attempt to
recharacterize the transactions, even if
unsuccessful, could result in delays in
payments to you. If either attempt were
successful, the notes would be
accelerated, and the trustee's recovery
on your behalf could be limited to the
then current value of the leases or the
underlying equipment. Consequently, you
could lose the right to future payments
and you may not receive your anticipated
principal and interest on the notes.
Although IOS Capital and IKON
Receivables-1, LLC both believe that the
contribution of the leases should be
treated as an absolute and unconditional
assignment, for accounting purposes the
leases will be treated as assets of IOS
Capital on the tax return of its
consolidated group. This treatment of the
assets might increase the risk of
recharacterization of the transfer to the
issuer as a financing.
Ratings of the Notes are Dependent The ratings of the notes will depend
upon Creditworthiness of Insurer primarily on the creditworthiness of the
insurer as the provider of the financial
guarantee insurance policy relating to
the notes. There is a risk that any
reduction in any of the insurer's
financial strength ratings would result
in a reduction in the ratings of the
notes.
Any Failure by the Counterparty to The notes will be dependent upon payments
Pay Amounts Owed Under the Swap counterparty under the swap agreement
Agreement Would Reduce the Funds for receipt of the full amount of
Available to Pay Interest on the interest on the notes. Any shortfall in
Notes the payment of interest on the notes due
entirely to the failure of the
counterparty to make a required payment
under the swap agreement will be funded
by the insurer as an insured payment. To
the extent the insurer fails to make such
payment, the noteholders would bear any
resulting deficiency in proportion to the
amount of interest payable on each class
of notes on such payment date.
As a general matter, the obligations of
the counterparty under the swap agreement
are unsecured. However, in the event that
the counterparty's long-term unsecured
senior debt ceases to be rated at a level
acceptable to the insurer, the
counterparty will be obligated either to
(a) post collateral or establish other
arrangements to secure its obligations
under the swap agreement or (b) arrange
for a substitute counterparty to assume
the rights and obligations of the
counterparty under the swap agreement, in
either case so that the ratings of the
notes are maintained or, if applicable,
restored to their level immediately prior
to the downgrading or withdrawal of the
counterparty's debt. If the counterparty
fails to take either of these actions,
the issuer, with the consent of the
insurer, will be entitled to terminate
the swap agreement and to claim from the
counterparty the fair market value of a
replacement swap from a counterparty
satisfactory to the insurer. The insurer
will bear the risk of any failure by the
counterparty to take the actions required
of it and the risk of any inability of
the issuer to obtain a replacement swap
agreement. However upon the occurrence of
a default by the insurer under the
insurance policy, the noteholders would
bear such risk.
S-9
<PAGE>
The Issuer
The Issuer, IKON Receivables, LLC, is a special purpose Delaware
limited liability company all of the membership interests in which are held by
the Seller, IKON Receivables-1, LLC, also a special purpose Delaware limited
liability company. All of the membership interests in the Seller are, in turn,
owned by the Originator and Servicer, IOS Capital, Inc.
The Notes will be secured solely by the Asset Pool (as defined
herein). The Issuer does not have, nor is it expected in the future to have, any
significant assets other than the Asset Pool and the sole sources of funds
available for payment of the Notes are the Asset Pool, including the Reserve
Account, and proceeds of the financial guaranty insurance policy described
herein (the "Policy").
Because the Issuer has no operating history and will not engage in any
business other than activities incidental to the acquisition of the Asset Pool
(and asset pools relating to other series of notes) and the issuance of the
Notes (and other series of notes), no historical or pro forma financial
statements or ratios of earnings to fixed charges with respect to the Issuer,
other than the balance sheet of the Issuer at April 6, 1999 included in the
accompanying Prospectus dated May 7, 1999, have been included herein or in the
Prospectus.
The Issuer will pledge its interest in the Asset Pool to Harris Trust
and Savings Bank, as Trustee for the benefit of holders of the Notes and issue
the Notes pursuant to an indenture between the Issuer and the Trustee.
The Servicer and the Originator
General. The Lease Receivables (as defined below) will be acquired by
the Seller from IOS Capital and by the Issuer from the Seller. IOS Capital, a
Delaware corporation headquartered in Macon, Georgia will serve as the Servicer
of the Leases. IOS Capital is a wholly-owned subsidiary of IKON Office
Solutions, Inc. ("IKON Office Solutions"). Additional information about IOS
Capital is contained in the Prospectus. See "The Originator's Leasing Business"
in the Prospectus.
At June 30, 1999, IOS Capital had approximately $2,726,203,000 in
assets, approximately $2,354,661,000 in liabilities and approximately
$371,542,000 in shareholders' equity.
Historical Delinquency and Loss Information. General delinquency
information for leases in IOS Capital's servicing portfolio (including and
excluding funded leases) not charged-off, and general charge-off information for
leases in IOS Capital's servicing portfolio (including and excluding funded
leases), are set forth in the tables below. Lease receivables in the Servicer's
servicing portfolio are charged-off between 121 and 181 days past due depending
upon credit quality and the reasons for delinquency in accordance with the IKON
risk management policy. Any account more than 181 days past due requires IKON
corporate authorization to waive charge-off. Any subsequent recoveries offset
gross losses.
As described under "The Originator's Leasing Business - Types of
Leases" in the Prospectus, the lease portfolio of IOS Capital consists of direct
financing leases and funded leases, although the Leases included in the Asset
Pool consist solely of direct financing leases. Funded leases are contractual
obligations between IKON Office Solutions and IKON Office Solutions' operational
units which have been financed by IOS Capital. Direct financing leases are
contractual obligations between IOS Capital and the customer and represent the
majority of IOS Capital's lease portfolio. The tables below separately set forth
historical delinquency and loss information for IOS Capital's lease portfolio
including funded leases and excluding funded leases for the respective periods
or dates indicated.
S-10
<PAGE>
Summary Historical Delinquency Data (Entire Portfolio)
IOS Capital Portfolio
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
June 30,
1999 September 30, 1998 September 30, 1997 September 30, 1996 September 30, 1995 September 30, 1994
------------------- ------------------ ------------------ ------------------ ------------------ ------------------
($ - millions) %* ($ - millions) %* ($ - millions) %* ($ - millions) %* ($ - millions) %* ($ - millions) %*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $2362.5 89.2% $2,292.2 90.8% $1,882.1 89.4% $1,299.7 86.5% $870.3 87.9% $579.7 88.7%
31-60 Days $ 172.1 6.5% $ 136.3 5.4% $ 113.7 5.4% $ 106.7 7.1% $ 80.2 8.1% $ 49.0 7.5%
61-90 Days $ 76.8 2.9% $ 63.1 2.5% $ 65.3 3.1% $ 54.1 3.6% $ 24.8 2.5% $ 16.3 2.5%
Over 90 Days $ 37.1 1.4% $ 32.8 1.3% $ 44.2 2.1% $ 42.1 2.8% $ 14.9 1.5% $ 8.5 1.3%
------- ----- -------- ----- -------- ------ -------- ------ ------ ------ ------ -----
Total $2648.5 100.0% $2,524.4 100.0% $2,105.3 100.0% $1,502.6 100.0% $990.2 100.0% $653.5 100.0%
</TABLE>
* Represents lease portfolio receivables as a percentage of the total
portfolio balance.
Summary Historical Loss Data (Entire Portfolio)
IOS Capital Portfolio
<TABLE>
<CAPTION>
For the 9
Month Period
Ended: For the Fiscal Year Ended:
------------ ------------------------------------------------------------------------------------
June 30, September 30, September 30, September 30, September 30, September 30,
1999 1998 1997 1996 1995 1994
------------ ------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Average Portfolio
Balance for the Period
($ millions)* $2,603 $2,394 $1,891 $1,275 $ 848 $ 591
Gross Charge-offs
($ millions)** $ 59.6 $ 98.8 $ 51.6 $ 29.9 $20.9 $14.4
Gross Charge-offs as
a % of the Average
Portfolio Balance for the
Period** 3.1%*** 4.1% 2.7% 2.3% 2.5% 2.4%
</TABLE>
* Average Portfolio Balance at September 30, 1994 was calculated by adding
the ending servicing portfolio balance for the quarters ending March 31,
1994, June 30, 1994 and September 30, 1994 and dividing by three. Average
Portfolio Balance at September 30 in each of fiscal years 1995 through 1998
was calculated by adding the ending servicing portfolio balance for each of
the four quarters of such fiscal year and dividing by four. Average
Portfolio Balance at June 30, 1999 was calculated by adding the ending
servicing portfolio balance for the quarters ending June 30, 1999, March
31, 1999 and December 31, 1998 and dividing by three.
** Information with respect to net charge-offs is not available.
*** Annualized.
S-11
<PAGE>
Summary Historical Delinquency Data (Without Funded Leases)
IOS Capital Portfolio
<TABLE>
<CAPTION>
As at:
-------------------------------------------------------------------------------
June 30, September 30, September 30,
1999 1998 1997
------------------------- ----------------------- ----------------------
($ - millions) %* ($ - millions) %* ($ - millions) %*
<S> <C> <C> <C> <C> <C> <C>
Current $ 1814.6 86.1% $1,656.0 87.4% $1,363.3 85.7%
31-60 Days $ 177.0 8.4% $ 138.3 7.3% $ 116.1 7.3%
61-90 Days $ 78.0 3.7% $ 64.4 3.4% $ 65.2 4.1%
91-120 Days $ 29.5 1.4% $ 30.3 1.6% $ 27.0 1.7%
Over 120 Days $ 8.4 0.4% $ 5.7 0.3% $ 19.1 1.2%
--------- ----- -------- ----- -------- -----
Total $ 2,107.5 100.0% $1,894.7 100.0% $1,590.7 100.0%
</TABLE>
* Represents lease portfolio receivables as a percentage of the
total portfolio balance.
Summary Historical Loss Data (Without Funded Leases)
IOS Capital Portfolio
<TABLE>
<CAPTION>
For the 9 Month
Period Ended: For the Fiscal Year Ended:
---------------- -------------------------------
September 30, September 30,
June 30, 1999 1998 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Average Portfolio Balance
for the Period ($ millions)* $ 2,021 $1,797 $1,447
Gross Charge-offs $ 51.1 $ 80.5 $ 47.4
($ millions)**
Gross Charge-offs as a %
of the Average Portfolio
Balance for the Period** 3.4%*** 4.5% 3.3%
</TABLE>
* Average Portfolio Balance at September 30 in each of fiscal years
1997 and 1998 was calculated by adding the ending servicing
portfolio balance for each of the four quarters of such fiscal
year and dividing by four. Average Portfolio Balance at June 30,
1999 was calculated by adding the ending servicing portfolio
balance for the quarters ending June 30, 1999, March 31, 1999 and
December 31, 1998 and dividing by three.
** Information with respect to net charge-offs is not available.
*** Annualized.
Gross charge-offs for IOS Capital's portfolio excluding funded leases
increased to $80.5 million, or 4.5% of the average portfolio balance excluding
funded leases, for the year ended September, 1998 from $47.4 million, or 3.3%,
for the year ended September 30, 1997. Approximately $5.2 million of this
increase resulted from losses associated with a single customer of two IKON
Office Solutions operational units. Of the remaining incremental increase in
gross charge-offs over fiscal year 1997, approximately $15.7 million resulted
from a change in IOS Capital's charge-off policy in mid-1998. This new policy
increased charge-offs, reflecting previously unrecognized charge-offs and new
restrictions on exceptions to the charge-off policy. Prior to the implementation
of the revised charge-off policy, the individual IKON Office Solutions
operational units had the authority to make exceptions to the charge-off policy
on leases over 120 days past due for customers that the operational units judged
were likely to pay. The revised policy defines specific exceptions to the
charge-off policy based on company-wide standardized credit risk management
criteria and requires specific evidence of a customer's ability to bring the
lease to a current status. Exceptions for leases that are between 121 and 180
days past due require approval by the credit review team at IOS Capital to avoid
charge-off. Exceptions for leases beyond 181 days past due require approval by
S-12
<PAGE>
members of a senior executive management team at IKON Office Solutions. The
revised policy promotes the constant and timely recognition of losses.
There can be no assurance that the levels of delinquency and loss
reflected in the tables above are or will be indicative of the performance of
the Leases in the future.
The Insurer and the Policy
General. The information set forth in this section has been
provided by Ambac Assurance Corporation ("Ambac" or the "Insurer") for inclusion
in this Prospectus Supplement. No representation is made by any of the
Underwriters (as defined herein), the Issuer, IOS Capital, or any of their
affiliates as to the accuracy or completeness of the information.
The Insurer. Ambac is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. Ambac
primarily insures newly issued municipal and structured finance obligations.
Ambac is a wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly
AMBAC Inc.), a 100% publicly-held company. Moody's Investors Service Inc.
("Moody's"), Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), and Fitch IBCA, Inc. ("Fitch IBCA") have each assigned a triple-A
financial strength rating to Ambac.
The consolidated financial statements of Ambac and subsidiaries
as of December 31, 1998 and 1997, and for each of the years in the three-year
period ended December 31, 1998, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Commission on March 30, 1999,
Commission File No. 1-10777), and the unaudited consolidated financial
statements of Ambac and subsidiaries as of June 30, 1999 and for the periods
ending June 30, 1999 and June 30, 1998, included in the Quarterly Report on Form
10-Q of Ambac Financial Group, Inc. for the period ended June 30, 1999 (which
was filed with the Commission on August 13, 1999), are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein by reference herein also
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of Ambac and subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Notes shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing of those documents.
The following table sets forth the capitalization of Ambac as of
December 31, 1996, December 31, 1997, December 31, 1998, and June 30, 1999,
respectively, in conformity with generally accepted accounting principles.
S-13
<PAGE>
Ambac Assurance Corporation
Consolidated Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31, June 30,
1996 1997 1998 1999
----------- ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Unearned premiums................ $ 995 $ 1,184 $ 1,303 $ 1,349
Other liabilities ............... 259 562 548 413
------------ ------------ ----------- -----------
Total liabilities................ 1,254 1,746 1,851 1,762
------------ ------------ ----------- -----------
Stockholder's equity: (1)
Common stock.............. 82 82 82 82
Additional paid-in capital 515 521 541 644
Accumulated other
comprehensive income... 66 118 138 39
Retained earnings......... 992 1,180 1,405 1,530
------------ ------------ ----------- -----------
Total stockholder's equity....... 1,655 1,901 2,166 2,295
------------ ------------ ----------- -----------
Total liabilities and
stockholder's equity ........ $ 2,909 $ 3,647 $ 4,017 $ 4,057
============ ============ =========== ============
</TABLE>
(1) Components of stockholder's equity have been restated for all
periods presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by Ambac effective January 1,
1998. As this new standard only requires additional information in the
financial statements, it does not affect Ambac's financial position or
results of operations.
For additional financial information concerning Ambac and
subsidiaries, see the audited and unaudited financial statements of Ambac and
subsidiaries incorporated by reference herein. Copies of the financial
statements of Ambac incorporated herein by reference and copies of Ambac's
annual statement for the year ended December 31, 1998 prepared in accordance
with statutory accounting standards are available, without charge, from Ambac.
The address of Ambac's administrative offices and its telephone number are One
State Street Plaza, 17th Floor, New York, New York, 10004 and (212) 668-0340.
Ambac makes no representation regarding the Notes or the
advisability of investing in the Notes and makes no representation regarding,
nor has it participated in the preparation of, this Prospectus Supplement other
than the information supplied by Ambac and presented under the heading "The
Insurer and the Policy" and in the financial statements incorporated herein by
reference.
The Policy. The following summary of the terms of the Policy
does not purport to be complete and is qualified in its entirety by reference to
the Policy.
The Insurer will issue a financial guaranty insurance policy (the
"Policy") with respect to the Notes in favor of the Trustee for the benefit of
Noteholders. The Policy unconditionally guarantees the payment of Insured
Payments (as defined herein) on the Notes. The Insurer will make each required
Insured Payment, other than with respect to Preference Amounts, to the Trustee
on the later of (i) the Payment Date (as defined herein) on which the Insured
Payment is distributable to the Noteholders pursuant to the Indenture; and (ii)
the third Business Day following the Business Day on which the Insurer shall
have received telephonic or telegraphic notice, subsequently confirmed in
writing, or written notice by registered or certified mail, from the Trustee,
specifying that an Insured Payment is due in accordance with the terms of the
Policy. The Insurer will pay any Insured Payment that is a Preference Amount on
the third Business Day following the Business Day on which the Insurer has
received a certified copy of a final non-appealable order requiring the return
of the Preference Amount, and other documentation reasonably required by the
Insurer, in a form satisfactory to the Insurer, provided that if this
documentation is received after 12:00 noon (New York City time) on that Business
Day, it will be deemed to have been received on the following Business Day.
S-14
<PAGE>
The Insurer's obligation under the Policy will be discharged to
the extent that funds are received by the Trustee for distribution to the
Noteholders, whether or not the funds are properly distributed by the Trustee.
The Insurer will be subrogated to all of the Noteholder's rights
to payment on the Notes to the extent of the payments made under the Policy and
shall be deemed to the extent of payments so made to be a registered Noteholder
for purposes of payment. Payments under the Policy will be made only at the time
set forth in the Policy and no accelerated payments shall be made regardless of
any acceleration of any of the Notes, unless the acceleration is at the sole
option of the Insurer.
The Policy does not cover shortfalls, if any, attributable to the
liability of the Issuer or the Trustee for withholding taxes, if any (including
interest and penalties in respect of that liability), any prepayment penalty or
other accelerated payment, which at any time may become due on or with respect
to any Note, including as a result of any Acceleration Event (as defined
herein), nor against any risk other than nonpayment, including failure of the
Trustee to make any payment due to the Noteholders. The Policy does not cover,
and Insured Payments do not include, any shortfalls due to the application of
the Soldiers' and Sailors' Relief Act.
For purposes of the Policy, "Noteholders" does not and may not
include the Issuer, the Seller or the Servicer.
"Business Day" means any day that is not a Saturday, a Sunday or
other day on which commercial banking institutions in the cities in which the
principal office of the Trustee, the Insurer and the Servicer are located are
authorized or obligated by law or executive order to remain closed.
"Insured Payment" means (a) on any Payment Date, the excess, if
any, of (i) the related Interest Payments (as defined herein) over (ii) the
related Available Funds (as defined herein), (b) on any Business Day, any
Preference Amount (without duplication), (c) on the Payment Date in October,
2000, the outstanding Note Principal Balance of the Class A-1 Notes then
outstanding to the extent Available Funds are not sufficient to make the payment
on that Payment Date, (d) on the Payment Date in May , 2001, the outstanding
Note Principal Balance of the Class A-2 Notes then outstanding to the extent
Available Funds are not sufficient to make the payment on that Payment Date, (e)
on the Payment Date in August, 2003, the outstanding Note Principal Balance of
each of the Class A-3a Notes and the Class A-3b Notes then outstanding to the
extent Available Funds are not sufficient to make the payment on that Payment
Date, and (f) on the Payment Date in November, 2005, the outstanding Note
Principal Balance of the Class A-4 Notes then outstanding to the extent
Available Funds are not sufficient to make the payment on that Payment Date.
.
"Note Principal Balance" means, as of any date of determination
and with respect to each Class of Notes, the principal balance of the related
class of Notes on October 7, 1999 (the "Issuance Date") less any amounts
actually distributed as principal thereon.
"Preference Amount" means any payment of principal or interest on
a Note to a Noteholder by or on behalf of the Trustee which has been deemed to
be a preferential transfer and theretofore recovered from the Noteholder by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.)
as amended from time to time, in accordance with a final non-appealable order of
a court having competent jurisdiction.
The Policy is noncancellable. The Policy expires and terminates
without any action on the part of the Insurer or any other person on the date
that is one year and one day following the date on which the Notes have been
paid in full.
The Policy is issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE
SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
S-15
<PAGE>
Drawings Under the Policy. On each Determination Date, the
Trustee will determine whether an Insured Payment is required to be paid for the
Notes for the related Payment Date. If the Trustee determines that an Insured
Payment is required to be paid for the related Payment Date, the Trustee will
complete a Notice in the form of Exhibit A to the Policy and submit it to the
Insurer no later than 12:00 noon New York City time on the third Business Day
preceding that Payment Date as a claim for an Insured Payment. If the Trustee
receives a certified copy of an order of the appropriate court that any amount
previously distributed to a Noteholder has been avoided in whole or in part as a
Preference Amount, the Trustee shall so notify the Insurer and shall comply with
the provisions of the Policy to obtain payment by the Insurer of such Preference
Amount.
Under the Indenture, the Insurer has the option to deliver funds
to the Trustee to provide for payment of fees or expenses of any provider of
services to the Issuer or to be added to Available Funds to the extent that a
drawing under the Policy otherwise would be required.
The Swap Agreement
The Issuer will enter into a swap agreement (the "Swap
Agreement") with Lehman Brothers Financial Products Inc. ("LBFP"), a Delaware
corporation and a wholly-owned subsidiary of Lehman Brothers Inc., as
counterparty (the "Counterparty") for the benefit of the Noteholders and the
Insurer. LBFP currently has a long-term credit rating of "AAA" from both S&P and
Fitch IBCA, and a long-term credit rating of "Aaa" from Moody's. LBFP will
provide upon request, without charge to each person to whom this Prospectus
Supplement is delivered, a copy of (i) the ratings analysis from each of S&P,
Fitch IBCA and Moody's evidencing those respective long-term credit ratings and
(ii) the annual reports of LBFP. Requests for such information should be
directed to Client Services, Lehman Brothers Financial Products Inc., 3 World
Financial Center, 8th Floor, New York, New York 10285, telephone (212) 526-LBFP.
With respect to the Swap Agreement relating to the Class A-3b
Notes, LBFP shall have the right to assign its rights and obligations under such
Swap Agreement to a replacement counterparty subject to the consent of the
Insurer and the requirement that each Rating Agency rating the Notes confirms
that such assignment will not cause such Rating Agency to lower or withdraw its
then current rating on the Notes.
Under the swap agreement, the Counterparty's payments will be
calculated at LIBOR and the Issuer's payments will be calculated at an assumed
fixed rate of 6.27%. To the extent that on any payment date interest calculated
at LIBOR exceeds interest calculated at the assumed fixed rate:
. the Counterparty will be obligated to pay an amount equal to
the excess to the Issuer; and
. the payment will constitute a portion of the Available
Funds.
Likewise, under the swap agreement to the extent that interest calculated at the
assumed fixed rate exceeds interest calculated at LIBOR, the Issuer will be
obligated to pay an amount equal to the excess to the Counterparty.
As a general matter, the obligations of the Counterparty under
the swap agreement are unsecured. However, if the Counterparty's long-term
unsecured senior debt ceases to be rated at a level acceptable to the Insurer,
the Counterparty will be obligated either to (a) post collateral or establish
other arrangements to secure its obligations under the swap agreement or (b)
arrange for a substitute Counterparty to assume the rights and obligations of
the Counterparty under the swap agreement, in either case so that the ratings of
the notes are maintained or, if applicable, restored to their level immediately
prior to the downgrading or withdrawal of the Counterparty's debt. If the
Counterparty fails to take either of these actions, the Issuer will be entitled
to terminate the swap agreement and to claim from the Counterparty the cost of
obtaining a replacement swap agreement from a Counterparty satisfactory to the
Insurer. The Insurer will bear the risk of any failure by the Counterparty to
take the actions required of it and the risk of any inability of the Issuer to
obtain a replacement swap agreement. However, upon the occurrence of default by
the Insurer under the insurance policy, the Noteholders would bear such risk.
S-16
<PAGE>
The Asset Pool
Lease Receivables. The Notes will be secured by a segregated pool
of assets (the "Asset Pool") that includes a portfolio of chattel paper composed
of leases, leases intended as security agreements and installment sales
contracts acquired or originated by IOS Capital (the "Leases"), together with
the equipment financing portion of each periodic rental payment due under the
Leases on or after the opening of business on September 1, 1999 (the "Cut-Off
Date") and all related Casualty Payments, Retainable Deposits, and Termination
Payments (each as defined herein). The Leases, including the Issuer's security
interest in the underlying equipment and other property relating to the Leases
(such equipment and property, the "Equipment"), are referred to as the "Lease
Receivables."
The Issuer will not have and the Asset Pool will not include any
ownership interest in any Equipment, including any residual interest in any
Equipment after the related Lease has been paid in full.
The Leases and Equipment will be acquired by the Seller from the
Originator pursuant to an Assignment and Servicing Agreement among the Seller,
the Originator and the Issuer (the "Assignment and Servicing Agreement").
Contemporaneously, the Lease Receivables will be transferred from the Seller to
the Issuer pursuant to the Assignment and Servicing Agreement and pledged by the
Issuer to the Trustee for the benefit of the Noteholders.
The Leases were originated by the Originator or acquired by the
Originator from sellers or other originators in accordance with the Originator's
specified underwriting criteria. The underwriting criteria applicable to the
Leases included in the Asset Pool are described in all material respects under
the heading "The Originator's Leasing Business" in the Prospectus.
The Leases are triple-net leases which means that the terms of
the leases require the lessees to pay all taxes, maintenance and insurance
associated with the related Equipment and provide that they are noncancellable
by the businesses and individual business owners who lease the Equipment (each,
a "Lessee"). Under some conditions, IOS Capital may consent to prepayment of the
Leases. Generally, IOS Capital will consent to a prepayment of a Lease where the
Lessee is upgrading the related Equipment. All payments under the Leases are
absolute, unconditional obligations of the related Lessees. The Leases provide
that payments under the Leases are not subject to setoff or reduction without
the consent of the related lessor (each a "Lessor"). Payments on the Leases will
be made by the Lessees to IOS Capital, as servicer, for the account of IKON
Receivables, LLC.
Each Lessee entered into its Lease for specified Equipment which
may be designated in schedules incorporated into the Lease. To the extent not
set forth in the Lease, the schedules, among other things, establish the
periodic payments and the term of the Lease with respect to the Equipment. The
Leases follow one of several different forms of lease agreement, with occasional
modifications which do not materially affect the basic terms of the Leases. As
of the Cut-Off Date, the weighted average remaining term of the Leases in the
Asset Pool is 39.5 months. The Originator will represent and warrant that, as of
the Cut-Off Date, all Leases will be current or less than 61 days delinquent
and, as of the initial Determination Date, all Lessees will have made the first
scheduled payment.
IOS Capital offers a cost per copy program, pursuant to which
Lessees pay a fixed monthly payment for which they are allowed a minimum monthly
copy usage. The monthly fixed payment represents equipment financing and a
monthly maintenance charge (the "Maintenance Charge"). The Maintenance Charge is
remitted to IKON Office Solutions monthly upon collection by IOS Capital. IOS
Capital calculates usage monthly using copier meter readings. To the extent that
the usage has exceeded the monthly copy allowance, IOS Capital bills the Lessee
incremental charges for the excess copy usage ("Excess Copy Charge"). This
Excess Copy Charge is remitted to IKON Office Solutions upon collection by IOS
Capital.
Lessees covenant to maintain the Equipment and install it at a
place of business agreed upon with IOS Capital. Delivery, transportation,
repairs and maintenance are the obligation of the Lessees, and all Lessees are
required to carry, at their respective expense, liability and replacement cost
insurance under terms acceptable to IOS Capital. Proceeds of this insurance will
constitute Casualty Payments (as defined herein). Any defaults under a Lease
permit a declaration, as immediately due and payable, of all remaining Lease
Payments under the Lease and the immediate return of the Equipment. Generally,
any payments received six days or more after the scheduled
S-17
<PAGE>
payment date are subject to late charges. Late charges will be retained by the
Servicer to the extent Servicer Advances (as defined below) are made by the
Servicer.
"Non-Performing Leases" are (a) Leases that have become more than
120 days delinquent, (b) Leases that have been accelerated by the Servicer or
(c) Leases that the Servicer has determined to be uncollectible in accordance
with the Servicer's customary practices. IOS Capital will represent and warrant
that, as of the Cut-Off Date, none of the Leases are Non-Performing Leases and
the Seller will represent in the Assignment and Servicing Agreement that at the
time of transfer of any Lease to the Issuer, the Lease was not a Non-Performing
Lease.
The Servicer's customary practices with respect to Non-Performing
Leases include any action necessary to cause, or attempt to cause, the Lessee
thereunder to cure its non-performance or to terminate the Lease and recover the
outstanding amount owed under the Lease and all damages resulting from any
default on the Non-Performing Leases. The Servicer will take action that is
consistent with the customary practices of servicers in the equipment leasing
industry. In addition, the Servicer will use its best efforts to sell or lease
any Equipment that is subject to a Non-Performing Lease in a timely manner and
upon the most favorable terms and conditions available at the time in order to
recoup any amounts still due on the Lease.
No more than 2% of the Leases in the Asset Pool will consist of
Leases with governmental entities as the obligor.
Certain Information with Respect to the Leases and the Lessees.
The following tables present information about the Leases and the Lessees as of
the Cut-Off Date. The Issuer is not aware of any trends or changes relating to
the data in the following tables that would be expected to impact the future
performance of the pool of Leases. As used in these tables, the "Statistical
Discounted Present Value of the Leases" means an amount equal to the future
remaining scheduled Lease Payments (as defined herein) from the Leases as of the
Cut-Off Date, discounted at a rate equal to 8.00%. The tables reflect a
Statistical Discounted Present Value of the Leases of $780,819,921.79. Certain
Leases have, however, been removed from the Asset Pool since the date of
calculation of these tables and the actual aggregate Statistical Discounted
Present Value of the Leases as of the Cut-Off Date was $771,225,122.69. This
removal did not materially affect the distribution of the Leases detailed below.
The aggregate Discounted Present Value of the Leases as of the Cut-Off Date
calculated at the Discount Rate of 7.792% is $777,328,316.25. Figures in the
tables may not add up to the stated totals due to rounding. See "Description of
the Notes--Discounted Present Value of the Leases."
S-18
<PAGE>
Distribution of Leases by State
<TABLE>
<CAPTION>
Percentage of Percentage of
Statistical Aggregate
Percentage of Statistical Discounted Original
Number of Number of Discounted Present Present Value Aggregate Original Equipment
State Leases Leases Value of Leases of Leases Equipment Cost Cost
- ------------------------ ----------- -------------- --------------------- ---------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Alabama 1,486 2.41% $ 16,494,672.02 2.11% $ 12,662,157.11 2.16%
Alaska 109 0.18 1,678,898.35 0.22 1,085,274.67 0.18
Arizona 2,844 4.62 27,522,818.25 3.52 22,554,016.23 3.84
Arkansas 281 0.46 4,393,491.66 0.56 2,471,436.24 0.42
California 2,839 4.61 54,896,157.69 7.03 34,595,863.19 5.89
Colorado 1,921 3.12 28,412,968.31 3.64 21,362,009.17 3.64
Connecticut 974 1.58 12,769,644.91 1.64 11,359,119.35 1.94
Delaware 72 0.12 975,443.11 0.12 800,316.77 0.14
District of Columbia 190 0.31 4,092,232.91 0.52 2,937,818.86 0.50
Florida 5,198 8.44 51,801,071.81 6.63 38,300,565.79 6.53
Georgia 1,788 2.90 30,953,256.50 3.96 22,103,060.58 3.77
Hawaii 55 0.09 1,318,649.19 0.17 655,654.19 0.11
Idaho 143 0.23 1,523,590.71 0.20 1,109,483.44 0.19
Illinois 2,391 3.88 33,637,846.55 4.31 21,131,561.62 3.60
Indiana 1,212 1.97 19,110,063.08 2.45 12,178,701.49 2.08
Iowa 1,606 2.61 14,755,768.35 1.89 10,842,310.99 1.85
Kansas 379 0.62 4,202,896.16 0.54 2,930,350.17 0.50
Kentucky 1,370 2.23 14,558,550.32 1.86 11,656,979.26 1.99
Louisiana 21 0.03 63,632.69 0.01 95,156.88 0.02
Maine 188 0.31 2,791,796.61 0.36 1,971,021.70 0.34
Maryland 584 0.95 8,088,004.91 1.04 6,996,976.39 1.19
Massachusetts 1,354 2.20 25,633,327.56 3.28 20,360,732.83 3.47
Michigan 4,511 7.33 45,524,070.61 5.83 38,995,198.94 6.64
Minnesota 5,200 8.45 52,901,695.50 6.78 37,115,734.13 6.32
Mississippi 1,251 2.03 11,878,351.58 1.52 10,787,456.34 1.84
Missouri 4,023 6.54 51,761,826.28 6.63 33,783,427.99 5.76
Montana 57 0.09 800,382.39 0.10 510,606.04 0.09
Nebraska 230 0.37 2,613,263.19 0.33 1,603,541.57 0.27
Nevada 423 0.69 3,898,214.30 0.50 2,567,354.61 0.44
New Hampshire 559 0.91 8,746,021.13 1.12 7,080,939.66 1.21
New Jersey 754 1.22 13,852,738.94 1.77 9,751,244.64 1.66
New Mexico 832 1.35 12,748,845.31 1.63 13,607,494.79 2.32
New York 2,706 4.40 36,834,128.81 4.72 30,120,651.64 5.13
North Carolina 3,223 5.24 36,451,315.29 4.67 25,802,483.54 4.40
North Dakota 14 0.02 97,678.54 0.01 73,138.86 0.01
Ohio 2,290 3.72 33,749,010.83 4.32 26,925,283.57 4.59
Oklahoma 368 0.60 4,405,890.59 0.56 3,027,699.71 0.52
Oregon 699 1.14 8,694,215.70 1.11 4,804,463.70 0.82
Pennsylvania 214 0.35 2,718,306.88 0.35 2,215,538.32 0.38
Rhode Island 240 0.39 5,054,120.60 0.65 3,260,775.03 0.56
South Carolina 611 0.99 11,373,655.28 1.46 7,175,170.09 1.22
South Dakota 34 0.06 245,334.95 0.03 169,175.81 0.03
Tennessee 1,115 1.81 14,912,840.31 1.91 11,804,023.26 2.01
Texas 223 0.36 2,304,917.89 0.30 1,639,090.58 0.28
Utah 237 0.39 3,151,538.30 0.40 2,342,715.37 0.40
Vermont 181 0.29 2,496,375.51 0.32 1,873,867.42 0.32
Virginia 1,600 2.60 17,703,098.58 2.27 13,787,561.31 2.35
Washington 1,558 2.53 20,979,068.86 2.69 22,302,278.90 3.80
West Virginia 53 0.09 909,381.35 0.12 800,915.53 0.14
Wisconsin 1,253 2.04 13,114,105.64 1.68 12,176,637.47 2.07
Wyoming 92 0.15 1,224,747.03 0.16 630,121.92 0.11
=================================================================================================================================
Total: 61,556 100.00% $780,819,921.79 100.00% $ 586,895,157.66 100.00%
=================================================================================================================================
</TABLE>
S-19
<PAGE>
Distribution of Leases by Lease Balance
<TABLE>
<CAPTION>
Percentage of Percentage
Statistical of Aggregate
Percentage of Statistical Discounted Original
Statistical Discounted Number of Number of Discounted Present Present Value Aggregate Original Equipment
Present Value of the Leases Leases Leases Value of Leases of Leases Equipment Cost Cost
- ----------------------------- ---------- --------------- -------------------- -------------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$0.01 - 5,000.00 25,060 40.71% $ 69,798,588.99 8.94% $ 79,288,774.90 13.51%
5,000.01 - 10,000.00 16,086 26.13 115,677,157.93 14.81 102,100,030.15 17.40
10,000.01 - 15,000.00 7,609 12.36 92,962,214.95 11.91 71,762,745.52 12.23
15,000.01 - 20,000.00 3,963 6.44 68,349,584.03 8.75 50,819,613.37 8.66
20,000.01 - 25,000.00 2,225 3.61 49,591,083.82 6.35 35,227,500.77 6.00
25,000.01 - 30,000.00 1,442 2.34 39,369,109.51 5.04 28,198,296.85 4.80
30,000.01 - 40,000.00 1,651 2.68 56,930,333.35 7.29 38,944,343.80 6.64
40,000.01 - 50,000.00 980 1.59 43,672,153.03 5.59 30,440,469.84 5.19
50,000.01 - 60,000.00 629 1.02 34,350,066.95 4.40 23,220,237.69 3.96
60,000.01 - 70,000.00 455 0.74 29,257,149.53 3.75 19,593,572.61 3.34
70,000.01 - 80,000.00 314 0.51 23,569,506.16 3.02 15,573,065.43 2.65
80,000.01 - 90,000.00 259 0.42 21,965,962.98 2.81 13,948,134.15 2.38
90,000.01 - 100,000.00 182 0.30 17,231,733.92 2.21 10,267,409.69 1.75
100,000.01 - 150,000.00 440 0.71 52,153,659.25 6.68 30,519,300.00 5.20
150,000.01 - 200,000.00 128 0.21 21,964,739.25 2.81 12,261,967.31 2.09
200,000.01- 300,000.00 79 0.13 18,974,369.79 2.43 10,574,647.96 1.80
300,000.01 - 400,000.00 31 0.05 10,735,929.81 1.37 5,846,639.70 1.00
400,000.01 - 500,000.00 8 0.01 3,582,101.74 0.46 2,280,296.54 0.39
500,000.01 - 600,000.00 8 0.01 4,306,651.25 0.55 2,213,689.31 0.38
600,000.01 - 700,000.00 2 0.00 1,277,612.68 0.16 1,019,489.58 0.17
700,000.01 - 800,000.00 2 0.00 1,434,828.18 0.18 1,173,693.30 0.20
800,000.01 - 900,000.00 1 0.00 841,198.24 0.11 204,675.53 0.03
1,000,000.01- 1,500,000.00 1 0.00 1,195,990.06 0.15 961,465.66 0.16
1,500,000.01 - 2,000,000.00 1 0.00 1,628,196.38 0.21 455,098.00 0.08
====================================================================================================================================
Total: 61,556 100.00% $780,819,921.79 100.00% $586,895,157.66 100.00%
====================================================================================================================================
</TABLE>
Distribution of Leases by Remaining Term to Maturity
<TABLE>
<CAPTION>
Percentage of Percentage
Statistical of Aggregate
Percentage of Statistical Discounted Aggregate Original Original
Number of Number of Discounted Present Present Value Equipment Cost Equipment
Remaining Term (months) Leases Leases Value of Leases of Leases Cost Cost
- ------------------------- ----------- -------------- -------------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
6 - 12 5,344 8.68% $ 19,625,208.92 2.51% $ 43,327,237.85 7.38%
13 - 24 14,310 23.25 91,995,205.14 11.78 112,022,475.84 19.09
25 - 36 19,806 32.18 215,047,108.59 27.54 165,686,009.86 28.23
37 - 48 11,752 19.09 207,555,521.86 26.58 128,322,139.07 21.86
49 - 60 10,329 16.78 244,880,649.09 31.36 136,731,059.65 23.30
61 - 72 15 0.02 1,716,228.19 0.22 806,235.39 0.14
===================================================================================================================================
Total: 61,556 100.00% $780,819,921.79 100.00% $ 586,895,157.66 100.00%
===================================================================================================================================
</TABLE>
S-20
<PAGE>
Distribution of Leases by Original Term to Maturity
<TABLE>
<CAPTION>
Percentage of Percentage
Statistical of Aggregate
Percentage of Statistical Discounted Original
Number of Number of Discounted Present Present Value Aggregate Original Equipment
Original Term (months) Leases Leases Value of Leases of Leases Equipment Cost Cost
- ------------------------- ----------- --------------- -------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
7 -12 310 0.50% $ 1,139,584.22 0.15% $ 825,597.63 0.14%
13 - 18 83 0.13 589,370.59 0.08 492,639.89 0.08
19 - 24 1,283 2.08 5,872,516.50 0.75 6,871,518.31 1.17
25 - 30 207 0.34 2,339,604.43 0.30 1,810,846.43 0.31
31 - 36 17,790 28.90 139,982,145.68 17.93 135,288,509.96 23.05
37 - 42 4,815 7.82 40,309,664.35 5.16 33,295,544.19 5.67
43 - 48 10,094 16.40 110,174,777.45 14.11 84,971,916.42 14.48
49 - 54 699 1.14 8,668,810.43 1.11 6,701,867.45 1.14
55 - 60 25,921 42.11 460,579,442.94 58.99 308,901,856.18 52.63
61 - 66 277 0.45 7,193,747.40 0.92 5,158,869.88 0.88
67 - 72 72 0.12 3,815,970.23 0.49 2,424,810.90 0.41
79 - 84 4 0.01 138,961.85 0.02 126,747.42 0.02
91 - 96 1 0.00 15,325.73 0.00 24,433.00 0.00
====================================================================================================================================
Total: 61,556 100.00% $ 780,819,921.79 100.00% $ 586,895,157.66 100.00%
====================================================================================================================================
</TABLE>
Distribution of Leases by Purchase Option
<TABLE>
<CAPTION>
Percentage of Percentage
Statistical of Aggregate
Percentage of Statistical Discounted Original
Number of Number of Discounted Present Present Value Aggregate Original Equipment
Purchase Option Leases Leases Value of Leases of Leases Equipment Cost Cost
- --------------------- ---------------- ------------- --------------------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Fair Market Value 57,761 93.83% $753,987,483.16 96.56% $559,108,860.86 95.27%
Nominal Buyout 3,795 6.17 26,832,438.63 3.44 27,786,296.80 4.73
====================================================================================================================================
Total: 61,556 100.00% $780,819,921.79 100.00% $586,895,157.66 100.00%
====================================================================================================================================
</TABLE>
Distribution of Leases by Delinquencies
<TABLE>
<CAPTION>
Percentage of Percentage
Statistical of Aggregate
Percentage of Statistical Discounted Original
Number of Number of Discounted Present Present Value Aggregate Original Equipment
Days Delinquent Leases Leases Value of Leases of Leases Equipment Cost Cost
- ------------------- ------------------- ------------ --------------------- ---------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
0-30 58,230 94.60% $726,626,007.04 93.06% $546,376,216.16 93.10%
31-60 3,326 5.40 54,193,914.75 6.94 40,518,941.50 6.90
====================================================================================================================================
Total: 61,556 100.00% $780,819,921.79 100.00% $586,895,157.66 100.00%
====================================================================================================================================
</TABLE>
Distribution of Leases by Equipment Type
<TABLE>
<CAPTION>
Percentage of Percentage
Statistical of Aggregate
Percentage of Statistical Discounted Original
Number of Number of Discounted Present Present Value Aggregate Original Equipment
Equipment Type Leases Leases Value of Leases of Leases Equipment Cost Cost
- ---------------------- --------------- -------------- -------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Analog Copier 37,059 60.20% $401,749,694.23 54.45% $322,899,308.44 55.02%
Digital/Multi-purpose
Copier 12,951 21.04 185,735,256.41 23.79 122,155,491.49 20.81
Color Copier 3,605 5.86 113,276,633.73 14.51 87,611,011.44 14.93
Fax Machine 5,941 9.65 22,700,656.81 2.91 15,520,995.47 2.64
Miscellaneous 1,054 1.71 9,421,523.81 1.21 8,328,677.00 1.42
Printer 946 1.54 47,936,156.81 6.14 30,379,673.82 5.18
====================================================================================================================================
Total: 61,556 100.00% $780,819,921.79 100.00% $586,895,157.66 100.00%
====================================================================================================================================
</TABLE>
S-21
<PAGE>
Additions, Substitutions and Adjustments. Although the Leases provide
that they cannot be cancelled by the Lessees, IOS Capital has, from time to
time, permitted early termination by Lessees ("Early Lease Termination") or
other modifications of the Lease terms in circumstances more fully specified in
the Assignment and Servicing Agreement, including, without limitation, in
connection with a full or partial buy-out or equipment upgrade.
In the event of an Early Lease Termination which has been prepaid in
full or in part, the Issuer will have the option to reinvest the proceeds of the
related Lease ("Early Termination Lease") in one or more Leases having similar
characteristics as the terminated Lease (each, an "Additional Lease").
In addition, IOS Capital will have the option to substitute one or
more leases having similar characteristics (each, a "Substitute Lease") for (a)
Non-Performing Leases, (b) Leases subject to repurchase as a result of a breach
of representation and warranty (each a "Warranty Lease") and (c) Leases
following a modification or adjustment to its terms (each, an "Adjusted Lease").
The aggregate Discounted Present Value of the Non-Performing Leases for which
IOS Capital may substitute Substitute Leases is limited to an amount not in
excess of 10% of the aggregate Discounted Present Value of the Leases as of the
Cut-Off Date. The aggregate Discounted Present Value of Adjusted Leases and
Warranty Leases for which IOS Capital may substitute Substitute Leases is
limited to an amount not in excess of 10% of the aggregate Discounted Present
Value of the Leases as of the Cut-Off Date.
The terms of a Lease may be modified or adjusted for administrative
reasons or at the request of the Lessee or Lessor in a variety of circumstances,
including changes to the delivery date of equipment, the cost of equipment, the
components of leased equipment or to correct information when a Lease is entered
into IOS Capital's servicing system. These modifications may result in
adjustments to the lease commencement date, the monthly payment date, the amount
of the monthly payment or the equipment subject to a Lease.
Additional Leases and Substitute Leases will be originated using the
same credit criteria as the initial Leases. To the extent material, information
with respect to Additional or Substitute Leases will be included in periodic
reports filed with the Commission as are required under the Securities Exchange
Act of 1934. Each Substitute Lease and Additional Lease will be required to be
an Eligible Lease.
In no event will the aggregate scheduled Lease Payments, after the
inclusion of the Substitute Leases and Additional Leases, be less than the
aggregate scheduled Lease Payments prior to the substitution or reinvestment.
Additionally, the scheduled final Lease Payment for the Substitute Lease or
Additional Lease will be on or prior to the Payment Date in June, 2005, or, to
the extent the final scheduled Lease Payment for the Lease is due subsequent to
the Payment Date in June, 2005, only scheduled Lease Payments due on or prior to
that date will be included in the Discounted Present Value of the Lease for the
purpose of making any calculation under the Indenture.
In the event that an Early Lease Termination is allowed by IOS Capital
and an Additional Lease is not provided, the amount prepaid will be equal to at
least the Discounted Present Value of the terminated Lease, plus any delinquent
payments. See "The Asset Pool--The Leases."
Assignment and Servicing Agreement. In the Assignment and Servicing
Agreement, IOS Capital will make certain representations and warranties
regarding the Leases and the related Equipment. In the event that (a) any of
these representations and warranties proves at any time to have been inaccurate
in any material respect as of the Issuance Date or (b) any Lease is terminated
in whole or in part by a Lessee, or (c) any amounts due with respect to any
Lease are reduced or impaired, as a result of (i) any action or inaction by IOS
Capital (other than any action or inaction of IOS Capital, when acting as
Servicer, in connection with the enforcement of any Lease other than those
leases IOS Capital permitted to be terminated early in a manner consistent with
the provisions of the Assignment and Servicing Agreement) or (ii) any claim by
any Lessee against IOS Capital, and, in any such case, the event or condition
causing the inaccuracy, termination, reduction, impairment or claim has not been
cured or corrected within 30 days after the earlier of the date on which IOS
Capital is given notice thereof by the Issuer or the Trustee or the date on
which IOS Capital otherwise first has notice thereof, IOS Capital will purchase
the Lease and the related Equipment interests by paying to the Trustee for
deposit into the Collection Account, not later than the Determination Date next
following the expiration of the 30-day period, an amount at least equal to the
Discounted
S-22
<PAGE>
Present Value of the Lease plus any amounts previously due and unpaid thereon.
In the alternative, subject to the satisfaction of certain requirements set
forth in the Assignment and Servicing Agreement, IOS Capital will have the
option to substitute one or more Substitute Leases for a Warranty Lease. Any
inaccuracy in any representation or warranty with respect to (i) the priority of
the lien of the Indenture with respect to any Lease or (ii) the amount (if less
than represented) of the Lease Payments, Casualty Payments or Termination
Payments under any Lease will be deemed to be material.
The Servicer. The Servicer will service the Lease Receivables pursuant
to the Assignment and Servicing Agreement. The Servicer may delegate its
servicing responsibilities to one or more sub-servicers, but will not be
relieved of its liabilities with respect thereto.
Pursuant to the Assignment and Servicing Agreement, the Servicer will
forward Excess Copy Charges and Maintenance Charges to IKON Office Solutions and
may make Servicer Advances (as defined herein).
The Servicer will retain possession of the Leases and Lease files;
provided, however, that, the Servicer may be required, upon the written request
- -------- -------
of the Insurer, to deliver the Leases and Lease files to the Trustee or other
custodian if the long-term debt rating assigned to the Servicer is downgraded
below BBB- by S&P or Baa3 by Moody's.
The Servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Assignment and Servicing Agreement. An uncured breach of any of these
representations or warranties that in any respect materially and adversely
affects the interests of the Noteholders will constitute a Servicer Event of
Default. See "Description of the Transaction Documents--Assignment and Servicing
Agreement--Servicer Events of Default" and "--Rights upon Servicer Events of
Default" in the Prospectus.
Remittance and Other Servicing Procedures. All payments on Leases will
be made by the Lessees to the order of the Servicer to the national lock box
account of the Servicer. The Servicer must deposit these payments (net of
amounts that the Servicer is entitled to retain or use to reimburse itself, or
must remit to third parties, such as IKON Office Solutions) in the Collection
Account within two Business Days of the receipt thereof. See "Description of the
Notes--Collection Account".
Servicing Compensation and Payment of Expenses. A servicing fee (the
"Servicing Fee") will be paid monthly to the Servicer on each Payment Date from
amounts in the Collection Account and will be calculated by multiplying one-
twelfth (or, in the case of the Initial Payment Date, a fraction of which the
number of days from the Issuance Date to the Initial Payment Date is the
numerator and 360 is the denominator) of 0.75% times the lesser of (i) the
Outstanding Principal Amount of the Notes or (ii) the Discounted Present Value
of the Performing Leases, each at the Determination Date for that Payment Date
before application of payments with respect thereto.
The Servicing Fee will be paid to the Servicer for servicing the Lease
Receivables and to pay certain administrative expenses in connection with the
Notes, including Trustee fees and certain Trustee expenses.
Reports to Noteholders. The Servicer or the Trustee, as applicable,
will forward or cause to be forwarded to each holder of record of each Class of
Notes statements or information with respect to the Asset Pool setting forth the
information specifically described in the Assignment and Servicing Agreement and
the Indenture, (as defined herein) which will include the statements and
information described under "Description of the Notes--Reports to Noteholders"
in the Prospectus.
Certain Rights of Insurer. Under the Transaction Documents, so long as
the Policy is outstanding and there is no Insurer Default, the Insurer will be
entitled to exercise substantially all of the rights of Noteholders and the
Noteholders will be precluded from exercising those rights without the prior
written consent of the Insurer. These rights include: (i) the right to remove
the Servicer or Trustee and to appoint or approve successors to the Servicer or
Trustee, (ii) the right to declare defaults or to waive defaults, (iii) the
right to institute
S-23
<PAGE>
proceedings in respect of the Transaction Documents or the Notes, and (iv) the
right to consent to or approve amendments or modifications to the Transaction
Documents.
An "Insurer Default" is a failure by the Insurer to make a payment
required under the Policy in accordance with the terms thereof.
Description of the Notes
General. The 6.14125% Class A-1 Lease-Backed Notes (the "Class A-1
Notes"), 6.31% Class A-2 Lease-Backed Notes (the "Class A-2 Notes"), 6.59% Class
A-3a Lease-Backed Notes (the "Class A-3a Notes"), Variable Rate Class A-3b
Lease-Backed Notes (the "Class A-3b Notes"; together with the Class A-3a Notes,
the "Class A-3 Notes") and 6.88% Class A-4 Lease-Backed Notes (the "Class A-4
Notes" and, together with the Class A-1 Notes, Class A-2 Notes, Class A-3a Notes
and Class A-3b Notes, the "Notes") will be issued pursuant to the Indenture. The
following statements with respect to the Notes is a summary of all material
terms relating to the Notes. However, investors in the Notes should review the
Indenture, the form of which is filed as an exhibit to the registration
statement of which this Prospectus forms a part. Whenever any particular section
of the Indenture or any term used therein is referred to, the section in the
Indenture or the term used therein should be reviewed by you in order to fully
understand this offering.
The Issuer will agree in the Indenture and in the Notes to pay to the
Noteholders (i) the Initial Principal Amount and (ii) monthly interest at the
times, from the sources and on the terms and conditions set forth in the
Indenture and in the Notes. The Notes are debt obligations of the Issuer secured
by the Asset Pool. The Notes do not represent any interest in or a recourse
obligation of IOS Capital, the Insurer (except as provided in the Policy), the
Trustee or any of their affiliates other than the Issuer. The Issuer is a
special purpose company with limited assets. Consequently, Noteholders must rely
solely upon the Asset Pool and the Policy for payment of principal of and
interest on the Notes.
The initial principal amount of the Notes of each class will be
$235,326,000 for the Class A-1 Notes (the "Class A-1 Initial Principal Amount"),
$51,100,000 for the Class A-2 Notes (the "Class A-2 Initial Principal Amount"),
$100,000,000 for the Class A-3a Notes (the "Class A-3a Initial Principal
Amount"), $240,891,000 for the Class A-3b Notes (the "Class A-3b Initial
Principal Amount"; together with the Class A-3a Initial Principal Amount, the
"Class A-3 Initial Principal Amount") and $72,278,000 for the Class A-4 Notes
(the "Class A-4 Initial Principal Amount" and, together with the Class A-1
Initial Principal Amount, the Class A-2 Initial Principal Amount and the Class
A-3 Initial Principal Amount, the "Class A Initial Principal Amount").
The initial aggregate principal amount of the Notes will comprise the
initial principal amount (the "Initial Principal Amount") of the Notes. The
aggregate unpaid principal amount of the Notes outstanding at any time will
comprise the outstanding principal amount (the "Outstanding Principal Amount")
of the Notes as of that time.
Interest on the Notes will be payable as set forth under "Interest
Payments." Principal will be payable as set forth under "Principal Payments."
Notes may be presented to the corporate trust office of the Trustee for
registration of transfer or exchange. Notes may be exchanged without a service
charge, but the Trustee may require payment to cover taxes or other governmental
charges.
Book-Entry Registration. The Noteholders may hold their notes through
The Depository Trust Company ("DTC") (in the United States) or Cedel Bank
("CEDEL") and the Euroclear System ("Euroclear") (in Europe) if they are
participants of those systems, or indirectly through organizations which are
participants in those systems. See "Description of the Notes--Book Entry
Registration" in the Prospectus.
Discounted Present Value of the Leases. The discounted present value
of the Leases (the "Discounted Present Value of the Leases"), at any given time,
shall equal the future remaining scheduled Lease Payments on the Leases
(including Non-Performing Leases), discounted at a rate equal to 7.792% (the
"Discount Rate"). The discounted present value of the Performing Leases (the
"Discounted Present Value of the Performing
S-24
<PAGE>
Leases") equals the Discounted Present Value of the Leases, reduced by all
future remaining scheduled Lease Payments on the Non-Performing Leases,
discounted at the Discount Rate. The aggregate Discounted Present Value of the
Leases as of the Cut-Off Date, calculated at the Discount Rate, is
$777,328,316.25. Certain of the information set forth in this Prospectus
Supplement is based on the Statistical Discounted Present Value of the Leases as
of the Cut-Off Date rather than on the basis of the Discounted Present Value of
the Leases as of the Cut-Off Date. However, the Statistical Discounted Present
Value of the Leases as of the Cut-Off Date does not vary materially from the
Discounted Present Value of the Leases as of the Cut-Off Date. See "The Asset
Pool--Certain Information with Respect to the Leases and the Lessees."
Expected Maturity; Stated Maturity. The expected maturity dates of the
Class A-1 Notes, Class A-2 Notes, Class A-3a Notes, Class A-3b Notes and Class
A-4 Notes are the Payment Dates in August, 2000, November, 2000, February, 2003,
February, 2003 and February, 2004, respectively. The stated maturity date with
respect to the Class A-1 Notes is the Payment Date in October, 2000, the stated
maturity date with respect to the Class A-2 Notes is the Payment Date in May,
2001, the stated maturity date with respect to the Class A-3a Notes is the
Payment Date in August, 2003, the stated maturity date with respect to the Class
A-3b Notes is the Payment Date in August, 2003 and the stated maturity date with
respect to the Class A-4 Notes is the Payment Date in November, 2005. However,
if all payments on the Leases are made as scheduled, final payment with respect
to the Notes would occur prior to stated maturity.
Determination Date. The determination date ("Determination Date") with
respect to each Payment Date is the fifth Business Day prior to that Payment
Date. On each Determination Date, the Servicer will determine the amount of
payments received on the Leases in respect of the immediately preceding calendar
month (each such period, a "Due Period") which will be available for
distribution on the Payment Date. See "Description of the Notes--Distributions
on Notes."
Payment Date. Payments on the Notes will be made on the fifteenth day
of each month (or if that day is not a Business Day, the next succeeding
Business Day), commencing on November 15, 1999, to holders of record on the last
Business Day preceding a Payment Date, or, if the notes are definitive notes,
the last Business Day of the month preceding a Payment Date (each, a "Record
Date"). See "Description of the Notes--Distributions on Notes."
Interest Payments. The Notes will bear interest from the Issuance Date
at the applicable interest rate for the respective class as set forth below. The
Interest Rate is calculated on the basis of a year of 360 days comprised of
twelve 30-day months (except in the case of the Class A-1 Notes and the Class A-
3b Notes, for which interest will be calculated on the basis of a year of 360
days and the actual number of days in the interest accrual period) payable on
the Payment Date to the person in whose name the Note was registered at the
close of business on the preceding Record Date. The interest rate for the Notes
is as follows: 6.14125% per annum on the Class A-1 Notes, 6.31% per annum on the
Class A-2 Notes, 6.59% per annum on the Class A-3a Notes and 6.88% per annum on
the Class A-4 Notes. The Class A-3b Notes will be variable rate notes and will
receive interest at a rate equal to LIBOR plus 0.36%. With respect to any
particular class of Notes, the "Interest Rate" refers to the applicable rate
indicated in the two preceding sentences. "LIBOR" means the London interbank
offered rate for one-month Eurodollar deposits appearing on the Telerate Screen
Page 3750.
Calculation of the LIBOR Rate for the Class A-3b Notes. With respect
to each Payment Date, LIBOR for the Class A-3b Notes shall be established by the
Trustee and as to any Interest Accrual Period, LIBOR will equal the London
interbank offered rate for Eurodollar deposits for one month which appears on
the Telerate Screen page 3750 as of 11:00 A.M., London time, on the second LIBOR
Business Day prior to the first day of such Interest Accrual Period. "Telerate
Screen Page 3750" means the display designated as page 3750 on the Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Trustee), the
rate will be the Reference Bank Rate. The "Reference Bank Rate" will be
determined on the basis of the rates at which deposits in U.S. Dollars are
offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the Trustee)
as of 11:00 A.M., London time, on the day that is two LIBOR Business Days prior
to the immediately preceding Payment Date to prime banks in the London interbank
market for a period of one month in amounts approximately
S-25
<PAGE>
equal to the principal amount of the Class A-3b Notes then outstanding. The
Trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate will be the arithmetic mean of the quotations. If on such
date fewer than two quotations are provided as requested, the rate will be the
arithmetic mean of the rates quoted by one or more major banks in New York City,
selected by the Trustee, as of 11:00 A.M., New York City time, on such date for
loans in U.S. Dollars to leading European banks for a period of one month in
amounts approximately equal to the principal amount of the Class A-3b Notes then
outstanding. If no such quotations can be obtained, the rate will be LIBOR for
the prior Payment Date. "LIBOR Business Day" means any day other than (i) a
Saturday or a Sunday or (ii) a day on which banking institutions in the State of
New York or in the city of London, England are required or authorized by law to
be closed.
On each Payment Date, the interest due (the "Interest Payments") with
respect to the Class A-1 Notes, the Class A-2 Notes, the Class A-3a Notes, the
Class A-3b Notes and the Class A-4 Notes will be the interest that has accrued
on those Notes since the last Payment Date (or in the case of the first Payment
Date, since the Issuance Date) (each such period, an "Interest Accrual Period")
at the applicable Interest Rate applied to the then unpaid principal amounts
(the "Outstanding Principal Amounts") of the Class A-1 Notes, the Class A-2
Notes, the Class A-3a Notes, Class A-3b Notes and the Class A-4 Notes,
respectively, after giving effect to payments of principal to the Class A-1
Noteholders, the Class A-2 Noteholders, the Class A-3a Noteholders, the Class A-
3b Noteholders and the Class A-4 Noteholders, respectively, on the preceding
Payment Date (or, in the case of the first Payment Date, the Issuance Date),
plus all previously accrued and unpaid interest on the Notes. See "Description
of the Notes--General" and "Distributions on Notes."
Principal Payments. For each Payment Date, the Noteholders will be
entitled to receive payments of principal ("Principal Payments"), to the extent
funds are available therefor, in the priorities set forth in the Indenture and
described below and under "Description of the Notes--Distributions on Notes." On
each Payment Date, to the extent funds are available therefor, the Principal
Payment will be paid to the Noteholders in the following priority: (a) (i) to
the Class A-1 Noteholders only, until the Outstanding Principal Amount on the
Class A-1 Notes has been reduced to zero, the Class A Principal Payment, then
(ii) to the Class A-2 Noteholders only, until the Outstanding Principal Amount
on the Class A-2 Notes has been reduced to zero, the Class A Principal Payment,
then (iii) to the Class A-3a Noteholders and the Class A-3b Noteholders only,
their respective pro rata shares based on Outstanding Principal Amount, until
the Outstanding Principal Amount on the Class A-3 Notes has been reduced to
zero, the Class A Principal Payment, and then (iv) to the Class A-4 Noteholders,
until the Outstanding Principal Amount on the Class A-4 Notes has been reduced
to zero, the Class A Principal Payment; and (b) if an Acceleration Event has
occurred, Additional Principal will be distributed, as an additional principal
payment, sequentially, to the Class A-1 Noteholders, the Class A-2 Noteholders,
the Class A-3a Noteholders and Class A-3b Noteholders pro rata and the Class A-4
Noteholders until the Outstanding Principal Amount of each class has been
reduced to zero.
"Additional Principal" with respect to each Payment Date equals the
excess, if any, of (i)(A) the Outstanding Principal Amount of the Notes plus the
Overcollateralization Balance as of the immediately preceding Payment Date after
giving effect to payments on that Payment Date, minus (B) the Discounted Present
Value of the Performing Leases as of the related Determination Date, over (ii)
the Class A Principal Payment to be paid on that Payment Date.
The "Class A Principal Payment" will equal (a) while the Class A-1
Notes are outstanding, (i) on all Payment Dates prior to the October, 2000
Payment Date, the lesser of (1) the amount necessary to reduce the Outstanding
Principal Amount on the Class A-1 Notes to zero and (2) the difference between
(A) the Discounted Present Value of the Performing Leases as of the
Determination Date for the preceding Payment Date and (B) the Discounted Present
Value of the Performing Leases as of the related Determination Date, and (ii) on
and after the October, 2000 Payment Date, the entire Outstanding Principal
Amount of the Class A-1 Notes and (b) after the Class A-1 Notes have been paid
in full, the amount necessary to reduce the aggregate Outstanding Principal
Amount of the Notes to the Class A Target Investor Principal Amount.
The "Class A Target Investor Principal Amount" with respect to each
Payment Date is an amount equal to the product of (a) the Class A Percentage and
(b) the Discounted Present Value of the Performing Leases as of the related
Determination Date.
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<PAGE>
The "Class A Percentage" will be equal to 85.65812%.
An "Acceleration Event" will occur if: (i) a Servicer Event of Default
has occurred and is continuing (regardless of whether the rights and obligations
of the Servicer are terminated as a result of that Servicer Event of Default);
(ii) with respect to any Payment Date, the Overcollateralization Balance is less
than or equal to the Overcollateralization Floor, (iii) for any three
consecutive Due Periods, the average of the Annualized Default Rates for those
Due Periods is greater than 6.25%; or (iv) for any three consecutive Due
Periods, the average of the Delinquency Rates for those Due Periods is greater
than 8.0%.
The "Overcollateralization Balance" with respect to each Payment Date
is an amount equal to the excess, if any, of (a) the Discounted Present Value of
Performing Leases as of the related Determination Date over (b) the Outstanding
Principal Amount of the Notes as of that Payment Date after giving effect to all
principal payments made on that day.
The "Overcollateralization Floor" with respect to each Payment Date
means (a) 2.5% of the Discounted Present Value of the Leases as of the Cut-Off
Date, plus (b) the Cumulative Loss Amount with respect to that Payment Date,
minus (c) the amount on deposit in the Reserve Account (as defined herein) after
giving effect to withdrawals to be made on account of that Payment Date.
The "Cumulative Loss Amount" with respect to each Payment Date is an
amount equal to the excess, if any, of (a) the total of (i) the Outstanding
Principal Amount of the Notes as of the immediately preceding Payment Date after
giving effect to all principal payments made on that day, plus (ii) the
Overcollateralization Balance as of the immediately preceding Payment Date,
minus (iii) the lesser of (A) the Discounted Present Value of the Performing
Leases as of the Determination Date relating to the immediately preceding
Payment Date minus the Discounted Present Value of the Performing Leases as of
the related Determination Date and (B) Available Funds remaining after the
payment of the Policy premium, amounts owing the Servicer and in respect of
interest on the Notes on that Payment Date, over (b) the Discounted Present
Value of the Performing Leases as of the related Determination Date.
The "Annualized Default Rate" means for any Due Period, the sum as of
the related Determination Date of the Discounted Present Value of the Leases
that became Non-Performing Leases during that Due Period minus the sum of the
recoveries on Non-Performing Leases received during that Due Period, divided by
the Discounted Present Value of the Leases on the Determination Date immediately
preceding that Determination Date, multiplied by twelve.
The "Delinquency Rate" means for any Due Period, the sum as of the
related Determination Date of the Discounted Present Value of the Leases that
are 61 or more days delinquent, as of that Determination Date, divided by the
Discounted Present Value of the Leases on that Determination Date.
Collection Account. The Trustee will establish and maintain an
Eligible Account (as defined herein) (the "Collection Account") into which the
Servicer must deposit, as described in the Prospectus, all Lease Payments,
Casualty Payments, Retainable Deposits, Termination Payments, certain proceeds
from purchases by IOS Capital of Leases as a result of breaches of
representations and warranties and recoveries from Non-Performing Leases to the
extent IOS Capital has not substituted a Substitute Lease (except to the extent
required to reimburse unreimbursed Servicer Advances) (each as defined herein)
on or in respect of each Lease included in the Asset Pool within two Business
Days of receipt thereof. See "Description of the Notes--Collections" in the
Prospectus.
An "Eligible Account" is either (a) an account maintained with a
depository institution or trust company acceptable to each of the Rating
Agencies and, so long as no Insurer Default (as defined herein) shall have
occurred and be continuing, the Insurer, or (b) a trust account or similar
account acceptable to each of the Rating Agencies that is maintained with a
federal or state chartered depository institution, which may be an account
maintained with the Trustee.
A "Lease Payment" is the equipment financing portion of each fixed
periodic rental payment payable by a Lessee under a Lease. Casualty Payments,
Retainable Deposits, Termination Payments, prepayments
S-27
<PAGE>
of rent required pursuant to the terms of a Lease at or before the commencement
of the Lease, security deposits, payments becoming due before the applicable
Cut-Off Date and supplemental or additional payments required by the terms of a
Lease with respect to taxes, insurance, maintenance (including, without
limitation, any Maintenance Charges) or other specific charges (including,
without limitation, any Excess Copy Charges), will not be Lease Payments.
A "Casualty Payment" is any payment pursuant to a Lease on account of
the loss, theft, condemnation, governmental taking, destruction, or damage
beyond repair (each, a "Casualty") of any item of Equipment subject thereto
which results, in accordance with the terms of the Lease, in a reduction in the
number or amount of any future Lease Payments due thereunder or in the
termination of the Lessee's obligation to make future Lease Payments thereunder.
A "Retainable Deposit" is any security or other similar deposit which
the Servicer has determined in accordance with its customary servicing practices
is not refundable to the related Lessee.
A "Termination Payment" is a payment payable by a Lessee under a Lease
upon the early termination of the Lease (but not on account of a casualty or a
Lease default) which may be agreed upon by the Servicer, acting in the name of
the Issuer, and the Lessee.
The following funds will be deposited into the Collection Account:
(a) Lease Payments;
(b) recoveries from Non-Performing Leases to the extent IOS Capital
has not substituted Substitute Leases for the Non-Performing
Leases;
(c) late charges received on delinquent Lease Payments not advanced
by the Servicer;
(d) proceeds from purchases by IOS Capital of Leases as a result of
breaches of representations and warranties to the extent IOS
Capital has not substituted Substitute Leases for those Leases;
(e) proceeds from investment of funds in the Collection Account and
the Reserve Account, if any;
(f) Casualty Payments;
(g) Retainable Deposits;
(h) Servicer Advances (as defined herein), if any, in respect of the
related Due Period;
(i) any amounts paid by the Counterparty to the Issuer pursuant to
the swap agreement;
(j) Termination Payments to the extent the Issuer does not reinvest
the Termination Payments in Additional Leases (as defined
herein); and
(k) proceeds, if any, received to redeem the Notes.
The foregoing funds on deposit in the Collection Account on each
Determination Date (excluding any Lease Payments not due during the related or
any prior Due Period), together with any funds deposited into the Collection
Account from the Reserve Account, will constitute "Available Funds".
The Servicer will not be required to deposit in the Collection
Account, and Available Funds will not include, cash flows realized from the sale
or release of the Equipment following the expiration dates of the Leases, other
than Equipment subject to Non-Performing Leases that have not been replaced.
S-28
<PAGE>
The Servicer must deposit the funds referred to in clauses (a) through
(d), (f) and (j) above into the Collection Account within two Business Days of
receipt thereof by the Servicer. The funds referred to in clauses (e), (g), (h),
(i) and (k) above are to be deposited into the Collection Account on or prior to
the related Payment Date.
Reserve Account. Prior to each Payment Date, the Trustee will transfer
from the Reserve Account to the Collection Account the amount specified by the
Servicer in the related Servicing Report representing investment earnings on
amounts held in the Reserve Account as of the related Determination Date. The
Trustee will establish and maintain an Eligible Account (the "Reserve Account").
On the Issuance Date, the Issuer will make an initial deposit to the Reserve
Account in an amount equal to 1.00% of the Discounted Present Value of the
Leases as of the Cut-Off Date. In the event that Available Funds (exclusive of
amounts on deposit in the Reserve Account) are insufficient to pay the Servicing
Fee, unreimbursed Servicer Advances, the premium on the Policy, Interest
Payments on the Notes and the Class A Principal Payment (such payments, the
"Required Payments" and such shortfall, an "Available Funds Shortfall") on any
Payment Date, the Trustee will transfer from the Reserve Account to the
Collection Account an amount equal to the lesser of the funds on deposit in the
Reserve Account (the "Available Reserve Amount") and the amount of the
deficiency.
On each Payment Date, Available Funds remaining after the payment of
the Required Payments will be deposited into the Reserve Account to the extent
that the Required Reserve Amount exceeds the Available Reserve Amount. The
"Required Reserve Amount" equals the lesser of (a) 1.00% of the Discounted
Present Value of the Leases as of the Cut-Off Date and (b) the then unpaid
principal amount (the "Outstanding Principal Amount") of the Notes. Any amounts
on deposit in the Reserve Account in excess of the Required Reserve Amount will
be released to the Issuer.
Distributions on Notes. The first Payment Date is November 15, 1999.
On each Determination Date, the Servicer will determine the Available Funds and
the Required Payments in respect of the related Payment Date.
For each Payment Date, the interest due with respect to the Notes will
be the interest that has accrued since the last Payment Date (or, in the case of
the first Payment Date, since the Issuance Date), at the applicable Interest
Rates applied to the Outstanding Principal Amount of each class, after giving
effect to payments of principal to Noteholders on the preceding Payment Date,
plus all previously accrued and unpaid interest on the Notes.
For each Payment Date, Principal Payments due with respect to the
Notes will be the Class A Principal Payment. In addition, if an Acceleration
Event occurs with respect to any Payment Date, Additional Principal will be
distributed, sequentially, as an additional principal payment on the Notes of
each class until the Outstanding Principal Amount of each class has been reduced
to zero.
On each Payment Date, the Trustee will make required payments of
principal and interest on the Notes from Available Funds.
Unless an Event of Default (as defined herein) and acceleration of the
Notes has occurred, on or before each Payment Date, the Servicer will instruct
the Trustee to apply or cause to be applied the Available Funds to make the
following payments in the following priority:
(a) to pay the Insurer the premium due under the Policy;
(b) to pay the Counterparty any amount due pursuant to the Swap
Agreement;
(c) to pay the Servicing Fee;
(d) to reimburse unreimbursed Servicer Advances (as defined herein)
in respect of a prior Payment Date;
S-29
<PAGE>
(e) to make Interest Payments owing on the Class A Notes concurrently
to the Class A-1 Noteholders, Class A-2 Noteholders, Class A-3a
Noteholders, Class A-3b Noteholders and Class A-4 Noteholders;
(f) to pay the Insurer any unreimbursed Insured Payments and any
unreimbursed optional payments together with interest thereon at
a per annum rate equal to the greater of the Citibank, N.A. base
rate from time to time plus 2% or the then highest applicable
rate of interest on the Notes (the "Late Payment Rate");
(g) to make the Class A Principal Payment to (i) the Class A-1
Noteholders only, until the Outstanding Principal Amount on the
Class A-1 Notes is reduced to zero, then (ii) to the Class A-2
Noteholders only, until the Outstanding Principal Amount on the
Class A-2 Notes is reduced to zero, then (iii) to the Class A-3a
Noteholders and the Class A-3b Noteholders only, their respective
pro rata shares, until the Outstanding Principal Amount on the
Class A-3a Notes and Class A-3b Notes is reduced to zero, and
finally (iv) to the Class A-4 Noteholders, until the Outstanding
Principal Amount on the Class A-4 Notes is reduced to zero;
(h) if an Acceleration Event has occurred, to pay the Additional
Principal, if any, as an additional reduction of principal to the
Noteholders, in the order established in clause (g) above, until
the Outstanding Principal Amount on all of the Class A Notes has
been reduced to zero;
(i) to make a deposit to the Reserve Account in an amount equal to
the excess of the Required Reserve Amount over the Available
Reserve Amount; and
(j) to pay the Issuer the balance, if any.
Advances by the Servicer. Prior to any Payment Date, the Servicer may,
but will not be required to, advance (each, a "Servicer Advance") to the Trustee
an amount sufficient to cover delinquencies on some or all Leases with respect
to prior Due Periods. In the absence of any Servicer Event of Default, the
Servicer will be reimbursed for Servicer Advances from Available Funds on the
following Payment Date. See "Distributions on Notes" above.
Redemption. The Issuer may, at its option, redeem the Notes, as a
whole, at their principal amount, without premium, together with interest at the
applicable rate accrued to the date fixed for redemption if on any payment date
the Discounted Present Value of the Performing Leases is less than or equal to
10% of the Discounted Present Value of the Leases as of the Cut-Off Date. The
Issuer will give notice of redemption to each Noteholder and the Trustee at
least 30 days before the Payment Date fixed for redemption. Upon deposit of
funds necessary to effect the redemption, the Trustee shall pay the remaining
unpaid principal amount on the Notes and all accrued and unpaid interest as of
the date fixed for redemption.
Events of Default and Notice Thereof. The following events, among
others, will be "Events of Default" with respect to the Notes:
(a) default in making Interest Payments on any Note when due and
payable;
(b) default in making Principal Payments at Stated Maturity;
(c) certain defaults in the performance of covenants or agreements or
breaches of representations or warranties by the Issuer;
(d) the occurrence of a Servicer Event of Default; or
(e) insolvency or bankruptcy events relating to the Issuer.
S-30
<PAGE>
The Indenture will provide that the Trustee will give the Insurer and
the Noteholders notice of all uncured defaults known to it (the term "default"
to include the events specified above without applicable grace periods).
If an Event of Default occurs, the Trustee shall, at the direction of
the Insurer (if no Insurer Default has occurred and is continuing) or of holders
of not less than 66-2/3% of the Outstanding Principal Amount of the Notes (if an
Insurer Default has occurred and is continuing), and, if an Insurer Default has
occurred and is continuing, may, declare the unpaid principal amount of the
Notes to be immediately due and payable together with all accrued and unpaid
interest thereon. However, if the Event of Default involves other than non-
payment of principal or interest on the Notes, the Trustee may not sell the
related Leases or any Equipment unless the sale is for an amount greater than or
equal to the Outstanding Principal Amount of the Notes unless directed to do so
by the Insurer (if no Insurer Default has occurred and is continuing) or the
holders of 66-2/3% of the then Outstanding Principal Amount of the Notes (if an
Insurer Default has occurred and is continuing).
Subsequent to an Event of Default and following any acceleration of
the Notes pursuant to the Indenture, any monies that may then be held or
thereafter received by the Trustee will be applied in the following order of
priority, on the date or dates fixed by the Trustee and, in case of the
distribution of the entire amount due on account of principal or interest, upon
presentation and surrender of the Notes:
First to the payment of all costs and expenses of collection
-----
incurred by the Trustee, the Insurer and the Noteholders (including the
reasonable fees and expenses of any counsel to the Trustee, the Insurer and
the Noteholders) and all fees and expenses (including legal fees and
expenses) owed to the Trustee under the Indenture;
Second to pay the Counterparty any amount due pursuant to the Swap
------
Agreement;
Third if the person then acting as Servicer under the Assignment
-----
and Servicing Agreement is not IOS Capital or an affiliate of IOS Capital,
to the payment of all Servicing Fees and unreimbursed Servicer Advances
then due to that person;
Fourth first, to the payment of all accrued and unpaid interest on
------
the Outstanding Principal Amount of the Class A-1 Notes, Class A-2 Notes,
Class A-3a Notes, Class A-3b Notes and Class A-4 Notes pro rata to the date
of payment thereof, including (to the extent permitted by applicable law)
interest on any overdue installment of interest and principal from the
maturity of that installment to the date of payment thereof at the rate per
annum equal to the Class A-1 Interest Rate, Class A-2 Interest Rate, Class
A-3a Interest Rate, Class A-3b Interest Rate and Class A-4 Interest Rate,
respectively, second to the payment of the Outstanding Principal Amount of
the Class A-1 Notes, third, to the payment of the Outstanding Principal
Amount of the Class A-2 Notes, fourth, to the payment of the Outstanding
Principal Amount of the Class A-3a Notes and Class A-3b Notes pro rata
based on Outstanding Principal Amounts, and fifth, to the payment of the
Outstanding Principal Amount of the Class A-4 Notes; provided, that the
Noteholders may allocate payments for interest, principal and premium at
their own discretion, except that no allocation shall affect the allocation
of amounts or future payments received by any other Noteholder;
Fifth to the payment of amounts then due the Insurer under the
-----
Indenture, including Policy premiums owed to the Insurer (other than
amounts referred to in clause Fifth);
Sixth to the payment to the Insurer of any unreimbursed Insured
-----
Payments and any unreimbursed optional payments made by the Insurer
together with interest thereon at the Late Payment Rate;
Seventh if the person then acting as Servicer is IOS Capital or an
-------
affiliate of IOS Capital, to the payment of all Servicing Fees and
unreimbursed Servicer Advances then due to the Servicer; and
Eighth to the payment of the remainder, if any, to the Issuer or
------
any other person legally entitled thereto.
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<PAGE>
The Issuer will be required to furnish annually to the Trustee a
statement of officers of the Issuer to the effect that to the best of their
knowledge the Issuer is not in default in the performance and observance of the
terms of the Indenture or, if the Issuer is in default, specifying the default.
The Indenture will provide that the Trustee, at the direction of the
Insurer (if no Insurer Default has occurred and is continuing) or the holders of
66-2/3% in aggregate principal amount of the Notes then outstanding (if an
Insurer Default has occurred and is continuing), will have the right to waive
certain defaults and, subject to certain limitations, to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust power conferred on the Trustee. The Indenture will
provide that in case an Event of Default occurs (which shall not have been cured
or waived), the Trustee will be required to exercise its rights and powers under
the Indenture and to use the degree of care and skill in their exercise that a
prudent man would exercise or use in the circumstances in the conduct of his own
affairs. Subject to these provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of the
Insurer or the Noteholders unless they have offered the Trustee reasonable
security or indemnity satisfactory to the Trustee. Upon request of a Noteholder,
the Trustee will provide information as to the outstanding principal amount of
each Class of Notes.
Modification of the Indenture. The Indenture may be modified and
amended as described under "Description of the Transaction Documents--
Modification of the Indenture" in the Prospectus. The consent of the Insurer (if
no Insurer Default has occurred and is continuing) or of the holders of 66-2/3%
of the aggregate principal amount of the Notes (if an Insurer Default has
occurred and is continuing) is required for any modification or amendment.
Servicer Events of Default. The events and conditions constituting
"Servicer Events of Default" under the Assignment and Servicing Agreement and
the rights of the Trustee on behalf of the Insurer or the Noteholders in the
event of a Servicer Event of Default are described in "Description of the
Transaction Documents--Servicer Events of Default" and "--Rights upon Servicer
Events of Default" in the Prospectus.
Servicer Events of Default shall include: (i) so long as IOS Capital
is the Servicer, if there shall be a downgrading of the long-term debt rating
assigned by Moody's or S&P to IOS Capital to BB or below or Ba2 or below, as the
case may be; (ii) if for any three consecutive Due Periods, the average of the
Annualized Default Rates for these Due Periods is greater than 8.0%; and (iii)
if for any three consecutive Due Periods, the average of the Delinquency Rates
for these Due Periods is greater than 10.0%.
Security for the Notes. Repayment of the Notes will be secured by (a)
a first priority security interest in the Leases perfected by filing UCC
financing statements against the Issuer, the Seller and IOS Capital, (b) a first
priority security interest in the Issuer's security interest in the Equipment
perfected by filing UCC financing statements against the Issuer and the Seller
and (c) a first priority security interest in all funds in the Collection
Account and the Reserve Account.
Prepayment and Yield Considerations
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yield to maturity of the Notes are
directly related to the rate of payments on the underlying Leases. The payments
on the Leases may be in the form of scheduled payments, prepayments or
liquidations due to default, casualty and other events, which cannot be
specified at present. Any payments may result in distributions to Noteholders of
amounts which would otherwise have been distributed over the remaining term of
the Leases. In general, the rate of payments may be influenced by a number of
other factors, including general economic conditions. The rate of principal
payments with respect to any class may also be affected by any purchase of the
underlying Leases by IOS Capital pursuant to the Assignment and Servicing
Agreement. In this event, the purchase price will decrease the Discounted
Present Value of the Performing Leases, causing the corresponding weighted
average life of the Notes to decrease. See "Risk Factors--Prepayments and
Related Reinvestment May Reduce Your Yield" in the Prospectus.
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<PAGE>
In the event a Lease becomes a Non-Performing Lease, a Warranty Lease
or an Adjusted Lease, IOS Capital will have the option to substitute a
Substitute Lease; provided that any substitution will be limited to (i) an
--------
aggregate amount not to exceed 10% of the Discounted Present Value of the Leases
as of the Cut-Off Date with respect to Non-Performing Leases and (ii) an
aggregate amount not to exceed 10% of the Discounted Present Value of the Leases
as of the Cut-Off Date with respect to Adjusted Leases and Warranty Leases. In
addition, in the event of an Early Lease Termination resulting in a Lease having
been prepaid in full, IOS Capital will have the option to transfer an Additional
Lease. The Substitute Leases and Additional Leases will have a Discounted
Present Value equal to or greater than that of the Leases being replaced and the
monthly payments on the Substitute Leases or Additional Leases will be at least
equal to those of the terminated Leases through the term of the terminated
Leases. In the event that an Early Lease Termination is allowed by IOS Capital
and a Substitute Lease is not provided, the amount prepaid will be equal to at
least the Discounted Present Value of the Early Termination Lease, plus any
delinquent payments.
The effective yield to holders of the Notes will depend upon, among
other things, the amount of and rate at which principal is paid to Noteholders.
The after-tax yield to Noteholders may be affected by lags between the time
interest income accrues to Noteholders and the time the related interest income
is received by the Noteholders.
The following chart sets forth the percentage of the Initial Principal
Amount of the Class A-1 Notes, Class A-2 Notes, Class A-3a Notes, Class A-3b
Notes and Class A-4 Notes which would be outstanding on the Payment Dates set
forth below assuming a Conditional Prepayment Rate ("CPR") of 0%, 7%, 10% and
12%, respectively, which in each case was calculated using a discount rate of
7.792%. The Initial Statistical Principal Amounts of the Class A-1 Notes, Class
A-2 Notes, Class A-3 Notes and Class A-4 Notes are $235,326,000, $51,100,000,
$100,000,000, $240,891,000 and $72,278,000, respectively. The "Statistical Class
A Percentage" for the Class A Notes is equal to 85.65812%. This information is
hypothetical and is set forth for illustrative purposes only. The CPR assumes
that a fraction of the outstanding Leases in the Asset Pool is prepaid on each
Distribution Date, which implies that each Lease in the Asset Pool is equally
likely to prepay. This fraction, expressed as a percentage, is annualized to
arrive at the Conditional Payment Rate for the Leases in the Asset Pool. The CPR
measures prepayments based on the outstanding discounted present value of the
Leases discounted at 7.792%, after the payment of all scheduled payments on the
Leases during the related Due Period. The CPR further assumes that all Leases
are the same size and amortize at the same rate and that each Lease will be
either paid as scheduled or prepaid in full. The amounts set forth below are
based upon the timely receipt of scheduled monthly Lease Payments as of the Cut-
Off Date, assume that the Issuer does not exercise its option to redeem the
Notes and assume the Issuance Date is October 7, 1999 and the first Payment Date
is November 15, 1999.
S-33
<PAGE>
<TABLE>
<CAPTION>
Percentage of the Initial Principal Amounts at the Respective CPR Set Forth Below
======================================================================================================================
0% CPR
---------------------------------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3a and Class Class A-4
- ------------------ ----------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Issuance Date 100% 100% 100% 100%
11/15/99 81 100 100 100
12/15/99 72 100 100 100
1/15/00 63 100 100 100
2/15/00 54 100 100 100
3/15/00 45 100 100 100
4/15/00 36 100 100 100
5/15/00 27 100 100 100
6/15/00 18 100 100 100
7/15/00 9 100 100 100
8/15/00 0 100 100 100
9/15/00 0 66 100 100
10/15/00 0 32 100 100
11/15/00 0 0 100 100
12/15/00 0 0 95 100
1/15/01 0 0 90 100
2/15/01 0 0 85 100
3/15/01 0 0 80 100
4/15/01 0 0 75 100
5/15/01 0 0 71 100
6/15/01 0 0 66 100
7/15/01 0 0 62 100
8/15/01 0 0 57 100
9/15/01 0 0 53 100
10/15/01 0 0 49 100
11/15/01 0 0 45 100
12/15/01 0 0 41 100
1/15/02 0 0 37 100
2/15/02 0 0 33 100
3/15/02 0 0 29 100
4/15/02 0 0 26 100
5/15/02 0 0 22 100
6/15/02 0 0 19 100
7/15/02 0 0 17 100
8/15/02 0 0 14 100
9/15/02 0 0 11 100
10/15/02 0 0 9 100
11/15/02 0 0 6 100
12/15/02 0 0 4 100
1/15/03 0 0 1 100
2/15/03 0 0 0 96
3/15/03 0 0 0 84
4/15/03 0 0 0 73
5/15/03 0 0 0 63
6/15/03 0 0 0 54
7/15/03 0 0 0 45
8/15/03 0 0 0 37
9/15/03 0 0 0 29
10/15/03 0 0 0 22
11/15/03 0 0 0 15
12/15/03 0 0 0 8
1/15/04 0 0 0 3
2/15/04 0 0 0 0
WEIGHTED AVERAGE
LIFE(1)(YEARS)
To Maturity: 0.44 1.02 2.10 3.80
To Call: 0.44 1.02 2.10 3.44
</TABLE>
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class A-3a
Note, Class A-3b Note and Class A-4 Note is determined by (a) multiplying
the amount of cash distributions in reduction of the Outstanding Principal
Amount of the respective Note by the number of years from the Issuance Date
to the relevant Payment Date, (b) adding the results, and (c) dividing the
sum by the Initial Principal Amount of the applicable class.
S-34
<PAGE>
<TABLE>
<CAPTION>
Percentage of the Initial Principal Amounts at the Respective CPR Set Forth Below
======================================================================================================================
7% CPR
---------------------------------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3a and Class Class A-4
- ------------------ ----------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Issuance Date 100% 100% 100% 100%
11/15/99 79 100 100 100
12/15/99 68 100 100 100
1/15/00 58 100 100 100
2/15/00 47 100 100 100
3/15/00 36 100 100 100
4/15/00 26 100 100 100
5/15/00 16 100 100 100
6/15/00 6 100 100 100
7/15/00 0 85 100 100
8/15/00 0 47 100 100
9/15/00 0 9 100 100
10/15/00 0 0 96 100
11/15/00 0 0 91 100
12/15/00 0 0 85 100
1/15/01 0 0 80 100
2/15/01 0 0 75 100
3/15/01 0 0 70 100
4/15/01 0 0 65 100
5/15/01 0 0 61 100
6/15/01 0 0 56 100
7/15/01 0 0 52 100
8/15/01 0 0 47 100
9/15/01 0 0 43 100
10/15/01 0 0 39 100
11/15/01 0 0 35 100
12/15/01 0 0 32 100
1/15/02 0 0 28 100
2/15/02 0 0 24 100
3/15/02 0 0 21 100
4/15/02 0 0 18 100
5/15/02 0 0 15 100
6/15/02 0 0 12 100
7/15/02 0 0 10 100
8/15/02 0 0 7 100
9/15/02 0 0 5 100
10/15/02 0 0 3 100
11/15/02 0 0 1 100
12/15/02 0 0 0 92
1/15/03 0 0 0 82
2/15/03 0 0 0 72
3/15/03 0 0 0 62
4/15/03 0 0 0 53
5/15/03 0 0 0 45
6/15/03 0 0 0 37
7/15/03 0 0 0 30
8/15/03 0 0 0 24
9/15/03 0 0 0 18
10/15/03 0 0 0 12
11/15/03 0 0 0 7
12/15/03 0 0 0 2
1/15/04 0 0 0 0
2/15/04 0 0 0 0
WEIGHTED AVERAGE
LIFE(1)(YEARS)
To Maturity: 0.39 0.89 1.92 3.64
To Call: 0.39 0.89 1.92 3.27
</TABLE>
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class A-3a
Note, Class A-3b Note and Class A-4 Note is determined by (a) multiplying
the amount of cash distributions in reduction of the Outstanding Principal
Amount of the respective Note by the number of years from the Issuance Date
to the relevant Payment Date, (b) adding the results, and (c) dividing the
sum by the Initial Principal Amount of the applicable class.
S-35
<PAGE>
<TABLE>
<CAPTION>
Percentage of the Initial Principal Amounts at the Respective CPR Set Forth Below
======================================================================================================================
10% CPR
---------------------------------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3a and Class Class A-4
- ------------------ ----------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Issuance Date 100% 100% 100% 100%
11/15/99 78 100 100 100
12/15/99 67 100 100 100
1/15/00 55 100 100 100
2/15/00 44 100 100 100
3/15/00 33 100 100 100
4/15/00 22 100 100 100
5/15/00 11 100 100 100
6/15/00 1 100 100 100
7/15/00 0 63 100 100
8/15/00 0 24 100 100
9/15/00 0 0 98 100
10/15/00 0 0 92 100
11/15/00 0 0 87 100
12/15/00 0 0 81 100
1/15/01 0 0 76 100
2/15/01 0 0 71 100
3/15/01 0 0 66 100
4/15/01 0 0 61 100
5/15/01 0 0 57 100
6/15/01 0 0 52 100
7/15/01 0 0 48 100
8/15/01 0 0 43 100
9/15/01 0 0 39 100
10/15/01 0 0 35 100
11/15/01 0 0 32 100
12/15/01 0 0 28 100
1/15/02 0 0 24 100
2/15/02 0 0 21 100
3/15/02 0 0 18 100
4/15/02 0 0 15 100
5/15/02 0 0 12 100
6/15/02 0 0 9 100
7/15/02 0 0 7 100
8/15/02 0 0 5 100
9/15/02 0 0 3 100
10/15/02 0 0 1 100
11/15/02 0 0 0 92
12/15/02 0 0 0 82
1/15/03 0 0 0 72
2/15/03 0 0 0 63
3/15/03 0 0 0 54
4/15/03 0 0 0 46
5/15/03 0 0 0 38
6/15/03 0 0 0 31
7/15/03 0 0 0 25
8/15/03 0 0 0 19
9/15/03 0 0 0 14
10/15/03 0 0 0 9
11/15/03 0 0 0 4
12/15/03 0 0 0 0
1/15/04 0 0 0 0
2/15/04 0 0 0 0
WEIGHTED AVERAGE
LIFE(1)(YEARS)
To Maturity: 0.36 0.84 1.84 3.56
To Call: 0.36 0.84 1.84 3.18
</TABLE>
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class A-3a
Note, Class A-3b and Class A-4 Note is determined by (a) multiplying the
amount of cash distributions in reduction of the Outstanding Principal
Amount of the respective Note by the number of years from the Issuance Date
to the relevant Payment Date, (b) adding the results, and (c) dividing the
sum by the Initial Principal Amount of the applicable class.
S-36
<PAGE>
<TABLE>
<CAPTION>
Percentage of the Initial Principal Amounts at the Respective CPR Set Forth Below
======================================================================================================================
12% CPR
---------------------------------------------------------------------------------------------
Payment Date Class A-1 Class A-2 Class A-3a and Class Class A-4
- ------------------ ----------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Issuance Date 100% 100% 100% 100%
11/15/99 77 100 100 100
12/15/99 65 100 100 100
1/15/00 54 100 100 100
2/15/00 42 100 100 100
3/15/00 30 100 100 100
4/15/00 19 100 100 100
5/15/00 8 100 100 100
6/15/00 0 90 100 100
7/15/00 0 48 100 100
8/15/00 0 8 100 100
9/15/00 0 0 95 100
10/15/00 0 0 90 100
11/15/00 0 0 84 100
12/15/00 0 0 79 100
1/15/01 0 0 73 100
2/15/01 0 0 68 100
3/15/01 0 0 63 100
4/15/01 0 0 58 100
5/15/01 0 0 54 100
6/15/01 0 0 49 100
7/15/01 0 0 45 100
8/15/01 0 0 41 100
9/15/01 0 0 37 100
10/15/01 0 0 33 100
11/15/01 0 0 29 100
12/15/01 0 0 26 100
1/15/02 0 0 22 100
2/15/02 0 0 19 100
3/15/02 0 0 16 100
4/15/02 0 0 13 100
5/15/02 0 0 10 100
6/15/02 0 0 8 100
7/15/02 0 0 5 100
8/15/02 0 0 3 100
9/15/02 0 0 1 100
10/15/02 0 0 0 95
11/15/02 0 0 0 85
12/15/02 0 0 0 75
1/15/03 0 0 0 66
2/15/03 0 0 0 57
3/15/03 0 0 0 49
4/15/03 0 0 0 41
5/15/03 0 0 0 34
6/15/03 0 0 0 27
7/15/03 0 0 0 22
8/15/03 0 0 0 16
9/15/03 0 0 0 11
10/15/03 0 0 0 7
11/15/03 0 0 0 2
12/15/03 0 0 0 0
1/15/04 0 0 0 0
2/15/04 0 0 0 0
WEIGHTED AVERAGE
LIFE(1)(YEARS)
To Maturity: 0.35 0.81 1.79 3.51
To Call: 0.35 0.81 1.79 3.10
</TABLE>
(1) The weighted average life of a Class A-1 Note, Class A-2 Note, Class A-3a
Note, Class A-3b Note and Class A-4 Note is determined by (a) multiplying
the amount of cash distributions in reduction of the Outstanding Principal
Amount of the respective Note by the number of years from the Issuance Date
to the relevant Payment Date, (b) adding the results, and (c) dividing the
sum by the Initial Principal Amount of the applicable class.
S-37
<PAGE>
The Trustee
The Trustee, Harris Trust and Savings Bank, is a banking corporation
organized under the laws of Illinois. The Prospectus describes the conditions
under which the Trustee may resign and the appointment of a successor trustee.
See "The Trustee" in the Prospectus.
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" set forth the material federal income
tax consequences to the original purchasers of the Notes of the purchase,
ownership and disposition of the Notes. Tax Counsel's opinion does not purport
to deal with all federal income tax considerations applicable to all categories
of investors. The tax consequences to holders subject to special rules,
including insurance companies, tax exempt organizations, regulated investment
companies, financial institutions or broker deals, taxpayers subject to the
alternative minimum tax, and holders that will hold the Notes as other than
capital assets, are not discussed below or in the Prospectus. In particular,
this discussion applies only to investors that purchase Notes directly from the
Issuer and hold the Notes as capital assets.
The discussion that follows, and the opinion set forth below of Dewey
Ballantine LLP, special tax counsel to the Issuer ("Tax Counsel"), are based
upon provisions of the Internal Revenue Code of 1986, as amended (the "Code")
and treasury regulations promulgated thereunder as in effect on the date hereof
and on existing judicial and administrative interpretations thereof. These
authorities are subject to change and to differing interpretations, which could
apply retroactively. The opinion of Tax Counsel is not binding on the courts or
the Internal Revenue Service (the "IRS"). Potential investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of the
Notes.
The following discussion addresses asset-backed notes such as the
Notes that are intended to be treated for federal income tax purposes as
indebtedness secured by the underlying Asset Pool. Tax counsel has prepared the
following discussion and is of the opinion that it is correct in all material
respects.
Tax Characterization of the Issuer. Tax Counsel is of the opinion that
the Issuer will not be treated as an association (or a publicly traded
partnership) taxable as a corporation for federal income tax purposes.
Tax Characterization of the Notes. In the opinion of Tax Counsel,
although no transaction closely comparable to that contemplated herein has been
the subject of any treasury regulation, revenue ruling or judicial decision,
based on the application of existing law to the facts as set forth in the
applicable agreement, the Notes will be treated as indebtedness for federal
income tax purposes. Although it is the opinion of Tax Counsel that the Notes
are properly characterized as indebtedness for federal income tax purposes, no
assurance can be given that this debt characterization of the Notes will
prevail. The IRS could recharacterize the Notes under several alternative
theories. See "Material Federal Income Tax Consequences--Tax Characterization of
the Notes" in the Prospectus.
Discount and Premium. It is anticipated that the Notes will not be
issued with any original issue discount. See "Material Federal Income Tax
Consequences--Discount and Premium--Original Issue Discount" in the Prospectus.
In addition, a subsequent purchaser who buys a Note for less than its principal
amount may be subject to the "market discount" rules of the Code. See "Material
Federal Income Tax Consequences--Discount and Premium--Market Discount" in the
Prospectus. A subsequent purchaser who buys a Note for more than its principal
amount may be subject to the "market premium" rules of the Code. See "Material
Federal Income Tax Consequences--Discount and Premium--Premium" in the
Prospectus.
S-38
<PAGE>
Sale or Exchange of the Notes. If a Note is sold or exchanged, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and its adjusted basis in the Note. See "Material Federal
Income Tax Consequences--Sale or Exchange" in the Prospectus.
Backup Withholding and Foreign Investors. Payments of interest and
principal, together with payments of proceeds from the sale of the Notes, may be
subject to certain withholding, backup withholding and information reporting
rules. The IRS recently issued regulations (the "Withholding Regulations"),
which modify these rules. The effective date of the Withholding Regulations has
been extended to payments made after December 31, 2000, although taxpayers may
begin compliance with the Withholding Regulations immediately. Prospective
investors are urged to consult their own tax advisors regarding the Withholding
Regulations.
For further discussion of backup withholding and taxation of foreign
investors in the Notes, see "Material Federal Income Tax Consequences--Backup
Withholding" and "--Foreign Investors" in the Prospectus.
ERISA Considerations
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan. A
violation of these "prohibited transaction" rules may generate excise tax and
other liabilities under ERISA and the Code for those persons. ERISA also imposes
certain duties on persons who are fiduciaries of plans subject to ERISA,
including the duty to make investments that are prudent, diversified (except if
prudent not to do so) and in accordance with governing plan documents. 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 the plan (subject to certain exceptions not here relevant).
Employee benefit plans that are government plans (as defined in Section 3(32) of
ERISA) and certain church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA or Section 4975 of the Code; however, those plans may be
subject to comparable federal, state or local law restrictions.
Some 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 the employee benefit plan's or the IRA's investment in that entity
(each a "Benefit Plan"). Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of the Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquired an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation were
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The Notes
should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. This determination is based in part upon
the traditional debt features of the Notes, including the reasonable expectation
of purchasers of Notes that the Notes will be repaid when due, as well as the
absence of conversion rights, warrants and other typical equity features. The
debt treatment of the Notes for ERISA purposes could change if the Issuer
incurred losses. However, without regard to whether the Notes are treated as an
equity interest for these purposes, the acquisition or holding of Notes by or on
behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Issuer or any of its Affiliates is or becomes a party in
interest or disqualified person with respect to such Benefit Plan. In this case,
certain exemptions from the prohibited transaction rules could be applicable
depending on the type and circumstances of the plan fiduciary making the
decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by banks,
collective investment funds; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 96-23, regarding transactions by in-house asset
managers; and PTCE 84-14, regarding transactions by "qualified professional
assets managers." Each investor using the assets of a Benefit Plan which
acquires the Notes, or to whom the Notes are transferred, will be deemed to have
represented that the acquisition and continued holding of the Notes will be
covered by a Department of Labor class exemption.
S-39
<PAGE>
Due to the complexity of the applicable rules and the penalties that
may be imposed upon persons involved in non-exempt prohibited transactions, any
Benefit Plan fiduciary considering the purchase of a Note with plan assets
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to the 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.
The sale of Notes to a Benefit Plan is in no respect a representation
by the Issuer or the Underwriters that this investment meets all relevant legal
requirements with respect to investments by Benefit Plans generally or by a
particular Benefit Plan, or that this investment is appropriate for Benefit
Plans generally or any particular Benefit Plan.
Use of Proceeds
The net proceeds from the sale of the Notes will be used to fund the
Reserve Account and to make distributions by the Issuer to the Seller and by the
Seller to the Originator. See "Use of Proceeds" in the Prospectus. The
Originator will apply a portion of the net proceeds distributed to it to satisfy
obligations of it or its subsidiaries under warehouse facilities, including a
warehouse facility to Twin Towers Inc., for which Deutsche Bank AG, New York
Branch is agent. Deutsche Bank AG is an affiliate of Deutsche Bank Securities,
one of the Underwriters.
Ratings of the Notes
It is a condition to the issuance of the Notes that the Class A-1
Notes be rated at least "P-1" and "A-1+" and that the Class A-2, A-3 and A-4
Notes be rated at least "Aaa" and "AAA" by Moody's and S&P, respectively (each a
"Rating Agency"). The ratings are dependent upon the financial strength ratings
of the Insurer as described in "Risk Factors--Ratings of the Notes are Dependent
upon Creditworthiness of the Insurer."
The ratings are not a recommendation to purchase, hold or sell the
Notes, inasmuch as the ratings do not comment as to market price or suitability
for a particular investor. There is no assurance that any rating will continue
for any period of time or that it will not be lowered or withdrawn entirely by
the Rating Agency if, in its judgment, circumstances so warrant. A revision or
withdrawal of a rating may have an adverse affect on the market price of the
Notes. The rating of the Notes addresses the likelihood of the timely payment of
interest and the ultimate payment of principal on the Notes by the Stated
Maturity Date. The rating does not address the rate of prepayments that may be
experienced on the Leases and, therefore, does not address the effect of the
rate of Lease prepayments on the return of principal to the Noteholders.
Underwriting
Under the terms and subject to the conditions set forth in the
underwriting agreement for the sale of the Notes, the Issuer has agreed to sell,
and each of the Underwriters, Lehman Brothers Inc., Chase Securities Inc.,
Deutsche Bank Securities and PNC Capital Markets, Inc., has severally agreed to
purchase, the principal amount of the Notes set forth below:
S-40
<PAGE>
<TABLE>
<CAPTION>
Principal Amount (Approximate)
--------------------------------------------------------------------------------
Lehman Brothers Chase Deutsche Bank PNC Capital
Inc. Securities Inc. Securities Markets, Inc. Totals
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1 Notes $ 70,597,800 $ 70,597,800 $ 47,065,200 $ 47,065,200 $235,326,000
Class A-2 Notes 15,330,000 15,330,000 10,220,000 10,220,000 $ 51,100,000
Class A-3a Notes 30,000,000 30,000,000 20,000,000 20,000,000 $100,000,000
Class A-3b Notes 72,267,300 72,267,300 48,178,200 48,178,200 $240,891,000
Class A-4 Notes 21,683,400 21,683,400 14,455,600 14,455,600 $ 72,278,000
-------------- -------------- ------------- ------------- ------------
Totals $ 209,878,500 $ 209,878,500 $ 139,919,000 $ 139,919,000 $699,595,000
</TABLE>
The Issuer has been advised by the Underwriters that the several
Underwriters propose initially to offer the Notes to the public at the
respective prices set forth on the cover page of this Prospectus, and to certain
dealers at these prices, less a selling concession not in excess of 0.105% per
Class A-1 Note, 0.120% per Class A-2 Note, 0.225% per Class A-3a Note, 0.225%
per Class A-3b Note and 0.255% per Class A-4 Note. The Underwriters may allow,
and dealers may reallow to other dealers, a discount not in excess of 0.05% per
Class A-1 Note, 0.06% per Class A-2 Note, 0.1125% per Class A-3a Note, 0.1125%
per Class A-3b Note and 0.125% per Class A-4 Note.
The Underwriters will each represent and agree that:
(a) it has not offered or sold, and, prior to the expiration of six
months from the Issuance Date, will not offer or sell, any Notes
to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for purposes
of their business, or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995;
(b) it has complied and will comply with all applicable provisions of
the Financial Services Act 1986 with respect to anything done by
it in relation to the Notes in, from or otherwise involving the
United Kingdom; and
(c) it has only issued or passed on and will only issue or pass on in
the United Kingdom any document received by it in connection with
the issue of the Notes to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or persons to whom the
document may otherwise lawfully be issued, distributed or passed
on.
The Issuer and IOS Capital, Inc. have agreed to jointly and severally
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
The Issuer has been advised by the Underwriters that the Underwriters
presently intend to make a market in the Notes, as permitted by applicable laws
and regulations. The Underwriters are not obligated, however, to make a market
in the Notes and any market making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Notes.
The Underwriters may engage in over-allotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids with
respect to the Notes in accordance with Regulation M under the Securities
Exchange Act of 1934, as amended. Over-allotment transactions involve syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the Notes so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transaction involve purchase of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Notes originally sold by the syndicate member are
purchased in a syndicate covering transaction. Such over-allotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the
S-41
<PAGE>
Notes to be higher than they would otherwise be in the absence of these
transactions. The Issuer and the Underwriters do not represent that the
Underwriters will engage in any of these transactions. These transactions, once
commenced, may be discontinued without notice at any time.
From time to time the Underwriters or their affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, the Originator or its affiliates.
For further information regarding any offer or sale of the Notes
pursuant to this Prospectus Supplement and the Prospectus, see "Plan of
Distribution" in the Prospectus.
Experts
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998 are incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of that firm as experts in accounting and auditing.
Legal Matters
Certain legal matters relating to the Notes will be passed upon for
the Issuer by Don H. Liu, Esq., General Counsel of the Originator and IKON
Office Solutions, the parent company of the Originator, and for the Underwriters
by Dewey Ballantine LLP, New York, New York. As of the date of this Prospectus
Supplement, Mr. Liu is a full-time employee and an officer of IKON Office
Solutions and a beneficial owner of shares of common stock of IKON Office
Solutions and options to purchase shares of common stock of IKON Office
Solutions.
S-42
<PAGE>
Index Of Principal Defined Terms
Acceleration Event.......................................... S-27
Additional Lease............................................ S-22
Additional Principal........................................ S-26
Adjusted Lease.............................................. S-22
Ambac....................................................... S-13
Annualized Default Rate..................................... S-27
Asset Pool.................................................. S-17
Assignment and Servicing Agreement.......................... S-17
Available Funds............................................. S-28
Available Funds Shortfall................................... S-29
Available Reserve Amount.................................... S-29
Benefit Plan................................................ S-39
Business Day................................................ S-15
Casualty.................................................... S-28
Casualty Payment............................................ S-28
CEDEL....................................................... S-24
Class A Initial Principal Amount............................ S-24
Class A Percentage.......................................... S-27
Class A Principal Payment................................... S-26
Class A Target Investor Principal Amount.................... S-26
Class A-1 Initial Principal Amount.......................... S-24
Class A-1 Notes............................................. S-24
Class A-2 Initial Principal Amount.......................... S-24
Class A-2 Notes............................................. S-24
Class A-3 Initial Principal Amount.......................... S-24
Class A-3 Notes............................................. S-24
Class A-3a Initial Principal Amount......................... S-24
Class A-3a Notes............................................ S-24
Class A-3b Initial Principal Amount......................... S-24
Class A-3b Notes............................................ S-24
Class A-4 Initial Principal Amount.......................... S-24
Class A-4 Notes............................................. S-24
Code........................................................ S-38
Collection Account.......................................... S-27
Counterparty................................................ S-16
CPR......................................................... S-33
Cumulative Loss Amount...................................... S-27
Cut-Off Date................................................ S-17
Default..................................................... S-31
Delinquency Rate............................................ S-27
Determination Date.......................................... S-25
Discount Rate............................................... S-24
Discounted Present Value of the Leases...................... S-24
Discounted Present Value of the Performing Leases........... S-25
DTC......................................................... S-24
Due Period.................................................. S-25
Early Lease Termination..................................... S-22
Early Termination Lease..................................... S-22
Eligible Account............................................ S-27
Equipment................................................... S-17
Euroclear................................................... S-24
Events of Default........................................... S-30
Excess Copy Charge.......................................... S-17
Fitch IBCA.................................................. S-13
IKON Office Solutions....................................... S-10
Initial Principal Amount.................................... S-24
Insured Payment............................................. S-15
Insurer..................................................... S-13
Insurer Default............................................. S-23
Interest Accrual Period..................................... S-26
Interest Payments........................................... S-26
Interest Rate............................................... S-25
IRA......................................................... S-39
IRS......................................................... S-38
Issuance Date............................................... S-15
Late Payment Rate........................................... S-30
LBFP........................................................ S-16
Lease Payment............................................... S-27
Lease Receivables........................................... S-17
Leases...................................................... S-17
Lessee...................................................... S-17
Lessor...................................................... S-17
LIBOR....................................................... S-25
LIBOR Business Day.......................................... S-26
Maintenance Charge.......................................... S-17
Moody's..................................................... S-13
Non-Performing Leases....................................... S-18
Note Principal Balance...................................... S-15
Noteholders................................................. S-15
Notes....................................................... S-24
Outstanding Principal Amount................................ S-29
Outstanding Principal Amounts............................... S-26
Overcollateralization Balance............................... S-27
Overcollateralization Floor................................. S-27
Plan Assets Regulation...................................... S-39
Policy...................................................... S-10
Preference Amount........................................... S-15
Principal Payments.......................................... S-26
PTCE........................................................ S-39
Rating Agency............................................... S-40
Record Date................................................. S-25
Reference Bank Rate......................................... S-25
Required Payments........................................... S-29
Required Reserve Amount..................................... S-29
Reserve Account............................................. S-29
Retainable Deposit.......................................... S-27
S&P......................................................... S-13
Servicer Advance............................................ S-30
Servicer Events of Default.................................. S-32
Servicing Fee............................................... S-23
Statistical Class A Percentage.............................. S-33
Substitute Lease............................................ S-22
Swap Agreement.............................................. S-16
Tax Counsel................................................. S-38
Telerate Screen Page 3750................................... S-25
Termination Payment......................................... S-28
Warranty Lease.............................................. S-22
<PAGE>
Prospectus
================================================================================
$1,825,000,000
IKON Receivables, LLC Lease-Backed Notes
Issuer Issuable in Series
================================================================================
- ------------------- From time to time the issuer may sell a series of its
You should read the notes that --
read the section
entitled "Risk . will represent debt obligations solely of the
Factors" starting issuer; and
on page 7 of this
prospectus and . will consist of one or more classes on terms to be
consider these determined at the time of sale.
factors before
making a decision The assets backing the notes may consist of any
to invest in the combination of --
notes.
. leases;
The notes of each
series will be debt . installment sale contracts;
solely of the
issuer and will be . rental stream obligations;
payable only from
the pledged assets . monies received relating to the leases, agreements,
of the issuer and contracts and obligations;
any credit
enhancement for . funds on deposit in one or more accounts; and
such series.
. one or more forms of credit enhancement.
Retain this
prospectus for The terms of your series of notes are described in this
future reference. prospectus and the accompanying prospectus supplement.
This prospectus
may not be used to
consummate sales of
securities unless
accompanied by the
prospectus
supplement relating
to the offering of
such securities
- -------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is May 7, 1999.
<PAGE>
Table Of Contents
<TABLE>
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Page
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<S> <C>
Important Information about this Prospectus and the Accompanying Prospectus Supplement.. 3
Prospectus Summary....................................................................... 4
Risk Factors............................................................................. 7
Where You Can Find More Information...................................................... 12
The Issuer............................................................................... 13
The Asset Pools.......................................................................... 13
Management's Discussion and Analysis of Financial Condition.............................. 14
Directors and Executive Officers of the Manager of the Issuer............................ 14
The Leases............................................................................... 15
Pool Factors............................................................................. 18
Use of Proceeds.......................................................................... 18
The Originator's Leasing Business........................................................ 18
The Trustee.............................................................................. 22
Description of the Notes................................................................. 23
Description of the Transaction Documents................................................. 29
Legal Aspects of the Lease Receivables................................................... 35
Material Federal Income Tax Consequences................................................. 37
Ratings.................................................................................. 41
ERISA Considerations..................................................................... 41
Plan of Distribution..................................................................... 42
Legal Opinions........................................................................... 42
Experts.................................................................................. 42
Index To Financial Statements............................................................ 43
Index Of Terms........................................................................... 47
</TABLE>
2
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Important Information about this
Prospectus and the Accompanying Prospectus Supplement
If the terms of your series of notes vary between this prospectus and
the accompanying prospectus supplement, you should rely on the information in
the prospectus supplement.
The prospectus supplement for your series of notes will state among
other things:
. the aggregate principal amount, interest rate and authorized
denominations of the notes;
. specific information concerning the characteristics of the
lease receivables;
. the terms of any credit enhancement with respect to the
notes;
. information concerning any other assets backing the notes,
including any reserve fund;
. the final scheduled payment date of the notes;
. how and when principal is to be paid on the notes on each
payment date, the timing of the application of principal and the
order of priority of the applications of the principal to the
respective classes of such notes;
. the federal income tax characterization of the notes;
. the terms of any subordination relating to the notes;
. the terms of any cross-collateralization relating to the notes;
. the terms of any redemptions and the related redemption prices
relating to the notes;
. servicing terms relating to the notes;
. the presence of any prefunding feature relating to the notes;
. the length and terms of any revolving period relating to the notes;
and
. additional information on the plan of distribution of the notes.
3
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Prospectus Summary
. This summary highlights select information from this prospectus and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
notes, read carefully this entire prospectus and the accompanying
prospectus supplement.
. This summary provides an overview of calculations, cash flows and other
information to aid your understanding. To understand all of the terms of
the offering, carefully read this entire document and, in particular, the
full description of these calculations, cash flows and other information in
this prospectus.
Lease-Backed Notes
Issuable in Series
Issuer
IKON Receivables, LLC, a Delaware limited liability company.
Originator
IOS Capital, Inc., a Delaware corporation formerly known as IKON Capital Inc.
and a wholly-owned subsidiary of IKON Office Solutions, Inc.
Seller
IKON Receivables-1, LLC, a Delaware special purpose limited liability company.
Servicer
The servicer will be IOS Capital unless otherwise specified in the related
prospectus supplement.
Trustee
For any series of notes, the trustee named in the related prospectus supplement.
The Notes
. The notes of each series will be secured solely by office equipment leases or
contracts and related assets. The assets will be pledged by the issuer to a
trustee under an indenture for the benefit of noteholders of that series.
. The transaction documents relating to each series of notes will describe the
rights of each of the related classes of notes to the funds derived from the
related asset pool.
. The notes are fixed income securities, having a principal balance and a
specified interest rate.
. Each class of notes may have a different interest rate, which may be a fixed
or floating interest rate. The related prospectus supplement will specify the
interest rate for each series or class of notes, or the initial interest rate
and the method for determining subsequent changes to the interest rate.
. A series may include one or more classes of notes which are:
. stripped of regular interest payments and entitled only to principal
distributions, with disproportionate, nominal or no interest
distributions; or
. stripped of regular principal payments and entitled only to interest
distributions, with disproportionate, nominal or no principal
distributions.
. A series of notes may include two or more classes of notes with different
terms including different interest rates and different timing, sequential order
or priority of payments, amount of principal or interest or both.
. A series may provide that distributions of principal or interest or both on
any class may be made:
. upon the occurrence of specified events;
. in accordance with a schedule or formula; or
4
<PAGE>
. on the basis of collections from designated portions of the related asset
pool.
. Any series may include one or more classes of notes which will not distribute
accrued interest but rather will add the accrued interest to the note principal
balance, or nominal balance, in the manner described in the related prospectus
supplement.
. A series may include one or more other classes of notes that are senior to
one or more other classes of notes in respect of distributions of principal and
interest and allocations of losses on the related asset pool.
The Asset Pools
. As specified in the related prospectus supplement, the pledged pool of assets
securing a series of notes may consist of:
. leases which may include any combination of leases, leases intended as
security agreements, installment sale contracts or rental stream
obligations, together with certain monies due on these leases and
agreements and related guarantees;
. interests other than ownership interests in the underlying equipment and
related property, together with the proceeds from disposal of the
equipment, if any;
. amounts held in any collection, reserve, prefunding or other accounts
established pursuant to the transaction documents;
. proceeds and recoveries on insurance policies and the disposition of
repossessed equipment;
. credit enhancement for an asset pool or any class of notes; and
. interest earned on certain short-term investments.
. If the related prospectus supplement specifies, the trustee may acquire
additional leases and equipment during a specified pre-funding period following
the issuance of the notes from monies in a pre-funding account.
. If the related prospectus supplement specifies, the notes may have a
revolving period. During a revolving period, the issuer may acquire additional
leases and interests in equipment from the proceeds of payments on existing
lease payments. The notes may not pay principal during this period.
Payment Date
As described in the related prospectus supplement, the notes will pay principal
and/or interest on specified dates. Payment dates will occur monthly,
quarterly, or semi-annually.
Due Period
The calendar month preceding the month in which a payment date occurs is the due
period. As the related prospectus supplement will more fully describe, the
servicer will remit collections received in respect of the due period to the
trustee prior to the related payment date. The collections may be used to fund
payments to noteholders on such payment date or to acquire additional lease
receivables.
Record Date
The related prospectus supplement will describe a date preceding the payment
date, as of which the issuer or its paying agent will fix the identity of the
holders of the notes. Noteholders whose identities are fixed on this date will
receive payments on the next succeeding payment date.
Registration of Notes
The issuer will initially issue the notes as global notes registered in the name
of Cede & Co. as nominee of The Depository Trust Company, or another nominee.
Noteholders will not receive definitive notes representing their interests,
except in certain limited circumstances described in the related prospectus
supplement.
Credit Enhancement
. As described in the related prospectus supplement, credit enhancement for an
asset pool or any class of notes may include any one or more of the following:
. a policy issued by an insurer specified in the related prospectus
supplement; overcollateralization;
. subordination of certain classes of notes;
. a reserve account;
. letters of credit;
5
<PAGE>
. credit or liquidity facilities;
. third party payments or other support; and
. cash deposits or other similar arrangements.
. The prospectus supplement will describe any limitations and exclusions from
coverage.
Optional or Mandatory Termination
. Under the circumstances described in this prospectus and the related
prospectus supplement, the servicer, the seller, the issuer or other entities
may, at their respective options, cause the early retirement of a series of
notes at the price or prices indicated in the related prospectus supplement.
. The related prospectus supplement may describe circumstances under which the
issuer, servicer or other entities will be required to retire early all or any
portion of a series of notes. An indenture may require these parties to solicit
competitive bids for the purchase of the related asset pool or otherwise.
Tax Considerations
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 that the
notes will be treated as debt and the issuer will not be treated as an
association (or publicly traded partnership) taxable as a corporation. You
should consult your tax advisors.
ERISA Considerations
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus and the related prospectus supplement,
pension, profit-sharing or other employee benefit plans, as well as individual
retirement accounts and certain types of Keogh Plans may purchase the notes.
You should consult with your counsel regarding the applicability of the
provisions of ERISA before purchasing a note.
Ratings
. The issuer will not issue the notes unless a rating agency rates them in one
of the four highest rating categories.
. You must not assume that the rating agency will not lower, qualify or withdraw
its rating.
6
<PAGE>
Risk Factors
You should carefully consider, among other things, the following risk factors
before deciding to invest in the notes offered by this prospectus.
<TABLE>
<S> <C>
You May Not Be Able to Sell Your There is currently no public market for the notes. If no public market
Notes develops, you may not be able to sell your notes. The underwriters expect
to make a market in the notes but they are not required to do so. There
is no assurance that any market will be created or, if created, will
continue.
Prepayments and Related Reinvestment In the case of notes purchased at a discount, you should consider the risk
May Reduce Your Yield that slower than anticipated rates of prepayments on the leases could
result in an actual yield that is less than the anticipated yield.
Conversely, you should consider the risk that in the case of notes
purchased at a premium, a faster than the anticipated rate of prepayments
could result in an actual yield that is less than the anticipated yield.
Be aware that you bear the risk of reinvesting unscheduled distributions
resulting from prepayments of the notes.
The rate of payment of principal is unpredictable because the rate on the
notes will depend on, among other things, the rate of payment on the
underlying leases. In addition to the normally scheduled payments on the
leases, payments may come from a number of different sources, including
the following:
. prepayments permitted by the servicer;
. payments as a result of leases which are defaulted;
. payments as a result of leases accelerated by the servicer;
. payments due to loss, theft, destruction or other casualty; and
. payments upon repurchases by IOS Capital on account of a breach of
representations and warranties.
Subject to limitations, IOS Capital may elect to reinvest the proceeds of
a lease which has been partially or fully repaid or upgraded in one or
more additional leases and to substitute leases for defaulted, repurchased
or modified or adjusted leases. Reinvestments and substitutions may
affect the rate or amount of payments on the leases as a whole, the rate
at which funds are distributed on the notes and the yield to noteholders.
The rate of early terminations of leases due to prepayments and various
non-payments may be influenced by a variety of economic and other factors.
For example, adverse economic conditions and natural disasters such as
floods, hurricanes, earthquakes and tornadoes may affect prepayments.
</TABLE>
7
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<TABLE>
<S> <C>
No Ownership Interest in the Neither the issuer nor the trustee for the benefit of noteholders will
Equipment; Certain Security have any ownership interest in any equipment, including any residual
Interests are Not Perfected and interest in the equipment at the end of the related lease term. Also, IOS
Other Creditors May Have Rights to Capital has not filed and will not file financing statements to perfect
the Equipment any security interest it may have in any of the equipment. Although any
security interest of IOS Capital in the equipment will be assigned by IOS
Capital to the seller and by the seller to the issuer, none of IOS
Capital, the seller, the issuer nor the trustee will have a perfected
security interest in the equipment against lessees. This lack of a
perfected security interest in the equipment may result in other creditors
of the related lessees acquiring rights in the equipment superior to those
of the issuer or the trustee and may adversely affect the ability of the
issuer or the trustee on behalf of noteholders to recover any monies on
the equipment following a lease default. This could reduce the funds
available to pay the notes. Accordingly, noteholders should not rely on
the sale, release or other disposition of any leased equipment for payment
on the notes.
State Laws and Other Factors May State laws impose requirements and restrictions on foreclosure sales and
Impede Recovery Efforts and Affect obtaining deficiency judgments and may prohibit, limit or delay
the Ability of the Issuer to Recoup repossession and sale of equipment to recover losses on non-performing
the Full Amount Due on the Leases leases.
Additional factors that may affect the issuer's ability to recoup the full
amount due on a lease include:
. the issuer's lack of any ownership interest in any of the equipment;
. the issuer's failure to file financing statements to perfect its security
interest in equipment against a lessee;
. depreciation;
. obsolescence;
. damage or loss of any item of equipment; and
. the application of federal and state bankruptcy and insolvency laws.
As a result, the noteholders may be subject to delays in receiving
payments and losses.
Possession of the Leases by and the Any insolvency by the issuer, the servicer, the originator or the seller,
Insolvency of the Issuer, while in possession of the leases may result in competing claims to
Originator, Seller or Servicer May ownership or security interests in the leases which could result in delays
Result in Reduced or Delayed in payments on the notes, losses to the noteholders or an acceleration of
Payments to Noteholders the repayment of the notes.
</TABLE>
8
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<TABLE>
<S> <C>
Commingling of Funds with IOS If bankruptcy or reorganization proceedings are commenced with respect to
Capital May Result in Reduced or the servicer, any funds then held by the servicer may be unavailable to
Delayed Payments to Noteholders noteholders. If those funds are not transferred to the trustee, as
required by the indenture, payments to noteholders could be delayed or
reduced if the servicer becomes bankrupt or insolvent.
Insolvency of IOS Capital or IKON In some circumstances, a bankruptcy of IOS Capital or IKON Receivables-1,
Receivables-1, LLC May Reduce LLC may reduce payments to noteholders. IOS Capital and IKON
Payments to Noteholders Receivables-1, LLC believe that each contribution of the leases should be
treated as an absolute and unconditional assignment.
However, in the event of an insolvency of IOS Capital or IKON
Receivables-1, LLC, a court or bankruptcy trustee could attempt to:
. recharacterize the contribution of the related leases by IOS Capital
to IKON Receivables-1, LLC as a loan from IKON Receivables-1, LLC to
IOS Capital secured by a pledge of the leases; or
. recharacterize the contribution of the related leases by IKON
Receivables-1, LLC to the issuer as a loan from the issuer to IKON
Receivables-1, LLC secured by a pledge of the leases; or
. consolidate the assets of the issuer with those of IOS Capital
because IOS Capital will indirectly own all of the membership
interests in the issuer; or
. consolidate the assets of the issuer with those of IKON
Receivables-1, LLC because IKON Receivables-1, LLC will own all
of the membership interests in the issuer.
If either recharacterization or consolidation were successful, the
bankruptcy trustee could repudiate any leases that are considered to be
operating leases for bankruptcy law purposes and all obligations relating
to such operating leases. An attempt to recharacterize the transactions,
even if unsuccessful, could result in delays in payments to you. If
either attempt were successful, the notes would be accelerated, and the
trustee's recovery on your behalf could be limited to the then current
value of the leases or the underlying equipment. Consequently, you could
lose the right to future payments and you may not receive your anticipated
principal and interest on the notes.
Although IOS Capital and IKON Receivables-1, LLC both believe that the
contribution of the leases should be treated as an absolute and
unconditional assignment, the leases will be treated as assets of IOS
Capital for tax purposes. This treatment of the assets might increase the
risk of recharacterization of the transfer.
Transfer of Servicing May Delay If IOS Capital were to cease servicing the leases, delays in processing
Payments to Noteholders payments on the leases and information regarding lease payments could
occur. This could delay payments to the noteholders.
</TABLE>
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<TABLE>
<S> <C>
Default or Insolvency of Lessees May If lessees default on the leases, lease payments will decrease and funds
Reduce Payments to Noteholders available for payment to you will be reduced.
No Recourse Against Affiliates of There is no recourse against any affiliates of the issuer. The notes
the Issuer represent debt of the issuer payable solely from the related asset pool
and any applicable credit enhancement. If the lease payments, any other
assets pledged to secure the notes and any applicable credit enhancement
are insufficient to pay the notes in full, you have no rights to obtain
payment from IOS Capital or any of its affiliates other than the issuer.
The issuer is a limited liability company with limited assets.
Losses and Delinquencies on the We cannot guarantee that the delinquency and loss levels of leases in the
Leases May Differ From the asset pools will correspond to the historical levels the originator
Originator's Historical Loss and experienced on its equipment lease portfolio. There is a risk that
Delinquency Levels delinquencies and losses could increase or decline significantly for
various reasons including:
. changes in the federal income tax laws; or
. changes in the local, regional or national economies.
Risks Associated with Year 2000 The originator is faced with the task of completing its goals for
Compliance compliance in connection with the year 2000 issue. The year 2000 issue is
the result of certain 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.
If 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 payments and in
processing payments on the leases and could cause a delay in distributions
to you.
The Addition and Substitution of If a significant number of leases are added or replaced, this could affect
Leases May Adversely Affect the rate at which funds are distributed on the notes and decrease the
Cashflow and May Decrease the Yield yield to noteholders. The transaction documents will permit IOS Capital
on the Notes under certain circumstances, to substitute or add qualifying leases. The
addition or substitution of leases may include leases that have different
payment due dates, installment amounts and maturity dates than the
existing or substituted leases.
IOS Capital may only add or substitute leases that meet qualifying
characteristics and conditions. The ability of IOS Capital to acquire
such leases depends upon its ability to originate enough leases that meet
the specified eligibility criteria. This may be affected by a variety of
social and economic factors, including interest rates, unemployment
levels, the rate of inflation and public perception of economic conditions
generally. The addition or substitution of leases could increase the
geographic, equipment
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
or other concentrations of the related asset pool.
Consequently, any adverse economic or social factors that particularly
affect a particular geographic area, certain types of equipment or other
concentrations of leases in the related asset pool may adversely affect
the performance of the asset pool, which, in turn, could affect the rating
of the notes.
Technological Obsolescence of If technological advances relating to office equipment cause leased
Equipment May Reduce Value of equipment to become obsolete, the value of the equipment will decrease.
Collateral This will reduce the amount of monies recoverable should the equipment be
sold following a lease default and you may not recover the full amount due
on your notes.
</TABLE>
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Where You Can Find More Information
The issuer or the servicer will file with the SEC all required annual,
quarterly and special reports, proxy statements and other information about the
notes. You can read and copy these documents at the public reference facility
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, NW, Room 1024,
Washington, DC 20549. You can also copy and inspect such reports, proxy
statements and other information at the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
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 we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Prospectus. Information that we file later with
the SEC will automatically update the information in this Prospectus. In all
cases, you should rely on the later information over different information
included in this Prospectus or the Prospectus Supplement. We incorporate by
reference any future annual, monthly and special SEC reports and proxy materials
filed by or on behalf the issuer until we terminate our offering of the notes.
We filed a registration statement relating to the notes with the SEC.
This Prospectus is part of the registration statement but the registration
statement includes additional information. As a recipient of this Prospectus,
you may request a copy of the registration statement and any document we
incorporate by reference, except exhibits to the documents (unless the exhibits
are specifically incorporated by reference), at no cost, by writing or calling
us at:
IOS Capital, 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.
You can find a listing of the pages where capitalized terms are
defined under "Index of Terms" beginning on page 47 in this Prospectus.
12
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The Issuer
IKON Receivables, LLC (the "Issuer") is a Delaware limited liability
company all of the membership interests in which will be held by IKON
Receivables-1, LLC, a special purpose Delaware limited liability company (the
"Seller"). All of the membership interests in the Seller will, in turn, be held
by IOS Capital, Inc. ("IOS Capital" or the "Originator"). The Issuer was
organized for the limited purpose of engaging in the transactions described
herein and any activities incidental to and necessary or convenient for the
accomplishment of such purposes and is restricted by its organizational
documents and certain agreements from engaging in other activities. In
addition, its organizational documents and certain agreements require it to
operate in a manner such that it should not be consolidated in the bankruptcy
estate of the Originator or its affiliates in the event that one of them becomes
subject to bankruptcy or insolvency proceedings. The Issuer's address is 501
Silverside Road, Suite 28, Wilmington, Delaware 19809.
The Issuer will from time to time sell a series of Notes consisting of
one or more classes on terms to be determined at the time of sale and described
in a related Prospectus Supplement. The Notes of each series will be secured
solely by the related Asset Pool (as defined herein). The Issuer does not have,
nor is it expected in the future to have, any significant assets other than the
Asset Pools. The servicer of any Asset Pool relating to any series of Notes may
be IOS Capital or another affiliate of the Issuer (IOS Capital or such other
servicer, in its capacity as servicer, the "Servicer").
The Issuer will pledge its interests in an Asset Pool to a Trustee in
respect of the related series of Notes pursuant to an Indenture between the
Issuer and such Trustee.
The balance sheet of the Issuer at April 6, 1999 is attached as
Exhibit 1 hereto.
The Asset Pools
The Notes of each series will be secured by a segregated pool of
equipment leases or contracts and related assets (an "Asset Pool"). The
property comprising each Asset Pool may include (i) a pool of leases, which may
include any combination of leases, leases intended as security agreements,
installment sale contracts or rental stream obligations (each, a "Lease"), (ii)
certain monies due under the Leases on or after a specified date (the "Cut-off
Date"), (iii) monies held from time to time in one or more accounts established
and maintained pursuant to the related Transaction Documents (as defined
herein), (iv) a security interest in the Seller's interests in the underlying
equipment and related property relating to such pool of Leases (such equipment
and related property, the "Equipment"), (v) the rights of the Issuer under the
Assignment and Servicing Agreement (as defined herein) relating to the Asset
Pool and (vi) investment earnings on certain accounts created under the related
Indenture. The Leases, including the Issuer's security interest in the
underlying equipment and other property relating to the Leases, in an Asset Pool
are referred to as the "Lease Receivables."
The Issuer will not have and the Asset Pools will not include any
residual interest in any Equipment after the related Lease has been paid in
full.
The Equipment generally will be limited to personal property which is
leased or financed by the Originator to lessees (each a "Lessee" and,
collectively, "Lessees") pursuant to Leases which either are "chattel paper" (as
defined in the Uniform Commercial Code) or are Leases that are not treated
materially differently from "chattel paper" for purposes of title transfer,
security interests or remedies on default.
The Lease Receivables will be acquired by the Seller from the
Originator under an Assignment and Servicing Agreement among the Seller, the
Originator and the Issuer (the "Assignment and Servicing Agreement").
Contemporaneously, the Lease Receivables will be transferred by the Seller to
the Issuer pursuant to the Assignment and Servicing Agreement. The Leases
included in an Asset Pool will be selected from Leases held by the Originator
based on the criteria described under "The Leases--Eligible Leases."
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<PAGE>
On or prior to the date of issuance of the Notes of any series to the
holders of Notes, the Issuer will form an Asset Pool by (i) acquiring Lease
Receivables pursuant to the related Assignment and Servicing Agreement and (ii)
entering into an Indenture with the Trustee, relating to the issuance of the
Notes.
The Leases in each Asset Pool will have been originated by the
Originator or acquired by the Originator in accordance with the Originator's
specified underwriting criteria. The material underwriting criteria applicable
to the Leases are described under "Originator's Leasing Business."
Management's Discussion and Analysis of Financial Condition
As of the date of this Prospectus, the Issuer has no operating
history. The net proceeds of the sale of the Notes will be used to fund any
applicable reserve or other accounts and to make distributions to the owner of
the Issuer. See "Use of Proceeds." The Issuer is prohibited by its Limited
Liability Company Agreement from engaging in business other than (i) the
purchase of equipment leases and Lease Receivables from IOS Capital and its
affiliates, (ii) the issuance of notes collateralized by its assets and (iii)
engaging in acts incidental, necessary or convenient to the foregoing and
permitted under Delaware law. The Issuer's ability to incur, assume or guaranty
indebtedness for borrowed money is also restricted by its Limited Liability
Company Agreement to only such activities that relate to the Lease Receivables.
Directors and Executive Officers of the Manager of the Issuer
The following table sets forth the executive officers and directors of
IKON Receivables Funding Inc., the manager of the Issuer ("Manager"), and their
ages and positions as of April __, 1999. Because the Issuer is organized as a
special purpose company and will be largely passive, it is expected that the
officers and directors of the Manager will participate in the management of the
Issuer only to a limited extent. Most of the actions related to maintaining and
servicing the assets will be performed by the Servicer.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Name Age Position
- ------------------------------------------------------------
<S> <C> <C>
Robert McLain 73 President & Director
Patricia Donato 35 Secretary & Director
Joseph Churchman 62 Director
Robert C. Campbell 41 Director
Robert W. Grier 40 Director
Karin M. Kinney 38 Secretary
Thomas Sheehan 39 Treasurer
</TABLE>
Robert K. McLain has served as Director since being elected on January
20, 1999. Mr. McLain joined the Alco Standard Corporation in 1972 and served in
various positions including Assistant Corporate Controller, Controller and Vice
President until his retirement from the Company in 1991. From the time he
retired from Alco until September 30, 1998, he organized and managed Delaware
investment companies, which include subsidiaries of IKON Office Solutions, Inc.
and Unisource Worldwide, Inc., on a part-time basis.
Patricia A. Donato has served as Director since being elected on
January 20, 1999. Ms. Donato joined the Alco Standard Corporation as a Tax
Coordinator in 1988. Since January 1991, she has served as Office Manager, and
subsequently, Controller, for investment companies in Delaware, which include
subsidiaries of IKON Office Solutions, Inc. and Unisource Worldwide, Inc..
Joseph B. Churchman has served as Director since being elected on
January 20, 1999. Mr. Churchman joined Alco Standard Corporation in 1975 as
Corporate Accounting Manager. He subsequently served as Manager of Alco's Data
Services and as President of Alco Health Services, now known as Amerisource,
until his
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<PAGE>
retirement in 1988. Currently, Mr. Churchman is a business consultant and serves
as a director of several Delaware investment companies.
Robert C. Campbell has served as Director since being elected on April
9, 1999. Mr. Campbell, the Co-founder and Managing Director of Entity Services
Group, L.L.C., advises corporations on structural and tax ramifications arising
from their holding companies. Mr. Campbell, a Certified Public Accountant, has
also served as a Tax Manager at KPMG LLP where he advised corporate clients on
tax planning and compliance issues. Prior to joining KPMG LLP, Mr. Campbell
worked at the captive-finance subsidiary of Sears Roebuck & Co.
Robert W. Grier has served as Director since being elected on April 9,
1999. Presently, Mr. Grier is Executive Vice President of Entity Services
Group, L.L.C. Mr. Grier has previously served as a Senior Tax Manager at KPMG
LLP, where he advised companies, ranging from closely-held to multi-national
corporations, on compliance and tax planning issues. Prior to joining KPMG LLP,
Mr. Grier was employed by Simon, Master & Sidlow, P.A., a Wilmington accounting
firm.
Karin M. Kinney has served as Secretary of IKON Office Solutions, Inc.
since 1996 and as Corporate Counsel since 1994. From 1987 through 1994, Ms.
Kinney served as Counsel.
Thomas Sheehan has served as Director of Financial Accounting,
Planning & Analysis for IKON Office Solutions, Inc. from December 1998 to the
present. Prior to assuming his current position, Mr. Sheehan served as Director
of Operational Support, Planning & Analysis from November 1996 through December
1998, Director of Financial Accounting from March 1994 through November 1996,
and Senior Manager, Advisory Services-Domestic from November 1993 through March
1994. Before joining IKON Office Solutions, Inc., Mr. Sheehan served as an
Atlanta-Regional Controller for Unijax Sloan, a Philadelphia-Assistant
Controller for Garrett-Buchanan Co. and a Valley Forge-Manager, Group Accounting
for Paper Corporation of America.
The Leases
Information with respect to the Lease Receivables in each Asset Pool
will be set forth in the related Prospectus Supplement, including the
composition of such Lease Receivables and the distribution of such Lease
Receivables by equipment type, payment frequency and Discounted Present Value of
the Leases (as defined herein) as of the applicable Cut-Off Date. As of the
date of issuance of the Notes of any series, no more than 5% of the Lease
Receivables in the related Asset Pool (as measured by Discounted Present Value
of the Leases) will deviate from the characteristics of the Lease Receivables
described in the related Prospectus Supplement.
Eligible Leases
All Leases have been originated or acquired in the ordinary course of
the Originator's business and comply with the Originator's credit and
collections policies. In addition, the following eligibility requirements apply
or will apply to all Leases on or prior to the related Cut-Off Date
(collectively, "Eligible Leases"):
(i) The Leases are valid and enforceable, and unconditionally
obligate the Lessee to make periodic Lease Payments (as defined herein)
(including taxes);
(ii) The Leases are noncancellable by the Lessee and do not contain
early termination options (except for Leases which contain early
termination or prepayment clauses that require the Lessee to pay all
remaining scheduled payments under such Lease upon early termination or
prepayment);
(iii) All payments payable under the Leases are absolute,
unconditional obligations of the Lessees;
(iv) All of the Leases require the Lessee or a third party to
maintain the Equipment in good working order, to bear all the costs of
operating the Equipment, including taxes and insurance relating thereto;
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<PAGE>
(v) The Leases do not materially violate any U.S. or state laws;
(vi) In the event of a Casualty (as defined herein), the Lessee is
required to pay at a minimum the outstanding principal or net book value of
the Leases and any applicable make-whole premium;
(vii) The Leases have been transferred to the Issuer free and clear
of any liens and are assignable without prior written consent of the
Lessee;
(viii) The Leases are U.S. dollar-denominated and the lessor and
each Lessee are located in the United States;
(ix) The Lease is not a consumer lease;
(x) No more than three percent (3%) of the Leases in any Asset Pool
will consist of Leases with government entities as the obligor;
(xi) The Lease is not subject to any guaranty by the Lessor or
Originator but may be subject to the guaranty of others;
(xii) No adverse selection was used in selecting the Lease for
transfer to the Issuer;
(xiii) The Lessee has represented to the Originator that it has
accepted the Equipment;
(xiv) The Lessee is not a subject of an insolvency or bankruptcy
proceeding at the time of the transfer;
(xv) The Leases are not Non-Performing Leases (as defined herein);
and
(xvi) Each Lease is not more than 61 days past due at time of
transfer to the Issuer.
Accounting Characteristics
The Leases consist of finance leases for accounting purposes. In a
finance lease, the lessor transfers substantially all benefits and risks of
ownership of the underlying equipment to the lessee. In accordance with
Statement of Financial Accounting Standards No. 13, a lease is classified as a
finance lease if the collectibility of lease payments are reasonably certain and
it meets one of the following criteria: (1) the lease transfers title and
ownership of the equipment to the lessee by the end of the lease term; (2) the
lease contains a bargain purchase option; (3) the lease term at inception is at
least 75% of the estimated life of the equipment; or (4) the present value of
the minimum lease payments is at least 90% of the fair market value of the
equipment at inception of the lease.
Although the Leases are finance leases for accounting purposes, some
or all of the Leases may be considered operating or non-finance leases for tax,
bankruptcy law or other purposes.
Discounted Present Value
The discounted present value of the Leases (the "Discounted Present
Value of the Leases"), at any given time, will equal the future remaining
scheduled payments (not including delinquent amounts, excess copy charges and
maintenance charges) from the Leases (including Non-Performing Leases),
discounted at the rate specified in the related Prospectus Supplement (the
"Discount Rate"). The discounted present value of the Performing Leases (the
"Discounted Present Value of the Performing Leases") equals the Discounted
Present Value of the Leases, reduced by all future remaining scheduled payments
on the Non-Performing Leases (not including delinquent amounts and maintenance
charges), discounted at the Discount Rate. The Discounted Present Value of the
Leases in respect of each Asset Pool as of the initial Cut-Off Date, calculated
at the Discount Rate, will be specified in the related Prospectus Supplement.
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<PAGE>
In connection with all calculations required to be made pursuant to an
Indenture or an Assignment and Servicing Agreement with respect to the
determination of the Discounted Present Value of the Leases at any given time,
it will be assumed that:
(i) Lease Payments are due on the last day of the period from and
including the first day of each calendar month to and including the last
day of the calendar month immediately preceding the related Payment Date;
(ii) Lease Payments are discounted on a monthly basis using a 30-day
month and a 360-day year; and
(iii) Lease Payments are discounted to the last day of the calendar
month prior to the relevant calculation date.
In addition, each Indenture and Assignment and Servicing Agreement
will provide that any calculation of future remaining scheduled payments made on
or with respect to any date will be calculated after giving effect to any
payments received prior to the date of that calculation to the extent such
payments relate to scheduled payments due and payable with respect to the
related Due Period (as defined herein) and all prior Due Periods.
Delinquencies and Gross Losses
Information relating to the Originator's delinquency and gross loss
experience with respect to leases it has originated or acquired will be set
forth in the related Prospectus Supplement. This information may include, among
other things, the experience with respect to all leases in the Originator's
portfolio during specified periods, including leases not included in any Asset
Pool and leases which may not meet the criteria for selection as a Lease
Receivable for an Asset Pool. There can be no assurance that the delinquency,
repossession and net loss experience on any Asset Pool will be comparable to the
Originator's prior experience.
Maturity and Prepayment Considerations
If a Lease permits a prepayment, the amount of the prepayment,
together with accelerated payments resulting from defaults, will, subject to the
use of those monies to acquire additional or substituted leases pursuant to the
terms of the applicable Transaction Documents, shorten the weighted average life
of the pool of Lease Receivables and the weighted average life of the Notes.
The rate of prepayments on the Lease Receivables may be influenced by a variety
of economic, financial and other factors. In addition, under certain
circumstances, the Originator will be obligated to reacquire Lease Receivables
from the Issuer pursuant to the applicable Transaction Documents as a result of
breaches of representations and warranties. Any reinvestment risks resulting
from a faster or slower amortization of the Notes, which results from
prepayments, will be borne entirely by the Noteholders.
Acquisition of Lease Receivables
The Lease Receivables underlying the Notes will be acquired pursuant
to an Assignment and Servicing Agreement (i) by the Seller from the Originator
and (ii) by the Issuer from the Seller.
The Issuer expects that each Lease Receivable so acquired will have
been originated or acquired by the Originator in accordance with the
underwriting criteria specified herein and sold to the Seller. See "The
Originator's Leasing Business - Credit Policies and Loss Experience" herein.
Pursuant to the Assignment and Servicing Agreement, the Originator will make
certain representations and warranties to the Seller in respect of the related
Lease Receivables and the benefit of such representations and warranties will be
assigned to the Issuer pursuant to the Assignment and Servicing Agreement. The
Issuer will assign all its rights under the Assignment and Servicing Agreement
to the Trustee for the benefit of the Noteholders with the result that the
Originator will be
17
<PAGE>
liable to the Issuer and the Trustee for defective or missing documents or an
uncured breach of the Originator's representations or warranties.
Pool Factors
A Noteholder's portion of the aggregate outstanding principal balance
of the related Class of Notes is the product of (i) the original outstanding
principal amount of such Noteholder's Notes and (ii) the applicable Pool Factor.
The "Pool Factor" for each Class of Notes will be a seven-digit decimal, which
the Servicer will compute on each determination date prior to each distribution
with respect to such Class of Notes, indicating the remaining outstanding
principal balance of such Class of Notes as of the applicable payment date (the
"Payment Date"), as a fraction of the initial outstanding principal balance of
such Class of Notes. Each Pool Factor will be initially 1.0000000, and
thereafter will decline to reflect reductions in the outstanding principal
balance of the applicable Class of Notes.
The Noteholders of record will receive reports on or about each
Payment Date concerning the payments received on the Lease Receivables, the
balance of Leases in the Asset Pool, the Pool Factor and various other items of
information. In addition, Noteholders of record during any calendar year will
be furnished information for tax reporting purposes not later than the latest
date permitted by law.
Use of Proceeds
The net proceeds from the sale of the Notes of each series will be
used to fund any applicable reserve or other accounts and to make distributions
by the Issuer to the Seller and by the Seller to the Originator.
The Originator's Leasing Business
The Originator, formerly known as IKON Capital, Inc., was formed in
1987 to provide lease financing to customers of IKON Office Solutions, Inc.
("IKON Office Solutions"). The Originator is a wholly-owned subsidiary of IKON
Office Solutions. The Originator's corporate headquarters are located at 1738
Bass Road, Macon, Georgia 31210. The Originator's securities are registered
under the Securities Exchange Act of 1934, as amended (the "1934 Act") and the
Originator is subject to the reporting requirements of the 1934 Act and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). The Originator filed an Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and a Quarterly
Report on Form 10-Q for the three-month period ended December 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 Office Solutions is a public company headquartered in Malvern,
Pennsylvania operating a large network of independent copier and office
equipment marketplaces in North America and the United Kingdom. IKON Office
Solutions has over 800 locations in the United States, Canada, the United
Kingdom, Germany, France, Denmark and Mexico. IKON Office Solutions also
provides equipment services and supplies, outsourcing and imaging services, such
as mailroom and copy center management, specialized document copying services
and electronic imaging and file conversion. IKON Office Solutions also offers
network consulting and design, hardware and software product interfaces,
computer networking, technology training and software solutions for the
networked office environment. IKON Office Solutions' fiscal 1998 gross revenues
were $5.6 billion.
The Originator is engaged in the business of arranging lease financing
exclusively for office equipment marketed by members of IKON Office Solutions'
independent dealer network ("IKON Marketplaces"), which sell and service copier
equipment and facsimile machines. The ability to offer lease financing on this
equipment through the Originator is considered a competitive marketing advantage
which more closely ties IKON Office Solutions to its customer base. During the
1998 fiscal year, 69% of new equipment sold by IKON marketplaces was financed
through the Originator. The Originator and IKON Office Solutions will seek to
increase this percentage in the future, as leasing enhances the overall profit
margin on equipment and is considered an important customer retention strategy.
For the fiscal years ended September 30, 1997 and 1996, the Originator's
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<PAGE>
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% facsimile machines, and 13% other equipment. Although equipment models
vary, IKON Office Solutions is increasingly focusing its marketing efforts on
the sale of higher segment equipment, such as copiers which produce 50 or more
impressions per minute.
The Originator's customer base (which consists of the end users of the
equipment) is widely dispersed, with the ten largest customers representing less
than 2.5% of the Originator's total lease portfolio as of September 30, 1998.
The typical new lease financed by the Originator during fiscal year 1998
averaged $17,900 in amount and 46 months in duration. Although 97% of the
leases in the Originator's total lease portfolio as of September 30, 1998 are
scheduled for regular monthly payments, customers are also offered quarterly,
semi-annual and other customized payment terms. In connection with its leasing
activities, the Originator performs billing, collection, property and sales tax
filings, and provides quotes on equipment upgrades and lease-end notification.
The Originator also provides certain financial reporting services to the IKON
marketplaces, such as a monthly report of marketplace increases in leasing
activity and related statistics.
Types of Leases
The lease portfolio of the Originator consists of direct financing
leases and funded leases, although the Leases to be included in any Asset Pool
will consist solely of direct financing leases. Funded leases are contractual
obligations between IKON Office Solutions and IKON Marketplaces which have been
financed by the Originator. Direct financing leases are contractual obligations
between the Originator and the IKON Office Solutions customer and represent the
majority of the Originator's lease portfolio.
Funded leases and direct financing leases are structured as either tax
leases (from the Originator's perspective) or conditional sales contracts,
depending on the customer's needs. The customer decides which of the two
structures it desires. Under either structure, the total cost of the equipment
to the customer is substantially the same (assuming the exercise of the purchase
option).
Tax leases represented 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 market value purchase option. Generally, the customer may return the
equipment, continue to rent the equipment or purchase the equipment for its fair
market value at the end of the lease.
Each tax lease has an assumed equipment residual value generally
ranging from 0% to 25% of original retail price, depending on model and term.
Although an Asset Pool may include tax leases with residual values, such
residual values will not be available for the benefit of the Noteholders of such
Asset Pool.
Conditional sale contracts account for the remaining 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 is entitled to
receive any tax benefit associated with equipment depreciation. Each
conditional sales contract has an assumed residual value of 0%. Conditional
sales contracts are customarily structured with higher monthly lease payments
than the tax leases and have a $1 purchase option for the equipment at the end
of the lease term. Although the customer has the option of returning or
continuing to rent the equipment at lease-end, the customer almost always
exercises the $1 purchase option at the end of the lease term.
Credit Policies and Loss Experience
General. Prior to January 1998, IKON Office Solutions maintained a
decentralized credit policy. Each IKON marketplace was responsible for
developing and maintaining a credit policy that governed credit
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practices and procedures. The policies contained minimum credit standards.
Credit authority levels were established and maintained locally with ultimate
authority vested in the district presidents and district CFOs. The Originator
provided credit assistance through the support of an automated front-end lease
application tracking system ("CLAS").
Beginning in January 1998, IKON Office Solutions centralized its
credit policy. IKON Office Solutions' National Risk Management Policy
established minimum standards for all IKON Office Solutions leasing transactions
and vested all credit authority with the Originator. The policy uses a tiered
approach incorporating analyst reviews and credit scoring based on customer
exposure.
Origination. Lease packages are assembled by an IKON Office Solutions
sales representative and submitted to its respective IKON marketplace or
district processing center. The IKON marketplace and/or district have the
responsibility to review for accuracy and completeness prior to submission to
the Originator for funding. The marketplace and/or district administration
staff enter the lease applications into the CLAS program. The CLAS program
provides both the credit processing and lease administration module. When
applications have completed both modules, the documents have been reviewed and
the invoice has been prepared, the marketplace and/or district administration
staff forward the leasing package for funding review and transmit the CLAS
application to the Originator.
The Originator reviews all documents for completion, accuracy and
compliance. Any changes to the original document must be approved by the
Originator's contract and documentation review specialists. Each application is
checked for credit approval based on a comprehensive risk management policy.
When the transaction has completed final review the CLAS application is updated
and uploaded to the mainframe for activation, funding and invoicing.
Credit Processing. The Originator's credit process is segmented by
transaction size and approval authority. The "High Risk Review List" lists
industries or customers which are considered volatile and require special
attention. Guidelines are also established for automatic approvals which
require minimal information.
The IKON Office Solutions approval process is tiered based upon
customer exposure. Requests less than $50,000 use the CLAS credit scorecard for
approval. Credit scoring for smaller balance exposures provides the Originator
with the ability to adjust risk scores system-wide and monitor performance.
Exposures of $50,000 to $250,000 rely on the expertise of the Originator's
credit staff in analyzing and verifying information regarding bank
relationships, trade references, D&B Business Information Reports, and financial
statements and/or tax returns. Exposures of more than $250,000 benefit from the
combined resources of the districts and the Originator, while maintaining local
ownership of the customer. Ideally, the process will be transparent to the
customer yet provide the necessary and timely information required to understand
the risk factors of the exposure and those in the portfolio.
Based upon the segmented approach, the following approval authorities
have been established:
. Customer Service Professional and/or Customer Service Professional
Manager
Dun & Bradstreet rated according to a decision matrix; up to
$50,000; no override authority.
. Business Credit Analysts
Up to high risk transactions.
. Senior Credit Analysts
Single signature for exposure up to $1 million; dual signature for
exposure up to $2 million.
. Director of Portfolio Quality & National Credit Coordinator
Single signature for exposure up to $2 million; dual signature for
exposure up to $5 million.
. Corporate
Exposure in excess of $5 million.
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Challenges to the recommendations of the Originator's credit analysts
will be the responsibility of the IKON Office Solutions district presidents. In
the event the analyst does not agree with the actions recommended by the IKON
Office Solutions district, the Originator senior management will be requested to
intervene. Sole credit authority remains with the Originator, not IKON Office
Solutions. The requirements for the above approval categories for exposures
under $250,000 may be overridden with approval of a Senior Credit Analyst,
National Credit Coordinator, Director of Portfolio Quality or President of the
Originator. Justifications will be entered into CLAS.
Collections. 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 61 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 61 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 a 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.
Delinquency and Loss Experience. Historical delinquency information
for leases not charged off and loss information for leases owned and included in
IOS Capital's servicing portfolio will be set forth in each Prospectus
Supplement. See "The Leases--Delinquencies and Gross Losses".
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 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 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 Office Solutions 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 Office Solutions' 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 approximately 69% complete and the testing and validation
phase is approximately 9% 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
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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 December 1998, the
Originator has expensed approximately $751,000 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 reasonably 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 Office Solutions, its customers and
suppliers, but to all businesses. Risks include:
. Legal risks, including customer, supplier, employee or shareholder
lawsuits over failure to deliver contracted services, product
failure, or health and safety issues.
. Loss of sales due to failure to meet customer quality expectations
or inability to ship products.
. Increased operational costs due to manual processing, date
corruption or disaster recovery.
. Inability to bill or invoice.
The cost of the Year 2000 project and the date on which IKON Office
Solutions and the Originator believe the Originator 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 Office Solutions' 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 Office Solutions expect to have contingency plans in place
by October 31, 1999. In addition, IKON Office Solutions 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, 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 Trustee
The Trustee for a series of Notes will be identified in the related
Prospectus Supplement. The Trustee's liability in connection with the issuance
and sale of the Notes will be limited solely to the express obligations of the
Trustee set forth in the Indenture. The Originator and its affiliates may from
time to time enter into normal banking and Trustee relationships with the
Trustee and its affiliates. The Trustee, the Servicer and any of their
respective affiliates may hold Notes in their own names. In addition, for
purposes of meeting the legal requirements of certain local jurisdictions, the
Trustee shall have the power to appoint a co-trustee or a separate Trustee under
the Indenture. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Indenture will be
conferred or imposed upon the Trustee and such separate Trustee or co-Trustee
jointly, or in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or co-
trustee, who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
No resignation or removal of the Trustee and no appointment of a
successor Trustee will become effective until the acceptance of appointment by
the successor Trustee. The Trustee may resign at any time by giving written
notice thereof to the Issuer and the Servicer and by mailing notice of
resignation by first-class mail,
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postage prepaid, to the Noteholders of such series at their addresses appearing
on the security register. The Trustee may be removed at any time by written
notice of the holders of Notes evidencing more than 66% of the voting rights
thereof, delivered to the Trustee and the Issuer. If the Trustee resigns, is
removed, or becomes incapable of acting, or if a vacancy shall occur in the
office of the Trustee for any cause, the Issuer must promptly appoint a
successor Trustee. If no successor Trustee shall have been so appointed by the
Issuer or the Noteholders, or if no successor Trustee shall have accepted
appointment within 30 days after any such resignation or removal, existence of
incapability, or occurrence of such vacancy, the Trustee or any Noteholder may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Assignment and Servicing Agreement, the Notes (other than the
authentication thereof) or of any Lease Receivable or related document and will
not be accountable for the use or application by the Servicer or the Issuer of
any funds paid to the Issuer in consideration of the sale of any Notes. If no
Servicer Events of Default (as defined herein) have occurred, then the Trustee
will be required to perform only those duties specifically required of it under
the Assignment and Servicing Agreement. However, upon receipt of the various
resolutions, certificates, statements, opinions, reports, documents, orders or
other instruments required to be furnished to it, the Trustee will be required
to examine them to determine whether they conform as to form to the requirements
of the Assignment and Servicing Agreement.
No recourse is available based on any provision of the Assignment and
Servicing Agreement, the Notes or any Lease Receivable or assignment thereof
against the Trustee, in its individual capacity, and the Trustee will not have
any personal obligation, liability or duty whatsoever to any Noteholder or any
other person with respect to any such claim and such claim shall be asserted
solely against the Servicer or any indemnitor, except for such liability as is
determined to have resulted from the Trustee's own gross negligence or willful
misconduct.
The Trustee will be entitled to receive (a) reasonable compensation
for its services, (b) reimbursement for its reasonable expenses and (c)
indemnification for loss, liability or expense incurred without gross negligence
or bad faith on its part, arising out of performance of its duties thereunder.
Description of the Notes
General
Each series of the Notes will be issued pursuant to an Indenture. The
following summaries (together with additional summaries under "Description of
the Transaction Documents" below) describe all material terms and provisions of
the Notes. The summaries do not contain all the terms of the Notes and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Transaction Documents and the Notes.
All of the Notes offered by this Prospectus will be rated in one of
the four highest rating categories by one or more nationally recognized
statistical rating organizations (each a "Rating Agency" and, collectively, the
"Rating Agencies").
The Notes will generally be styled as debt instruments, having a
principal balance and a specified floating or fixed interest rate. The Notes of
each series will represent debt secured by an Asset Pool comprised primarily of
the Lease Receivables described in the related Prospectus Supplement.
General Payment Terms of Notes
As provided in the related Transaction Documents, Noteholders will be
entitled to receive payments on their Notes on the specified Payment Dates or on
the next day that is not a Saturday, Sunday or other day on which commercial
banking institutions located in the city or cities where the Corporate Trust
Office of the Trustee and the Servicer (and, if applicable, any credit
enhancement provider) are located are authorized or obligated by law or
executive order to be closed (each a "Business Day").
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Neither the Notes nor the underlying Lease Receivables will be
guaranteed or insured by any governmental agency or instrumentality or the
Issuer, the Servicer, the Seller, any Trustee or any of their respective
affiliates.
Collections
The following funds will be deposited into the Collection Account (as
defined below):
(a) Lease Payments;
(b) recoveries from Non-Performing Leases (as defined below) to the
extent the Originator has not substituted Substitute Leases (as defined
below) for such Non-Performing Leases;
(c) late charges received on delinquent Lease Payments not advanced by
the Servicer;
(d) proceeds from purchases of Leases by the Originator as a result of
breaches of representations and warranties to the extent the Originator has
not substituted Substitute Leases for such Leases;
(e) proceeds from investment of funds in the Collection Account and
any other applicable Transaction Account (as defined below);
(f) Casualty Payments;
(g) Retainable Deposits (each as defined below);
(h) Servicer Advances (as defined below, if any);
(i) Termination Payments (as defined below), to the extent the Issuer
does not reinvest such Termination Payments in Additional Leases; and
(j) proceeds received to effect a redemption of the Notes pursuant to
the Indenture .
The foregoing funds on deposit in the Collection Account on each
determination date relating to a Payment Date, excluding Lease Payments not due
during the preceding calendar month (a "Due Period") or any prior Due Period,
together with any funds deposited into the Collection Account from any Reserve
Account as described below under "Distributions," will constitute available
funds ("Available Funds"). Available Funds do not include cash flows realized
from the sale or release of Equipment following the expiration date of the
related Lease other than Equipment subject to Non-Performing Leases (as defined
below) that have not been replaced.
The Servicer must deposit the funds referred to in clauses (a) through
(d), (f) and (i) above into the Collection Account within two Business Days of
receipt thereof by the Servicer. The funds referred to in clauses (e), (g), (h)
and (j) above are to be deposited into the Collection Account on or prior to the
related Payment Date.
A "Lease Payment" is the equipment financing portion of each fixed
periodic rental payment payable by a Lessee under a Lease. Casualty Payments,
Retainable Deposits, Termination Payments, prepayments of rent required pursuant
to the terms of a Lease at or before the commencement of the term of such Lease,
security deposits, payments becoming due before each Cut-Off Date and
supplemental or additional payments required by the terms of a Lease with
respect to taxes, insurance, maintenance or other specific charges such as
excess copy charges are not Lease Payments.
A "Casualty Payment" is any payment pursuant to a Lease on account of
the loss, theft, condemnation, governmental taking, destruction, or damage
beyond repair (each, a "Casualty") of any item of Equipment subject thereto
which results, in accordance with the terms of the Lease, in a reduction in the
number or amount of any future Lease Payments or in the termination of the
Lessee's obligation to make future Lease Payments.
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A "Retainable Deposit" is any security or other similar deposit which
the Servicer has determined in accordance with its customary servicing practices
is not refundable to the related Lessee.
A "Termination Payment" is a payment payable by a Lessee under a Lease
upon the early termination of such Lease (other than on account of a Casualty or
a Lease default) which may be agreed upon by the Servicer, acting in the name of
the Issuer, and the Lessee.
"Non-Performing Leases" are (i) Leases that have become more than 120
days delinquent, (ii) Leases that have been accelerated by the Servicer or (iii)
Leases that the Servicer has determined to be uncollectible in accordance with
the Servicer's customary practices.
Distributions
On each Payment Date, Available Funds will be applied to make payments
of principal and interest due on the Notes, amounts owed to the Servicer,
Trustee (to the extent not payable by the Servicer) and other parties and for
other purposes as described and in the priority set forth in the related
Prospectus Supplement. If a Reserve Account is established for a series of
Notes, the related Prospectus Supplement will describe how much in that account
will be transferred to the Collection Account when there is a deficiency in
Available Funds otherwise available to make any payment due on each Payment
Date. Similarly, the related Prospectus Supplement will describe the extent to
which the proceeds of any applicable credit enhancement will be applied to make
up any such deficiency.
Prepayment and Yield Considerations
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yield to maturity of the Notes are
directly related to the rate of payments on the underlying Leases. The payments
on the Leases may be in the form of scheduled payments, prepayments or
liquidations due to default, casualty and other events, which cannot be
specified at present. Any prepayments or liquidations will result in
distributions to Noteholders of amounts which would otherwise have been
distributed over the remaining term of the Leases. The rate of such prepayments
and liquidations may be influenced by a number of other factors, including
general economic conditions. The rate of principal payments may also be
affected by any repurchase of the underlying Leases by the Originator or Seller
pursuant to the Assignment and Servicing Agreement. In such event, the
application of the repurchase price will decrease the Discounted Present Value
of the Performing Leases, causing the corresponding weighted average life of the
Notes to decrease.
Subject to certain limitations, the Originator will have the option to
substitute Eligible Leases having similar characteristics (each a "Substitute
Lease") for (i) Non-Performing Leases, (ii) Leases subject to repurchase as a
result of a breach of a representation and warranty by the Originator under the
Transaction Documents which breach has not been cured following discovery/notice
of such breach (each, a "Warranty Lease") and (iii) Leases following a
modification or adjustment to the terms of such Lease (each an "Adjusted
Lease"). The Originator may substitute Substitute Leases for Non-Performing
Leases, Adjusted Leases or Warranty Leases in amounts not to exceed specified
percentages (to be stated in the related prospectus supplement) of the
Discounted Present Value of the Leases as of the original Cut-Off Date. In
addition, in the event of a Lease that terminates early or which has been
prepaid in full (each, an "Early Termination Lease"), the Originator will have
the option to transfer an additional lease of similar characteristics (each, an
"Additional Lease"). The Substitute Leases and Additional Leases must have a
Discounted Present Value of not less than the Discounted Present Value of the
Leases being replaced and the monthly payments on the Substitute Leases or
Additional Leases must be at least equal to those of the replaced Leases through
the term of such replaced Leases. In the event that a Substitute Lease is not
provided for a Non-Performing Lease, the Discounted Present Value of the Leases
in the related Asset Pool will be reduced in an amount at least equal to the
Discounted Present Value of the Non-Performing Lease, plus any delinquent
payments.
The effective yield to holders of the Notes will depend upon, among
other things, the rate at which principal is paid to such Noteholders. The
after-tax yield to Noteholders may be affected by lags between the time interest
income accrues to Noteholders and the time the related interest income is
received by the Noteholders.
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Book-Entry Registration
Noteholders of a given series may hold their Notes through the
Depository Trust Company ("DTC") (in the United States) or CEDEL or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
Cede & Co. ("Cede"), as nominee for DTC, will hold the global Notes in
respect of given series. 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 those positions in customers' securities
accounts in the Depositories' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of securities. Participants
include brokers and dealers, banks, trust companies and clearing corporations.
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between 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, 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 those credits or any transactions in
those subsequent Notes will be reported to the relevant CEDEL Participant or
Euroclear Participant on that 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.
Noteholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Notes may do so only through Participants and Indirect Participants. In
addition, Noteholders will receive all distributions of principal and interest
through the Participants who in turn will receive them from DTC. Under a book-
entry format, Noteholders may experience some delay in their receipt of
payments, since the payments will be forwarded by the Issuer or note paying
agent to Cede, as nominee for DTC. DTC will forward the payments to its
Participants, which thereafter will forward them to Indirect Participants or the
Noteholders. It is anticipated that the only "Noteholder" in respect of any
series will be Cede, as nominee of DTC. Noteholders will not be recognized as
Noteholders, and the Noteholders will be permitted to exercise the rights of
Noteholders only indirectly through DTC and its Participants.
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Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Notes among Participants on whose behalf it acts with respect to the Notes
and to receive and transmit distributions of principal of, and interest on, the
Notes. Participants and Indirect Participants with which the Noteholders have
accounts with respect to the Notes similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Noteholders. Accordingly, although such Noteholders will not possess Notes, the
Rules provide a mechanism by which Participants will receive payments and will
be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Noteholder
to pledge Notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to such Notes, may be limited due to
the lack of a physical certificate for such Notes.
DTC will advise the Issuer and/or Trustee in respect of each series
that it will take any action permitted to be taken by a Noteholder only at the
direction of one or more Participants to whose accounts with DTC the Notes are
credited. DTC may take conflicting actions with respect to other undivided
interests to the extent that such actions are taken on behalf of Participants
whose holdings include such undivided interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
trust depository ("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 38 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 37 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
underwriters. 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
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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.
DTC management is aware that some computer applications, systems and
the like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter Year 2000
problems. DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and interest payments) to Noteholders, book-entry
deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to properly perform its services is also
dependent upon other parties, including, but not limited to, issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information and the
provision of services, including telecommunications and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being Year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
additional, DTC is in the process of developing such contingency plans as it
deems appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
Except as required by law, neither the Issuer nor any paying agent
will have any liability for any aspect of the records relating to or payments
made or account of beneficial ownership interests of the related Notes held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
Definitive Notes
The Notes of any series will be issued in fully registered,
certificated form ("Definitive Notes") to the Noteholders or their nominees,
rather than to DTC or its nominee, only if (i) the Servicer advises in writing
that DTC is no longer willing or able to discharge properly its responsibilities
as Trust Depository with respect to such Notes and such Issuer is unable to
locate a qualified successor, (ii) the Servicer, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
"Event of Default" under the Indenture or a default by the Servicer under the
Assignment and Servicing Agreement. Noteholders representing at least a
majority of the outstanding principal amount of the Notes of that series advise
the Issuer through DTC in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in such Noteholders' best
interest.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Trustee will be required to notify all affected
Noteholders through Participants of the availability of Definitive Notes. Upon
surrender by DTC of its Notes and receipt of instructions for reregistration,
the Issuer will reissue DTC's Notes as Definitive Notes to the Noteholders in
the amounts specified in the reregistration instructions.
Distributions of principal of, and interest on, Definitive Notes will
thereafter be made by the Issuer in accordance with the procedures set forth in
the Indenture directly to holders of Definitive Notes in whose names the
Definitive Notes were registered at the close of business on the applicable
Record Date. Distributions will be made by check mailed to the address of such
holder as it appears on the register maintained by the Trustee. The final
payment on any Definitive Note, however, will be made only upon presentation and
surrender of the Note at the office or agency specified in the notice of final
distribution to the applicable Noteholders.
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Definitive Notes will be transferable and exchangeable at the offices
of the Issuer or Trustee or of a certificate registrar named in a notice
delivered to holders of the Definitive Notes. No service charge will be imposed
for any registration of transfer or exchange, but the Issuer or the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Reports to Noteholders
On or prior to each Payment Date, the Servicer or the Trustee will
forward or cause to be forwarded to each holder of record of a Class of Notes a
statement or statements with respect to the related Asset Pool setting forth the
information specifically described in the Transaction Document which generally
will include the following information:
(i) the amount of the distribution with respect to that class of
Notes;
(ii) the amount of the distribution allocable to principal;
(iii) the amount of the distribution allocable to interest;
(iv) the Discounted Present Value of the Leases in the related Asset
Pool;
(v) the Asset Pool balance;
(vi) the aggregate outstanding principal balance and the Pool Factor
for such Class of Notes after giving effect to all payments reported under
(ii) above on such Payment Date;
(vii) the amount paid to or retained by the Servicer, if any, with
respect to the related Due Period; and
(viii) the aggregate purchase amounts for Lease Receivables that
have been reacquired, if any, for the related Due Period.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year, the Issuer or the Servicer will provide to the
Noteholders a statement containing the amounts described in (ii) and (iii) above
for that calendar year and any other information required by applicable tax
laws, for the purpose of the Noteholders' preparation of federal income tax
returns.
Description of the Transaction Documents
The following summary describes the material terms of each transaction
document pursuant to which an Asset Pool will be created and a series of Notes
will be issued. For purposes of this Prospectus, the term "Transaction
Documents" as used with respect to a series of Notes means the Indenture and
Assignment and Servicing Agreement relating to a series of Notes. Forms of the
Transaction Documents have been filed as exhibits to the Registration Statement
of which this Prospectus forms a part. This description is not a complete
summary of all the provisions of the respective Transaction Documents.
Assignment and Servicing Agreement
Acquisition of the Lease Receivables. On the Issuance Date, the
Seller will acquire the related Lease Receivables from the Originator pursuant
to an Assignment and Servicing Agreement in which the Originator will make
certain representations and warranties concerning the Lease Receivables. The
rights and benefits of the Seller under the Assignment and Servicing Agreement
will be assigned to the Issuer by the Seller pursuant to the Assignment and
Servicing Agreement and, in turn, pledged to the Trustee under an Indenture.
Contemporaneously, the Issuer will acquire the related Lease
Receivables from the Seller pursuant to the Assignment and Servicing Agreement.
The Issuer will pledge the Issuer's right, title and interests in and to the
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Lease Receivables to the Trustee for the benefit of Noteholders under the
Indenture. The rights and benefits of the Issuer under the Assignment and
Servicing Agreement will be assigned to the Trustee on behalf of Noteholders as
collateral for the Notes by the Issuer under the Indenture.
Additions, Substitutions and Adjustments. The Originator will be
obligated to purchase from the Issuer its interest in any Lease in the Asset
Pool that has become a Warranty Lease unless an Eligible Lease is substituted
therefor in accordance with the related Assignment and Servicing Agreement.
Pursuant to the Assignment and Servicing Agreement, the Originator
will have the option to substitute Eligible Leases for Non-Performing Leases,
Adjusted Leases and Warranty Leases and to add Additional Leases. The
percentage of Leases in any Asset Pool that can be substituted for Non-
Performing Leases, Adjusted Leases and Warranty Leases will be limited, as
described in the related Prospectus Supplement, to a percentage of the aggregate
Discounted Present Value of the Leases in the Asset Pool as of the related Cut-
Off Date. See "Description of the Notes -- Prepayment and Yield
Considerations."
Servicing. The Servicer will service the Lease Receivables in an
Asset Pool pursuant to an Assignment and Servicing Agreement. The Servicer may
delegate its servicing responsibilities to one or more sub-servicers, but will
not be relieved of its liabilities with respect thereto.
The Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Assignment and Servicing Agreement. An uncured breach of
such a representation or warranty that in any respect materially and adversely
affects the interests of the Noteholders will constitute a Servicer Event of
Default by the Servicer.
The Assignment and Servicing Agreement will provide that the Servicer
will take or cause to be taken all actions as are necessary or advisable to
service, administer and collect each Lease in accordance with customary and
prudent servicing procedures for leases of a similar type, and in accordance
with applicable laws, rules and regulations and, in any event, according to a
standard of care not less than that which it applies to leases it services for
its own account.
Advances by the Servicer. Prior to any Payment Date, with respect to
any series, the Servicer may, but will not be required to, advance (each, a
"Servicer Advance") to the Trustee an amount sufficient to cover delinquencies
on Leases with respect to the prior Due Period. The Servicer will be entitled
to reimbursement for Servicer Advances.
Servicing Compensation. The Servicer will be entitled to receive a
servicing fee for each Due Period (the "Servicing Fee") in an amount equal to a
specified percentage per annum of the Discounted Present Value of the Performing
Leases or the Outstanding Principal Amount of the Notes, as of the first day of
such Due Period. The Indenture will specify the priority of the Servicing Fee
in relation to payments to Noteholders and other persons. The Servicing Fee may
be paid prior to any distribution to the Noteholders.
If so provided in the related Transaction Documents, the Servicer will
also be entitled to reimbursement of out-of-pocket expenses reasonably incurred
in the course of performance of its duties as Servicer and to collect and retain
any late fees, the penalty portion of interest paid on past due amounts and
other administrative fees or similar charges allowed by applicable law with
respect to the Lease Receivables and any prepayment premiums or other payments
in excess of the present value of all outstanding amounts owed under a Lease by
a Lessee as a result of the early termination thereof, and will be entitled to
reimbursement from the Issuer for certain liabilities. Payments by or on behalf
of Lessees will be allocated to scheduled payments and late fees and other
charges in accordance with the Servicer's normal practices and procedures.
The Servicing Fee will compensate the Servicer for performing the
functions of a third-party servicer of similar types of leases as an agent for
their beneficial owner. The Servicing Fee also will compensate the Servicer for
administering the Lease Receivables, accounting for collections and furnishing
statements to the Issuer and the Trustee with respect to distributions. The
Servicing Fee also will reimburse the Servicer for certain taxes,
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accounting fees, outside auditor fees, trustees fees, data processing costs and
other costs incurred in connection with administering the Lease Receivables.
Statements to Trustees and Issuer. Prior to each Payment Date for a
series of Notes, the Servicer will provide to the Trustee as of the close of
business on the last day of the preceding related Due Period, a statement
setting forth substantially the same information as is required to be provided
in the periodic reports provided to Noteholders described under "Description of
the Notes--Reports to Noteholders."
Evidence as to Compliance. The Assignment and Servicing Agreement
will provide that a firm of independent public accountants will furnish to the
Issuer and the Trustee, annually, a statement as to compliance by the Servicer
during the preceding twelve months (or, in the case of the first such
certificate, the period from the applicable Issuance Date) with certain
standards relating to the servicing of the Lease Receivables.
The Assignment and Servicing Agreement will also provide for the
annual delivery to the Issuer and/or the Trustee of a certificate signed by an
officer of the Servicer stating that the Servicer either has fulfilled its
obligations under the Assignment and Servicing Agreement in all material
respects throughout the preceding 12 months (or, in the case of the first
certificate, the period from the applicable Issuance Date) or, if there has been
a default in the fulfillment of any obligation in any material respect,
describing each default. The Servicer also will agree to give the Trustee
notice of certain Servicer Events of Defaults (as defined below) under the
related Assignment and Servicing Agreement.
Copies of such statements and certificates may be obtained by
Noteholders owning at least 25% of the outstanding principal amount of the Notes
of the relevant series upon request in writing addressed to the Trustee or the
Servicer.
Certain Matters Regarding the Servicer. The Assignment and Servicing
Agreement will provide that the Servicer may not resign from its obligations and
duties as Servicer thereunder, except upon determination that the performance by
the Servicer of such duties is no longer permissible under applicable law. No
resignation by the Servicer will become effective until the Trustee or a
successor servicer has assumed the Servicer's servicing obligations and duties
under the Assignment and Servicing Agreement.
The Assignment and Servicing Agreement will further provide that
neither the Servicer nor any of its directors, officers, employees, or agents
will be under any liability to the Issuer or the Noteholders for taking any
action or for refraining from taking any action pursuant to the Assignment and
Servicing Agreement; provided, however, that neither the Servicer nor any of
-------- -------
those other persons will be protected against any liability that would otherwise
be imposed based on any breach of the warranties, representations or warranties
made by the Servicer in the Assignment and Servicing Agreement or by reason of
willful misfeasance, bad faith or negligence in the performance or non-
performance of duties.
Under the circumstances specified in the Assignment and Servicing
Agreement, any entity into which the Servicer may be merged or consolidated, or
any entity resulting from any merger or consolidation to which the Servicer is a
party, or any entity succeeding to the business of the Servicer or, with respect
to its obligations as Servicer, which corporation or other entity in each of the
foregoing cases assumes the obligations of the Servicer, will be the successor
to the Servicer under the Assignment and Servicing Agreement.
Servicer Events of Default. The following events and conditions, and
any additional events and conditions that are described in the related
Prospectus Supplement, will be defined in the Assignment and Servicing
Agreement as "Servicer Events of Default":
(a) failure on the part of the Servicer to remit to the Trustee within
three Business Days following the receipt thereof any monies
received by the Servicer required to be remitted to the Trustee
under the Assignment and Servicing Agreement;
(b) failure on the part of the Servicer to pay to the Trustee on the
date when due, any payment required to be made by the Servicer
pursuant to the Assignment and Servicing Agreement;
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(c) default on the part of either the Servicer or (so long as IOS
Capital is the Servicer) IOS Capital in its observance or
performance in any material respect of certain covenants or
agreements in the Assignment and Servicing Agreement which
failure continues unremedied for a period of 30 days after the
earlier of (i) the date it first becomes known to any officer of
IOS Capital or the Servicer, as the case may be, and (ii) the date
on which written notice thereof requiring the same to be remedied
shall have been given to the Servicer or IOS Capital, as the case
may be, by the Trustee, or to the Servicer or IOS Capital, as the
case may be, and the Trustee by any Noteholder;
(d) if any representation or warranty of IOS Capital made in the
Assignment and Servicing Agreement proves to be incorrect in any
material respect as of the time made; provided, however, that the
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breach of any representation or warranty made by IOS Capital in
such Assignment and Servicing Agreement will be deemed to be
"material" only if it affects the Noteholders or the
enforceability of the related Indenture or of the related Notes;
and provided, further, that a material breach of any
-------- -------
representation or warranty made by IOS Capital in an Assignment
and Servicing Agreement with respect to any of the Lease
Receivables subject thereto will not constitute a Servicer Event
of Default if IOS Capital purchases such Lease Receivable in
accordance with the Assignment and Servicing Agreement to the
extent provided therein;
(e) certain insolvency or bankruptcy events relating to the Servicer;
(f) the failure of the Servicer to make one or more payments due with
respect to aggregate recourse debt or other obligations exceeding
$5,000,000, or the occurrence of any event or the existence of any
condition, the effect of which event or condition is to cause (or
permit one or more persons to cause) more than $5,000,000 of
aggregate recourse debt or other obligations of the Servicer to
become due before its (or their) stated maturity or before its (or
their) regularly scheduled dates of payment so long as such
failure, event or condition shall be continuing and not waived by
the person or persons entitled to performance; or
(g) a final judgment or judgments (or decrees or orders) for the
payment of money aggregating in excess of $5,000,000 and any one
of such judgments (or decrees or orders) has remained unsatisfied
and in effect for any period of 60 consecutive days without a stay
of execution.
Rights upon Servicer Events of Default. As long as a Servicer Event
of Default under the Assignment and Servicing Agreement remains unremedied, the
Trustee may, and upon the instruction of holders of Notes evidencing not less
than 66-2/3% in principal amount of the Notes of the relevant series or, if and
to the extent described in the related Prospectus Supplement, any credit
enhancement provider, shall, terminate all the rights and obligations of the
Servicer, if any, under the related Assignment and Servicing Agreement,
whereupon a successor servicer appointed by such Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Assignment
and Servicing Agreement and will be entitled to similar compensation
arrangements. If, however, a bankruptcy trustee or similar official has been
appointed for the Servicer, and no Servicer Event of Default other than the
appointment of a successor servicer has occurred, the bankruptcy trustee or
official may have the power to prevent the Trustee or the Noteholders from
effecting a transfer of servicing. In the event that the Trustee is unwilling
or unable to so act, it may, subject to certain limitations, appoint, or
petition a court of competent jurisdiction for the appointment of, a successor
servicer. The Trustee may make arrangements for compensation to be paid to the
successor, which in no event may be greater than the servicing compensation
payable to the Servicer under the Assignment and Servicing Agreement or such
other amount indicated in the related Prospectus Supplement.
Indenture
Accounts. The Trustee will establish and maintain one or more
accounts in the name of such Trustee on behalf of the Noteholders into which
payments made on or with respect to the related Lease Receivables shall be
deposited as provided in the related Transaction Documents (the "Collection
Account"). In addition, the Trustee may establish one or more other separate
accounts in the name of the Trustee for the benefit of the
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Noteholders, (i) for the deposit of funds for distribution to the Noteholders (a
"Distribution Account"), (ii) to provide reserves to cover shortfalls in
Available Funds (a "Reserve Account"), (iii) to provide funds for the purchase
of additional Lease Receivables during any applicable pre-funding period (a
"Pre-Funding Account"), or (iv) for any other purpose (an "Additional Account").
Funds in the Collection Account and any Distribution Account, Reserve
Account, Pre-Funding Account or Additional Account (collectively, the
"Transaction Accounts") will be invested as provided in the related Indenture in
Eligible Investments. "Eligible Investments" are generally limited to
investments acceptable to the Rating Agencies as being consistent with the
rating of the Notes. Eligible Investments generally are limited to obligations
that mature not later than the Business Day immediately preceding the next
succeeding Payment Date.
The Transaction Accounts will be maintained as Eligible Accounts.
"Eligible Account" means either (a) an account maintained with a depository
institution or trust company acceptable to each of the Rating Agencies and any
credit enhancement provider, or (b) a trust account or similar account
maintained with a federal or state chartered depository institution, which may
be an account maintained with the Trustee.
Distributions. Beginning on the first Payment Date, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on each Class of Notes entitled thereto will be made to the Noteholders.
The timing, calculation, allocation, order, source, priorities of, distribution
of, and requirements for each Class of Notes will be set forth in the related
Prospectus Supplement.
Credit Enhancements. The amounts and types of credit enhancement
arrangements, if any, and the provider thereof, if applicable, with respect to
each Class of Notes of a given series will be set forth in the related
Prospectus Supplement. If and to the extent provided in the related Prospectus
Supplement, credit enhancement may be in the form of an insurance policy,
subordination of one or more classes of Notes, reserve accounts,
overcollateralization, letters of credit, credit or liquidity facilities, third
party payments or other support, surety bonds, guaranteed cash deposits or such
other arrangements as may be described in the related Prospectus Supplement or
any combination of two or more of the foregoing. If specified in the related
Prospectus Supplement, credit enhancement for a Class of Notes may cover one or
more other classes of Notes of the same series, and credit enhancement for a
series of Notes may cover one or more other series of Notes.
The presence of credit enhancement for the benefit of any Class or
series of Notes is intended to enhance the likelihood of receipt by the
Noteholders of such Class or series of the full amount of principal and interest
due thereon and to decrease the likelihood that such Noteholders will experience
losses. As more specifically provided in the related Prospectus Supplement, the
credit enhancement for a Class or series of Notes will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance and interest thereon. If losses occur which exceed the amount
covered by any credit enhancement or which are not covered by any credit
enhancement, Noteholders of any Class or series will bear their allocable share
of deficiencies, as described in the related Prospectus Supplement. In
addition, if a form of credit enhancement covers more than one Class of Notes or
more than one series of Notes, Noteholders of any such Class or series will be
subject to the risk that such credit enhancement will be exhausted by the claims
of Noteholders of other series.
If the protection provided to the Noteholders of a given Class of
Notes by any applicable credit enhancement or by the subordination of another
Class of Notes is insufficient, the Issuer must rely solely on the Asset Pool.
Modification of the Indenture. Under an Indenture, the rights and
obligations of the Issuer and the rights of the Noteholders may be modified by
the Issuer with the consent of the holders of not less than 662/3% in aggregate
principal amount of the Notes then outstanding under the Indenture or, if and to
the extent described in the related Prospectus Supplement, the consent of any
credit enhancement provider; but no such modification may be made if it would
result in the reduction or withdrawal of the then current ratings of the
outstanding related Notes and no such modification may be made without the
consent of the holder of each outstanding note affected thereby if it would: (a)
change the fixed maturity of any Note, or the principal amount or interest
amount payable thereof, or change the priority of payment thereof or reduce the
interest rate or the principal thereon or change the place of payment where, or
the coin or currency in which, any Note or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any payment on or
after the maturity thereof; or (b) reduce the above-stated
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percentage of Notes, without the consent of the holders of all Notes then
outstanding under that Indenture or (c) modify the provisions of the Indenture
restricting modifications or waivers of the provisions of the Indenture except
to increase any percentage or fraction set forth therein or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the holder of each outstanding note affected thereby; or (d)
modify or alter the provisions of the Indenture treating Notes held by the
Issuer or any affiliate of the Issuer as not being "Outstanding" for certain
purposes under the Indenture; or (e) permit the creation of any lien ranking
prior to or on a parity with the lien of the Indenture with respect to any part
of any Asset Pool or, except as provided in the Indenture, terminate the lien of
the Indenture on any part of an Asset Pool at any time subject to the Indenture
or deprive any Noteholder of the security afforded by the lien of the Indenture.
Events of Default. "Events of Default" under an Indenture will
include, in addition to any other events or conditions described in the related
Prospectus Supplement: (i) a default for five days or more in the payment of
any interest on any Note issued under that Indenture; (ii) a default in the
payment of the principal of or any installment of the principal of any Note at
the stated maturity or when the same becomes due and payable; (iii) a default in
the observance or performance in any material respect of any covenant or
agreement regarding the contemplated transaction made in the related Transaction
Documents, or any representation or warranty made by the Issuer in the
Transaction Documents or in any certificate delivered pursuant thereto or in
connection therewith having been incorrect as of the time made, and the
continuation of any default or the failure to cure a breach of a representation
or warranty for a period of 30 days (or in certain circumstances 90 days) after
notice thereof is given to the Issuer by the Trustee or the Issuer and the
Trustee by the holders of at least 25% in principal amount of the Notes then
outstanding; or (iv) certain events of bankruptcy, insolvency, receivership or
liquidation relating to the Issuer.
If an Event of Default occurs, the Trustee or, to the extent described
in the related Prospectus Supplement, any credit enhancement provider may, and
if so directed by holders of not less than 66-2/3% of the then outstanding
principal amount of the Notes, shall, declare the unpaid principal amount of the
related Notes to be immediately due and payable together with all accrued and
unpaid interest thereon. If the Event of Default involves other than non-
payment of principal or interest on the Notes, the Trustee may not sell the
related Lease Receivables unless the sale is for an amount greater than or equal
to the outstanding principal amount of the Notes unless directed to do so by the
holders of 662/3% of the then outstanding principal amount of the Notes.
Subsequent to an Event of Default and following any acceleration of
the Notes pursuant to the Indenture, any monies that may then be held or
thereafter received by the Trustee will be applied in the order of priority set
forth in the related Prospectus Supplement at the date or dates fixed by the
Trustee and, in case of the distribution of the entire amount due on account of
principal or interest, upon presentation and surrender of the Notes.
Each Indenture will provide that the holders of 662/3% in aggregate
principal amount of the Notes then outstanding or, if and to the extent
described in the related Prospectus Supplement, any credit enhancement provider
will have the right to waive certain defaults and, subject to certain
limitations, to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust power conferred
on the Trustee. The Indenture will provide that in case an Event of Default
shall occur (which shall not have been cured or waived), the Trustee will be
required to exercise its rights and powers under such Indenture and to use the
degree of care and skill in their exercise that a prudent man would exercise or
use in the conduct of his own affairs. Subject to these provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the Noteholders unless they shall have
offered to the Trustee security or indemnity satisfactory to the Trustee. Upon
request of a Noteholder, the Trustee will provide information as to the
outstanding principal amount of each Class of Notes.
Redemption. The Issuer may, at its option, redeem the Notes, as a
whole, at their principal amount, without premium, together with interest
accrued to the date fixed for redemption if on any payment date the Discounted
Present Value the Leases is less than or equal to 10% of the Discounted Present
Value of the Leases in the related Asset Pool as of the original Cut-Off Date.
The Issuer will give notice of redemption to each Noteholder and the Trustee at
least 30 days before the Payment Date fixed for prepayment. Upon deposit of
funds necessary to effect redemption, the Trustee shall pay the remaining unpaid
principal amount on the Notes and all accrued and unpaid interest as of the
Payment Date fixed for redemption.
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Legal Aspects of the Lease Receivables
General
The Leases will either be "chattel paper" as defined in the Uniform
Commercial Code or Leases that are not treated materially differently from
"chattel paper" for purposes of title transfer, security interests or remedies
on default. Pursuant to the UCC for most purposes, a sale of chattel paper is
treated in a manner similar to a transaction creating a security interest in
chattel paper. In connection with the creation of an Asset Pool, the Issuer,
the Originator, the Servicer and/or the Seller will cause the filing of
appropriate UCC-1 financing statements with respect to the Leases to be made
with the appropriate governmental authorities. Under the Assignment and
Servicing Agreement, the Servicer will be obligated from time to time to take
any actions necessary to protect, perfect and preserve the Issuer's or the
Trustee's interests in the Leases and their proceeds, as the case may be.
The Leases are triple-net leases, requiring the Lessees to pay all
taxes, maintenance and insurance associated with the Equipment, and provide that
they are noncancellable by the Lessees.
The Leases are full payoff leases, under which the obligations of the
Lessee are absolute and unconditional, regardless of any defense, setoff or
abatement which the Lessee may have against IOS Capital, as Originator or
Servicer, the Issuer, or any other person or entity whatsoever.
Defaults under the Leases are generally the result of failure to pay
amounts when due, failure to observe other covenants in the Lease,
misrepresentations by, or insolvency, bankruptcy or appointment of a trustee or
receiver for, the Lessee under a Lease. The remedies of the lessor (and the
Issuer as assignee) following any applicable notice and cure period are
generally to enforce the performance by the Lessee of the terms and covenants of
the Lease (including the Lessee's obligations to make scheduled payments) or
recover damages of the breach thereof, to accelerate the balance of the
remaining scheduled payments paid or to terminate the rights of the Lessee under
such Lease. Although the Leases permit the lessor to repossess and dispose of
the related Equipment in the event of a lease default, and to credit the
proceeds against the Lessee's liabilities thereunder, these remedies may be
limited where the Lessee thereunder is subject to bankruptcy, or other
insolvency proceedings.
UCC and Bankruptcy Considerations
The Originator will transfer all the Originator's interest in the
Equipment to the Seller. The Seller will assign its interest as secured party
in the Equipment relating to the Leases to the Issuer, which in turn will pledge
that interest to the Trustee for the benefit of the Noteholders. The Seller
will not transfer any of its ownership interests in any of the Equipment.
Because of this, the Trustee, on behalf of the Noteholders, will have no
interest in or recourse to any of the Equipment other than by virtue of the
security interest granted to the Issuer in the Seller's interest in the
Equipment and the Issuer's pledge of that interest to the Trustee. As a result,
the Trustee may be unable to foreclose on the Equipment in the event of a
default by a Lessee on any Lease and Noteholders may experience delays in
receiving payments and suffer a loss of their investment in the Notes. UCC
financing statements will not be filed to perfect any security interest in the
Equipment. Moreover, Equipment may be subject to a superior lien. In this
case, the senior lienholder may be entitled to be paid the full amount of the
indebtedness owed to it out of the sale proceeds before the proceeds could be
applied to the payment of claims on behalf of the Issuer or Noteholders. In
addition, in the event of bankruptcy of the Originator or the Seller, the
security interest in the Equipment of the Issuer or Trustee may be subject to
avoidance under the Bankruptcy Code of 1978, as amended (the "Bankruptcy Code").
In the event of a default by the Lessee under a finance lease, the
Servicer may take action to enforce the Non-Performing Lease by repossession and
resale of the Equipment. Under the UCC in most states, a creditor can, without
prior notice to the debtor, repossess assets securing a defaulted contract by
the Lessee's voluntary surrender of such assets or by "self-help" repossession
that does not involve a breach of the peace or by judicial process.
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
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repossession. Generally, this right of reinstatement may be exercised on a
limited number of occasions in any one-year period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the Lessee with reasonable
notice of the date, time and place of any public sale and/or the date after
which any private sale of the collateral may be held and that any such sale be
conducted in a commercially reasonable manner. The Assignment and Servicing
Agreement may require the Servicer to sell promptly any repossessed item of
Equipment or re-lease such Equipment for the benefit of the Noteholders.
Under most state laws, a Lessee has the right to redeem collateral for
its obligations prior to actual sale by paying to the secured party the unpaid
balance of the obligation plus reasonable expenses for repossession, holding and
preparing the collateral for disposition and arranging for its sale, plus, to
the extent provided for in the written agreement of the parties, reasonable
attorneys' fees.
In addition, because the market value of the equipment of the type
subject to the Leases generally declines with age and because of obsolescence,
the net disposition proceeds of Equipment at any time during the term of a Lease
may be less than the outstanding balance of the Lease Payments. Because of
this, and because other creditors may have rights in the related Equipment
superior to those of the Issuer, the Servicer may not be able to recover the
entire amount due on a Non-Performing Lease in the event that the Servicer
elects to repossess and sell the Equipment at any time.
Under the UCC and laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a Lessee for any deficiency on
repossession and resale of the asset securing the unpaid balance of the Lessee's
contract. However, some states impose prohibitions or limitations on deficiency
judgments. In most jurisdictions, the courts, in interpreting the UCC, would
impose upon a creditor an obligation to repossess the equipment in a
commercially reasonable manner and to "mitigate damages" in the event of a
Lessee's failure to cure a default. The creditor would be required to exercise
reasonable judgment and follow acceptable commercial practice in seizing and
disposing of the equipment and to offset the net proceeds of such disposition
against its claim. In addition, a Lessee may successfully invoke an election of
remedies defense to a deficiency claim in the event that the Servicer's
repossession and sale of the Equipment is found to be a retention discharging
the Lessee from all further obligations under UCC Section 9-505(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 be uncollectible.
Certain statutory provisions, including federal and state bankruptcy
and insolvency laws, may also limit the ability of the Servicer to repossess and
resell collateral or obtain a deficiency judgment. In the event of the
bankruptcy or reorganization of a Lessee, various provisions of the Bankruptcy
Code and related laws may interfere with or eliminate the ability of the
Servicer, the Issuer or the Trustee to enforce its rights under the Lease
Receivables. If bankruptcy proceedings were instituted in respect of a Lessee,
the Issuer and/or Trustee could be prevented from continuing to collect payments
due from or on behalf of the Lessee or exercising any remedies without the
approval of the bankruptcy court, and the bankruptcy court could permit the
Lessee to use or dispose of the Equipment and provide the Issuer and/or Trustee
with a lien on substitute collateral, so long as such substitute collateral
constituted "adequate protection" as defined under the Bankruptcy Code.
In the case of operating leases, the Bankruptcy Code grants to the
bankruptcy trustee or the debtor-in-possession a right to elect to assume or
reject any executory contract or unexpired lease. Any rejection of this type of
lease or contract constitutes a breach of the lease or contract, entitling the
nonbreaching party to a claim for damages for breach of contract. The net
proceeds from any resulting judgment would be deposited by the Servicer into the
Collection Account and allocated to the Noteholders as more fully described
herein and in the related Prospectus Supplement. Upon the bankruptcy of a
Lessee, if the bankruptcy trustee or debtor-in-possession elected to reject a
Lease, the flow of scheduled payments to Noteholders would cease. In the event
that, as a result of the bankruptcy of a Lessee, the Leases become Non-
Performing Leases, no recourse would be available against the Originator (except
for misrepresentation or breach of warranty) and the Noteholders could suffer a
loss. Similarly, upon the bankruptcy of the Issuer, if the bankruptcy trustee
or debtor-in-possession elected to reject a Lease, the
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flow of Lease Payments to the Issuer and the Noteholders would cease. As noted
above, however, the Issuer has been structured so that the filing of a
bankruptcy petition with respect to it is unlikely. See "The Issuer."
In addition, certain of the Leases (but not in excess of 3% of the
related Asset Pool) may be with governmental entities. Payment by governmental
authorities of amounts due under these Leases may be contingent upon legislative
approval. Further, the assignment of their payment obligations may be void or
voidable if not done in compliance with applicable government rules and
regulations. Accordingly, payment delays and collection difficulties may limit
collections with respect to certain governmental Leases.
These UCC and bankruptcy provisions, in addition to the possible
decrease in value of a repossessed item of Equipment, may limit the amount
realized on the sale of the Equipment to less than the amount due on the related
Lease.
Material Federal Income Tax Consequences
General
The following discussion sets forth the material federal income tax
consequences to the original purchasers of the Notes of the purchase, ownership
and disposition of the Notes. The opinion of Dewey Ballantine LLP, special tax
counsel to the Issuer ("Tax Counsel"), does not purport to deal with all federal
tax considerations applicable to all categories of investors. Certain holders,
including insurance companies, tax-exempt organizations, financial institutions
or broker dealers, taxpayers subject to the alternative minimum tax, and holders
that will hold the Notes as other than capital assets, may be subject to special
rules that are not discussed below. In particular, this discussion applies only
to institutional investors that purchase Notes directly from the Issuer and hold
the Notes as capital assets.
The discussion that follows, and the opinion set forth below of Tax
Counsel are based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and treasury regulations promulgated thereunder as in
effect on the date hereof and on existing judicial and administrative
interpretations thereof. These authorities are subject to change and to
differing interpretations, which could apply retroactively. The opinion of Tax
Counsel is not binding on the courts or the Internal Revenue Service (the
"IRS"). Potential investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Notes.
The following discussion addresses lease-backed notes such as the
Notes that are intended to be treated for federal income tax purposes as
indebtedness secured by the underlying Lease Receivables. Tax Counsel has
prepared the following discussion and is of the opinion that such discussion is
correct in all material respects.
Tax Characterization of the Issuer
Tax counsel is of the opinion that the Issuer will not be treated as
an association (or a publicly traded partnership) taxable as a corporation for
federal income tax purposes.
Tax Characterization of the Notes
In the opinion of Tax Counsel, although no transaction closely
comparable to that contemplated herein has been the subject of any treasury
regulation, revenue ruling or judicial decision, based on the application of
existing law to the facts as set forth in the applicable agreements, the Notes
will be treated as indebtedness for federal income tax purposes. If
characterized as indebtedness, interest on the Notes will be taxable as ordinary
income for federal income tax purposes when received by Noteholders using the
cash method of accounting and when accrued by Noteholders using the accrual
method of accounting. Noteholders using the accrual method of accounting may be
required to report income for tax purposes in advance of receiving a
corresponding cash distribution with which to pay the related tax. Interest
received on the Notes also may constitute "investment income" for purposes of
certain limitations of the Code concerning the deductibility of investment
interest expense.
37
<PAGE>
Although it is the opinion of Tax Counsel that the Notes are properly
characterized as indebtedness for federal income tax purposes, no assurance can
be given that such characterization of the Notes will prevail. If the Notes
were treated as an ownership interest in the Leases, all income on the Leases
would be income to the holders of the Notes, and related fees and expenses would
generally be deductible (subject to certain limitations on the deductibility of
miscellaneous itemized deductions by individuals) and certain market discount
and premium provisions of the Code might apply to a purchase of the Notes.
If, alternatively, the Notes were treated as an equity interest in the
Issuer, the Issuer might be classified as a partnership or as an association
taxable as a corporation or a publicly traded partnership taxable as a
corporation. If the Notes were treated as interests in a partnership, each item
of income, gain, loss, deduction and credit generated through the ownership of
the Equipment and the Lease Receivables by the partnership would be passed
through to the Noteholders, as partners in a partnership according to their
respective interests therein. The timing, amount and character of the income or
expenses reportable by the Noteholders as partners in such a partnership could
differ from the income or expenses reportable by the Noteholders as holders of
debt. If the Noteholders were treated as partners, a cash basis Noteholder
might be required to report income when it accrues to the partnership rather
than when it is received by the Noteholder. Moreover, if Notes were treated as
interests in a partnership, an individual Noteholder's share of expenses of the
partnership (such as Servicing Fees) would be miscellaneous itemized deductions
that in the aggregate are allowed only to the extent they exceed two percent of
the individual Noteholder's adjusted gross income, meaning that the individual
Noteholder might be taxed on a greater amount of income than the stated interest
on his or her Notes. Finally, if a Note were treated as a partnership interest,
any taxable income allocated to a Holder that is a pension, profit sharing or
employee benefit plan or other tax-exempt, could constitute "unrelated business
taxable income."
If the Notes were treated as interests in an association taxable as a
corporation or a publicly traded partnership taxable as a corporation, the
resulting entity would be subject to federal income tax at corporate tax rates
on its taxable income generated by ownership of the Lease Receivables.
Moreover, distributions by the entity on the Notes probably would not be
deductible in computing the entity's taxable income and all or part of any
distributions to Noteholders would probably be treated as dividend income to
such Noteholders. Such an entity-level tax could result in a reduced amount of
cash available for distributions to Noteholders.
Since the Issuer will treat the Notes as indebtedness for federal
income tax purposes, the Trustee (and Participants and Indirect Participants)
will not attempt to satisfy the tax reporting requirements that would apply
under these alternative characterizations of the Notes. Further, if the IRS
were to contend successfully that the Notes are interests in a publicly traded
partnership taxable as a corporation, additional tax consequences would apply to
foreign Noteholders. Investors are urged to consult their own tax advisors with
regard to the potential application of those provisions.
Discount and Premium
A Note purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In very general terms, (i) original issue discount is
treated as a form of interest and must be included in a beneficial owner's
income as it accrues (regardless of the beneficial owner's regular method of
accounting) using a constant yield method; (ii) market discount is treated as
ordinary income and must be included in a beneficial owner's income as principal
payments are made on the Note (or upon a sale of a Note); and (iii) if a
beneficial owner so elects, premium may be amortized over the life of the Note
and offset against inclusions of interest income. These tax consequences are
discussed in greater detail below. Beneficial owners who are required to
include the interest income as it accrues may be required to report income for
tax purposes in advance of receiving a corresponding cash contribution with
which to pay the related tax.
Original Issue Discount. In general, a Note will be considered to be
issued with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The issue price of a Note
is the initial offering price to the public (excluding bond houses and brokers)
at which a substantial amount of the Notes is sold. The issue price also
includes any accrued interest attributable to the period between the beginning
of the Due Period and the closing date relating to such series of Notes (the
"Issuance Date"). The stated redemption price at maturity of a Note that has a
notional principal amount or receives principal only or that is or may provide
for accruals of interest is equal to the sum of all distributions to be made
under that Note. The stated
38
<PAGE>
redemption price at maturity of any other Note is its stated principal amount,
plus an amount equal to the excess (if any) of the interest payable on the first
Payment Date over the interest that accrues for the period from the Issuance
Date to the first Payment Date. The Trustee will supply, at the time and in the
manner required by the IRS, to beneficial owners, brokers and middlemen
information with respect to the original issue discount accruing on the Notes.
Notwithstanding the general definition, original issue discount will
be treated as zero if the discount is less than 0.25 percent of the stated
redemption price at maturity of the Note multiplied by its weighted average
life. The weighted average life of a Note is 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 Issuance Date until
the date on which each of those distributions is expected to be made by (ii) a
fraction, the numerator of which is the amount of the distribution and the
denominator of which is the Note's stated redemption price at maturity. Even if
original issue discount is treated as zero under this rule, the actual amount of
original issue discount must be allocated to the principal distributions on the
Note and, when each such distribution is received, gain equal to the discount
allocated to the distribution will be recognized.
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 that Note, and reduced by the amount of
any distributions made on that 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 it at a cost less than
its remaining stated redemption price at maturity also will be required to
include in gross income for each day on which it holds the Note, the daily
portion of original issue discount with respect to the Note (but reduced, if the
cost of the Note to the purchaser exceeds its adjusted issue price, by an amount
equal to the product of (i) that daily portion and (ii) a constant fraction, the
numerator of which is that excess and the denominator of which is the sum of the
daily portions of original issue discount on the Note for all days on or after
the day of purchase).
Market Discount. A beneficial owner that purchases a Note at a market
discount, that is, at a purchase price less than the remaining stated redemption
price at maturity of such Note (or, in the case of a Note with original issue
discount, its adjusted issue price), will be required to allocate each principal
distribution first to accrued market discount on the Note, and recognize
ordinary income to the extent such distribution does not exceed the aggregate
amount of accrued market discount on such Note not previously included in
income. With respect to Notes that have unaccrued original issue discount, such
market discount must be included in income in addition to any original issue
discount. A beneficial owner that incurs or continues indebtedness to acquire a
Note at a market discount may also be required to defer the deduction of all or
a portion of the interest on such indebtedness until the corresponding amount of
market discount is included in income. In general terms, market discount on a
Note may be treated as accruing either (i) under a constant yield method or (ii)
in proportion to remaining accruals of original issue discount, if any, or if
none, in proportion to remaining distributions of interest on the Note. The
Trustee will make available, as required by the IRS, to beneficial owners of
Notes information necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if such discount is less than 0.25 percent of the
remaining stated redemption price at maturity of such Note multiplied by its
weighted average remaining life. Weighted average remaining life presumably
would be calculated in a manner similar to weighted average life, taking into
account payments (including prepayments) prior to the date of acquisition of the
Note by the subsequent purchaser. If market discount on a Note is treated as
zero under this rule, the actual amount of market discount must be allocated to
the remaining principal distributions on the Note and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
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
39
<PAGE>
such an election, the amount of any interest payment that must be included in
such beneficial owner's income for each period ending on a Payment Date will be
reduced by the portion of the premium allocable to such period based on the
Premium Note's yield to maturity. Such premium amortization should be made using
constant yield principles. If such election is made by the beneficial owner, the
election will also apply to all bonds the interest on which is not excludible
from gross income ("fully taxable bonds") held by the beneficial owner at the
beginning of the first taxable year to which the election applies and to all
such fully taxable bonds thereafter acquired by it, and is irrevocable without
the consent of the IRS. If such an election is not made, (i) such a beneficial
owner must include the full amount of each interest payment in income as it
accrues, and (ii) the premium must be allocated to the principal distributions
on the Premium Note and when each such distribution is received, a loss equal to
the premium allocated to such distribution will be recognized. Any tax benefit
from the premium not previously recognized will be taken into account in
computing gain or loss upon the sale or disposition of the Premium Note.
Special Election. A beneficial owner may elect to include in gross
income all "interest" that accrues on a Note by using a constant yield method.
For purposes of the election, the term "interest" includes stated interest,
acquisition discount, original issue discount, de minimis original issue
discount, market discount, de minimis market discount and unstated interest as
adjusted by any amortizable bond premium or acquisition premium. A beneficial
owner should consult its own tax advisor regarding the time and manner of making
and the scope of the election and the implementation of the constant yield
method.
Sale or Exchange of Notes
If a Note is sold or exchanged, the seller of the Note will recognize
gain or loss equal to the difference between the amount realized on the sale or
exchange and the adjusted basis of the Note. The adjusted basis of a Note will
generally equal its cost, increased by any OID or market discount includible in
income with respect to the Note through the date of sale and reduced by any
principal payments previously received with respect to the Note, any payments
allocable to previously accrued OID or market discount and any amortized market
premium. Subject to the market discount rules, gain or loss will generally be
capital gain or loss if the Note was held as a capital asset. Capital losses
generally may be used only to offset capital gains.
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 percent if recipients of those
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from that tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
The IRS has issued regulations (the "Withholding Regulations"), which
change some of the rules relating to certain presumptions currently available
relating to information reporting and backup withholding. The Withholding
Regulations 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 date of expiration of the certificate under the rules
as currently in effect.
Foreign Investors
Distributions made on a Note to, or on behalf of, a beneficial owner
that is not a U.S. Person generally will be exempt from U.S. federal income and
withholding taxes. The term "U.S. Person " means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
an estate that is subject to U.S. federal income tax regardless of the source of
its income, or a trust if a court within the United States can exercise primary
supervision over its administration and at least one United States person has
the authority to control all substantial decisions of
40
<PAGE>
the trust. This exemption is applicable provided (a) the beneficial owner is not
subject to U.S. tax as a result of a connection to the United States other than
ownership of the Note, (b) the beneficial owner signs a statement under
penalties of perjury that certifies that such beneficial owner is not a U.S.
Person, and provides the name and address of such beneficial owner, and (c) the
last U.S. Person in the chain of payment to the beneficial owner receives such
statement from such beneficial owner or a financial institution holding on its
behalf and does not have actual knowledge that such statement is false.
Beneficial owners should be aware that the IRS might take the position that this
exemption does not apply to a beneficial owner that is a "controlled foreign
corporation" described in Section 881(c)(3)(C) of the Code.
If income or gain with respect to a Note is effectively connected with
a U.S. trade or business carried on by a Noteholder who or which is not a U.S.
person, the 30 percent withholding tax will not apply but such Noteholder will
be subject to U.S. federal income tax at graduated rates applicable to U.S.
persons.
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.
State and Local Tax Consequences
Investors should consult their own tax advisors regarding whether the
purchase of the Notes, either alone or in conjunction with an investor's other
activities, may subject an investor to any state or local taxes based on an
assertion that the investor is either "doing business" in, or deriving income
from a source located in, any state or local jurisdiction. Additionally,
potential investors should consider the state, local and other tax consequences
of purchasing, owning or disposing of a Note. State and local tax laws may
differ substantially from the corresponding federal tax law, and the foregoing
discussion does not purport to describe any aspect of the tax laws of any state
or other jurisdiction. Accordingly, potential investors should consult their
own tax advisors with regard to such matters.
The federal and state income tax discussions set forth above are
included for general information only and may not be applicable depending upon a
Noteholder's particular tax situation. Prospective purchasers should consult
their tax advisors with respect to the tax consequences to them of the purchase,
ownership and disposition of the notes, including the tax consequences under
state, local, foreign and other tax laws and the possible effects of changes in
federal or other tax laws or in the interpretations thereof.
Ratings
Each Class of Notes offered by this Prospectus and the related
Prospectus Supplement will be rated in one of the four highest rating categories
by one or more Rating Agencies. These ratings will address, in the opinion of
such Rating Agencies, the likelihood that the Issuer will be able to make timely
payment of all amounts due on the related Notes in accordance with the terms
thereof. These ratings will neither address any prepayment or yield
considerations applicable to any Notes nor constitute a recommendation to buy,
sell or hold any Notes.
ERISA Considerations
The Prospectus Supplement for each series of Notes will summarize
considerations under ERISA relevant to the purchase of Notes of that series by
employee benefit plans and individual retirement accounts.
41
<PAGE>
Plan of Distribution
The Notes will be acquired by the underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices to
be determined at the time of sale or at the time of commitment therefor.
In connection with the sale of the Notes, underwriters may receive
compensation from the Issuer or from purchasers of the Notes in the form of
discounts, concessions or commissions. The underwriters and dealers
participating in the distribution of the Notes may be deemed to be underwriters
in connection with the Notes, and any discounts or commissions received by them
from the Issuer and any profit on the resale of Notes by them may be deemed to
be underwriting discounts and commissions under the Securities Act.
In connection with this offering, the underwriters may over-allot or
effect transactions which stabilize or maintain the market prices of the offered
notes at levels above those which might otherwise prevail in the open market.
Any stabilizing, if commenced, may be discontinued at any time.
The underwriting agreement pertaining to the sale of the Notes will
provide that the obligations of the underwriters will be subject to certain
conditions precedent, that the underwriters will be obligated to purchase all
the Notes subject to that agreement if any are purchased and that, in limited
circumstances, the Issuer will indemnify the underwriters and the underwriters
will indemnify the Issuer against certain civil liabilities, including
liabilities under the Securities Act, or will contribute to payments required to
be made in respect thereof.
Purchasers of Notes, including dealers, may, depending on the facts
and circumstances of their purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Notes. Noteholders should consult with their legal advisors in this regard
prior to any such reoffer or sale.
Legal Opinions
Certain legal matters will be passed upon in relation to the issuance
of the Notes for the Issuer by Ballard Spahr Andrews & Ingersoll, LLP,
Philadelphia, Pennsylvania and in relation to certain other matters for the
underwriters by Dewey Ballantine LLP, New York, New York.
Experts
The balance sheet of IKON Receivables, LLC at April 6, 1999, appearing
in this Prospectus and Registration Statement, has been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
42
<PAGE>
Index To Financial Statements
Page
----
Report of Independent Auditors 44
Balance Sheet of the Issuer as of April 6, 1999 45
Notes to Balance Sheet 46
43
<PAGE>
Report of Independent Auditors
------------------------------
The Board of Directors
IKON Receivables, LLC
We have audited the accompanying balance sheet of IKON Receivables, LLC (an
indirect wholly-owned subsidiary of IOS Capital, Inc.) as of April 6, 1999.
This balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of IKON Receivables, LLC at April 6,
1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
April 8, 1999
Philadelphia, Pennsylvania
44
<PAGE>
Exhibit 1
IKON Receivables, LLC
Balance Sheet
April 6, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Assets
<S> <C>
Cash.................................................................... $1,000
------
Total assets......................................................... $1,000
======
Liabilities and Member's Equity
Liabilities............................................................. $ 0
Member's equity......................................................... $1,000
------
Total liabilities and member's equity................................... $1,000
======
</TABLE>
See accompanying notes.
45
<PAGE>
IKON Receivables, LLC
Notes to Balance Sheet
April 6, 1999
1. Organization
------------
IKON Receivables, LLC (the "Company"), an indirect wholly-owned subsidiary
of IOS Capital, Inc. ("IOS Capital"), was organized in the State of Delaware
on January 20, 1999, and is managed by IKON Receivables Funding, Inc. (the
"Manager").
The Company was organized to engage exclusively in the following business
and financial activities: to purchase or acquire from any other subsidiary
of IKON Office Solutions, Inc. any right to payment, whether constituting an
account, chattel paper, instrument or general intangible, and certain
related property (other than equipment) and rights (collectively, "Lease
Receivables"), and to hold, sell, transfer, pledge or otherwise dispose of
Lease Receivables or interests therein pursuant to an Assignment and
Servicing Agreement by and among IKON Receivables-1, LLC ("the Sole
Member"), as Seller, IOS Capital, as Originator and Servicer, and the
Company, as Issuer; to enter into any agreement related to any Lease
Receivables that provides for the administration, servicing and collection
of amounts due on such Lease Receivables; to enter into and perform its
obligations under the Assignment and Servicing Agreement, and any interest
rate hedging arrangements in connection therewith; to distribute Lease
Receivables or proceeds from Lease Receivables and any other income to its
Sole Member in such amounts as determined by the Manager; and to engage in
any lawful act or activity and to exercise any power that is incidental and
is necessary or convenient to the foregoing and permitted under Delaware
law.
Neither the Sole Member nor the Manager shall be liable for the debts,
liabilities, contracts or other obligations of the Company solely by reason
of being the Sole Member or Manager of the Company.
2. Capital Contribution
--------------------
IKON Receivables-1, LLC made an initial capital contribution of $1,000 to
IKON Receivables, LLC on April 6, 1999.
3. Registration Statement
----------------------
At April 6, 1999, the Company was in the process of registering with the
Securities and Exchange Commission to be able to issue up to $825 million
of its Lease-Backed Notes.
46
<PAGE>
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.
<TABLE>
<S> <C>
1934 Act.........................................................................................................18
Additional Account...............................................................................................33
Additional Lease.................................................................................................25
Adjusted Lease...................................................................................................25
Asset Pool.......................................................................................................13
Assignment and Servicing Agreement...............................................................................13
Available Funds..................................................................................................24
Bankruptcy Code..................................................................................................35
Business Day.....................................................................................................23
Casualty.........................................................................................................24
Casualty Payment.................................................................................................24
Cede.............................................................................................................26
CEDEL Participants...............................................................................................27
CLAS.............................................................................................................20
Code.............................................................................................................37
Collection Account...............................................................................................32
Commission.......................................................................................................18
Cooperative......................................................................................................27
Cut-off Date.....................................................................................................13
Definitive Notes.................................................................................................28
Depositories.....................................................................................................26
Discount Rate....................................................................................................16
Discounted Present Value of the Leases...........................................................................16
Discounted Present Value of the Performing Leases................................................................16
Distribution Account.............................................................................................33
DTC..............................................................................................................26
Due Period.......................................................................................................24
Early Termination Lease..........................................................................................25
Eligible Account.................................................................................................33
Eligible Investments.............................................................................................33
Eligible Leases..................................................................................................15
Equipment........................................................................................................13
Euroclear Operator...............................................................................................27
Euroclear Participants...........................................................................................27
Events of Default................................................................................................34
High Risk Review List............................................................................................20
IKON marketplaces................................................................................................18
IKON Office Solutions............................................................................................18
Indirect Participants............................................................................................26
Industry.........................................................................................................28
IOS Capital......................................................................................................13
IRS..............................................................................................................37
Issuer...........................................................................................................13
IT...............................................................................................................21
Lease............................................................................................................13
Lease Payment....................................................................................................24
Lease Receivables................................................................................................13
Lessee...........................................................................................................13
Lessees..........................................................................................................13
Manager..........................................................................................................14
Non-Performing Leases............................................................................................25
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
Originator.......................................................................................................13
Originator's Leasing Business....................................................................................14
Participants.....................................................................................................26
Payment Date.....................................................................................................18
Pool Factor......................................................................................................18
Pre-Funding Account..............................................................................................33
Premium Note.....................................................................................................39
Rating Agencies..................................................................................................23
Rating Agency....................................................................................................23
Reserve Account..................................................................................................33
Retainable Deposit...............................................................................................25
Rules............................................................................................................27
Seller...........................................................................................................13
Servicer.........................................................................................................13
Servicer Advance.................................................................................................30
Servicer Events of Default.......................................................................................31
Servicing Fee....................................................................................................30
Substitute Lease.................................................................................................25
Systems..........................................................................................................28
Tax Counsel......................................................................................................37
Termination Payment..............................................................................................25
Terms and Conditions.............................................................................................27
Transaction Accounts.............................................................................................33
Transaction Documents............................................................................................29
Trust Depository.................................................................................................27
U.S. Person......................................................................................................40
Warranty Lease...................................................................................................25
Withholding Regulations..........................................................................................40
</TABLE>
48
<PAGE>
============================================================================
$699,595,000
IKON Receivables, LLC
_____________________________________
P R O S P E C T U S
S U P P L E M E N T
_____________________________________
Lehman Brothers
Chase Securities Inc.
Deutsche Banc Alex. Brown
PNC Capital Markets, Inc.
Dated September 30, 1999
Until 90 days after the date of this prospectus supplement, all dealers that
effect transactions in the Notes, whether or not participating in this offering,
may be required to deliver a prospectus supplement and prospectus. This is in
addition to the dealers' obligation to deliver a prospectus supplement and
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
$235,326,000 6.14125% Class A-1
Lease-Backed Notes
$51,100,000 6.31% Class A-2
Lease-Backed Notes
$100,000,000 6.59% Class A-3a
Lease-Backed Notes
$240,891,000 Variable Rate Class A-3b
Lease-Backed Notes
$72,278,000 6.88% Class A-4
Lease-Backed Notes
============================================================================
