<PAGE> 1
As filed with the Securities and Exchange Commission on November 12, 1998
Registration No. 333-12199
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
PRE-EFFECTIVE
AMENDMENT NO. 6
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
FIRST SIERRA RECEIVABLES II, Inc.
(Exact name of registrant as specified in its charter)
FIRST SIERRA RECEIVABLES III, Inc.
(Exact name of co-registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
To be applied for
(I.R.S. Employer
Identification Number)
600 Travis St., Suite 7050
Houston, TX 77002
713-221-8822
(Address, including zip code and telephone number
including area code, of registrants' principal executive offices)
MR. E. R. GEBHART
Vice President
600 Travis St., Suite 7050
Houston, TX 77002
713-221-8822
(Name, address, including zip code and telephone
number, including area code, of agent for service)
Copies to:
CHRISTOPHER J. DIANGELO, ESQ.
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
(212) 259-6718
Approximate date of commencement of proposed sale to the public: From time to
time on or after the date this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend interest
reimbursement plans, check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
Proposed Maximum Proposed Maximum
Amount to be Offering Price Per Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Registered Certificate (1) Price (1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contract Backed Notes and Certificates $1,000,000 100% $1,000,000 $303.03 (paid)
==================================================================================================================================
</TABLE>
The registrants hereby amend this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrants shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE> 2
Item 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
<TABLE>
<S> <C>
1.1* --Form of Underwriting Agreement for the Notes.
1.2* --Form of Underwriting Agreement for the Certificates.
3.1* --Certificate of Incorporation of the Co-Registrant.
3.2* --Bylaws of the Co-Registrant.
3.3* --Certificate of Limited Partnership of the Registrant.
3.4* --Agreement of Limited Partnership of the Registrant.
4.1* --Form of Pooling and Servicing Agreement between the Trust and the Trustee, including
forms of Notes and certain other related agreements as Exhibits thereto.
4.2* --Form of Pooling and Servicing Agreement between the Company and the Trustee,
including forms of Notes and certain other related agreements as Exhibits
thereto.
4.3* --Form of Pooling and Servicing Agreement between the Trust, the Company
and the Servicer.
4.4* --Form of Pooling and Servicing Agreement between the Company and the Trustee.
5.1** --Opinion of Dewey Ballantine LLP with respect to legality.
5.2** --Opinion of Dewey Ballantine LLP with respect to
legality with respect to Series 1998-1.
8.1** --Opinion of Dewey Ballantine LLP as to tax matters.
8.2** --Opinion of Dewey Ballantine LLP as to tax matters
with respect to Series 1998-1.
10.1* --Form of Bond Insurance Policy.
23.1** --Consent of Dewey Ballantine (included in Exhibits
5.1, 5.2, 8.1 and 8.2).
23.2** --Consent of Independent Auditor of the Trust.
99.1** --Form of Prospectus Summary -- Notes.
99.2 --Form of Prospectus Summary -- Certificates.
</TABLE>
* Incorporated by reference to Registration Statement No. 33-98822.
** Previously filed.
(b) All financial statements, schedules and historical financial
information have been omitted as they are not applicable.
Item 17. UNDERTAKINGS
The undersigned Registrants hereby undertake:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
II-2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrants have duly caused this Amendment to Registration Statement No.
333-12199 on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas on November 12, 1998.
The Registrants reasonably believe that the security rating
requirement pursuant to Transaction Requirement B.5 will be met by the time of
sale.
FIRST SIERRA RECEIVABLES III, INC.
By: /s/ Thomas Depping
--------------------------------
Thomas Depping
President
FIRST SIERRA RECEIVABLES II, INC.
By: /s/ Thomas Depping
--------------------------------
Thomas Depping
President
II-5
<PAGE> 4
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement No. 333-12199 on Form S-3 has been signed by
the following person in the capacities indicated on the 12th day of November,
1998.
SIGNATURE TITLE
--------- -----
/s/ Thomas Depping Director and President of First Sierra
- ------------------------------ Receivables III, Inc. and First Sierra
By: Thomas Depping Receivables II, Inc.
/s/ E. Roger Gebhart Director, Vice President and Treasurer of
- ------------------------------ First Sierra Receivables III, Inc. and
By: E. Roger Gebhart First Sierra Receivables II, Inc.
/s/ Sandy B. Ho Director, Chief Financial Officer and
- ------------------------------ Secretary of First Sierra Receivables III,
By: Sandy B. Ho Inc. and First Sierra Receivables II, Inc.
/s/ Russell Strickland Director of First Sierra Receivables III,
- ------------------------------ Inc. and First Sierra Receivables II, Inc.
By: Russell Strickland
/s/ Cheryl Strickland Director of First Sierra Receivables III,
- ------------------------------ Inc. and First Sierra Receivables II, Inc.
By: Cheryl Strickland
II-6
<PAGE> 1
EXHIBIT 99.2
Subject to completion, dated November 12, 1998
The Information in this Prospectus Supplement is not complete and may be
changed. We may not sell these certificates until the registration statement
filed with the Securities and Exchange Commission is effective. This Prospectus
Supplement is not an offer to sell these certificates and it is not soliciting
an offer to buy these certificates in any state where the offer or sale is not
permitted.
Prospectus supplement to prospectus dated _______, 1998
- -------------------
FIRST SIERRA EQUIPMENT CONTRACT TRUST 1998-1
Issuer $______________
FIRST SIERRA FINANCIAL, INC. Equipment Contract Backed Certificates,
Originator and Servicer Series 1998-1
FIRST SIERRA RECEIVABLES III, INC.
Depositor
- -------------------
The First Sierra Equipment Contract Trust 1998-1 will issue five classes of
certificates representing fractional undivided interests in the assets of the
trust. The assets of the trust will consist primarily of a pool of finance
leases and commercial loans and a security interest in the related underlying
equipment or other property.
- --------------------------------------------------------------------------------
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE S-_ OF THIS
PROSPECTUS SUPPLEMENT AND PAGE __ OF THE PROSPECTUS AND CONSIDER THESE FACTORS
BEFORE MAKING A DECISION TO INVEST IN THE CERTIFICATES.
The certificates represent interests in the trust only and are not interests
in or obligations of any other person.
Neither the certificates nor the underlying leases and loans will be insured or
guaranteed by any governmental agency or instrumentality or by any other person.
- --------------------------------------------------------------------------------
THE CERTIFICATES--
- - Of the five classes of certificates issued by the trust, only the two classes
of certificates set forth in the table below are offered by this prospectus
supplement.
- - Interest and principal on the certificates is scheduled to be paid monthly,
on the 12th day of the month, or the business day immediately following such
12th day. The first scheduled payment date is December 14, 1998.
CREDIT ENHANCEMENT--
- - The Class A Certificates will be unconditionally and irrevocably guaranteed
as to the payment of scheduled interest and ultimate principal thereon
pursuant to the terms of a certificate insurance policy to be issued by
[MBIA Logo].
- - The trust is also issuing the Class B Certificates or the subordinate
certificates, which are not being offered by this prospectus supplement.
Payments on the Class B Certificates are subordinated to payments due on the
Class A Certificates. The subordination of the Class B Certificates provides
additional credit enhancement for the Class A Certificates.
- - The trust is also issuing a trust certificate representing the entire
beneficial ownership interest in the trust. Payments on the trust certificate
are subordinated to the payments due on the certificates. Subordination of
the trust certificate provides credit enhancement for all of the certificates.
<TABLE>
<CAPTION>
Initial Aggregate Pass-Through Underwriting Proceeds to the
Class Certificate Balance Rate Price to Public(1) Discount Depositor(2)
- ----- ------------------- ------------ ------------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
A-1 $ % % % $
A-2 $ % % % $
Total $ $ $ $
</TABLE>
- ------------------------
(1) Plus accrued interest, if any, from _____, 1998.
(2) Before deducting expenses, estimated to be $________.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
FIRST UNION CAPITAL MARKETS PRUDENTIAL SECURITIES INCORPORATED
The date of this prospectus supplement is November __, 1998
<PAGE> 2
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS
We provide information to you about the certificates 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 certificates, and (2) this prospectus supplement, which describes
the specific terms of your series of certificates.
This prospectus supplement does not contain complete information about
the offering of the offered certificates. Additional information is contained
in the prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We can not sell the offered certificates to you unless you
have received both this prospectus supplement and the prospectus.
To the extent the prospectus contemplates different or multiple options,
you should rely on the information in this prospectus supplement as to the
application option.
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a registration statement under the Securities Act of 1933,
as amended, with respect to the offered certificates offered pursuant to this
prospectus supplement. This prospectus supplement and the prospectus, which
form a part of the registration statement, omit certain information contained
in such registration statement pursuant to the rules and regulations of the
Commission. You may inspect and copy the registration statement at the Public
Reference Room at the Commission at 450 Fifth Street, N.W., Washington, D.C.
and the Commission's regional offices at Seven World Trade Center, 13th Floor,
New York, New York, 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You can obtain copies of such
materials at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Commission maintains a site on the World Wide Web containing reports, proxy
materials, information statements and other items. The address is
http://www.sec.gov.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-3
<PAGE> 3
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT THE INFORMATION
PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS..................................... S-3
TABLE OF CONTENTS................................................... S-4
SUMMARY............................................................. S-5
Parties......................................................... S-5
The Trust................................................... S-5
The Depositor............................................... S-5
First Sierra................................................ S-5
The Sellers................................................. S-5
The Certificate Insurer..................................... S-5
The Trustee................................................. S-5
Description of the Certificates................................. S-6
The Offered Certificates.................................... S-6
The Subordinate Certificates................................ S-7
The Trust Certificate....................................... S-7
Payments on the Certificates.................................... S-7
Payment Date................................................ S-7
Record Date................................................. S-7
Collection Period........................................... S-7
Interest.................................................... S-7
Principal................................................... S-7
Flow of Funds................................................... S-8
Credit Enhancement.............................................. S-10
Certificate Insurance Policy................................ S-10
Subordination............................................... S-10
The Trust Assets................................................ S-10
General..................................................... S-10
Origination and Acquisition................................. S-10
Statistical Information..................................... S-11
Servicing....................................................... S-12
Substitutions and Modifications................................. S-13
Advances........................................................ S-13
Repurchases for Breaches of Representations and Warranties...... S-14
Certain Legal Aspects of the Contracts.......................... S-14
Optional Redemption............................................. S-15
Material Federal Income Tax Consequences........................ S-15
ERISA Considerations............................................ S-15
Rating of the Offered Certificates.............................. S-15
RISK FACTORS........................................................ S-16
THE RECEIVABLES..................................................... S-17
The Equipment................................................... S-17
The Contracts................................................... S-17
Substitutions and Modifications................................. S-19
THE SELLERS......................................................... S-25
FIRST SIERRA........................................................ S-25
THE SERVICER........................................................ S-26
Delinquency and Loss Experience................................. S-27
Collection Policies............................................. S-28
LEGAL PROCEEDINGS................................................... S-29
FORMATION OF THE TRUST.............................................. S-29
General......................................................... S-29
The Trustee..................................................... S-29
The Trust Assets................................................ S-30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION......... S-30
DESCRIPTION OF THE CERTIFICATES..................................... S-30
General......................................................... S-30
Conveyance of Receivables....................................... S-31
Representations and Warranties of First Sierra.................. S-32
Indemnification................................................. S-34
The Accounts.................................................... S-34
Servicer Advances............................................... S-34
Flow of Funds................................................... S-35
Withholding..................................................... S-45
Reports to Certificateholders................................... S-45
Optional Redemption............................................. S-47
Remittance and Other Servicing Procedures....................... S-47
Servicing Compensation and Payment of Expenses.................. S-48
Evidence as to Compliance....................................... S-48
Certain Matters Relating to the Servicer........................ S-49
Events of Servicing Termination................................. S-49
Rights Upon an Event of Servicing Termination................... S-50
Events of Default............................................... S-50
Termination of the Trust........................................ S-51
Amendment....................................................... S-51
THE TRUSTEE......................................................... S-52
General......................................................... S-52
Duties and Immunities of the Trustee............................ S-52
PREPAYMENT AND YIELD
CONSIDERATIONS...................................................... S-53
Weighted Average Lives of the Offered Certificates.............. S-54
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER........ S-57
MATERIAL FEDERAL INCOME TAX CONSEQUENCES............................ S-58
Tax Characterization of the Trust............................... S-58
Taxation of Beneficial Owners................................... S-58
Discount and Premium............................................ S-58
Sale of a Certificate........................................... S-58
Foreign Beneficial Owners....................................... S-58
Backup Withholding.............................................. S-58
STATE AND LOCAL TAX CONSIDERATIONS.................................. S-61
ERISA CONSIDERATIONS................................................ S-62
LEGAL INVESTMENT.................................................... S-63
RATINGS............................................................. S-63
METHOD OF DISTRIBUTION.............................................. S-63
REPORT OF EXPERTS................................................... S-64
LEGAL MATTERS....................................................... S-64
REPORT OF PUBLIC INDEPENDENT ACCOUNTANTS............................ S-65
INDEX OF PRINCIPAL DEFINED TERMS.................................... S-68
S-4
<PAGE> 4
SUMMARY
- - This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of the
offering of the offered notes, read carefully this entire prospectus
supplement and the accompanying prospectus.
- - This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
- - You can find a listing of the pages where capitalized terms used in this
prospectus supplement summary are defined under the caption "Index of
Principal Defined Terms" beginning on page S-__ in this prospectus supplement
and under the caption "Index of Terms" beginning on page __ in the
accompanying prospectus.
-------------------------------
PARTIES
THE TRUST
First Sierra Equipment Contract Trust 1998-1 is a trust established under the
laws of the State of New York.
THE DEPOSITOR
First Sierra Receivables III, Inc. is a Delaware corporation. The depositor is a
wholly-owned special-purpose subsidiary of First Sierra. The principal office of
the depositor is located at 600 Travis Street, Suite 7050, Houston, Texas 77002,
and its telephone number is (___) ________.
FIRST SIERRA
First Sierra Financial, Inc. is a Texas corporation. The principal office of
First Sierra is located at 600 Travis Street, Suite 7050, Houston, Texas 77002,
and its telephone number is (713) 221-8822. First Sierra originated the
contracts and will also service the contracts held by the trust.
For a description of First Sierra's business and underwriting procedures, see
"First Sierra."
THE SELLERS
The Sellers are certain affiliates and certain trusts sponsored by First Sierra
or its affiliates, including investors related thereto.
THE CERTIFICATE INSURER
MBIA Insurance Corporation is a New York financial guaranty insurance company.
For a description of the business and selected financial information of the note
insurer, see "The Certificate Insurance Policy and the Certificate Insurer."
THE TRUSTEE
Bankers Trust Company is a New York banking corporation. The corporate trust
offices of the trustee are located at Four Albany Street, New York,
New York 10006, and its telephone number is (212) 250-4237.
For a description of the trustee, and its responsibilities with
respect to the certificateholders, see "The Trustee."
S-5
<PAGE> 5
DESCRIPTION OF THE CERTIFICATES
The trust will issue five classes of its equipment contract backed certificates.
The certificates are designated as the "Class A-1 Certificates", the "Class A-2
Certificates", the "Class B-1 Certificates", the "Class B-2 Certificates" and
the "Class B-3 Certificates". The Class A-1 Certificates and the Class A-2
Certificates are collectively referred to as the "Class A Certificates" or the
offered certificates.
The offered certificates are offered pursuant to this prospectus supplement. The
Class B-1, Class B-2 and Class B-3 Certificates, also referred to as the "Class
B Certificates" or the subordinate certificates, are not offered pursuant to
this prospectus supplement. We will sell the subordinate certificates to
qualified institutional investors in private transactions.
The certificates will be backed solely by a pledge of the assets of the trust,
which consist primarily of a segregated pool of finance lease and commercial
loan contracts and a security interest in the related underlying equipment or
other property.
The trust will also issue a trust certificate representing the entire beneficial
ownership interest in the trust. The trust certificate is subordinate to the
certificates.
THE OFFERED CERTIFICATES
Each class of offered certificates will have the initial principal amount and
interest rate set forth in the following table. The dates on which the final
payment of principal and interest on each class of offered certificates is
expected to be made and must ultimately be made are also set forth in the
following table.
<TABLE>
<CAPTION>
Initial Certificate Expected Final Legal Final CUSIP
Class Principal Balance Pass-Through Rate Payment Date Maturity Date Number
- ----- ----------------- ----------------- -------------- ------------- ------
<S> <C> <C> <C> <C> <C>
A-1 $ %
A-2 $ %
</TABLE>
The aggregate initial certificate principal balance of the offered certificates
is equal to $___________. The sum of the initial certificate principal balance
for the Class A-1 and the Class A-2 Certificates is equal to $__________.
The offered certificates will initially be issued in book-entry form only,
through the facilities of The Depository Trust Company. The offered certificates
will be issued in minimum denominations of $1,000 and multiples of $1,000 in
excess thereof.
S-6
<PAGE> 6
THE SUBORDINATE CERTIFICATES
The following table sets forth the initial certificate principal balance and
the pass-through rate with respect to each class of subordinate certificates.
<TABLE>
<CAPTION>
Initial Certificate
Class Principal Balance Pass-Through Rate
- ----- ----------------- -----------------
<S> <C> <C>
B-1 $ %
B-2 $ %
B-3 $ %
</TABLE>
THE TRUST CERTIFICATE
The trust certificate represents the ownership interest in the trust. Payments
in respect of the trust certificate are subordinate to payments in respect of
the certificates.
The depositor must retain the trust certificate. The depositor, as holder of the
trust certificate, is referred to herein as the "residual holder".
PAYMENTS ON THE CERTIFICATES
PAYMENT DATE
Principal and interest is scheduled to be paid to the certificateholders on
the 12th day of each month, or, if such day is not a business day, on the next
succeeding business day, commencing on December 14, 1998.
RECORD DATE
The trustee will make payments to the certificateholders of record as of the
close of business on the first day of such month.
COLLECTION PERIOD
Payments made on each payment date will relate to the collections received in
respect of the contracts and the equipment during the period beginning on the
opening of business on the second day of the immediately preceding calendar
month and ending on the close of business on the first day of the calendar month
in which such payment date occurs.
INTEREST
Interest on the certificates of each class will accrue at the applicable
pass-through rate from a payment date to the day before the next payment date.
In the case of the first payment date, interest begins to accrue on the day of
the closing.
For the Class A-1 Certificates, interest on the certificates will be calculated
on an "actual/360" basis. For the certificates other than the Class A-1
Certificates, interest on the certificates will be calculated on a "30/360"
basis.
Interest on a class of certificates which is not paid as scheduled is due on
the following payment date and will accrue interest at a rate equal to the
pass-through rate for such class plus 1%.
PRINCIPAL
On each payment date, the certificateholders are scheduled to receive an amount
of principal generally equal to the sum of actual principal collections,
payments by the originator for contracts repurchased by it and writedowns of any
defaulted contracts, each during the related collection period. The
certificateholders of each class of certificates are scheduled to receive a
percentage of
S-7
<PAGE> 7
the above amount. Each class's percentage will equal such class's initial
certificate principal balance divided by the initial aggregate discounted
contract principal balance of the contracts.
However, certain circumstances could cause principal to be paid earlier or
later, or in reduced amounts. Principal amounts which are not paid as scheduled
are due on the following payment date.
FLOW OF FUNDS
On each payment date, amounts received during the related collection period in
respect of the contracts are to be paid, until such amounts are exhausted, in
the following order of priority:
first to the payment of certain fees and expenses of the servicer;
second to the payment of the premium amounts to the certificate insurer;
third to the payment of certain fees and expenses of the trustee;
fourth to the payment of interest due, including overdue interest, on the
outstanding certificates on such payment date, in the following
priority order: (i) the Class A Certificates, (ii) the Class B-1
Certificates, (iii) the Class B-2 Certificates, and (iv) the Class B-3
Certificates. Classes having a higher priority are paid in full before
classes with a lower priority are paid any amount. Amounts distributed
to the Class A certificateholders are shared by the Class A-1 and Class
A-2 certificateholders in proportion to the outstanding certificate
principal balance of each class;
- - However, no payment of interest will be made on the Class B-1, Class
B-2 or Class B-3 Certificates if such payment would result in
insufficient funds to pay the principal due on the Class A Certificates
on such payment date. In such an event, the amount necessary to pay the
principal due on the Class A Certificates would be withheld from the
interest distribution and distributed to the Class A certificateholders
as principal.
fifth to the payment of principal due, including overdue principal, on the
outstanding Class A Certificates on such payment date. Amounts
distributed to the holders of the Class A Certificates are paid first
to the holders of the Class A-1 Certificates until the note principal
balance of the Class A-1 Certificates is reduced to zero, and then
are paid to the holders of the Class A-2 Certificates;
sixth to the payment of any unpaid reimbursement amounts to the certificate
insurer;
seventh to the payment of principal due, including overdue principal,
on the outstanding Class B Certificates, beginning with the class
having the lowest numerical designation. Classes with a lower numerical
designation are paid in full before classes with a higher numerical
designation are paid any amount;
- - However, during the continuance of a "restricting event," principal
will not be paid as set forth above, but will not be paid as set forth
above, but will instead be paid to the most senior class of
certificates then outstanding.
- - A "restricting event" means the occurrence of any of:
- an event of servicing termination which is not cured within
applicable grace periods;
- a "gross charge-off event"; or
- a "delinquency trigger event".
- - A "gross charge-off event" occurs when, over any six-month period, the
average discounted contract principal balance of all defaulted
contracts exceeds 2.5% of the aggregate discounted contract principal
balance of all contracts.
- - A "delinquency trigger event" occurs when, over any six-month period,
the average
S-8
<PAGE> 8
discounted contract principal balance of all of the contracts for which
payments have not been made for more than 30 days exceeds 7.5% of the
aggregate discounted contract principal balance of all contracts.
eighth any other amounts required to be paid to the servicer; and
ninth any remaining funds are paid to the residual holder.
- - However, if any distribution to be made to the residual holder would
cause the trust certificate principal balance to be less than 3% of the
initial aggregate discounted contract principal balance, then such
distribution will not be paid to the residual holder, but will instead
be distributed to the certificateholders as an additional distribution
of principal. Such distribution will be made to each class of
certificates in proportion to such class's principal payment
percentage.
- - Further, during the continuance of a restricting event, no distribution
will be made to the residual holders. Rather, such amount will be paid
to the most senior class of certificates then outstanding.
The following chart diagrams the flow of funds described above. Both the
information in the chart and described above is qualified in its entirety by the
more detailed description of the flow of funds set forth herein under
"Description of the Certificates--Flow of Funds."
[GRAPH]
______The solid line indicates the flow of funds under normal circumstances.
- -..-..The dashed and dotted line indicates the flow of funds when there are not
enough funds to pay the principal due on the Class A Certificates on a payment
date. Starting with the most junior class of certificates, funds are diverted to
the extent necessary to pay the base principal distribution amount with respect
to Class A. ------The dashed line indicates the flow of funds during a
restricting event. During a restricting event, only the most senior class of
certificates outstanding receives principal. Principal payable to more
subordinate classes of certificates or the amounts
S-9
<PAGE> 9
payable to the residual holder are diverted to the most senior class of
certificates outstanding. The chart assumes the Class A Certificates are
outstanding.
CREDIT ENHANCEMENT
The credit enhancement available to the certificateholders will consist of, with
respect to the Class A Certificates only, the certificate insurance policy
issued by MBIA Insurance Corporation, the certificate insurer, and the
subordination provisions of the trust.
CERTIFICATE INSURANCE POLICY
MBIA Insurance Corporation will issue its certificate insurance policy on
November , 1998 for the benefit of the holders of the Class A Certificates.
Pursuant to this policy, MBIA Insurance Corporation will unconditionally and
irrevocably guarantee the payments required to be made during the term of such
policy.
In the event that, on any payment date, the holders of the Class A Certificates
do not receive the full amount of the payment then due to them, such shortfall
(together with interest thereon at the related pass-through rate) is due and
payable and will be funded either from an account which holds money for this
purpose or from the proceeds of a drawing under the policy.
SUBORDINATION
The credit enhancement available for the benefit of any class of certificates is
provided by each class of certificates having a lower priority of payment than
such class of certificates, as well as by the trust certificate. Losses caused
by defaults on the underlying contracts will be absorbed first, by the residual
holder, second, by the holders of the Class B-3 Certificates, third, by the
holders of the Class B-2 Certificates, fourth, by the holders of the Class B-1
Certificates and fifth, by the holders of the Class A Certificates. Thus, before
any losses are allocated to a class of certificates, the certificate principal
balance of each class of certificates subordinate to such class, as well as the
trust certificate principal balance, must be reduced to zero.
In addition, upon the occurrence of a restricting event, amounts otherwise
payable to the subordinate certificateholders and the residual holder will be
suspended and shall be disbursed to the most senior class of certificates then
outstanding, as a further reduction of the outstanding certificate principal
balance of such class.
THE TRUST ASSETS
GENERAL
The assets of the trust will consist of:
- - a segregated pool of direct finance lease and commercial loan contracts
relating to a wide range of equipment, including computers and
peripherals, computer software, medical and dental related equipment
including dental operatories, medical, dental and veterinary diagnostic
equipment including x-ray machines, blood analyzers, and other
diagnostic equipment, telecommunications, general office, automotive
servicing, hospitality and food services related equipment, heavy
mobile construction equipment, copiers, and specialty vehicles
including bucket trucks, lifts, delivery vans and trucks together with
all monies received relating thereto on or after October 1, 1998;
- - the security interest of the originator or its affiliate, in the
equipment or other property securing such contracts;
- - all funds on deposit in certain accounts relating to the contracts and
the equipment;
- - certain of the originator's rights under insurance policies relating to
the contracts and the equipment; and
- - the note insurance policy to be issued by MBIA Insurance Corporation.
Any security deposits received by the servicer with respect to the contracts
will be retained by the servicer, and such amounts will not be available to the
trust in the event of the liquidation of the related contracts.
ORIGINATION AND ACQUISITION
Each contract was previously originated by either:
- - a third-party unaffiliated with First Sierra, each, a "source," and
acquired by First Sierra through its "private label program"; or
- - First Sierra directly through its "vendor or broker program."
S-10
<PAGE> 10
All of the contracts:
- - which are in the form of leases are characterized as "finance leases;"
- - require the periodic, scheduled payment of rent or other payments on a
monthly, quarterly, semi-annual, or annual basis, in arrears or in
advance. Such periodic payments are referred to herein as "scheduled
payments;"
- - require that the obligor under such contract assumes all responsibility
with respect to the related equipment, including the obligation to pay
all costs relating to its operation, maintenance, repair and, with
certain exceptions described herein, insurance or self insurance; and
- - contain "hell or high water" provisions, which unconditionally obligate
the obligor to make all scheduled payments without setoff.
STATISTICAL INFORMATION
The statistical information of the contracts presented in this prospectus
supplement is based on the pool of contracts that existed on October 1, 1998,
the "statistic calculation date" and was calculated using an assumed discount
rate of %. The statistical distribution of the characteristics of the
contracts as of November , 1998 for the final contract pool is calculated
using an actual discount rate of %, and will vary somewhat from the
statistical distribution of such characteristics as of the statistic calculation
date. However, such characteristics will not vary by more than 5% (measured by
the aggregate discounted contract principal balance) on the date investors make
their investment decision.
The "discounted contract principal balance" with respect to any contract, on any
date of determination, is the sum of the present value of all of the remaining
scheduled payments becoming due under such contract after the end of the prior
collection period, discounted monthly at the
S-11
<PAGE> 11
actual discount rate. The discounted contract principal balance of any
defaulted contract, early termination contract, or expired contract or contract
assigned back to First Sierra pursuant to the pooling and servicing agreement
shall be equal to zero.
The "aggregate discounted contract principal balance" as determined from time to
time is the sum of the discounted contract principal balances of all contracts.
As of the statistic calculation date, all of the contracts had the following
characteristics:
- - a statistical aggregate discounted contract principal balance of
approximately $________.
- - discounted contract principal balances ranging from $____ to $_____;
- - an average discounted contract principal balance of approximately $_____;
- - an original term to maturity of __ months to __ months, with a weighted
average original term to maturity of approximately __ months;
- - a remaining term to maturity of not less than __ months and not more
than __ months, with a weighted average remaining term to maturity of
approximately __ months; and
- - no more than ____% of the statistical discounted contract principal
balance attributable to any one obligor.
On November __, 1998, the statistical characteristics of the contracts pool will
meet the following guidelines (percentages are measured as of October 1, 1998,
and are measured by:
- - the initial aggregate discounted contract principal balance):
- - the average original equipment cost of the equipment is less than or
equal to $______;
- - the terms of the contracts range from __ to ___ months;
- - the final scheduled payment date on the contract with the latest
maturity is __________, 20__;
- - the maximum concentration of contracts relating to a single obligor will
be a percentage less than or equal to ____%;
- - the contracts relating to the top ten obligors will comprise a percentage
less than or equal to ___%;
- - the maximum concentration of contracts relating to a single source will
be a percentage less than or equal to ___%;
- - the maximum concentration of contracts in a single state will be less
than or equal to ___%, except that with respect to the State of
California, the concentration shall be limited to ___%; and
- - not more than 1% will be comprised of contracts which are leases to a
government or a municipality.
For a further description of the Equipment and the Contracts, see "The
Receivables."
SERVICING
The servicer is responsible for servicing, managing and administering the
contracts and the equipment and enforcing and making collections on the
contracts. The servicer is required to exercise the degree of skill and care in
performing these functions that it customarily exercises with respect to similar
property owned or serviced by the servicer.
S-12
<PAGE> 12
For a further description of the servicer and the servicer's delinquency and
loss experience, see "The Servicer."
SUBSTITUTIONS AND MODIFICATIONS
First Sierra is allowed to transfer to the trust substitute contracts in
exchange for defaulted contracts, early termination contracts, or contracts as
to which a warranty event or casualty loss has occurred. Such substitutions are
subject to the following conditions:
- - on a cumulative basis the sum of the discounted contract principal
balance of all substitute contracts cannot exceed 10% of the aggregate
discounted contract principal balance of all contracts as of October
1, 1998;
- - the substitute contracts being transferred must have a discounted
contract principal balance that is greater than the discounted contract
principal balance of the contracts being replaced; and
- - no substitution shall be permitted if, as a result thereof, (X) the sum
of the scheduled payments on all contracts due in any collection period
thereafter would be less than or increase the amount by which it is
less than (Y) the sum of the scheduled payments which would otherwise
be due in such collection period.
The servicer may waive, modify or vary any term of a contract if the servicer,
in its reasonable and prudent judgment, determines that it will not be
materially adverse to the certificateholders.
However, the servicer will covenant in the pooling and servicing agreement that:
- - it will not forgive any payment of rent, principal or interest;
- - unless an obligor is in default, it will not permit any modification
with respect to a contract which would defer the payment of any
principal or interest or any scheduled payment or change the final
maturity date on any contract except as necessary to effect recovery
under defaulted contracts; in no circumstances will a change in the
final maturity date of any contract be allowed if such new maturity
date is later than the latest maturity date of any other contract then
held by the trust; and
- - the servicer may accept prepayment in part or
in full subject to certain limitations as more fully described in this
prospectus supplement.
ADVANCES
In the event that any obligor fails to remit its full scheduled payment due in a
collection period by the determination date related to such
S-13
<PAGE> 13
collection period, the servicer may make an advance from its own funds of an
amount equal to such unpaid scheduled payment, if the servicer, in its sole
discretion, determines that eventual repayment of such advance is likely from
collections from or on behalf of the related obligor.
The pooling and servicing agreement provides for the reimbursement of the
servicer for such advances.
For a further description of the servicer's obligation to make advances, see
"Description of the Certificates - Servicer Advances."
REPURCHASES FOR BREACHES OF REPRESENTATIONS AND WARRANTIES
If the interest of the trust in any of the equipment, the related contract, or
the related contract file is materially adversely affected by a breach of a
representation or warranty made by First Sierra with respect to such contract
and if such breach has not been cured within thirty days of discovery of such
breach, First Sierra, as originator or as servicer, as the case may be, will be
obligated to accept the reconveyance of a contract and the related equipment
from the trustee and to deposit the repurchase amount in the collection account.
For a further description of First Sierra's repurchase obligations, see
"Description of the Certificates - Representations and Warranties of First
Sierra."
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The sellers will warrant that:
- - the transfer by the sellers to the trust of the contracts and the
security interest in the related equipment is a valid transfer and
assignment of the contracts and the security interest in the related
equipment; and
- - if the transfer by the sellers to the trust is deemed to be a grant to
the trust of a security interest in the contracts and the related
equipment, then the trust will have a first priority perfected security
interest therein, except for certain liens which have priority over
previously perfected security interests by operation of law, and, with
certain exceptions, in the proceeds thereof.
The servicer will be required to take such action as is required to perfect the
trust's interest in the contracts and the equipment except as discussed below
with respect to the equipment. If the sellers, the servicer or the trustee,
while in possession of an item of the contracts, sells or pledges and delivers
such contracts to another party, in violation of the pooling and servicing
agreement, there is a risk that the purchaser could acquire an interest in such
contracts having priority over the trust's interest.
The sellers and the trust will file financing statements in accordance with the
Uniform Commercial Code as in effect in the applicable jurisdiction (the "UCC")
evidencing the security interest of the trustee in the trust assets as follows:
- - a UCC-1 financing statement with respect to the assignment of all
contracts by the sellers to the trust pursuant to the receivables
transfer agreement; and
- - a UCC-1 financing statement with respect to the assignment of all
contracts by the trust to the trustee.
First Sierra has filed UCC-3 financing statements with respect to contracts
originated by a source as to which the related equipment had an original cost of
$75,000 or more and UCC-1 financing statements with respect to contracts
originated by First Sierra as to which the related equipment had an original
cost of $35,000 or more.
Accordingly, with respect to contracts originated by a Source as to which the
related equipment had an original cost less than $75,000 and contracts
originated by First Sierra as to which the related equipment had an original
cost less than $35,000,
S-14
<PAGE> 14
none of the sellers nor the servicer has filed or will be required to file UCC
financing statements in favor of the trustee identifying the equipment
as collateral assigned to the trustee on behalf of the trust. In the
absence of such filings, any security interest in the related equipment will not
be perfected in favor of the trustee and the trustee shall
have no liability with respect to such lack of perfection.
OPTIONAL REDEMPTION
The certificates may be redeemed in whole, but not in part, on any distribution
date on which the residual holder exercises its option to cause the early
retirement of the certificates. This can only occur after the aggregate note
principal balance of each class of certificates declines to less than 10% of its
original level. The redemption price is equal to the unpaid principal amount of
the certificates of each class, plus accrued and unpaid interest thereon. See
"Description of the Certificates - Optional Redemption."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Dewey Ballantine LLP, tax counsel, has opined that, under existing law, the
trust will be classified as a grantor trust and not as an association taxable as
a corporation for federal income tax purposes. The beneficial owners of the
certificates must report their respective allocable shares of all income earned
on the trust property and may deduct their respective allocable shares of
reasonable servicing fees and other fees paid or incurred by the trust. See
"Material Federal Income Tax Consequences" for additional information concerning
the application of federal income tax laws.
ERISA CONSIDERATIONS
Certificates may be purchased by or with the assets of an employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the provisions of Section 4975 of the Internal Revenue Code of
1986. An acquisition of certificates by such an employee benefit plan is subject
to the general fiduciary standards of ERISA and satisfaction of the conditions
imposed under the terms of prohibited transaction exemptions granted to the
underwriters. See "ERISA Considerations" herein.
RATING OF THE OFFERED CERTIFICATES
The offered certificates must receive at least the following ratings from
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and
Moody's Investors Service, Inc. ("Moody's") in order to be issued:
<TABLE>
<CAPTION>
Class Rating
- ----- ---------------------------
S&P Moody's
---- -------
<S> <C> <C>
A-1 A-1+ P-1
A-2 AAA Aaa
</TABLE>
See "Ratings."
S-15
<PAGE> 15
RISK FACTORS
In addition to the risk factors discussed in the prospectus,
prospective offered certificateholders should consider, among other things, the
following additional factors in connection with the purchase of the offered
certificates:
RISK OF DOWNGRADE OF INITIAL RATINGS ASSIGNED TO CERTIFICATES. It is a
condition to the issuance of the offered certificates that they receive the
ratings from the rating agencies set forth in the summary under the heading
"Rating of the Offered Certificates." A rating is not a recommendation to
purchase, hold or sell the offered certificates, inasmuch as such rating does
not comment as to market price or suitability for a particular investor. The
ratings of the offered certificates address the likelihood of the timely payment
of interest on and the ultimate repayment of principal of the offered
certificates pursuant to their respective terms. There is no assurance that a
rating will remain for any given period of time or that a rating will not be
lowered or withdrawn entirely by a rating agency if in its judgment
circumstances in the future so warrant. The ratings of the offered certificates
are based primarily on the rating agencies' analysis of the contracts, and the
equipment, and, with respect to the Class A Certificates, the subordination
provided by the subordinate certificates and the trust certificate and the
certificate insurance policy.
TRANSFER OF SERVICING MAY DELAY PAYMENTS. If First Sierra were to cease
acting as servicer, delays in processing payments on the contracts and
information in respect thereof could occur and result in delays in payments to
the certificateholders.
RISKS ASSOCIATED WITH INABILITY OF FIRST SIERRA TO REACQUIRE CONTRACTS
AND THE RELATED EQUIPMENT. First Sierra, as originator or as servicer, as the
case may be, will make representations and warranties with respect to certain
matters relating to the contracts and the equipment. In certain circumstances,
First Sierra will be required to reacquire from the trust contracts and the
related equipment with respect to which such representations and warranties have
been breached. In the event that First Sierra is incapable of complying with its
obligations to reacquire the contracts and the related equipment and no other
party is obligated to perform or satisfy such obligations, the
certificateholders may be subject to delays in receiving payments and suffer
loss of their investment in the certificates.
GEOGRAPHIC CONCENTRATIONS OF CONTRACTS AND THE RELATED EQUIPMENT. As of
the statistic calculation date, obligors with respect to approximately ____%,
____% and ____% of the contracts and the related equipment (based on the
aggregate
S-16
<PAGE> 16
discounted contract principal balance as of the statistic calculation date and
mailing addresses) were located in the States of [California, Florida and
Texas,] respectively. See the "Receivables" herein. Accordingly, adverse
economic conditions or other factors particularly affecting these states could
adversely affect the delinquency, loss or repossession experience of the trust
with respect to the contracts and the equipment.
YEAR 2000 ISSUE. The "Year 2000" issue involves computer programs and
applications that were written using two digits (instead of four) to describe
the applicable year. Failure to successfully modify such programs and
applications to the Year 2000 compliant may have a material adverse impact on
First Sierra. Exposure arises not only from potential consequences (for example,
business interruption) of certain of First Sierra's own applications not being
Year 2000 compliant, but also from non-compliance by significant counterparties
with which First Sierra does business. Management has made inquiries of its
major software vendors and has received assertions that the software programs
from such vendors are Year 2000 compliant. First Sierra expects to complete
testing of the software vendors' assertions by the first quarter of 1999.
S-17
<PAGE> 17
THE RECEIVABLES
The Receivables consist of the Contracts and a security interest in the
Equipment.
THE EQUIPMENT
The Equipment subject to the Contracts consists of small to medium
sized equipment used in a wide variety of businesses consistent with small
ticket equipment leasing. The equipment and other property underlying the
Contracts may include, but is not limited to, the following: (i) computers and
peripherals; (ii) computer software; (iii) medical and dental related equipment
including dental operatories; (iv) medical, dental and veterinary diagnostic
equipment including x-ray machines, blood analyzers, and other diagnostic
equipment, (v) telecommunications, (vi) general office, (vii) automotive
servicing, (viii) hospitality and food services related equipment; (ix)
equipment utilized in the arbor industry; (x) machines tools; (xi) manufacturing
process equipment; (xii) heavy mobile construction equipment; (xiii) copiers;
and (xiv) specialty vehicles including bucket trucks, lifts, delivery vans and
trucks.
THE CONTRACTS
The Contracts consist of small ticket leases, and commercial loans and
security interests in the related equipment or other property (i) acquired by
First Sierra from small independent leasing companies on an on-going basis
through the Private Label Program or (ii) originated directly by First Sierra
through the Broker Program or the Vendor Program. See "First Sierra" herein.
The Receivables consist of the Contracts and a security interest in the
Equipment. As of the Statistic Calculation Date, the Contracts had an Aggregate
Discounted Contract Principal Balance (calculated using an assumed discount rate
of _____% (the "Statistical Discount Rate")) of approximately $____________ (the
"Statistical Discounted Contract Principal Balance"). The statistical
information concerning the pool of Receivables set forth herein is based upon
information as of the Statistic Calculation Date and using the Statistical
Discount Rate. [The actual discount rate of _____% (the "Rate") has been
calculated using the actual levels of fees payable by the Trust, the actual
Pass-Through Rate with respect to each class of the Class A Certificates, the
Class B-1 Certificates, the Class B-2 Certificates and the Class B-3
Certificates and shall be used to calculate the actual Initial Class A
Certificate Principal Balance and the actual Initial Aggregate Discounted
Contract Principal Balance of the Contracts.] The Initial Aggregate Discounted
Contract Principal Balance of the Contracts as of the Cut-Off Date calculated
using the Discount Rate is $____________. Between the Statistic Calculation Date
and the Closing Date some amortization of the pool is expected to occur. In
addition, certain Contracts included in the pool as of the Statistic Calculation
Date may be determined not to meet the eligibility requirements for the final
pool, and may not be included in the final pool. Moreover, certain Contracts
that are not included in the pool as of the Statistic Calculation Date may be
included in the final pool. While the statistical distribution of the
characteristics as of the Closing Date for the final Receivables pool and
calculated at the Discount Rate will vary somewhat from the statistical
distribution of such characteristics as of the Statistic Calculation Date and
calculated at the assumed Discount Rate as presented in this prospectus
supplement, such characteristics will not vary by more than 5% (measured by the
Aggregate Discounted Contract Principal Balance).
The "Discounted Contract Principal Balance" with respect to any
Contract, on any Determination Date, is the sum of the present value of all of
the remaining Scheduled Payments becoming due under such Contract after the end
of the prior Collection Period, discounted monthly at the Discount Rate in the
manner described below; provided, however, that except to the extent expressly
provided in the Pooling and Servicing Agreement, the Discounted Contract
Principal Balance of any Defaulted Contract, Early Termination Contract, or
Expired Contract or Contract repurchased by First Sierra or the Servicer
pursuant to the Pooling and Servicing Agreement shall be equal to zero.
In connection with all calculations required to be made pursuant to the
Transaction Documents with respect to the determination of Discounted Contract
Principal Balances, on any Determination Date the Discounted Contract Principal
Balance for each Contract shall be calculated assuming:
(i) Scheduled Payments are due on the last day of each Collection
Period;
(ii) Scheduled Payments are discounted on a monthly basis using a
30-day month and a 360-day year; and
(iii) Scheduled Payments are discounted to the last day of the
Collection Period prior to the Determination Date.
The "Aggregate Discounted Contract Principal Balance" as determined
from time to time is the sum of the Discounted Contract Principal Balances of
all Contracts.
All of the Contracts require the periodic, scheduled payment of rent or
other payments on a monthly, quarterly, semi-annual or annual basis, in arrears
or in advance. Such periodic payments are referred to herein as "Scheduled
Payments."
The Contracts have the characteristics specified in the Pooling and
Servicing Agreement and described herein, and the Contracts eligible to be
designated as Substitute Contracts will conform to the characteristics specified
in the Pooling and Servicing Agreement and herein.
The terms of the Contracts generally range from _____ to _____ months.
The final scheduled payment date on the Contract with the latest maturity is
__________, _____. As of the Statistic Calculation Date, all of the Contracts
had (i) original terms to maturity of _____ months to _____ months, with a
weighted average original term to maturity of approximately _____ months; and
(ii) a remaining term to maturity of not less than _____ months and not more
than _____ months, with a weighted average remaining term to maturity of
approximately _____ months.
References herein to percentages of Obligors refer in each case to the
percentage of the Statistical Discounted Contract Principal Balance of the
Contracts as of the Statistic Calculation Date.
As of the Statistic Calculation Date, the Discounted Contract Principal
Balances of the Contracts ranged from $_____ to $_____. No more than _____% of
the Statistical Discounted Contract
S-18
<PAGE> 18
Principal Balance is attributable to any one Obligor, and the average
Discounted Contract Principal Balance is approximately $_____.
The Servicer is permitted to allow an Obligor to prepay a Contract in
an amount not less than the related Prepayment Amount. In addition, in the event
that an Obligor requests an upgrade or trade-in of Equipment, the Servicer may
remove such Equipment and related Contract from the Trust Assets, but only upon
payment of an amount equal to the sum of (i) the Discounted Contract Principal
Balance as of the first day of the Collection Period preceding such removal,
(ii) one month's interest thereon at the Discount Rate, and (iii) any Scheduled
Payments due and outstanding under such Contract that have not been paid by the
Obligor (collectively, the "Repurchase Amount").
SUBSTITUTIONS AND MODIFICATIONS
First Sierra may, with the consent of the Certificate Insurer,
substitute one or more Contracts and provide a security interest in the related
Equipment for and replace one or more Contracts and terminate the security
interest in the related Equipment that (i) becomes a Defaulted Contract, a
Prepayment or an Early Termination Contract or (ii) is required to be
repurchased by First Sierra pursuant to the Pooling and Servicing Agreement.
Each Substitute Contract shall be a Contract which satisfies certain
representations and warranties set forth in the Pooling and Servicing Agreement
(a "Substitute Contract") as of the related Substitute Contract Cut-Off Date. In
addition, the following conditions must be satisfied:
(i) on a cumulative basis from the Cut-Off Date, the sum of the
Discounted Contract Principal Balance (as of the related Substitute
Contract Cut-Off Date) of such Substitute Contracts does not exceed 10% of
the Initial Aggregate Discounted Contract Principal Balance of all
Contracts as of the Cut-Off Date;
(ii) as of the related Substitute Contract Cut-Off Date, the Substitute
Contracts then being transferred have a Discounted Contract Principal
Balance that is not less than the Discounted Contract Principal Balance of
the Contracts being replaced; and
(iii) no substitution shall be permitted if, as a result thereof, (X)
the sum of the Scheduled Payments on all Contracts due in any Collection
Period thereafter would be less than or increase the amount by which it is
less than (Y) the sum of the Scheduled Payments which would otherwise be
due in such Collection Period.
The Servicer may waive, modify or vary any term of a Contract if the
Servicer, in its reasonable and prudent judgment, determines that it will not be
materially adverse to the Certificateholders or the Certificate Insurer.
However, the Servicer will covenant in the Pooling and Servicing Agreement that
(i) it will not forgive any payment of rent, principal or interest, (ii) unless
an Obligor is in default, it will not permit any modification with respect to a
Contract which would defer the payment of any principal or interest or any
Scheduled Payment or change the final maturity date on any Contract except as
necessary to effect recovery under Defaulted Contracts; provided, however, that
no change in the final maturity date of any Contract shall be permitted under
any circumstances if such new maturity date is later than the latest maturity
date of any
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<PAGE> 19
other Contract then held by the Trust, and (iii) the Servicer may accept
Prepayment in part or in full; provided, further, that (1) in the event of
Prepayment in full, the Servicer may consent to such Prepayment only in an
amount not less than the Prepayment Amount and (2) in the event of a partial
Prepayment, the Servicer may consent to such partial Prepayment only if (x)
following such partial Prepayment there are no delinquent amounts then due from
the Obligor and (y) such partial Prepayment will not reduce the Discounted
Contract Principal Balance by more than an amount equal to (I) the amount of
such partial Prepayment, minus (II) unpaid interest at the Discount Rate,
accrued through the end of the Collection Period immediately following such
partial Prepayment on the outstanding Discounted Contract Principal Balance
prior to such partial Prepayment. In the case of a partial Prepayment, the
Servicer is required to accurately recalculate the Discounted Contract Principal
Balance, and the allocation of Scheduled Payments to principal and interest.
Pursuant to the Pooling and Servicing Agreement, the Servicer will
manage, administer, service and make collections on the Contracts, in accordance
with the terms of the Pooling and Servicing Agreement, the Contracts, the
Servicer's current credit and collection policies and applicable law and, to the
extent consistent with such terms, in the same manner in which, and with the
same care, skill, prudence and diligence with which, it services and administers
leases of similar credit quality for itself or others, if any, giving due
consideration to customary and usual standards of practice of prudent
institutional small ticket equipment finance lease servicers and, in each case,
taking into account its other obligations under the Pooling and Servicing
Agreement (collectively, the "Servicing Standard"). The Servicer shall use
commercially reasonable best efforts consistent with the Servicing Standard and
its customary servicing procedures, to repossess or otherwise comparably convert
the ownership of any Equipment that it has reasonably determined should be
repossessed or otherwise converted following a default under the Contract,
remarket, either through sale or re-lease, the Equipment upon the expiration of
the term of the related Contract and act as sales and processing agent for
Equipment which it repossesses. The Servicer shall follow such practices and
procedures as are consistent with the Servicing Standard and as it shall deem
necessary or advisable and as shall be customary and usual in its servicing of
equipment leases and other actions by the Servicer in order to realize upon such
a Contract, which may include reasonable efforts to enforce any recourse
obligations of Obligors and repossessing and selling the Equipment at public or
private sale. The foregoing is subject to the provision that, in any case in
which the Equipment shall have suffered damage, the Servicer shall not be
required to expend funds in connection with any repair or towards the
repossession of such Equipment unless it shall determine in its discretion that
such repair and/or repossession will increase the proceeds and recoveries on
such Equipment by an amount greater than the amount of such expenses.
Following is certain statistical information relating to the
Receivables pool, calculated as of the Statistic Calculation Date and assuming a
statistical Discount Rate of [6.544%.] Certain columns may not total 100% due to
rounding.
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<PAGE> 20
DISTRIBUTION OF THE CONTRACTS BY DISCOUNTED CONTRACT PRINCIPAL
BALANCE
<TABLE>
<CAPTION>
Percentage of
Statistical Statistical Discounted
Discounted Contract Number of Discounted Contract Contract
Principal Balance Contracts Principal Balance Principal Balance
------------------- --------- ------------------- ----------------------
Greater Less Than or
Than Equal to
- -------- ------------
<S> <C> <C> <C> <C>
$ 1 $ 5,000 $ %
5,000 10,000
10,000 15,000
15,000 20,000
20,000 25,000
25,000 30,000
30,000 35,000
35,000 40,000
40,000 45,000
45,000 50,000
50,000 55,000
55,000 60,000
60,000 65,000
65,000 70,000
70,000 75,000
75,000 80,000
80,000 85,000
85,000 90,000
90,000 95,000
95,000 100,000
100,000 150,000
150,000 200,000
200,000 250,000
250,000 300,000
300,000 350,000
350,000 400,000
400,000 450,000
450,000 500,000
500,000 600,000
600,000 750,000
=============================================================================================================================
Total............................................ $ 100.00%
=============================================================================================================================
</TABLE>
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<PAGE> 21
DISTRIBUTION OF THE CONTRACTS BY DEFINED OBLIGOR INDUSTRY (TOP 25)
<TABLE>
<CAPTION>
Statistical Percentage of
Number Discounted Statistical
of Contract Discounted Contract
Industry Type Contracts Principal Balance Principal Balance
------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Offices and Clinics of Dentists $ %
Offices and Clinics of Medical Doctors
Veterinary Services
Eating Places
Automotive Dealers, NEC
Business Services, NEC
Offices and Clinics of Chiropractors
Eating and Drinking Places
Hotels and Motels
Gasoline Service Stations
Lawn and Garden Services
Local Trucking, Without Storage
Offices and Clinics of Optometrists
Veterinary Services for Livestock
Grocery Stores
Commercial Printing, Lithographic
Equipment Rental & Leasing
Miscellaneous Retail Stores
Miscellaneous Food Stores
Drug Stores and Proprietaries
Landscape and Horticulture
Home Health Care Services
Engineering Services
Computer Related Services
Top & Body Repair Painting
- ------------------------------------------------------------------------------------------------------------------------------------
Total (Top 25 Defined Industries)........................................ $ %
- ------------------------------------------------------------------------------------------------------------------------------------
All Others............................................................... $ %
====================================================================================================================================
Total .............................................................. $ 100.00%
====================================================================================================================================
</TABLE>
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<PAGE> 22
DISTRIBUTION OF THE CONTRACTS BY OBLIGOR BILLING ADDRESS
<TABLE>
<CAPTION>
Statistical Percentage of
Number of Discounted Contract Statistical Discounted
State Contracts Principal Balance Contract Principal Balance
----- --------- ------------------- --------------------------
<S> <C> <C> <C> <C>
Alabama $ %
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Washington, D.C.
West Virginia
Wisconsin
Wyoming
====================================================================================================================================
Total................................. $ 100.00%
====================================================================================================================================
</TABLE>
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<PAGE> 23
DISTRIBUTION OF THE CONTRACTS BY REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Remaining Term in
Months
- --------------------------------------------------------------------------------------------------------------------
Percentage of
Statistical Statistical
Greater Less Than Number Discounted Contract Discounted Contract
Than or Equal to of Contracts Principal Balance Principal Balance
- ------- ----------- ------------ ------------------- -------------------
<S> <C> <C> <C> <C>
1 12 $ %
12 24
24 36
36 48
48 60
60 72
72 84
84 96
- --------------------------------------------------------------------------------------------------------------------
Total............................. $ 100.00%
====================================================================================================================
</TABLE>
DISTRIBUTION OF THE CONTRACTS BY ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Original Term in Months
- --------------------------------------------------------------------------------------------------------------------
Percentage of
Statistical Statistical
Greater Less Than Number Discounted Contract Discounted Contract
Than or Equal to of Contracts Principal Balance Principal Balance
- ------- ----------- ------------ ------------------- -------------------
<S> <C> <C> <C> <C>
1 12 $ %
12 24
24 36
36 48
48 60
60 72
72 84
84 96
- --------------------------------------------------------------------------------------------------------------------
Total............................. $ 100.00%
====================================================================================================================
</TABLE>
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<PAGE> 24
THE SELLERS
Certain affiliates and certain trusts sponsored by the Originator or
its affiliates, including investors related thereto (the "Sellers") will
transfer the Receivables to the Trust pursuant to the Receivables Transfer
Agreement, dated as of October 1, 1998, among First Sierra, First Sierra
Receivables III, Inc., Prudential Securities Credit Corporation, First Union
National Bank, Variable Funding Capital Corporation, Bankers Trust Company and
the Trust.
The Sellers will warrant to the Trust in the Receivables Transfer
Agreement that the transfer of the related Receivables to the Trust is a valid
transfer of the Receivables to the Trust. In addition, the Sellers and the Trust
will treat the transactions described herein as an absolute conveyance of the
Receivables to the Trust, and the Trust will take all actions that are required
to perfect the Trust's ownership interest in the Receivables. Notwithstanding
the foregoing, if First Sierra were to become a debtor in a bankruptcy case and
a creditor or trustee-in-bankruptcy of such debtor or such debtor itself were to
take the position that the transfer of the Receivables to the Trust should be
recharacterized as a pledge of such Receivables to secure a borrowing of such
debtor, then delays in payments of collections of Receivables to the Trust could
occur or (should the court rule in favor of any such trustee, debtor or
creditor) reductions in the amount of such payments could result. If the
transfer of Receivables to the Trust is recharacterized as a pledge, then a tax
or government lien on the property of First Sierra arising before the transfer
of Receivables to the Trust may have priority over the Trust's interest in such
Receivables. If the transfer of Receivables to the Trust is treated as a sale,
the Receivables would not be part of First Sierra's bankruptcy estate and would
not be available to First Sierra's creditors.
FIRST SIERRA
For a discussion regarding First Sierra Financial Inc. ("First Sierra")
and its origination programs and underwriting guidelines, see "FIRST SIERRA" in
the Prospectus.
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<PAGE> 25
THE SERVICER
First Sierra Financial, Inc., a Delaware corporation (in its separate
capacity as Servicer, the "Servicer"), was founded in June 1994. Its principal
office is located at 600 Travis Street, Suite 7050,
S-26
<PAGE> 26
Houston, Texas 77002. Since its incorporation through March 31, 1998, First
Sierra has acquired over $830 million of contracts for equipment and other
property. First Sierra, is a publicly traded company and its common stock is
listed on the Nasdaq National Market System under the symbol "FSFH."
As of June 30, 1998, First Sierra had 376 full time employees, of which
75 were engaged in credit and collection activities, 150 were engaged in
servicing and general administration activities and 151 were engaged in
marketing activities.
DELINQUENCY AND LOSS EXPERIENCE
The tables set forth below present certain information regarding the
delinquency and loss experience of the Servicer's portfolio of contracts for
equipment and other property for the periods indicated. There can be no
assurance that the levels of delinquency and loss experience reflected in the
following tables are indicative of the performance of the Contracts. Through
June 30, 1998, the Servicer had incurred net charge-offs of $______.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> For the
Year Ended For the
December 31, Year Ended For the Year Ended For the Quarter
1995 December 31, 1996 December 31, 1997 Ended June 30, 1998
-----------------------------------------------------------------------------------------------------------
Private Broker/ Private Broker/ Private Broker/
Total(1) Label Vender Total Label Vender Total Label Vendor Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Remaining
Contract Receivable $83,687 $244,049 $13,185 $257,234 $422,290 $189,068 $611,358 $498,128 $265,435 $837,940
31 - 60 days past due 2.53% 2.46% 1.25% 2.40% 1.86 1.90% 1.87% 1.91% 0.88% 1.07%
61 - 90 days past due 0.45% 0.81% 0.21% 0.78% 0.60 0.50% 0.57% 0.63% 0.49% 0.57%
Over 90 days past due 0.08% 0.35% 0.00% 0.33% 0.38 0.36% 0.37% 0.40% 0.76% 0.55%
Total 3.06% 3.62% 1.46% 3.51 2.84 2.76% 2.81% 2.22% 2.13% 2.19%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For The For The For The
Year Ended Year Ended Year Ended
December 31, December 31, December 31, For The Quarter
1995 1996 1997 Ended June 30, 1998
----------- -------------- ----------------------------- ----------------------------
Private Private Private Broker/ Private Broker/
Label(2) Label(2) Label Vender Label Vendor
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio $30,561 $124,592 $260,011 $61,954 $373,776 $187,449
Net losses $0 $25 $222 $362 $250 $741
Percentage of average
servicing portfolio 0.00% 0.02% 0.09% 0.58% 0.07% 0.40%
</TABLE>
S-27
<PAGE> 27
- ------------------------
(1) All contracts outstanding as of December 31, 1995 were acquired under
First Sierra's Private Label Program.
(2) Because First Sierra did not establish its Broker/Vendor Programs until
July, 1996, the figures provided for the years ended December 31, 1995
and December 31, 1996 only relate to the Private Label Program.
The tables above include delinquency and loss experiences for the
Servicer's overall contract portfolio. Delinquency statistics have declined over
the reported periods due to continued generally favorable economic conditions
and consistent application of credit underwriting standards. The overall net
loss performance has remained consistent within a few basis points of historical
performance. The increases in the total dollar amount of the net losses is due
to the increase in the total number of leases acquired.
While the above delinquency and loss experiences are typical of the
Servicer's experiences at the date for the periods indicated, there can be no
assurance that the delinquency and loss experiences on the Contracts will be
similar. Accordingly, the information should not be considered to reflect the
credit quality of the Contracts included in the Trust, or as a basis of
assessing the likelihood, amount or severity of losses on the Contracts. The
Contracts, in general, are likely to have characteristics which distinguish them
from the majority of the contracts in the Servicer's servicing portfolio.
COLLECTION POLICIES
For a discussion of the Servicer's collection policies, see "THE SERVICER --
Collection Policies" in the Prospectus.
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<PAGE> 28
LEGAL PROCEEDINGS
As of the date of this prospectus supplement, First Sierra is involved
in various lawsuits arising in the ordinary course of its business. In the
opinion of management of First Sierra, the outcome of these matters will not
have a material adverse effect on the financial condition or results of
operations of First Sierra. As of the date of this prospectus supplement is not
involved in any legal proceedings.
FORMATION OF THE TRUST
GENERAL
The Trust, First Sierra Equipment Contract Trust 1998-1, is a grantor trust
formed in accordance with the laws of the State of New York, pursuant to the
Pooling and Servicing Agreement, solely for the purpose of effectuating the
transactions described herein. Prior to formation, the Trust will have had no
assets or obligations and no operating history. Upon formation, the Trust will
not engage in any business activity other than (i) acquiring, holding and
managing the Receivables, (ii) issuing the Certificates and the Trust
Certificate and (iii) distributing payments thereon. As described under
"Description of the Certificates - Servicing Compensation and Payment of
Expenses," a portion of the monthly collections with respect to the Contracts
will be paid to the Servicer as servicing compensation and to the Certificate
Insurer and the Trustee as fees. All other expenses of the Trust will be paid as
provided in the Pooling and Servicing Agreement.
THE TRUSTEE
Bankers Trust Company is the Trustee under the Pooling and Servicing
Agreement. Bankers Trust Company is a New York banking corporation, the
principal offices of which are located at Four Albany Street, New York, New York
10006. The Trustee's duties in connection with the Notes is limited solely to
its express obligations under the Pooling and Servicing Agreement.
S-29
<PAGE> 29
THE TRUST ASSETS
The Trust Assets will consist of the Equipment, the Contracts and any
Scheduled Payments, Final Scheduled Payments and Defaulted Contract Recoveries
to be made by Obligors (but not including any payments due on or prior to the
Cut-Off Date); any guaranties of an Obligor's obligations under a Contract; with
respect to any Contract, copies of the Contract, any UCC financing statement and
other original documents related to the Contract, the application of the related
Obligor, documentation evidencing the information with respect to such Contract
input into the computerized electronic contract management system maintained by
the Servicer for all Contracts and other agreements similar to the Contracts,
and any other information required by the Certificate Insurer or the Servicer
pursuant to its customary policies and procedures (the "Contract Files"); the
insurance policies maintained by the Obligors with respect to the Equipment (the
"Insurance Policies") and the proceeds of such Insurance Policies; any rights of
the Trust under the Receivables Transfer Agreement (including the right to
instruct First Sierra to exercise any unassignable rights of enforcement under
the Contracts and any guaranties thereof); funds from time to time deposited in
the Collection Account; and any and all income and proceeds of the foregoing.
The Trust Assets will not include any security deposits received by the Servicer
with respect to the Contracts. Because the Trust does not have any operating
history and will not engage in any business activity other than owning the Trust
Assets, issuing the Certificates and making distributions thereon, there has not
been included any historical or pro forma ratio of earnings to fixed charges
with respect to the Trust.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
As of the date of this prospectus supplement, the Trust has not had an
operating history. The net proceeds of the sale of the Offered Certificates will
be employed to purchase the Contracts. The Trust was formed for the limited
purposes of (i) the purchase of equipment contracts from First Sierra and its
affiliates, (ii) the issuance of certificates collateralized by its assets and
(iii) engaging in acts incidental, necessary or convenient to the foregoing.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement to be entered into by the Servicer, the Trust and the Trustee. The
Servicer will provide a copy of the Pooling and Servicing Agreement to
subsequent Certificateholders without charge on written request addressed to it
at 600 Travis Street, Suite 7050, Houston, Texas 77002.
The following summary describes material terms of the Receivables
Transfer Agreement and the Pooling and Servicing Agreement. The summary does not
purport to be complete. Wherever provisions of the Receivables Transfer
Agreement and the Pooling and Servicing Agreement are referred to, such
provisions are hereby incorporated herein by reference.
GENERAL
The obligations evidenced by the Certificates are recourse to the
assets of the Trust only and are not recourse to the Depositor, First Sierra,
the Servicer, the Trustee or any other Person.
The Trust will agree in the Pooling and Servicing Agreement and in the
respective Offered Certificates to pay to the Class A-1 Certificateholders and
the Class A-2 Certificateholders (i) an amount of principal equal to the Initial
Certificate Principal Balance thereof and (ii) Certificate Interest thereof, in
each case, at the times, from the sources and on the terms and conditions set
forth in the Pooling and Servicing Agreement and in the respective Offered
Certificates.
S-30
<PAGE> 30
The _____% Class A-1 Equipment Contract Backed Certificates (the
"Class A-1 Certificates") in the initial principal amount of $_____________, the
_____% Class A-2 Equipment Contract Backed Certificates (the "Class A-2
Certificates" and, together with the Class A-1 Certificates, the "Class A
Certificates" or the "Offered Certificates") in the initial principal amount of
$____________, which Offered Certificates aggregate $_____ in initial principal
amount (the "Initial Class A Certificate Principal Balance"), will each be
issued pursuant to the Pooling and Servicing Agreement. The Initial Class A
Certificate Principal Balance to be issued hereunder is equal to approximately
_____% (the "Class A Percentage") of the Initial Aggregate Discounted Contract
Principal Balance of the Contracts. Each Class of Offered Certificates will
initially be issued in book-entry form only through The Depository Trust Company
in minimum denominations of $1,000 and integral multiples thereof. Payments on
the Offered Certificates are required to be made by the Trustee on each Payment
Date.
The first Payment Date for distributions to the Offered
Certificateholders will be ________. Payments are required to be made by the
Trustee, by check mailed or, if requested by the Certificateholder, by wire
transfer of immediately available funds, to Certificateholders entitled thereto
at the address appearing on the certificate register on the Record Date, which,
for so long as the Offered Certificates are in book-entry form through The
Depository Trust Company, will be Cede & Co.
In addition to the Offered Certificates, the Trust will also issue four
classes of subordinate securities, the _____% Class B-1 Equipment Contract
Backed Certificates (the "Class B-1 Certificates"), the _____% Class B-2
Equipment Contract Backed Certificates (the "Class B-2 Certificates"), the
_____% Class B-3 Equipment Contract Backed Certificates (the "Class B-3
Certificates" and, collectively with the Class B-1 Certificates and the Class
B-2 Certificates, the "Subordinate Certificates" and the Subordinate
Certificates, collectively with the Offered Certificates, the "Certificates")
and the Trust Certificate (the "Trust Certificate," together with the
Subordinate Certificates, the "Subordinate Securities," and collectively with
the Subordinate Certificates and the Class A Certificates, the "Securities").
The Subordinate Certificates and the Trust Certificate are not offered
hereby, and will be issued initially to the Residual Holder. The Residual Holder
expects that some of the Subordinate Certificates will be privately placed with
one or more qualified institutional investors. The Residual Holder will be
required to retain the Trust Certificate.
One hundred percent of the Class A Insured Distribution Amount due to
the Class A Certificateholders on each Payment Date is insured by the
Certificate Insurer under the Certificate Insurance Policy. See "The Certificate
Insurance Policy and the Certificate Insurer."
CONVEYANCE OF RECEIVABLES
On the Closing Date, the Trust will acquire from the Sellers all the
right, title, and interest of the Sellers in and to (a)(i) any Equipment that is
owned by the Sellers and any and all income and proceeds from such Equipment,
but subject to the rights of the Obligor to quiet enjoyment of such Equipment
under the related Contract and (ii) any security interest of the Sellers in any
of the Equipment that is not owned by the Sellers; (b) the Contracts, including,
without limitation, all Scheduled Payments,
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<PAGE> 31
Defaulted Contract Recoveries and any other payments due or made with respect to
the Contracts after the Cut-Off Date relating to such Contracts; (c) any
guarantees of an Obligor's obligations under a Contract; (d) all other documents
in the Contract Files relating to the Contracts, including, without limitation,
any UCC financing statements related to the Contracts or the Equipment; (e) any
Insurance Policies and Insurance Proceeds with respect to the Contracts; (f) all
amounts on deposit in the Collection Account; and (g) any and all income and
proceeds of any of the foregoing; provided, however, that the transfer shall not
include the Initial Unpaid Amounts relating thereto (collectively, the
"Receivables").
The Trustee will have possession of the Contracts and the Contract
Files, and the Servicer will retain copies of any other documents which relate
to the Receivables, any related evidence of insurance and payment, delinquency
and related reports maintained by the Servicer in the ordinary course of
business with respect to each Receivable. Prior to transfer of the Receivables
to the Trust, the Servicer will cause its electronic ledger to be marked to show
that such Receivables have been transferred from First Sierra to the Trust, and
First Sierra and the Trust will each file UCC financing statements reflecting
the transfer and assignment of the Receivables in certain jurisdictions, as
required by the Receivables Transfer Agreement and the Pooling and Servicing
Agreement. See "Certain Legal Aspects of the Receivables" in the prospectus.
REPRESENTATIONS AND WARRANTIES OF FIRST SIERRA
First Sierra, as Originator or as Servicer, as the case may be, will
make certain warranties in the Pooling and Servicing Agreement (as of the
Closing Date with respect to the Contracts and, with respect to a Substitute
Contract, as of the date on which the Trust acquires such Substitute Contract
(each, a "Transfer Date"), the benefits of which will be assigned to the Trust
and then to the Trustee, including that:
* no provision of any Contract has been waived, altered or modified in any
respect, except by instrument or documents contained in its Contract File and
identified by First Sierra and no modification or amendment of any Contract
would individually or in the aggregate materially and adversely affect the
Trustee's rights thereunder or has reduced the amount of any
Scheduled Payment (or the aggregate Scheduled Payments) owing thereunder or
extended the expiration date thereof;
* each Contract is a valid and binding payment obligation of the related
Obligor and is enforceable in accordance with its terms (except as may be
limited by applicable insolvency, bankruptcy, moratorium, reorganization, or
other similar laws affecting enforceability of creditors' rights generally and
the availability of equitable remedies) and is in full force and effect;
* each Contract contains a "hell or high water" clause under which the
Obligor's obligations are non-cancelable and unconditional and not subject to
any right of set-off, defense, abatement, counterclaim, reduction or
recoupment;
* no Contract is or will be subject to rights of rescission, set-off,
counterclaim or defense, and each Contract provides for acceleration of the
Scheduled Payments upon default by the Obligor;
* the Contracts, at the time they were made, did not violate the laws of any
applicable state or of the United States, including, without limitation,
usury, truth-in-lending and equal credit opportunities laws applicable to such
Contract;
* no Contract permits the prepayment or early termination thereof at the
option of the Obligor for an amount that is less than the Prepayment Amount
related to such Contract;
* no Contract provides for the substitution, addition or exchange of any
item of Equipment which would result in any reduction of payments due under
such Contract;
* all of the Contracts require the Obligor to maintain the Equipment in
good working order, to bear all the costs of operating the Equipment,
including taxes and
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<PAGE> 32
insurance relating thereto;
* the Contract provides for periodic Scheduled Payments, which are
principally due and payable on a monthly, quarterly, semi-annual, or annual
basis;
* in an event of a Casualty Loss, such Contract requires the Obligor, at the
Obligor's expense, to (a) replace the Equipment with like equipment in good
repair, or (b) pay the sum of all unpaid rent and other payments due under the
Contract, all accelerated future payments due under the Contract (discounted
to present value payoff amount) and the booked residual value of the
Equipment;
* under the terms of the Contract the Obligor may not elect to utilize its
security deposit to offset any Scheduled Payment;
* if obtained during the original approval, the Contracts provide a personal
guarantee of the Obligor;
* all of the Contracts originated by a Source permit the Source to accelerate
Scheduled Payments if an Obligor is in default under the Contract;
* all the Contracts meet the Originator's credit and collections policies and
procedures;
* each Source has entered into valid sale and assignment of each Contract
originated by such Source;
* each Contract conveyed includes only the remaining, in the event the
Contract does not include all original Scheduled Payments under the Contract,
non-cancelable Scheduled Payments (provided that such remaining Scheduled
Payments do not exceed an amount greater than 84);
* the right, title and interest of the Originator or its affiliates in and to
each Contract and the related Equipment have not been sold, transferred,
assigned or pledged by such entities to any other Person (or any such pledge
has been released as evidenced by releases of collateral) and at the time of
the conveyance of such Contract to the Trust, the Trust will be the sole
owner of such Contract and the rights thereunder in and to the related
Equipment and will have good and marketable title to each Contract and will
have the power to convey such Contract and assign its interest in the related
Equipment free and clear of any liens;
* as of the Closing Date, all action required by the Receivables Transfer
Agreement and the Pooling and Servicing Agreement shall have been taken by the
Originator or its affiliates to convey all of its right, title and interest in
and to the Contracts and the related Equipment to the Trust;
* all filings (including UCC filings) necessary to evidence the conveyance of
the Contracts to the Trust and to perfect the first perfected priority
security interest of the Trustee in the Contracts and the Originator's
interest in related Equipment in accordance with the filing requirements of
the Receivables Transfer Agreement and the Pooling and Servicing Agreement
have been made in all appropriate jurisdictions and are in full force and
effect;
* as of the Cut-Off Date, no Obligor will have been released, in whole or in
part, from any of its obligations in respect of any such Contract; no such
Contract will have been satisfied, canceled, extended or subordinated, in
whole or in part, or rescinded, and no Equipment covered by any such Contract
will have been released from such Contract, in whole or in part, nor will any
instrument have been executed that would effect any such satisfaction,
release, cancellation, subordination or rescission; and
* as of the initial Cut-Off Date (in each case calculated using the statistical
discount rate of _____%), no one Obligor is the Obligor under Contracts for
which the sum of the Statistical Discounted Contract Principal Balances
exceeds $__________, no more than $____________ of the Statistical Discounted
Contract Principal Balance is attributable to any 10 Obligors and the average
original cost (based on GAAP) of the Equipment subject to the Contracts shall
not exceed $100,000.
First Sierra will make similar representations and warranties with
respect to Substitute Contracts as of the date of the related transfer of such
Substitute Contracts. Such representations and warranties will survive the
transfer of the Substitute Contracts to the Trust.
Under the terms of the Pooling and Servicing Agreement, First Sierra
will be obligated to accept the reconveyance of any Receivables and deposit the
Repurchase Amount on or before the end of the
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<PAGE> 33
calendar month following the month of its discovery or receipt of notice of a
breach of a representation or warranty that materially adversely affects such
item of Receivables, which breach has not been cured or waived in all material
respects. This obligation to accept the reconveyance of the Receivables and
remit the Repurchase Amount will constitute the sole remedy against First Sierra
available to the Depositor, the Trust, the Trustee and the Certificateholders
for a breach of a representation or warranty made by First Sierra with respect
to the required characteristics of the Receivables.
INDEMNIFICATION
The Pooling and Servicing Agreement will provide that the Servicer will
defend and indemnify the Depositor, First Sierra, the Trustee, the Trust and the
Certificateholders against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and expenses
of litigation, reasonably incurred, arising out of or resulting from (i) the
use, repossession or operation by the Servicer or any affiliate thereof of any
Equipment and (ii) (A) the failure of the Servicer to perform its duties under
the Pooling and Servicing Agreement or (B) in the case of the Trustee, the
performance of their respective duties, except to the extent that such cost,
expense, loss, damage, claim or liability resulted from the Trustee's gross
negligence or willful misconduct. First Sierra's obligations, as Servicer, to
indemnify the Depositor, the Certificate Insurer, the Trustee, the Trust and the
Certificateholders for acts or omissions of First Sierra as Servicer will
survive the removal of the Servicer but will not apply to any acts or omissions
of a successor Servicer. Such indemnification does not extend to indirect,
incidental, special or consequential damages.
THE ACCOUNTS
The Servicer is required to establish and maintain in accordance with
the Pooling and Servicing Agreement two accounts: the Lockbox Account and the
Collection Account. The Collection Account is to be held by the Trustee in the
name of the Trust and for the benefit of Certificateholders. The Collection
Account will be one or more segregated trust accounts. The Lockbox Account will
be a demand deposit account maintained at Chase Bank of Texas, N.A. (the
"Lockbox Bank").
"Advance Payments" are amounts paid by an Obligor during a Collection
Period with respect to amounts due from such Obligor in subsequent Collection
Periods. Advance Payments will be retained in the Lockbox Account until the
Determination Date relating to the Collection Period in which such Advance
Payment (or portion thereof) is due in accordance with the provisions of the
related Contract.
The Pooling and Servicing Agreement permits the Servicer to direct the
investment of amounts in the Collection Account in certain eligible investments
that mature not later than the Business Day prior to the next succeeding Payment
Date. Generally, the Residual Holder shall be entitled to any income from such
investments.
SERVICER ADVANCES
In the event that any Obligor fails to remit the full Scheduled Payment
due from it with respect to a Collection Period by the Determination Date
related to such Collection Period, the Servicer
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<PAGE> 34
may make an advance from its own funds of an amount equal to such unpaid
Scheduled Payment (a "Servicer Advance") if the Servicer, in its sole
discretion, determines that eventual repayment of such Servicer Advance is
likely from collections from or on behalf of the related Obligor. The Pooling
and Servicing Agreement provides for the reimbursement of the Servicer for such
Servicer Advances from first, Excluded Amounts on the subsequent Payment Date
and second, to the extent not reimbursed from Excluded Amounts, funds available
for distribution in the Collection Account on each subsequent Payment Date
before the required payments to Certificateholders have been paid as set forth
below in "Flow of Funds." If at any time First Sierra or an affiliate is no
longer the Servicer, no Servicer Advances will be required. The Pooling and
Servicing Agreement shall provide that, in the event that the Servicer
determines that any Servicer Advances previously made are not recoverable from
the related Obligor, or any Delinquent Contracts for which the Servicer has
made a Servicer Advance in respect thereof become Defaulted Contracts, the
Trustee shall draw on the Collection Account to repay such Servicer Advances in
accordance with the provisions of the Pooling and Servicing Agreement.
FLOW OF FUNDS
On each Determination Date, the Servicer is required to deliver to the
Trustee, the Certificate Insurer and each Rating Agency a certificate (the
"Servicer's Certificate") setting forth the information needed to make payments
on the upcoming Payment Date.
See "Subordination Provisions" in the Summary of Terms to this
prospectus supplement for a description of the operation and effect of the "Flow
of Funds" mechanics with respect to the various classes of Certificates.
On each Payment Date, the Trustee will be required to make
the following payments from the Available Funds then on deposit in the
Collection Account, in the following order of priority (to the extent funds are
available therefor):
(i) to the Servicer, any unreimbursed Servicer Advances (other
than Servicer Advances for the related Collection Period);
(ii) to the Servicer, the Servicer Fee then due, together with
any accrued and unpaid Servicer Fees from prior Collection Periods;
(iii) to the Servicer, any Servicing Charges, if any,
deposited in the Collection Account;
(iv) to the Certificate Insurer, the Premium Amount then due,
together with any accrued and unpaid premium amounts from prior
Collection Periods;
(v) to the Trustee, the Trustee Fees then
due, together with any Trustee Fees from prior Collection
Periods;
(vi) to the Trustee, the Trustee Expenses
then due, together with any Trustee Expenses from prior
Collection Periods;
(vii) to the Class A-1 Certificateholders and to the Class
A-2 Certificateholders, the Certificate Interest thereon, pari passu;
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(viii) to the Class B-1 Certificateholders, the Certificate
Interest thereon for the related Collection Period (to the extent the
disbursement of such Certificate Interest will not result in an
Available Funds Shortfall);
(ix) to the Class B-2 Certificateholders, the Certificate
Interest thereon for the related Collection Period (to the extent the
disbursement of such Certificate Interest will not result in an
Available Funds Shortfall);
(x) to the Class B-3 Certificateholders, the Certificate
Interest thereon for the related Collection Period (to the extent the
disbursement of such) Certificate Interest will not result in an
Available Funds Shortfall);
(xi) until the Class A Certificate Principal Balance has been
reduced to zero, to the Class A Certificateholders, the sum of (a) the
Base Principal Distribution Amount for Class A for such Payment Date,
and (b) any Overdue Principal for Class A, such amount to be applied
sequentially, with 100% of such amount being applied to reduce the
applicable Certificate Principal Balance of the Class A Certificates
then outstanding and having the lowest numerical designation (e.g.,
first to the Class A-1 Certificates) to zero before any principal
payment is made to the next Class;
(xii) to the Certificate Insurer, the unpaid reimbursement
amount, if any;
(xiii) until the Certificate Principal Balance of the Class
B-1 Certificates has been reduced to zero, to the Class B
Certificateholders, from the Available Funds then remaining in the
Collection Account, the sum of (a) the Base Principal Distribution
Amount for Class B-1 for such Payment Date, and (b) any Overdue
Principal for Class B-1; provided, however, that if a Restricting Event
exists on such Payment Date, the amount otherwise required to be paid
to the Class B Certificateholders under this clause (xiii), shall
instead be paid to the Class A Certificateholders during such time as a
Restricting Event is continuing as an additional reduction of the Class
A Certificate Principal Balance up to the amount necessary to reduce
the Class A Certificate Principal Balance to zero (and shall be paid in
the sequential-pay fashion described in clause (xi) above);
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(xiv) until the Certificate Principal Balance
thereof has been reduced to zero, to the Class C
Certificateholders, from the Available Funds then remaining
in the Collection Account, the sum of (a) the Base Principal
Distribution Amount for Class B-2 for such Payment Date, and
(b) any Overdue Principal for Class B-2; provided, however,
that if a Restricting Event exists on such Payment Date, the
amount otherwise required to be paid to the Class B-2
Certificateholders under this clause (xiv), shall instead be
paid (x) to Class A Certificateholders as an additional
reduction of the Class A Certificate Principal Balance up to
the amount necessary to reduce the Class A Certificate
Principal Balance to zero (and shall be paid in the
sequential-pay fashion described in clause (xi) above), and
(y) then to the Class B-1 Certificateholders as an additional
reduction of the Certificate Principal Balance of the Class
B-1 Certificates up to the amount necessary to reduce such
balance to zero;
(xv) until the Certificate Principal Balance
thereof has been reduced to zero, to the Class B-3
Certificateholders, from the Available Funds then remaining
in the Collection Account, the sum of (a) the Base Principal
Distribution Amount for Class B-3 for such Payment Date, and
(b) any Overdue Principal for Class B-3; provided, however,
that if a Restricting Event exists on such Payment Date; the
amount otherwise required to be paid to the Class B-3
Certificateholders under this clause (xv), shall instead be
paid (x) to the Class A Certificate Certificateholders as an
additional reduction of the Class A Certificate Principal
Balance up to the amount necessary to reduce the Class A
Certificate Principal Balance to zero (and shall be paid in
the sequential-pay fashion described in clause (xi) above),
(y) then to the Class B-1 Certificateholders as an additional
reduction of the Certificate Principal Balance of the Class
B-1 Certificates up to the amount necessary to reduce such
balance to zero, and (z) then to the Class B-2
Certificateholders as an additional reduction of the
Certificate Principal Balance of the Class B-2 Certificates
up to the amount necessary to reduce such balance to zero;
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(xvi) to the Servicer, any other amounts due the
Servicer as expressly provided in the Pooling and Servicing
Agreement; and
(xvii) to the Residual Holder, any remaining
amounts; provided, however, that
(I) if a Restricting Event does not exist on
such Payment Date, but if any payment of
funds to the Residual Holder on such
Payment Date would result in the excess of
(i) the Aggregate Discounted Contract
Principal Balance as of the end of the
immediately preceding Collection Period,
over (ii) the sum of the Certificate
Principal Balances of all Classes of
Certificates (each calculated after giving
effect to all payments of principal to be
made on such Payment Date) being less than
3% of the Initial Aggregate Discounted
Contract Principal Balance, such amount
shall not be paid to the Residual Holder
but shall instead be paid pursuant to this
clause (xvii) to the Class A
Certificateholders (in the sequential-pay
fashion described in clause (xi) above),
the Class B-1 Certificateholders, the Class
B-2 Certificateholders and the Class B-3
Certificateholders as an additional payment
of principal in an amount with respect to
each such Class equal to the product of (A)
a fraction, the numerator of which is the
Class A Percentage, the Class B-1
Percentage, the Class B-2 Percentage, or
the Class B-3 Percentage, as the case may
be, and the denominator of which is the sum
of the Class A Percentage, the Class B-1
Percentage, the Class B-2 Percentage and
the Class B-3 Percentage and (B) the amount
that would otherwise be paid to the
Residual Holder pursuant to this clause
(xvii); and
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(II) if a Restricting Event exists on such
Payment Date, the amount otherwise required
to be paid to the Residual Holder under
this clause (xvii) shall instead be paid as
a payment of principal to the Holders of
the Class A-1 Certificates, the Class A-2
Certificates, the Class B-1 Certificates,
the Class B-2 Certificates and the Class
B-3 Certificates, in that order, as an
additional reduction of the related
Certificate Principal Balance up to the
amount necessary to reduce such balance to
zero.
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As used in this prospectus supplement, the following terms have the following
meanings:
Advance Payment: With respect to a Contract and a Collection Period,
any Scheduled Payment, Final Scheduled Payment or portion of either made by or
on behalf of an Obligor and received by the Servicer during such Collection
Period, which Scheduled Payment, Final Scheduled Payment or portion thereof does
not become due until a subsequent Collection Period.
Aggregate Initial Certificate Principal Balance: The aggregate of the
Initial Certificate Principal Balances of each Class of Certificates.
Available Distribution Amount: With respect to a Collection Period, the
total of (a) the Available Funds with respect to the related Collection Period,
minus (B) the Trust Operating Expenses.
Available Funds: With respect to a Payment Date, all amounts held in
the Collection Account on the related Determination Date, after taking into
account all deposits required to be made on such Determination Date, plus
proceeds of any Servicer Advances made on the Business Day immediately prior to
the Payment Date, other than any such amounts which relate to any subsequent
Collection Period.
Available Funds Shortfall: An event which occurs on a Payment Date if
the Base Principal Distribution Amount for Class A for such Payment Date exceeds
the Available Distribution Amount for such Payment Date.
Base Principal Amount: With respect to any Collection Period, an amount
equal to the excess of (x) the Aggregate Discounted Contract Principal Balances
of the Contracts as of the close of business on the last day of the second
preceding Collection Period over (y) the Aggregate Discounted Contract Principal
Balances of the Contracts as of the close of business on the last day of the
immediately preceding Collection Period.
Base Principal Distribution Amount: With respect to the Class A
Certificates, (a) for any Collection Period prior to the Termination Date, for
the Class B-1 Certificates, the Class B-2 Certificates or the Class B-3
Certificates, the product of (i) the Class A Percentage and (ii) the Base
Principal Amount for such Collection Period; (b) for the Termination Date for
the Class B-1 Certificates, the Class B-2 Certificates or the Class B-3
Certificates, the amount described in clause (a) above plus the portion of the
Base Principal Distribution Amount for Class B-1, Class B-2 or Class B-3 as
applicable, not applied as a reduction of the respective Certificate Principal
Balance on such date; and (c) for any Collection Period following the
Termination Date for the Class B-1 Certificates, the Class B-2 Certificates or
the Class B-3 Certificates, the amount described in clause (a) above plus the
B-1, Class B-2 or Class B-3, as the case may be, for such Collection Period.
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<PAGE> 40
With respect to the Class B-1 Certificates, the Class B-2 Certificates
or the Class B-3 Certificates and any Payment Date, the product of (a) the Class
Percentage for such Class and (b) the Base Principal Amount for such Payment
Date.
Class A Insured Distribution Amount means, with respect to any Payment
Date, the sum of (i) the Certificate Interest for the Class A-1 Certificates and
Class A-2 Certificates, and (ii) if such Payment Date is the Maturity Date for
the Class A-1 Certificates or the Class A-2 Certificates, the Certificate
Principal Balance then outstanding with respect to such Class of Certificates,
otherwise the excess if any, of (A) the Certificate Principal Balance of the
Class A Certificates over (B) the Aggregate Discounted Contract Principal
Balance of all Contracts other than Defaulted Contracts.
Defaulted Contract. A Contract becomes a "Defaulted Contract" at the
earlier of the date on which (i) the Servicer has determined in its sole
discretion, in accordance with the Servicing Standard and its customary
servicing procedures, that such Contract is not collectible, (ii) all or part of
a Scheduled Payment thereunder is more than 180 days delinquent or (iii) that
was repurchased by a Source pursuant to a Source Agreement.
Defaulted Contract Recoveries: All proceeds of the sale of Equipment
related to Defaulted Contracts and any amounts collected as judgments against an
Obligor or others related to the failure of such Obligor to pay any required
amounts under the related Contract or to return the Equipment, in each case as
reduced by (i) any unreimbursed Servicer Advances with respect to such Contract
or such
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<PAGE> 41
Equipment and (ii) any reasonably incurred out-of-pocket expenses incurred by
the Servicer in enforcing such Contract or in liquidating such Equipment.
Delinquency Trigger Event: Exists on any Payment Date on which the
average of the Delinquency Trigger Ratios for such Payment Date and the five
immediately preceding Payment Dates exceeds [7.5%].
Delinquency Trigger Ratio: With respect to any Payment Date, the
quotient, expressed as a percentage of (a) the Aggregate Discounted Contract
Principal Balance of all Contracts as to which all or a portion of a Scheduled
Payment remained unpaid for more than 30 days from its due date, determined as
of the end of the immediately preceding calendar month, divided by (b) the
Aggregate Discounted Contract Principal Balance of all Contracts as of the last
day of the immediately preceding calendar month (including any Contracts which
were repossessed or substituted).
Delinquent Contract: As of any Determination Date, any Contract (other
than a Contract which became a Defaulted Contract prior to such Determination
Date) with respect to which all or a portion of any Scheduled Payment was not
received when due by the Servicer as of the close of business on the last day of
the month in which such payment was due.
Determination Date: With respect to a Payment Date, a date which is the
tenth day of the calendar month in the month in which such Payment Date occurs,
or if such day is not a Business Day, the immediately preceding Business Day;
provided, however, that in no event shall such Determination Date be later than
two Business Days prior to such Payment Date.
Discounted Contract Principal Balance: With respect to any Contract, on
any Determination Date, the sum of the present value of all of the remaining
Scheduled Payments becoming due under such Contract after the end of the prior
Collection Period, discounted monthly at the Discount Rate in the manner
described below; provided, however, that except to the extent expressly provided
in the Pooling and Servicing Agreement, the Discounted Contract Principal
Balance of any Defaulted Contract, Early Termination Contract, or Expired
Contract or Contract, purchased by First Sierra pursuant to the Pooling and
Servicing Agreement, shall be equal to zero.
In connection with all calculations required to be made pursuant to the
Transaction Documents with respect to the determination of Discounted Contract
Principal Balances, for any date of determination the "Discounted Contract
Principal Balance" for each Contract shall be calculated assuming:
(i) Scheduled Payments are due on the last day of each Collection
Period;
(ii) Scheduled Payments are discounted on a monthly basis using a 30
day month and a 360 day year; and
(iii) Scheduled Payments are discounted to the last day of the
Collection Period prior to the Determination Date.
Early Termination Contract: Any Contract that has terminated pursuant
to the terms of such Contract prior to its scheduled expiration date, other than
a Defaulted Contract.
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Excluded Amounts: Any payments received from an Obligor or a Source in
connection with any application fees, tax processing fees, wire transfer fees,
express mail fees, insurance premiums, late charges and other penalty amounts,
taxes, fees or other charges imposed by any governmental authority, any
indemnity payments made by an Obligor for the benefit of the obligee under the
related Contract or any payments collected from an Obligor or received from a
Source relating to servicing and/or maintenance payments pursuant to the related
Contract or maintenance agreement, as applicable, Expired Contract Proceeds or
any other non-rental charges reimbursable to the Servicer in accordance with the
Servicer's customary policies and procedures plus any collections received
following the end of the immediately preceding Collection Period up to the
amount of the Servicer Advance made on the immediately preceding Payment Date.
Expired Contract: Any Contract that has terminated on its scheduled
expiration date.
Final Scheduled Payment: With respect to any Contract, any payment set
forth in such Contract other than the regular Scheduled Payment which is
required to be paid by the related Obligor at the maturity of such Contract.
Gross Charge-Off Event: Exists on any Payment Date on which the average
of the Gross Charge-Off Ratio for such Payment Date and the five immediately
preceding Payment Dates exceeds [2.5%].
Gross Charge-Off Ratio: With respect to any Payment Date, 12 times the
quotient, expressed as a percentage, of (a) the Aggregate Discounted Contract
Principal Balance of all Contracts that become Defaulted Contracts during the
immediately preceding calendar month less all recoveries received during the
immediately preceding calendar month, including, but not limited to, Source
buybacks, Source reserve fund payments, liquidation proceeds and residual
proceeds, divided by (b) the Aggregate Discounted Contract Principal Balance of
all Contracts as of the end of the immediately preceding calendar month. For the
purposes of the calculation of the Gross Charge-Off Ratio, the Discounted
Contract Principal Balance of any Contract which is a Defaulted Contract shall
not be zero, but shall instead be calculated as provided in the definition of
Discounted Contract Principal Balance without reference to the last proviso in
such definition.
Initial Unpaid Amount: With respect to a Contract, the excess of (x)
the aggregate amount of all Scheduled Payments due prior to the Cut-Off Date
over (y) the aggregate of all Scheduled Payments made prior to the Cut-Off Date
with respect to such Contract.
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Initial Certificate Principal Balance: With respect to the following Classes of
Certificates.
<TABLE>
<S> <C>
Class A-1 $
---------
Class A-2 $
---------
Class B-1 $
---------
Class B-2 $
---------
Class B-3 $
---------
</TABLE>
The "Initial Certificate Principal Balance" with respect to the Class
A Certificates is the sum of the Initial Certificate Principal Balances of the
Class A-1 Certificates and the Class A-2 Certificates.
Interest Accrual Period: With respect to any Payment Date, the period
from and including the prior Payment Date to but excluding such Payment Date and
with respect to the initial Payment Date, the period from and including
November __, 1998 to but excluding such Payment Date.
Majority Holders: The applicable Certificateholders that together own
Certificates with an aggregate Percentage Interest in excess of 50%.
Maturity Date: With respect to each Class of Certificates, the
following dates:
<TABLE>
<S> <C>
Class A-1 Certificates ---------
Class A-2 Certificates ---------
Class B-1 Certificates ---------
Class B-2 Certificates ---------
Class B-3 Certificates ---------
</TABLE>
Certificate Current Interest: With respect to a Class of Certificates
and any Collection Period, the interest accrued during the related Interest
Accrual Period, equal to, for the Class A-1 Certificate, the product of (x) a
fraction, the numerator of which is the actual number of days elapsed in the
related Interest accrual Period and the denominator of which is 360, (y) the
Pass-Through Rate for the Class A-1 Certificates and (z) the aggregate
Certificate Principal Balance of the Class A-1 Certificates outstanding
immediately prior to such Payment Date, and for all other classes of
Certificates, the product of (x) one-twelfth of the Pass-Through Rate for such
Class of Certificates and (y) the aggregate Certificate Principal Balance of
such class of Certificates outstanding immediately prior to such Payment Date.
Certificate Interest: With respect to a Class of Certificates and any
Collection Period, the sum of the Certificate Current Interest and the Overdue
Interest for such Class.
Certificate Principal Balance: At any time, with respect to a Class of
Certificates, the Initial Certificate Principal Balance of such Class minus all
payments theretofore received by the Certificateholders of such Class on account
of principal. the "Certificate Principal Balance" with respect to the Class A
Certificates is, at any time, the sum of the Certificate Principal Balances of
the Class A-1 Certificates and the Class A-2 Certificates.
Pass-Through Rate: With respect to each Class of Certificates, the
following rates of interest:
<TABLE>
<S> <C>
Class A-1 %
------
Class A-2 %
------
Class B-1 %
------
Class B-2 %
------
Class B-3 %
------
</TABLE>
Overdue Interest: With respect to a Class of Certificates and any
Payment Date, the difference between (a) the sum of (i) the excess, if any, of
any Certificate Current Interest due on the immediately preceding Payment Date
for such Class over the Certificate Current Interest for such Class on such
immediately preceding Payment Date, (ii) without duplication of the amount
described in clause (i), the amount of the Overdue Interest for such Class due
and unpaid as of the immediately preceding Payment Date and (iii) for the Class
A-1 Certificates only, the product of (x) The sum of clauses (i) and (ii), (y) a
fraction, the numerator of which is the actual number of days elapsed in the
related Interest Accrual Period and the denominator of which is 360, and (z) the
sum of the Class A-1 Pass-Through Rate plus 1%, and (b) any Overdue Interest for
class A-1 paid on such payment Date, and for each other Class of Certificates,
the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of the
sum of the Pass-Through Rate for such Class plus 1%, and (b) any Overdue
Interest for such Class paid on such Payment Date.
Overdue Principal: With respect to any Class of Certificates and any
Payment Date, the difference, if any, equal to (a) the aggregate of the Base
Principal Distribution Amounts with respect to such Class due on all prior
Payment Dates and (b) the aggregate amount of the principal (from whatever
source) actually distributed to Noteholders of such class on all prior Payment
Dates. the "Overdue Principal: with respect to the Class A Certificates is equal
to the sum of the Overdue Principal for the Class A-1 Certificates and the Class
A-2 Certificates.
Percentage Interest: With respect to a Certificateholder and a Class of
Certificates on any date of determination, the percentage obtained by dividing
the Certificate Principal Balance of the Certificate held by such
Certificateholder as of the Closing Date by the related Certificate Principal
Balance of the related Class of Certificates as of the Closing Date.
Prepayment: With respect to a Collection Period and a Contract (except
a Defaulted Contract), the amount received by the Servicer during such
Collection Period from or on behalf of an Obligor with respect to such Contract
in excess of the sum of (x) the Scheduled Payment and any Final Scheduled
Payment due during such Collection Period, plus (y) the aggregate of any overdue
Scheduled Payments, Initial Unpaid Amounts and unpaid Servicing Charges for such
Contract, so long as such amount is designated by the Obligor as a prepayment
and the Servicer has consented to such prepayment. Defaulted Contract Recoveries
are not Prepayments.
Prepayment Amount: With respect to a Payment Date and a Contract, an
amount, without duplication, equal to the sum of (i) the Discounted Contract
Principal Balance as of the close of business on the second preceding Collection
Period (without any deduction for any security deposit paid by an Obligor,
unless such security deposit has been deposited in the Collection Account
pursuant to the Pooling and Servicing Agreement); (ii) the product of (x) such
Contract's Discounted Contract Principal Balance as of the immediately preceding
Payment Date and (y) one-twelfth of the Discount Rate; (iii) any Scheduled
Payments theretofore due and not paid by an Obligor; and (iv) any Final
Scheduled Payment due or to become due under the Contract.
Reimbursement Amount: As of any Payment Date, the sum of (x)(i) all
Insured Payments previously received by the Trustee from the Certificate Insurer
and not previously repaid to the Certificate Insurer pursuant to the Pooling and
Servicing Agreement plus (ii) interest accrued on each such Insured Payment not
previously repaid to the Certificate Insurer from the date the Trustee received
the related Insured Payment to, but not including, such Payment Date and (y)(i)
any amounts then due and owing to the Certificate Insurer under the Insurance
Agreement plus (ii) interest on such amounts.
Repurchase Amount: With respect to a Payment Date and a Contract, the
sum, without duplication, of (i) the Discounted Contract Principal Balance as of
the close of business on the second preceding Collection Period (without any
deduction for any security deposit paid by an Obligor, unless such security
deposit has been deposited in the Collection Account pursuant to the Pooling and
Servicing Agreement); (ii) the product of (x) such Contract's Discounted
Contract Principal Balance as of the beginning of the immediately preceding
Collection Period and (y) one-twelfth of the Discount Rate; (iii) any Scheduled
Payments theretofore due and not paid by an Obligor; and (iv) any Final
Scheduled Payment due or to become due under the Contract.
Restricting Event: An event which shall occur on a Payment Date on
which (a) an Event of Servicing Termination has occurred under the Pooling and
Servicing Agreement and is not cured within the grace period set forth in the
Pooling and Servicing Agreement, (b) a Gross Charge-Off Event exists, or (c) a
Delinquency Trigger Event exists or (d) the Certificate Insurer makes an Insured
Payment.
Scheduled Payments: With respect to a Payment Date and a Contract, the
periodic payment (exclusive of any amounts in respect of insurance, warranty
extensions, service contracts or taxes, and reflecting any adjustment for
partial Prepayments, and further reflecting the effect of any permitted
modification to such Contract) set forth in such Contract due from the Obligor
in the related
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<PAGE> 44
Collection Period; provided, however, that with respect to any Contract as to
which First Sierra retained the security deposit, a Scheduled Payment shall not
include the final payment or payments to be made thereon equal to the amount of
such security deposit.
Substitute Contract Cut-Off Date: With respect to a Substitute
Contract, the close of business on the first day of the calendar month in which
the related Transfer Date occurs.
Termination Date: With respect to the Class B-1 Certificates, the Class
B-2 Certificates or the Class B-3 Certificates, the Payment Date on which the
Certificate Principal Balance of such Class of Certificates is reduced to zero.
Trust Certificate Principal Balance: As of any Payment Date, the
difference, if any, between (i) the sum of (x) the Aggregate Discounted Contract
Principal Balances of all Contracts as of the end of the immediately preceding
Collection Period and (y) the Aggregate Discounted Contract Principal Balances
as of the day prior to such Payment Date of all Substitute Contracts to be
conveyed to the Trust on such Payment Date and (ii) the sum of (w) the
outstanding Class A Certificate Principal Balance, (x) the outstanding Class B-1
Certificate Principal Balance; (y) the outstanding Class B-2 Certificate
Principal Balance and (z) the outstanding Class B-3 Certificate Principal, after
taking into account any distributions on such Payment Date.
Trust Operating Expenses: With respect to any Payment Date, an amount
equal to the amounts owing to the Servicer, the Certificate Insurer and the
Trustee pursuant to the Pooling and Servicing Agreement and payable out of
Available Funds in priority to amounts owing the Certificateholders.
WITHHOLDING
The Trustee is required to comply with all applicable federal income
tax withholding requirements respecting payments to Certificateholders of
interest with respect to the Certificates. The consent of Certificateholders is
not required for such withholding. In the event the Certificateholder is other
than The Depository Trust Company, then in the event that the Trustee does
withhold or causes to be withheld any amount from interest payments or advances
thereof to any Certificateholders pursuant to federal income tax withholding
requirements, the Trustee shall indicate the amount withheld annually to such
Certificateholders.
REPORTS TO CERTIFICATEHOLDERS
On each Payment Date the Trustee will furnish or cause to be furnished
with each payment to Certificateholders, a statement prepared by the Servicer
setting forth the following information (per $1,000 of Initial Certificate
Principal Balance as to (a) and (b) below):
a. With respect to a statement to a Class A Certificateholder,
or a Subordinate Certificateholder, the amount of such payment
allocable to such Certificateholder's required payment of the Base
Principal Amount and Overdue Principal;
b. With respect to a statement to a Class A Certificateholder,
or a Subordinate Certificateholder, the amount of such payment
allocable to Current Interest and Overdue Interest;
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<PAGE> 45
c. The aggregate amount of fees and compensation received by
the Servicer pursuant to the Pooling and Servicing Agreement for the
Collection Period;
d. The aggregate Certificate Principal Balance for each Class
of Certificates, the Certificate Factor for each Class of Certificates,
the Pool Factor and the Aggregate Discounted Contract Principal
Balance, after taking into account all distributions made on such
Payment Date;
e. The total unreimbursed Servicer Advances with respect to
the related Collection Period;
f. The amount of Defaulted Contract Recoveries for the related
Collection Period and the Aggregate Discounted Contract Principal
Balances for all Contracts that became Defaulted Contracts during the
related Collection Period, calculated immediately prior to the time
such Contracts became Defaulted Contracts; and
g. The total number of Contracts and the Aggregate Discounted
Contract Principal Balances thereof, together with the number and
aggregate Discounted Contract Principal Balances of all Contracts as to
which the Obligors, as of the related Calculation Date, were one, two,
three or four Scheduled Payments delinquent, and Delinquent Contracts
reconveyed.
Such reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. The Depositor will
cause to be filed with the commission such periodic reports as are required
under the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder and as are otherwise agreed to by the Commission. Copies
of such periodic reports may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The "Certificate Factor" of a Class of Certificates is the seven digit
decimal number that the Servicer will compute or cause to be computed for each
Collection Period and will make available on the related Determination Date
representing the ratio of (x) the Certificate Principal Balance for such Class
of Certificates which will be outstanding on the next Payment Date (after taking
into account all distributions to be made on such Payment Date) to (y) the
Initial Certificate Principal Balance of such Class of Certificates.
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<PAGE> 46
The "Pool Factor" is the seven digit decimal number that the Servicer
will compute or cause to be computed for each Collection Period and will make
available on the related Determination Date representing the ratio of (x) the
Aggregate Discounted Contract Principal Balance as of the end of the immediately
preceding Collection Period to (y) the Aggregate Discounted Contract Principal
Balance as of the Cut-Off Date.
In addition, by January 31 of each calendar year following any year
during which the Certificates are outstanding, commencing January 31, 1999, the
Trustee will furnish to each Certificateholder of record at any time during such
preceding calendar year, information as to the aggregate of amounts reported
pursuant to items (a) and (b) above for such calendar year to enable
Certificateholders to prepare their federal income tax returns.
OPTIONAL REDEMPTION
Subject to the consent of the Certificate Insurer, following the Record
Date on which the Aggregate Outstanding Principal Balance of the Certificates is
less than 10% of the Aggregate Initial Certificate Principal Balance, the
Residual Holder will have the option to cause the early retirement of the
Certificates. In the event of such a redemption, the entire outstanding Class
A-1 Certificate Principal Balance, Class A-2 Certificate Principal Balance,
Class B-1 Certificate Principal Balance, Class B-2 Certificate Principal
Balance, Class B-3 Certificate Principal Balance, together with accrued interest
thereon at the related Pass-Through Rate, will be required to be paid to the
Class A-1 Certificateholders, the Class A-2 Certificateholders, the Class B-1
Certificateholders, the Class B-2 Certificateholders and the Class B-3
Certificateholders and all amounts owed to the Certificate Insurer will be paid
to the Certificate Insurer, respectively, on such Payment Date.
REMITTANCE AND OTHER SERVICING PROCEDURES
The Servicer has agreed to manage, administer and service the
Receivables and to enforce and make collections on the Receivables and any
Insurance Policies, exercising the degree of skill and care consistent with that
which the Servicer customarily exercises with respect to similar property owned,
managed or serviced by it.
The Servicer may grant to an Obligor any rebate, refund or adjustment
that the Servicer in good faith believes is required, because of Prepayment in
full of a Contract. The Servicer may deduct the amount of any such rebate,
refund or adjustment from the amount otherwise payable by the Servicer into the
Collection Account; provided, however, that the Servicer will not permit any
rescission or cancellation of any Contract which would materially impair the
rights of the Trust, the Certificate Insurer or the Certificateholders in the
Contracts or the proceeds thereof, nor will the prepayment price after giving
effect to any such rebate, refund or adjustment (and without any adjustment for
any security deposit previously paid by the Obligor) be less than the Prepayment
Amount. The Servicer may waive, modify or vary any term of a Contract if the
Servicer, in its reasonable and prudent judgment, determines that it will not be
materially adverse
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to the Certificateholders or the Certificate Insurer. However, the Servicer will
covenant in the Pooling and Servicing Agreement that (i) it will not forgive any
payment of rent, principal or interest, (ii) unless an Obligor is in default, it
will not permit any modification with respect to a Contract which would defer
the payment of any principal or interest or any Scheduled Payment or change the
final maturity date on any Contract; provided, however, that no change in the
final maturity date of any Contract shall be permitted under any circumstances
if such new maturity date is later than the latest maturity date of any other
Contract then held by the Trust, and (iii) the Servicer may accept Prepayment in
part or in full; provided, further, that (1) in the event of Prepayment in full,
the Servicer may consent to such Prepayment only in an amount not less than the
Prepayment Amount and (2) in the event of a partial Prepayment, the Servicer may
consent to such partial Prepayment only if (x) following such partial Prepayment
there are no delinquent amounts then due from the Obligor and (y) such partial
Prepayment will not reduce the Discounted Contract Principal Balance by more
than an amount equal to (I) the amount of such partial Prepayment, minus (II)
unpaid interest at the Discount Rate, accrued through the end of the Collection
Period immediately following such partial Prepayment on the outstanding
Discounted Contract Principal Balance prior to such partial Prepayment. In the
case of a partial Prepayment, the Servicer is required to accurately recalculate
the Discounted Contract Principal Balance, and the allocation of Scheduled
Payments to principal and interest.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For its servicing of the Contracts, the Servicer will receive servicing
compensation including the monthly Servicer Fee for each Collection Period
(payable on the next succeeding Payment Date) and Servicing Charges.
The servicing compensation will compensate the Servicer for customary
equipment contract servicing activities to be performed by the Servicer for the
Trust, additional administrative services performed by the Servicer on behalf of
the Trust and expenses paid by the Servicer on behalf of the Trust.
The Servicer, as an independent contractor on behalf of the Trust and
for the benefit of the Certificateholders and the Certificate Insurer, will be
responsible for managing, servicing and administering the Receivables and
enforcing and making collections on the Contracts and any Insurance Policies and
for enforcing any security interest in any item of Equipment, all as set forth
in the Pooling and Servicing Agreement. The Servicer's responsibilities will
include collection and posting of all payments, responding to inquiries of
Obligors, investigating delinquencies, accounting for collections, furnishing
monthly and annual statements to the Trustee and the Certificate Insurer with
respect to distributions, making Servicer Advances (at its sole discretion),
providing appropriate federal income tax information for use in providing
information to Certificateholders, collecting and remitting sales and property
taxes on behalf of taxing authorities and maintaining the perfected security
interest of the Trust in the Equipment and the Contracts.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement requires that the Servicer cause an
independent accountant (who may also render other services to the Servicer) to
prepare a statement to the Trustee, the Certificate Insurer and each Rating
Agency dated not later than April 30, 1999, and annually as of the same month
thereafter, to the effect that the independent accountant has examined the
servicing procedures, manuals, guides and records of the Servicer and the
accounts and records of the Servicer relating to the Receivables and the
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Contract Files (which procedures, manuals, guides and records shall be described
in one or more schedules to such statement), that such firm has compared the
information contained in the Servicer's Certificates delivered in the relevant
period with information contained in the accounts and records for such period
and that, on the basis of such examination and comparison, nothing has come to
the independent accountant's attention to indicate that the Servicer has not,
during the relevant period, serviced the Receivables in compliance with such
servicing procedures, manuals and guides and in the same manner required by the
Servicer's standards and with the same degree of skill and care consistent with
that which the Servicer customarily exercises with respect to similar property
owned by it, that such accounts and records have not been maintained in
accordance with the Pooling and Servicing Agreement, that the information
contained in the Servicer's Certificates does not reconcile with the information
contained in the accounts and records or that such certificates, accounts and
records have not been properly prepared and maintained in all material respects,
except in each case for (a) such exceptions as the independent accountant shall
believe to be immaterial and (b) such other exceptions as shall be set forth in
such statement. On or before April 30 of each year, commencing on April 30,
1999, the Servicer shall deliver to the Trustee, the Certificate Insurer and
each Rating Agency a copy of such statement.
The Pooling and Servicing Agreement will also provide for annual
delivery of a report (the "Supplementary Report") by the Servicer to the Trustee
and the Certificate Insurer not later than 120 days after the end of each fiscal
year, signed by an authorized officer of the Servicer (a "Servicing Officer") on
behalf of the Servicer and dated as of the last day of such fiscal year, stating
that (a) a review of the activities of the Servicer and the Servicer's
performance under the Pooling and Servicing Agreement for the previous 12-month
period has been made under such Servicing Officer's supervision and (b) nothing
has come to such Servicing Officer's attention to indicate that an Event of
Servicing Termination has occurred, or, if such Event of Servicing Termination
has so occurred and is continuing, specifying each such event known to the
officer, the nature and status thereof and the steps necessary to remedy such
event.
The Pooling and Servicing Agreement will provide that the Servicer,
upon request of the Trustee, will furnish to the Trustee such underlying data
necessary for administration of the Trust or enforcement actions as can be
generated by the Servicer's existing data processing system.
CERTAIN MATTERS RELATING TO THE SERVICER
The Pooling and Servicing Agreement will provide that the Servicer may
not resign from its obligations and duties as Servicer thereunder, except upon
consent of the Certificate Insurer at the direction of the Majority Holders or a
determination that the Servicer's performance of such duties is no longer
permissible under applicable law. The Servicer can only be removed pursuant to
an Event of Servicing Termination as discussed below.
EVENTS OF SERVICING TERMINATION
An "Event of Servicing Termination" under the Pooling and Servicing
Agreement will occur (a) if the Servicer fails to make any payment or deposit
required under the Pooling and Servicing Agreement within three Business Days
but not more than once in any Collection Period; (b) if the Servicer fails to
submit a Servicer's Certificate, within three Business Days following knowledge
or notice of non-receipt; (c) (i) if the Servicer fails to observe or perform in
any material respect any other covenant or agreement in the Pooling and
Servicing Agreement or the Certificates or (ii) if any representation or
warranty of the Servicer in the Servicing
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Agreement is incorrect, and such failure or breach materially and adversely
affects the rights of the Trustee, the Certificate Insurer or the
Certificateholders and continues unremedied for 30 days after the earlier to
occur of (x) written notice to the Servicer by the Trustee or to the Trustee or
the Servicer by the Certificate Insurer or any Certificateholders or (y) the
date on which any Servicing Officer is required pursuant to the terms of the
Pooling and Servicing Agreement to provide notice to the Certificateholders of
any such failure or breach; (d) upon the filing of an involuntary petition in
bankruptcy or the decree or order of a court, agency or supervisory authority
having jurisdiction over the Servicer for the appointment of a conservator,
receiver, trustee in bankruptcy or liquidator in any bankruptcy, insolvency or
similar proceedings, and the continuance of any such petition, decree or order
undismissed or unstayed and in effect for a period of 60 consecutive days; (e)
upon the voluntary filing of such petition or assignment for the benefit of
creditors, the consent by the Servicer to any such appointment, the admission in
writing by the Servicer of its inability to pay its debts as they become due or
the determination by a court that the Servicer is generally not paying its debts
as they come due; (f) in the event that the Servicer assigns or attempts to
assign its rights and duties under the Pooling and Servicing Agreement except as
specifically permitted therein; or (g) a final judgment or order shall be
rendered against the Servicer for payment in excess of $500,000 and continues
for 90 days without a stay;(h) if there occurs a change of "control" of the
Servicer ("control" having the meaning ascribed to it in the Rules and
regulations under the Securities Exchange Act of 1934, as amended), unless the
Certificate Insurer has determined that such change in control does not have a
material adverse effect on the interests of the Certificate Insurer; or (i) upon
the occurrence of any other event specified in the Insurance Agreement.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
If an Event of Servicing Termination has occurred and is continuing,
either the Trustee shall at the direction of the Certificate Insurer or the
Majority Holders may with the consent of the Certificate Insurer terminate all
(but not less than all) of the Servicer's rights and obligations under the
Pooling and Servicing Agreement. Upon such termination, the Trustee or such
successor Servicer as may be appointed in accordance with the procedures set
forth in the Pooling and Servicing Agreement will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Pooling and
Servicing Agreement; provided, however, that the Trustee or the successor
Servicer, as the case may be, shall not (i) assume any obligation to reacquire
Receivables by reason of misrepresentations or breaches of warranties or (ii) be
liable for acts, omissions or breaches of representations or warranties by the
Servicer occurring prior to transfer of the servicing functions. Notwithstanding
such termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination for services rendered prior to such
termination.
EVENTS OF DEFAULT
Upon the occurrence of an Event of Default, the Trustee, upon the
direction of the Controlling Parties, shall declare the unpaid principal amount
of all the Certificates to be due and payable, together with all accrued and
unpaid interest thereon without presentment, demand, protest or other notice of
any kind, all of which are waived by the Trust. "Events of Default" wherever
used herein means any one of the following events:
(i) failure to distribute or cause to be distributed to the Trustee,
for the benefit of the Certificateholders, all or part of any payment of
interest required to be made under the terms of such Certificates or the Pooling
and Servicing Agreement when due; or
(ii) failure to distribute or cause to be distributed (x) to the
Trustee, for the benefit of the Certificateholders, on any Payment Date an
amount equal to the principal due on the outstanding Certificates as of such
Payment Date to the extent that sufficient Available Funds are on deposit in the
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Collection Account or (y) on the Maturity Date of a Class of Certificates, any
remaining principal owed on such Class of Certificates.
"Controlling Parties" means: (i) with respect to an Event of Default
resulting only from the failure to make a required payment on the Class B-3
Certificates, (a) the Majority Holders of the Class B-1 Certificates, the Class
B-2 Certificates and the Class B-3 Certificates and (b) the Certificate Insurer,
but if the Certificate Insurer has defaulted on its Obligations under the
Certificate Insurance Policy and such default is continuing, the Majority
Holders of the Class A Certificates, (ii) with respect to an Event of Default
resulting only from the failure to make a required payment on the Class B-2
Certificates and the Class B-3 Certificates, (a) the Majority Holders of the
Class B-1 Certificates and the Class B-2 Certificates and (b) the Certificate
Insurer, but if the Certificate Insurer has defaulted on its Obligations under
the Certificate Insurance Policy and such default is continuing, the Majority
Holders of the Class A Certificates; (iii) with respect to an Event of Default
resulting only from the failure to make a required payment on the Class B-1
Certificates, the Class B-2 Certificates and the Class B-3 Certificates, (a) the
Majority Holders of the Class B-1 Certificates and (b) the Certificate Insurer,
but if the Certificate Insurer has defaulted on its Obligations under the
Certificate Insurance Policy and such default is continuing, the Majority
Holders of the Class A Certificates; and (iv) with respect to an Event of
Default resulting from the failure to make a required payment on the Class A
Certificates, the Certificate Insurer, but if the Certificate Insurer has
defaulted on its Obligations under the Certificate Insurance Policy and such
default is continuing, the Majority Holders of the Class A Certificates.
TERMINATION OF THE TRUST
The Trust and the Pooling and Servicing Agreement will terminate, (i)
at the option of the Residual Holder, at any time which is 123 days after the
payment to the Class A Certificateholders, the Class B-1 Certificateholders, the
Class B-2 Certificateholders and the Class B-3 Certificateholders of all amounts
required to be paid to them pursuant to the Pooling and Servicing Agreement,
reducing the Class A Certificate Principal Balance, the Class B-1 Certificate
Principal Balance, the Class B-2 Certificate Principal Balance and the Class B-3
Certificate Principal Balance to zero; or (ii) after the 120th day following the
Maturity Date of the Class A-2 Certificates. Upon termination of the Trust and
the reduction of the Class A Certificate Principal Balance, the Class B-1
Certificate Principal Balance, the Class B-2 Certificate Principal Balance and
the Class B-3 Certificate Principal Balance to zero and payment of any amounts
then owing to the Certificate Insurer and the Trustee, any remaining property
then held by the Trust shall be distributed to the Residual Holder.
The respective representations, warranties and indemnities of First
Sierra, the Servicer and the Depositor will survive any termination of the Trust
and the Pooling and Servicing Agreement.
AMENDMENT
The Transaction Documents may be amended by agreement of the Trustee,
the Depositor and the Servicer at any time, without consent of the
Certificateholders but with the consent of the Certificate Insurer, to cure any
ambiguity, upon receipt of an opinion of counsel to the Servicer that such
amendment will not adversely affect in any respect the interests of any
Certificateholder.
The Transaction Documents may also be amended from time to time by the
Trustee, the Depositor, the Servicer and the Majority Holders for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Transaction Documents or of modifying in any manner the rights
of the Certificateholders; provided, however, that no such amendment shall (a)
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of
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payments on the Receivables or distributions which are required to be made on
any Certificate without the consent of the holder of such Certificate or (b)
reduce the aforesaid percentage of Certificateholders required to consent to any
amendment, without unanimous consent of the Certificateholders.
The Trustee is required under the Pooling and Servicing Agreement to
furnish Certificateholders and the Rating Agencies with written notice of the
substance of any such amendment to the Pooling and Servicing Agreement promptly
upon execution of such amendment.
THE TRUSTEE
GENERAL
The Trustee, Bankers Trust Company, has an office at Four
Albany Street, New York, New York 10006.
The Trustee may resign, subject to the conditions set forth below, at
any time upon written notice to the Servicer and the Certificate Insurer, in
which event the Servicer will be obligated to appoint a successor Trustee. If no
successor Trustee shall have been so appointed and have accepted such
appointment within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition a court of competent jurisdiction for the
appointment of a successor Trustee. Any successor Trustee shall be acceptable to
the Certificate Insurer and shall meet the financial and other standards for
qualifying as a successor Trustee under the Pooling and Servicing Agreement. The
Servicer may with the consent of the Certificate Insurer and shall at the
direction of the Certificate Insurer or the Certificateholders of any Class
evidencing more than 25% of the Percentage Interests of such Class may, subject
to the consent of the Certificate Insurer, also remove the Trustee if the
Trustee ceases to be eligible to continue as such under the Pooling and
Servicing Agreement and fails to resign after written request therefor, or is
legally unable to act, or if the Trustee is adjudicated to be insolvent. In such
circumstances, the Servicer or such Certificateholders will also be obligated to
appoint a successor Trustee (acceptable to the Certificate Insurer). The
Certificate Insurer shall also have the right to remove the Trustee for "cause"
under the Pooling and Servicing Agreement. Any resignation or removal of the
Trustee and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of the Pooling and Servicing Agreement, the Certificates (other than
the authentication thereof) or of any Receivable or related document and will
not be accountable for the use or application by First Sierra of any funds paid
to the Sellers in consideration of the sale of any Certificates. If no Event of
Servicing Termination has occurred, then the Trustee will be required to perform
only those duties specifically required of it under the Pooling 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 Pooling and Servicing
Agreement.
No recourse is available based on any provision of the Pooling and
Servicing Agreement, the Certificates or any Receivable or assignment thereof
against Bankers Trust Company, in its individual capacity, and Bankers Trust
Company shall not have any personal obligation, liability or duty whatsoever to
any Certificateholder or any other person with respect to any such claim and
such claim shall be asserted solely
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against the Trust Assets or any indemnitor, except for such liability as is
determined to have resulted from the Trustee's own negligence or
willful misconduct.
The Trustee will be entitled to receive, pursuant to the priority set
forth in the Pooling and Servicing Agreement, (a) reasonable compensation for
its services (the "Trustee Fee"), (b) reimbursement for its reasonable expenses
and (c) indemnification for loss, liability or expense incurred without
negligence or bad faith on its part, arising out of performance of its duties
thereunder ((b) and (c) collectively, the "Trustee Expenses").
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on, and the weighted average life of,
the Offered Certificates will be directly related to the rate of principal
payments on the underlying Contracts. If purchased at a price other than par,
the yield to maturity will also be affected by the rate of such principal
payments. The principal payments on such Contracts may be in the form of
scheduled principal payments or liquidations due to default, casualty,
repurchases for breach and the like. Any such payments will result in
distributions to Offered Certificateholders of amounts which would otherwise
have been distributed over the remaining term of the Contracts. In general, the
rate of such payments may be influenced by a number of other factors, including
general economic conditions. The rate of payment of principal may also be
affected by any removal of the Contracts from the pool and the deposit of the
related Prepayment Amount or Repurchase Amount into the Collection Account.
The Contracts generally do not provide for the right of the Obligor to
prepay. Under the Pooling and Servicing Agreement, the Servicer will be
permitted to allow such Prepayments in full or in part, provided that no
Prepayment of a Contract will be allowed in an amount less than the Prepayment
Amount.
The Expected Final Payment Date for the Class A-1 Certificates is
______, 1999, for the Class A-2 Certificates is ____________ , ____, for the
Class B-1 Certificates is ________, ____, for the Class B-2 Certificates is
__________, ____ and for the Class B-3 Certificates is __________, ____. Such
dates are the dates on which the related Certificate Principal Balance would be
reduced to zero, assuming, among other things, (i) Prepayments with respect to
the Contracts are received at a rate of [4%] CPR and (ii) the Modeling
Assumptions (as defined below) apply. The weighted average life of the Offered
Certificates is likely to be shorter than would be the case if payments actually
made on the Contracts conformed to the foregoing assumptions, and the final
Payment Dates with respect to the Offered Certificates could occur significantly
earlier than such final scheduled Payment Dates due to defaults and because
First Sierra is obligated to repurchase Contracts in the event of breaches of
representations and warranties.
"Weighted average life" refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such security
is repaid to the investor. The weighted average
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lives of the Offered Certificates will be influenced by the rate at which
principal payments (including scheduled payments and prepayments) on the
Contracts are made. Principal payments on Contracts may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments and liquidations due to a default or other dispositions of
the Contracts). The weighted average lives of the Offered Certificates will also
be influenced by delays associated with realizing on Defaulted Contracts. The
prepayment model used in this prospectus supplement, the "Conditional Prepayment
Rate" or "CPR", represents an assumed annualized rate of prepayment relative to
the then outstanding balance on a pool of contracts. The CPR assumes that a
fraction of the outstanding Contract Pool is prepaid on each Payment Date, which
implies that each Contract in the Contract Pool is equally likely to prepay.
This fraction, expressed as a percentage, is annualized to arrive at the CPR for
the Contract Pool. The CPR measures prepayments based on the outstanding
principal on the previous Payment Date. The CPR further assumes that all
Contracts are the same size and amortize at the same rate and that each Contract
will be either paid as scheduled or prepaid in full.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
For the purpose of the tables below, it is assumed, among other things,
that: (i) the Closing Date for the Certificates occurs on November __, 1998,
(ii) distributions on the Certificates are made on the 12th day of each month
regardless of the day on which the Payment Date actually occurs, commencing in
December 1998 in accordance with the priorities described herein, (iii) no
delinquencies or defaults in the payment of principal and interest on the
Contracts are experienced, (iv) no Contract is repurchased for breach of a
representation and warranty or otherwise, (v) the Discount Rate is _____% per
annum, (vi) Prepayments with respect to the Contracts are received on the last
day of each Collection Period, commencing on November 1, 1998 (vii) no
Restricting Event occurs, (viii) the Class A-1 Pass-Through Rate is ______% per
annum, the Class A-2 Pass-Through Rate is ______% per annum, the Class B-1
Pass-Through Rate is ______% per annum, the Class B-2 Pass-Through Rate is
______% per annum, and the Class B-3 Pass-Through Rate is ______% per annum,
(ix) the Servicing Fee is 0.50% per annum, (x) the Contract pool consists of a
single contract with a Discounted Contract Principal Balance equal to
$______________ and (xi) Scheduled Payments on such contract are timely received
(collectively, the "Modeling Assumptions").
Since the tables were prepared on the basis of the Modeling Assumptions,
there are discrepancies between the characteristics of the actual Contracts and
the characteristics of the Contracts assumed in preparing the tables. Any such
discrepancies may have an effect upon the percentages of the Initial Certificate
Principal Balance for the Offered Certificates outstanding and the weighted
average lives of the Offered Certificates set forth in the tables. In addition,
since the actual Contracts in the Trust have characteristics which differ from
those assumed in preparing the tables set forth below, the related weighted
average life may be longer or shorter than as indicated in the tables.
The following tables set forth the percentages of the initial principal
amount of the Class A-1 Certificates and the Class A-2 Certificates that would
be outstanding after each of the dates shown, assuming a CPR of 0%, 2%, 4%, 6%
and 8%, respectively.
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PERCENTAGE OF INITIAL CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-1 CERTIFICATES
<TABLE>
<CAPTION>
Prepayment Speed (CPR)
Payment 0% 2% 4% 6% 8%
Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Closing Date 100% 100% 100% 100% 100%
November __, 1999 % % % % %
November __, 2000 % % % % %
November __, 2001 % % % % %
November __, 2002 % % % % %
November __, 2003 % % % % %
November __, 2004 % % % % %
November __, 2005 % % % % %
November __, 2006 % % % % %
- --------------------------------------------------------------------------------
Weighted Average
Life (years)
</TABLE>
PERCENTAGE OF INITIAL CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-2 CERTIFICATES
<TABLE>
<CAPTION>
Prepayment Speed (CPR)
Payment 0% 2% 4% 6% 8%
Date
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Closing Date 100% 100% 100% 100% 100%
November __, 1999 % % % % %
November __, 2000 % % % % %
November __, 2001 % % % % %
November __, 2002 % % % % %
November __, 2003 % % % % %
November __, 2004 % % % % %
November __, 2005 % % % % %
November __, 2006 % % % % %
- ---------------------------------------------------------------------------------------
Weighted Average
Life (years)
</TABLE>
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The Contracts will not have the characteristics assumed above, and
there can be no assurance that (i) the Contracts will prepay at any of the rates
shown in the tables or at any other particular rate or will prepay
proportionately or (ii) the weighted average lives of the Offered Certificates
will be as calculated above. Because the rate of distributions of principal of
the Offered Certificates will be a result of the actual amortization (including
prepayments) of the Contracts, which will include Contracts that have remaining
terms to stated maturity shorter or longer than those assumed, the weighted
average lives of the Offered Certificates will differ from those set forth
above, even if all of the Contracts prepay at the indicated constant prepayment
rates.
The effective yield to the Offered Certificateholders will depend upon,
among other things, the price at which such Offered Certificates are purchased,
and the amount of and rate at which principal, including both scheduled and
unscheduled payments thereof, is paid to the Offered Certificateholders. See
"Risk Factors" in the prospectus.
Due to the subordination provisions applicable to the Certificates, it
is likely that the Certificate Principal Balance of the Class A Certificates
will amortize more rapidly than will the Initial Aggregate Discounted Contract
Principal Balance. See "Summary of Terms -- Subordination Provisions" and
"Description of Certificates -- Flow of Funds" in this prospectus supplement.
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THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
[MBIA to update]
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment will be received by
the Trustee or its successor, on behalf of the Owners from the Certificate
Insurer for distribution by the Trustee to each Owner of each Owner's
proportionate share of such Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policy with respect to a particular
Insured Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Trustee, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the time
set forth in the Certificate Insurance Policy and no accelerated Insured
Payments shall be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Trust or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount (as described below) on the Business Day following receipt on
a Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required by
the Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Owner relating to or arising under the Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Certificate Insurer as agent for such Owner in any
legal proceeding related to such preference payment, such instruments being in a
form satisfactory to the Certificate Insurer, provided that if such documents
are received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall be
disbursed to the received or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the Class
A Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the Payment Date on which the related Deficiency Amount is due or the
second Business Day following receipt in New York, New York on a Business Day by
State Street and Trust Company, N.A. as Fiscal Agent for the Certificate Insurer
or any successor fiscal agent appointed by the Certificate Insurer (the "Fiscal
Agent") of a Notice (as described below); provided that if such Notice is
received after 12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice
received by the Fiscal Agent is not in proper form or is otherwise insufficient
for the purpose of making a claim under the Certificate Insurance Policy it
shall be deemed not to have been received by the Fiscal Agent for purposes of
this paragraph, and the Certificate Insurer or the Fiscal Agent, as the case may
be, shall promptly so advise the Trustee and the Trustee and the Trustee may
submit an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless
otherwise stated in the Certificate Insurance Policy will be disbursed by the
Fiscal Agent to the Trustee on behalf of the Owners by wire transfer of
immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Trustee for the payment of such Insured Payment and legally available
therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Certificate Insurance
Policy.
Subject to the terms of the Pooling and Servicing Agreement, the
Certificate Insurer shall be subrogated to the rights of each Owner to receive
payments under the Class A Certificates to the extent of any payment by the
Certificate insurer under the Certificate Insurance Policy. As used in the
Certificate Insurance Policy, the following terms shall have the following
meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day
on which the Certificate Insurer and banking institutions in New York City
or in the City in which the corporate trust office of the Trustee is
located are authorized or obligated by law or executive order to close.
"Deficiency Amount" means, as of any Payment Date, the Available Funds
Shortfall.
"Insured Payment" means (i) as of any Payment Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of the exhibit attached to the
Certificate Insurance Policy, the original of which is substantially delivered
by registered or certified mail, from the Trustee specifying the related Insured
Payment which shall be due and owing on the applicable Payment Date,
"Owner" means each holder of a Class A Certificate (other than the
Depositor, the Servicer or any subservicer) who, on the applicable Payment Date,
is entitled under the terms of the applicable Class A Certificate, to payment
thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Class A Certificates that is recoverable and sought to be recovered as a
avoidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended from time to time
(the "Bankruptcy Code"), in accordance with a final nonappealable order of a
court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined therein will have the respective meanings set forth in the
Pooling and Servicing Agreement as of the date of execution of the Certificate
Insurance Policy, without giving effect to any subsequent amendment or
modification to the Pooling and Servicing Agreement unless such amendment or
modification has been approved in writing by the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process
on the Fiscal Agent of the Certificate Insurer may be made at the address listed
below for the Fiscal Agent of the Certificate Insurer or such other address as
the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant to,
and shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in and
is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA, Inc., and its subsidiaries as of December 31,
1997 and December 31, 1996 and for the three years ended December 31, 1997
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA, Inc. for the year ended December 31,
1997, and the consolidated financial statements of the Certificate Insurer and
its subsidiaries for six months ended June 30, 1998 and for the periods ended
June 30, 1998 and June 30, 1997 included in the Quarterly Report of Form 10-Q of
MBIA, Inc. for the period ending June 30, 1998 and hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein 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 the Certificate Insurer and its
subsidiaries included in documents filed by MBIA, Inc. 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 Class A Certificates shall be deemed to be
incorporated by reference into this prospectus supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities ("SAP")
and generally accepted accounting principals ("GAAP"):
<TABLE>
<CAPTION>
SAP
------------------------------
December 31, June 30,
1997 1998
------------ ------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets $5,256 $6,048
Liabilities 3,496 3,962
Capital and Surplus 1,760 2,086
</TABLE>
<TABLE>
<CAPTION>
GAAP
------------------------------
December 31, June 30,
1997 1998
------------ ------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets $5,988 $6,794
Liabilities 2,624 2,977
Shareholder's Equity 3,364 3,817
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1997
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of the Prospectus or this Prospectus Supplement or any
information or disclosure contained therein or herein, or omitted therefrom or
heretofrom, other than with respect to the accuracy of the information herein
regarding the Certificate Insurance Policy and Certificate Insurer set forth
under the heading "The Certificate Insurance Policy and the Certificate
Insurer."
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies, Inc. rates the claims paying ability of the Certificate Insurer
"AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability
to pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates, and such ratings may be subject to revision or withdrawal
at any time by the ratings agencies. Any downward revision or withdrawal of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Certificate Insurer does not guaranty the market price of the
Class A Certificates nor does it guaranty that the ratings on the Class A
Certificates will not be revised or withdrawn.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is the opinion of Dewey Ballantine LLP, tax counsel to
the Trust ("Tax Counsel") as to certain of the material federal income tax
considerations to investors of the purchase, ownership and disposition of the
securities offered hereby. Tax Counsel's opinion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. Tax Counsel's opinion 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 securities as other than capital assets, may be subject to
special rules that are not discussed below. In addition, this summary is
generally limited to investors who will hold the Certificates as "capital
assets" (generally, property held for investment) within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the "Code"). It is
recommended that investors 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 securities.
CHARACTERIZATION OF THE TRUST
In the opinion of Tax Counsel, the Trust will be classified as a
grantor trust and not as an association taxable as a corporation for federal
income tax purposes. Each Beneficial Owner ("Beneficial Owner") will be treated
as the owner of an interest in the ordinary income and corpus portions of the
Trust.
TAXATION OF BENEFICIAL OWNERS
For purposes of federal income tax, the Servicer will be deemed to have
retained a fixed portion of the interest due on a portion of the Receivables
(the "Retained Yield") equal to the difference between (x) the annual percentage
rate of interest ("APR") of such Receivable and (y) the sum of the Pass-Through
Rate and reasonable fees and expenses payable by the Trust. The Retained Yield
will be treated as a "stripped coupon" within the meaning of Section 1286 of the
Code. Accordingly, each Beneficial Owner will be treated as owning an interest
in the principal of, and certain interest payable on, each Receivable (minus the
portion of the interest payable on such Receivable that exceeds the sum of the
Pass-Through Rate on the Certificates and the fees and expenses payable by the
Trust) and such ownership interest will be treated as a "stripped bond" within
the meaning of Section 1286 of the Code.
Each Beneficial Owner is required to include in income for federal
income tax purposes its share of the gross income of the Trust, including
interest and certain other charges accrued on the Receivables and any gain upon
collection or disposition of the Receivables subject to the discussion below
under the heading "--Discount and Premium" herein. Such gross income
attributable to interest on the Receivables will exceed the Pass-Through Rate by
an amount equal to the Beneficial Owner's share of the reasonable expenses of
the Trust for the period during which it owns a Certificate. Each Beneficial
Owner is entitled to deduct its share of the amount used to pay expenses of the
Trust to the extent described below. Any amounts received by a Beneficial Owner
from the Certificate Insurance Policy will be treated for federal income tax
purposes as having the same characteristics as the payments they replace.
Each Beneficial Owner should report its share of the income of the
Trust under its usual method of accounting. Accordingly, interest may be
included in a Beneficial Owner's gross income when it accrues on the
Receivables, or in the case of Beneficial Owners who are cash basis taxpayers,
when received by the Servicer on behalf of the Beneficial Owners. Because (i)
interest accrues on the Receivables over differing monthly periods and is paid
in arrears and (ii) interest collected on a Receivable generally is paid to
Beneficial Owners in the following month, the amount of interest accruing to a
Beneficial Owner during any calendar month will not equal the interest
distributed in that month. Discount on any Certificate would be includible in
income as described below. The discussion herein is based on Tax Counsel's
advice that each
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<PAGE> 58
Beneficial Owner's interest in the Trust should be treated as an interest in a
single debt instrument bearing interest equal to the sum of the Pass-Through
Rate plus such Certificate's share of the expenses of the Trust. The Trustee
will report tax information consistent with such advice. Because the
Certificates are stripped bonds, alternative characterizations are possible.
Investors should consult their own tax advisors regarding the proper treatment
of the Certificates for federal income tax purposes.
Each Beneficial Owner will be entitled to deduct, consistent with its
method of accounting, its pro rata share of reasonable servicing fees and other
fees paid or incurred by the Trust as provided in Section 162 or 212 of the
Code. If a Beneficial Owner is an individual, estate or trust, the deduction for
such Beneficial Owner's share of such fees will be allowed only to the extent
that all of such Beneficial Owner's miscellaneous itemized deductions, including
such Beneficial Owner's share of such fees, exceed 2% of such Beneficial Owner's
adjusted gross income. In addition, in the case of Beneficial Owners who are
individuals, certain otherwise allowable itemized deductions will be reduced by
an amount equal to 3% of such Beneficial Owner's adjusted gross income in excess
of a statutorily defined threshold, but not by more than 80% of such itemized
deductions. To the extent that any fee is determined to be in excess of a
reasonable amount (and hence not deductible), such excess should be
characterized as an additional ownership right that has been stripped from the
Receivables. Accordingly, the gross income of the Beneficial Owners should not
include any amount attributable to such excess fee.
DISCOUNT AND PREMIUM
A Beneficial Owner that purchases a Certificate at a discount (i.e.,
for an amount less than its face amount) must include such discount in income
over the life of the Certificate. The rate at which discount must be included in
income depends on whether it is greater or less than a statutorily defined de
minimis amount. Although not entirely certain, it would appear that the
determination of the amount of discount and the de minimis computation can be
made for each overall Certificate and need not be done on a Receivable-by-
Receivable basis. Generally, discount is treated as de minimis if
it is less than 1/4 of one percent of the principal amount of the Certificate
times the number of full years remaining to the weighted average maturity date
of the Certificate. It is not clear in calculating the weighted average maturity
date whether expected prepayments are taken into account.
If the discount is de minimis (which should be the case for original
purchasers of Certificates) it would appear that such discount is includible in
income as principal distributions are received on the Receivables and in
proportion to such principal distributions. Although not entirely clear, the
income attributable to de minimis discount should be treated as capital gain if
the Certificate was held as a capital asset.
If the discount is more than a de minimis amount, such discount must be
included in income as it accrues on the basis of the yield to maturity of the
Certificate taking into account the prepayment assumption, to the particular
purchaser. Unless the Certificates are originally issued with more than a de
minimis amount of discount, the Trustee will not be providing any information
relating to the computation of the accruals of discount by subsequent purchasers
of Certificates.
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<PAGE> 59
In the event that a Certificate is treated as purchased at a premium
(i.e., the purchase price exceeds the portion of the remaining Principal Balance
of the Receivables allocable to such Certificate), such premium will be
amortizable by a Beneficial Owner as an offset to interest income (with a
corresponding reduction in the Beneficial Owner's basis) under a constant yield
method over the term of the Receivable if an election under Section 171 of the
Code is made (or was previously in effect) with respect to the Certificates. Any
such election will also apply to debt instruments held by the taxpayer during
the year in which the election is made and to all debt instruments acquired
thereafter.
SALE OF A CERTIFICATE
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale (other than amounts
attributable to accrued interest, which will be taxable as such) and the
Beneficial Owner's adjusted basis in the Receivables and any other assets held
by the Trust. A Beneficial Owner's adjusted basis will equal the Beneficial
Owner's cost allocated to the Certificate increased by any discount previously
included in income, and decreased by any payments received that are attributable
to accrued discount (or by any offset previously allowed for accrued premium)
and by the amount of principal distributions previously received on the
Receivables. Any gain or loss will be capital gain or loss if the Certificate
was held as a capital asset.
FOREIGN BENEFICIAL OWNERS
Interest attributable to Receivables which is received by a Beneficial
Owner who or which is not a United States person, as defined below (other than a
foreign bank and certain other persons), generally will not be subject to the
normal 30 percent United States withholding tax (or lower treaty rate) imposed
with respect to such payments, provided that such Beneficial Owner fulfills
certain certification requirements. Under such requirements, the holder must
certify, under penalties of perjury, that it is not a "United States person" and
provide its name and address. If income or gain with respect to a Certificate is
effectively connected with a United States trade or business carried on by a
Beneficial Owner who or which is not a United States person, the 30 percent
withholding tax will not apply but such Beneficial Owner will be subject to
United States federal income tax at graduated rates applicable to United States
persons. For this purpose, "United States person" means a person who or which is
for United States federal income tax purposes 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,
or an estate that is subject to 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 fiduciary has
the authority to control all substantial decisions of the trust. Recent
legislation has authorized the issuance of tax regulations to determine whether
partnerships are considered to be "United States persons" by taking into account
factors other than the state of organization; however, the legislative history
of the enacting legislation indicates that those tax regulations should apply
only to partnerships organized after the publication of such regulations (or of
the likely content). Any person who or which is not a United States person is a
"Foreign Owner."
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<PAGE> 60
BACKUP WITHHOLDING
Backup withholding of federal income tax at a rate of 31 percent may
apply to payments made in respect of the Certificates as well as payments of
proceeds from the sale of Certificates, to Beneficial Owners that are not
"exempt recipients" and that fail to provide certain identifying information
(such as the taxpayer identification number of the Beneficial Owner) to the
Trustee or its agent in the manner required or, in the case of interest
payments, that fail to report all interest and dividends required to be shown on
their federal income tax returns. Individuals generally are not exempt
recipients, whereas corporations and certain other entities generally are exempt
recipients. Payments made in respect of the Certificates must be reported to the
IRS, unless the recipient is an exempt recipient and establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
person would be allowed as a refund or a credit against such person's United
States federal income tax, provided that the required information is furnished
to the IRS. Furthermore, certain penalties may be imposed by the IRS on a
Beneficial Owner who is required to supply information but who does not do so in
the proper manner.
STATE AND LOCAL INCOME TAX CONSIDERATIONS
State tax consequences to each Beneficial Owner will depend upon the
provisions of the state tax laws to which the Beneficial Owner is subject. Most
states modify or adjust the taxpayer's federal taxable income to arrive at the
amount of income potentially subject to state tax. Resident individuals
generally pay state tax on 100 percent of such state-modified income, while
corporations and other taxpayers generally pay state tax only on that portion of
state-modified income assigned to the taxing state under the state's own
apportionment and allocation rules.
Because each state's income tax laws vary, it is impossible to predict
the income tax consequences to the Beneficial Owners in all of the state taxing
jurisdictions in which they are already subject to tax. There can be no
assurance that other states will not claim that the Servicer has undertaken
activities in such states. If such a claim were made, no assurances can be given
as to the treatment of the Beneficial Owner by any particular state. Beneficial
Owners are urged to consult their own tax advisors with respect to state and
local taxes.
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR'S
PARTICULAR TAX SITUATION. IT IS RECOMMENDED THAT PROSPECTIVE PURCHASERS CONSULT
THEIR TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE CERTIFICATES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
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<PAGE> 61
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing, or other employee benefit plan as well as individual retirement
accounts and certain types of Keogh Plans (each, a "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 Benefit Plan. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code for such
persons. Title I of ERISA also requires that fiduciaries of a Benefit Plan
subject to ERISA make investments that are prudent, diversified (except if
prudent not to do so) and in accordance with governing plan documents.
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<PAGE> 62
A violation of these "prohibited transaction" rules may generate excise
tax and other liabilities under ERISA and the Code for fiduciaries, "parties in
interest" and "disqualified persons."
Unless a statutory, regulatory or administrative exemption is
available, a violation of the prohibited transaction rules could occur if any
Certificates were to be acquired by a Benefit Plan or with "plan assets" of any
Benefit Plan, and if any of the Seller, the Trustee, any Underwriters or any of
their affiliates were a "party in interest" or a "disqualified person" with
respect to such Benefit Plan. The Seller, the Trustee and the Underwriters are
likely to be "parties in interest" or "disqualified persons" with respect to
many Benefit Plans.
Pursuant to the Final Regulation issued by the U.S. Department of Labor
("DOL") concerning the definition of what constitutes the "plan assets" of a
Benefit Plan, the assets and properties of certain entities in which a Benefit
Plan makes an equity investment could be deemed to be assets of the Benefit Plan
unless certain exceptions under the Final Regulation apply or an exemption is
available. There can be no assurance that any of the exceptions provided in the
Final Regulation will apply. If the underlying assets of the Trust were deemed
to be plan assets by reason of the acquisition of Certificates by Benefit Plans,
the Seller, the Servicer the Trustee and other persons who provide services with
respect to the Trust might be subject to the fiduciary responsibility provisions
of Title I of ERISA and the operations of the Trust could result in prohibited
transactions.
The DOL has granted to Wheat First Securities, Inc., doing business as
First Union Capital Markets, and Prudentials Securities Incorporated
administrative exemptions (Prohibited Transactions Exemption ____ and ____),
(the "Exemptions") which generally exempt from the application of the prohibited
transaction provisions of Section 406(a), Section 406(b)(1), Section 406(b)(2)
and Section 407(a) of ERISA and the excise taxes imposed pursuant to Sections
4975(a) and (b) of the Code, certain transactions relating to the servicing and
operation of asset pools, including pools of motor vehicle installment
obligations such as the Receivables and the purchase, sale and holding of
asset-backed pass-through certificates, including pass-through certificates
evidencing interests in certain receivables, loans and other obligations, such
as the Certificates, provided that certain conditions set forth in the
Exemptions are satisfied. Each Exemption sets forth the following seven general
conditions which must be satisfied for a transaction to be eligible for
exemptive relief thereunder:
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<PAGE> 63
(1) The acquisition of the Certificates by a Benefit Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Benefit Plan as they would be in an arm's length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by the
Benefit Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust;
(3) The Certificates acquired by the Benefit Plan have received a rating at
the time of such acquisition that is one of the three highest general
rating categories from either S&P, Moody's, Fitch or Duff & Phelps
Credit Rating Co.;
(4) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below);
(5) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Certificates represents not
more than reasonable compensation for their services. The sum of all
payments made and retained by the Seller pursuant to the assignment of
the Receivables to the Trust represents not more than the fair market
value of such Receivables. The sum of all payments made to and retained
by the Servicer represents not more than reasonable compensation for
such person's services under the Pooling Agreement and reimbursement of
such person's reasonable expenses in connection therewith;
(6) The Benefit Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act; and
(7) The transfer of additional receivables to the Trust after the Closing
Date in exchange for funds credited to a pre-funding account do not
exceed 25% of the total principal amount of the Certificates and the
transfers do not occur later than 90 days after the Closing Date or the
date provided for in the Pooling Agreement or the date a default occurs
under the Pooling Agreement, if earlier; the transfer of additional
receivables is also subject to additional requirements regarding the
term and conditions of such receivables, the financial effect on the
Trust, independent monitoring and disclosure.
A fiduciary of a Benefit Plan considering whether to purchase any
Certificates should individually determine that the Benefit Plan satisfies the
conditions described in clauses (1) and (6) above. The Seller believes that the
Trust will satisfy the conditions described in the other clauses above.
If the general conditions of each Exemption are satisfied, such
Exemption provides an exemption from the restrictions imposed by Sections 406(a)
and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(c)(1)(A) through (D) of the Code) in connection with the direct or indirect
sale, exchange or transfer of Certificates by Benefit Plans
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in the initial issue of Certificates, the holding of Certificates by Benefit
Plans or the direct or indirect acquisition or disposition in the secondary
market of Certificates by Benefit Plans. However, no exemption is provided from
the restrictions of Section 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Certificate on behalf of an Excluded Plan (as
defined herein) by any person who has discretionary authority or renders
investment advice with respect to the assets of such Excluded Plan. For purposes
of the Certificates, an "Excluded Plan" is a Benefit Plan sponsored by (1) an
Underwriter, (2) the Certificate Insurer, (3) the Issuer, (4) the Seller, (5)
the Servicer, (6) the Trustee, (7) any Obligor with respect to Receivables
constituting more than 5% of the aggregate unamortized principal balance of the
Receivables as of the date of initial issuance and (8) any affiliate or
successor of a person described in (1) to (7) above (the "Restricted Group").
If the specific conditions of Section I.B. of each Exemption are also
satisfied, such Exemption provides an exemption from the restrictions imposed by
Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in connection
with (1) the direct or indirect sale, exchange or transfer of Certificates in
the initial issuance of Certificates to a Benefit Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of plan assets in Certificates is (a) an Obligor with respect to 5%
or less of the fair market value of the Receivables or (b) an affiliate of such
a person, (2) the direct or indirect acquisition or disposition in the secondary
market of Certificates by Benefit Plans and (3) the holding of Certificates by
Benefit Plans. Among the specific conditions that must be satisfied is the
condition that the Benefit Plan acquires no more than 25% of the Certificates
and immediately after the acquisition of the Certificates no more than 25% of
the assets of the Benefit Plan with respect to which the person is a fiduciary
are invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity. As of the Cut-Off Date, the Seller
believes no Obligor with respect to Receivables included in the Trust is an
Obligor with respect to 5% or more of the aggregate unamortized principal
balance of the Receivables.
If the specific conditions of Section I.C. of each Exemption are also
satisfied, such Exemption provides an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Trust. The specific conditions of Section I.C. are that (i) such transactions
are carried out in accordance with the terms of the Pooling Agreement, and (ii)
the Pooling Agreement (or a description of the material terms thereof) is made
available to investors prior to their investment in the Trust. The Seller
intends to comply with the foregoing conditions.
Section I.D. of each Exemption provides an exemption from the
restrictions imposed by Section 406(a) and 407(a) of ERISA, and the taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Sections
4975(c)(1)(A) through (D) of the Code if such restrictions are deemed to
otherwise apply merely because a person is deemed to be a "party in interest" or
a "disqualified person" with respect to an investing Benefit Plan by virtue of
providing services to the Benefit Plan (or by virtue of having certain specified
relationships to such a person) solely as a result of such Benefit Plan's
ownership of Certificates.
S-65
<PAGE> 65
Before purchasing a Certificate based on the Exemption, a fiduciary of
a Benefit Plan should itself confirm (1) that such Certificate constitutes a
"certificate" for purposes of the Exemption and (2) that the specific conditions
and other requirements set forth in such Exemption would be satisfied.
Prospective Benefit Plan investors in the Certificates should consult
with their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Exemption, and the potential consequences in their specific
circumstances, prior to making an investment in the Certificates. Moreover, each
Benefit Plan fiduciary should determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Certificates 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.
S-66
<PAGE> 66
LEGAL INVESTMENT
The Class A-1 Certificates will be eligible securities for purchase by
money market funds under the Investment Company Act of 1940, as amended.
RATINGS
As a condition to the issuance of the Class A-1 Certificates, the Class
A-1 Certificates must be rated "P-1" by Moody's and "A-1+" by S&P and as a
condition to the issuance of the Class A-2 Certificates, the Class A-2
Certificates must be rated "Aaa" by Moody's and "AAA" by S&P. A security rating
is not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time. The ratings assigned to the Offered
Certificates address the likelihood of the receipt by the Offered
Certificateholders of all distributions to which such Offered Certificateholders
are entitled. The ratings assigned to the Offered Certificates do not represent
any assessment of the likelihood that principal prepayments might differ from
those originally anticipated or address the possibility that Offered
Certificateholders might suffer a lower than anticipated yield.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement (the "Underwriting Agreement") for the sale of the Offered
Certificates dated November __, 1998, the Depositor has agreed to sell and Wheat
First Securities, Inc., doing business as First Union Capital Markets ("First
Union"), and Prudential Securities Incorporated, Inc. ("Prudential" and,
together with First Sierra, the "Underwriters"), have agreed to purchase, the
Offered Certificates.
First Union Corporation, the parent corporation of First Union, owns
approximately 3.3% of the outstanding common stock of First Sierra.
S-67
<PAGE> 67
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions therein, to purchase all the Offered Certificates
offered hereby if any of such Offered Certificates are purchased.
The Underwriters have advised the Depositor that they propose to offer
the Offered Certificates purchased by the Underwriters for sale from time to
time in one or more negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to such market prices or at
negotiated prices. The Underwriters may effect such transactions by selling such
Offered Certificates to or through a dealer, and such dealer may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriters or purchasers of the Offered Certificates for whom they
may act as agent. Any dealers that participate with the Underwriters in the
distribution of the Offered Certificates purchased by the Underwriters may be
deemed to be underwriters, and any discounts or commissions received by them or
the Underwriters, and any profit on the resale of the Offered Certificates by
them or the Underwriters may be deemed to be underwriting discounts or
commissions under the Securities Act of 1933, as amended (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
certificates at levels above those which might otherwise prevail in the open
market. Such stabilizing, if commenced, may be discontinued at any time.
For further information regarding any offer or sale of the Offered
certificates pursuant to this prospectus supplement and the prospectus, see
"Methods of Distribution" in the prospectus.
The Transaction Documents and the Underwriting Agreement provide that
First Sierra will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act, or contribute to payments the
Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation
and its subsidiaries as of December 31, 1997 and December 31, 1996 and for the
three years ended _____________ incorporated by reference into this prospectus
supplement have been audited by Coopers & Lybrand, L.L.P., independent
accountants, as set forth in their report thereon, and are incorporated by
reference herein in reliance upon the authority of such firm as experts in
accounting and auditing.
The financial statements of the Trust, as of __________________,
appearing in Appendix A of this Prospectus Supplement have been audited by
____________________, independent public accountants, as indicated in their
report thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such report and upon the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
by Dewey Ballantine LLP, New York, New York. Certain federal income tax matters
will be passed upon for the Trust by Dewey Ballantine LLP, New York, New York.
Certain legal matters relating to the Certificate Insurer will be passed upon
for the Certificate Insurer by Kutak Rock, Omaha, Nebraska.
S-68
<PAGE> 68
INDEX OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
Page
<S> <C>
Advance Payment......................................................... S-34
Advance Payments........................................................ S-34
Aggregate Discounted Contract Principal Balance......................... S-12
Aggregate Initial Certificate Principal Balance......................... S-40
Available Distribution Amount........................................... S-40
Available Funds......................................................... S-40
Available Funds Shortfall............................................... S-40
Bankruptcy Code......................................................... S-57
Base Principal Amount................................................... S-40
Base Principal Distribution Amount...................................... S-40
</TABLE>
i
<PAGE> 69
<TABLE>
<S> <C>
Business Day......................................................... S-57
Class A Insured Distribution Amount.................................. S-41
Class A Certificates................................................. S-31
Class A Percentage................................................... S-31
Class A-1 Certificates............................................... S-6,S-31
Class A-2 Certificates............................................... S-6,S-31
Class B-1 Certificates............................................... S-6,S-31
Class B-2 Certificates............................................... S-6,S-31
Class B-3 Certificates............................................... S-6,S-31
Code................................................................. S-59
Conditional Prepayment Rate.......................................... S-54
Contract Files....................................................... S-30
Controlling Parties.................................................. S-51
CPR.................................................................. S-54
Defaulted Contract................................................... S-41
Defaulted Contract Recoveries........................................ S-41
Deficiency Amount.................................................... S-57
Delinquency Trigger Event............................................ S-42
Delinquency Trigger Ratio............................................ S-42
Delinquent Contract.................................................. S-42
Depositor............................................................ S-5
Determination Date................................................... S-42
Discount Rate........................................................ S-17
Discounted Contract Principal Balance................................ S-18,S-42
Early Termination Contract........................................... S-42
Event of Servicing Termination....................................... S-49
Events of Default.................................................... S-50
Excluded Amounts..................................................... S-43
Expired Contract..................................................... S-43
Final Scheduled Payment.............................................. S-43
First Union.......................................................... S-63
Fiscal Agent......................................................... S-57
Fitch................................................................ S-57
GAAP................................................................. S-57
Gross Charge-Off Event............................................... S-8,S-43
Gross Charge-Off Ratio............................................... S-43
</TABLE>
ii
<PAGE> 70
<TABLE>
<S> <C>
Trustee Expenses.................................................... S-53
Trustee Fee......................................................... S-53
Initial Class A Offered Certificate Principal Balance............... S-31
Initial Certificate Principal Balance............................... S-43
Initial Unpaid Amount............................................... S-43
Insurance Policies.................................................. S-30
Insured Payment..................................................... S-57
Interest Accrual Period............................................. S-44
IRS................................................................. S-58
Lockbox Bank........................................................ S-34
Majority Holders.................................................... S-44
Maturity Date....................................................... S-44
Modeling Assumptions................................................ S-54
Certificate Current Interest........................................ S-44
Certificate Factor.................................................. S-46
Certificate Interest................................................ S-44
Certificate Principal Balance....................................... S-44
Pass-Through Rate................................................... S-44
Notice.............................................................. S-57
Offered Certificates................................................ S-31
OID................................................................. S-59
Overdue Interest.................................................... S-44
Overdue Principal................................................... S-44
Owner............................................................... S-57
Percentage Interest................................................. S-44
Plan Assets Regulation.............................................. S-62
Pool Factor......................................................... S-47
Preference Amount................................................... S-57
Prepayment.......................................................... S-44
Prepayment Amount................................................... S-44
Private Label....................................................... S-17,S-27
Prudential.......................................................... S-68
PTCE................................................................ S-67
Reimbursement Amount................................................ S-44
Repurchase Amount................................................... S-21,S-44
Restricting Event................................................... S-47
S&P................................................................. S-17
SAP................................................................. S-57
Scheduled Payments.................................................. S-20,S-47
Securities.......................................................... S-35
Securities Act...................................................... S-68
Sellers............................................................. S-6,S-27
Servicer............................................................ S-30
Servicer Advance.................................................... S-39
</TABLE>
iii
<PAGE> 71
<TABLE>
<S> <C>
Servicer's Certificate.............................................. S-39
Servicing Officer................................................... S-51
Servicing Standard.................................................. S-22
Statistical Discount Rate........................................... S-17
Statistical Discounted Contract Principal Balance................... S-17
Subordinate Certificates............................................ S-35
Subordinate Securities.............................................. S-35
Substitute Contract................................................. S-21
Substitute Contract Cut-Off Date.................................... S-47
Supplementary Report................................................ S-51
Tax Counsel......................................................... S-62
Termination Date.................................................... S-47
Transfer Date....................................................... S-36
Trust............................................................... S-6
Trust Certificate................................................... S-35
Trust Certificate Principal Balance................................. S-47
Trust Operating Expenses............................................ S-47
UCC................................................................. S-16
Underwriters........................................................ S-68
Underwriting Agreement.............................................. S-68
</TABLE>
iv
<PAGE> 72
APPENDIX A
<PAGE> 73
REPORT OF PUBLIC INDEPENDENT ACCOUNTANTS
[To the managers of First Sierra Equipment Contract Trust 1998-1:
We have audited the accompanying balance sheet of First Sierra
Equipment Contract Trust 1998-1, as of _____________. This financial statement
is the responsibility of the Trust management. Our responsibility is to express
an opinion on this financial statement 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 financial statement presentation.
We believe that our audit 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 First Sierra Equipment Contract
Trust 1998-1, as of _____________, as of _______________, in conformity with
generally accepted accounting principles.]
A-1
<PAGE> 74
FIRST SIERRA EQUIPMENT CONTRACT TRUST 1998-1
BALANCE SHEET -- [DATE]
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash...........................................................................................................$1,000
OWNER'S EQUITY
OWNER'S EQUITY:
Trust Certificate............................................................................... ..1000
Total liabilities and owner's equity.............................................................$1,000
</TABLE>
The accompanying notes are an integral part of this statement.
A-2
<PAGE> 75
FIRST SIERRA EQUIPMENT CONTRACT TRUST 1998-1
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations:
First Sierra Equipment Contract Trust 1998-1 (the Trust), was
formed in the State of New York on _____________. The Trust has been inactive
since that date.
The Trust was organized to engage exclusively in the following
business and financial activities: to acquire equipment contracts from First
Sierra and any of its affiliates; to issue and sell notes collateralized by its
assets; 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.
2. Capital Contribution:
First Sierra purchased a trust certificate representing 100% of
the beneficial ownership interest in the Trust for $1,000 on _______________.
A-3
<PAGE> 76
================================================================================
No dealer, salesman, or any other person has been authorized to give any
information or to make any representation not contained in this prospectus
supplement and the prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or by the Underwriter. This prospectus supplement and the prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to any one to
whom it is unlawful to make any such offer or solicitation. Neither the delivery
of this prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that information herein or therein is correct as of any
time since the date of this prospectus supplement or the prospectus.
- -------------------
TABLE OF CONTENTS PAGE
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Summary Of Terms.................................................................................................S-5
Risk Factors.....................................................................................................S-16
The Receivables..................................................................................................S-17
The Sellers......................................................................................................S-25
First Sierra.....................................................................................................S-25
The Servicer.....................................................................................................S-26
Legal Proceedings................................................................................................S-29
Formation Of The Trust...........................................................................................S-29
Management's discussion and Analysis of Financial Condition......................................................S-30
Description Of The Certificates..................................................................................S-30
The Trustee......................................................................................................S-52
Prepayment And Yield Considerations..............................................................................S-53
The Certificate Insurance Policy and the Certificate Insurer.....................................................S-57
Material Federal Income Tax Consequences.........................................................................S-58
State And Local Tax Considerations...............................................................................S-61
Erisa Considerations.............................................................................................S-62
Legal Investment.................................................................................................S-63
Ratings..........................................................................................................S-63
Method Of Distribution...........................................................................................S-63
Report Of Experts................................................................................................S-64
Legal Matters....................................................................................................S-64
Index Of Principal Defined Terms.................................................................................i
Report Of Public Independent Accountants.........................................................................A-1
PROSPECTUS
Available Information...............................................................................................i
Incorporation of Certain Documents by Reference.....................................................................i
Reports to Securityholders.........................................................................................ii
Summary.............................................................................................................1
Risk Factors.......................................................................................................13
Use of Proceeds....................................................................................................18
The Issuers........................................................................................................18
The Asset Pools....................................................................................................18
The Receivables....................................................................................................19
First Sierra.......................................................................................................19
The Servicer.......................................................................................................22
Prepayment and Yield Considerations................................................................................23
Pool Factors.......................................................................................................23
The Company........................................................................................................24
The Trustees.......................................................................................................25
Description of the Securities......................................................................................25
Description of the Trust Agreements................................................................................30
Certain Legal Matters Affecting the Receivables....................................................................40
Material Federal Income Tax Consequences...........................................................................41
ERISA Considerations...............................................................................................48
Method of Distribution.............................................................................................48
Certain Legal Matters..............................................................................................49
Financial Information..............................................................................................49
Additional Information.............................................................................................49
Index of Terms.....................................................................................................50
</TABLE>
Until 90 days after the date of this prospectus supplement, all dealers that
effect transactions in the Offered Notes, whether or not participating in this
offering, may be required to deliver a prospectus supplement and the prospectus
to which it relates. This is in addition to the dealers' obligation to deliver a
prospectus supplement and the related prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
===============================================================================
FIRST SIERRA EQUIPMENT CONTRACT TRUST 1998-1
$________________
FIRST SIERRA FINANCIAL, INC.
Originator and Servicer
FIRST SIERRA RECEIVABLES III, INC.
Depositor
$______________ ____%
EQUIPMENT CONTRACT BACKED NOTES, CLASS A-1
$_____________ _____%
EQUIPMENT CONTRACT BACKED NOTES, CLASS A-2
--------------------------
PROSPECTUS SUPPLEMENT
--------------------------
FIRST UNION CAPITAL MARKETS
PRUDENTIAL SECURITIES INCORPORATED
____________, 1998
================================================================================
